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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 1-11343
CORAM HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0615337
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
1125 SEVENTEENTH STREET, SUITE 2100
DENVER, COLORADO 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 292-4973
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock ($.001 par value per share) Over the Counter
Bulletin Board
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months 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 | |
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |X| No | |
As of April 2, 2001, there were outstanding 49,638,452 shares of the
registrant's common stock, which is the only class of voting stock of the
registrant outstanding. As of such date, the aggregate market value of the
shares of common stock held by nonaffiliates of the registrant based on the
closing price for the common stock on the Over the Counter Bulletin Board on
April 2, 2001, was approximately $11.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
None
STATEMENT ON FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking"
statements (as such term is defined in the Private Securities Litigation
Reform Act of 1995) and information relating to Coram Healthcare Corporation
("CHC") and its subsidiaries (collectively "Coram" or the "company") that are
based on the beliefs of the management of Coram, as well as, assumptions made
by and information currently available to the management of Coram. Coram's
actual results may vary materially from the forward-looking statements made
in this report due to important factors, including, but not limited to: the
uncertainties related to the ongoing bankruptcy proceedings of Coram
Healthcare Corporation and Coram, Inc., including actions taken by parties
who may be adverse to management's plan of reorganization; Coram's ability to
maintain continued compliance with the provisions of the Omnibus Budget
Reconciliation Act of 1993 (commonly referred to as "Stark II"); Coram's lack
of profitability; uncertainties associated with the outcomes of certain
pending legal proceedings; the company's significant level of outstanding
indebtedness; the company's need to obtain additional financing or equity;
uncertainties associated with the dilution that would occur if the company's
existing debt holders exercise their equity conversion rights; the company's
limited liquidity; the company's dependence upon the prices paid by
third-party payers for the company's services; uncertainties associated with
the changes in state and federal regulations and the impact on healthcare
services businesses, as well as, enhanced regulatory oversight of the
healthcare industry; and certain other factors, all of which are described in
greater detail in this report in Item 7 under the caption "Risk Factors."
When used in this report, the words "estimate," "project," "believe,"
"anticipate," "intend," "expect" and similar expressions are intended to
identify forward-looking statements. Such statements reflect the current
views of management with respect to future events based on currently
available information and are subject to risks and uncertainties that could
cause actual results to differ materially from those contemplated in such
forward-looking statements. For a discussion of such risks, see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Risk Factors." Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof.
Management does not undertake any obligation to publicly release any
revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
LINES OF BUSINESS. During 2000, Coram was engaged primarily in two
principal lines of business consisting of alternate site (outside the
hospital) infusion therapy and related services (including non-intravenous
home health products such as durable medical equipment and respiratory
therapy services) and pharmacy benefit management and specialty mail-order
pharmacy services. Other services offered by Coram include centralized
management, administration and clinical support for clinical research trials.
In December 1999, Coram announced that it was repositioning its
business to focus on its core alternate site infusion therapy business and
the clinical research business operated by its wholly-owned subsidiary, CTI
Network, Inc. Accordingly, Coram's primary business strategy is to focus its
efforts on the delivery of its core infusion therapies, such as nutrition,
anti-infective therapies, intravenous immunoglobulin ("IVIG"), therapy for
persons receiving transplants, and coagulant and blood clotting therapies for
persons with hemophilia. Coram has also implemented programs focused on the
reduction and control of the costs of providing services and operating
expenses, assessment of under-performing branches and review of branch
efficiencies. Accordingly, several branches have been closed or scaled back
to serve as satellites for other branches and personnel have been eliminated
(see Note 6 to the company's Consolidated Financial Statements).
Additionally, the company's pharmacy benefit management and specialty
mail-order pharmacy services businesses were sold during the year ended
December 31, 2000 (see Note 5 to the company's Consolidated Financial
Statements). Most of the company's alternate site infusion therapy net
revenue is derived from third-party payers such as private indemnity
insurers, managed care organizations and governmental payers. Management's
objective is to continue to provide services that consistently achieve
desired clinical outcomes and maintain Coram's consistent high level of
patient satisfaction while focusing on disciplined enhancements to the
service model. By establishing best demonstrated practice benchmarks for
nursing, pharmacy and clinical operations personnel, cost reductions have
been achieved while simultaneously improving the quality and consistency of
care. Furthermore, management throughout Coram is continuing to concentrate
on reimbursement for services rendered by emphasizing improved billing
procedures, documentation and cash collections methods, continued assessment
of systems support for reimbursement and concentration of Coram's expertise
and managerial resources into certain reimbursement locations.
Prior to August 1, 2000, the company delivered pharmacy benefit
management and specialty mail-order pharmacy services through its Coram
Prescription Services ("CPS") business, which provided services and
mail-order prescription drugs for chronically ill patients from one primary
mail order facility, four satellite mail order facilities and one retail
pharmacy. The pharmacy benefit management service provided on-line claims
administration, formulary management and certain drug utilization review
services
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through a nationwide network of retail pharmacies. CPS's specialty mail-order
pharmacy services were delivered through its six facilities, which provided
distribution, compliance monitoring, patient education and clinical support
to a wide variety of patients. In connection with Coram's repositioned
business focus, on July 31, 2000 the company completed the sale of CPS to
Curascript Pharmacy Services, Inc. and Curascript PBM Services, Inc., which
are newly formed affiliates of GTCR Golder Rauner, L.L.C. and are led by
certain members of the former CPS management team. See Note 5 to the
company's Consolidated Financial Statements.
Prior to January 1, 2000, the company provided ancillary network
management services through its wholly-owned subsidiaries, Coram Resource
Network, Inc. and Coram Independent Practice Association, Inc. (collectively
the "Resource Network Subsidiaries" or "R-Net"), which managed networks of
home healthcare providers on behalf of HMOs, PPOs, at-risk physician groups
and other managed care organizations. R-Net served its customers through two
primary call centers and three satellite offices. In April 1998, the company
entered into a five-year capitated agreement with Aetna U.S. Healthcare, Inc.
("Aetna") (the "Master Agreement") for the management and provision of
certain home health services, including home infusion, respiratory therapy,
durable medical equipment, hospice care and home nursing support for several
of Aetna's disease management programs. Effective July 1, 1998, the company
began receiving capitated payments on a monthly basis for members covered
under the Master Agreement. The company also assumed certain financial risks
for certain home health services and began providing management services for
a network of home health providers through R-Net. The agreements that R-Net
had for the provision of ancillary network management services have been
terminated and R-Net is no longer providing any ancillary network management
services. Coram and Aetna were previously involved in litigation over the
Master Agreement; however, the litigation was amicably resolved and the case
was dismissed on April 20, 2000. The Resource Network Subsidiaries filed
voluntary bankruptcy petitions on November 12, 1999 with the United States
Bankruptcy Court for the District of Delaware under Chapter 11 of the United
States Bankruptcy Code. The Resource Network Subsidiaries are being
liquidated pursuant to such proceedings. See Note 4 to the company's
Consolidated Financial Statements.
While management believes the implementation of its overall business
strategy has improved operating performance throughout the company, no
assurances can be given as to its ultimate success. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Coram's reportable segments over the last three fiscal years have been
alternate site infusion therapy and related services (including
non-intravenous home health products such as durable medical equipment and
respiratory therapy services), ancillary network management services, mail
order pharmacy and pharmacy benefit management services, and other services,
consisting primarily of centralized management, administration and clinical
support for clinical research trials. The Resource Network Subsidiaries
managed networks of home healthcare providers on behalf of managed care plans
and other payers. The agreements that R-Net had for the provision of
ancillary network management services have been terminated and R-Net is no
longer providing any ancillary network management services. The Resource
Network Subsidiaries are being liquidated in the Chapter 11 proceedings that
are currently pending in the United States Bankruptcy Court for the District
of Delaware. See Note 4 to the company's Consolidated Financial Statements.
Mail order pharmacy and pharmacy benefit management services were provided by
the CPS business, which was discontinued effective July 31, 2000 following
its disposition. See Note 5 to the company's Consolidated Financial
Statements.
COMPANY HISTORY; RECENT EVENTS
Coram was formed on July 8, 1994 as a result of a merger by and among
T(2) Medical, Inc., Curaflex Health Services, Inc., Medisys, Inc., and
HealthInfusion, Inc., each of which was a publicly-held national or regional
provider of home infusion therapy and related services. Each of these
companies became and is now an indirect, wholly-owned subsidiary of CHC. The
merger was accounted for as a pooling of interests.
Coram made a number of acquisitions since operations commenced, the
most significant of which was the acquisition of certain assets of the home
infusion business of Caremark, Inc., a wholly-owned subsidiary of Caremark
International, Inc., effective April 1, 1995. In addition, Coram acquired
H.M.S.S., Inc., a leading regional provider of home infusion therapies based
in Houston, Texas, effective September 12, 1994. As a result of these
acquisitions, Coram became a leading provider of alternate site infusion
therapy services in the United States based on geographic service area and
total revenue.
In April 1998, the company signed the Aetna Master Agreement, which
became effective July 1, 1998. Under the Master Agreement, which was expected
to last five years, the Resource Network Subsidiaries managed and provided
home healthcare services for over two million Aetna enrollees in eight states
for a stated monthly fee per enrollee. The Resource Network Subsidiaries
began serving Aetna enrollees under the Master Agreement on or about July 1,
1998. The Resource Network Subsidiaries provided a notice of termination of
the Master Agreement effective June 30, 1999, and Aetna terminated the
company's National Ancillary Services Agreement, which covered infusion
services provided by the company's branch locations, effective April 12,
2000. Subsequently, the disputes with Aetna were resolved amicably between
the parties on April 20, 2000 and the company and Aetna have
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agreed to use good faith efforts to negotiate a new agreement for home
infusion services. See Item 3. "Legal Proceedings" and Note 13 to the
company's Consolidated Financial Statements for more information regarding
this matter.
On July 31, 2000, Coram completed the sale of CPS to Curascript
Pharmacy Services, Inc. and Curascript PBM Services, Inc. See Note 5 to the
company's Consolidated Financial Statements.
CHC and its first tier wholly-owned subsidiary, Coram, Inc. ("CI")
(collectively the "Debtors"), filed voluntary petitions under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") on August 8, 2000.
As of such date, the Debtors are operating as debtors-in-possession subject
to the jurisdiction of the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). None of the company's other subsidiaries
is a debtor in the proceeding. See Note 3 to the company's Consolidated
Financial Statements and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations: Risk Factors."
DELIVERY OF ALTERNATE SITE INFUSION SERVICES
GENERAL. Coram delivers its alternate site infusion therapy services
through 76 branch offices located in 40 states and Ontario, Canada.
Additionally, Coram delivers alternate site infusion therapy services through
joint venture and partnership agreements at several other geographic
locations. Infusion therapy involves the intravenous administration of
nutrition, anti-infective therapy, intravenous immunoglobulin ("IVIG"), blood
factor therapies, pain management, chemotherapy and other therapies.
Infusion patients are primarily referred to Coram following the
diagnosis of a specific disease or upon discharge from a hospital. The
treating physician generally will determine whether the patient is a
candidate for home infusion treatment. Typically, a hospital discharge
planner, the patient's physician and a managed care payer will recommend or
determine the infusion company to which a patient is referred even though the
patient ultimately has the freedom to choose his or her own service provider.
Because drugs administered intravenously tend to be more potent and complex
than oral drugs, the delivery of intravenous drugs requires patient training,
specialized equipment and clinical monitoring by skilled nurses and
pharmacists. Most therapies require either a gravity-based flow control
device or an electro-mechanical pump to administer the drugs. Some therapies
are administered continuously; however, most are given for prescribed
intermittent periods of time. Coram nurses and pharmacists work with the
patient's physician to monitor and assess the patient's condition and update
the therapy as necessary. The duration of the patient's treatment may last
from as little as a few days to as long as the patient's entire life.
BRANCH FACILITIES. The delivery of infusion services is coordinated
through local or regional infusion branches, or related satellite locations.
A typical full service branch provides the following functions:
(i) patient intake and admission;
(ii) sterile product preparation by pharmacists and pharmacy
technicians;
(iii) clinical pharmacy services;
(iv) clinical nursing services;
(v) collaborative clinical monitoring and disease management;
(vi) materials management, including drug and supply inventory and
delivery;
(vii) billing, collections and benefit verification;
(viii) marketing to local referral sources, including doctors, hospitals
and payers; and
(ix) general management.
A typical full service branch has a fully equipped infusion pharmacy,
offices for clinical and administrative personnel and a storage warehouse. It
also employs a branch manager, licensed pharmacists, pharmacy technicians,
registered nurses, dietitians, and sales and administrative personnel. Such a
branch also serves the market area in which it is located, generally within a
two-hour driving radius of the patients served, as well as, outlying locations
where it can arrange appropriate nursing services. Smaller satellite locations
contain limited supplies and pharmacy operations and are used as support centers
to respond to patient needs in specific
4
geographical areas. Coram's full service branches and satellite locations are
leased and range from 125 to 32,000 square feet of office space, primarily in
suburban office parks, often in close proximity to major medical facilities.
IN-HOME PATIENT CARE. Before accepting a patient for home infusion
treatment, the staff at the local branch works closely with the patient's
physician or clinician and hospital personnel in order to assess the patient's
suitability for home care. This assessment process includes, among other things,
an assessment of the patient's physical and emotional status as well as an
assessment of certain social factors such as the safety and cleanliness of the
home environment and the availability of family members or others to assist in
the administration of the patient's therapy, if necessary. Patient review also
includes a verification of the patient's eligibility based upon established
admission criteria and the patient's benefits package available from his or her
insurance carrier, managed care provider or governmental payer.
When a patient's suitability for home care has been confirmed, the patient
and the patient's designated carepartner receive training and education
concerning the therapy to be administered, including the proper infusion
technique and the care and use of intravenous devices and other equipment used
in connection with the therapy. The patient and the patient's carepartner are
also trained to monitor the patient's response to the therapy in order to
identify changes of which the healthcare team should be notified. The initial
patient assessment and training are generally performed by nurses employed by or
overseen by Coram.
Prior to the patient receiving treatment services from Coram, the treating
physician develops the patient's plan of treatment and communicates it to the
local branch's clinical support team, including its nurses and pharmacists. The
team develops a plan of care and works with the treating physician and the payer
case manager, if applicable, to provide care and to monitor the patient's
progress and responses to treatment. The Coram pharmacist speaks with the
patient or carepartner prior to dispensing the prescribed therapy and performs a
prospective review of the patient's condition and medical history. Throughout
the patient's therapy, the local branch's clinical support team will regularly
provide the treating physician and the payer case manager with reports on the
patient's condition, creating an information flow that allows the treating
physician to actively manage the patient's treatment. The treating physician
always directs the patient's care, including changing the plan of treatment in
accordance with the patient's needs and responses.
Upon the patient's arrival home, a nurse performs an initial patient
assessment which includes a comprehensive physical examination and environmental
assessment. Typically, the administration of the patient's first home infusion
treatment is overseen during that visit. Thereafter, the frequency of nursing
visits depends upon the particular therapy the patient is receiving, as well as,
the level of independence the patient or carepartner has achieved with regard to
the administration and monitoring of the prescribed therapy. During these
subsequent visits, the nurse may check and assess the patient's intravenous
lines and related equipment, obtain blood samples, change the pump settings
and/or drug administration, assess the patient's condition and compliance with
the plan of care and provide ongoing teaching and support. The patient's
supplies and drugs are typically delivered on a weekly basis depending on the
therapy and the type of drugs being administered. The treating physician and the
payer case manager, if applicable, remain actively involved in the patient's
treatment by monitoring the success of the plan of treatment and revising as
necessary.
ALTERNATE SITE INFUSION THERAPY: PRODUCTS AND SERVICES
GENERAL. Coram provides a variety of infusion therapies, principally
nutrition, anti-infective therapies and IVIG, as well as, coagulant and blood
clotting therapies for patients with hemophilia. A physician, based upon a
patient's diagnosis, treatment plan and response to therapy, determines the
initiation and duration of these therapies. Certain therapies, such as
anti-infective therapy, are generally used in the treatment of temporary
infectious conditions, while others, such as nutrition or coagulants, may be
required on a long-term or permanent basis. The patient, the designated
carepartner or an employee of Coram administers infusion therapies at the
patient's home. In some patient groups, such as immuno-suppressed patients
(e.g., AIDS/HIV, cancer, transplant patients, etc.), blood coagulant therapies
or anti-infective therapies may be provided periodically over the duration of
the primary disease or for the remainder of the patient's life, generally as
episodic care.
NUTRITION THERAPY. Total parenteral nutrition therapy ("TPN") involves the
intravenous feeding of life-sustaining nutrients to patients with impaired or
altered digestive tracts due to inflammatory bowel disease, short bowel syndrome
or other gastrointestinal illnesses. The therapy is generally administered
through a central catheter surgically implanted into a major blood vessel to
introduce the nutrient solution into the bloodstream. The nutrient solution may
contain amino acids, dextrose, fatty acids, electrolytes, trace minerals or
vitamins. In many cases, the underlying illness or condition from which
parenteral nutrition patients suffer is recurrent in nature requiring periodic
re-hospitalization for treatment followed by resumption of parenteral nutrition
at home. Some patients must remain on parenteral nutritional therapy for life
and other patients may require short-term TPN therapy to augment nutritional
status, such as patients with a diagnosis of cancer, hyperemesis, HIV, eating
disorders, and other diseases and treatments.
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Enteral nutrition therapy is administered through a feeding tube into the
gastrointestinal tract to patients who cannot eat as a result of an obstruction
to the upper gastrointestinal tract or other medical conditions. Enteral
nutrition therapy is often administered over a long period, often for six months
or longer.
ANTI-INFECTIVE THERAPY. Anti-infective therapy is the infusion of
antibacterial, anti-viral or anti-fungal medications into the patient's
bloodstream for the treatment of a variety of infectious episodes, such as
osteomyelitis (bone infections), bacterial endocarditis (infection of the heart
valves), wound infections, infections associated with AIDS, cancer,
post-transplant and infections of the kidneys and urinary tract. Intravenous
anti-infective drugs are delivered through a peripheral catheter inserted in a
vein in the patient's arm or via a centrally placed catheter. Anti-infective
drugs are often more effective when infused directly into the bloodstream than
when taken orally.
INTRAVENOUS IMMUNOGLOBULIN. Intravenous immunoglobulin ("IVIG") therapy
involves the administration of blood derivative products (gammaglobulins) which
are administered to patients with immune deficiency or altered immune status.
IVIG therapy is most commonly administered to patients with primary immune
deficiencies or autoimmune disorders or as part of a post-transplant treatment
protocol. Patients receiving IVIG therapy for primary immune deficiencies
usually receive the therapy for life. Patients receiving IVIG therapy for
autoimmune disorders receive the therapy intermittently over a period of months
depending on their condition.
COAGULATION AND BLOOD CLOTTING THERAPIES. Coagulation or factor
replacement therapy is the intermittent administration of a blood clotting
factor. Blood clotting factors are generally administered to persons with
hemophilia or related genetic disorders which affect the blood's ability to
clot. In these disorders, one or more of the normal blood clotting factors is
not produced in sufficient amounts by the body. The absence of these clotting
factors makes it difficult or impossible for a patient to stop bleeding. Severe
hemophiliacs can suffer from spontaneous bleeding episodes without trauma.
Repeated bleeding episodes can cause permanent loss of mobility in the joints
putting the patient at further risk medically and impinging on their ability to
live a normal life. Factor replacement products are administered via a centrally
inserted or peripherally inserted intravenous catheter over a short period of
time (approximately 10 minutes). Factor is infused when bleeding episodes occur
or on a routine preventative basis (prophylaxis). Most patients (even children)
and/or their carepartners learn to start their own intravenous catheter and
administer their factor. Persons with hemophilia and others who have inherited
clotting disorders will require these products throughout their lives.
The ability to acquire factor product under normal conditions is volatile,
but currently the international demand for certain factor products far exceeds
the supply. Availability of factor product from manufacturers is spotty, thereby
requiring the company to purchase through the blood broker market wherein
pricing may not be favorable to the company and product availability can change
significantly from day to day. During such times of shortages, prices soar with
limited availability to pass these additional costs on to patients. Due to the
nature of factor manufacturing processes, intermittent product shortages may be
experienced from time to time, which may make it difficult for Coram to meet the
needs of its patients and may have an adverse impact on Coram's future results
of operations. These shortages could be due to insufficient donor pools, failed
production lots, contamination, etc. Moreover, a single patient's requirements
may, at any given time, expend what would normally be a whole month's inventory
for multiple patients. During March 2001, the company began experiencing
difficulties obtaining recombinant factor VIII (rVIII) due to a nationwide
shortage of this product which was precipitated by Federal Drug Administration
requirements exceeding expectations of current manufacturing. Coram currently
has a supply of this factor product in inventory to meet immediate patient
demands; however, management is proactively taking steps to secure inventory of
this product at levels sufficient to meet anticipated future demands. These
steps include, but are not limited to, declining new patients for this
particular factor product until the shortage eases, as well as, asking patients
who are currently using rVIII to consult with their physicians and consider
voluntarily switching to appropriate alternative products on a temporary basis.
Under normal circumstances, limited allocations of products from manufacturers
greatly impacts the company's ability to expand its customer base, but
management believes this current factor shortage is likely to impair the
company's ability to grow this segment of its business.
TRANSPLANT SERVICES. Coram developed a specific program and is providing
therapies and services to pre-and post bone marrow, blood cell and organ
transplant patients. This clinically focused care management program includes,
among other things, proprietary patient and environmental assessment and
monitoring protocols, patient education tools and clinical training programs.
The most common therapy for transplant patients is anti-infective therapy,
including antibiotics, anti-viral and anti-fungal agents, most often prescribed
intravenously to prevent or treat an infection due to the patient's
immuno-compromised status. Other prescribed therapies include TPN, IVIG,
biologic response modifiers, immunosuppressive therapies and blood products.
BIOTHERAPY. Coram provides patients with biological response modifiers,
colony stimulating factors, erythropoietin and interferons. In addition, Coram
provides growth hormone therapies as prescribed by physicians.
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DURABLE MEDICAL EQUIPMENT AND RESPIRATORY THERAPY EQUIPMENT. Coram
provides durable medical and respiratory therapy equipment to its patients for
use at home. Durable medical and respiratory equipment include, but are not
limited to, hospital beds, wheelchairs, walkers, oxygen systems, home
ventilators, sleep apnea equipment and nebulizers. Coram's integrated service
approach allows patients to access infusion therapy or other therapy services
and the necessary medical equipment through a single source.
OTHER THERAPIES. Coram provides other technologically advanced therapies
such as antineoplastic chemotherapy, pain management, intravenous inotropic
therapy for patients with congestive heart failure or for those who are awaiting
cardiac transplants, intravenous anti-coagulant therapy for prevention of blood
clots, and anti-nausea therapy for chemotherapy induced emesis or hyperemesis
gravidarum. Hydration therapy is often administered in conjunction with
intravenous chemotherapy. Other therapies, as described herein, amounted to less
than 5% of the company's infusion therapy net revenue for each of the years
ended December 31, 2000, 1999, and 1998.
ALTERNATE SITE INFUSION THERAPY: ORGANIZATION AND OPERATIONS
GENERAL. Coram's alternate site infusion therapy business operations are
currently conducted through 76 branches. During the year ended December 31,
2000, the branches were divided into two geographic areas. Each area has a
Senior Vice President of Operations who reports directly to the President, and
an Area Vice President of Sales who reports to the Senior Vice President of
Sales, who reports to the President. Coram's new organizational structure was
designed to create greater operating and decision making efficiencies associated
with operating and managing the company. Management believes that the functional
approach to management has, and will continue to, facilitate high quality local
decision making, which allows Coram to attract and retain experienced local
managers and be responsive to local market needs. As the company continues to
reposition its business and increase its focus on the alternate site infusion
therapy business, management continuously reviews operations, focusing on cost
effective delivery of quality patient care. For example, Coram established a
Hemophilia Services Division and specialty hemophilia distribution centers in
Malvern, Pennsylvania, Albuquerque, New Mexico and Sacramento, California. Each
center utilizes existing Coram branches and resources and concentrates
experienced company clinicians and management on addressing the unique needs of
hemophilia patients and their carepartners.
OPERATING SYSTEMS AND CONTROLS. An important factor in Coram's ability to
monitor its operating locations is its management information systems. Besides
routine financial reporting, the company has developed a performance model for
monitoring the field operations of its infusion business. Actual operating
results derived from the management information systems can be compared to the
performance model, enabling management to identify opportunities for increased
efficiency and productivity. Management believes that the use of standardized,
specific performance matrices and the identification and monitoring of best
demonstrated practices facilitate operational improvements.
Coram endeavors to ensure that its local managers have the appropriate
authority and ability to perform effectively by providing training, education,
policies and procedures and standardized systems. Coram has designed various
management incentive plans that reward performance based on revenue growth,
accounts receivable collection, inventory control and contribution of earnings
before interest expense, income taxes, depreciation and amortization ("EBITDA").
ALTERNATE SITE INFUSION THERAPY: QUALITY ASSURANCE/PERFORMANCE IMPROVEMENT
Coram established performance improvement programs for its infusion
therapy business that are consistent with its service standards and enable the
company to monitor whether the objectives of those standards are met. In 1999,
Coram began triennial re-surveys conducted by the Joint Commission on the
Accreditation of Health Care Organizations ("JCAHO"). As of December 31, 1999,
the corporate office and 30 branches, including related satellite locations,
successfully completed the triennial survey process. During 2000, an additional
32 branches were successfully resurveyed by the JCAHO. The company expects that
the entire triennial resurvey of all locations will be completed in the second
quarter of 2001.
An integral part of Coram's quality efforts is the branch team that meets
periodically to perform, among other things, the following functions:
(i) evaluate branch programs, policies and procedures and amend
protocols as needed;
(ii) provide ongoing direction to quality improvement efforts;
(iii) evaluate patient satisfaction activities and results and analyze any
trends, respond as necessary to achieve better outcomes;
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(iv) assist in the development of new programs or procedures to meet
recognized needs within the branch or the community that it serves;
(v) evaluate the branch staff efforts related to professional and
clinical issues such as clinical monitoring of patients; and
(vi) identify and monitor key performance areas of operations and modify
as needed.
Further, Coram's Clinical Operations Department assists branch management
in assessing the levels of service being provided to patients. Coram's
integrated approach to performance improvement is designed to identify both
national and regional trends related to high volume, high risk and new
activities. It encompasses continuous assessment and measurement of patient
satisfaction at both local and national levels and clinical outcomes. It also
encompasses the measurement of management's success in achieving the desired
operational and fiscal benchmarks that are key to the company's success.
DURABLE MEDICAL EQUIPMENT AND RESPIRATORY THERAPY EQUIPMENT
Coram provides a full line of durable medical and respiratory therapy
equipment including, but not limited to, hospital beds, wheelchairs, walkers,
oxygen systems, home ventilators, sleep apnea equipment and nebulizers to serve
the needs of its home care patients through branches located in San Diego,
California; Indianapolis, Indiana; Lenexa, Kansas; New Orleans, Louisiana;
Detroit, Michigan and Casper, Wyoming. Coram also provides these services
through one of its partnerships which has three locations in Wisconsin. Durable
medical and respiratory therapy equipment are available to patients for purchase
or rent. The many synergies between the company's durable medical and
respiratory therapy equipment product line and its base infusion business
benefit both the company and its customers. Coram primarily benefits from the
opportunity to provide durable medical and respiratory therapy equipment to
patients who are already receiving infusion or other therapy services and
patients and payers principally benefit from the opportunity to obtain
healthcare services and equipment through a single source.
CLINICAL RESEARCH
Coram has been providing support services for clinical research studies
for the alternate site infusion therapy business since 1995. In 1998, the
company created a Clinical Research division and began devoting additional
resources to, and actively marketing, its capabilities in this area. This
division is operated through the company's wholly-owned subsidiary, CTI Network,
Inc. ("CTI"). Utilizing integrated information systems and Coram's national
network of approximately 750 full-time equivalent alternate site infusion nurses
and pharmacists, as well as, contracted nurses from non-Coram agencies, CTI can
offer its customers the opportunity to complete some of the most challenging
aspects of a clinical trial more quickly by:
(i) providing single source contracting through a central office for
national services;
(ii) assisting in the identification of potential investigators;
(iii) providing nurse study coordinators at the physician's office;
(iv) providing alternate site healthcare services such as therapy
administration, specimen collection, patient education and training,
patient assessments and data collection;
(v) providing alternate site pharmacy services;
(vi) providing patient screening and surveying services; and
(vii) providing product acquisition and national distribution services.
CPS: PHARMACY BENEFIT MANAGEMENT AND SPECIALTY MAIL-ORDER PHARMACY SERVICES
On July 31, 2000, the company completed the sale of CPS to Curascript
Pharmacy Services, Inc. and Curascript PBM Services, Inc. (collectively, the
"Buyers"). The Buyers are newly formed affiliates of GTCR Golder Rauner, L.L.C.
and the Buyers are led by certain members of the former CPS management team. See
Note 5 to the company's Consolidated Financial Statements.
8
CPS offered HMO, PPO, at-risk physician groups, self funded employer
benefit plans, labor organizations and other managed care customers pharmacy
benefit management and specialty mail-order pharmacy services. The pharmacy
benefit management services included on-line claims administration, formulary
management and drug utilization review through a nationwide network of over
51,000 retail pharmacies. The company generally maintained approximately 60 such
arrangements in place for pharmacy benefit management services. CPS's specialty
mail-order pharmacy service offered centralized distribution, compliance
monitoring, patient education and clinical support to patients with specialized
needs. In particular, CPS focused its marketing efforts on patients with organ
transplants, HIV/AIDS, growth deficiencies and other chronic conditions. As of
July 31, 2000, CPS had approximately 6,200 active patients receiving its
specialty mail-order pharmacy services.
The CPS division operated from its centralized facility in Orlando,
Florida, which opened in March 1999, replacing its former centralized facility
in Omaha, Nebraska. Both facilities were operational for much of 1999, with the
Omaha facility serving a support role as the transition was made to Orlando. The
Omaha facility serviced local payer relationships and the Orlando facility
served as the primary CPS call center and specialty mail-order pharmacy
location. CPS maintained four other satellite pharmacy operations to satisfy
specific local customer and payer requirements. One of the satellites functioned
as a walk-in retail pharmacy and was located in a large hospital. CPS closed its
Plainview, New York satellite pharmacy effective February 2000.
RESOURCE NETWORK SUBSIDIARIES: ANCILLARY NETWORK MANAGEMENT SERVICES
The Resource Network Subsidiaries offered ancillary network management
services to HMOs, PPOs, at-risk physician groups and other managed care
organizations for the home health services offered under their benefits plans.
As of January 1, 1999, R-Net was providing its services to its customers' plans
that covered approximately 3.5 million lives. Typically, a network of home
health service vendors managed by R-Net included providers of home infusion,
home nursing, durable medical equipment, respiratory therapy, home hospice,
medical supplies, women's health, orthotics, prosthetics and other home health
services identified by the customer. Each network provider was contracted with
R-Net and received referrals of patients from R-Net. Where appropriate, the
company's infusion and CPS divisions participated in the provider networks
established by R-Net.
For most of 1999, R-Net operated from its two primary call centers and
three satellite offices. The division's call center in Whippany, New Jersey was
opened in 1998 for the purpose of replacing the former Totowa, New Jersey call
center with a suitable facility for rendering the services required of R-Net
under the Master Agreement with Aetna that was signed in April 1998. R-Net also
maintained a call center in Houston, Texas. Together, R-Net's primary call
centers provided administrative services for the division and management and
intake services for several payer customers. The R-Net satellite offices were
devoted to serving the members of only one or two local customers.
The agreements that R-Net had for the provision of ancillary network
management services have been terminated and R-Net is no longer providing any
ancillary network management services. The Resource Network Subsidiaries are
being liquidated pursuant to certain Chapter 11 bankruptcy proceedings that are
currently pending in the United States Bankruptcy Court for the District of
Delaware. The Chapter 11 proceedings were originally initiated with the filing
on August 19, 1999 of an involuntary bankruptcy petition against Coram Resource
Network, Inc. in such court. Subsequently, both Resource Network Subsidiaries
filed voluntary petitions for relief on November 12, 1999. See Item 3. "Legal
Proceedings."
All of the R-Net locations have been closed in connection with its pending
liquidation. Additionally, all Coram employees who were members of the Resource
Network Subsidiaries' Board of Directors resigned during the year ended December
31, 2000, and currently only the Chief Restructuring Officer appointed by the
Bankruptcy Court remains on the Board of Directors to manage and operate the
liquidation of the R-Net business. Coram classifies the operating losses of this
business as discontinued operations in the consolidated financial statements.
See Item 3. "Legal Proceedings" and Notes 4 and 13 to the company's Consolidated
Financial Statements for more information regarding discontinued operations and
the amicable resolution of certain disputes between Aetna, the company and the
Resource Network Subsidiaries.
REIMBURSEMENT OF SERVICES
Virtually all of Coram's operating revenue is derived from third-party
payers, including private insurers, managed care organizations such as HMOs and
PPOs, at-risk physician groups, and governmental payers such as Medicare and
Medicaid. Like other medical service providers, Coram experiences lengthy
reimbursement periods in certain circumstances as a result of third-party
payment procedures. Consequently, management of accounts receivable through
effective patient registration, billing, documentation, collection and
reimbursement procedures is critical to financial success and continues to be a
high priority for management. Coram continues to focus on the processing of
clean claims and the careful screening of new cases to determine that adequate
reimbursement will be available and will be received in a timely manner.
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In certain instances, fixed fee or capitated fee arrangements are
utilized. Under a capitated fee arrangement, Coram would agree to deliver or
arrange for the delivery of certain home health services required under the
payer customer's health plan in exchange for a fixed per member per month
service fee. The total per member per month fee is calculated using all members
enrolled in the particular health plan as of certain dates. Before establishing
the appropriate per member per month fee, Coram typically reviews utilization
data provided by the payer customer and/or other available utilization data. In
some instances, the per member per month rates will be adjusted or reconciled
periodically to reflect actual utilization to prevent excess losses by the
company or excess expense outlays by the payer customer. As of December 31,
2000, the infusion therapy division was a party of only four capitated
contracts, none of which provided more than 5% of the company's net revenue for
any year during the three year period ended December 31, 2000. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Background."
Reimbursement payments are provided through various sources, such as
insurance companies, self-insured employers, patients and the Medicare and
Medicaid programs. The Healthcare Financing Administration has developed, for
use in the Medicare Part B program, a national fee schedule for respiratory
therapy, home medical equipment and infusion therapy, which provides
reimbursement at 80% of the amount of any fee on the schedule. The remaining 20%
co-insurance portion is the obligation of secondary insurance and/or the
patient. A substantial amount of the revenue Coram earns under the Medicare
program originates from the Part B program. Private indemnity payers typically
reimburse at a higher amount for a given service and provide a broader range of
benefits than governmental and managed care payers, although net revenue and
gross profit from both private and other third-party non-governmental payers
have been affected by continuing efforts to contain or reduce reimbursement for
healthcare services. An increasing percentage of Coram's net revenue has been
derived in recent years from agreements with HMOs, PPOs, managed care providers
and other contracted payers. Although these agreements often provide for
negotiated reimbursement at reduced rates, they generally result in lower bad
debts and provide opportunities to generate greater volume than traditional
indemnity referrals.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. Management is aware of certain ongoing
audits and reviews with respect to prior reimbursements from Medicare and
Medicaid. While management believes that the company is in substantial
compliance with all applicable laws and regulations, compliance with such laws
and regulations can be subject to future government review and interpretation,
as well as, significant regulatory action, including fines, penalties, and
exclusion from the Medicare and Medicaid programs. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations: Risk
Factors."
In December 2000, Coram announced that as part of its continuing efforts
to improve efficiency and overall performance, several Patient Financial Service
Centers (reimbursement sites) were being consolidated and the related
reimbursement positions were to be eliminated. By consolidating to fewer sites,
management expects to implement improved training, more easily standardize "best
demonstrated practices," enhance specialization related to payers such as
Medicare and achieve more consistent and timely cash collections. Management
does not expect this change to affect Coram's patients or payers, but believes,
instead, that in the long-term they will receive better, more consistent
service. The transition is expected to be accomplished in stages beginning April
1, 2001 and ending in the third quarter of the same year. Management has taken
certain actions to mitigate the potential shortfall in cash collections during
the upcoming transition period, including, but not limited to, offering
incentives for personnel to stay with the company until the completion of their
corresponding regional consolidation. No assurances can be given that the
consolidation of the company's Patient Financial Service Centers will be
completed by the end of the third quarter of 2001, that the consolidation will
be successful in enhancing timely reimbursement or that the company will not
experience a significant shortfall in cash collections during or after the
transition period. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations: Risk Factors."
COMPETITION
The alternate site infusion therapy market is highly competitive. Some of
Coram's current and potential competitors in these lines of business include:
(i) integrated providers of alternate site healthcare services;
(ii) hospitals; and
(iii) local providers of multiple products and services for the alternate
site healthcare market.
Coram has experienced increased competition in its alternate site infusion
therapy business from hospitals and physicians that have sought to increase the
scope of services offered through their facilities, including services similar
to those offered by Coram.
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Coram competes with other providers on a number of critical
differentiating factors, including quality of care and service, reputation
within the medical and payer communities, geographic scope and price.
Competition within Coram's alternate site infusion therapy line of business has
been affected by the decision of third-party payers and their case managers to
be more active in monitoring and directing the care delivered to their
beneficiaries. Accordingly, relationships with such payers and their case
managers and inclusion within preferred provider and other networks of approved
or accredited providers is often a prerequisite to Coram's ability to continue
to serve many of its patients. Similarly, Coram's ability to align itself with
other healthcare service providers may increase in importance as managed care
providers and provider networks seek out providers who offer a broad range of
services that may exceed the range of services currently offered directly by
Coram.
There are relatively few barriers to entry in the local markets which
Coram serves. Local or regional companies are currently competing in many of the
healthcare markets served by the company and others may do so in the future.
Entrance into the local markets by competitors could cause a decline in net
revenue, loss of market acceptance of Coram's services and price competition.
Coram expects to continue to encounter competition in the future that could
limit its ability to maintain or increase its market share. Such competition
could have an adverse effect on the business, financial condition and results of
operations of Coram. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations: Risk Factors."
SALES AND MARKETING
Coram's alternate site infusion therapy products and services are marketed
through branch sales personnel, including managed care consultants and account
managers, to its primary referral sources. The company established product
managers for three of its core therapies: nutrition, anti-infectives/transplant
and hemophilia-related services through three Strategic Business Units:
Nutrition Services, Anti-Infectives/Transplant Services and Blood Products
Services (including hemophilia and IVIG), respectively. The vice president for
each unit has responsibility for ongoing program development and provides
clinical and marketing resources to focus on growing sales in these areas.
Substantially all of Coram's new patients are referred by physicians,
medical groups, hospital discharge planners, case managers employed by HMOs,
PPOs or other managed care organizations, insurance companies and home care
agencies. Coram's sales force in each of its lines of business is responsible
for establishing and maintaining referral sources. Sales employees generally
receive a base salary plus incentive compensation based on core therapy revenue
growth and/or EBITDA enhancements.
Coram's network of field representatives enables it to market its services
to numerous sources of patient referrals, including physicians, hospital
discharge planners, hospital personnel, HMOs, PPOs and insurance companies.
Marketing is focused on presenting Coram's clinical expertise tailored to
specific customer interests, with an emphasis on certain key therapies.
Specialty marketing and sales support personnel promote products and services
that are outside of base infusion therapy.
As a result of escalating pressures to contain healthcare costs,
third-party payers are participating in certain decisions regarding healthcare
alternatives, using their significant bargaining power to secure discounts and
to direct referrals of their enrollees to providers. In response, Coram has
directed its sales and development focus to aggressively pursue agreements with
third-party payers, managed care organizations and provider networks that
provide high quality, cost-effective care. Coram maintains a dedicated sales
force in each of its lines of business to enhance its efforts to market and sell
its services to managed care payers. In the company's infusion therapy division,
managed care sales representatives are deployed to focus on regional and
national payers, with a field sales force to affect "pull-through" from referral
sources within each payer's network. Coram is currently focusing its efforts in
its infusion therapy business on increasing referrals through selected managed
care agreements, with the goal of being the preferred infusion provider, as well
as, selling specialty programs such as nutrition, anti-infectives, IVIG and
services for persons with hemophilia and persons receiving certain types of
organ and bone marrow/blood cell transplants.
CUSTOMERS AND SUPPLIERS
Coram provides alternate site home healthcare services and products to a
large number of patients and related payers. Excluding Medicare and Medicaid,
which collectively represented approximately 22% of consolidated net revenue
from continuing operations, including CPS, for the year ended December 31, 2000,
no other single payer accounted for more than 5% of Coram's net revenue for
2000.
Coram purchases products from a large number of suppliers and considers
its relationships with its vendors to be good, subject to credit uncertainty and
the ongoing bankruptcy proceedings. Management believes that substantially all
of its products are available from alternative sources with terms consistent, in
all material respects, to its present agreements. This is true for products
currently being purchased through Cardinal Health, Inc. and Baxter Healthcare
Corporation, two of Coram's major suppliers of drugs and supplies. During the
year ended December 31, 2000, Coram purchased approximately $95.8 million of
drugs and supplies from
11
Cardinal Health, Inc. and $22.8 million from Baxter Corporation, or
approximately 63% and 15%, respectively, of its total drugs and supplies.
The principal supplier of Coram's infusion pumps, Sabratek Corporation
("Sabratek"), filed for protection under Chapter 11 of the United States
Bankruptcy Code on December 17, 1999. Baxter Healthcare Corporation ("Baxter")
purchased certain Sabratek assets, including Sabratek's pump manufacturing
division, and has continued to produce the related tubing and infusion sets
needed to operate the ambulatory infusion pumps manufactured by Sabratek and
used by Coram. Beginning in January 2000, Coram's fleet of approximately 5,000
Sabratek 6060 Homerun pumps began to experience malfunctions and failures of
various sorts due to inherent flaws in the design of the pump. Pumps needing
repair were sent back to Sabratek for repair at no cost due to a five-year
warranty on pump repairs that was part of the underlying contract. However, due
to part shortages, Sabratek did not always perform these repairs promptly. When
Baxter acquired Sabratek during 2000, the pumps still awaiting repair were
transferred to Baxter. The 6060 Homerun pumps continued to malfunction in larger
numbers so that by December 2000 approximately 500 pumps were at Baxter awaiting
repair. Baxter inherited the same difficulties with repairs that Sabratek
experienced: an insufficient labor pool and substandard repair parts. In order
to supply a sufficient number of these pumps for patient needs, Coram has had to
reserve use of the 6060 Homerun pumps to only those patients who are truly
ambulatory, carefully manage its nationwide supply by transferring pumps from
branch to branch and, in some cases, rent pumps from other vendors. Vendors in
some markets have been similarly affected by Baxter's pump repair backlog and
occasionally could not supply the company's 6060 Homerun pump needs. When this
has occurred, Coram has doubled its efforts to make effective use of available
pumps. Coram has not refused any patients because of the short supply of 6060
Homerun pumps; however, the ability to purchase the amount of tubing required in
the contract with Baxter, and thereby attain certain required purchasing
thresholds, may be jeopardized by Baxter's inability to repair and return the
pumps in a timely manner. Currently, over 600 Coram pumps are in for repair with
Baxter. While management believes the company can meet the needs of its
patients, quality of care may be impacted resulting in reduced patient
satisfaction. Diversifying the pump fleet would add significant cost to the
process, as well as, demand on limited resources to provide patient and
caregiver training and certification. Under normal conditions, Coram would
transition its pump fleet at a rate of approximately 20% per year; however, the
current conditions may require the company to replace the entire fleet within
the next year. Management is currently pursuing alternatives to the current
infusion pump supply chain; however, management cannot predict what consequences
will result from obtaining alternate ambulatory infusion pumps.
GOVERNMENT REGULATION
GENERAL. The federal government and all states in which Coram is currently
operating regulate various aspects of Coram's business. In particular, Coram's
operations are subject to extensive federal and state laws regulating, among
other things, the provision of pharmacy, home care, nursing services, ancillary
network management services, health planning, health and safety, environmental
compliance and toxic and medical waste disposal. Coram is also subject to fraud
and abuse and self-referral laws, which affect its business relationships with
physicians, other healthcare providers and referral sources and its
reimbursement from government payers. Generally, all states require infusion
companies to be licensed as pharmacies and to have appropriate state and federal
registrations for dispensing controlled substances. Some states require infusion
companies to be licensed as nursing or home health agencies and to obtain
medical waste permits. In addition, certain company employees are subject to
state laws and regulations governing the ethics and professional practices of
pharmacy and/or nursing.
Coram may also be required to obtain certifications or register in order
to participate in governmental payment programs such as Medicare and Medicaid.
Some states have established certificate-of-need programs regulating the
establishment or expansion of healthcare operations, including certain of
Coram's operations. The failure to obtain, renew or maintain any of the required
regulatory approvals, certifications, registrations or licenses could adversely
affect Coram's business and could prevent the location or locations involved
from offering products and services to patients and/or from billing third-party
payers. Coram's operating results could be adversely affected, directly or
indirectly, as a result of any such actions. Coram believes it complies, in all
material respects, with these and all other applicable laws and regulations. The
healthcare services industry will continue to be subject to pervasive regulation
at the federal and state levels, the scope and effect of which cannot be
predicted. No assurances can be given that the activities of Coram will not be
reviewed and challenged or that government sponsored healthcare reform, if
enacted, will not result in material adverse changes to the company.
FRAUD AND ABUSE. Coram's operations are subject to the illegal
remuneration provisions of the Social Security Act (sometimes referred to as the
"anti-kickback" statute) that imposes criminal and civil sanctions on persons
who knowingly and willfully solicit, offer, receive or pay any remuneration,
whether directly or indirectly, in return for, or to induce, the referral of a
patient for treatment, or, among other things, the ordering, purchasing or
leasing, of items or services that are paid for in whole or in part by federal
healthcare programs. Violations of the federal anti-kickback statute are
punishable by criminal penalties, including imprisonment, fines and exclusion of
the provider from future participation in federal healthcare programs. Federal
healthcare programs have been defined to include any plan or program that
provides health benefits which is funded by the United States Government and
commonly
12
include, among others, Medicare, Medicaid and the Civilian Health and Medical
Program of the Uniformed Services. Administrative exclusion and civil monetary
penalties for anti-kickback violations can also be imposed through an
administrative process. Federal enforcement officials may also attempt to use
other general federal statutes to punish behavior considered fraudulent or
abusive, including the Federal False Claims Act, which provides for penalties of
up to $10,000 per claim plus treble damages, and permits private persons to sue
on behalf of the government. While the federal anti-kickback statute expressly
prohibits transactions that have traditionally had criminal implications, such
as kickbacks, rebates or bribes for patient referrals, its language has been
construed broadly and has not been exclusively limited to such obviously
wrongful transactions. Some court decisions state that, under certain
circumstances, the statute is also violated when "one" purpose (as opposed to
the "primary" or a "material" purpose) of a payment is to induce referrals.
Congress has frequently considered, but has not yet adopted, federal legislation
that would expand the federal anti-kickback statute to include the same broad
prohibitions regardless of payer source.
In addition to the payment or receipt of illegal remuneration for the
referral or generation of federal healthcare program business, the fraud and
abuse laws cover other billing practices that are considered fraudulent (such as
presentation of duplicate claims, claims for services not actually rendered or
for procedures that are more costly than those actually rendered) or abusive
(such as claims presented for services not medically necessary based upon a
misrepresentation of fact) subject to the same remedies described above.
Similarly, a large number of states have varying laws prohibiting certain
direct or indirect remuneration between healthcare providers for the referral of
patients to a particular provider, including pharmacies and home health
agencies. Possible sanctions for violations of these laws include loss of
licensure, exclusion from state funded programs and civil and criminal
penalties.
PROHIBITION ON PHYSICIAN REFERRALS. Under the Omnibus Budget
Reconciliation Act of 1993 (commonly referred to as "Stark II"), it is unlawful
for a physician to refer patients for certain designated health services
reimbursable under the Medicare or Medicaid program to an entity with which the
physician has a financial relationship, unless the financial relationship fits
within an exception enumerated in Stark II or regulations promulgated
thereunder. Aspects of Coram's business which are "designated health services"
for purposes of Stark II include outpatient prescription drugs, parenteral and
enteral nutrition, equipment and supplies, durable medical equipment and home
health services. A "financial relationship" under Stark II is defined broadly as
an ownership or investment interest in, or any type of compensation arrangement
in which remuneration flows between the physician and the provider. Coram has
financial relationships with physicians and physician owned entities in the form
of medical director agreements and service agreements pursuant to which the
company provides pharmacy products. In each case, the relationship has been
structured, based on advice of legal counsel, using an arrangement management
believes to be consistent with applicable exceptions set forth in Stark II, such
as the personal services arrangements exception or the exception for payments by
a physician for items and services.
In addition, the company is aware of certain referring physicians that
have had a financial interest in the company through ownership of shares of the
company's common stock. The Stark II law includes an exception for the ownership
of publicly traded stock in certain companies with equity above certain levels.
As of December 31, 2000, the company complied with the requirements of such
exception. However, there can be no assurance that the ownership of shares of
Coram common stock by referring physicians will continue to fit within the
public company exception of Stark II because the public company exception
requires the issuing company to have stockholders' equity of at least $75
million either as of the end of its most recent fiscal year or on a weighted
average basis during the last three fiscal years. Due principally to the gain on
troubled debt restructuring (see Note 8 to the company's Consolidated Financial
Statements) and the disposition of CPS (see Note 5 to the company's Consolidated
Financial Statements), at December 31, 2000 the company's stockholders' equity
was above the required level. However, in light of the company's recurring
operational losses during each of the years in the three year period ended
December 31, 2000, management's ability to maintain an appropriate level of
stockholders' equity cannot be reasonably assured. With a decrease in equity
below $75 million at December 31, 2001, Coram may no longer qualify for such
exception and would be forced to cease accepting referrals of patients with
government sponsored benefit programs from physicians who own shares of Coram's
common stock. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations: Risk Factors."
Under Stark II, an entity is prohibited from claiming payment under the
Medicare or Medicaid programs for services rendered pursuant to a prohibited
referral and is liable for the refund of amounts received pursuant to prohibited
claims. The entity can also be assessed civil penalties of up to $15,000 per
improper claim and can be excluded from participation in the Medicare and/or
Medicaid programs. In addition, a number of the states in which the company
operates have similar prohibitions on physician self-referrals with similar
penalties. Although management believes it has structured its financial
relationships with physicians to comply with such Stark II and applicable state
law equivalents, a failure to comply with the provisions of such laws could have
a material adverse effect on the company.
OTHER FRAUD AND ABUSE LAWS. The False Claims Act imposes civil liability
on individuals or entities that submit false or fraudulent claims for payment to
the government. Violations of the False Claims Act may result in civil penalties
and forfeitures and exclusion from the Medicare and Medicaid programs. The
Health Insurance Portability and Accountability Act of 1996 created two new
federal
13
crimes: "Healthcare Fraud" and "False Statements Relating to Healthcare
Matters." The Healthcare Fraud statute prohibits knowingly and willfully
executing a scheme or artifice to defraud any healthcare benefit program. A
violation of this statute is a felony and may result in fines and/or
imprisonment. The False Statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact by any trick, scheme or
device or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare benefits, items or
services. A violation of this statute is a felony and may result in fines and/or
imprisonment.
Recently, the federal government has made a decision to significantly
increase the financial resources allocated to enforcing the healthcare fraud and
abuse laws. In addition, private insurers and various state enforcement agencies
have increased their level of scrutiny of healthcare claims in an effort to
identify and prosecute fraudulent and abusive practices in healthcare. A failure
to comply with any of the fraud and abuse laws could have a material adverse
effect on the company.
MEDICARE AND HEALTHCARE REFORM. As part of the Balanced Budget Act of 1997
(the "BBA"), Congress made numerous changes that affect Part A certified home
health agencies and Part B suppliers like Coram that participate in the Medicare
program. These policies were subsequently modified by the Medicare, Medicaid and
SCHIP Balanced Budget Refinement Act of 1999 (the "BBRA") and the Medicare,
Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (the "BIPA").
The BBA requires Part A certified home health agencies, as a condition of
their participation in Part A of the Medicare program, to post surety bonds. The
bonds are to be used to secure performance and compliance with Medicare program
rules and requirements. The regulations, as originally published, would have
required each Medicare certified home health provider to obtain a surety bond in
an amount equal to the greater of 15% of the annual amount Medicare paid to the
provider in the prior year (up to a maximum of $3,000,000) or $50,000. The BBRA
modified the annual surety bond amounts for home health agencies to require the
lesser of 10% of the amount Medicare paid to the provider in the prior year or
$50,000. The deadline for securing such bonds has been extended indefinitely
while the Health Care Financing Administration ("HCFA") reviews the bonding
requirements. HCFA has indicated that the new compliance date will be sixty days
after the publication of the final rule. Management believes, based upon
currently available information derived from its discussions with surety bond
brokers and organizations that issue surety bonds, that the necessary bonds will
not be generally available to home health providers until HCFA revises its
bonding requirements in a way that clarifies and/or limits the types of
liabilities that will be covered by the bonds. As of April 9, 2001, the company
had only one Medicare certified home health provider location, which has not
obtained a surety bond.
As required by the BBA, HCFA also intends to issue separate surety bond
regulations applicable to Part B suppliers. Virtually all of Coram's branch
offices participate as suppliers in the Part B Medicare program. Similar bonding
requirements are being reviewed by state Medicaid programs. If Coram is not able
to obtain all of the necessary surety bonds, it may have to cease its
participation in the Medicare and Medicaid programs for some or all of its
branch locations. In October 2000, HCFA issued final supplier standards, which
expanded certain operational requirements for suppliers. In the final rule, HCFA
decided to delay the surety bond rule pending "extensive changes" to this
requirement. HCFA stated that it will consider public comments received on the
surety bond requirements, primarily relating to costs, along with its experience
with surety bonds for home health agencies and the General Accounting Office's
study of Medicare surety bonds, when it issues a proposed rule on surety bonds
in the future. Until HCFA issues another rule on this provision, there is no
surety bond requirement for suppliers. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations: Liquidity and Capital
Resources -- Part A and Part B Medicare Surety Bonds."
The BBA also reduced reimbursement for oxygen and oxygen related therapies
by 25% effective January 1, 1998, with an additional 5% reduction effective
January 1, 1999 and in subsequent years. In addition, the BBA eliminated
consumer price index updates for durable medical equipment and parenteral and
enteral nutrients, supplies and equipment for five years, thereby "freezing" the
payment amount for such items until the year 2003. The BBRA restored a portion
of the durable medical equipment and oxygen payments by increasing the fee
schedules by 0.3% in 2001 and 0.6% in 2002. The BIPA further modified payments
for durable medical equipment by providing a full inflation update for items of
durable medical equipment (but not oxygen and oxygen equipment) in 2001,
implemented in two steps; however, the BIPA does not authorize durable medical
equipment payment increases for 2002.
The BBA also mandated the implementation of a prospective payment system
("PPS") for home health services for cost reporting periods beginning on or
after October 1, 1999. This deadline was subsequently extended to October 1,
2000. On July 3, 2000, HCFA issued a final rule to implement the home health
PPS. Under the final rule, Medicare pays home health agencies for each covered
60-day episode of care, based on the care needs of the patients, as determined
by a standardized assessment tool used to assess patient needs. Agencies also
are eligible for outlier payments if the costs of caring for an individual
beneficiary were significantly higher than the specified payment rate. The BIPA
delays a scheduled 15 percent reduction in aggregate home health PPS amounts by
another year, until October 1, 2002, while the United States Comptroller General
studies the need for the 15 percent reduction. The aggregate amount of Medicare
payments to home health agencies in fiscal year 2002 will equal the aggregate
payments in fiscal year 2001,
14
updated by the market basket index ("MBI") increase, minus 1.1%. The BIPA also
provides a full MBI update for services provided under the home health PPS for
fiscal year 2001, implemented in two phases. In addition, the BBA established
consolidated billing requirements for home health agencies, under which payment
for home health products and services may only be made to the home health agency
that establishes the beneficiary's home health plan of care, regardless of
whether the item or service was furnished by the agency or by an outside
provider or supplier. The BBRA excludes durable medical equipment and oxygen and
oxygen supplies from the consolidated billing requirement, thereby enabling
durable medical equipment and oxygen suppliers to continue to bill Medicare Part
B directly for items and services furnished to home health patients, rather than
be dependent on a home health agency for payment.
The BIPA also addresses HCFA policies regarding coverage of and payment
for drugs and biologicals. For instance, the BIPA requires that payment for
drugs under Part B be made on an assigned basis; in other words, the provider
must accept the Medicare fee schedule amount as payment in full. The BIPA also
addresses HCFA's attempts to modify the calculation of average wholesale prices
("AWPs") of drugs, upon which Medicare reimbursement is based. The federal
government has been investigating whether pharmaceutical manufacturers have been
manipulating AWPs. In May 2000, HCFA proposed using new Department of Justice
pricing data for updating Medicare payment allowances for drugs and biologicals,
although HCFA withdrew this proposal in November 2000, citing the likelihood of
Congressional action in this area. The BIPA established a temporary moratorium
on direct or indirect reductions (but not increases) in payment rates in effect
on January 1, 2001, until the Secretary of Health and Human Services reviews a
study that the General Accounting Office ("GAO") is directed to conduct
regarding the Medicare reimbursement for drugs and biologicals and related
services. The GAO is directed to report to Congress and the Secretary of Health
and Human Services within nine months of enactment on specific recommendations
for revised payment methodologies. It is uncertain at this time what Medicare
prescription drug payment recommendations will be proposed by the GAO or whether
such proposals or other payment initiatives will be adopted by the Medicare
program in the future.
The BBA also authorized certain demonstration projects for competitive
bidding involving, at a minimum, oxygen and oxygen equipment, through December
31, 2002. The first competitive bidding project, underway in Polk County,
Florida, is using payment rates that are between 13% and 31% lower than
Medicare's existing fee schedule for five categories of products, including
oxygen equipment and supplies, enteral nutrition equipment and supplies and
urological supplies. Plans are underway to implement another round of
competitive bidding in Polk County in October 2001, covering oxygen equipment
and supplies, hospital beds and accessories, urological supplies and surgical
dressings. A second competitive bidding project was launched on February 1, 2001
in the San Antonio, Texas area, and applies to, among other things, oxygen
equipment and supplies and nebulizer inhalation drugs. The long-range impact of
the home health prospective payment system and future competitive bidding
projects is unclear. Accordingly, there can be no assurances that adoption of
these or other payment systems and the implementation of the Medicare
reimbursement reductions and freezes described above will not result in a
material decrease in the amount of reimbursement Coram receives from the
Medicare program for the services it currently provides and any other home
health or related oxygen, durable medical equipment or home infusion services
Coram may provide in the future.
HEALTH INFORMATION PRACTICES. The administrative simplification provisions
of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
mandate, among other things, the adoption of standards for the exchange of
electronic health information in an effort to encourage overall administrative
simplification and enhance the effectiveness and efficiency of the healthcare
industry. Among the standards that the Department of Health and Human Services
(the "DHHS") must adopt pursuant to HIPAA are standards for the following:
electronic transactions and code sets; unique identifiers for providers,
employers, health plans and individuals; security and electronic signatures;
privacy; and enforcement.
Although HIPAA was intended ultimately to reduce administrative expenses
and burdens faced within the healthcare industry, the law may initially bring
about significant and, in some cases, costly changes. The DHHS has released two
rules to date mandating the use of new standards with respect to certain
healthcare transactions and health information. The first rule requires the use
of uniform standards for common healthcare transactions, including healthcare
claims information, plan eligibility, referral certification and authorization,
claims status, plan enrollment and disenrollment, payment and remittance advice,
plan premium payments and coordination of benefits, and it establishes standards
for the use of electronic signatures.
Second, the DHHS released new standards relating to the privacy of
individually identifiable health information. These standards not only require
compliance with rules governing the use and disclosure of protected health
information, but they also impose those rules, by contract, on any business
associate to whom such information is disclosed. Rules governing the security of
health information have been proposed but have not yet been issued in final
form.
The DHHS finalized the new standards on August 17, 2000, and the company
will be required to comply with them by October 16, 2002. The privacy standards
were issued on December 28, 2000, to become effective on April 14, 2001, with a
compliance date of April 14, 2003. In addition, on February 28, 2001, the DHHS
amended the final privacy rule to allow additional public comments before the
rule becomes effective on April 14, 2001. The current administration and
Congress are taking a careful look at the existing
15
regulations, but it is uncertain whether there will be further changes to the
privacy standards or their compliance date. With respect to the security
regulations, once they are issued in final form, affected parties will have
approximately two years to be fully compliant. Sanctions for failing to comply
with the HIPAA health information practices provisions include criminal
penalties and civil sanctions.
The company is evaluating the effect of HIPAA and taking steps to achieve
compliance. At this time, management anticipates that the company will be able
to fully comply with the HIPAA requirements that have been adopted. However,
management cannot, at this time, estimate the cost of such compliance, nor can
management estimate the cost of compliance with standards that have not yet been
finalized by the DHHS. Although the new and proposed health information
standards are likely to have a significant effect on the manner in which the
company handles health data and communicates with payers, based on current
knowledge, management believes that the cost of compliance will not have a
material adverse effect on the company's business, financial condition, results
of operations or cash flows.
Further statutes or regulations may be adopted which would impose
additional requirements in order for Coram to be eligible to participate in the
federal and state payment programs. Such new legislation or regulations may
adversely affect Coram's business operations. There is significant national
concern today about the availability and rising cost of healthcare in the United
States. It is anticipated that new federal and/or state legislation will be
passed and regulations adopted to attempt to provide broader and better
healthcare services and to manage and contain their cost. Management is unable
to predict the content of any legislation or what, if any, changes may occur in
the method and rates of its Medicare and Medicaid reimbursement or in other
government regulations that may affect its businesses, or whether such changes,
if made, will have a material adverse effect on Coram's business, financial
position and results of operations.
STATE LAWS REGARDING FEE SPLITTING, PROVISION OF MEDICINE AND INSURANCE.
The laws of many states prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. Although management believes its
operations, as currently conducted, are in material compliance with existing
applicable laws, certain aspects of Coram's business operations have not been
subject to state or federal regulatory interpretation. There can be no assurance
that a review of Coram's business by courts or regulatory authorities will not
result in determinations that could adversely affect the company's operations or
that the healthcare regulatory environment will not change so as to restrict its
existing operations or its expansion.
Most states have laws regulating insurance companies and HMOs. Coram is
not qualified in any state to engage in either the insurance or HMO business,
but Coram had registered one of its R-Net subsidiaries as a risk-taking
preferred provider organization in one state. This subsidiary is no longer
operating. As managed care penetration increases, state regulators are beginning
to scrutinize the practices of and relationships among third-party payers,
medical service providers and entities providing management and administrative
services to medical service providers, especially with respect to risk-sharing
arrangements by and among such providers. State regulators are also reviewing
whether risk-bearing entities are subject to insurance or HMO regulation.
Management believes that its practices are consistent with those of other direct
healthcare service providers and do not constitute licensable HMO or insurance
activities. To the extent such licenses may be required, Coram will make the
necessary filings and registrations to achieve compliance with applicable laws.
However, given the limited regulatory history with respect to such practices,
there can be no assurance that states requiring licensure will not attempt to
assert jurisdiction. If the states pursue actions against Coram and/or its
customers, Coram may be compelled to restructure or refrain from engaging in
certain business practices.
PHARMACIES AND HOME HEALTH AGENCIES. Each of Coram's pharmacies is
licensed in the states in which it is located and in the states where its
products are delivered. Each of these pharmacies also has a Controlled
Substances Registration Certificate issued by the Drug Enforcement
Administration of the United States Department of Justice. Many states in which
the company operates also require home infusion companies to be licensed as home
health agencies. The failure of a branch facility to obtain, renew or maintain
any required regulatory approvals or licenses could adversely affect the
existing operations of that branch facility.
OTHER REGULATIONS. Coram's operations are subject to various state
hazardous and medical waste disposal laws. The laws currently in effect do not
classify most of the waste produced during the provision of the company's
services to be hazardous, although disposal of non-hazardous medical waste is
also subject to regulation. Occupational Safety and Health Administration
("OSHA") regulations require employers of workers who are occupationally exposed
to blood or other potentially infectious materials to provide those workers with
certain prescribed protections against bloodborne pathogens. The regulatory
requirements apply to all healthcare facilities, including the company's
branches, and require employers to make a determination as to which employees
may be exposed to blood or other potentially infectious materials and to have in
effect a written exposure control plan. Furthermore, employers are required to
provide hepatitis-B vaccinations, personal protective equipment, infection
control training, post-exposure evaluation and follow-up, waste disposal
policies and procedures, and engineering and work practice controls. Employers
are also required to comply with certain record keeping requirements. Management
believes that the company is in material compliance with the foregoing laws and
regulations.
16
INTERNAL COMPLIANCE AND MONITORING. Coram implemented measures to ensure
compliance with applicable laws and engaged Richard P. Kusserow, the former
Inspector General of the Department of Health and Human Services, as a
consultant to assist Coram in its continued development and administration of
its compliance program. Coram's internal regulatory compliance review program is
intended to deal with legal, regulatory and ethical compliance issues. However,
no assurances can be given that Coram's business arrangements, present or past
(or those of its predecessors or divested subsidiaries, affiliates or
partnerships), will not be the subject of an investigation or prosecution by a
federal or state governmental authority in the future. Such investigations could
result in a penalty, or any combination of the penalties discussed above,
depending upon the agency involved in such investigation and prosecution.
Coram regularly monitors legislative developments and would seek to
restructure a business arrangement if it was determined that any of its business
relationships placed the company in material noncompliance with any applicable
statute or regulation. The healthcare services industry will continue to be
subject to substantial regulation at the federal and state levels, the scope and
effect of which cannot be predicted by management. Any loss by Coram of its
various federal certifications, its authorization to participate in the Medicare
or Medicaid programs or its licenses under the laws of any state or other
governmental authority from which a substantial portion of its revenue is
derived would have a material adverse effect on its business. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Risk Factors."
EMPLOYEES
As of December 31, 2000, Coram had approximately 2,200 full-time
equivalent employees (2,700 full and part-time employees). None of Coram's
employees are currently represented by a labor union or other labor
organization, or covered by a collective bargaining agreement. Approximately 34%
of the full-time employees are nurses and pharmacists, with the remainder
consisting primarily of sales and marketing, billing and reimbursement, branch
operations, clinical coordinators, financial and systems professionals.
Management believes that its employee relations are good.
ITEM 2. PROPERTIES
The company's corporate headquarters are located in Denver, Colorado and
consist of approximately 20,000 square feet of office space leased through
August 31, 2001. Due to the current lease agreement expiring in August 2001,
Coram is reviewing several options for the corporate office. As of April 2,
2001, Coram had 76 branch offices throughout the United States and Canada,
totaling approximately 0.8 million square feet of facility space with annual
rent aggregating approximately $10.3 million. In addition, the company leases
space in Bannockburn, Illinois which houses the company's information systems
and CTI business. Management believes that the loss of a lease on any one
facility would not materially effect the company's operations.
In September 2000, the Bankruptcy Court approved a Debtors' motion to
reject four unexpired, non-residential real property leases and any associated
subleases. The rejected leases include underutilized locations in: (i)
Allentown, Pennsylvania; (ii) Denver, Colorado; (iii) Philadelphia,
Pennsylvania; and (iv) Whippany, New Jersey.
ITEM 3. LEGAL PROCEEDINGS
BANKRUPTCY PROCEEDINGS. On August 8, 2000, the Debtors filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court for the District of Delaware, In Re: Coram
Healthcare Corporation and Coram, Inc., Case Nos. 00-3299 (MFW) and 00-3300
(MFW) (collectively the "Chapter 11 Cases"), respectively. The proceedings have
been consolidated for administrative purposes only by the United States
Bankruptcy Court in Delaware and are being administered under the docket of In
Re: Coram Healthcare Corporation, Case No. 00-3299 (MFW). None of the Debtors'
other subsidiaries are a debtor in the proceeding. See Note 3 to the company's
Consolidated Financial Statements for further details.
Except as may otherwise be determined by the Bankruptcy Court overseeing
the Chapter 11 Cases, the protection afforded by Chapter 11 generally
automatically stays any litigation proceedings pending against either or both of
the Debtors. All such claims will be addressed through the proceedings
applicable to the Chapter 11 Cases. The automatic stay would not, however, apply
to actions brought against the company's non-debtor subsidiaries.
OFFICIAL COMMITTEE OF THE EQUITY SECURITY HOLDERS' MATTERS. A committee of
persons claiming to own shares of the company's publicly-traded common stock
(the "Equity Committee") objected to an amended and restated joint plan of
reorganization (the "Restated Joint Plan") filed in the Bankruptcy Court on
October 20, 2000 by the Debtors, contending that, among other things, the
company valuation upon which the Restated Joint Plan of reorganization was
premised and the underlying projections and assumptions were flawed. On December
21, 2000, the Bankruptcy Court determined not to confirm the Restated Joint
Plan. The company and the Equity Committee are involved in a review of certain
company information regarding, among other things, the
17
Equity Committee's contentions. Additionally, the Equity Committee filed a
motion with the Bankruptcy Court seeking permission to bring a derivative
lawsuit directly against the company's Chief Executive Officer, a former member
of the Board of Directors and Cerberus Partners, L.P. (a party to the company's
debtor-in-possession financing agreement, Senior Credit Facility and Securities
Exchange Agreement). The Equity Committee's lawsuit alleges a collusive plan
whereby the named parties conspired to devalue the company for the benefit of
the company's creditors under the Securities Exchange Agreement. On February 26,
2001, the Bankruptcy Court ruled that the Equity Committee's motion would not be
productive at that time and, accordingly, the motion to proceed with the lawsuit
was denied without prejudice.
Management cannot predict whether any future objections of the Equity
Committee will be forthcoming or if they would prevent confirmation of a plan of
reorganization, if any, set forth by the Debtors' management. Management also
cannot predict if any other actions of the Equity Committee will have adverse
consequences to the company.
RESOURCE NETWORK SUBSIDIARIES' BANKRUPTCY. On November 12, 1999, the
Resource Network Subsidiaries filed voluntary petitions under Chapter 11 of the
United States Code in the United States Bankruptcy Court for the District of
Delaware, Case No. 99-2889 (MFW). On August 19, 1999, a small group of parties
with claims against the Resource Network Subsidiaries filed an involuntary
bankruptcy petition under Chapter 11 against Coram Resource Network, Inc. in the
United States Bankruptcy Court for the District of Delaware. The two proceedings
were consolidated by stipulation of the parties and the case is pending under
the style, IN RE CORAM RESOURCE NETWORK, INC. AND CORAM INDEPENDENT PRACTICE
ASSOCIATION, INC., Case No. 99-2889 (MFW). The Resource Network Subsidiaries are
now being liquidated pursuant to the proceedings. The Chief Restructuring
Officer of the Resource Network Subsidiaries had threatened suit on behalf of
the estates against Coram Healthcare Corporation ("CHC"). The draft complaint
included claims for damages against CHC and certain of its former and current
officers and directors in excess of $41 million. The draft complaint included a
threat to pierce the corporate veil of the Resource Network Subsidiaries to
reach CHC and included claims of breaches by the officers and directors of their
fiduciary duties to the Resource Network Subsidiaries and CHC.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtor's Chapter 11 proceedings seeking, among other things, to have the two
separate bankruptcy proceedings substantively consolidated into one proceeding.
If granted, the Chapter 11 proceedings involving the Resource Network
Subsidiaries and the Chapter 11 proceedings involving the Debtors would have
been combined such that the assets and liabilities of the Resource Network
Subsidiaries would be joined with the assets and liabilities of the Debtors, the
liabilities of the combined entity would be satisfied from their combined funds
and all intercompany claims would be eliminated. Furthermore, the creditors of
both proceedings would have voted on any reorganization plan for the combined
entities. The Resource Network Subsidiaries and the Debtors engaged in discovery
related to this substantive consolidation motion and, in connection therewith,
the parties reached a settlement agreement in November 2000. The settlement
agreement was approved by the Bankruptcy Court in December 2000 and the Debtors
made a payment of $0.5 million to the Resource Network Subsidiaries in January
2001.
Notwithstanding the withdrawal of the substantive consolidation motion,
the Resource Network Subsidiaries still maintain a proof of claim in excess of
$41 million against CHC's estate and the company maintains a reciprocal claim of
approximately the same amount against the Resource Network Subsidiaries' estate.
The ultimate outcome of these claims cannot be predicted with any degree of
certainty but management, in consultation with legal counsel, does not believe
that the final resolution of this matter or other matters raised by the Resource
Network Subsidiaries' Chief Restructuring Officer will have a material adverse
impact on the company's financial position or results of operations.
AETNA U.S. HEALTHCARE, INC. On June 30, 1999, the company filed a
complaint (the "Coram Complaint") against Aetna in the United States District
Court for the Eastern District of Pennsylvania setting forth claims against
Aetna for fraud, misrepresentation, breach of contract and rescission relating
to the Master Agreement between the parties for ancillary network management
services through the Resource Network Subsidiaries. On June 30, 1999, the
company received a copy of a complaint (the "Aetna Complaint") that had been
filed by Aetna on June 29, 1999 in the Court of Common Pleas of Montgomery
County, Pennsylvania. The Aetna Complaint sought specific performance,
injunctive relief and declaratory relief to compel the company to perform under
the Master Agreement, including the payment of compensation to the healthcare
providers that had rendered and continued to render services to Aetna's health
plan members. As stated in the Aetna Complaint, Aetna disputed the company's
right to terminate the Agreement. The company removed the Aetna Complaint to
federal court. On July 20, 1999, Aetna filed a counterclaim against the company
in the federal court lawsuit brought by the company. In its counterclaim, Aetna
sued the company for, among other things, breach of the Master Agreement and
fraudulent misrepresentation, contending the company never intended to perform
under the Master Agreement, defamation, interference with contractual relations
with providers and interference with prospective contractual relations with
other companies that allegedly bid for the Master Agreement.
On April 20, 2000, the company and Aetna reached an amicable resolution to
the then outstanding disputes and, in connection therewith, all claims and
counterclaims amongst the parties were dismissed from the courts of appropriate
jurisdiction. The final
18
resolution of these matters did not have a material adverse effect on the
company's consolidated financial position or results of operations. The impact
of this dispute resolution has been charged to discontinued operations in the
accompanying consolidated financial statements.
APRIA HEALTHCARE, INC. Apria Healthcare, Inc. and one of its affiliates,
Apria Healthcare of New York State, Inc., (collectively "Apria") filed suit
against CHC and the Resource Network Subsidiaries in the Superior Court of
Orange County, California. Apria's claims related to services that were rendered
as part of certain home health provider networks managed by the Resource Network
Subsidiaries. Apria's complaint alleged that, among other things, the Resource
Network Subsidiaries operated as the alter ego of CHC and, as a result, CHC
should be declared responsible for the alleged breaches of the contracts that
the Resource Network Subsidiaries had with Apria. The complaint included
requests for declaratory, compensatory and other relief in excess of $1.4
million. On February 21, 2001, the company and Apria agreed to a "dismissal
without prejudice" from the Superior Court of Orange County, California with
each party responsible for its own legal fees.
TBOB ENTERPRISES, INC. On July 17, 2000, TBOB Enterprises, Inc. ("TBOB")
filed an arbitration demand against CHC (TBOB Enterprises, Inc. f/k/a Medical
Management Services of Omaha, Inc. against Coram Healthcare Corporation, in the
American Arbitration Association office in Dallas, Texas). In its demand, TBOB
claims that the company breached its obligations under an agreement entered into
by the parties in 1996 relating to a prior earn-out obligation of the company
that originated from the acquisition of the claimant's prescription services
business in 1993 by a wholly-owned subsidiary of the company. The company
operated the business under the name Coram Prescription Services ("CPS") and the
assets of the CPS business were sold on July 31, 2000. See Note 5 to the
company's Consolidated Financial Statements for further details. TBOB alleges,
among other things, that the company has impaired the earn-out payments due TBOB
by improperly charging certain expenses to the CPS business and failing to
fulfill the company's commitments to enhance the value of CPS by marketing its
services. The TBOB demand alleges damages of more than $0.9 million. TBOB
contends that this amount must be paid in addition to the final scheduled
earn-out payment of approximately $1.3 million that was due in March 2001. TBOB
reiterated its monetary demand through a proof of claim filed against CHC's
estate for the aggregate amount of approximately $2.2 million (the scheduled
earn-out payment plus the alleged damages). The company received a copy of a
letter from TBOB to the American Arbitration Association in which it is
attempting to obtain a refund of the filing fees that TBOB paid in connection
with the arbitration proceeding because the final $1.3 million earn-out payment
that was scheduled for March 2001 and the alleged damages of $0.9 million have
been stayed by operation of the Bankruptcy Code. In February 2001, TBOB withdrew
its arbitration claim due to the ongoing bankruptcy proceedings. Management does
not believe that final resolution of this matter will have a material adverse
impact on the company's financial position or results of operations.
INTERNAL REVENUE SERVICE EXAMINATION. CHC is contesting a notice of
deficiency issued by the Internal Revenue Service through administrative
proceedings and litigation. See Note 9 to the company's Consolidated Financial
Statements for further details.
ALAN FURST ET. AL. V. STEPHEN FEINBERG, ET. AL. A complaint was filed
in the United States District Court for the Third District of New Jersey on
November 8, 2000 and an Amended Class Action Complaint was filed on November
15, 2000, alleging that certain current and former officers and directors of
the company and the company's principal lenders, Cerberus Partners, L.P.,
Foothill Capital Corporation and Goldman Sachs & Co., implemented a scheme to
perpetrate a fraud upon the stock market regarding the common stock of CHC. A
second Amended Class Action Complaint was filed on March 21, 2001, which
removed all of the officers and directors of the company as defendants,
except the company's Chief Executive Officer and another current member of
the Board of Directors. Plaintiffs allege that the defendants artificially
depressed the trading price of the company's publicly traded shares and
created the false impression that stockholders' equity was decreasing in
value and was ultimately worthless. Plaintiffs further allege that members of
the class sustained total investment losses of $50 million or more. The
company notified its insurance carrier and intends to avail itself of any
appropriate insurance coverage for its directors and officers who are
vigorously contesting the allegations. Because of the recent nature of this
case, the company cannot predict its outcome nor can it predict the scope and
nature of any indemnification that the directors and officers may have with
the company's insurance carrier.
GENERAL. Management of the company and its subsidiaries intends to
vigorously defend the company in the matters described above. Nevertheless, due
to the uncertainties inherent in litigation, including possible indemnification
against other parties, the ultimate disposition of such matters cannot presently
be determined. Adverse outcomes in some or all of the proceedings could have a
material adverse effect on the financial position, results of operations and
liquidity of the company.
The company and its subsidiaries are also parties to various other legal
actions arising out of the normal course of their businesses, including employee
claims, reviews of cost reports submitted to Medicare and examinations by
regulators such as Medicare and Medicaid fiscal intermediaries and the Health
Care Financing Administration. Management believes that the ultimate resolution
of such other actions will not have a material adverse effect on the financial
position, results of operations or liquidity of the company.
19
PRICEWATERHOUSECOOPERS. On July 7, 1997, the company filed suit against
Price Waterhouse LLP (now known as PricewaterhouseCoopers) in the Superior Court
of San Francisco, California, seeking damages in excess of $165.0 million. As
part of the settlement that resolved a case filed by the company against
Caremark International, Inc. and Caremark, Inc. (collectively "Caremark"),
Caremark assigned and transferred to the company all of Caremark's claims and
causes of action against Caremark's independent auditors,
PricewaterhouseCoopers, related to the lawsuit filed by the company against
Caremark. This assignment of claims includes claims for damages sustained by
Caremark in defending and settling its lawsuit with the company. The case was
dismissed from the California court because of inconvenience to witnesses with a
right to re-file in Illinois. The company re-filed the lawsuit in state court in
Illinois and PricewaterhouseCoopers filed a motion to dismiss the company's
lawsuit on several grounds, but their motion was denied on March 15, 1999.
PricewaterhouseCoopers filed an additional motion to dismiss the lawsuit in May
1999, and that motion was dismissed on January 28, 2000. The lawsuit is
currently in the discovery stage and a trial is scheduled to commence after June
22, 2002. There can be no assurance of any recovery from PricewaterhouseCoopers.
GOVERNMENT REGULATION. Under the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly referred
to as "Stark II"), it is unlawful for a physician to refer patients for certain
designated health services reimbursable under the Medicare or Medicaid programs
to an entity with which the physician has a financial relationship, unless the
financial relationship fits within an exception enumerated in Stark II or
regulations promulgated thereunder. A "financial relationship" under Stark II is
defined broadly as an ownership or investment interest in, or any type of
compensation arrangement in which remuneration flows between the physician and
the provider. The company has financial relationships with physicians and
physician owned entities in the form of medical director agreements and service
agreements pursuant to which the company provides pharmacy- products. In each
case, the relationship has been structured, based upon advice of legal counsel,
using an arrangement management believes to be consistent with the applicable
exceptions set forth in Stark II.
In addition, the company is aware of certain referring physicians that
have had financial interests in the company through ownership of shares of the
company's common stock. The Stark II law includes an exception for the ownership
of publicly traded stock in companies with equity above certain levels. This
exception of Stark II requires the issuing company to have stockholders' equity
of at least $75 million either as of the end of its most recent fiscal year or
on average over the last three fiscal years. Due principally to the
extraordinary gain on troubled debt restructuring (see Note 8 to the company's
Consolidated Financial Statements) and the disposition of CPS (see Note 5 to the
company's Consolidated Financial Statements), at December 31, 2000 the company's
stockholders' equity was above the required level. However, in light of the
company's recurring operational losses during each of the years in the three
year period ended December 31, 2000, management's ability to maintain an
appropriate level of stockholders' equity cannot be reasonably assured. The
penalties for failure to comply with Stark II include civil penalties that could
be imposed upon the company or the referring physician, regardless of whether
either the physician or the company intended to violate the law.
Management has been advised by counsel that a company whose stock is
publicly traded has, as a practical matter, no reliable way to implement and
maintain an effective compliance plan for addressing the requirements of Stark
II other than complying with the public company exception. Accordingly, if the
company's common stock remains publicly traded and its stockholders' equity
falls below the required levels, the company would be forced to cease accepting
referrals of patients with government-sponsored benefit programs or run a
significant risk of noncompliance with Stark II. Because referrals of the
company's patients with government-sponsored benefit programs comprise
approximately 23% of the company's consolidated net revenue (excluding CPS) for
the year ended December 31, 2000, discontinuing the acceptance of patients with
government-sponsored benefit programs would have a material adverse effect on
the financial condition, results of operations and cash flows of the company.
Additionally, ceasing to accept such referrals could materially adversely affect
the company's business reputation in the market as it may cause the company to
be a less attractive provider to which a physician could refer his or her
patients. The company previously requested a Stark II waiver from the Healthcare
Financing Administration, but such waiver request was denied.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Prior to March 7, 2000, shares of Coram's common stock had been listed and
traded on the New York Stock Exchange under the symbol "CRH." Beginning on March
7, 2000, the shares have been traded through the Over the Counter Bulletin Board
("OCBB") maintained by the National Association of Securities Dealers, Inc.,
under the symbol "CRHE." After the Debtors' filing for Chapter 11
reorganization, the company has been trading under the symbol "CRHEQ." The
following table sets forth the high and low sales prices of the company's common
stock, as reported on the New York Stock Exchange ("NYSE") Composite Tape and on
the OCBB for the two years ended December 31, 2000:
High Low
----- -----
Calendar Year 2000
First Quarter..................... 1 1/4
Second Quarter.................... 39/64 1/4
Third Quarter..................... 7/16 1/32
Fourth Quarter.................... 27/64 3/64
Calendar Year 1999
First Quarter..................... 2 13/16 1 7/16
Second Quarter.................... 2 5/8 1 1/2
Third Quarter..................... 1 5/8 9/16
Fourth Quarter.................... 1 1/8 3/8
As of April 2, 2001, there were 4,682 record holders of the company's
common stock. On April 2, 2001, the last bid for Coram's common stock on the
OCBB was $0.2344 per share and the last reported ask price was also $0.2344 per
share. These quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
The trading of company common stock moved to the OCBB following an
agreement between the company and the NYSE that shares of Coram's common stock
no longer met the requirements for trading on the NYSE. Coram had received
notice in 1999 that it had fallen below the minimum listing criteria of the
NYSE, including the minimum share price of $1.00, the minimum market
capitalization of $50 million and the minimum equity of $50 million.
Coram has not paid or declared any cash dividends on its capital stock
since its inception and is currently precluded from doing so under its borrowing
agreements. Coram currently intends to retain all future earnings for use in the
operations of its businesses. Accordingly, Coram does not anticipate paying cash
dividends on its common stock in the foreseeable future. The payment of any
future dividends will depend upon, among other things, the terms and conditions
set forth in the Debtors' plan of reorganization related to their bankruptcy
proceedings, the terms of its borrowing agreements, future earnings, operations,
capital requirements, the general financial condition of the company,
contractual restrictions and general business conditions.
Coram did not sell any of its equity securities in the year ended December
31, 2000 that were not registered under the Securities Act of 1933 (the "Act"),
as amended. However, the registrant's wholly-owned subsidiary, Coram, Inc.,
exchanged certain of its outstanding debt obligations for 905 shares of Coram,
Inc.'s Series A Cumulative Preferred Stock, with an aggregate liquidation
preference of approximately $109.3 million (see Note 11 to the company's
Consolidated Financial Statements). These preferred shares were not registered
under the Act. Under certain conditions in the Debtors' post-bankruptcy period,
the combined voting rights of the holders of the preferred stock may represent a
majority controlling interest in Coram, Inc. This circumstance could cause a
deconsolidation of the registrant's most significant direct subsidiary.
The holders of Coram's Series B Convertible Subordinated Notes (the
"Series B Notes") have the right to convert the Series B Notes into shares of
the company's common stock. In addition, these holders and/or their affiliates
are lenders under the Series A Senior Subordinated Notes (the "Series A Notes")
of the company and are lenders under the Securities Exchange Agreement pursuant
to which they were issued warrants to purchase 1.9 million shares of Coram's
common stock; however, the warrants expired contemporaneous with the termination
of the Securities Exchange Agreement on February 6, 2001. In certain
circumstances and assuming conversion of the Series B Notes, such holders may
collectively own a majority of the issued and outstanding common stock of the
company and be in a position to take steps to control the affairs of the
company. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations: Risk Factors" and Note 8 to the company's
Consolidated Financial Statements.
The Debtors' restated and amended joint plan of reorganization, if
approved, would have effectively eliminated all of Coram's common stock because
Coram Healthcare Corporation ("CHC") would be dissolved as soon as practicable
after the effective date of the plan and all equity interests in CHC would be
completely eliminated. At this time, the Debtors have not formulated another
plan of reorganization (see Note 3 to the company's Consolidated Financial
Statements).
21
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the company's Consolidated Financial Statements and related
notes and Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Amounts are in thousands, except per share data.
Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Net revenue .................................................. $ 464,820 $ 521,196 $ 445,112 $ 439,472 $ 502,830
Cost of service .............................................. 341,656 408,878 326,736 309,693 348,247
--------- --------- --------- --------- ---------
Gross profit ............................................... 123,164 112,318 118,376 129,779 154,583
Operating expenses:
Selling, general and administrative expenses ............... 90,329 96,809 83,337 86,457 97,981
Provision for estimated uncollectible accounts ............. 9,773 28,310 14,845 14,983 27,327
Amortization of goodwill ................................... 10,227 10,784 11,139 13,586 15,259
Restructuring cost (recovery) expense (1) .................. (322) 5,831 (3,900) -- --
Losses on impairments of long-lived assets ................. 8,323 9,100 -- -- --
Provision for (income from) litigation settlements (2) ..... -- -- -- (156,792) 27,875
--------- --------- --------- --------- ---------
Total operating expenses ........................... 118,330 150,834 105,421 (41,766) 168,442
--------- --------- --------- --------- ---------
Operating income (loss) from continuing operations ........... 4,834 (38,516) 12,955 171,545 (13,859)
Other income (expenses):
Interest income ............................................ 991 655 1,086 2,236 1,486
Interest expense (3) ....................................... (26,788) (29,763) (32,734) (75,026) (78,767)
Gains on sales of businesses (4) ........................... 18,649 -- 1,071 26,744 --
Termination fee (5) ........................................ -- -- -- 15,182 --
Other income (expense), net ................................ 3,008 740 (266) 1,517 2,114
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
reorganization expenses, income taxes, minority
interests and extraordinary gain on troubled debt
restructuring .............................................. 694 (66,884) (17,888) 142,198 (89,026)
Reorganization expenses, net (6) ............................. (8,264) -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes, minority interests and extraordinary
gain on troubled debt restructuring ........................ (7,570) (66,884) (17,888) 142,198 (89,026)
Income tax expense (benefit) ................................. 250 440 2,300 7,550 (13,998)
Minority interests in net income of consolidated
joint ventures ............................................. 571 1,470 1,399 7,283 7,698
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
extraordinary gain on troubled debt restructuring .......... (8,391) (68,794) (21,587) 127,365 (82,726)
--------- --------- --------- --------- ---------
Discontinued Operations:
Loss from operations ....................................... -- (28,411) (108) (2,105) (2,288)
Loss from disposal ......................................... (662) (17,618) -- -- --
--------- --------- --------- --------- ---------
Total discontinued operations ................................ (662) (46,029) (108) (2,105) (2,288)
--------- --------- --------- --------- ---------
Extraordinary gain on troubled debt restructuring,
net of income tax expense of $400 (7) ...................... 107,772 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ............................................ $ 98,719 $(114,823) $ (21,695) $ 125,260 $ (85,014)
========= ========= ========= ========= =========
Earnings (Loss) Per Share
Basic:
Income (loss) from continuing operations ................. $ (0.17) $ (1.39) $ (0.44) $ 2.68 $ (1.99)
Loss from discontinued operations ........................ (0.01) (0.93) -- (0.04) (0.06)
Extraordinary gain on troubled debt restructuring ........ 2.17 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) per common share ...................... $ 1.99 $ (2.32) $ (0.44) $ 2.64 $ (2.05)
========= ========= ========= ========= =========
Diluted:
Income (loss) from continuing operations ................. $ (0.17) $ (1.39) $ (0.44) $ 2.34 $ (1.99)
Loss from discontinued operations ........................ (0.01) (0.93) -- (0.04) (0.06)
Extraordinary gain on troubled debt restructuring ........ 2.17 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) per common share ...................... $ 1.99 $ (2.32) $ (0.44) $ 2.30 $ (2.05)
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Cash and cash equivalents .................................... $ 27,259 $ 6,633 $ 203 $ 108,950 $ 15,375
Working capital (deficit) (8) ................................ (97,144) 71,045 66,261 (11,620) (132,529)
Total assets ................................................. 345,376 402,751 421,029 515,252 543,795
Long-term debt, net of current maturities (9) ................ 24 302,662 242,162 150,428 266,641
Stockholders' equity (deficit) ............................... 76,978 (21,699) 92,857 125,026 (21,842)
Earnings per common share amounts prior to 1997 have been restated to
comply with Statement of Financial Accounting Standards No. 128, EARNINGS PER
SHARE. The financial data prior to 2000 has been restated to conform with the
2000 presentation.
(1) In 2000, management re-evaluated the reserves necessary to complete its
restructuring initiatives and, as a result, recognized a net restructuring
reserve reversal of approximately $0.3 million. In 1999, Coram initiated
two company-wide restructuring plans, the
22
"Coram Restructure Plan" and the "Field Reorganization Plan," and charged
approximately $5.8 million to operations as restructuring charges. These
plans resulted in the closure of certain facilities and a reduction of
personnel. In 1998, it was determined that the original reserve
established in 1994 as a result of the Four Way Merger, the "Coram
Consolidation Plan," was substantially complete and the reserve was
reversed. See Note 6 to the company's Consolidated Financial Statements.
(2) The $156.8 million income from litigation settlement recorded in 1997
relates to the settlement of a lawsuit against Caremark resulting from the
purchase of the Caremark home infusion business in 1995. The provision for
litigation settlements in 1996 includes approximately $25.9 million of
cash and non-cash charges related to an agreement to settle certain
stockholder class actions and certain derivative litigations.
(3) On December 28, 2000, the Debtors announced the Bankruptcy Court's
approval of their request to exchange a sufficient amount of debt and
related accrued interest for equity in the form of Coram, Inc. Series A
Cumulative Preferred Stock. On December 29, 2000, Cerberus Partners, L.P.,
Goldman Sachs Credit Partners, L.P. and Foothill Capital Corporation
agreed to exchange $11.6 million of aggregate unpaid accrued contractual
interest on the Series A Notes and the Series B Notes; however, such
exchanged accrued interest was charged to expense up to and including the
date of the exchange. See Note 8 to the company's Consolidated Financial
Statements. The 1999 decrease in interest expense was partially the result
of the forbearance of interest from November 15, 1999 through April 20,
2000 (the date of the resolution of certain litigation with Aetna) ,
offset by an increase in the principal amount of the debt and an increase
in the interest rate charged on the Series A notes, beginning in April
1999. Interest expense decreased significantly in 1998 and 1999 due to a
repayment of the company's former senior credit facility and a
restructuring of its subordinated debt.
(4) Effective July 31, 2000, the company completed the sale of its CPS
business and recorded a gain on sale of approximately $18.3 million. In
addition, pursuant to a contingent consideration arrangement related to
one of the company's operating subsidiaries, approximately $0.4 million
was recognized as incremental proceeds during the year ended December 31,
2000. See Note 5 to the company's Consolidated Financial Statements. In
1998 and 1997, Coram sold its lithotripsy business to Integrated Health
Services, Inc., and recorded gains on sales of $0.7 million and $26.7
million, respectively.
(5) In 1997, the company received $21.0 million from the termination of a
merger agreement with Integrated Health Services, Inc., pursuant to which
Integrated Health Services, Inc. would have acquired Coram. As a result,
the company recorded other income of $15.2 million, representing the $21.0
million termination fee less related costs.
(6) In 2000, the company recognized $8.3 million in net reorganization
expenses related to the Debtors' Chapter 11 bankruptcy proceedings. These
expenses include, but are not limited to, professional fees, expenses
related to success and retention plans and United States Trustee fees,
offset by interest earned on cash accumulated due to the Debtors not
paying their pre-petition liabilities and other expenditures during the
Chapter 11 proceedings. See Note 3 to the company's Consolidated Financial
Statements.
(7) In connection with the exchange of the Series A Notes and certain accrued
interest for Coram, Inc. Series A Cumulative Preferred Stock, the company
recognized an extraordinary gain on troubled debt restructuring of
approximately $107.8 million, net of tax. See Note 11 to the company's
Consolidated Financial Statements.
(8) Under the United States Bankruptcy Code, certain claims against the
Debtors in existence prior to the filing date are stayed while the Debtors
continue their operations as debtors-in-possession. These claims, which
total approximately $159.1 million at December 31, 2000, are reflected in
the Consolidated Balance Sheets as liabilities subject to compromise and
are deemed to be current liabilities. See Note 3 to the company's
Consolidated Financial Statements.
(9) At December 31, 2000, the company's Series A Notes and Series B Notes,
which aggregate approximately $153.3 million, are classified as
liabilities subject to compromise. See Notes 3 and 8 to the company's
Consolidated Financial Statements. The current maturities of long-term
debt, which gives effect to certain previous debt restructuring
transactions were $0.4 million, $0.3 million, $150.2 million, and $198.0
million at December 31, 1999, 1998, 1997, and 1996, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K contains certain "forward-looking"
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) and information relating to Coram that is based on the beliefs of
the management of Coram, as well as, assumptions made by and information
currently available to the management of Coram. The company's actual results may
vary materially from the forward-looking statements made in this report due to
important factors such as the outcome of bankruptcy proceedings of the Debtors
and certain other factors, which are described in greater detail later in this
Item 7. under the caption "Risk
23
Factors." When used in this report, the words "estimate," "project," "believe,"
"anticipate," "intend," "expect" and similar expressions are intended to
identify forward-looking statements. Such statements reflect the current views
of management with respect to future events based on currently available
information and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. For a discussion of such risks, see "Risk Factors." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Management does not undertake any obligation
to publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The company's consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Debtors' bankruptcy filings and circumstances
relating thereto, including the company's leveraged financial structure and
cumulative losses from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. During the pendency of the
Debtors' Chapter 11 bankruptcy proceedings, the company may sell or otherwise
dispose of assets and liquidate or settle liabilities for amounts other than
those reflected in the consolidated financial statements. Further, a plan of
reorganization filed in the Chapter 11 proceedings could materially change the
amounts reported in the consolidated financial statements, which do not give
effect to any adjustments of the carrying value of assets or liabilities that
might be necessary as a consequence of a plan of reorganization. The company's
ability to continue as a going concern is dependent upon, among other things,
confirmation of a plan of reorganization, future profitable operations, the
ability to comply with the terms of the company's financing agreements, the
ability to remain in compliance with the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly known as
"Stark II") and the ability to generate sufficient cash from operations and/or
financing arrangements to meet obligations.
BACKGROUND. During 2000, Coram and its subsidiaries were engaged primarily
in two principal lines of business: (i) alternate site (outside the hospital)
infusion therapy, including non-intravenous home health products such as durable
medical equipment and respiratory therapy services, and (ii) pharmacy benefit
management and specialty mail-order pharmacy services. Effective July 31, 2000,
the company sold its pharmacy benefit management and specialty mail-order
pharmacy services business to Curascript Pharmacy, Inc. and Curascript PBM
Services, Inc. (collectively the "Buyers"). The Buyers were effectively a
management-led group that was financed by GTCR Golder Rauner, L.L.C. Other
services offered by Coram include centralized management, administration and
clinical support for clinical research trials.
Also, Coram's R-Net subsidiaries are being liquidated through proceedings
that are currently pending in the United States Bankruptcy Court for the
District of Delaware. These proceedings originated in August 1999 following the
filing of an involuntary bankruptcy petition against Coram Resource Network,
Inc. in such court. All of the R-Net locations have been closed in connection
with the pending liquidation of R-Net. Additionally, Coram employees who were
members of the Resource Network Subsidiaries' Board of Directors resigned during
the year ended December 31, 2000, and currently only the Chief Restructuring
Officer appointed by the Bankruptcy Court remains on the Board of Directors to
manage and operate the liquidation of the R-Net business. See Note 4 to the
company's Consolidated Financial Statements.
REORGANIZATION. On August 8, 2000, CHC and CI filed voluntary petitions
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code").
Following the filing of the voluntary Chapter 11 petitions, the Debtors have
been operating as debtors-in-possession subject to the jurisdiction of the
Bankruptcy Court. None of the company's other subsidiaries is a debtor in the
proceeding. The Debtors' need to seek the relief afforded by the Bankruptcy Code
was due, in part, to its requirement to remain in compliance with the physician
ownership and referral provisions of Stark II after December 31, 2000 and the
scheduled May 27, 2001 maturity of the Series A Senior Subordinated Unsecured
Notes. The Debtors sought advice and counsel from a variety of sources and, in
connection therewith, the Independent Committee of the Board of Directors
unanimously concluded that the bankruptcy and restructuring were the only viable
alternatives.
On August 9, 2000, the Bankruptcy Court approved the Debtors' motions for:
(i) payment of all employee wages and salaries and certain benefits and other
employee obligations; (ii) payment of critical trade vendors, utilities and
insurance in the ordinary course of business for both pre and post-petition
expenses; (iii) access to a debtor-in-possession financing arrangement (see Note
8 to the company's Consolidated Financial Statements for details of the executed
agreement); and (iv) use of all company bank accounts for normal business
operations. In September 2000, the Bankruptcy Court approved the Debtors' motion
to reject four unexpired, non-residential real property leases and any
associated subleases. The rejected leases include underutilized locations in:
(i) Allentown, Pennsylvania; (ii) Denver, Colorado; (iii) Philadelphia,
Pennsylvania; and (iv) Whippany, New Jersey. Additionally, on January 25, 2001,
the Bankruptcy Court approved a motion to extend the period of time in which the
Debtors can reject unexpired leases of non-residential real property to May 4,
2001. Certain other motions filed by the Debtors have been granted and others
are presently pending.
24
In September 2000 and October 2000, the Bankruptcy Court approved payments
of up to approximately $2.6 million for retention bonuses payable to certain key
employees. The bonuses were scheduled to be paid in two equal installments; (i)
the later of the date of emergence from bankruptcy or December 31, 2000 and (ii)
December 31, 2001. Due to events that have delayed the emergence from
bankruptcy, the Bankruptcy Court approved early payment of the first installment
to most individuals within the retention program and such payments, aggregating
approximately $0.7 million, were made on March 15, 2001. The remaining portion
of the first installments of approximately $0.5 million are scheduled for
payment upon approval of a plan of reorganization by the Bankruptcy Court, and
the second installment remains scheduled to be paid on December 31, 2001.
The Debtors are currently paying the post-petition claims of their vendors
in the ordinary course of business and are, pursuant to an order of the
Bankruptcy Court, causing their subsidiaries to pay their own debts in the
ordinary course of business. Even though the filing of the Chapter 11 cases
constituted defaults under the company's principal debt instruments, the
Bankruptcy Code imposes an automatic stay that will generally preclude the
creditors and other interested parties under such arrangements from taking
remedial action in response to any such resulting default without prior
Bankruptcy Court approval.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtors' Chapter 11 proceedings seeking, among other things, to have the two
separate bankruptcy proceedings substantively consolidated into one proceeding.
The Resource Network Subsidiaries and the Debtors engaged in discovery related
to this substantive consolidation motion and, in connection therewith, the
parties reached a settlement agreement in November 2000. See Note 13 to the
company's Consolidated Financial Statements for further details.
All of the R-Net locations have effectively been closed in connection with
the pending liquidation of R-Net. Additionally, Coram employees who were members
of the Resource Network Subsidiaries' Board of Directors resigned during the
year ended December 31, 2000, and currently only the Chief Restructuring Officer
appointed by the Bankruptcy Court remains on the Board of Directors to manage
and operate the liquidation of the R-Net business.
On the same day as the Chapter 11 cases were filed, the Debtors filed
their joint plan of reorganization (the "Joint Plan") and their joint disclosure
statement with the Bankruptcy Court. The Joint Plan was subsequently amended and
restated (the "Restated Joint Plan") and, on or about October 10, 2000, the
Restated Joint Plan and the First Amended Disclosure Statement with respect to
the Restated Joint Plan was approved for distribution by the Bankruptcy Court.
Among other things, the Restated Joint Plan provided for: (i) a conversion of
all of the CI obligations represented by the company's Series A Senior
Subordinated Unsecured Notes (the "Series A Notes") and the Series B Senior
Subordinated Unsecured Convertible Notes (the "Series B Notes") into (a) a
four-year, interest only note in the principal amount of $180 million, that
would bear interest at the rate of 9% per annum and (b) all of the equity in the
reorganized CI; (ii) the payment in full of all secured, priority and general
unsecured debts of CI; (iii) the payment in full of all secured and priority
claims against CHC; (iv) the impairment of certain general unsecured debts of
CHC, including, among others, CHC's obligations under the Series A Notes and the
Series B Notes; and (v) the complete elimination of the equity interests of CHC.
Furthermore, pursuant to the Restated Joint Plan, CHC would be dissolved as soon
as practicable after the effective date of the Restated Joint Plan and the stock
of CHC would no longer be publicly traded. Therefore, under the Debtors'
Restated Joint Plan, as filed, the existing stockholders of CHC would receive no
value for their shares and all of the outstanding equity of CI as the surviving
entity would be owned by the holders of the company's Series A Notes and Series
B Notes.
Representatives of the company negotiated the principal aspects of the
Joint Plan with representatives of the holders of the company's Series A Notes
and Series B Notes and Senior Credit Facility prior to the filing of such Joint
Plan.
On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that are entitled to a distribution under the Restated Joint Plan. The
Debtors did not send ballots to the holders of other types of claims and
interested parties, including equity holders; however, the holders of such
claims and interested parties are deemed to reject the plan in any event. The
tabulated vote of the unsecured creditors was in favor of the company's Restated
Joint Plan. A confirmation hearing was held on December 21, 2000 at which time
the Restated Joint Plan was not approved by the Bankruptcy Court. On December
28, 2000, the Bankruptcy Court extended the period during which the Debtors have
the exclusive right to file a plan or plans before the Bankruptcy Court to March
28, 2001. Additionally, the Bankruptcy Court extended the Debtors' exclusive
period to solicit acceptances of any filed plan or plans to May 28, 2001.
Management has petitioned the Bankruptcy Court for additional extensions of such
exclusivity periods.
In order for the company to remain compliant with the requirements of
Stark II, on December 29, 2000, CI exchanged approximately $97.7 million of the
Series A Notes and approximately $11.6 million of accrued but unpaid interest on
the Series A Notes and the Series B Notes in exchange for 905 shares of CI
Series A Cumulative Preferred Stock (see Notes 8 and 11 to the company's
Consolidated Financial Statements for further details). This transaction
generated an extraordinary gain on troubled debt restructuring of approximately
$107.8 million, net of tax, and at December 31, 2000 the company's stockholders'
equity exceeded the
25
minimum Stark II requirement necessary to comply with the public company
exemption. See Note 13 to the company's Consolidated Financial Statements for
further discussion regarding Stark II.
On or about February 6, 2001, the Official Committee of the Equity
Security Holders (the "Equity Committee") filed a motion with the Bankruptcy
Court seeking permission to bring a lawsuit directly against CHC's Chief
Executive Officer, a former member of CHC's Board of Directors and Cerberus
Partners, L.P. (a party to the company's debtor-in-possession financing
agreement, Senior Credit Facility and Securities Exchange Agreement). On
February 26, 2001, the Bankruptcy Court ruled that the Equity Committee's motion
would not be productive at that time and, accordingly, the motion was denied
without prejudice. See Note 13 to the company's Consolidated Financial
Statements for further details.
On the same day, the Bankruptcy Court approved the Debtors' motion and
appointed Goldin Associates, L.L.C. ("Goldin") as independent restructuring
advisors to the Debtors. Goldin will provide consulting and advisory support
services designed to assist the Debtors in concluding their bankruptcy
proceedings. Among other things, the scope of Goldin's services include: (i)
reporting its findings to the Independent Committee of the Board of Directors
(the "Independent Committee"), including its assessment of the appropriateness
of the Restated Joint Plan, and advising the Independent Committee respecting an
appropriate course of action calculated to bring the Debtors' bankruptcy
proceedings to a fair and satisfactory conclusion; (ii) preparing a written
report as may be required by the Independent Committee and/or the Bankruptcy
Court; and (iii) being available to appear before the court and provide
testimony. Goldin was also appointed as an arbiter between the Debtors and the
Equity Committee.
Based upon Goldin's findings and recommendations, the Debtors may develop
and submit a new joint plan of reorganization to the Bankruptcy Court. However,
if the Debtors' exclusivity periods are terminated by one or more interested
parties, it is possible that one or more holders of claims or interests in the
Debtors will file a plan or plans with the Bankruptcy Court. Any new plan or
plans must be approved for distribution by the Bankruptcy Court, voted upon by
certain impaired creditors and equity holders of the Debtors and approved by the
Bankruptcy Court to become effective after certain findings required by the
Bankruptcy Code are made. The Bankruptcy Court may confirm a plan of
reorganization notwithstanding the non-acceptance of the plan by an impaired
class of creditors or equity holders if certain conditions of the Bankruptcy
Code are satisfied. No assurances can be given regarding the timing of or
whether the Debtors will submit a new plan or what the terms of such plan may
be.
Under the Bankruptcy Code, certain claims against the Debtors in existence
prior to the filing date are stayed while the Debtors continue their operations
as debtors-in-possession. These claims are reflected in the December 31, 2000
Consolidated Balance Sheet as liabilities subject to compromise. Additional
Chapter 11 claims have arisen and may continue to arise subsequent to the filing
date resulting from the rejection of executory contracts, including certain
leases, and from the determination by the Bankruptcy Court of allowed claims for
contingencies and other disputed amounts. Parties affected by the rejections may
file claims with the Bankruptcy Court in accordance with the provisions of the
Bankruptcy Code and applicable rules. Claims secured by the Debtors' assets also
are stayed, although the holders of such claims have the right to petition the
Bankruptcy Court for relief from the automatic stay to permit such creditors to
foreclose on the property securing their claims. Additionally, certain claimants
have sought relief from the Bankruptcy Court to remove the stay against their
actions in order to continue pursuit of their claims against the Debtors or the
Debtors' insurance carriers.
The holders of Coram, Inc.'s Series A Cumulative Preferred Stock continue
to maintain an unsecured creditors' position within the Debtors' bankruptcy
proceedings in the aggregate amount of their liquidation preference.
Notwithstanding the debt to equity exchange, the aforementioned holders'
priority in the Debtors' bankruptcy proceedings will be no less than it was
immediately prior to said exchange.
Schedules were filed with the Bankruptcy Court setting forth the assets
and liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to the New Joint Plan.
The New Joint Plan, once developed, will be subject to a vote by the Debtors'
impaired creditors and confirmation by the Bankruptcy Court, as described above.
BUSINESS STRATEGY. The major strategic alternatives and initiatives
currently being implemented by Coram include: (i) renewed focus on the growth in
net revenue from core therapies provided by the infusion therapy division; (ii)
liquidation of R-Net; (iii) the continued investment into and development of
services provided by CTI; (iv) cost reduction initiatives (including a
reimbursement site consolidation plan); (v) cash collections; and (vi)
submission of a new plan of reorganization by the Debtors. Combined, management
believes that success in the foregoing will improve Coram's financial prospects
and improve and stabilize relationships with payers and referral sources. There
can be no assurance that any other strategic alternatives will be consummated or
will be available to Coram on commercially acceptable terms.
26
In December 1999, Coram announced that it was repositioning its business
to focus on its core alternate site infusion therapy business and the clinical
research business operated by its subsidiary, CTI. Accordingly, Coram's primary
business strategy is to focus its efforts on the delivery of its core infusion
therapies, such as nutrition, anti-infective therapies, IVIG and coagulant and
blood clotting therapies for persons with hemophilia. To that end, Coram has
established product managers with dedicated sales, marketing and clinical
resources aimed at expanding Coram's growth in these areas. Coram has also
implemented programs focused on the reduction and control of cost of services
and operating expenses, assessment of poorly performing branches and review of
branch efficiencies. Coram management is also reviewing the way the company
provides nursing care and is implementing changes to its practices to maintain
Coram's high level of patient satisfaction and effective clinical results while
reducing the actual number of nursing visits.
Management throughout the company is continuing to concentrate on
reimbursement by emphasizing improved billing and cash collection methods,
continued assessment of systems support for reimbursement and concentration of
the company's expertise and managerial resources into certain reimbursement
locations. In December 2000, Coram announced that as part of its continuing
efforts to improve efficiency and overall performance, several Patient Financial
Service Centers (reimbursement sites) were being consolidated and the related
reimbursement positions were to be eliminated. By consolidating to fewer sites,
management expects to implement improved training, more easily standardize "best
demonstrated practices," enhance specialization related to payers such as
Medicare and achieve more consistent and timely cash collections. Management
does not expect this change to affect Coram's patients or payers, but believes,
instead, that in the long-term they will receive better, more consistent
service. The transition is expected to be accomplished in stages beginning April
1, 2001 and ending in the third quarter of the same year. Management has taken
certain actions to mitigate the potential shortfall in cash collections during
the upcoming transition period, including, but not limited to, offering
incentives for personnel to stay with the company until the completion of their
corresponding regional consolidation. No assurances can be given that the
consolidation of the company's Patient Financial Service Centers will be
completed by the end of the third quarter of 2001, that the consolidation will
be successful in enhancing timely reimbursement or that the company will not
experience a significant shortfall in cash collections during or after the
transition period, which is described in greater detail in this Item 7 under the
caption "Risk Factors."
FACTORS AFFECTING RECENT OPERATING RESULTS. The following list summarizes
the major events or factors impacting Coram's operating and financial condition
in 2000, and which may impact Coram in the future:
(i) maintaining compliance with the provisions of Stark II by, in part,
exchanging a sufficient amount of debt and related accrued interest for
equity in the form of Coram, Inc. Series A Cumulative Preferred Stock in
order to increase its stockholders' equity above the required levels;
(ii) the Debtors' Chapter 11 bankruptcy filings and their related
reorganization expenses including, but not limited to, professional fees;
(iii) continued refinement and completion of the Caremark Business
Consolidation Plan and the Coram Restructure Plan, as described in Note 6
to the company's Consolidated Financial Statements;
(iv) the sale of the CPS business to Curascript Pharmacy, Inc. and Curascript
PBM Services, Inc. on July 31, 2000;
(v) the Chapter 11 bankruptcy filings involving the Resource Network
Subsidiaries and their anticipated liquidation through such proceedings;
(vi) resolution of certain litigation between Aetna and the company, which was
settled amicably amongst the parties on April 20, 2000;
(vii) an increased focus on the company's durable medical equipment and
respiratory services business, including non-consolidated joint ventures,
and the significant number of days that elapse between the date that
services are rendered and the reimbursement for those services;
(viii) ongoing pricing pressure in the company's infusion business as a result
of an unfavorable shift in payer mix from private indemnity insurers to
managed care organizations and other contracted payers, and intense
competition among infusion providers. The following table sets forth the
approximate percentages of the company's infusion therapy net revenue
from certain categories of payers for the three years ended December
31, 2000;
27
For the Year Ended
December 31,
------------------------
2000 1999 1998
---- ---- ----
Managed care organizations and other
contracted payers .............................. 59% 58% 51%
Medicare and Medicaid programs ................... 23% 22% 24%
Private indemnity insurance and other
non-contracted payers .......................... 18% 20% 25%
---- ---- ----
Totals ................................. 100% 100% 100%
==== ==== ====
(ix) increased competition from hospitals and physicians that have sought to
increase the scope of services they offer through their facilities and
offices, including services similar to those offered by the company, or
that have entered into risk-sharing relationships with third-party payers
pursuant to which they have been delegated control over the provision of a
wide variety of healthcare services, including the services offered by the
company; and
(x) increased costs associated with providing certain infusion therapy
services offered by Coram, including increased costs for clinical
staffing, product delivery, on-call personnel and other volume related
costs associated with such therapies combined with increased costs for
certain blood and blood derivative products that are in short supply and
an increase in the number of patients receiving such therapies.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
DISCONTINUED OPERATIONS. As discussed in Note 4 to the company's
Consolidated Financial Statements, the company considers R-Net's results as part
of discontinued operations; however, for the year ended December 31, 2000, the
Resource Network Subsidiaries had no operations. The following discussion of
Coram's financial condition and results of operations during 2000 and 1999
excludes the discontinued operations for R-Net.
NET REVENUE. Net revenue decreased $56.4 million or 10.8% to $464.8
million in 2000 from $521.2 million in 1999. The decrease is primarily due to a
decrease in CPS net revenue of approximately $25.2 million as a result of the
sale of the CPS business on July 31, 2000, a decrease in infusion net revenue
due, in part, to the termination of its National Ancillary Services Agreement
with Aetna and corporate initiatives to focus on core therapies.
GROSS PROFIT. Gross profit increased $10.8 million to $123.2 million or a
gross margin of 26.5% in 2000 from $112.3 million or a gross margin of 21.6% in
1999. The gross profit and gross margin percentage increases are primarily due
to a more favorable product/therapy mix, increased high margin CTI business and
certain cost reduction programs implemented in December 1999. The components of
gross profit are as follows (in millions):
For the Year Ended
December 31,
----------------
2000 1999
------ ------
Infusion ........................... $113.5 $ 99.9
CPS ................................ 8.1 11.3
CTI ................................ 1.6 1.1
------ ------
Total gross profit ................. $123.2 $112.3
====== ======
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A decreased
$6.5 million or 6.7% to $90.3 million in 2000 from $96.8 million in 1999. The
decrease is primarily due to the sale of CPS effective July 31, 2000. In
addition, certain cost reduction programs were implemented in December 1999
contributing to the favorable expense decrease in 2000. Offsetting the 2000
decrease was an increase in incentive compensation due to certain bonus plans
implemented in 2000. In 1999, the recovery of a note receivable of
approximately $1.8 million favorably impacted expenses for the year.
PROVISION FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS. The provision for
estimated uncollectible accounts is $9.8 million or 2.1% of net revenue in 2000
compared to $28.3 million or 5.4% of net revenue in 1999. The percentage
decrease is due primarily to the company's increased collection efforts and
certain recoveries of amounts previously deemed to be uncollectible. In 1999,
the company's provision was higher as a result of charges of $2.5 million for
certain receivables that arose in relation to the R-Net business, receivables
due from other healthcare providers or payers that have filed for protection
under applicable bankruptcy or receivership laws and other charges of $11.2
million that related to an overall deterioration of the company's accounts
receivable aging.
RESTRUCTURING COST (RECOVERY) EXPENSE. During 2000, management
re-evaluated the reserves necessary to complete its
28
restructuring plans and, as a result, recognized a net restructuring reversal of
$0.3 million. In 1999, Coram initiated two company-wide restructuring plans, the
"Coram Restructure Plan" and the "Field Reorganization Plan," and charged
approximately $5.8 million to operations as restructuring charges. See Note 6 to
the company's Consolidated Financial Statements for further details.
LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS. Coram recognized impairments of
goodwill and other long-lived assets of $8.3 million and $9.1 million for the
years ended December 31, 2000 and 1999, respectively. See Note 2 to the
company's Consolidated Financial Statements for further details. These
impairment losses relate principally to operating losses of certain infusion
business branches that resulted following the termination of agreements with
Aetna, the discontinuance of R-Net and certain other operating factors.
OPERATING INCOME (LOSS). Coram had operating income of $4.8 million during
2000 compared to a loss of $38.5 million during 1999. The increase in operating
income is due primarily to the increase in gross profit from core therapies,
cost reduction efforts, lower net restructuring costs in 2000 and a reduction in
the provision for estimated uncollectible accounts.
INTEREST EXPENSE. Interest expense decreased $3.0 million to $26.8 million
in 2000 from $29.8 million in 1999. The decrease is primarily due to (i) the
forbearance of interest on the Series A and Series B Notes which resulted in a
lower effective interest rate for book purposes in 2000 and (ii) the reduced
outstanding borrowings on the Senior Credit Facility and the Series A Notes as a
result of the application of the proceeds from the sale of the CPS business on
July 31, 2000. See Notes 5 and 8 to the company's Consolidated Financial
Statements for further details.
GAINS ON SALES OF BUSINESSES. During 2000, the company recorded gains on
sales of businesses of $18.6 million consisting primarily of the gain on sale of
the CPS business and the receipt of a contingent earn-out payment relating to
one of the company's operating subsidiaries. See Note 5 to the company's
Consolidated Financial Statements for further details.
OTHER INCOME (EXPENSE), NET. In 2000, the company recognized $3.0 million
in other income, compared to $0.7 million in 1999. The increase is primarily due
to recovery of a non-operating receivable of approximately $2.0 million and the
receipt of approximately $1.0 million in life insurance proceeds, offset by the
recognition of a $0.7 million reserve for an escrow deposit receivable related
to the 1997 sale of the company's lithotritpsy business to Integrated Health
Services, Inc., which filed for protection under Chapter 11 of the United States
Bankruptcy Code during 2000.
REORGANIZATION EXPENSES, NET. In 2000, the company recognized $8.3 million
in net reorganization expenses related to the Debtors' Chapter 11 bankruptcy
proceedings. These expenses include, but are not limited to, professional fees,
expenses related to success and retention plans and United States Trustee fees,
offset by interest earned on accumulated cash due to the Debtors not paying
their pre-petition liabilities and other expenditures during the Chapter 11
proceedings. See Note 3 to the company's Consolidated Financial Statements.
INCOME TAX EXPENSE. See Note 9 to the company's Consolidated Financial
Statements for discussion of the variance between the statutory income tax rate
and the company's effective income tax rate.
MINORITY INTERESTS IN NET INCOME OF CONSOLIDATED JOINT VENTURES. Minority
interests in net income of consolidated joint ventures decreased $0.9 million to
$0.6 million in 2000 from $1.5 million in 1999. The reduction was primarily due
to reduced profitability of certain majority owned joint ventures and the
acquisition of the remaining interest of a joint venture in December 1999 which
was previously owned 51% by the company.
LOSS FROM DISCONTINUED OPERATIONS. During December 1999, as a result of
the bankruptcy proceedings pending against the Resource Network Subsidiaries,
Coram reclassified the operating losses of this division to discontinued
operations for all periods prior to the measurement date of November 12, 1999.
The $28.4 million for the year ended December 31, 1999 represents operating
losses through such measurement date. See Note 4 to the company's Consolidated
Financial Statements for further details.
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS. During 1999, Coram recorded
charges in the aggregate amount of $17.6 million, including estimated losses
through final disposition of the Resource Network Subsidiaries, severance, lease
obligations, asset impairments and legal costs related to the bankruptcy and
wind-down of R-Net's operations. The 2000 net charge of $0.7 million includes
additional reserves for litigation and other wind-down costs, net of certain
insurance recoveries, facility cost reserve reductions resulting from the
Debtors' bankruptcy proceedings, reserve adjustments due to changes in the
estimated amounts of legal and professional fees necessary to complete R-Net's
Chapter 11 bankruptcy proceedings and a $0.5 million settlement with the Debtors
for a certain substantive consolidation matter. See Note 4 to the company's
Consolidated Financial Statements for further details.
EXTRAORDINARY GAIN ON TROUBLED DEBT RESTRUCTURING. With approval from the
Bankruptcy Court, the Debtors exchanged debt and
29
related interest for equity in the form of Coram, Inc. Series A Cumulative
Preferred Stock and, as a result, recognized an extraordinary gain of
approximately $107.8 million, net of $0.4 million of taxes. See Note 8 to the
company's Consolidated Financial Statements for further details.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
DISCONTINUED OPERATIONS. As discussed in Note 4 to the company's
Consolidated Financial Statements, the company considers R-Net's results as part
of discontinued operations. Had R-Net been included in continuing operations,
the following would have been contributed to the company's operations (in
millions):
For the Year Ended
December 31,
--------------------
1999 1998
------- -------
Net revenue .................. $ 74.4 $ 61.6
Gross (loss) profit .......... (8.0) 13.6
Operating loss ............... (28.4) (0.1)
The following discussion of Coram's financial condition and results of
operations during 1999 and 1998 excludes the discontinued operations for R-Net.
NET REVENUE. Net revenue increased $76.1 million or 17.1% from $445.1
million in 1998 to $521.2 million in 1999. The net revenue increase can be
primarily attributed to (i) an increase in infusion therapy business of $36.1
million resulting principally from an 8.9% increase in net revenue per patient
and (ii) an increase of approximately $38.8 million from the CPS division, which
resulted from expansion of services and improved sales efforts.
GROSS PROFIT. Gross profit decreased $6.1 million from $118.4 million or a
gross margin of 26.6% in 1998 to $112.3 million or a gross margin of 21.6% in
1999. The gross margin percent decrease was due to a shift to higher cost
therapies, partially offset by a gross margin improvement in the CPS and CTI
divisions. The components of gross profit are as follows (in millions):
For the Year Ended
December 31,
---------------------
1999 1998
-------- --------
Infusion ..................... $ 99.9 $ 114.4
CPS .......................... 11.3 3.9
CTI .......................... 1.1 0.1
-------- --------
Total gross profit ........... $ 112.3 $ 118.4
======== ========
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A increased
$13.5 million or 16.2 % from $83.3 million in 1998 to $96.8 million in 1999. Of
this increase, $5.5 million was related to the expansion of the CPS division.
The remaining increase was related to an increase in personnel costs in the
normal course of business, partially offset by the recovery of a note receivable
of approximately $1.8 million which favorably impacted expenses in 1999.
PROVISION FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS. The provision for
estimated uncollectible accounts was $28.3 million or 5.4 % of net revenue in
1999 compared to $14.8 million or 3.3 % of net revenue in 1998. In 1999, the
company's provision was higher as a result of charges of $2.5 million for
certain receivables that arose in relation to the R-Net business, receivables
due from other healthcare providers or payers that have filed for protection
under applicable bankruptcy or receivership laws and other charges of $11.2
million that related to an overall deterioration of the company's accounts
receivable aging.
RESTRUCTURING COST (RECOVERY) EXPENSE. During 1999, Coram recorded charges
of $5.8 million for estimated costs related to the Field Reorganization Plan and
Coram Restructure Plan. In 1998, it was determined that the original reserve
established in 1994 as a result of the Four Way Merger, the "Coram Consolidation
Plan," was substantially complete and the remaining reserve of approximately
$3.9 million was reversed. See Note 6 to the company's Consolidated Financial
Statements.
LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS. Coram recognized an impairment on
goodwill and other long-lived assets of $9.1 million for the year ended December
31, 1999. See Note 2 to the company's Consolidated Financial Statements for
further details. This impairment loss related primarily to operating losses of
certain infusion business branches that resulted following the termination of
agreements with Aetna, the discontinuance of R-Net and certain other operating
factors.
OPERATING INCOME (LOSS). Coram had an operating loss of $38.5 million
during 1999 compared to income of $13.0 million during 1998. The decrease is due
primarily to the decrease in gross profit, the increase in SG&A expenses, the
increase in the provision for uncollectible accounts, the increase in
restructuring costs and the impairment of goodwill and other long-lived assets.
30
INTEREST EXPENSE. Interest expense decreased by $2.9 million to $29.8
million in 1999 from $32.7 million in 1998. The decrease is primarily due to a
$14.9 million expense reduction resulting from the completion of the
restructuring of the company's former credit facilities, offset by an increase
of $3.0 million attributable to draws of $44 million on the senior credit
facility, an increase in the principal amounts outstanding under the Series A
and Series B Senior Notes as a result of PIK interest payments and an increase
in the interest rate on the Series A Notes.
GAINS ON SALES OF BUSINESSES. In 1998, the company recorded gains on the
sales of businesses totaling $1.0 million. Included therein was $0.7 million in
connection with the sale of the company's remaining lithotripsy partnership. See
Note 5 to the company's Consolidated Financial Statements for further details.
INCOME TAX EXPENSE. See Note 9 to the company's Consolidated Financial
Statements for discussion of the variance between the statutory income tax rate
and the company's effective income tax rate.
LOSS FROM DISCONTINUED OPERATIONS. During December 1999, as a result of
the bankruptcy proceedings pending against the Resource Network Subsidiaries,
Coram reclassified the operating losses of this division to discontinued
operations for all periods prior to the measurement date of November 12, 1999.
The $28.3 million increase in the loss from discontinued operations during the
year ended December 31, 1999 represents operating losses through such
measurement date and such increase is principally due to the termination of the
Aetna Master Agreement. See Note 4 to the company's Consolidated Financial
Statements for further details.
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS. During 1999, Coram recorded
charges in the aggregate amount of $17.6 million, including estimated losses
through final disposition of the Resource Network Subsidiaries, severance, lease
obligations, asset impairments and legal costs related to the bankruptcy and
wind-down of R-Net's operations. See Note 4 to the company's Consolidated
Financial Statements for further details.
QUARTERLY RESULTS (UNAUDITED)
The following summarizes selected quarterly financial information with
respect to the company's operations for the last eight fiscal quarters. Amounts
are in thousands, except per share data.
2000 Quarter Ended
------------------------------------------------
Dec. 31 Sept. 30 Jun. 30 Mar. 31
--------- --------- --------- ---------
Net revenue ..................................... $ 96,934 $ 102,866 $ 130,224 $ 134,796
Cost of service ................................. 69,265 75,667 96,069 100,655
--------- --------- --------- ---------
Gross profit .................................... 27,669 27,199 34,155 34,141
Operating expenses:
Selling, general and administrative expenses . 19,711 22,109 25,053 23,456
Provision for estimated uncollectible
accounts ................................... (375) 3,357 3,548 3,243
Amortization of goodwill ..................... 2,557 2,562 2,530 2,578
Restructuring cost (recovery) expense ........ (322) -- -- --
Losses on impairments of long-lived assets ... 8,323 -- -- --
--------- --------- --------- ---------
Total operating expenses ............. 29,894 28,028 31,131 29,277
--------- --------- --------- ---------
Operating income (loss) from continuing
operations .................................... (2,225) (829) 3,024 4,864
Other income (expenses):
Interest income ............................... 502 195 135 159
Interest expense .............................. (6,475) (6,866) (6,771) (6,676)
Equity in net income of unconsolidated joint
ventures ..................................... 61 322 117 259
Gains on sales of businesses .................. 193 18,456 -- --
Gains (losses) on dispositions of property
and equipment, net ........................... (126) (82) 9 (25)
Other income, net ............................. 2,396 13 53 11
--------- --------- --------- ---------
Income (loss) from continuing operations before
reorganization expenses, income taxes,
minority interests and extraordinary gain on
troubled debt restructuring ................... (5,674) 11,209 (3,433) (1,408)
Reorganization expenses, net .................... (6,459) (1,805) -- --
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes, minority interests and
extraordinary gain on troubled debt
restructuring ................................. (12,133) 9,404 (3,433) (1,408)
Income tax expense ............................ -- 75 75 100
Minority interests in net income (loss) of
consolidated joint ventures ................. 105 129 356 (19)
--------- --------- --------- ---------
Income (loss) from continuing operations before
extraordinary gain on troubled debt
restructuring ................................. (12,238) 9,200 (3,864) (1,489)
--------- --------- --------- ---------
1999 Quarter Ended
------------------------------------------------
Dec. 31 Sept. 30 Jun. 30 Mar. 31
--------- --------- --------- ---------
Net revenue ..................................... $ 134,338 $ 132,939 $ 129,571 $ 124,348
Cost of service ................................. 108,638 102,370 101,150 96,720
--------- --------- --------- ---------
Gross profit .................................... 25,700 30,569 28,421 27,628
Operating expenses:
Selling, general and administrative expenses . 30,718 23,538 23,612 18,941
Provision for estimated uncollectible
accounts ................................... 16,431 3,690 4,141 4,048
Amortization of goodwill ..................... 2,625 2,711 2,716 2,732
Restructuring cost (recovery) expense ........ 4,881 -- -- 950
Losses on impairments of long-lived assets ... 9,100 -- -- --
--------- --------- --------- ---------
Total operating expenses ............. 63,755 29,939 30,469 26,671
--------- --------- --------- ---------
Operating income (loss) from continuing
operations .................................... (38,055) 630 (2,048) 957
Other income (expenses):
Interest income ............................... 140 216 244 55
Interest expense .............................. (7,570) (8,110) (7,524) (6,559)
Equity in net income of unconsolidated joint
ventures ..................................... 248 193 -- 1
Gains on sales of businesses .................. -- -- -- --
Gains (losses) on dispositions of property
and equipment, net ........................... (60) 115 (110) (52)
Other income, net ............................ 119 47 40 199
--------- --------- --------- ---------
Income (loss) from continuing operations before
reorganization expenses, income taxes,
minority interests and extraordinary gain on
troubled debt restructuring ................... (45,178) (6,909) (9,398) (5,399)
Reorganization expenses, net .................... -- -- -- --
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes, minority interests and
extraordinary gain on troubled debt
restructuring ................................. (45,178) (6,909) (9,398) (5,399)
Income tax expense ............................ 65 125 175 75
Minority interests in net income (loss) of
consolidated joint ventures ................. 287 176 579 428
--------- --------- --------- ---------
Income (loss) from continuing operations before
extraordinary gain on troubled debt
restructuring ................................. (45,530) (7,210) (10,152) (5,902)
--------- --------- --------- ---------
31
2000 Quarter Ended
------------------------------------------------
Dec. 31 Sept. 30 Jun. 30 Mar. 31
--------- --------- --------- ---------
Discontinued Operations:
Income (loss) from operations ................. -- -- -- --
Income (loss) from disposal ................... 2,495 324 (98) (3,383)
--------- --------- --------- ---------
Total discontinued operations ................... 2,495 324 (98) (3,383)
--------- --------- --------- ---------
Extraordinary gain on troubled debt
restructuring, net of tax ..................... 107,772 -- -- --
--------- --------- --------- ---------
Net income (loss) ............................... $ 98,029 $ 9,524 $ (3,962) $ (4,872)
========= ========= ========= =========
Earnings (Loss) Per Share
Basic:
Income (loss) from continuing operations .... $ (0.25) $ 0.18 $ (0.08) $ (0.03)
Income (loss) from discontinued operations .. 0.05 0.01 -- (0.07)
Extraordinary gain on troubled debt
restructuring .............................. 2.17 -- -- --
--------- --------- --------- ---------
Net income (loss) per common share .......... $ 1.97 $ 0.19 $ (0.08) $ (0.10)
========= ========= ========= =========
Diluted:
Income (loss) from continuing operations .... $ (0.25) $ 0.17 $ (0.08) $ (0.03)
Income (loss) from discontinued operations .. 0.05 0.01 -- (0.07)
Extraordinary gain on troubled debt
restructuring .............................. 2.17 -- -- --
--------- --------- --------- ---------
Net income (loss) per common share ......... $ 1.97 $ 0.18 $ (0.08) $ (0.10)
========= ========= ========= =========
1999 Quarter Ended
------------------------------------------------
Dec. 31 Sept. 30 Jun. 30 Mar. 31
--------- --------- --------- ---------
Discontinued Operations:
Income (loss) from operations ................. 1,870 (7,957) (27,841) 5,517
Income (loss) from disposal ................... (17,618) -- -- --
--------- --------- --------- ---------
Total discontinued operations ................... (15,748) (7,957) (27,841) 5,517
--------- --------- --------- ---------
Extraordinary gain on troubled debt
restructuring, net of tax ..................... -- -- -- --
--------- --------- --------- ---------
Net income (loss) ............................... $ (61,278) $ (15,167) $ (37,993) $ (385)
========= ========= ========= =========
Earnings (Loss) Per Share
Basic:
Income (loss) from continuing operations .... $ (0.91) $ (0.15) $ (0.21) $ (0.12)
Income (loss) from discontinued operations .. (0.32) (0.16) (0.56) 0.11
Extraordinary gain on troubled debt
restructuring .............................. -- -- -- --
--------- --------- --------- ---------
Net income (loss) per common share .......... $ (1.23) $ (0.31) $ (0.77) $ (0.01)
========= ========= ========= =========
Diluted:
Income (loss) from continuing operations .... $ (0.91) $ (0.15) $ (0.21) $ (0.12)
Income (loss) from discontinued operations .. (0.32) (0.16) (0.56) 0.11
Extraordinary gain on troubled debt
restructuring .............................. -- -- -- --
--------- --------- --------- ---------
Net income (loss) per common share ......... $ (1.23) $ (0.31) $ (0.77) $ (0.01)
========= ========= ========= =========
The quarterly results have historically varied based upon unusual and
infrequently occurring charges. See Note 15 to the company's Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
BANKRUPTCY PROCEEDINGS. The Debtors filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code on August 8, 2000. As of
such date, the Debtors are operating as debtors-in-possession subject to the
jurisdiction of the Bankruptcy Court. None of the company's other subsidiaries
is a debtor in the proceeding. Although the filing of the Chapter 11 cases
constitutes defaults under the company's principal debt instruments, Section 362
of the Bankruptcy Code imposes an automatic stay that will generally preclude
creditors and other interested parties under such arrangements from taking
remedial action in response to any such default without prior Bankruptcy Court
approval. In addition, the Debtors may reject executory contracts and unexpired
leases. Parties affected by the rejections may file claims with the Bankruptcy
Court in accordance with the provisions of the Bankruptcy Code and applicable
rules. See Note 3 to the company's Consolidated Financial Statements.
Schedules were filed with the Bankruptcy Court setting forth the assets
and liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to the new plan of
reorganization, which is yet to be developed. Therefore, it is not possible to
fully or completely estimate the liquidation amount of the liabilities subject
to compromise at December 31, 2000 due to the Debtors' Chapter 11 cases and the
uncertainty surrounding the ultimate amount and settlement terms for such
liabilities.
CREDIT FACILITIES. On August 20, 1998, the company entered into the Senior
Credit Facility, which provided for the availability of up to $60.0 million for
acquisitions, working capital, letters of credit and other corporate purposes.
The terms of the agreement also provided for the issuance of letters of credit
of up to $25.0 million provided that available credit would not fall below zero.
On September 21, 2000 and January 29, 2001, the company permanently reduced the
commitment to $2.7 million and $2.1 million, respectively, in order to reduce
the fees related to commitments on which the company was not be able to borrow
against due to the Debtors' bankruptcy proceedings. Effective February 6, 2001,
the Senior Credit Facility lenders and the company terminated the agreement. As
of December 31, 2000, the lenders had outstanding irrevocable letters of credit
issued for the benefit of the company totaling $2.1 million. In connection with
the termination of the Senior Credit Facility, the company established new
letters of credit through Wells Fargo Bank Minnesota, NA ("Wells Fargo") and
such new letters of credit are fully secured by interest bearing cash deposits
of the company held by Wells Fargo.
The Debtors entered into a secured debtor-in-possession ("DIP") financing
agreement with Madeleine L.L.C., an affiliate of Cerberus Partners, L.P. (a
party to the Senior Credit Facility), as of August 30, 2000. The agreement
provides that the Debtors could access, as necessary, up to $40 million
depending upon borrowing base availability, for use in connection with the
operations of their businesses and the businesses of their subsidiaries. On
September 12, 2000, the Bankruptcy Court approved the DIP agreement. See Note 8
to the company's Consolidated Financial Statements for further details. Through
April 2, 2001, no borrowings had been made under the DIP financing agreement;
however, at such date, the borrowing base was approximately $35.5 million
pursuant to the limitations of the DIP financing agreement.
32
On December 29, 2000, the Securities Exchange Agreement was amended
("Amendment No. 4") and an Exchange Agreement was simultaneously executed among
the Debtors and Cerberus Partners, L.P., Goldman Sachs Credit Partners, L.P. and
Foothill Capital Corporation (collectively the "Holders"). Pursuant to such
arrangements, the Holders agreed to exchange approximately $97.7 million
aggregate principal amount of the Series A Notes and $11.6 million of aggregate
unpaid accrued contractual interest on the Series A Notes and the Series B Notes
as of December 29, 2000 for 905 shares of Coram, Inc. Series A Cumulative
Preferred Stock (see Note 11 to the company's Consolidated Financial Statements
for further details regarding the preferred stock). Following the exchange, the
Holders retain approximately $61.2 million aggregate principal amount of the
Series A Notes and $92.1 million aggregate principal amount of the Series B
Notes. Pursuant to Amendment No. 4, the per annum interest rate on both the
Series A Notes and the Series B Notes has been adjusted to 9.0%. Moreover, the
Series A Notes' and Series B Notes' original scheduled maturity dates of May
2001 and April 2008, respectively, have both been modified to June 30, 2001. Due
to the Holders' receipt of consideration with a fair value less than the face
value of the exchanged principal and accrued interest, the exchange transactions
qualified as a troubled debt restructuring pursuant to Statement of Financial
Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings." In connection therewith, the company recognized an
extraordinary gain of approximately $107.8 million, net of tax, in its
Consolidated Statements of Income.
GENERAL. The company's consolidated financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Debtors' bankruptcy filings and
circumstances relating thereto, including the company's leveraged financial
structure and cumulative losses from operations, such realization of assets and
liquidation of liabilities is subject to significant uncertainty. During the
pendency of the Debtors' Chapter 11 bankruptcy proceedings, the company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the consolidated financial statements. Further,
any plan of reorganization filed in the Chapter 11 proceedings could materially
change the amounts reported in the consolidated financial statements, which do
not give effect to any adjustments of the carrying value of assets or
liabilities that might be necessary as a consequence of any proposed plan of
reorganization. The company's ability to continue as a going concern is
dependent upon, among other things, confirmation of a plan of reorganization,
future profitable operations, the ability to comply with the terms of the
company's financing agreements, the ability to remain in compliance with the
physician ownership and referral provisions of the Omnibus Budget Reconciliation
Act of 1993, known as "Stark II," and the ability to generate sufficient cash
from operations and/or financing arrangements to meet obligations.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents increased $20.7
million to $27.3 million at December 31, 2000 compared to $6.6 million at
December 31, 1999.
Net cash provided by operating activities was approximately $42.6 million
for the year ended December 31, 2000, compared to $9.5 million of net cash used
in operating activities for the year ended December 31, 1999. The significant
components of the operating cash flows are as follows (in millions):
Years Ended December 31,
------------------------
2000 1999
-------- --------
Continuing operations after non-cash charges and before
gains on sales of businesses ..................................................................... $ 22,547 $ (1,661)
Changes in operating assets and liabilities, net:
Accounts receivable .............................................................................. 3,490 (36,828)
Prepaid expenses, inventories and other assets ................................................... 8,275 3,136
Current and other liabilities, including accrued interest ........................................ 12,418 26,203
Cash basis restructuring costs ..................................................................... (3,505) (2,375)
Cash used by reorganization items, net ............................................................. (1,581) --
Miscellaneous, other ............................................................................... 919 2,057
-------- --------
Totals ..................................................................................... $ 42,563 $ (9,468)
======== ========
The increase in the cash provided by continuing operations after non-cash
charges and before gains on sales of businesses is principally attributable to
(i) management's cost reduction programs implemented in December 1999, (ii) a
favorable change in core therapy mix which provided a higher gross margin to the
company and (iii) more efficient utilization of company resources toward profit
generation.
The net change in cash provided by or (used in) in the accounts receivable
activity relates to (i) increased collection efforts in 2000 and certain
recoveries of amounts previously deemed to be uncollectible, (ii) the absence of
a continued build-up in the accounts receivable balances accompanying the CPS
revenue growth due to disposition of the CPS business effective July 31, 2000
and (iii) an overall decline in the infusion therapy net revenue of
approximately 7.4%, which is indicative of management's initiative to favorably
change the core therapy mix.
33
Net cash provided by investing activities was $37.8 million for the year
ended December 31, 2000 as compared to cash used for investing activities of
$7.3 million in the year ended December 31, 1999. For 2000, cash provided by
investing activities is primarily due to cash proceeds of $41.3 million from the
sale of the CPS business and the receipt of a $0.3 million contingent earn-out
payment related to one of the company's operating subsidiaries, offset by
purchases of property and equipment totaling approximately $3.5 million.
Net cash used in financing activities was $56.0 million for the year ended
December 31, 2000 compared to cash provided by financing activities of $43.4
million for the year ended December 31, 1999. For 2000, cash used in financing
activities included net debt repayments of $54.1 million, debtor-in-possession
financing fees of $0.5 million and cash distributions paid to minority interests
of $1.4 million.
Management believes that the net costs for the Debtors' reorganization and
bankruptcy proceedings will result in significant use of cash for the year
ending December 31, 2001. These items principally consist of professional fees
and expenses and employee retention payments. Management believes that such
costs will primarily be funded through cash provided by operations and, if
necessary, borrowings from the DIP financing agreement.
The final liquidation of the Resource Network Subsidiaries through their
bankruptcy proceedings may result in certain additional cash expenditures by the
company beyond the cash accounts already deemed to be a part of R-Net's
bankruptcy estate. However, management does not expect that such amounts, if
any, will be material to the financial condition or cash flows of the company.
As of December 31, 2000, the company did not have any material commitments
for capital expenditures; however, management is currently evaluating all of the
company's information systems. Pending the outcome of this evaluation, certain
commitments for material capital expenditures may result.
Coram is in a dispute with the Internal Revenue Service regarding certain
tax refunds previously received by the company. Should it not prevail in the
majority of the issues in dispute, Coram would need to access funds to address
the alleged deficiency of approximately $12.7 million, plus interest and
penalties. Furthermore, management cannot predict whether any future objections
of the Official Committee of the Equity Security Holders in the Debtors'
bankruptcy proceedings will be forthcoming or if they would prevent confirmation
of a plan of reorganization set forth by the Debtors' management. Outcomes
unfavorable to the company or unknown additional actions could require the
company and the Debtors to access significant additional funds. See Notes 3, 4
and 13 to the company's Consolidated Financial Statements.
PART A AND PART B MEDICARE SURETY BONDS. As discussed in Item 1 under
"Government Regulation," the Health Care Financing Administration ("HCFA") is
reviewing the bonding requirements for Part A certified home health agencies and
Part B suppliers as a condition of participation in the Medicare program.
Management expects that the compliance date for having the necessary bonds in
place will be sixty days after the publication of the final rule. Such bond
amounts may be funded in whole or in part through cash generated from operations
or from available funds under the terms of the DIP financing agreement. Any
borrowings under the DIP financing agreement could reduce amounts available
under that facility to fund other company capital requirements. In addition,
depending upon the final regulations, the company may be able to establish
letters of credit for the bonding requirement in whole or in part, however, such
letters of credit may require the use of cash in order to be fully
collateralized. Management also believes that another potential source for
meeting a bonding requirement may be to obtain bonds through a qualified
insurance carrier. No assurances can be given that capital generated by
operations or funds under the terms of the DIP financing agreement or
availability from an insurance carrier at a reasonable cost will satisfy these
surety bond requirements, when finalized.
WORKING CAPITAL. Working capital at December 31, 2000 is a deficit of
$97.1 million compared to working capital surplus of $71.0 million at December
31, 1999, a decrease of $168.3 million. The change in working capital is
primarily due to an increase in current liabilities relating to liabilities
subject to compromise, which includes the full amount of the company's Series A
Notes and the Series B Notes aggregating approximately $153.3 million, and
accruals for management incentive compensation, as well as, administrative costs
of the Debtors' bankruptcy proceedings. See Note 3 to the company's Consolidated
Financial Statements.
ACCOUNTS RECEIVABLE. Coram maintains systems and processes to collect its
accounts receivable as quickly as possible after the underlying service is
rendered. Nevertheless, there is a spread between when the company collects
payments for services and when the company pays for salaries, supplies and
overhead related to that service. As such, as Coram grows its revenue, the need
for working capital increases. As a result, due to the timing difference between
cash received from the growth in sales and disbursement of cash to pay the
expenses associated with these sales, the amount of cash generated from accounts
receivable may not be sufficient to cover expenses associated with the growth of
the business. Furthermore, if Coram incurs a significant increase in its days
sales outstanding of accounts receivable, the borrowing base under the terms of
the DIP financing agreement could be reduced, which in turn would
34
reduce the amount of available credit under the agreement. Also see Item 7.
under the caption "Risk Factors." Coram may not be able to meet its increased
cash requirements.
RISK FACTORS
THERE CAN BE NO ASSURANCE REGARDING CORAM'S GOING CONCERN RELATED TO THE
CHAPTER 11 PROCEEDINGS.
The company's ability to continue operations is dependent upon, among
other things, the ability of the company to comply with the terms of the DIP
financing arrangement, confirmation of a plan of reorganization, success of
future operations after such confirmation and the ability to generate sufficient
cash from operations and financing sources to meet obligations. There can be no
assurances that any plan of reorganization will be approved by the Bankruptcy
Court or that such a plan will allow the company to operate profitably. Any plan
of reorganization and other actions during the Chapter 11 proceedings could
change materially the financial condition and/or outlook of the company.
Furthermore, the future availability or terms of financing can not be determined
in light of the Chapter 11 filings and there can be no assurance that the
amounts available through the DIP financing will be sufficient to fund the
operations of the company until a proposed plan of reorganization is approved by
the Bankruptcy Court. In addition, the company may experience difficulty in
attracting and maintaining patients and appropriate personnel as a result of the
Chapter 11 proceedings.
CORAM'S FUTURE PROFITABILITY IS NOT CERTAIN WHICH COULD ADVERSELY AFFECT
THE COMPANY'S CONTINUED OPERATIONS AND STOCK PRICE.
Numerous factors have affected Coram's performance and financial condition
to date, including, among others: (i) ongoing pricing pressure in Coram's
infusion therapy business as a result of a continuing shift in payer mix from
private indemnity insurance to managed care and governmental payers and intense
competition among infusion providers; (ii) increased competition from hospitals
and physicians who have sought to increase the scope of services they offer
through their facilities and offices, including services similar to those
offered by Coram; and (iii) increased competition from hospitals and physicians
which have entered into risk-sharing relationships with third-party payers
pursuant to which they have been delegated control over the provision of a wide
variety of healthcare services, including the services offered by Coram. There
can be no assurance that the foregoing factors will not continue to have an
adverse effect on the company's financial condition and results of operations in
the future.
THE OUTCOME OF PENDING BANKRUPTCY AND LEGAL PROCEEDINGS COULD ADVERSELY
AFFECT CORAM'S BUSINESS.
As described in Item 3. Legal Proceedings, Coram is involved in several
legal disputes. Additionally, Coram Healthcare Corporation and Coram, Inc. are
currently in Chapter 11 Bankruptcy. Even though Coram intends to pursue its
claims and defend itself vigorously in these matters, the company can not
predict the outcome of current and future matters due to the uncertainties
inherent in litigation and bankruptcy proceedings. Pending the submission of a
plan of reorganization and its approval by the Bankruptcy Court and the outcome
of certain legal disputes, the financial condition, results of operations and
liquidity of the company may be materially adversely affected.
OPERATIONS MAY BE ADVERSELY AFFECTED BY THE SIGNIFICANT OUTSTANDING
INDEBTEDNESS.
Following the exchange of debt for Coram Inc. Series A Notes Preferred
Stock, Coram had approximately $153.3 million outstanding long-term debt in the
form of Series A and Series B Notes at an interest rate of 9.0% per annum
maturing on June 30, 2001. Pending the submission of plan of reorganization and
its approval by the Bankruptcy Court, the financial condition, results of
operations and liquidity of the company may be materially adversely affected.
See Item 7. "Liquidity and Capital Resources." and Note 8 to the company's
Consolidated Financial Statements.
UNDER THE PROVISIONS OF STARK II LAW, CORAM WILL NEED TO MAINTAIN CERTAIN
EQUITY REQUIREMENTS IN ORDER TO BE ABLE TO AVOID DISRUPTION IN ACCEPTING
REFERRALS OF CERTAIN PATIENTS FROM PHYSICIANS WHO MAY OWN SHARES OF CORAM
COMMON STOCK.
Coram has learned that certain physicians have, from time to time, owned
shares of its common stock. Under federal law, including certain provisions
contained in the Stark II law, the ownership of shares in a healthcare service
provider is a financial relationship subject to federal regulation. For example,
the Stark II law prohibits a physician from making Medicare or Medicaid
referrals for certain "designated health services," including durable medical
equipment, parenteral and enteral nutrition therapy and outpatient prescription
drugs, to entities with which the physician or an immediate family member has a
financial relationship, unless an exception to the law is available. The Stark
II law includes an exception for the ownership of publicly traded stock in
companies with equity above certain levels. This exception of Stark II requires
the issuing company to have stockholders' equity of at least $75 million either
as of the end of its most recent fiscal year or on average over the last three
fiscal years. Due principally to the gain on troubled debt restructuring and the
disposition of CPS, at December 31, 2000 the company's stockholders' equity was
above the required level. However, in light of the company's recurring
operational losses during each of the three years in the period ended December
31, 2000,
35
management's ability to maintain an appropriate level of stockholders' equity
cannot be reasonably assured. The penalties for failure to comply with Stark II
include civil penalties that could be imposed upon the company or the referring
physician, regardless of whether either the physician or the company intended to
violate the law. Accordingly, if the company's common stock remains publicly
traded, and its stockholders' equity falls below the required levels, the
company would be forced to cease accepting referrals of patients with government
sponsored benefit programs or run a significant risk of noncompliance with Stark
II. Ceasing to accept such referrals could materially adversely affect the
company's financial condition and business reputation in the market as it may
cause the company to be a less attractive provider to which a physician could
refer his or her patients. The company previously requested a Stark II waiver
from the Health Care Financing Administration, but such waiver request was
denied.
CORAM MAY NOT BE ABLE TO MEET ITS INCREASED CASH REQUIREMENTS.
Management throughout the company is continuing to concentrate on
enhancing timely reimbursement by emphasizing improved billing and cash
collection methods, continued assessment of systems support for reimbursement
and concentration of the company's expertise and managerial resources into
certain reimbursement locations. In December 2000, Coram announced that as part
of its continuing efforts to improve efficiency and overall performance, several
Patient Financial Service Centers (reimbursement sites) were being consolidated
and the related reimbursement positions were to be eliminated. By consolidating
to fewer sites, management expects to implement improved training, more easily
standardize "best demonstrated practices," enhance specialization related to
payers such as Medicare and achieve more consistent and timely cash collections.
Management does not expect this change to affect Coram's patients or payers, but
believes, instead, that in the long-term they will receive better, more
consistent service. The transition is expected to be accomplished in stages
beginning April 1, 2001 and ending in the third quarter of the same year.
Management has taken certain actions to mitigate the potential shortfall in cash
collections during the upcoming transition period, including, but not limited
to, offering incentives for personnel to stay with the company until the
completion of their corresponding regional consolidation. No assurances can be
given that the consolidation of the company's Patient Financial Service Centers
will be completed by the end of the third quarter of 2001, that the
consolidation will be successful in enhancing timely reimbursement or that the
company will not experience a significant shortfall in cash collections during
or after the transition period.
Coram has experienced pressures from vendors to tighten payment terms for
needed drugs and supplies. Noncompliance with terms could result in the company
not having access to the necessary drugs and supplies to maintain or grow its
present business. In addition, Coram relies heavily on the collection of third
party payments from insurance providers to pay these vendors. In connection
therewith, it is imperative that the company maintains tightly controlled cash
collection and billing practices. There can be no assurance that third party
payers will not extend the time in which they pay Coram for its services.
Furthermore, there can be no assurances that the closure and consolidation of
several reimbursement sites in 2001 will not cause a significant shortfall in
cash collections. Any disruption in cash collections, either due to changes in
third party payment practices or shortfalls resulting from the closure and
consolidation of Coram's reimbursement sites would cause additional liquidity
pressures on the company.
AVERAGE WHOLESALE PRICE CHANGES HAVE AND MAY CONTINUE TO TREND IN A
DIRECTION THAT IS ADVERSE TO CORAM'S INDUSTRY.
For most of the drugs that Coram provides to its patients, it is
reimbursed by many of its governmental and third party payers according to rate
schedules that are based on the Average Wholesale Price ("AWP") of the drugs
provided. AWP is an industry term that is intended to represent the prices at
which retail pharmacies, such as Coram, acquire individual drugs from drug
manufacturers and distributors. Certain independent sources, including Medical
Economics, Inc. and First DataBank, Inc., publish AWP lists for use by the
pharmacy and healthcare industries. These independent sources survey drug
manufacturers and use the price information provided by these drug manufacturers
to calculate AWPs for nearly all the drugs received by Coram's patients. The
AWPs provided by these independent sources are intended to represent the prices
at which retail pharmacies acquire the drugs provided to their patients. Thus
AWPs for drugs should rise and fall roughly corresponding to the rise and fall
of the price at which retail pharmacies purchase their drugs.
Since the company is reimbursed by many of its governmental and third
party payers for most of the drugs that it provides according to rate schedules
that are based on AWP, the company's reimbursement rates for these drugs should
move roughly along with the price at which it acquires the drugs. However, in
many cases, the AWPs for certain drugs have failed to keep pace with rapid unit
cost price increases for those drugs. In such instances, the margin between
Coram's reimbursement rate and the cost at which it acquired the drug, which
margin should cover the costs of the clinical services and overhead expenses
associated with the delivery and administration of the drug, has been
substantially reduced or eliminated.
Since 1997, the cost at which Coram has acquired certain drugs has
increased over eighty percent with no corresponding increase in AWP. Due to
supply shortages, certain drugs derived from blood products, such as certain
immunoglobulin agents, have in some instances experienced substantial
increases in their unit cost purchase price when compared to their relative
changes in AWP. There can be no assurances that the upward trend in the cost
of certain drugs will cease, or that the AWPs for certain drugs will keep pace
36
with the increasing unit costs of those drugs. Further significant increases in
drug costs that are not accompanied by corresponding increases in AWP could have
in a material adverse impact on the company's profit margins.
THE COMPANY'S REVENUE AND PROFITABILITY ARE SUBJECT TO PRICES PAID BY
THIRD PARTY PAYERS.
The company receives payment from government programs and insurance
companies for the services it provides. The rates paid by these third parties
cannot be controlled by the company and may not be sufficient to allow Coram to
generate a profit from providing its services. Additionally, managed care payers
and traditional indemnity insurers are increasingly requesting fee structures
and other arrangements providing for the assumption by healthcare providers of
all or a portion of the financial risk of providing care. The failure of these
third party payers to pay prices adequate enough to cover the company's
operating expenses could have a material adverse effect on the business, results
of operation or financial condition of Coram.
Additionally, the company maintains certain critical third party vendor
relationships with Cardinal Health, Inc. and Baxter Healthcare Corporation. The
combined aggregate purchases from these two vendors accounted for approximately
78% of the total activity for the year ended December 31, 2000. Although
management considers its relationships with these two important drug and
supplies vendors to be good and stable, there can be no assurances that such
relationships will continue. Should either of these vendors elect not to provide
drugs and supplies to the company on a recurring basis, there would likely be a
significant disruption to the company's business and the results of operations
could be adversely impacted until such time as a replacement vendor could be
identified. Moreover, there could be no assurances that the pricing structure
that the company currently enjoys could be matched by a replacement vendor.
Additionally, because the company's patient census has declined over the past
year, its ability to meet volume commitments with certain vendors has eroded,
thereby causing additional price increases on some contracts. Further declines
in patient census could result in a breach of a contract that could have
significant negative financial impact to the company. It would also erode the
positive image management has developed with the vendor community and adversely
impact the company's ability to leverage its purchasing activity with new
vendors.
THE ONGOING SHIFT OF SERVICES DELIVERED TO PERSONS COVERED UNDER BENEFIT
PLANS FUNDED BY GOVERNMENTAL OR MANAGED CARE PAYERS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Since the inception of Coram's business in 1994, it has been experiencing
a shift in its payer sources from private indemnity payers to governmental and
managed care payers. Private indemnity payers typically reimburse at a higher
amount for a given service and provide a broader range of benefits than
governmental and managed care payers. Congress has reduced reimbursement rates
applicable to certain home health and durable medical equipment services.
Similarly, other legislative and regulatory proposals have been made which, if
adopted, would have the effect of reducing the amount received by Coram for its
services. Moreover, intense competition among providers of healthcare services
have encouraged managed care payers to continue to reduce the prices paid for
services, including the services offered by Coram.
CORAM MAY FIND ITSELF UNABLE TO PROCURE THE PRODUCTS NECESSARY TO SERVE
ITS PATIENTS.
The ability to acquire factor product under normal conditions is volatile,
but currently the international demand for certain factor products far exceeds
the supply. Availability of factor product from manufacturers is spotty, thereby
requiring the company to purchase through the blood broker market wherein
pricing may not be favorable to the company and product availability can change
significantly from day to day. During such times of shortages, prices soar with
limited availability to pass these additional costs on to patients. Due to the
nature of factor manufacturing processes, intermittent product shortages may be
experienced from time to time, which may make it difficult for Coram to meet the
needs of its patients and may have an adverse impact on Coram's future results
of operations. These shortages could be due to insufficient donor pools, failed
production lots, contamination, etc. Moreover, a single patient's requirements
may, at any given time, expend what would normally be a whole month's inventory
for multiple patients. During March 2001, the company began experiencing
difficulties obtaining recombinant factor VIII (rVIII) due to a nationwide
shortage of this product which was precipitated by Federal Drug Administration
requirements exceeding expectations of current manufacturing. Coram currently
has a supply of this factor product in inventory to meet immediate patient
demands; however, management is proactively taking steps to secure inventory of
this product at levels sufficient to meet anticipated future demands. These
steps include, but are not limited to, declining new patients for this
particular factor product until the shortage eases, as well as, asking patients
who are currently using rVIII to consult with their physicians and consider
voluntarily switching to appropriate alternative products on a temporary basis.
Under normal circumstances, limited allocations of products from manufacturers
greatly impacts the company's ability to expand its customer base, but
management believes this current factor shortage is likely to impair the
company's ability to grow this segment of its business. Coram's potential
inability to purchase pharmaceutical products and supplies required by its
patients could have a material, adverse impact on the company's business.
37
CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD GIVE INCREASED PRICING
POWER TO PURCHASERS OF THE COMPANY'S SERVICES AND REDUCE THE COMPANY'S
REVENUE AND PROFITS.
Managed care organizations have grown substantially in terms of the
percentage of the population that is covered by such organizations and in terms
of their control over an increasing portion of the healthcare economy. Managed
care plans have continued to consolidate to enhance their ability to influence
the delivery of healthcare services and to exert pressure to control healthcare
costs. This increased pressure may require the company to reduce its prices or
forfeit existing or new business which would have a material adverse effect on
its business, financial condition and results of operations.
CORAM FACES SIGNIFICANT COMPETITION AND MAY NOT BE ABLE TO COMPETE
SUCCESSFULLY.
Coram competes in the alternate site infusion therapy market which is
highly competitive. Some of Coram's current and potential competitors include:
(i) integrated providers of alternate site healthcare services;
(ii) hospitals;
(iii) local providers of multiple products and services offered for
the alternate site healthcare market; and
(iv) physicians and physician owned organizations such as
independent practice associations and multi-specialty group
practices.
Coram has experienced increased competition in its alternate site infusion
therapy business from hospitals and physicians that have sought to increase the
scope of services offered at or through their facilities or offices, including
services similar to those offered by the company and from hospitals and
physicians that have entered into risk relationships with managed care
organizations pursuant to which they have taken control of certain medical
services, including the services offered by the company. Certain competitors in
various markets may have superior financial, marketing or managerial resources,
size, purchasing power or strategic relationships with providers, referral
sources, such as physicians and hospital discharge planners, and traditional
indemnity and managed care payers.
There are relatively few barriers to entry in the infusion therapy
services market. Local or regional companies are currently competing in many of
the markets served by the company and others may do so in the future. Coram
expects its competitors to continue to improve their service offerings and price
competitiveness. Coram also expects its competitors to develop new strategic
relationships with providers, referral sources and payers, which could result in
increased competition. The introduction of new and enhanced services,
acquisitions and industry consolidation and the development of strategic
relationships by Coram's competitors could cause a decline in sales, loss of
market acceptance of Coram's services or price competition, or make the
company's services less attractive. There can be no assurance that Coram will be
able to compete successfully against current or future competitors or that
competitive pressures will not have a material adverse effect on Coram's
business, financial condition and results of operations. See Item 1.
"Competition," and Item 7. "Business Strategy" and "Factors Affecting Recent
Operating Results."
THE SUCCESS OF CORAM'S BUSINESS IS DEPENDENT ON RELATIONSHIPS WITH THIRD
PARTIES.
The profitability of Coram's business depends in part on its ability to
establish and maintain close working relationships with managed care
organizations, private and governmental third-party payers, hospitals,
physicians, physician groups, home health agencies, long-term care facilities
and other institutional health providers and insurance companies and large
self-insured employers. A central feature of the company's business strategy is
to improve its relationships with such third parties and with physicians and
physician groups. There can be no assurance that the company will be successful
in improving and maintaining such relationships or that the company's existing
relationships will be successfully maintained or that additional relationships
will be successfully developed and maintained in existing or future markets. The
loss of existing relationships such as the loss of its relationship with Aetna
and its affiliated company, Prudential, or the failure to continue to develop
and maintain ongoing relationships in the future could have a material adverse
effect on the company's business, financial condition and results of operations.
See Item 7. "Business Strategy."
CORAM'S BUSINESS MAY SUFFER IF IT IS UNABLE TO RETAIN KEY PERSONNEL.
Coram is substantially dependent upon the services of its key executive
officers, which include Daniel D. Crowley, Chairman and Chief Executive Officer
and Allen J. Marabito, Executive Vice President. The loss of services of any of
these executives could have a material adverse effect on the company. The
company's future growth and success depends, in large part, upon its ability to
obtain,
38
retain and expand its staff of professional personnel. There can be no assurance
that the company will be successful in its efforts to attract and retain such
personnel.
CORAM MAY BE UNABLE TO RECRUIT APPROPRIATE PERSONNEL, WHICH WOULD HAVE A
MATERIAL ADVERSE EFFECT ON ITS BUSINESS.
The continued operation of Coram's business, as well as its future growth
and success, depends upon its ability to recruit and retain a staff of
professional personnel, including licensed pharmacists and nurses. Certain parts
of the United States, including certain states in which the company has
operations, are currently experiencing a shortage of these licensed
professionals. Coram has been affected by this shortage and management believes
that its current financial position has made it more difficult for the company
to recruit and retain experienced professional personnel. As a result, the
company has experienced higher contract labor costs. A continued prolonged
shortage of either or both of these types of professionals being available to or
interested in working with Coram could have a material adverse effect on the
company's business, results of operations and financial condition.
CORAM'S COMMON STOCK IS SUBJECT TO A HIGH DEGREE OF RISK AND MARKET
VOLATILITY.
As a result of the Chapter 11 bankruptcy filings of the Debtors, the
equity interests of the common stockholders are subject to a high degree of
risk. Should a plan of reorganization similar to the Restated Joint Plan of
reorganization be approved, the complete elimination of the equity interests of
CHC would occur. The Bankruptcy Court appointed Goldin Associates, L.L.C. as
independent restructuring advisors to the Debtors to assess, among other things,
the appropriateness of the Restated Joint Plan of reorganization. Goldin is also
appointed as an arbiter between the Debtors and the Official Committee of the
Equity Security Holders in the Debtors' bankruptcy proceedings. See Note 3 to
the company's Consolidated financial Statements.
There has historically been and may continue to be significant volatility
in the market price for Coram's common stock. Factors include, but not limited
to, the Debtors' Chapter 11 bankruptcy proceedings, actual or anticipated
fluctuations in Coram's operating results, new products or services introduced
or new contracts entered into by the company or its competitors, conditions and
trends in the healthcare industry including changes in government reimbursement
policies, changes in financial estimates by securities analysts, general market
conditions and other factors could cause the market price of Coram's common
stock to fluctuate substantially. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market price for the common stock of healthcare
companies. These broad market fluctuations may adversely affect the market price
of the common stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has been brought against that company. There can be no assurances that such
litigation will not occur in the future with respect to Coram. Such litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon Coram's business,
financial condition and results of operations.
CORAM'S REIMBURSEMENT RATES MAY BE ADVERSELY IMPACTED BY RECENT REGULATORY
ACTION.
Approximately thirty state Medicaid programs have adopted regulations or
other policies whereby they will begin applying a new average wholesale price
list to calculate the amounts that they will pay for certain drugs furnished to
Medicaid beneficiaries for services rendered on or after May 1, 2000. Other
states may be expected to adopt similar regulations or policies. These new
average wholesale price lists would drastically reduce the rates at which the
Medicaid programs would reimburse pharmacy providers such as Coram for their
services. The drugs and services scheduled for the rate reduction include over
400 individual therapeutic solutions, representing approximately fifty different
drug therapies, many of which are commonly received by Coram's patients. The
reductions range in size from a ten percent to over ninety percent decrease in
the rates that the Medicaid programs would reimburse for these drugs, supplies
and services. Some or all of these state Medicaid programs may be expected to
adopt new average wholesale price lists that further expand the rate reduction
to additional drugs and supplies commonly received by Coram's patients.
Coram has not experienced, and does not expect to experience, any
significant decrease in the cost for which it acquires drugs and supplies that
would correspond to the decreased reimbursements from the state Medicaid
programs. In addition, the state Medicaid programs have made no efforts to
balance the reduction in drug and supply reimbursements with a corresponding
increase in the amounts which they reimburse providers, such as Coram, for the
cost of the clinical services and related overhead associated with the
procurement, delivery and administration of these drugs and supplies to Medicaid
beneficiaries.
For the year ended December 31, 2000, the company's net revenue derived
from services rendered to Medicaid beneficiaries was approximately $34.4 million
or 7.4% of the company's overall consolidated net revenue. The company cannot
predict what impact such rate reductions will have on the company's results of
operations or financial condition.
The Medicare program and most private payer organizations with which the
company does business also reimburse the company for its services using a
formula that incorporates the average wholesale price of the drug delivered. If
the federal Medicare program
39
and/or private payer organizations adopt the Medicaid average wholesale price
lists with the decreased drug reimbursement rates, Coram cannot provide any
assurance that its results of operations and financial condition will not be
materially adversely impacted.
THE OPERATION OF CORAM'S BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION.
GENERAL. Coram's healthcare services business is subject to extensive and
frequently changing state and federal regulation. Specifically, Coram is subject
to state laws governing and regulating several aspects of its business,
including home infusion therapy services (including certificates of need and
licensure requirements in certain states), dispensing, distributing and
compounding of prescription products and home health services. Federal laws
governing Coram's activities include regulation of pharmacy operations and
regulations under the Medicare and Medicaid programs relating to, among other
things, the submission of claims for payment and certification of home health
agencies. Coram also is subject to certain state and federal laws prohibiting
the payment of remuneration for patient or business referrals and the provision
of services where a prohibited financial relationship exists between a referring
physician and the entity providing the service.
New laws and regulations are enacted from time to time to regulate new and
existing services and products in the home infusion and home health industries.
Changes in the law or new interpretations of existing laws also could have an
adverse effect on the company's methods and costs of doing business. Further,
Coram's failure to comply with such laws could adversely affect its ability to
continue to provide, or receive reimbursement for, its equipment, products and
services, and also could subject Coram and its officers and employees to civil
and criminal penalties. There can be no assurances that the company will not
encounter regulatory impediments that could adversely affect its ability to open
new branch offices and to expand the services currently provided at its existing
branch offices.
Set forth below is a more detailed discussion of certain factors related
to federal and state regulation of Coram and its business.
MEDICARE AND MEDICAID REGULATIONS. As a provider of services under the
Medicare and Medicaid programs, Coram is subject to federal laws and regulations
governing its operations, arrangements with other providers and reimbursement
procedures and practices. These laws include the federal anti-kickback statute,
which prohibits the payment or receipt of any form of remuneration in return for
referring business or patients to providers of services for which payments are
made by a federal healthcare program. Violation of these laws may result in
civil and criminal penalties, including substantial fines, loss of the right to
participate in the Medicare and Medicaid programs and imprisonment. In addition,
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
expanded the government's fraud and abuse elimination efforts. HIPAA, among
other provisions, expands the government's efforts for prosecuting fraud and
abuse beyond Medicare and Medicaid to all payers; makes exclusion from the
Medicare and Medicaid programs mandatory for a minimum of five years for any
felony conviction relating to fraud; requires that organizations contracting
with another organization or individual take steps to be informed as to whether
the organization or individual is excluded from Medicare and Medicaid
participation; and enhances civil penalties by increasing the amount of fines
permitted. The applicable federal laws also include prohibitions contained in
Stark II, which prohibits referrals by physicians for designated health
services, which include outpatient prescription drugs, parenteral and enteral
nutrition, equipment and supplies, durable medical equipment and home health
services, if such physician has a disqualifying investment or compensation
relationship with the supplier of such services and no exceptions applies. While
Coram believes it has structured its financial relationships with physicians to
comply with Stark II, a failure to comply with the provisions of Stark II could
have a material adverse effect on the company. In addition, various federal laws
impose civil and criminal penalties against participants in the Medicare or
Medicaid programs who make false claims for payment for services or otherwise
engage in false billing practices.
Many states also have statutes prohibiting the payment or receipt of (or
the offer or solicitation of) anything of value in return for, or to induce, a
referral for healthcare goods or services. There are several other state
statutes that, although they do not explicitly address payments for referrals,
could be interpreted as prohibiting the practice. While similar in many respects
to the federal laws, these laws vary from state to state, are often vague and
have seldom been interpreted consistently by courts and regulatory agencies. In
addition, various state laws impose civil and criminal penalties against
participants in the Medicaid program who make false claims for payment for
services or otherwise engage in false billing practices. Private insurers and
various state enforcement agencies have recently increased their scrutiny of
healthcare providers' practices and claims, particularly in the home health and
home medical equipment areas.
Enforcement of federal fraud and abuse laws, and regulatory scrutiny
generally has increasingly focused on the home healthcare industry. For example,
Medicare fiscal intermediaries have implemented "Wedge" audits, which involve a
review of a small sample of patient records to identify non-compliance. Any
adverse findings under these types of audits can result in overpayment
determinations and offsets against future payments. There can be no assurance
that Coram will not become the subject of a regulatory or other investigation or
proceeding or that its interpretations of applicable healthcare laws and
regulations will not be challenged. The defense
40
of any such challenge could result in substantial cost to the company and
diversion of management's time and attention. Any such challenge, whether
ultimately sustained or not, could have a material adverse effect on Coram.
MEDICARE CERTIFICATION. Federal regulations governing the Medicare program
are also applicable to Coram's home health services. These regulations include
an annual review of healthcare facilities and personnel and provide criteria for
coverage and reimbursement. As of December 31, 2000, the company has one
location certified by Medicare to provide home health services.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The company's management is aware of
certain current audits and reviews with respect to prior reimbursements from
Medicare and Medicaid. While management believes that the company is in
compliance with all applicable laws and regulations, compliance with such laws
and regulations can be subject to future government review and interpretation,
as well as, significant regulatory action including fines, penalties, and
exclusion from the Medicare and Medicaid programs.
PERMITS AND LICENSURE. Many states require companies providing home
infusion therapy products and services, home healthcare services, and other
products and services of the type offered by Coram to be licensed. Through its
subsidiaries, Coram currently is licensed under state law to provide nursing
services in 20 states and currently is licensed to provide pharmacy services in
42 states and 1 Canadian province.
CERTIFICATES OF NEED. Many states require companies providing home
healthcare services, home infusion therapy and other services of the type
offered by Coram to have a certificate of need issued by a state health planning
agency. Certificates of need are often difficult to obtain and in many instances
a certificate of need is not obtainable at all (because an area is determined to
be adequately served by existing providers or for other reasons). If Coram
commences operations in a state, or expands its operations in a state where it
is currently operating, and those operations require a certificate of need, the
company will be required to obtain a certificate of need with respect to those
operations. There can be no assurance that Coram would be able to obtain
required certificates of need and the failure to obtain such certificates of
need could adversely affect Coram's ability to grow its business.
HEALTHCARE REFORM.
The healthcare industry continues to undergo significant changes driven by
various efforts to reduce costs, including efforts at national healthcare
reform, trends toward managed care, limits in Medicare coverage and
reimbursement levels, consolidation of healthcare distribution companies and
collective purchasing arrangements by office-based healthcare practitioners. The
impact of third-party pricing pressures and low barriers to entry have
dramatically reduced profit margins for healthcare providers. Continued growth
in managed care and capitated plans have pressured healthcare providers to find
ways of becoming more cost competitive. This has also led to consolidation of
healthcare providers in the company's market areas. Coram's inability to react
effectively to these and other changes in the healthcare industry could
adversely affect its operating results.
In addition, political, economic and regulatory influences are subjecting
the healthcare industry in the United States to extensive and dynamic change,
and many competing proposals have been introduced in Congress and various state
legislatures to reform the present healthcare system. It is possible that
healthcare reform at the federal or state level, whether implemented through
legislation or through action by federal or state administrative agencies, would
require Coram to make significant changes in the way it conducts business.
Certain aspects of healthcare reform such as proposed reductions in Medicare and
Medicaid payments, if successfully developed and adopted, could have a material
effect upon the company's business. Coram anticipates that Congress and state
legislatures will continue to review and assess alternative healthcare delivery
systems and payment methodologies, and public debate of these issues will likely
continue in the future. It is not possible at this time to predict what, if any,
further reforms will be adopted, or when such reforms will be adopted and
implemented. No assurance can be given that any such reforms will not have a
material adverse effect upon Coram's business, results of operations, and
financial condition.
INSURANCE MAY NOT BE SUFFICIENT TO COVER LOSSES FROM PROFESSIONAL
LIABILITY AND PRODUCTS LIABILITY EXPOSURE.
The services performed and products sold by Coram involve an inherent risk
of professional and products liability. While the company maintains insurance
consistent with industry practice, there can be no assurance that the amount of
insurance currently maintained will satisfy any claims made against Coram or
that it will be able to obtain insurance in the future at commercially
reasonable rates or in adequate amounts. Coram cannot predict the effect that
any such claims, regardless of their ultimate outcome, might have on its
business or reputation or on its ability to attract and retain patients and
employees.
CORAM MAY BE UNABLE TO RESPOND TO TECHNOLOGICAL CHANGE EFFECTIVELY.
41
Coram's alternate site infusion business is dependent on physicians
continuing to prescribe the administration of drugs and nutrients through
intravenous and other infusion methods. Intravenous administration is often the
most appropriate method for treating critically ill patients and is often the
only way to administer proteins and biotechnology drugs. Nonetheless,
technological advances in drug delivery systems, the development of therapies
that can be administered orally, such as protease inhibitors for the treatment
of persons with HIV/AIDS, and the development of new medical treatments that
cure certain complex diseases or reduce the need for infusion therapy could
adversely impact Coram's alternate site infusion therapy business.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the company's exposure to market risk related to
changes in interest rates. This discussion contains forward-looking statements
that are subject to risks and uncertainties. Actual results could vary
materially as a result of a number of factors, including but not limited to,
changes in interest rates, and those set forth under Item 7. "Management's
Discussion and Analysis of Results of Operations and Financial Condition:
Background -- FACTORS AFFECTING RECENT OPERATING RESULTS."
As of December 31, 2000, the company had outstanding long-term debt of
$153.6 million of which $153.3 million matures in June 2001 and bears interest
at 9.0% per annum. The company also has a debtor-in-possession ("DIP") agreement
providing for the availability of up to $40.0 million for use in connection with
the operation of its businesses and the businesses of its subsidiaries. The
facility matures on the earlier of either confirmation of the Debtors' plan of
reorganization or August 31, 2001 and bears an interest rate of prime plus 2.0%,
which was 11.5% on December 31, 2000. As of December 31, 2000, the company had
no borrowings under the DIP agreement. Because substantially all of the interest
on the company's debt is fixed, a hypothetical 10.0% change in interest rates
would not have a material impact on the company. Increases in interest rates
could, however, increase interest expenses associated with future borrowings by
the company, if any. The company does not hedge against interest rate changes.
See Note 8 to the company's Consolidated Financial Statements.
The debt to equity exchange transaction described in Note 8 to the
company's Consolidated Financial Statements qualified as a troubled debt
restructuring pursuant to Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings." In
accordance therewith, the Debtors will not recognize any interest expense on the
Series A Notes and the Series B Notes until after their maturity in June 2001.
ITEM 8. FINANCIAL STATEMENTS
The company's Consolidated Financial Statements, Notes to Consolidated
Financial Statements and financial statement schedule at December 31, 2000 and
1999 and for the years ended December 31, 2000, 1999 and 1998 and the Report of
Independent Auditors are included in this report as indicated on the Index to
Financial Statements and Schedule on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The following table sets forth certain information concerning each member
of Coram's Board of Directors as of April 9, 2001. Except as provided below,
none of the directors entered into any arrangement or understanding pursuant to
which such person was to serve as a director.
Director
Name Age Position with Coram Since
- ----------------------- --- ------------------- --------
Daniel D. Crowley...... 53 Chairman of the Board 1999
Donald J. Amaral....... 48 Director 1995
William J. Casey....... 56 Director 1997
L. Peter Smith......... 51 Director 1994
Sandra L. Smoley....... 64 Director 2000
Mr. Crowley joined Coram as its Chairman, Chief Executive Officer and
President as of November 30, 1999.
42
In addition, Mr. Crowley serves as Chairman, Chief Executive Officer and
President of Dynamic Healthcare Solutions, LLC, a privately held management
consulting and investment firm that he established in 1997. Prior to founding
Dynamic Healthcare Solutions, LLC, Mr. Crowley served as the Chairman, Chief
Executive Officer and President of Foundation Health Corporation, a post that
he had served for more than five years.
Effective August 1, 1999, Mr. Crowley and an affiliate of Cerberus
Partners, L.P. ("Cerberus"), a party to the company's debtor-in-possession
financing agreement, Senior Credit Facility and Securities Exchange Agreement,
executed a three-year employment agreement whereby Mr. Crowley is paid $960,000
per annum, plus the potential of performance related bonus opportunities, equity
options and fringe benefits. Such agreement is subject to automatic one year
extensions unless either party provides written notice within 60 days of the
original expiration date or subsequent renewal dates. The agreement further
provides that the Cerberus affiliate can unilaterally terminate the arrangement
at any time by written notice; however, certain severance payments would be
triggered by such termination. The services rendered by Mr. Crowley include, but
are not limited to, business and strategic healthcare investment advice to
executive management at Cerberus and its affiliates. Moreover, Mr. Crowley is
the Chairman of the Board of Directors of Winterland Productions, Inc.
("Winterland"), a privately held affinity merchandise company, which is a
Cerberus affiliate portfolio investment. On January 2, 2001, Winterland
voluntarily filed for protection under Chapter 11 of the United States
Bankruptcy Code in the Northern District of California.
A committee of persons claiming to own shares of the company's
publicly-traded common stock (the "Equity Committee") filed a motion with the
Bankruptcy Court seeking permission to bring a derivative lawsuit directly
against Mr. Crowley, Cerberus and Stephen A. Feinberg, a former member of the
Board of Directors. The Equity Committee's lawsuit alleges a collusive plan
whereby the named parties conspired to devalue the company for the benefit of
the company's creditors under the Securities Exchange Agreement. On February 26,
2001, the Bankruptcy Court ruled that the Equity Committee's motion would not be
productive at that time and, accordingly, the motion to proceed with the lawsuit
was denied without prejudice.
Mr. Amaral served as Chairman of the company's Board of Directors from
September 1997 until November 30, 1999. Mr. Amaral has served as a director of
the company since October 1995, Chief Executive Officer of the company from
October 1995 through April 23, 1999 and October 22, 1999 through November 30,
1999, and as President from October 1995 through December 1997. Previously, he
was President and Chief Operating Officer of OrNda Healthcorp ("OrNda") from
April 1994 to August 1995, and served in various executive positions with Summit
Health Ltd. ("Summit") from October 1989 to April 1994, including President and
Chief Executive Officer between October 1991 and April 1994. Summit was merged
into OrNda in April 1994. Mr. Amaral is also a member of the Board of Directors
of CareMatrix Corporation.
Mr. Casey has served as a director of Coram since September 1997. Since
1983, Mr. Casey has served as a consultant in the healthcare industry,
specializing in hospital management evaluation, hospital planning, managed care
contracting and turnaround services. From 1986 to 1997, Mr. Casey also served as
Contract Administrator for Emergency Department Physicians' Medical Group, Inc.
and its affiliated medical groups, which provide physician services to
non-governmental facilities. In addition, from 1988 to 1997, Mr. Casey served as
Contract Administrator for NP Medical Group, Inc., which provides physician
services to government facilities. Mr. Casey also serves as a director of
TriCounties Bank.
Mr. L. Peter Smith has served as a director of Coram since July 1994.
Between November 1993 and July 1994, Mr. Smith was a director of Medisys, Inc.
(one of the companies that joined together in 1994 to form Coram). Mr. Smith
served as the Managing Partner of AllCare Health Services, Inc., which was
acquired by Medisys, Inc. in December 1992. Mr. Smith is also the Chief
Executive Officer and a member of the Board of Directors of Ralin Medical, Inc.,
a company specializing in cardiac disease management. Mr. Smith also serves on
the Board of Directors of Gateway, Inc. and AMSYS, Inc. Mr. Smith previously
served on the Board of Directors of Sabratek Corporation from October 1992
through August 23, 1999. Sabratek Corporation filed a voluntary bankruptcy
petition under Chapter 11 of the United States Bankruptcy Code on December 17,
1999 and that proceeding is presently pending before the United States
Bankruptcy Court in Delaware. In January 2000, the assets and certain
liabilities of Sabratek Corporation's Device Business were acquired by Baxter
Healthcare Corporation.
Ms. Smoley was elected to Coram's Board of Directors on February 10, 2000.
Ms. Smoley is the Chairperson and Chief Executive Officer of The Sandra Smoley
Company, a healthcare and local government consulting firm based in Sacramento,
California. From October 1993 to January 1999, she served as Secretary of the
California Health and Welfare Agency. Prior to that time, she was Secretary of
the California State and Consumer Services Agency from January 1993 to October
1993.
Stephen A. Feinberg, a director of Coram since June 1998, resigned from
the Board of Directors on July 24, 2000.
Richard A. Fink, a director of Coram since July 1994, resigned from the
Board of Directors on February 10, 2000.
43
EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
executive officers of Coram, who serve at the pleasure of the Board of
Directors. Biographical information with respect to Daniel D. Crowley is set
forth under the caption "Board of Directors" above.
Name Age Position(s) with Coram
- ---------------------- --- ----------------------------------------------
Daniel D. Crowley...... 53 Chairman of the Board of Directors, Chief
Executive Officer and President
Scott R. Danitz (1).... 43 Senior Vice President, Chief Financial Officer
and Treasurer
Scott T. Larson (2).... 38 Former Senior Vice President, General Counsel
and Secretary
Allen J. Marabito...... 54 Executive Vice President
Vito Ponzio, Jr........ 46 Senior Vice President, Human Resources
Joseph D. Smith (3).... 42 Former Chief Operating Officer
(1) Effective January 1, 2001, Mr. Danitz was promoted to Chief
Financial Officer and Treasurer.
(2) Effective January 15, 2001, Mr. Larson resigned his position with
Coram.
(3) Effective June 30, 2000, Mr. Smith resigned his position with Coram
and currently has a one year consulting arrangement with the company
that expires on June 30, 2001.
Scott R. Danitz served as the company's Vice President and Controller from
January 1998 through December 1999, Senior Vice President, Finance and Chief
Accounting Officer from January 2000 through December 2000 and Senior Vice
President, Chief Financial Officer and Treasurer since January 2001. Previously,
Mr. Danitz was employed by First Data Corporation from 1989 through 1997 and
held various positions, the most recent of which had been Vice President and
Controller, Payment Instruments division.
Scott T. Larson served as the company's Senior Vice President and
General Counsel from July 1998 through his resignation date of January 15,
2001. In addition, Mr. Larson was elected Secretary in April 1999.
Previously, Mr. Larson served as the company's Vice President and Legal
Counsel from March 1996 to July 1998 and as Assistant General Counsel from
July 1994 through February 1996. Between December 1991 and July 1994, Mr.
Larson served as Corporate Counsel and later as Assistant General Counsel for
T(2) Medical, Inc. (one of the companies that joined together in 1994 to form
Coram). Before joining T2 Medical, Inc., Mr. Larson was employed as an
attorney with the Atlanta-based law firm of Alston & Bird.
Allen J. Marabito joined Coram effective November 30, 1999 as Executive
Vice President. From 1997 to 1999, Mr. Marabito was in private law practice and
Senior Vice President with Dynamic Healthcare Solutions, LLC. From 1991 to 1997,
he served as Senior Vice President, Secretary and General Counsel of Foundation
Health Corporation.
Vito Ponzio, Jr. has served as the company's Senior Vice President, Human
Resources since September 1998. Previously, Mr. Ponzio served as the company's
Vice President of Human Resources from February 1996 to September 1998 and as
Director of Human Resources from February 1994 to February 1996.
Joseph D. Smith served as the company's Chief Operating Officer from
January 1999 through his resignation date of June 30, 2000. In addition, Mr.
Smith was President of the Resource Network division from March 1998 until
November 1999. Prior to that time, Mr. Smith served as Chief Operating Officer
of the East Area of the company beginning in December 1996. Preceding that and
since September 1994, Mr. Smith had served as Area Vice President of the
Northeast Area of the company. From 1993 until September 1994, Mr. Smith was the
Eastern Area Vice President of H.M.S.S., Inc., a regional home infusion company
acquired by Coram in September 1994. Effective June 30, 2000, Mr. Smith resigned
his position with Coram and currently has a one year consulting arrangement with
the company that expires on June 30, 2001.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended, requires
Coram's directors, executive officers and persons who beneficially own greater
than 10% of a registered class of Coram's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Based solely upon its review of copies of the Section 16 reports that Coram
received and written representations from certain reporting persons, management
believes that during its year ended December 31, 2000 all of its directors,
executive officers and greater than 10% beneficial owners were in compliance
with these filing requirements.
44
ITEM 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
COMPENSATION OF DIRECTORS
FEES FOR BOARD SERVICE. Under current company policy, non-employee
directors earn $2,000 for each Board of Directors' meeting attended in person
and $750 for each Board of Directors meeting attended by telephone conference
call. No compensation is earned for participating at meetings of committees of
the Board of Directors. However, an exception to the aforementioned Board of
Director fee structure is the compensation for Donald J. Amaral. Mr. Amaral
currently receives a fixed $100,000 per annum for service on the Board of
Directors and consulting services to the company's executive management. Such
agreement will expire on May 16, 2001.
Employee directors earn no additional compensation for service as a
director. All directors are entitled to reimbursement for expenses incurred in
connection with attending meetings of the Board of Directors or committees
thereof. Compensation for participation on the Board of Directors is at the
discretion of the Board of Directors. Effective April 1, 2000, the Board of
Directors adopted resolutions approving an annual retainer of $12,000 for each
non-employee director, except for Mr. Amaral. Due to the Debtors' bankruptcy
proceedings, certain amounts payable to members of the Board of Directors have
been stayed and, in connection therewith, such members have filed proofs of
claims against the company's bankruptcy estate.
Mr. Crowley, the only director who is currently an employee, received no
additional compensation for service on the Board of Directors. In addition to
the reimbursement for out-of-pocket expenses relating to meeting attendance,
non-employee directors of Coram earned the following compensation for Board of
Directors' meetings attended during the year ended December 31, 2000:
Donald J. Amaral....... $ 100,000
William J. Casey....... 25,750
Richard A. Fink (1).... 750
Stephen A. Feinberg (2) 11,000
L. Peter Smith......... 15,750
Sandra L. Smoley....... 23,750
(1) Effective February 10, 2000, Mr. Fink resigned from Coram's Board of
Directors.
(2) Effective July 24, 2000, Mr. Feinberg resigned from Coram's Board of
Directors.
OUTSIDE DIRECTORS' AUTOMATIC OPTION GRANT PROGRAM. Non-employee members of
the Board of Directors participate in the Automatic Option Grant Program in
effect under Coram's 1994 Stock Option Plan. On the date of each annual meeting
of Coram's stockholders, each individual who will continue to serve as a
non-employee Board member receives a non-statutory stock option to purchase
2,500 shares of Coram common stock at an exercise price equal to the fair market
value of Coram's common stock on the automatic option grant date. Due to the
absence of an annual meeting of Coram's stockholders during the year ended
December 31, 2000, no stock options were granted pursuant to the Automatic
Option Grant Program during such year. Additionally, each non-employee
individual, upon being newly appointed or elected to Coram's Board of Directors,
is automatically granted, at the time of such initial election or appointment, a
non-statutory option to purchase 75,000 shares of Coram common stock. For the
year ended December 31, 2000, options to purchase 75,000 shares relating to
newly appointed/elected individuals were granted to Ms. Smoley upon her
appointment to the Board of Directors on February 10, 2000, at an exercise price
of $0.6875 per share. With regard to the stock options for both the newly
appointed/elected Board members and the continuing Board members, each option is
immediately exercisable for all of the option shares. However, any shares
purchased under the option will be subject to repurchase by Coram at the
original exercise price paid per share upon the optionee's cessation of Board
service prior to the vesting of such shares. The optionee's option shares vest
in a series of equal monthly installments over twelve months of Board service
measured from the automatic option grant date. The shares subject to each
automatic option grant under the 1994 Stock Option Plan vest in full upon (i)
the optionee's cessation of Board service due to death or disability, (ii) an
acquisition of Coram by merger or asset sale or (iii) a change in control of
Coram. As of April 9, 2001, all stock options granted to members of the Board of
Directors under the Automatic Option Grant Program are fully vested.
Each automatic option granted to a non-employee Board member includes a
limited stock appreciation right which allows the optionee, upon the successful
completion of a hostile tender offer for more than 50% of Coram's outstanding
securities, to surrender that option to Coram, in return for a cash distribution
in an amount per surrendered option share equal to the highest price per share
of Coram common stock paid in the tender offer, less the exercise price payable
per share.
Following Richard A. Fink's resignation from Coram's Board of Directors on
February 10, 2000, the Board of Directors granted a request made by Mr. Fink to
amend his stock option agreement, dated September 9, 1998, pursuant to which Mr.
Fink was granted
45
options to purchase 75,000 shares of Coram's common stock at $1.6875 per share.
Under the amendment, all such options became immediately exercisable and can be
exercised at any time through the stated maximum option expiration date of
September 9, 2008.
The Debtors' restated joint plan of reorganization, if approved, would
have effectively eliminated all options to purchase Coram's common stock because
Coram Healthcare Corporation would be dissolved as soon as practicable after the
effective date of the plan and all equity interests therein would be completely
eliminated. Another plan put forth by the Debtors' management or other
interested parties may have a similar effect, however, appropriate approvals
thereof in accordance with the United States Bankruptcy Code would be required.
Coram entered into indemnification agreements with each of its directors
and executive officers that would require Coram to provide indemnification to
each such person in certain circumstances for claims made against them in
connection with their service on behalf of the company.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the annual and long-term compensation
earned by the Chief Executive Officer and the five most highly compensated
current and former executive officers of the company (other than such Chief
Executive Officer) during the year ended December 31, 2000 (collectively the
"Named Executive Officers") for services rendered in all capacities to the
company and its subsidiaries for each of the years in the three-year period
ended December 31, 2000.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------------------------
Other Annual Stock All Other
Name and Principal Position(1) Year Salary Bonus Compensation(2) Options(#) Compensation
- --------------------------------------- ------ ---------- --------- --------------- ---------- ------------
Daniel D. Crowley (3)...................... 2000 $ 650,000 $ -- $127,754 -- $ 50,000
Director and Chairman of the Board, 1999 50,000 -- -- 1,000,000 --
Chief Executive Officer and President 1998 -- -- -- -- --
Allen J. Marabito (4) ..................... 2000 $ 310,000 $ -- $100,768 -- $ 23,846
Executive Vice President 1999 -- -- -- 500,000 --
1998 -- -- -- -- --
Joseph D. Smith (5)........................ 2000 $ 340,862 $ -- $ -- -- --
Former Chief Operating Officer 1999 311,767 -- -- 350,000 --
and President, Resource Network 1998 264,827 217,500(8) -- 50,000 --
division
Scott R. Danitz (6)........................ 2000 $ 192,308 $ -- $ -- 50,000 $ 70,405
Senior Vice President, Chief 1999 132,867 100,000(9) -- -- --
Financial Officer and Treasurer 1998 107,231 10,000(8) -- 45,000 --
Scott T. Larson............................ 2000 $ 185,000 $ -- $ -- 40,000 $ 100,000(10)
Former Senior Vice President, 1999 184,914 -- -- -- --
General Counsel and Secretary 1998 163,481 105,000(8) -- 75,000 --
Vito Ponzio, Jr. (7)....................... 2000 $ 161,923 $ -- $ -- 40,000 $ 50,944
Senior Vice President, Human 1999 143,846 -- -- 50,000 --
Resources 1998 129,827 86,250(8) -- 50,000 --
In September 2000 and October 2000, the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") approved payments of up to
approximately $2.6 million for the Debtors' Key Employee Retention Pan ("KERP"),
which provides for bonuses payable to certain key management personnel. The
bonuses were scheduled to be paid in two equal installments: (i) the later of
the date of emergence from bankruptcy or December 31, 2000 (the "First KERP
Installment") and (ii) December 31, 2001 (the "Second KERP Installment"). Due to
events that have delayed emergence from bankruptcy, in March 2001 the Bankruptcy
Court approved early payment of the First KERP Installment to all participating
individuals, except for Mr. Crowley and Mr. Marabito. Mr. Crowley and Mr.
Marabito will receive their First KERP Installment upon emergence from
bankruptcy. Only the First KERP Installment amounts paid in March 2001 are
included in the table above as "All Other Compensation" because such amounts
principally relate to the year ended December 31, 2000.
46
The company also sponsors a Management Incentive Plan ("MIP"), which
provides for annual bonuses payable to certain key employees. The bonuses are
predicated on overall corporate performance (principally cash collections and
earnings before interest, taxes, depreciation and amortization ("EBITDA")), as
well as, individual performance targets and objectives. On March 20, 2001, the
Compensation Committee of the company's Board of Directors approved an overall
award of approximately $13.6 million for those individuals participating in the
MIP. No amounts from the MIP for the year ended December 31, 2000 are included
in the table above because such amounts are not yet scheduled to be paid.
(1) See information above under captions "Board of Directors" and "Executive
Officers" for employment history.
(2) Does not include perquisites aggregating in dollar value less than the
lesser of $50,000 or 10% of the individual's annual salary and bonus
reported for such individual for the year presented. The perquisites
exceeding 25% of the total perquisites for the Named Executive Officers
include (i) $3,600 per month for temporary corporate housing and an auto
allowance of $1,800 per month for Mr. Crowley and (ii) $3,500 per month
for temporary corporate housing and an auto allowance of $1,000 per month
for Mr. Marabito. The aforementioned corporate housing and auto allowances
for Mr. Crowley and Mr. Marabito are subject to certain customary tax
gross-up adjustments. Such adjustments are included in the "Other Annual
Compensation" amounts.
(3) Mr. Crowley participates in both the KERP and MIP retention/incentive
arrangements. In connection therewith, his allocated amount under the
First and Second KERP Installments aggregates $800,000. Mr. Crowley's
allocated MIP amount for the year ended December 31, 2000 is approximately
$10.8 million.
Effective August 2, 2000, the company's Board of Directors approved a
contingent bonus to Mr. Crowley. Under the agreement, subject to certain
material terms and conditions, Mr. Crowley is to be paid $1.8 million
following the successful refinancing of the company's debt. In connection
therewith and the debt to preferred stock conversion discussed in Notes 3
and 6 to the company's Consolidated Financial Statements, the company
recorded a $1.8 million success bonus expense for the year ended December
31, 2000. Such success bonus will not be payable until such time as the
Debtors' amended plan of reorganization is fully approved by the
Bankruptcy Court.
Mr. Crowley owns Dynamic Healthcare Solutions, LLC ("DHS"), a consulting
company from which Coram purchased services. For the years ended December
31, 2000 and 1999, the company paid approximately $0.7 million and $0.2
million, respectively, to Mr. Crowley's consulting company for related
consulting services and reimbursable expenses (such payments to DHS are
not included in the table above). The terms and conditions of the
underlying consulting agreement were approved by the company's Board of
Directors when Mr. Crowley was hired by Coram. Effective with the Debtors'
Chapter 11 filings in the Bankruptcy Court, DHS employees who were serving
as consultants to Coram terminated their employment with DHS and became
full time Coram employees. Coram continues to reimburse DHS for the actual
overhead costs of DHS' Sacramento, California location that are directly
attributable to the duties Mr. Crowley performs on behalf of Coram. Such
reimbursements do not include any element of profit for DHS.
(4) Mr. Marabito participates in both the KERP and MIP retention/incentive
arrangements. In connection therewith, his allocated amount under the
First and Second KERP Installments aggregates $150,000. Mr. Marabito's
allocated MIP amount for the year ended December 31, 2000 is $930,000.
(5) Effective June 30, 2000, Mr. Smith resigned his position as Chief
Operating Officer with Coram and has entered into a consulting agreement
with the company. Under the agreement, Mr. Smith provides sales consulting
services on an independent contractor basis until June 30, 2001. His
consulting fee is $25,700 per month.
(6) Effective January 1, 2001, Mr. Danitz was promoted to Chief Financial
Officer and Treasurer. Mr. Danitz participates in both the KERP and MIP
retention/incentive arrangements. In connection therewith, his allocated
amount under the First and Second KERP Installments aggregates $100,000,
including $50,000 of which was paid on or about March 15, 2001. Mr.
Danitz's allocated MIP amount for the year ended December 31, 2000 is
approximately $245,000.
(7) Mr. Ponzio participates in both the KERP and MIP retention/incentive
arrangements. In connection therewith, his allocated amount under the
First and Second KERP Installments aggregates $80,000, including $40,000
of which was paid on or about March 15, 2001. Mr. Ponzio's allocated MIP
amount for the year ended December 31, 2000 is approximately $199,000.
(8) This amount reflects performance, retention and discretionary bonuses paid
in 1998 for services rendered in 1997.
(9) This amount reflects discretionary bonuses earned in 1998 and paid in 1999
and retention bonuses paid in 2000 for services rendered in 1999.
47
(10) Effective January 15, 2001, Mr. Larson resigned his position with Coram.
In connection therewith, an incentive/retention bonus of $100,000 was paid
to Mr. Larson in January 2001.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to
each of the Named Executive Officers during the year ended December 31, 2000. In
addition, in accordance with the rules of the Securities and Exchange
Commission, hypothetical gains or "option spreads" that would exist for the
respective options are also shown. These gains are based on assumed rates of
annual compounded stock price appreciation of 5% and 10% from the date the
options were granted over the full option term. No stock appreciation rights
were granted to the Named Executive Officers during the year ended December 31,
2000.
Individual Grants
----------------------------------------------------------------- Potential Realizable Value at
% of Total Assumed Annual Rates of
Number of Options Stock Price Appreciation for
Securities Granted to Option Term(1)
Underlying Employees ------------------------------
Options in Exercise Price Expiration
Name Granted Fiscal Year Per Share Date 5% 10%
- ---- --------- ----------- -------------- ---------------- ----------- -------------
Daniel D. Crowley.. -- -- $ -- -- $ -- $ --
Allen J. Marabito.. -- -- -- -- -- --
Joseph D. Smith.... -- -- -- -- -- --
Scott R. Danitz.... 50,000 4.42 0.625 February 1, 2010 19,653 49,804
Scott T. Larson.... 40,000 3.53 0.625 February 1, 2010 15,722 39,844
Vito Ponzio, Jr.... 40,000 3.53 0.625 February 1, 2010 15,722 39,844
(1) Potential realizable value is determined by taking the exercise price per
share and applying the stated annual appreciation rate compounded annually
for the term of the option, subtracting the exercise price per share at
the end of the period and multiplying the remaining number by the number
of options granted. Actual gains, if any, on stock option exercises and
common stock holdings are dependent on the future performance of Coram's
common stock and overall stock market conditions. The above table does not
reflect changes in the market price of Coram's common stock subsequent to
December 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information concerning the outstanding
stock options held by each of the Named Executive Officers at December 31, 2000.
No stock options or stock appreciation rights were exercised by the Named
Executive Officers during the year ended December 31, 2000. No stock
appreciation rights were held by the Named Executive Officers as of such date.
Number of Unexercised In-the-Money
Options at Options at
December 31, 2000 December 31, 2000(1)
-------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Daniel D. Crowley .. 333,333 666,667 $ -- $ --
Allen J. Marabito .. 166,667 333,333 -- --
Joseph D. Smith .... -- -- -- --
Scott R. Danitz .... 28,853 66,147 -- --
Scott T. Larson .... 115,625 74,375 -- --
Vito Ponzio, Jr .... 140,467 99,533 -- --
(1) Whether an option is "in-the-money" is determined by subtracting the
exercise price of the option from the closing price for Coram's common
stock on December 31, 2000 ($0.42) from the Over the Counter Bulletin
Board maintained by the National Association of Securities Dealers, Inc.
If the closing price for Coram's common stock on December 31, 2000 is
greater than the exercise price of the option, the option is
"in-the-money." For the purpose of such calculation, the market price per
share is the applicable market price as of December 31, 2000 and does not
reflect market price changes subsequent to December 31, 2000.
Shares subject to options granted to the company's Named Executive
Officers under the 1994 Stock Option Plan will immediately vest in full upon (i)
an acquisition of the company by merger or asset sale in which such options are
not to be assumed by the acquiring entity or (ii) if such options are so
assumed, the subsequent involuntary termination of the optionee's employment
within eighteen months following such acquisition. In addition, the Compensation
Committee of the Board of Directors, as the 1994 Stock Option Plan
administrator, has the authority to provide for the accelerated vesting of the
shares of the company's common stock subject to outstanding options held by the
company's executive officers. Similarly, the Compensation Committee can
accelerate vesting of any unvested shares actually held by those individuals
under the 1994 Stock Option Plan in connection with a hostile takeover of the
company effected through a successful tender offer for more than 50% of the
company's outstanding securities, or
48
through a change in the majority of the Board of Directors as a result of one or
more contested elections for Board of Director membership, or in the event such
individual's employment were involuntarily terminated following such hostile
takeover.
The Debtors' restated joint plan of reorganization, if approved, would
have effectively eliminated all options to purchase Coram's common stock because
Coram Healthcare Corporation would be dissolved as soon as practicable after the
effective date of the plan and all equity interests therein would be completely
eliminated. Another plan put forth by the Debtors' management or other
interested parties may have a similar effect, however, appropriate approvals
thereof in accordance with the United States Bankruptcy Code would be required.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
The company has entered into or anticipates entering into employment
and/or severance agreements with its Named Executive Officers and certain other
executive officers as described below.
DANIEL D. CROWLEY. Effective November 30, 1999, Coram entered into an
employment agreement with Daniel D. Crowley, for a three-year term commencing on
such date, unless otherwise terminated in accordance with its terms. The
agreement also provides for two automatic one year renewals after the completion
of the initial three year term. Under the agreement and related amendments, Mr.
Crowley serves as Chairman of the Board of Directors, President and Chief
Executive Officer of the company. He receives a base salary of $650,000 per
year, subject to annual merit adjustments, and the right to receive performance
bonuses, which are characterized as an EBITDA bonus and a refinancing success
bonus. The EBITDA bonus generally provides incentive compensation by measuring
operating results (EBITDA) against target EBITDA established by the Compensation
Committee of the Board of Directors before the beginning of each year. Pursuant
to the second amendment to Mr. Crowley's employment agreement, dated April 6,
2000, such EBITDA bonus for the year ended December 31, 2000 utilizes a two-tier
methodology whereby Mr. Crowley receives the sum of (i) 25% of the company's
EBITDA in excess of $14 million and (ii) a one-time $5 million enhanced bonus,
which may be shared with other individuals as designated by Mr. Crowley, if the
company's EBITDA exceeds $35 million. The refinancing success bonus provides for
a $1.8 million award upon confirmation of the Debtors' plan of reorganization,
if the plan includes a refinancing component. A refinancing, as contemplated by
the third amendment to the employment agreement, dated August 2, 2000, is a
Board of Directors approved transaction or series of related transactions that
converts some or all of the company's principal debt instruments into new debt
instruments and/or equity securities (common or preferred) of Coram Healthcare
Corporation and Coram, Inc. The company's principal debt instruments are further
defined to be those under the Securities Exchange Agreement and the Senior
Credit Facility (see Note 8 to the company's Consolidated Financial Statements).
Additionally, Mr. Crowley is also eligible to receive an acquisition bonus of
approximately three times the sum of (i) his base salary and (ii) his EBITDA
performance bonus in the event the company merges with or is acquired by another
company.
Under the employment agreement, Mr. Crowley was also granted options to
purchase 1,000,000 shares of Coram's common stock at $0.75 per share (the stock
price of the company on November 29, 1999). The options vest and become
exercisable in three equal annual installments upon Mr. Crowley's completion of
each year of service. Mr. Crowley also receives four weeks of vacation, an
automobile allowance in the amount of $1,800 per month, a tax preparation fee
allowance, certain customary tax gross-up adjustments, temporary corporate
housing in Denver and a company sponsored $1.0 million life insurance policy
with Mr. Crowley's designee as the beneficiary thereunder. Mr. Crowley is also
eligible for health, dental, medical and group life insurance. As part of the
agreement, Mr. Crowley agreed that during the term of his employment at the
company, and for one year thereafter, he will not directly or indirectly own,
manage, control, participate in, consult with, render services to, or in any
manner engage in any business which competes with the company's business in the
company's geographical area. In addition, Mr. Crowley may not solicit the
company's employees, customers or suppliers during the term of his employment at
the company and for one year thereafter.
If Mr. Crowley's duties are substantially altered or his employment is
terminated by the company other than for cause or voluntarily by Mr. Crowley in
the event that the company fails to comply with any material provision of the
agreement, then Mr. Crowley would be entitled to receive his base salary,
automobile allowance and all available bonuses otherwise payable pursuant to the
employment agreement for a period of three years from the date of separation.
Additionally, during such three-year period, Mr. Crowley would retain his
eligibility to participate in the company's health, dental, medical, group life
and similar welfare benefit plans, as well as, the aforementioned company
sponsored $1.0 million life insurance policy. If the Board of Directors and Mr.
Crowley mutually agree to a new Chief Executive Officer and/or President, then
all of the terms and conditions of Mr. Crowley's employment agreement would
continue in effect; however, the aforementioned EBITDA bonus would be subject to
an allocation between Mr. Crowley and the new executive.
ALLEN J. MARABITO. Effective November 30, 1999, Coram entered into an
employment agreement with Allen J. Marabito, for a three-year term commencing on
such date, unless otherwise terminated in accordance with its terms. Under the
agreement and related amendment, Mr. Marabito serves as Executive Vice President
of the company. He receives a base salary of $310,000 per year, subject
49
to annual merit adjustments, and the right to receive a performance bonus
between 60% and 300% of his base salary, if the company's EBITDA exceeds the
EBITDA target for that year that was established by the Compensation Committee
of the Board of Directors. He is also eligible to receive an acquisition bonus
of approximately three times the sum of (i) his base salary and (ii) his EBITDA
performance bonus in the event the company merges with or is acquired by another
company. If Mr. Marabito's employment is terminated by the company other than
for cause or voluntarily by Mr. Marabito in the event that the company fails to
comply with any material provision of the agreement, then Mr. Marabito would be
entitled to receive his base salary through the longer of (i) the remaining term
of the agreement; or (ii) twenty four months, plus the EBITDA target bonuses
during such period. Under the agreement, Mr. Marabito was also granted options
to purchase 500,000 shares of Coram's common stock at $0.8125 per share (the
stock price of the company on December 17, 1999). The options vest and become
exercisable in three equal annual installments upon Mr. Marabito's completion of
each year of service. Mr. Marabito also receives four weeks of vacation, an
automobile allowance in the amount of $1,000 per month, a tax preparation fee
allowance, certain customary tax gross-up adjustments and temporary corporate
housing in Denver. Mr. Marabito is also eligible for health, dental, medical and
group life insurance. As part of the agreement, Mr. Marabito agreed that during
the term of his employment at the company, and for one year thereafter, he will
not directly or indirectly own, manage, control, participate in, consult with,
render services to, or in any manner engage in any business which competes with
the company's business in the company's geographical area. In addition, Mr.
Marabito may not solicit the company's employees, customers or suppliers during
the term of his employment at the company and for one year thereafter.
SCOTT R. DANITZ. Effective August 1, 2000, Coram entered into an
employment agreement with Mr. Danitz for a one-year term, unless otherwise
terminated in accordance with its terms. Under the agreement, Mr. Danitz serves
as Senior Vice President and Chief Accounting Officer of the company.
Subsequently, Mr. Danitz was promoted to Chief Financial Officer and Treasurer,
effective January 1, 2001. Mr. Danitz receives a base salary of $200,000 per
year, subject to annual merit adjustments, and the right to receive certain
bonus/incentive plan compensation. If Mr. Danitz's employment is terminated by
the company other than for cause or upon the occurrence of a "change in
control," then Mr. Danitz would be entitled to severance equal to a minimum of
one year of salary and health and welfare benefits. In addition, Mr. Danitz is
eligible to receive an acquisition bonus of approximately $200,000 in the event
the company merges with or is acquired by another company. Mr. Danitz also
receives an automobile allowance in the amount of $900 per month and is eligible
for health, medical, dental and group life insurance. As part of the agreement,
Mr. Danitz agreed that during the term of his employment at the company, and for
one year thereafter, he will not directly or indirectly own, manage, control,
participate in, consult with, render services to, or in any manner engage in any
business which competes with the company's business in the company's
geographical area. In addition, Mr. Danitz may not solicit the company's
employees, customers or suppliers during the term of his employment at the
company and for one year thereafter.
VITO PONZIO, JR. Effective April 26, 1999, the company entered into a
one-year automatically renewable employment agreement with Mr. Ponzio which
provides for a payment of $150,000 and minimum severance equal to one year of
salary upon the occurrence of a "change in control." The severance amount
represents minimum severance, including health and welfare benefits, due upon
termination by the company (other than for cause) or involuntary termination of
employment following a "change in control." Mr. Ponzio agreed that during the
term of his employment at the company, and for one year thereafter, he will not
directly own, manage, control, participate in, consult with, render services to,
or in any manner engage in any business which competes with the company's
business in the company's geographical area. In addition, Mr. Ponzio may not
solicit the company's employees, customers or suppliers during the term of his
employment at the company and for one year thereafter.
OTHER NAMED EXECUTIVE OFFICERS. Effective June 30, 2000, Joseph D. Smith
resigned his position as Chief Operating Officer with Coram, terminated his then
existing employment agreement and entered into a consulting agreement with the
company. Under the agreement, Mr. Smith provides sales consulting services on an
independent contractor basis until June 30, 2001. Mr. Smith receives a
consulting fee of $25,700 per month. As part of the agreement, Mr. Smith agreed
that during the term of his consulting arrangement at the company, and for one
year thereafter, he will not directly or indirectly own, manage, control,
participate in, consult with, render services to, or in any manner engage in any
business which competes the company's business in the company's geographical
area. In addition, Mr. Smith may not solicit the company's employees, customers
or suppliers during the term of his employment at the company and for one year
thereafter.
Effective January 15, 2001, Scott T. Larson resigned his position with
Coram. In connection therewith, an incentive/retention bonus of $100,000 was
paid to Mr. Larson in January 2001. Pursuant to Mr. Larson's employment
agreement dated April 26, 1999, Mr. Larson agreed that during the term of his
employment with the company, and for one year thereafter, he will not directly
or indirectly own, manage, control, participate in, consult with, render
services to, or in any manner engage in any business which competes with the
company's business in the company's geographical area. In addition, Mr. Larson
may not solicit the company's employees, customers or suppliers during the term
of his employment at the company and for one year thereafter.
Domenic A. Meffe served as the Vice President and General Manager of the
company's Coram Prescription Services ("CPS") division from November 1997
through July 2000 and was appointed to serve as the division's President in
January 1998. Mr. Meffe
50
had a severance agreement which was to provide him with compensation equal to a
minimum of two year's annual salary, a transaction bonus of $500,000 upon the
closing of a sale of the CPS division and a retention payment of $72,500 in the
event that Mr. Meffe remained employed through the consummation of any such
sale. However, in conjunction with the sale of the CPS division to Curascript
Pharmacy Services, Inc. and Curascript PBM Services, Inc., which are newly
formed affiliates of GTCR Golder Rauner, L.L.C. and are led by certain members
of the former CPS management team, including Mr. Meffe, all the aforementioned
agreements were effectively rescinded and, as a result, no severance or bonus
payments were made.
The Debtors' bankruptcy proceedings and the corresponding impact of the
United States Bankruptcy Code could impose certain limitations on the amount of
severance that the company would be permitted to pay under the aforementioned
employment agreements and contracts.
For employment agreement purposes, a "change in control" is generally
defined as (i) a merger or consolidation in which the company is not the
surviving entity; (ii) the sale, transfer or other disposition of all or
substantially all the assets of the company; (iii) any reverse merger in which
the company is the surviving entity but in which securities possessing more than
fifty percent of the total combined voting power of Coram's outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such merger. The term "change of
control" has been defined in a way that would disqualify any change of control
resulting from the conversion by Coram's current debtholders of their current
convertible debt instruments into stock of Coram.
ITEM 12. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth, as of March 30, 2001 (unless otherwise
noted below), the number of shares of outstanding Coram common stock
beneficially owned by (i) each person known to Coram to be the owner of more
than 5% of the its outstanding common stock, (ii) each of the executive officers
of the company as of December 31, 2000, (iii) each of the members of the Board
of Directors of the company as of December 31, 2000, and (iv) all members of the
Board of Directors and executive officers of Coram as a group. All information
is taken from or based upon ownership filings made by such persons with the
Securities and Exchange Commission (the "Commission") or upon information
provided by such persons to Coram.
Percentage of
Shares of
Number of Common
Shares of Stock
Name and Address of Beneficial Owner (1) Common Stock (2) Outstanding
- ---------------------------------------- ---------------- -----------
Donald J. Amaral.............................................. 2,624,296 5.0%
William J. Casey.............................................. 81,900 *
Daniel D. Crowley............................................. 333,333 *
Scott R. Danitz............................................... 52,984 *
Scott T. Larson............................................... 124,931 *
Allen J. Marabito............................................. 166,666 *
Vito Ponzio, Jr............................................... 177,881 *
L. Peter Smith................................................ 117,581 *
Sandra R. Smoley.............................................. 75,000 *
All executive officers and directors, as a group (9 Persons).. 3,754,572 7.1
Reporting Persons (as defined herein), as a group (3) ....... 6,993,409 14.1
Cerberus Entities (4)......................................... 21,190,076 29.9
Foothill (5).................................................. 8,633,779 14.8
Goldman, Sachs (6)............................................ 21,017,092 29.7
* Less than 1%
(1) Unless otherwise indicated, the address of each person named above is 1125
Seventeenth Street, Suite 2100, Denver, Colorado 80202.
(2) The aggregate ownership numbers presented in the table above include
shares of common stock acquirable upon exercise of common stock subject to
options within 60 days for the following persons: Mr. Amaral 2,500,000;
Mr. Casey 80,000; Mr. Crowley 333,333; Mr. Danitz 50,207; Mr. Larson
117,707; Mr. Marabito 166,666; Mr. Ponzio 170,857; Mr. L. Peter Smith
87,500 and Ms. Smoley 75,000. Mr. Larson resigned his position with the
company on January 15, 2001. In connection therewith, his options to
purchase shares of common stock were outstanding as of March 30, 2001 and
are included in the table above, but such options expired on or about
April 15, 2001. Except as indicated by footnote, Coram has been advised
that the persons and entities named in the table above have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them.
51
(3) On July 14, 2000, an investor group seeking representation on the Coram
Healthcare Corporation Board of Directors filed a Schedule 13D pursuant to
Rule 13d-1(k)(1) of Regulation 13D-G under the Securities Exchange Act of
1934. As stated in such filing, the investor group was concerned that
management may consider a restructuring that, absent representation of
their interests, would be materially detrimental to their equity holdings.
To protect their interests in the company, the investor group may engage
in actions directly or through agents such that they may be deemed to
constitute a "group" within the meaning of Section 13(d) (3) of the
Securities Exchange Act of 1934, and as such, each of the members of such
group are deemed to beneficially own all shares of stock owned by the
entire group; however, each member of the group has disclaimed beneficial
ownership of the shares held by the group. The most recent Schedule 13D/A
filing on December 19, 2000 was on behalf of Jerome Blank; Andrew Blank;
AEOW `96, LLC, a California limited liability company; Harry Heller Falk;
F. Philip Handy; Heller Family Limited Partnership, a Florida limited
partnership; the Bernard Osher Trust UTA dated 3-8-88, a California trust;
JB Capital Management, Inc., a Florida Corporation; Bernard Osher; the RHH
Company, a Florida Corporation and Richard L. Haydon (collectively
referred to as the "Reporting Persons").
(4) Information with respect to Cerberus Partners, L.P. ("Cerberus"), Cerberus
International, Ltd. ("International"), Ultra Cerberus Fund, Ltd. ("Ultra")
and certain private investment funds (the "Other Funds") (Cerberus,
International, Ultra and the Other Funds are collectively referred to as
the "Cerberus Entities") are based on the Schedule 13D, Amendment No. 1,
Amendment No. 2 and Amendment No. 3 thereto, dated June 30, 1998, August
26, 1998, April 9, 1999 and July 16, 2000, respectively, filed with the
Commission and Coram's records reflecting the Series B Senior Subordinated
Convertible Notes (the "Series B Notes") issued to the Cerberus Entities.
The Cerberus Entities hold $42,380,152 principal amount of the Series B
Notes of the company as of March 30, 2001. The Series B Notes are
convertible, at the option of the holder thereof, into 21,190,076 shares
of common stock of Coram at the rate of $2.00 per share.
Pursuant to an agreement between Cerberus and Goldman Sachs Credit
Partners, L.P. ("GSCP"), dated April 22, 1997 (the "GSCP Agreement"), GSCP
has the right to receive the dividends from, and the proceeds from the
sale of, $9,597,796 principal amount (the "GSCP Interest") of the
$17,995,868 principal amount of the Series B Notes held by Cerberus and
the shares of common stock into which such Series B Notes relating to the
GSCP Interest are convertible. In addition, certain unaffiliated entities,
in the aggregate, have the right to receive the dividends from, and the
proceeds from the sale of, $671,846 principal amount of Series B Notes and
the shares of common stock into which such Series B Notes are convertible.
The address for the Cerberus Entities is 450 Park Avenue, 28th Floor, New
York, New York 10022.
(5) Information with respect to Foothill Capital Corporation is based on the
Schedule 13G, Amendment No. 1 and Amendment No. 2 thereto dated June 30,
1998, August 26, 1998 and April 9, 1999, respectively, filed with the
Commission and Coram's records reflecting Series B Notes issued to
Foothill Capital Corporation. Such filings with the Commission were on
behalf of The Foothill Group, Inc., a Delaware Corporation ("Group");
Foothill Capital Corporation, a California corporation ("Capital");
Foothill Partners II, L.P., a Delaware limited partnership ("Partners");
Foothill Income Trust, L.P., a Delaware limited partnership ("Foothill
Trust"); FIT GP, LLC, a Delaware limited liability company ("FIT") and M.
Edward Stearns, Karen S. Sandler, Dennis R. Ascher, Jeffrey T. Nikora, and
John F. Nickoll (collectively, the "Managing Partners/Members") and Peter
E. Schwab and David C. Hilton (the "Managing Partners") (Group, Capital,
Partners, Foothill Trust, FIT, the Managing Partners/Members and the
Managing Partners are collectively referred to as "Foothill"). Group, the
Managing Partners/Members and the Managing Partners are the general
partners of Partners. Capital is a wholly-owned subsidiary of Group. FIT
is the general partner of Foothill Trust and the Managing Partners/Members
are the managing members of FIT. Accordingly, (i) Group, the Managing
Partners/Members and the Managing Partners may be deemed to beneficially
own the shares of common stock held by Partners, as its general partners,
(ii) the Managing Partners/Members may be deemed to beneficially own the
shares of common stock held by Foothill Trust as the managing members of
the general partner of Foothill Trust, (iii) FIT may be deemed to
beneficially own the shares of common stock held by Foothill Trust, as its
general partner, and (iv) Group may be deemed to beneficially own the
shares held by Foothill Capital as its sole shareholder. Foothill has a
beneficial interest in all or part of $17,267,557 principal amount of the
company's Series B Notes, which are convertible into 8,633,779 shares of
common stock at a conversion price of $2.00 per share. The address for
Foothill is 2450 Colorado Avenue, Suite 3000W, Santa Monica, California
90404.
(6) Goldman, Sachs & Co. ("GS") is an indirect wholly-owned subsidiary of The
Goldman Sachs Group, Inc. ("GSG"). GSG is the 99% owner of GS Global
Holdings L.L.C. ("GSGH"). GSGH is the general partner of Goldman Sachs
Credit Partners, L.P. ("GSCP").
As of March 30, 2000, GS, GSG and GSGH may be deemed to own beneficially
and indirectly in the aggregate 21,017,092 shares of common stock by
reason of the ownership by GSCP of (a) $32,436,389 principal amount of the
Series B Notes of the company issued pursuant to the Securities Exchange
Agreement dated May 6, 1998, as amended (the "Securities Exchange
Agreement"), which are convertible into 16,218,194 shares of common stock
and (b) $9,597,796 principal amount of the Series B Notes issued pursuant
to the Securities Exchange Agreement with the company which are
convertible into 4,798,898 shares of common stock
52
and are deemed to be beneficially and indirectly owned through the GSCP
Interest. Under the terms of the Series B Notes the company has the right,
in lieu of payment of interest in cash, to pay interest on each interest
payment date through the issuance of additional Series B Notes in a
principal amount equal to the amount of interest then due and owing. GS,
GSG and GSGH each disclaim beneficial ownership of the securities reported
herein, except to the extent of their pecuniary interest therein.
GSCP may be deemed to own beneficially and directly $32,436,389 principal
amount of the Series B Notes issued pursuant to the Securities Exchange
Agreement which are convertible into 16,218,194 shares of common stock and
beneficially and indirectly $9,597,796 principal amount of the Series B
Notes which are convertible into 4,798,898 shares of common stock pursuant
to the GSCP Agreement. GSCP disclaims beneficial ownership of the
securities reported herein, except to the extent of its pecuniary interest
therein.
GS, a National Association of Securities Dealers member, is an investment
banking firm that regularly performs services such as acting as a
financial advisor and serving as principal or agent in the purchase and
sale of securities. The address for Goldman, Sachs & Co. is 85 Broad
Street, New York, New York 10004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
L. Peter Smith previously served on the Board of Directors of Sabratek
Corporation ("Sabratek"), a manufacturer of medical devices. In December 1998,
Coram agreed to amend its agreement with Sabratek to make Sabratek the company's
sole supplier of multi-therapy infusion pumps and related proprietary
telemedicine technology during the next ten years. This agreement contains a
provision that allows either party to cancel the agreement upon 90 days notice.
The pricing schedule applicable to the infusion pumps and related technology to
be purchased was negotiated by certain of Coram's management after proposals
from other manufacturers for comparable equipment had been solicited. The
company purchased approximately $2.8 and $7.8 million of multi-therapy infusion
pumps and related proprietary telemedicine technology from Sabratek Corporation
during the years ended December 31, 1999 and 1998, respectively. Sabratek filed
for Chapter 11 bankruptcy protection in the United States Bankruptcy Court in
Delaware on December 17, 1999 and, in connection therewith, Coram filed a $1.3
million proof of claim in Sabratek's bankruptcy proceedings for vendor rebates
earned but not paid. In January 2000, the assets and certain liabilities of
Sabratek's Device Business were acquired by Baxter Healthcare Corporation
("Baxter"). Baxter subsequently filed a proof claim of approximately $0.3
million in the Debtors' bankruptcy proceedings for products purchased from
Sabratek. Management is currently evaluating the validity of Baxter's proof of
claim. Notwithstanding the separate proofs of claim filings, Baxter and the
company have an ongoing amicable business relationship involving drugs, supplies
and pumps sold by Baxter to the company.
On July 31, 2000, Coram completed the sale of its Coram Prescription
Services ("CPS") business to a management-led group financed by GTCR Golder
Rauner, L.L.C. for a one-time payment of approximately $41.3 million. See Note 5
to the company's Consolidated Financial Statements.
Stephen A. Feinberg, a former director of the company, is the managing
member of Cerberus Associates, L.L.C., which is the general partner of Cerberus
Partners, L.P., a party to the company's debtor-in-possession financing
agreement, Senior Credit Facility and Securities Exchange Agreement
(collectively the "Cerberus Entities"). The Cerberus Entities are also the
investment managers for each of the International, Ultra and Other Funds. As of
April 9, 2001, the Cerberus Entities held $28.2 million and $42.4 million
principal amount of the company's Series A Senior Subordinated Unsecured Notes
and Series B Senior Subordinated Unsecured Convertible Notes, respectively. No
amounts are outstanding under the Senior Credit Facility, which expired on
February 6, 2001; however, with the proceeds from the disposition of the CPS
division, the company paid approximately $14.6 million to the Cerberus Entities
in satisfaction of the outstanding balance on the Senior Credit Facility and a
partial payment on the Series A Senior Subordinated Unsecured Notes.
Contemporaneous with the expiration of the Senior Credit Facility, warrants held
by the Cerberus Entities to purchase 680,124 shares of the company's common
stock also expired. In connection with the Debtors' bankruptcy proceedings,
effective August 30, 2000, the Debtors entered into a secured
debtor-in-possession financing agreement with Madeleine L.L.C., an affiliate of
the Cerberus Entities. Although the company has not borrowed any amounts under
the debtor-in-possession financing arrangement, approximately $0.4 million was
paid to the Cerberus Entities as origination fees.
On December 28, 2000, the Debtors announced the Bankruptcy Court's
approval of their request to convert a sufficient amount of debt and related
accrued interest to equity in the form of Coram, Inc. Series A Cumulative
Preferred Stock in order to maintain compliance with the physician ownership and
referral provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly
referred to as "Stark II"). On December 29, 2000, the Securities Exchange
Agreement was amended ("Amendment No. 4") and an Exchange Agreement was
simultaneously executed. Pursuant to such arrangements, the Cerberus Entities
agreed to exchange approximately $45.0 million aggregate principal amount of the
Series A Senior Subordinated Unsecured Notes (the "Series A Notes") and $3.8
million of aggregate unpaid accrued contractual interest on the Series A Notes
and the Series B Senior Subordinated Unsecured Convertible Notes (the "Series B
Notes") as of December 29, 2000 for approximately 417 shares of Coram, Inc.
Series A
53
Cumulative Preferred Stock (see Note 11 to the Consolidated Financial Statements
for further details regarding the preferred stock). Pursuant to Amendment No. 4,
the per annum interest rate on both the Series A Notes and the Series B Notes
has been adjusted to 9.0%. Moreover, the Series A Notes' and Series B Notes'
original scheduled maturity dates of May 2001 and April 2008, respectively, have
both been modified to June 30, 2001.
Effective August 1, 1999, Mr. Crowley and Cerberus Capital Management,
L.P. (an affiliate of the Cerberus Entities) executed a three-year employment
agreement whereby Mr. Crowley provides certain services and is paid $960,000
per annum, plus the potential of performance related bonus opportunities.
Additionally, Mr. Crowley is entitled to expense reimbursements and
participation in the vacation, pension, profit sharing, life insurance,
hospitalization, major medical and other employee benefit plans as may be
offered by the Cerberus Entities. The bonuses contemplated under the
agreement are predicated on a sophisticated set of financial criteria that
principally relate to the fiscal performance, market value and disposition
proceeds of the Cerberus Entities' equity investees. Moreover, Mr. Crowley
maintains an option to purchase up to 3% of the capital stock in the Cerberus
Entities' equity investees, exclusive of Coram. The employment agreement is
subject to automatic one year extensions unless either party provides written
notice within 60 days of the original expiration date or subsequent renewal
dates. The Cerberus Entities may also unilaterally terminate the employment
agreement with written notice; however, all unpaid salary and bonuses on the
remaining term of the initial three-year agreement, as well as participation
in employee benefit plans, would continue to be obligations of the Cerberus
Entities pursuant to the terms and conditions of the employment agreement.
Termination for cause, disability, death and breach of the employment
contract result in varying degrees of severance and employee benefit plan
participation. The services rendered by Mr. Crowley include, but are not
limited to, business and strategic healthcare investment advice to executive
management at the Cerberus Entities. Moreover, Mr. Crowley is the Chairman of
the Board of Directors of Winterland Productions, Inc. ("Winterland"), a
privately held affinity merchandise company, which is a portfolio investment
of the Cerberus Entities. On January 2, 2001, Winterland voluntarily filed
for protection under Chapter 11 of the United States Bankruptcy Code in the
Northern District of California.
Mr. Crowley is the Chairman, Chief Executive Officer and President of
Dynamic Healthcare Solutions, LLC ("DHS"), a privately held management
consulting and investment firm. Coram utilized the consulting services of Mr.
Crowley's company and made payments for these services and certain reimbursable
expenses. For the year ended December 31, 2000, the company paid approximately
$0.7 million to Mr. Crowley's consulting company for consulting services and
reimbursable expenses. Effective with the Debtors' Chapter 11 filings in the
Bankruptcy Court, DHS employees who were serving as consultants to Coram
terminated their employment with DHS and became full time Coram employees. Coram
continues to reimburse DHS for the actual overhead costs of DHS' Sacramento,
California location that are directly attributable to the duties Mr. Crowley
performs on behalf of Coram. Such reimbursements do not include any element of
profit for DHS.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements
of the registrant and Report of Independent Auditors are presented on pages F-1
and thereafter:
Report of Independent Auditors
Consolidated Balance Sheets -- December 31, 2000 and 1999
Consolidated Statements of Income -- Years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows -- Years ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE. The following consolidated financial
statement schedule of the registrant for the years ended December 31, 2000, 1999
and 1998 is presented following the Notes to Consolidated Financial Statements.
Schedule II -- Valuation and Qualifying Account
54
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
notes thereto.
(b) Reports on Form 8-K.
On January 16, 2001, Coram Healthcare Corporation filed a report on Form
8-K regarding an order denying acceptance of the joint plan of
reorganization of Coram Healthcare Corporation and its wholly-owned
subsidiary, Coram, Inc., by the United States Bankruptcy Court for the
District of Delaware.
On April 4, 2001, Coram Healthcare Corporation filed a report on Form 8-K
relating to the settlement agreement entered into by and among Coram
Resource Network, Inc., Coram Independent Practice Association, Inc.,
Coram Healthcare Corporation and Coram, Inc.
On April 4, 2001, Coram Healthcare Corporation filed a report on Form 8-K
announcing the approval by the United States Bankruptcy Court for the
District of Delaware of the company's request to exchange a sufficient
amount of debt and related accrued interest for equity in the form of
Coram, Inc. Series A Cumulative Preferred Stock.
(c) Exhibits
Included as exhibits are the items listed on the Exhibit Index. The
registrant will furnish a copy of any of the exhibits listed below upon payment
of $5.00 per exhibit to cover the costs to the registrant of furnishing such
exhibit.
Exhibit
Number Exhibit
- -------- -------
2.1 -- Agreement and Plan of Merger dated as of February 6, 1994, by
and Among the registrant, T(2), Curaflex, HealthInfusion,
Medisys, T(2) Acquisition company, CHS Acquisition company, HII
Acquisition company and MI Acquisition company (Incorporated
by reference to Exhibit 2.1 of Registration No. 33-53957 on
Form S-4).
2.2 -- First Amendment to Agreement and Plan of Merger dated as of
May 25, 1994, by and among the registrant, T(2) Curaflex,
HealthInfusion, Medisys, T(2) Acquisition company, CHS
Acquisition company, HII Acquisition company and MI
Acquisition company (Incorporated by reference to Exhibit 2.2
of Registration No. 33-53957 on Form S-4).
2.3 -- Second Amendment to Agreement and Plan of Merger dated as of
July 8, 1994 by and among the registrant, T(2), Curaflex,
HealthInfusion, Medisys, T(2) Acquisition company, CHS
Acquisition company, HII Acquisition company and MI
Acquisition company (Incorporated by Reference to Exhibit 2.3
of the registrant's Current Report on Form 8-K dated as of
July 15, 1994).
2.4 -- Asset Sale and Note Purchase Agreement, (the "Asset Purchase
Agreement") among the registrant, Caremark International Inc.
and Caremark Inc. dated as of January 29, 1995 (Incorporated
by reference to Exhibit C of the registrant's Current Report
on Form 8-K dated April 6, 1995).(a)
2.5 -- Agreement and Plan of Merger among the registrant, CHC
Acquisition Corp. and Lincare Holdings Inc., (the "Lincare
Merger Agreement") dated as of April 17, 1995 (Incorporated by
reference to Exhibit B of The registrant's Current Report on
Form 8-K dated May 2, 1995).(a)
2.6 -- Agreement and Plan of Merger entered into as of October 19,
1996, Among Coram Healthcare Corporation, Integrated Health
Services, Inc. and IHS Acquisition XIX, Inc. (Incorporated by
reference to Exhibit 2.1 of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996).
2.7 -- Purchase Agreement by and between Integrated Health
55
Services, Inc., T(2) Medical, Inc., Coram Healthcare Corporation
of Greater New York and Coram Healthcare Corporation.
(Incorporated by reference to Exhibit 2 of the registrant's
Current Report on Form 8-K dated as of August 20, 1997).
2.8 -- Side Agreement dated as of September 30, 1997 among Coram
Healthcare Corporation, T(2) Medical, Inc., Coram Healthcare
Corporation of Greater New York and Integrated Health
Services, Inc. (Incorporated by reference to Exhibit 2.1 of
the registrant's Current Report on Form 8-K dated as of
September 30, 1997).
2.9 -- Purchase Agreement by and between Curaflex Health Services,
Inc., Coram Healthcare Corporation, Curascript Pharmacy, Inc.,
Curascript PBM Services, Inc. and GTCR Fund VI, L.P., dated
July 31, 2000. (Incorporated by reference to Exhibit 2.1 of
the registrant's Current Report on Form 8-K dated as of July
31, 2000).
2.10 -- Debtor-In-Possession Financing Agreement dated August 30,
2000, by and among Coram Healthcare Corporation and Coram,
Inc. and Madeleine L.L.C. (Incorporated by reference to
Exhibit 2.1 of the registrant's Current Report on Form 8-K
dated as of September 13, 2000).
3.1 -- Certificate of Incorporation of registrant, as amended through
May 1, 1994 (Incorporated by reference to Exhibit 3.1 of
Registration No. 33-53957 on Form S-4).
3.2 -- Bylaws of registrant (Incorporated by reference to Exhibit 3.2
of Registration No. 33-53957 on Form S-4).
3.3 -- Certificate of Amendment of the registrant's Certificate of
Incorporation (Incorporated by reference to Exhibit 3.3 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
4.1 -- Form of Common Stock Certificate for the registrant's common
stock, $.001 par value per share. (Incorporated by reference
to Exhibit 4.1 of the registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).
4.2 -- Form of Common Stock Certificate for the registrant's common
stock, par value $0.001, including legend thereon in respect
of the Stockholder Rights Agreement which exhibit is hereby
incorporated by reference thereto.
4.3 -- Form of Certificate of Designation, Preferences and Rights of
the registrant's Series X Participating Preferred Stock (filed
as Exhibit A to the Stockholder Rights Agreement, which was
filed as Exhibit 1 To the registrant's Current Report on Form
8-K dated as of June 25, 1997, and which exhibit is hereby
incorporated by reference thereto).
4.4 -- Form of Certificate of Designation, Preferences and Relative,
Participating, Optional and Other Special rights of Preferred
Stock and Qualifications, Limitations and Restrictions
Thereof, dated December 29, 2000. (Incorporated by reference
to Exhibit 4.1 of the registrant's Current Report on Form 8-K
dated as of December 28, 2000).
10.1 -- Amended and Restated Credit Agreement dated as of February 10,
1995, by and among Curaflex, T(2), HealthInfusion, Medisys, and
HMSS as Co-Borrowers, Toronto Dominion (Texas), Inc., as Agent
(the "Amended Credit Agreement") (Incorporated by reference to
Exhibit 10.1 of the registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).(a)
10.2 -- Form of Employment Agreement between the registrant and
Charles A. Laverty (Incorporated by reference to Exhibit 10.1
of Registration No. 33-53957 on Form S-4).
10.3 -- Form of Severance/Non-Compete Agreement between the registrant
and Miles E. Gilman (Incorporated by reference
56
to Exhibit 10.2 of Registration No. 33-53957 on Form S-4).
10.4 -- Form of Severance/Non-Compete Agreement between the registrant
and William J. Brummond (Incorporated by reference to Exhibit
10.3 of Registration No. 33-53957 on Form S-4).
10.5 -- Form of Severance/Non-Compete Agreement between the registrant
and Tommy H. Carter (Incorporated by reference to Exhibit 10.4
of Registration No. 33-53957 on Form S-4).
10.6 -- Form of Indemnification Agreement between the registrant and
each of the registrant's directors and certain executive
officers. (Incorporated by reference to Exhibit 10.6 of the
registrant's Form 10-K for the year ended December 31, 1994).
Revised Incorporated by reference to Exhibit 10.7 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
10.7 -- Registrant's 1994 Stock Option/Stock Issuance Plan and related
Forms of agreements (Incorporated by reference to Exhibit
10.15 of Registration No. 33-53957 on Form S-4).
10.8 -- Registrant's Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.16 of Registration No. 33-53957 on
Form S-4).
10.9 -- 401(k) Plan of T(2) Medical, Inc. dated December 8, 1989
(Incorporated herein by Reference to Exhibit 10(s) of T(2)
Annual Report on Form 10-K for the fiscal year ended September
30, 1989, filed with the Commission on or about December 29,
1988.)
10.10 -- 1988 Stock Option Plan of T(2) Medical, Inc., as amended and
restated as of July 31, 1990 and as further amended as of (i)
August 20, 1991; (ii) November 12, 1991; and (iii) July 6,
1992 (Incorporated by reference to Exhibit 10.18 of
Registration No. 33-53957 on Form S-4).
10.11 -- Curaflex 1989 Stock Option Plan (Incorporated by reference to
Exhibit 10.53 of Registration No. 33-53957 on Form S-4).
10.12 -- Curaflex Amended 1990 Stock Option Plan (Incorporated by
reference to Exhibit 10.54 of Registration No. 33-53957 on
Form S-4).
10.13 -- Curaflex Directors' Nonqualified Stock Option Plan
(Incorporated by reference to Exhibit 10.59 of Registration
No. 33-53957 on Form S-4).
10.14 -- Clinical Homecare Ltd. 1990 Incentive Stock Option Plan, as
amended (Incorporated by reference to Exhibit 10.61 of
Registration No. 33-53957 on Form S-4).
10.15 -- Clinical Homecare Ltd. 1990 Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.62 of Registration
No. 33-53957 on Form S-4).
10.16 -- 1989 Stock Option Plan of Medisys (Incorporated by reference
to Exhibit 10.85 of Registration No. 33-53957 on Form S-4).
10.17 -- Form of Non-Plan Option Agreement of Medisys (Incorporated by
Reference to Exhibit 10.86 of Registration No. 33-53957 on
Form S-4).
10.18 -- Credit Agreement among Coram Healthcare Corporation, Coram,
Inc., the Lenders named therein and Chemical Bank, as
Administrative Agent, Collateral Agent and Fronting Bank (the
"Senior Credit Facility") dated as of April 6, 1995.
(Incorporated by reference to Exhibit D of the registrant's
Current Report on Form 8-K dated April 6, 1995).(a)
57
10.19 -- First Amendment and Waiver to the Credit Agreement, dated as
of August 9, 1995, together with exhibits hereto, among the
registrant, Coram Inc., each Subsidiary Guarantor (as defined
therein), the Financial Institutions party thereto (as defined
therein), and Chemical Bank as Agent. (Incorporated by
reference to Exhibit 10.19 of the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995).(a)
10.20 -- Second Amendment to the Credit Agreement dated as of September
7, 1995, by and among the registrant, Coram Inc., each
Subsidiary Guarantor (as defined therein), the Financial
Institutions party thereto (as defined therein), and Chemical
Bank as Agent. (Incorporated by reference to Exhibit 10.20 of
the registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).(a)
10.21 -- Third Amendment and Limited Waiver to the Credit Agreement,
dated as of September 29, 1995, by and among the registrant,
Coram Inc., each Subsidiary Guarantor (as defined therein),
the Financial Institutions party thereto (as defined therein),
and Chemical Bank as Agent (Incorporated by reference to
Exhibit 10.21 of the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).(a)
10.22 -- Fourth Amendment and Limited Waiver to the Credit Agreement
and First Amendment to Security Documents dated as of October
13, 1995, together with selected exhibits thereto, by and
among the registrant, Coram Inc., each Subsidiary Guarantor
(as defined therein), the Financial Institutions Party thereto
(as defined therein) and Chemical Bank as Agent (Incorporated
by reference to the company's Current Report on Form 8-K as
filed October 24, 1995).
10.23 -- Warrant Agreement dated as of October 13, 1995, among the
registrant, Coram Inc., and the other parties specified
therein (Incorporated by reference to the company's Current
Report on Form 8-K as filed October 24, 1995).
10.24 -- Amendment and Limited Waiver to Bridge Securities Purchase
Agreement, dated as of October 13, 1995, by and among the
registrant, Coram Inc., and Donaldson, Lufkin & Jenrette.
(Incorporated by reference to Exhibit 10.24 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).(a)
10.25 -- Form of Employment Agreement, Amendment No. 1 and Amendment
No. 2 dated as of April 23, 1999, of Employment Agreement
between the registrant and Donald J. Amaral. (Incorporated by
reference to Exhibit 10.25 and 10.04 of the registrant's
Quarterly Report on Form 10-Q for the quarters ended September
30, 1995, June 30, 1998, and September 30, 1999,
respectively).
10.26 -- Securities Purchase Agreement ("Securities Purchase
Agreement") and Form of Subordinated Bridge Note, dated as of
April 6, 1995, among Coram Inc., Coram Funding, Inc. and the
registrant (Incorporated by reference to Exhibit E of the
registrant's Current report on Form 8-K dated April 6,
1995).(a)
10.27 -- Exclusive Distribution Agreement--Healthcare Products and
Biomedical Equipment and Services Agreement between Medical
Specialties Distributors, Inc. ("MSD") and Coram, dated as of
June 1, 1996. (Incorporated by reference to Exhibit 10.1 of
the registrant's Quarterly Report on Form 10-Q/A Amendment No.
1 for the quarter ended June 30, 1996).
58
10.28 -- Medical Specialties Master Service Agreement between MSD and
Coram, dated as of June 1, 1996. (Incorporated by reference to
Exhibit 10.2 of the registrant's Quarterly Report on Form
10-Q/A Amendment No. 1 for the quarter ended June 30, 1996).
10.29 -- Medical Specialties Master Rental Agreement between MSD and
Coram, dated as of June 1, 1996. (Incorporated by reference to
Exhibit 10.3 of the registrant's Quarterly Report on Form
10-Q/A Amendment No. 1 for the quarter ended June 30, 1996).
10.30 -- Coram Healthcare Litigation Memorandum of Understanding
between all Parties to In re Coram Healthcare Corp. Securities
Litigation, Master File No. 95-N-2074 and Shevde v. Sweeney et
al., Civil Action No. 96-N-722, dated as of August 5, 1996.
(Incorporated by reference to Exhibit 10.4 of the registrant's
Quarterly Report on Form 10-Q/A Amendment No. 1 for the
quarter ended June 30, 1996).
10.31 -- Fifth Amendment to the Credit Agreement dated as of February
6, 1996, by and among the registrant, Coram Inc., each
Subsidiary Guarantor (as defined therein), the Financial
Institutions party thereto (as described therein), and
Chemical Bank as Agent. (Incorporated by reference to Exhibit
99.1 of the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996).(a)
10.32 -- Sixth Amendment to Credit Agreement dated as of April 19,
1996, by and among the registrant, Coram Inc., each Subsidiary
Guarantor (as defined therein), the Financial Institutions
party thereto (as described therein), and Chemical Bank as
Agent. (Incorporated by reference to Exhibit 99.2 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).(a)
10.33 -- Seventh Amendment to Credit Agreement dated as of July 3,
1996, by and among the registrant, Coram Inc., each Subsidiary
Guarantor (as defined therein), the Financial Institutions
party thereto (as described therein), and Chemical Bank as
Agent. (Incorporated by reference to Exhibit 99.1 of the
registrant's Quarterly Report on Form 10-Q/A Amendment No. 1
for the quarter ended June 30, 1996).(a)
10.34 -- Eighth Amendment to Credit Agreement dated as of December 3,
1996, By and among the registrant, Coram Inc., each Subsidiary
Guarantor as defined therein), the Financial Institutions
party thereto (as described therein), and Chase Manhattan Bank
as Agent.(a)
10.35 -- Ninth Amendment and Limited Waiver to the Credit Agreement
dated as of March 14, 1997, by and among the registrant, Coram
Inc., each Subsidiary Guarantor (as defined therein), the
Financial Institutions party thereto (as described therein),
and Chase Manhattan Bank as Agent.(a)
10.36 -- Amended Agreement, dated as of March 28, 1997 by and among the
registrant, Coram Inc., and Donaldson, Lufkin & Jenrette.(a)
10.37 -- Sabratek Corporation and Coram Healthcare Exclusive Supply
Agreement for IV Infusion Pumps, IV Disposable Sets and
Related Items, dated as of February 26, 1997.
10.38 -- Amendment to 9% Subordinated Convertible Debenture and Notice
of Conversion dated as of June 30, 1996, by and among the
registrant, Coram Inc., and the other parties specified
therein (Incorporated by reference to the company's report on
Form 8-K as filed on July 12, 1996).
59
10.39 -- Tenth Amendment to Credit Agreement dated June 2, 1997, by and
Among the registrant, Goldman Sachs Credit Partners L.P.,
Coram, Inc., each Subsidiary Guarantor (as defined therein)
and The Chase Manhattan Bank, as administrative agent and
collateral agent for the Lenders named therein, to that
certain Credit Agreement dated as of April 6, 1995, by and
among the registrant, Coram, Inc, each Subsidiary Guarantor
(as defined therein), the Financial Institutions named therein
and the Chase Manhattan Bank, as collateral agent for the
Lenders named therein (Incorporated by reference to Exhibit 99
of the registrant's Current Report on Form 8-K dated as of
June 2, 1997).(a)
10.40 -- Letter Agreement of March 29, 1998 by and among Cerberus
Partners, L.P., Goldman Sachs Credit Partners, L.P. and
Foothill Capital Corporation on the one hand, and Coram
Healthcare Corporation, on the other, deferring the payment of
interest and fees pursuant to (i) the Securities Purchase
Agreement dated as of April 6, 1995 and (ii) the Letter
Agreement dated March 28, 1997 between Coram Funding, Inc. and
Coram Healthcare Corporation. (Incorporated by reference to
Exhibit 10.40 of the registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.41 -- Prime Vendor Agreement and Letter Amendment, dated October 14,
1999, between Coram Healthcare Corporation and Cardinal
Health, Inc. Certain portions of the Prime Vendor Agreement
have been omitted pursuant to a request for confidential
treatment. The entire Prime Vendor Agreement has been filed
confidentially with the Securities Exchange Commission.
(Incorporated by reference to Exhibit 10.1 of the registrant's
Quarterly Report on Form 10-Q for the quarters ended September
30, 1998 and 1999, respectively).
10.42 -- Amendment No. 1 and Waiver to the Securities Exchange
Agreement among the registrant, Cerberus Partners, L.P.,
Goldman Sachs Credit Partners L.P., and Foothill Capital
Corporation. (Incorporated by reference to Exhibit 10.01 of
the registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
10.43 -- Promissory Notes and Security Agreement dated July 21, 1998
among the registrant and Foothill Capital Corporation, as
collateral agent for Cerberus Partners, L.P., Goldman Sachs
Credit Partners L.P. and Foothill Partners III, L.P. and their
respective successors and assigns. (Incorporated by reference
to Exhibit 10.02 of the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
10.44 -- Request for Deferral of Interest Payment under the Series B
Convertible Subordinated Notes due 2008 and the related
Securities Exchange Agreement, dated May 6, 1998, by and
between Coram, Inc., Coram Healthcare Corporation, Cerberus
Partners, L.P., Goldman SachsCredit Partners, L.P. and
Foothill Capital Corporation, as amended (Incorporated by
reference to Exhibit 10.03 of the registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.45 -- Securities Exchange Agreement among the company, Cerberus
Partners, L.P., Goldman Sachs Credit Partners, L.P., and
Foothill Capital Corporation. (Incorporated by reference to
Exhibit 10.01 of the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).(a)
60
10.46 -- Form of Letter of Credit required by the Master Agreement by
and between the registrant and its applicable affiliates and
Aetna U.S.Healthcare, Inc. and its applicable affiliates
(Incorporated by reference to Exhibit 10.02 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998).
10.47 -- Addendum amendment to Sabratek Corporation and Coram
Healthcare for IV Infusion pumps, IV Disposable Sets and
Related Items, dated as of February 26, 1997, as of December
7, 1998.
10.48 -- Employment Agreement and Agreement between the company and
Richard M. Smith, dated as of April 26, 1999 and November 11,
1999, respectively. (Incorporated by reference to Exhibits
10.4 and 10.2, respectively of the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
10.49 -- Employment Agreement, between the company and Wendy L.
Simpson, dated as of April 26, 1999. (Incorporated by
reference to Exhibit 10.5 of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999).
10.50 -- Employment Agreement, between the company and Joseph D. Smith,
dated as of April 26, 1999. (Incorporated by reference to
Exhibit 10.6 of the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
10.51 -- Employment Agreement, between the company and Daniel D.
Crowley, dated as of November 30, 1999, together with
Amendment No. 1 thereto.
10.52 -- Employment Agreement, between the company and Allen J.
Marabito, dated as of November 30, 1999, together with
amendment No. 1 thereto.
10.53 -- First Amendment to Prime Vendor Agreement, dated as of January
1, 2000 by and between the company and Cardinal Health, Inc.
10.54 -- Second Amendment to Employment Agreement, between the company
and Daniel D. Crowley, dated as of April 6, 2000.
(Incorporated by reference to Exhibit 10.1 of the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000).
10.55 -- Settlement agreement entered into by and among Coram Resource
Network, Inc., Coram Independent Practice Association, Inc.,
Coram Healthcare Corporation and Coram, Inc. (Incorporated by
reference to Exhibit 10.1 of the registrant's Current Report
on Form 8-K dated as of November 17, 2000).
10.56 -- Amendment No. 4, dated December 29, 2000, in respect of the
Securities Exchange Agreement dated as of May 6, 1998, among
Coram Healthcare Corporation, Coram, Inc., Cerberus Partners,
L.P., Goldman Sachs Credit Partners, L.P. and Foothill Capital
Corporation. (Incorporated by reference to Exhibit 10.1 of the
registrant's Current Report on Form 8-K dated as of December
28, 2000).
10.57 -- Exchange Agreement, dated December 29, 2000, among Coram,
Inc., Goldman Sachs Credit Partners, L.P., Cerberus Partners,
L.P. and Foothill Capital Corporation. (Incorporated by
reference to Exhibit 10.2 of the registrant's Current Report
on Form 8-K dated as of December 28, 2000).
10.58 -- Third Amendment to Employment Agreement, between the company
and Daniel D. Crowley, dated August 2, 2000.*
10.59 -- Employment Agreement, between the company and Scott R. Danitz,
dated August 1, 2000.*
10.60 -- Employment Agreement, between the company and Vito Ponzio, Jr,
dated April 26, 1999.*
61
10.61 -- Consulting Services Agreement, between the company and Joseph
D. Smith, dated June 30, 2000.*
10.62 -- Consulting Services Agreement, between the company and Donald
J. Amaral, dated May 16, 2000.*
20.1 -- Stockholder Rights Agreement (the "Stockholder Rights
Agreement"), dated as of June 25, 1997, between Coram
Healthcare Corporation and BankBoston, N.A., which includes
the form of Certificate of Designation, Preferences and Rights
setting forth the terms of the Series X Participating
Preferred Stock, par value $0.001 per share, as Exhibit A, the
Summary of Stockholder Rights Agreement as Exhibit B and the
form of Right Certificate as Exhibit C. Pursuant to the
Stockholder Rights Agreement, printed Right Certificates will
not be mailed until as soon as practicable after the earlier
of the tenth business day after public announcement that a
person or group has become an Acquiring Person or the tenth
business day after a person commences, or announces its
intention to commence, a tender offer or exchange offer the
consummation of which would result in such person becoming an
Acquiring Person. (Incorporated by reference Exhibit 1 of the
registrant's Current Report on Form 8-K dated as of June 25,
1997).
21.1 -- Subsidiaries of the registrant.*
23.1 -- Consent of Ernst & Young LLP.*
62
(a) Certain exhibits and schedules of this Exhibit have been omitted. The
registrant agrees to furnish supplementally any omitted schedule or
exhibit to the Securities and Exchange Commission.
* Filed herewith.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on April
16, 2001.
CORAM HEALTHCARE CORPORATION
By: /s/ DANIEL D. CROWLEY
---------------------------------------------------
Daniel D. Crowley
CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF
EXECUTIVE OFFICER AND PRESIDENT
By: /s/ SCOTT R. DANITZ
---------------------------------------------------
Scott R. Danitz
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
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 on the dates indicated.
/s/ DANIEL D. CROWLEY Chairman of the Board April 16, 2001
- --------------------------------- of Directors, Chief
Daniel D. Crowley Executive Officer and
President
/s/ DONALD J. AMARAL Director April 16, 2001
- ---------------------------------
Donald J. Amaral
/s/ WILLIAM J. CASEY Director April 16, 2001
- ---------------------------------
William J. Casey
/s/ L. PETER SMITH Director April 16, 2001
- ---------------------------------
L. Peter Smith
/s/ SANDRA R. SMOLEY Director April 16, 2001
- ---------------------------------
Sandra R. Smoley
64
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets -- As of December 31, 2000 and 1999............ F-3
Consolidated Statements of Income -- Years Ended December 31, 2000, 1999
and 1998.................................................................. F-4
Consolidated Statements of Stockholders' Equity -- Years Ended December 31,
2000, 1999 and 1998....................................................... F-5
Consolidated Statements of Cash Flows -- Years Ended December 31, 2000,
1999 and 1998............................................................. F-6
Notes to Consolidated Financial Statements................................. F-7
Schedule II -- Valuation and Qualifying Accounts........................... S-1
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Coram Healthcare Corporation
We have audited the accompanying consolidated balance sheets of Coram
Healthcare Corporation as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 present fairly,
in all material respects, the consolidated financial position of Coram
Healthcare Corporation at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. 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.
The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern. However, the company
has incurred net losses from continuing operations in each of the three years in
the period ended December 31, 2000 and, as more fully described in Note 8 to the
consolidated financial statements, the company has not been in compliance with
certain covenants of its loan agreements. In addition, as more fully described
in Note 3 to the consolidated financial statements, Coram Healthcare Corporation
and its first tier wholly owned subsidiary Coram, Inc. (the "Debtors") filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code and continue to operate as a debtors-in-possession under the protection of
Chapter 11. These matters raise substantial doubt about the company's ability to
continue as a going concern. As of April 2, 2001, the Debtors have not filed an
amended plan of reorganization. Management is in the process of developing an
amended plan of reorganization for approval by the United States Bankruptcy
Court, the Debtors' creditors and, if necessary, the Official Committee of the
Equity Security Holders. In the event that an amended plan of reorganization is
accepted, continuation of the business thereafter is dependent on the company's
ability to achieve successful future profitable operations, the ability to
comply with the terms of the company's financing agreements, the ability to
remain in compliance with the physician ownership and referral provisions of the
Omnibus Budget Reconciliation Act of 1993 (commonly known as "Stark II") and the
ability to generate sufficient cash from operations and/or financing
arrangements to meet obligations. The accompanying consolidated financial
statements do not include any adjustments reflecting the possible future effects
on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the outcome of these
uncertainties.
ERNST & YOUNG LLP
Denver, Colorado
April 2, 2001
F-2
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
December 31,
--------------------------
2000 1999
---------- ----------
Current assets:
Cash and cash equivalents........................................................................... $ 27,259 $ 6,633
Cash limited as to use.............................................................................. 387 613
Accounts receivable, net of allowances of $17,912 and $30,920....................................... 77,387 106,935
Inventories......................................................................................... 12,796 22,966
Deferred income taxes, net.......................................................................... 428 364
Other current assets................................................................................ 4,759 5,614
---------- ----------
Total current assets........................................................................ 123,016 143,125
Property and equipment, net.......................................................................... 15,292 22,198
Deferred income taxes, net........................................................................... 1,697 1,481
Other deferred costs and intangible assets, net of accumulated amortization of $16,963 and $61,812... 8,448 13,337
Goodwill, net of accumulated amortization of $87,770 and $78,027..................................... 193,855 216,062
Other assets......................................................................................... 3,068 6,548
---------- ----------
Total assets................................................................................ $ 345,376 $ 402,751
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities not subject to compromise:
Accounts payable.................................................................................... $ 21,450 $ 37,600
Accrued compensation and related liabilities........................................................ 24,598 11,273
Interest payable.................................................................................... 4 5,100
Current maturities of long-term debt, including revolving lines of credit........................... 179 390
Income taxes payable................................................................................ 773 240
Deferred income taxes............................................................................... 52 419
Accrued merger and restructuring costs.............................................................. 2,301 7,392
Accrued reorganization costs........................................................................ 4,831 --
Other accrued liabilities........................................................................... 6,845 9,666
---------- ----------
Total current liabilities not subject to compromise................................................... 61,033 72,080
Total current liabilities subject to compromise (See Note 3) ......................................... 159,127 --
---------- ----------
Total current liabilities ............................................................................ 220,160 72,080
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities............................................................. 24 302,662
Minority interests in consolidated joint ventures and preferred stock issued by a subsidiary........ 5,978 1,652
Other liabilities................................................................................... 13,630 14,092
Deferred income taxes............................................................................... 2,073 1,427
Net liabilities of discontinued operations.......................................................... 26,533 32,537
---------- ----------
Total liabilities........................................................................... 268,398 424,450
Commitments and contingencies......................................................................... -- --
Stockholders' equity (deficit):
Preferred stock, par value $.001, authorized 10,000 shares, none issued............................... -- --
Common stock, par value $.001, 150,000 shares authorized, 49,638 shares issued and outstanding........ 50 50
Additional paid-in capital............................................................................ 427,357 427,399
Accumulated deficit................................................................................... (350,429) (449,148)
---------- ----------
Total stockholders' equity (deficit)........................................................ 76,978 (21,699)
---------- ----------
Total liabilities and stockholders' equity (deficit)........................................ $ 345,376 $ 402,751
========== ==========
See accompanying notes to consolidated financial statements.
F-3
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
-----------------------------------------
2000 1999 1998
---------- ---------- ----------
Net revenue.......................................................................... $ 464,820 $ 521,196 $ 445,112
Cost of service...................................................................... 341,656 408,878 326,736
---------- ---------- ----------
Gross profit......................................................................... 123,164 112,318 118,376
Operating expenses:
Selling, general and administrative expenses....................................... 90,329 96,809 83,337
Provision for estimated uncollectible accounts..................................... 9,773 28,310 14,845
Amortization of goodwill........................................................... 10,227 10,784 11,139
Restructuring cost (recovery) expense.............................................. (322) 5,831 (3,900)
Losses on impairments of long-lived assets......................................... 8,323 9,100 --
---------- ---------- ----------
Total operating expenses................................................... 118,330 150,834 105,421
---------- ---------- ----------
Operating income (loss) from continuing operations................................... 4,834 (38,516) 12,955
Other income (expenses):
Interest income.................................................................... 991 655 1,086
Interest expense................................................................... (26,788) (29,763) (32,734)
Equity in net income of unconsolidated joint ventures.............................. 759 442 69
Gains on sales of businesses....................................................... 18,649 -- 1,071
Losses on dispositions of property and equipment, net.............................. (224) (107) (363)
Other income, net.................................................................. 2,473 405 28
---------- ---------- ----------
Income (loss) from continuing operations
before reorganization expenses, income taxes, minority interests and
extraordinary gain on troubled debt restructuring................................ 694 (66,884) (17,888)
Reorganization expenses, net......................................................... (8,264) -- --
---------- ---------- ----------
Loss from continuing operations before income taxes, minority interests and
extraordinary gain on troubled debt restructuring................................ (7,570) (66,884) (17,888)
Income tax expense................................................................. 250 440 2,300
Minority interests in net income of consolidated joint ventures.................... 571 1,470 1,399
---------- ---------- ----------
Loss from continuing operations before extraordinary gain on troubled debt
restructuring....................................................................... (8,391) (68,794) (21,587)
---------- ---------- ----------
Discontinued Operations:
Loss from operations............................................................... -- (28,411) (108)
Loss from disposal................................................................. (662) (17,618) --
---------- ---------- ----------
Total discontinued operations........................................................ (662) (46,029) (108)
---------- ---------- ----------
Extraordinary gain on troubled debt restructuring, net of income tax expense of
$400............................................................................. 107,772 -- --
---------- ---------- ----------
Net income (loss).................................................................... $ 98,719 $ (114,823) $ (21,695)
========== ========== ==========
Earnings (Loss) Per Share
Basic and Diluted:
Loss from continuing operations.................................................. $ (0.17) $ (1.39) $ (0.44)
Loss from discontinued operations................................................ (0.01) (0.93) --
Extraordinary gain on troubled debt restructuring................................ 2.17 -- --
---------- ---------- ----------
Net income (loss) per common share............................................... $ 1.99 $ (2.32) $ (0.44)
========== ========== ==========
Weighted average common shares used in computation of basic and diluted
earnings (loss) per share...................................................... 49,638 49,512 48,870
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock Additional
--------------------- Paid-In Accumulated
Shares Amount Capital Deficit Totals
------ ------ ---------- ----------- ----------
Balances at January 1, 1998............ 48,069 $ 48 $ 437,608 $ (312,630) $ 125,026
Issuances of common stock and
warrants, net..................... 1,132 1 2,225 -- 2,226
Warrant cancellation................. -- -- (12,700) -- (12,700)
Net loss............................. -- -- -- (21,695) (21,695)
------ ----- ---------- ---------- ----------
Balances at December 31, 1998.......... 49,201 49 427,133 (334,325) 92,857
Issuances of common stock and
warrants, net..................... 437 1 266 -- 267
Net loss............................. -- -- -- (114,823) (114,823)
------ ----- ---------- ---------- ----------
Balances at December 31, 1999.......... 49,638 50 427,399 (449,148) (21,699)
Other................................ -- -- (42) -- (42)
Net income........................... -- -- -- 98,719 98,719
------ ----- ---------- ---------- ----------
Balances at December 31, 2000.......... 49,638 $ 50 $ 427,357 $ (350,429) $ 76,978
====== ===== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
-------------------------------------------
2000 1999 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations.............................................. $ (8,391) $ (68,794) $ (21,587)
Adjustments to reconcile net loss from continuing operations to
net cash provided by (used in) continuing operations:
Provision for estimated uncollectible accounts................................. 9,773 28,310 14,845
Depreciation and amortization (including accelerated write-off
of deferred debt issuance costs in 2000) .................................... 23,227 23,892 28,566
Reorganization expenses, net................................................... 8,264 -- --
Minority interest in net income of consolidated joint ventures, net............ 571 1,470 1,399
Losses on dispositions of property and equipment............................... 224 107 363
Gains on sales of businesses................................................... (18,649) -- (1,071)
Cash distributions from equity investees....................................... 883 922 866
Equity in net income of unconsolidated joint ventures, net..................... (759) (442) (69)
Losses on impairments of long-lived assets..................................... 8,323 9,100 --
Changes in operating assets and liabilities, net:
Accounts receivable.......................................................... 3,490 (36,828) (29,426)
Prepaid expenses, inventories and other assets............................... 8,275 3,136 (16,691)
Current and other liabilities, including accrued interest.................... 12,418 26,203 11,505
Accrued merger and restructuring............................................. (3,505) 3,456 (4,815)
---------- ---------- ----------
Net cash provided by (used in) continuing operations before
reorganization items.......................................................... 44,144 (9,468) (16,115)
Operating cash flows used by reorganization items............................... (1,581) -- --
---------- ---------- ----------
Net cash provided by (used in) continuing operations (net of
reorganization items) ........................................................ 42,563 (9,468) (16,115)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................................. (3,527) (6,947) (11,556)
Investment in a joint venture................................................... (249) -- --
Proceeds from sales (payments for acquisitions) of businesses, net.............. 41,513 (481) (3,285)
Proceeds from dispositions of property and equipment............................ 60 159 179
---------- ---------- ----------
Net cash provided by (used in) investing activities............................. 37,797 (7,269) (14,662)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from promissory notes and other debt obligations....................... 1,500 50,000 35,250
Cash consideration for warrant cancellation..................................... -- -- (4,300)
Principal payments of debt obligations.......................................... (55,562) (6,061) (115,932)
Cash paid for debt financing costs.............................................. -- -- (856)
Cash paid for debtor-in-possession financing costs.............................. (536) -- --
Cash distributions to minority interests........................................ (1,405) (796) (441)
Purchases of stock and exercises of warrants and options, net................... -- 210 89
---------- ---------- ----------
Net cash (used in) provided by financing activities............................. (56,003) 43,353 (86,190)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH FROM CONTINUING OPERATIONS...................... 24,357 26,616 (116,967)
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS.......................... (3,731) (20,186) 8,220
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 6,633 203 108,950
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR.......................................... $ 27,259 $ 6,633 $ 203
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................................................... $ 9,175 $ 9,974 $ 8,525
Income taxes.................................................................. 513 554 2,470
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Extraordinary gain on troubled debt restructuring (long-term
debt conversion to subsidiary preferred stock), net of
income tax expense of $400.................................................. $ 107,772 $ -- $ --
Warrants issued in connection with debt financing............................. -- -- 1,863
Debt issued in consideration for cancellation of warrants..................... -- -- 8,400
Common stock issued in connection with employment agreements.................. -- -- 103
See accompanying notes to consolidated financial statements.
F-6
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. DESCRIPTION OF BUSINESS
BUSINESS ACTIVITY. As of December 31, 2000, Coram Healthcare Corporation
("CHC") and its subsidiaries ("Coram" or the "company"), were engaged primarily
in the business of furnishing alternate site (outside the hospital) infusion
therapy, including non-intravenous home health products such as durable medical
equipment and respiratory services. Other services offered by Coram include
centralized management, administration and clinical support for clinical
research trials. Coram delivers its alternate site infusion therapy services
through 76 branch offices located in 40 states and Ontario, Canada. CHC and its
first tier wholly owned subsidiary, Coram, Inc. ("CI") (collectively the
"Debtors"), filed voluntary petitions under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") on August 8, 2000. As of such date the
Debtors are operating as debtors-in-possession subject to the jurisdiction of
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). None of the company's other subsidiaries is a debtor in the proceeding.
See Note 3 for further details.
In December 1999, Coram announced that it was repositioning its business
to focus on its core alternate site infusion therapy business and the clinical
research business operated by its subsidiary, CTI Network, Inc. Accordingly,
Coram's primary business strategy is to focus its efforts on the delivery of its
core infusion therapies, such as nutrition, anti-infective therapies,
intravenous immunoglobulin ("IVIG"), therapy for persons receiving transplants,
and coagulant and blood clotting therapies for persons with hemophilia. Coram
has also implemented programs focused on the reduction and control of the costs
of providing services and operating expenses, assessment of under-performing
branches and review of branch efficiencies. Pursuant to this review, several
branches have been closed or scaled back to serve as satellites for other
branches and personnel have been eliminated. See Note 6. Most of the company's
alternate site infusion therapy net revenue is derived from third-party payers
such as private indemnity insurers, managed care organizations and governmental
payers.
Prior to August 1, 2000, the company delivered pharmacy benefit management
and specialty mail-order pharmacy services through its Coram Prescription
Services ("CPS") business, which provided pharmacy benefit management services
as well as specialty mail-order prescription drugs for chronically ill patients
from one primary mail order facility, four satellite mail order facilities and
one retail pharmacy. The pharmacy benefit management service provided on-line
claims administration, formulary management and certain drug utilization review
services through a nationwide network of retail pharmacies. CPS's specialty
mail-order pharmacy services were delivered through its six facilities, which
provided distribution, compliance monitoring, patient education and clinical
support to a wide variety of patients. On July 31, 2000, Coram completed the
sale of its CPS business to a management-led group financed by GTCR Golder
Rauner, L.L.C. for a one-time payment of $41.3 million. See Note 5.
Prior to January 1, 2000, the company provided ancillary network
management services through its subsidiaries, Coram Resource Network, Inc. and
Coram Independent Practice Association, Inc. (collectively the "Resource Network
Subsidiaries" or "R-Net"), which managed networks of home healthcare providers
on behalf of HMOs, PPOs, at-risk physician groups and other managed care
organizations. R-Net served its customers through two primary call centers and
three satellite offices. In April 1998, the company entered into a five-year
capitated agreement with Aetna U.S. Healthcare, Inc. ("Aetna") (the "Master
Agreement") for the management and provision of certain home health services,
including home infusion, home nursing, respiratory therapy, durable medical
equipment, hospice care and home nursing support for several of Aetna's disease
management programs. Effective July 1, 1998, the company began receiving
capitated payments on a monthly basis for members covered under the Master
Agreement, assumed financial risk for certain home health services and began
providing management services for a network of home health providers through
R-Net. The agreements that R-Net had for the provision of ancillary network
management services have been terminated and R-Net is no longer providing any
ancillary network management services. Coram and Aetna were previously involved
in litigation over the Master Agreement; however, the litigation was amicably
resolved and the case was dismissed on April 20, 2000. The Resource Network
Subsidiaries filed voluntary bankruptcy petitions on November 12, 1999 with the
Bankruptcy Court under Chapter 11 of the United States Bankruptcy Code, and the
Resource Network Subsidiaries are being liquidated pursuant to such proceedings.
COMPANY HISTORY. The company was formed on July 8, 1994, as a result of
a merger by and among T(2) Medical, Inc. ("T2 Medical"), Curaflex Health
Services, Inc. ("Curaflex"), HealthInfusion, Inc. ("HealthInfusion") and
Medisys, Inc. ("Medisys")
F-7
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(collectively, the "Merged Entities") (the "Four-Way Merger"). Each of these
companies is a wholly-owned subsidiary of the company. The transaction was
accounted for as a pooling of interests.
The company has made a number of acquisitions since commencing operations,
the most significant of which was the acquisition of substantially all of the
assets and the assumption of certain specified liabilities of the alternate site
infusion business and certain related businesses (the "Caremark Business") from
Caremark Inc., a subsidiary of Caremark International, Inc. (collectively
"Caremark"), effective April 1, 1995. See Note 6. In addition, Coram acquired
H.M.S.S., Inc. ("HMSS"), a leading regional provider of home infusion therapies
based in Houston, Texas, effective September 12, 1994.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject the company to concentrations of credit risk consist primarily of cash
equivalents and accounts receivable. At December 31, 2000, substantially all of
the company's cash was deposited with Harris Trust and Savings Bank. Daily cash
balances may be in excess of the FDIC insurance limits, but credit risk is
mitigated as deposits are kept only with high credit quality institutions.
Accounts receivable are primarily from third-party payers, including private
indemnity insurers, managed care organizations and state and federal
governmental payers such as Medicare and Medicaid, and are unsecured. Credit
risk is mitigated by the large number of entities that comprise the third-party
payer base and credit evaluations of patients and third-party payers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
BASIS OF PRESENTATION. The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. However, as a result of the Debtors' bankruptcy filings and
circumstances relating thereto, including the company's leveraged financial
structure and cumulative losses from operations, such realization of assets and
liquidation of liabilities is subject to significant uncertainty. During the
pendency of the Debtors' Chapter 11 bankruptcy proceedings, the company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the consolidated financial statements. Further, a
plan of reorganization filed in the Chapter 11 proceedings could materially
change the amounts reported in the consolidated financial statements, which do
not give effect to any adjustments of the carrying value of assets or
liabilities that might be necessary as a consequence of a plan of reorganization
(see Note 3 for further details). The company's ability to continue as a going
concern is dependent upon, among other things, confirmation of a plan of
reorganization, future profitable operations, the ability to comply with the
terms of the company's financing agreements, the ability to remain in compliance
with the physician ownership and referral provisions of the Omnibus Budget
Reconciliation Act of 1993 (commonly known as "Stark II") and the ability to
generate sufficient cash from operations and/or financing arrangements to meet
obligations.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Coram, its subsidiaries and joint ventures which are considered
to be under the control of the company. All material intercompany accounts and
transaction balances have been eliminated in consolidation. The company uses the
equity method of accounting to account for investments in entities in which it
exhibits significant influence, but not control, and has an ownership interest
of 50% or less.
BANKRUPTCY REPORTING. Effective August 8, 2000, the company began
presenting its consolidated financial statements in accordance with the
provisions of SOP 90-7, "Financial Reporting by Entities in Reorganization under
the Bankruptcy Code" ("SOP 90-7").
RECLASSIFICATIONS. Certain amounts in the 1999 and 1998 consolidated
financial statements have been reclassified to conform to the 2000 presentation.
REVENUE RECOGNITION. Revenue is recognized as services are rendered or
products are delivered. Substantially all of the company's revenue is billed to
third-party payers, including insurance companies, managed care plans,
governmental payers and contracted institutions. Revenue is recorded net of
contractual adjustments and related discounts. Contractual adjustments represent
estimated differences between service revenue at established rates and amounts
expected to be realized from third-party payers under contractual agreements.
Management fees, which are collected from entities managed by the company, are
based on a percentage of the entities' operating results, number of active
patients or a fixed monthly amount. Management fees were immaterial for all
periods presented in the consolidated statements of income.
In certain cases, particularly during the term of operations for R-Net,
the company agreed to accept fixed fee or capitated fee arrangements. Under a
capitated arrangement, the company will agree to deliver or arrange for the
delivery of certain home health
F-8
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
services required under the payer customer's health plan in exchange for a fixed
per member per month service fee. The total per member per month fee is
calculated using all members enrolled in the particular health plan as of
certain dates. The per member per month service fees are recognized as revenue
in the month the fees are designated to cover home health services. As of
December 31, 2000, Coram was a party to four capitated arrangements which
represented less than 5% of the company's consolidated net revenue from
continuing operations for each of the years in the three year period ended
December 31, 2000.
Revenue from the Medicare and Medicaid programs accounted for
approximately 22%, 21%, and 24% of the company's consolidated net revenue from
continuing operations for the years ended December 31, 2000, 1999 and 1998,
respectively. Laws and regulations governing the Medicare and Medicaid programs
are complex and subject to interpretation. Management believes that the company
is in compliance with all applicable laws and regulations. Compliance with such
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action, including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
CASH AND CASH EQUIVALENTS. Cash equivalents include all highly liquid
investments with an original maturity of three months or less. The company's
cash balance that was limited as to its use includes cash which has restrictions
imposed on its use by third parties.
INVENTORIES. Inventories, consisting primarily of pharmaceuticals and
medical supplies, are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of one to seven years for equipment, furniture, fixtures
and vehicles. Leasehold improvements are amortized over the shorter of the lease
term or estimated useful lives of the underlying assets. Repairs and maintenance
costs are expensed as incurred.
GOODWILL AND OTHER LONG-LIVED ASSETS. Goodwill represents the excess of
purchase price over the fair value of net assets acquired through business
combinations accounted for as purchases and is amortized on a straight-line
basis over 25 years. The carrying value of goodwill and other long-lived assets
is reviewed quarterly to determine if any impairment indicators are present. If
it is determined that such indicators are present and the review indicates that
the assets will not be recoverable, based on undiscounted estimated cash flows
over their remaining depreciation and amortization period, their carrying value
is reduced to estimated fair value based on discounted cash flow estimates.
Impairment indicators include, among other conditions, cash flow deficits; a
historical or anticipated decline in revenue or operating profit; adverse legal,
regulatory or reimbursement developments; or a material decrease in the fair
value of some or all of the assets. A review is done separately for each of the
identifiable markets in which the company operates. During the years ended
December 31, 2000 and 1999, Coram recognized losses on impairments of long-lived
assets of approximately $8.3 million and $9.1 million, respectively. The
impairment charges were primarily because of operating losses of the infusion
business that resulted following the termination of the Master Agreement with
Aetna and the discontinuance of R-Net. The amount of impairment charges were
determined using forecasted discounted cash flows of those branches with
indicators of potential impairment of allocated long-lived assets. The
forecasted cash flows were based on earnings before interest, taxes,
depreciation and amortization ("EBITDA"), with an effective 8% growth rate,
offset by corporate administrative cost allocations with an estimated growth
rate of 2%. Additionally, a discount rate of 10% was used to calculate the net
present value of the projected future cash flows.
If future cash flows from operations decrease, Coram may be required to
record additional write-downs of its goodwill and other long-lived assets. Any
such write-down could have a material adverse effect on the company's financial
position and results of operations.
F-9
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PROVISION FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS. Management regularly
reviews the collectibility of accounts receivable utilizing system-generated
reports which track collection and write-off activity. Estimated write-off
percentages are then applied to each aging category by payer classification to
determine the allowance for estimated uncollectible accounts. Additionally, the
company establishes appropriate additional reserves for accounts that are deemed
uncollectible due to occurrences such as bankruptcy filings by the payer. The
allowance for estimated uncollectible accounts is adjusted as needed to reflect
current collection, write-off and other trends, including changes in assessment
of realizable value. While management believes the resulting net carrying
amounts for accounts receivable are fairly stated at each quarter-end and that
the company has made adequate provision for uncollectible accounts based on all
information available, no assurances can be given as to the level of future
provisions for uncollectible accounts, or how they will compare to the levels
experienced in the past. The company's ability to successfully collect its
accounts receivable depends, in part, on its ability to adequately supervise and
train personnel in billing and collections, and minimize losses related to
branch consolidations and system changes.
EARNINGS PER SHARE. Basic and diluted earnings (loss) per share were
identical for each year in the three year period ended December 31, 2000. In
each such year, the company experienced losses from continuing operations and,
in accordance with the provisions of Financial Accounting Standards Board
("FASB") Statement No. 128, EARNINGS PER SHARE, the denominator utilized to
calculate earnings (loss) per share does not increase when losses from
continuing operations are in evidence because to do so would be anti-dilutive.
COMPREHENSIVE INCOME. The FASB issued Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME ("Statement 130"),
establishing rules for reporting and displaying comprehensive income.
Comprehensive income is defined as essentially all changes in stockholders'
equity exclusive of transactions with owners (e.g., dividends, stock options,
etc.) and includes net income plus changes in certain assets and liabilities
that are reported directly in equity, referred to as "Other Comprehensive
Income." Other Comprehensive Income includes unrealized gains or losses on
available-for-sale securities, translation adjustments on investments in foreign
subsidiaries, and certain changes in minimum pension liabilities. The company
has no material activity that requires disclosure under Statement 130.
DERIVATIVES AND HEDGING ACTIVITIES. In June 1998, the FASB issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("Statement 133"), which requires recording
all derivative instruments as assets or liabilities, measured at fair value.
Statement 133 was initially effective for fiscal years beginning after June 15,
1999. In June 1999, the FASB issued Statement of Financial Accounting Standards
no. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL
OF THE EFFECTIVE DATE OF FASB NO. 133, which deferred the effective date of
Statement 133 to fiscal years beginning after June 15, 2000. Therefore, Coram
will adopt the new requirement effective January 1, 2001. Management does not
believe that adoption of the new accounting pronouncement will have a material
effect on the company's financial position or operating results.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the
reported period. Actual results could differ from those estimates.
3. REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE
On August 8, 2000, CHC and CI, filed voluntary petitions under Chapter 11
of the United States Bankruptcy Code (the "Bankruptcy Code"). Following the
filing of the voluntary Chapter 11 petitions, the Debtors have been operating as
debtors-in-possession subject to the jurisdiction of the Bankruptcy Court. None
of the company's other subsidiaries is a debtor in the proceeding. The Debtors'
need to seek the relief afforded by the Bankruptcy Code was due, in part, to its
requirement to remain in compliance with the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993, commonly referred
to as Stark II (see discussion of Stark II in Note 13), after December 31, 2000
and the scheduled May 27, 2001 maturity of the Series A Senior Subordinated
Unsecured Notes. The Debtors sought advice and counsel from a variety of sources
and, in connection therewith, the Independent Committee of the Board of
Directors unanimously concluded that the bankruptcy and restructuring were the
only viable alternatives.
On August 9, 2000, the Bankruptcy Court approved the Debtors' motions for:
(i) payment of all employee wages and salaries and certain benefits and other
employee obligations; (ii) payment of critical trade vendors, utilities and
insurance in the ordinary course of
F-10
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
business for both pre and post-petition expenses; (iii) access to a
debtor-in-possession financing arrangement (see Note 8 for details of the
executed agreement); and (iv) use of all company bank accounts for normal
business operations. In September 2000, the Bankruptcy Court approved the
Debtors' motion to reject four unexpired, non-residential real property leases
and any associated subleases. The rejected leases include underutilized
locations in: (i) Allentown, Pennsylvania; (ii) Denver, Colorado; (iii)
Philadelphia, Pennsylvania; and (iv) Whippany, New Jersey. The successful
rejection of the Whippany, New Jersey lease caused the company to reverse
certain reserves that had previously been established related to closure of its
discontinued operations. Additionally, on January 25, 2001, the Bankruptcy Court
approved a motion to extend the period of time in which the Debtors can reject
unexpired leases of non-residential real property to May 4, 2001. Certain other
motions filed by the Debtors have been granted and others are presently pending.
In September 2000 and October 2000, the Bankruptcy Court approved payments
of up to approximately $2.6 million for retention bonuses payable to certain key
employees. The bonuses were scheduled to be paid in two equal installments (i)
the later of the date of emergence from bankruptcy or December 31, 2000 and (ii)
December 31, 2001. Due to events that have delayed the emergence from
bankruptcy, the Bankruptcy Court approved early payment of the first installment
to most individuals within the retention program and such payments, aggregating
approximately $0.7 million, were made on March 15, 2001. The remaining portion
of the first installments of approximately $0.5 million are scheduled for
payment upon approval of a plan of reorganization by the Bankruptcy Court, and
the second installment remains scheduled to be paid on December 31, 2001. The
company is accruing monthly amounts as earned pursuant to the provisions of the
retention plan.
The Debtors are currently paying the post-petition claims of their vendors
in the ordinary course of business and are, pursuant to an order of the
Bankruptcy Court, causing their subsidiaries to pay their own debts in the
ordinary course of business. Even though the filing of the Chapter 11 cases
constituted defaults under the company's principal debt instruments, the
Bankruptcy Code imposes an automatic stay that will generally preclude the
creditors and other interested parties under such arrangements from taking
remedial action in response to any such resulting default without prior
Bankruptcy Court approval.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtors' Chapter 11 proceedings seeking, among other things, to have the two
separate bankruptcy proceedings substantively consolidated into one proceeding.
The Resource Network Subsidiaries and the Debtors engaged in discovery related
to this substantive consolidation motion and, in connection therewith, the
parties reached a settlement agreement in November 2000. See Note 13 for further
details.
On the same day as the Chapter 11 cases were filed, the Debtors filed
their joint plan of reorganization (the "Joint Plan") and their joint disclosure
statement with the Bankruptcy Court. The Joint Plan was subsequently amended and
restated (the "Restated Joint Plan") and, on or about October 10, 2000, the
Restated Joint Plan and the First Amended Disclosure Statement with respect to
the Restated Joint Plan was authorized for distribution by the Bankruptcy Court.
Among other things, the Restated Joint Plan provided for: (i) a conversion of
all of the CI obligations represented by the company's Series A Senior
Subordinated Unsecured Notes (the "Series A Notes") and the Series B Senior
Subordinated Unsecured Convertible Notes (the "Series B Notes") into (a) a
four-year, interest only note in the principal amount of $180 million, that
would bear interest at the rate of 9% per annum and (b) all of the equity in the
reorganized CI; (ii) the payment in full of all secured, priority and general
unsecured debts of CI; (iii) the payment in full of all secured and priority
claims against CHC; (iv) the impairment of certain general unsecured debts of
CHC, including, among others, CHC's obligations under the Series A Notes and the
Series B Notes; and (v) the complete elimination of the equity interests of CHC.
Furthermore, pursuant to the Restated Joint Plan, CHC would be dissolved as soon
as practicable after the effective date of the Restated Joint Plan and the stock
of CHC would no longer be publicly traded. Therefore, under the Debtors'
Restated Joint Plan, as filed, the existing stockholders of CHC would receive no
value for their shares and all of the outstanding equity of CI as the surviving
entity would be owned by the holders of the company's Series A Notes and Series
B Notes.
Representatives of the company negotiated the principal aspects of the
Joint Plan with representatives of the holders of the company's Series A Notes
and Series B Notes and Senior Credit Facility prior to the filing of such Joint
Plan.
On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that are entitled to a distribution under the Restated Joint Plan. The
Debtors did not send ballots to the holders of other types of claims and
interested parties, including equity holders; however, the holders of such
claims and interested parties are deemed to reject the plan in any event. The
tabulated vote of the unsecured creditors was in favor of the company's Restated
Joint Plan. A confirmation hearing was held on December 21, 2000 at which time
the Restated Joint Plan was not approved by the Bankruptcy Court. On December
28, 2000, the Bankruptcy Court extended the period during which the Debtors have
the exclusive right to file a plan or plans before the Bankruptcy Court to March
28, 2001. Additionally, the Bankruptcy Court extended
F-11
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the Debtors' exclusive period to solicit acceptances of any filed plan or plans
to May 28, 2001. Management has petitioned the Bankruptcy Court for additional
extensions of such exclusivity periods.
In order for the company to remain compliant with the requirements of
Stark II, on December 29, 2000 and effective December 31, 2000, CI exchanged
approximately $97.7 million of the Series A Notes and approximately $11.6
million of accrued but unpaid interest on the Series A Notes and the Series B
Notes for 905 shares of CI Series A Cumulative Preferred Stock (see Notes 8 and
11 for further details). This transaction generated an extraordinary gain on
troubled debt restructuring of approximately $107.8 million, net of tax, and at
December 31, 2000 the company's stockholders' equity exceeded the minimum Stark
II requirement necessary to comply with the public company exemption. See Note
13 for further discussion regarding Stark II.
On or about February 6, 2001, the Official Committee of the Equity
Security Holders (the "Equity Committee") filed a motion with the Bankruptcy
Court seeking permission to bring a lawsuit directly against CHC's Chief
Executive Officer, a former member of CHC's Board of Directors and Cerberus
Partners, L.P. (a party to the company's debtor-in-possession financing
agreement, Senior Credit Facility and Securities Exchange Agreement). On
February 26, 2001, the Bankruptcy Court ruled that the Equity Committee's motion
would not be productive at that time and, accordingly, the motion was denied
without prejudice. On the same day, the Bankruptcy Court approved the Debtors'
motion and appointed Goldin Associates, L.L.C. ("Goldin") as independent
restructuring advisors to the Debtors. Goldin will provide consulting and
advisory support services designed to assist the Debtors in concluding their
bankruptcy proceedings. Among other things, the scope of Goldin's services
include (i) reporting its findings to the Independent Committee of the Board of
Directors (the "Independent Committee"), including its assessment of the
appropriateness of the Restated Joint Plan, and advising the Independent
Committee respecting an appropriate course of action calculated to bring the
Debtors' bankruptcy proceedings to a fair and satisfactory conclusion, (ii)
preparing a written report as may be required by the Independent Committee
and/or the Bankruptcy Court and (iii) being available to appear before the court
and provide testimony. Goldin was also appointed as an arbiter between the
Debtors and the Equity Committee.
Based upon Goldin's findings and recommendations, the Debtors may develop
and submit a new joint plan of reorganization to the Bankruptcy Court. However,
if the Debtors' exclusivity periods are terminated by one or more interested
parties, it is possible that one or more holders of claims or interests in the
Debtors will file a plan or plans with the Bankruptcy Court. Any new plan or
plans of reorganization (hereinafter collectively referred to as the "New Plan")
must be approved for distribution by the Bankruptcy Court, voted upon by certain
impaired creditors and equity holders of the Debtors and approved by the
Bankruptcy Court to become effective after certain findings required by the
Bankruptcy Code are made. The Bankruptcy Court may confirm a plan of
reorganization notwithstanding the non-acceptance of the plan by an impaired
class of creditors or equity holders if certain conditions of the Bankruptcy
Code are satisfied. No assurances can be given regarding the timing of or
whether the Debtors' will submit a new plan or what the terms of such plan may
be.
Under the Bankruptcy Code, certain claims against the Debtors in existence
prior to the filing date are stayed while the Debtors continue their operations
as debtors-in-possession. These claims are reflected in the December 31, 2000
Consolidated Balance Sheet as liabilities subject to compromise. Additional
Chapter 11 claims have arisen and may continue to arise subsequent to the filing
date resulting from the rejection of executory contracts, including certain
leases, and from the determination by the Bankruptcy Court of allowed claims for
contingencies and other disputed amounts. Parties affected by the rejections may
file claims with the Bankruptcy Court in accordance with the provisions of the
Bankruptcy Code and applicable rules. Claims secured by the Debtors' assets also
are stayed, although the holders of such claims have the right to petition the
Bankruptcy Court for relief from the automatic stay to permit such creditors to
foreclose on the property securing their claims. Additionally, certain claimants
have sought relief from the Bankruptcy Court to remove the stay against their
actions in order to continue pursuit of their claims against the Debtors or the
Debtors' insurance carriers. The principal categories and balances of Chapter 11
claims accrued in the Consolidated Balance Sheets and included in liabilities
subject to compromise at December 31, 2000 are summarized as follows (in
thousands):
Series A and Series B Notes and other long-term debt obligations. $ 153,422
Liabilities of discontinued operations subject to compromise..... 2,936
Earn-out obligation.............................................. 1,268
Accrued merger and restructuring costs (primarily severance
liabilities)................................................... 468
Accounts payable................................................. 111
Legal and professional liabilities............................... 113
Other............................................................ 809
---------
Total liabilities subject to compromise........................ $ 159,127
=========
In addition to the amounts disclosed in the table above, the holders of
Coram, Inc.'s Series A Cumulative Preferred Stock continue
F-12
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
to maintain an unsecured creditors' position within the Debtors' bankruptcy
proceedings in the aggregate amount of their liquidation preference.
Notwithstanding the debt to equity exchange, the aforementioned holders'
priority in the Debtors' bankruptcy proceedings will be no less than it was
immediately prior to said exchange.
Schedules were filed with the Bankruptcy Court setting forth the assets
and liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to the New Plan. The
New Plan, once developed, may be subject to a vote by certain of the Debtors'
impaired creditors and equity holders and confirmation by the Bankruptcy Court,
as described above. Therefore, it is not possible to fully or completely
estimate the fair value of the liabilities subject to compromise at December 31,
2000 due to the Debtors' Chapter 11 cases and the uncertainty surrounding the
ultimate amount and settlement terms for such liabilities.
Reorganization expenses are items of expense or income that are incurred
or realized by the company as a result of the reorganization. These items
include, but are not limited to, professional fees, United States Trustee fees
and interest earned on cash accumulated related to the Debtors not paying their
pre-petition liabilities and other expenditures incurred relating to the Chapter
11 proceedings. The principal components of reorganization expenses for the year
ended December 31, 2000 are as follows (in thousands):
Legal, accounting and consulting fees............ $ 5,299
Success and retention expenses................... 2,491
Resource Network Subsidiary settlement amount.... 500
United States Trustee fees....................... 21
Interest income.................................. (47)
--------
Total reorganization expenses, net............. $ 8,264
========
4. DISCONTINUED OPERATIONS
In November 1999, following the filing of voluntary bankruptcy petitions
for the Resource Network subsidiaries and the plan to liquidate the R-Net
division, Coram disclosed as Net Liabilities of Discontinued Operations in the
Consolidated Financial Statements, the excess of R-Net's liabilities over
assets. Coram also separately reflected R-Net's operating results in the
Consolidated Statements of Income as Discontinued Operations.
The Losses from Operations of Discontinued Operations of R-Net reflected
in the company's Consolidated Statements of Income include the following (in
thousands):
Years Ended December 31,
-------------------------------
2000 1999 1998
-------- -------- --------
Net revenue....................................... $ -- $ 74,432 $ 61,596
======== ======== ========
Gross profit (loss)............................... $ -- $ (8,003) $ 13,608
======== ======== ========
Loss from operations of discontinued operations... $ -- $(28,411) $ (108)
======== ======== ========
The $17.6 million Loss from Disposal of Discontinued Operations for the
year ended December 31, 1999 includes $1.5 million of loss from operations for
the period from the November 12, 1999 measurement date to December 31, 1999,
including $2.9 of net revenue during this period. The Loss from Operations of
Discontinued Operations also includes $5.5 million of reserves for severance,
litigation, facility costs and other wind-down costs, and $10.6 million for
asset impairment reserves.
The Loss from Disposal of Discontinued Operations of approximately $0.7
million for the year ended December 31, 2000 includes additional reserves for
litigation and other wind-down costs, net of certain insurance recoveries,
facility cost reserve reductions resulting from the Debtors' bankruptcy
proceedings, reserve adjustments due to changes in the estimated amounts of
legal and professional fees necessary to complete R-Net's Chapter 11 bankruptcy
proceedings and the $0.5 million settlement with the Debtors for the substantive
consolidation matter.
The components of the net liabilities of discontinued operations included
in the Consolidated Balance Sheets are summarized as follows (in thousands):
F-13
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31,
2000 1999
--------- --------
Cash.................................................. $ 1,162 $ 2,022
Intercompany receivable (payable)..................... 500 (437)
Accounts payable...................................... (28,619) (29,509)
Accrued expenses...................................... (1,512) (4,613)
Other long-term liabilities........................... (1,000) --
--------- --------
(29,469) (32,537)
Net liabilities subject to compromise under Debtors'
Chapter 11 case..................................... 2,936 --
--------- --------
Net liabilities of Discontinued Operations............ $ (26,533) $(32,537)
========= ========
As of December 31, 2000, approximately $27.5 million of the liabilities
related to the discontinued operations was subject to compromise under the R-Net
Chapter 11 bankruptcy proceedings.
All of the R-Net locations have been closed in connection with the pending
liquidation of R-Net. Additionally, Coram employees who were members of the
Resource Network Subsidiaries' Board of Directors resigned during the year ended
December 31, 2000, and currently only the Chief Restructuring Officer appointed
by the Bankruptcy Court remains on the Board of Directors to manage and operate
the liquidation of the R-Net business.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtors' Chapter 11 proceedings seeking, among other things, to have the two
separate bankruptcy proceedings substantively consolidated into one proceeding.
The Resource Network subsidiaries and the Debtors engaged in discovery related
to this substantive consolidation motion and, in connection therewith, the
parties reached a settlement agreement in November 2000. See Note 13 for further
details.
5. SALE OF CPS AND OTHER BUSINESSES
On July 31, 2000, the company completed the sale of substantially all of
the assets and assignment of certain related liabilities of the CPS business to
Curascript Pharmacy, Inc. and Curascript PBM Services, Inc. (collectively the
"Buyers") for a one-time cash payment of approximately $41.3 million. The Buyers
were effectively a management-led group that was financed by GTCR Golder Rauner,
L.L.C. The company's gain on the sale of the CPS business was approximately
$18.3 million. The cash proceeds, after related expenses, were applied to the
remaining principal balance under the company's revolving line of credit of
$28.5 million and an additional $9.5 million was applied to the principal
balance of the Series A Senior Subordinated Unsecured Notes. See Note 8 for
further details.
Pursuant to a contingent consideration arrangement related to one of the
company's operating subsidiaries, approximately $0.4 million was recognized as
incremental proceeds during the year ended December 31, 2000. The contingency
related to the operating activities of the subsidiary through June 30, 2000.
Upon payment of the contingent consideration, substantially all conditions of
the initial sale and purchase agreement have been satisfied.
On June 1, 1998, the company signed an agreement with Integrated Health
Services, Inc. ("IHS") for the sale of the company's remaining lithotripsy
partnership for an aggregate purchase price of approximately $1.0 million,
payable in common stock of IHS. As a result, the company recognized a gain of
approximately $0.7 million in 1998.
6. ACQUISITIONS AND RESTRUCTURING
ACQUISITIONS. Certain agreements related to previously acquired businesses
or interests therein provide for additional contingent consideration to be paid
by the company. The amount of additional consideration, if any, is generally
based on the financial performance levels of the acquired companies. As of
December 31, 2000, the company may be required to pay, under such contingent
obligations, approximately $1.3 million. However, payment of such amounts has
been stayed by the Debtors' bankruptcy proceedings. Subject to certain elections
by the company or the sellers, $0.6 million of these contingent obligations may
be paid in cash. In the period these payments become probable, they are recorded
as additional goodwill. Payments made during the years ended December 31, 2000,
1999, and 1998 were $0.1 million, $0.4 million, and $0.3 million, respectively.
See Note 13 for further details concerning contingencies relative to earn-out
payments.
MERGER AND RESTRUCTURING. As a result of the formation of Coram and the
acquisition of substantially all of the assets of the alternate site infusion
business of Caremark, Inc., a subsidiary of Caremark International, Inc. (the
"Caremark Business"), during May 1995, the company initiated a restructuring
plan (the "Caremark Business Consolidation Plan") and charged approximately
$25.8 million to operations as a restructuring cost.
F-14
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During January 1999, the company undertook an organizational realignment
to affect a functional reporting structure (the "Field Reorganization Plan") and
charged $1.0 million to operations as a restructuring cost. The Field
Reorganization Plan's restructuring cost relates to severance payments, fringe
benefits and taxes for approximately 25 severed employees. This plan was
completed in the first quarter of the year ended December 31, 2000.
During July 1999, the company adopted a restructuring plan associated with
the reorganization of the R-Net call center operations responsible for managing
the Master Agreement with Aetna (the "R-Net Restructure Plan"). The R-Net
Restructure Plan resulted in an initial charge to operations of approximately
$5.1 million. In November 1999, prior to the R-Net decision to file voluntary
Chapter 11 bankruptcy petitions, the company re-evaluated the estimated cost to
complete the R-Net Plan and revised the initial charge to approximately $4.3
million, which consisted of accruals for restructuring of $2.8 million for
facility costs and $0.6 million for personnel reduction costs, and a loss on
impairment of long-lived assets charge for $0.9 million. As a result of the
R-Net liquidation described in Notes 1 and 4, these charges are included in the
Loss from Discontinued Operations for the year ended December 31, 1999 and the
related restructuring accrual and impairment of long-lived assets are reflected
in the net liability of discontinued operations.
During December 1999, the company initiated an organizational
restructure and strategic repositioning plan (the "Coram Restructure Plan")
and charged approximately $4.8 million to operations as a restructuring cost.
The Coram Restructure Plan resulted in the closing of additional facilities
and reduction of personnel. In connection therewith, the company reserved for
(i) personnel reduction costs relating to severance payments, fringe benefits
and taxes for employees that have been or may be terminated and (ii) facility
closing costs that consist of rent, common area maintenance and utility costs
for fulfilling lease commitments of approximately fifteen branch and
corporate facilities that have been or may be closed or downsized. Reserves
for facility closing costs are offset by amounts arising from sublease
arrangements, but not until such arrangements are in the form of signed and
executed contracts. As part of the Coram Restructure Plan, the company
informed certain reimbursement sites of their estimated closure dates. Such
operations have been scheduled for closure during the first half of 2001,
including the severance of approximately 80 related employees.
Under the Caremark Business Consolidation Plan and the Coram Restructure
Plan, the total charges through December 31, 2000, the estimate of total future
cash expenditures and the estimated total charges are as follows (in thousands):
CHARGES THROUGH DECEMBER 31, 2000 BALANCES AT DECEMBER 31, 2000
--------------------------------- -----------------------------
ESTIMATED
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES
------------ ------- ----- ------------ -------
Caremark Business Consolidation
Plan:
Personnel Reduction Costs ......................... $11,300 $ -- $11,300 $ -- $11,300
Facility Reduction Costs .......................... 10,000 3,900 13,900 793 14,693
------- ------- ------- ------- -------
Subtotal ....................................... 21,300 3,900 25,200 793 25,993
Coram Restructure Plan:
Personnel Reduction Costs ......................... 2,073 -- 2,073 488 2,561
Facility Reduction Costs .......................... 629 -- 629 1,488 2,117
------- ------- ------- ------- -------
Subtotal ....................................... 2,702 -- 2,702 1,976 4,678
------- ------- ------- ------- -------
Totals .............................................. $24,002 $ 3,900 $27,902 2,769 $30,671
======= ======= ======= =======
Restructuring Costs Subject to Compromise ........... (468)
-------
Accrued Merger and Restructuring Costs Per the
Consolidated Balance Sheets ........................ $ 2,301
=======
During the year ended December 31, 2000, significant items impacting the
restructuring reserves are summarized as follows:
Balance at December 31, 1999 .................... $ 7,392
Activity during the year ended December 31, 2000:
Payments under the plans .................... (3,076)
Reversal attributable to the sale of CPS .... (1,225)
Other reversals ............................. (322)
-------
2,769
Restructuring costs subject to compromise ...... (468)
-------
Balance at December 31, 2000 ................... $ 2,301
=======
The company estimates that the future cash expenditures related to the
restructuring plans stated above will be made in the following periods: 56%
through December 31, 2001, 22% through December 31, 2002, 11% through December
31, 2003 and 11% thereafter.
F-15
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
December 31,
--------------------
2000 1999
-------- --------
Leasehold improvements ....................... $ 4,200 $ 4,503
Equipment and other .......................... 42,221 46,078
Furniture and fixtures ....................... 6,390 6,898
-------- --------
52,811 57,479
Less accumulated depreciation and amortization (37,519) (35,281)
-------- --------
$ 15,292 $ 22,198
======== ========
The above includes immaterial amounts of equipment under capital leases.
8. DEBT OBLIGATIONS
Debt obligations are as follows (in thousands):
December 31,
------------
2000 1999
---- ----
Debtor-In-Possession Financing Agreement ...................... $ -- $ --
Senior Credit Facility ........................................ -- 44,000
Series A Senior Subordinated Unsecured Notes .................. 61,208 166,825
Series B Senior Subordinated Unsecured Convertible Notes ...... 92,084 91,474
Other obligations, including capital leases, at interest rates
ranging from 7.5% to 13.2% .................................. 333 753
--------- ---------
153,625 303,052
Less: Debt obligations subject to compromise .................. (153,422) --
Less: Current scheduled maturities ............................ (179) (390)
--------- ---------
$ 24 $ 302,662
========= =========
As a result of the Debtors' Chapter 11 Bankruptcy Court filings,
substantially all short and long-term debt obligations at the August 8, 2000
filing date have been classified as liabilities subject to compromise in the
accompanying Consolidated Balance Sheets as of December 31, 2000 in accordance
with SOP 90-7. Under the United States Bankruptcy Code, actions against the
Debtors to collect prepetition indebtedness are subject to an automatic stay
provision. As of August 8, 2000, the company's principal credit and debt
agreements included (i) a Securities Exchange Agreement (the "Securities
Exchange Agreement"), dated May 6, 1998, with Cerberus Partners, L.P., Goldman
Sachs Credit Partners, L.P. and Foothill Capital Corporation (collectively the
"Holders") and the related Series A Senior Subordinated Unsecured Notes (the
"Series A Notes") and the Series B Senior Subordinated Unsecured Convertible
Notes (the "Series B Notes") and (ii) a Senior Credit Facility with Foothill
Income Trust L.P., Cerberus Partners, L.P. and Goldman Sachs Credit Partners,
L.P. (collectively the "Lenders") and Foothill Capital Corporation as agent
thereunder. Subsequent to the petition date, the Debtors entered into a secured
debtor-in-possession financing agreement with an affiliate of Cerberus Partners,
L.P. Pursuant to the terms and conditions of the aforementioned credit and debt
agreements, the company is precluded from paying cash dividends or making other
capital distributions. Moreover, the Debtors' voluntary Chapter 11 filings
caused events of default to occur under the Securities Exchange Agreement and
the Senior Credit Facility, thereby terminating the Debtors' ability to make
additional borrowings under the Senior Credit Facility through its expiration on
February 6, 2001.
Notwithstanding the debt-to-preferred stock exchange discussed below,
post-petition interest expense on pre-petition indebtedness of approximately
$8.0 million was considered an allowable Bankruptcy Court claim and was charged
to interest expense in the accompanying Consolidated Statements of Income. The
recognition of interest expense pursuant to SOP 90-7 is appropriate during the
Chapter 11 proceedings if it is probable that it will be an allowed priority,
secured or unsecured claim. The Debtors' Restated Joint Plan (see Note 3), if
approved, would have effectively eliminated all post-petition interest on
pre-petition borrowings. Another plan put forth by the Debtors' management may
have a similar effect on post-petition interest; however, appropriate approvals
thereof in accordance with the Bankruptcy Code would be required.
DEBTOR-IN-POSSESSION ("DIP") FINANCING AGREEMENT. In connection with the
Chapter 11 Bankruptcy Court filings, effective
F-16
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
August 30, 2000, the Debtors entered into a secured debtor-in-possession
financing agreement with Madeleine L.L.C. ("Madeleine"), an affiliate of
Cerberus Partners, L.P. The agreement contemplates that the Debtors could
access, as necessary, a line of credit of up to $40 million for use in
connection with the operation of their businesses and the businesses of their
subsidiaries. On September 12, 2000, the Bankruptcy Court issued an order
approving the DIP financing agreement.
The DIP financing agreement matures on the earlier of either confirmation
of the Debtors' plan of reorganization or August 31, 2001. The DIP financing
agreement provides for maximum borrowings generally equal to the product of: (i)
65% of Net Eligible Accounts Receivable, as defined in the underlying agreement,
and (ii) 95%. Outstanding borrowings under the DIP financing agreement bear
interest at a rate of prime plus 2.0%, payable in arrears on the first business
day of each month. The effective interest rate was 11.5% on December 31, 2000.
The DIP financing agreement is secured by the capital stock of the Debtor's
subsidiaries, as well as, the accounts receivable and certain other assets held
by the Debtors and their subsidiaries. Under the DIP financing agreement, among
other nominal fees, the Debtors paid a fee of 1% or $0.4 million and are liable
for commitment fees on the unused facility at a rate of 0.5% per annum, payable
monthly in arrears.
The terms of the DIP financing agreement contain customary
representations, warranties and covenants, including certain financial covenants
related to earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA"), lease obligations and capital expenditures. A breach of
such representations, warranties and covenants could result in restrictions on
the Debtors' ability to obtain advances under the DIP financing agreement and
possibly the exercise of remedies by Madeleine. Management believes that at
December 31, 2000, the company was in compliance with all the covenants of the
DIP financing agreement; however, there can be no assurance as to future
compliance therewith and whether waivers, if necessary, would be granted.
Through April 2, 2001, no borrowings had been made under the DIP financing
agreement; however, at such date, the borrowing base was approximately $35.5
million pursuant to the limitations of the DIP financing agreement.
SENIOR CREDIT FACILITY. On August 20, 1998, the company entered into the
Senior Credit Facility, which provided for the availability of up to $60.0
million for acquisitions, working capital, letters of credit and other corporate
purposes. The terms of the agreement also provided for the issuance of letters
of credit of up to $25.0 million provided that available credit would not fall
below zero. On September 21, 2000 and January 29, 2001, the company permanently
reduced the commitment to $2.7 million and $2.1 million, respectively, in order
to reduce the fees related to commitments on which the company was not able to
borrow against. Effective February 6, 2001, the Lenders and the company
terminated the Senior Credit Facility. As of December 31, 2000, the lenders had
outstanding irrevocable letters of credit issued for the benefit of the company
totaling $2.1 million. In connection with the termination of the Senior Credit
Facility, the company established new letters of credit through Wells Fargo Bank
Minnesota, NA ("Wells Fargo") and such new letters of credit are fully secured
by interest bearing cash deposits of the company held by Wells Fargo.
The Senior Credit Facility provided for interest on outstanding
indebtedness at the rate of prime plus 1.5%, payable in arrears. Additionally,
the terms of the agreement provided for a fee of 1.0% per annum on the
outstanding letter of credit obligations, also payable in arrears. The Senior
Credit Facility further provided for additional fees to be paid on demand to any
letter of credit issuer pursuant to the application and related documentation
under which such letters of credit are issued. As of December 31, 2000, such
fees were 0.825% per annum on the amount of outstanding letter of credit
obligations. The Senior Credit Facility was secured by the capital stock of the
company's subsidiaries, as well as, the accounts receivable and certain other
assets held by the company and its subsidiaries. The Senior Credit Facility
contained other customary covenants and events of default.
Among other nominal fees, the company paid $0.6 million upon consummation
of the Senior Credit Facility and was thereafter liable for commitment fees on
the unused facility at 0.375% per annum, due quarterly in arrears. Additionally,
the terms of the agreement provided for the issuance of warrants to purchase up
to 1.9 million shares of the company's common stock at $0.01 per share, subject
to customary anti-dilution adjustments (the "1998 Warrants"). The estimated fair
value of the 1998 Warrants was determined on the date of issuance and
capitalized as deferred debt issuance costs. Such costs were amortized ratably
to interest expense over the life of the Senior Credit Facility; however,
contemporaneous with the permanent reduction of the borrowing capacity on
September 21, 2000, the company charged to interest expense approximately $1.1
million of remaining deferred debt issuance costs related to the Senior Credit
Facility. The 1998 Warrants expired on February 6, 2001 when the Senior Credit
Facility was terminated.
SECURITIES EXCHANGE AGREEMENT. On May 6, 1998, the company entered into
the Securities Exchange Agreement with the Holders of its subordinated rollover
note (the "Rollover Note"). While the Rollover Note was outstanding, the Holders
had the right to receive warrants to purchase up to 20% of the outstanding
common stock of the company (the "Rollover Note Warrants") on a fully diluted
F-17
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
basis. Effective April 13, 1998, the Securities Exchange Agreement provided for
the cancellation of the Rollover Note, including deferred interest and fees, and
the Rollover Note Warrants in an exchange for the payment of $4.3 million in
cash and the issuance by the company to the Holders of (i) $150.0 million in
principal amount of Series A Notes and (ii) $87.9 million in principal amount of
8.0% Series B Notes. Additionally, the Holders of the Series A Notes and the
Series B Notes were given the right to approve certain new debt and the right to
name one director to the company's Board of Directors. Such director was elected
to the Board of Directors in June 1998 and reelected in August 1999; however,
the designated board member resigned in July 2000.
On April 9, 1999, the company entered into Amendment No. 2 (the "Note
Amendment") to the Securities Exchange Agreement with the Holders. Pursuant to
the Note Amendment, the outstanding principal amount of Series B Notes is
convertible into shares of the company's common stock at a conversion price of
$2.00 per share (subject to customary anti-dilution adjustments). Prior to
entering into the Note Amendment, the Series B Notes were convertible into
common stock at a conversion price of $3.00 per share, which was subject to
downward (but not upward) adjustment based on prevailing market prices for the
company's common stock on April 13, 1999 and October 13, 1999. Based on reported
market closing prices for the company's common stock prior to April 13, 1999,
this conversion price would have been adjusted to below $2.00 on such date had
the company not entered into the Note Amendment. Pursuant to the Note Amendment,
the parties also increased the interest rate applicable to the Series A Notes
from 9.875% to 11.5% per annum.
On December 28, 2000, the Debtors announced the Bankruptcy Court's
approval of their request to exchange a sufficient amount of debt and related
accrued interest for equity in the form of Coram, Inc. Series A Cumulative
Preferred Stock in order to maintain compliance with the physician ownership and
referral provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly
referred to as "Stark II"). On December 29, 2000, the Securities Exchange
Agreement was amended ("Amendment No. 4") and an Exchange Agreement was
simultaneously executed among the Debtors and the Holders. Pursuant to such
arrangements, the Holders agreed to exchange approximately $97.7 million
aggregate principal amount of the Series A Notes and $11.6 million of aggregate
unpaid accrued contractual interest on the Series A Notes and the Series B Notes
as of December 29, 2000 for 905 shares of Coram, Inc. Series A Cumulative
Preferred Stock (see Note 11 for further details regarding the preferred stock).
Following the exchange, the Holders retain approximately $61.2 million aggregate
principal amount of the Series A Notes and $92.1 million aggregate principal
amount of the Series B Notes. Pursuant to Amendment No. 4, the per annum
interest rate on both the Series A Notes and the Series B Notes has been
adjusted to 9.0%. Moreover, the Series A Notes' and Series B Notes' original
scheduled maturity dates of May 2001 and April 2008, respectively, have both
been modified to June 30, 2001. Due to the Holders receipt of consideration with
a fair value less than the face value of the exchanged principal and accrued
interest, the exchange transactions qualified as a troubled debt restructuring
pursuant to Statement of Financial Accounting Standards No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructurings" ("SFAS No. 15"). In
connection therewith, the company recognized an extraordinary gain of
approximately $107.8 million, net of tax, in the accompanying Consolidated
Statements of Income.
The Securities Exchange Agreement, pursuant to which the Series A Notes
and the Series B Notes were issued, contains customary covenants and events of
default. Upon the Debtors' Chapter 11 bankruptcy filings, the company was in
violation of certain covenants and conditions thereunder; however, such
bankruptcy proceedings have stayed any remedial actions by either the Debtors or
the Holders. Additionally, the company was not in compliance with other
covenants relating to certain contractual relationships its wholly-owned
Resource Network Subsidiaries had with certain parties that were contracted to
provide services pursuant to the Aetna Master Agreement, effective May 1, 1998,
and to other covenants relating to the capitalization of subsidiaries. The
company received waivers from its lenders regarding such events of
noncompliance. The voluntary filing of Chapter 11 bankruptcy petitions by the
Resource Network Subsidiaries caused further defaults under the Securities
Exchange Agreement; however, such defaults were waived by the Holders. In
connection with these waivers and the waivers provided for certain matters of
noncompliance under the Senior Credit Facility, the company and the Holders
entered into an amendment on November 15, 1999 pursuant to which the Holders
agreed that no interest on the Series A Notes and the Series B Notes would be
due for the period from November 15, 1999 through the earlier of (i) final
resolution of the litigation with Aetna or (ii) May 15, 2000. The Aetna
litigation was settled on April 20, 2000 and, as a result, the obligation to pay
interest on the Series A Notes and the Series B Notes resumed on such date.
However, pursuant due to the Debtors' Chapter 11 bankruptcy filings, no interest
is being paid subsequent to August 8, 2000.
Management believes that at December 31, 2000, the company was in
compliance with all other covenants of the Securities Exchange Agreement. There
can be no assurance as to whether further covenant violations or defaults will
occur in future periods and whether any necessary waivers would be granted.
At the election of the company, the Series A Notes and the Series B Notes
are scheduled to pay interest quarterly in arrears in cash or through the
issuance of parri passu debt securities, except that Holders can require the
company to pay interest in cash if the
F-18
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
company exceeds a predetermined interest coverage ratio. Notwithstanding the
contractual terms of the Securities Exchange Agreement, no interest is being
paid subsequent to August 8, 2000 due to the Debtors' ongoing bankruptcy
proceedings. Pursuant to the troubled debt restructuring rules promulgated under
SFAS No. 15, no interest expense will be recognized in the company's
consolidated financial statements relative to the Series A Notes and the Series
B Notes through June 30, 2001.
The Series A Notes and the Series B Notes are callable, in whole or in
part, at the option of the Holders thereof in connection with any change of
control of the company (as defined in the Securities Exchange Agreement), if the
company ceases to hold and control certain interests in its significant
subsidiaries, or upon the acquisition of the company or certain of its
subsidiaries by a third party. In such instances, the notes are callable at 103%
of the then outstanding principal amount, plus accrued interest. The Series B
Notes are also redeemable at the option of the Holders thereof upon maturity of
the Series A Notes at the outstanding principal amount thereof, plus accrued
interest. In addition, the Series A Notes are redeemable at 103% of the then
outstanding principal amount, plus accrued interest at the option of the
company.
In connection with the disposition of CPS, effective July 31, 2000, the
company applied $9.5 million of the net cash proceeds derived therefrom to
prepay a portion of the principal amount outstanding under the Series A Notes.
The Holders of the Series A Notes waived the 103% prepayment premium thereby
permitting the company to reduce the then outstanding principal balance by the
full amount of the payment.
SECURED PROMISSORY NOTES. In July 1998, the company issued secured
promissory notes in the aggregate principal amount of $6.0 million to the
Holders of the Series A Notes and the Series B Notes. The promissory notes
matured on August 20, 1998 and carried an interest rate of 12.0% per annum,
payable in cash on the maturity date. In August 1998, the company paid all
amounts due thereunder.
FORMER SENIOR CREDIT FACILITY. In January 1998, the company repaid all
principal, interest and related fees, aggregating approximately $80.1 million,
due under a former senior credit facility and terminated such facility. Interest
on the former senior credit facility was based on margins over certain domestic
and foreign indices and was accruing at the annual rate of 8.94% upon repayment.
ROLLOVER NOTE. Through April 13, 1998, the Rollover Note carried an
interest rate that was based on various indices plus a margin that increased by
0.25% quarterly (16.75% upon the Rollover Note's effective cancellation date).
In connection therewith, $10.3 million was charged to interest expense for the
year ended December 31, 1998. Additionally, the fair value of the Rollover Note
Warrants was amortized over the warrants' contractual life and, accordingly, the
company charged approximately $3.2 million to interest expense for the year
ended December 31, 1998.
9. INCOME TAXES
The amount of income tax expense allocated to continuing operations,
discontinued operations and the extraordinary gain on troubled debt
restructuring are as follows (in thousands):
Years Ended December 31,
------------------------
2000 1999 1998
------ ------ ------
Continuing operations ........................... $ 250 $ 440 $2,300
Discontinued operations ......................... -- -- --
Extraordinary gain on troubled debt restructuring 400 -- --
------ ------ ------
Total income tax expense .............. $ 650 $ 440 $2,300
====== ====== ======
The components of the consolidated income tax expense attributable to
continuing operations were as follows (in thousands):
Years Ended December 31,
------------------------
2000 1999 1998
------ ------ ------
Current:
Federal .............................. $ -- $ 41 $1,750
State ................................ 250 399 550
------ ------ ------
Total Current ................ 250 440 2,300
------ ------ ------
Deferred:
Federal .............................. -- -- --
State ................................ -- -- --
------ ------ ------
Total Deferred ............... -- -- --
------ ------ ------
Income tax expense ................... $ 250 $ 440 $2,300
====== ====== ======
F-19
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table reconciles the federal statutory rate to the effective
income tax expense rate attributable to continuing operations:
Years Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
Federal statutory rate .............................. (35.0)% (35.0)% (35.0)%
Valuation allowances ................................ (18.6) 37.5 25.3
State income taxes, net of federal income tax
benefit ............................................. 8.4 (6.0) (1.8)
Goodwill ............................................ 31.2 3.7 13.2
Reorganization expenses ............................. 20.2 -- --
Other ............................................... (3.1) 0.4 10.2
----- ----- -----
Effective income tax expense rate ................... 3.1% 0.6% 11.9%
===== ===== =====
The effective income tax rates for each of the years ended December 31,
2000, 1999 and 1998 are higher than the statutory rate because the company is
not recognizing the deferred income tax benefits of the current year losses.
Furthermore, the effective income tax rate for the year ended December 31, 1998
is higher than the statutory rate because the company adjusted its estimate for
the dispute with the Internal Revenue Service, as described below.
The temporary differences, tax effected, which give rise to the company's
net deferred tax assets (liabilities) were as follows (in thousands):
December 31,
------------------------
2000 1999
--------- ---------
Deferred tax assets:
Goodwill ....................................... $ 46,096 $ 47,331
Restructuring costs ............................ 3,107 6,312
Net operating loss carryforwards ............... 62,936 84,784
AMT credit carryforwards ....................... 4,213 4,478
Allowance for notes receivable ................. -- 481
Allowance for doubtful accounts ................ 10,074 14,353
Intangible assets .............................. 3,585 3,355
Resource Network Subsidiaries' reserves ........ 6,475 9,547
Accrued interest ............................... 451 --
Accrued bonuses ................................ 6,535 903
Accrued vacation ............................... 674 719
Other accruals ................................. 2,806 1,961
Other .......................................... 1,350 1,763
--------- ---------
Total gross deferred tax assets ........ 148,302 175,987
Less valuation allowance ....................... (146,177) (174,142)
--------- ---------
Total deferred tax assets .............. 2,125 1,845
Deferred tax liabilities:
Property and equipment ......................... (2,073) (1,427)
Other .......................................... (52) (418)
--------- ---------
Total deferred tax liabilities ......... (2,125) (1,845)
--------- ---------
Net deferred tax asset (liability) ..... $ -- $ --
========= =========
Deferred tax assets have been limited to amounts expected to be recovered,
net of deferred tax liabilities that would otherwise become payable in the
carryforward period. As management believes that realization of the balance of
deferred tax assets is sufficiently uncertain at this time, they have been
wholly offset by valuation allowances at both December 31, 2000 and 1999.
As of December 31, 2000, the company had net operating loss carryforwards
("NOLs") for federal income taxes of approximately $159.3 million, which are
available to offset future federal taxable income and expire in varying amounts
in the years 2002 through 2019. This NOL balance includes approximately $42.1
million generated prior to the Four-Way Merger and such amount is subject to an
annual usage limitation of approximately $4.5 million. The ability to utilize
the full amount of the $159.3 million of NOLs is uncertain due to rules related
to changes in ownership.
As a result of the issuance of Coram, Inc. Series A Cumulative Preferred
Stock in December 2000 (see Note 11), the company effectuated a deconsolidation
of its group for federal income tax purposes. Accordingly, subsequent income tax
returns will be filed with Coram, Inc. as the parent company of the new
consolidated group and Coram Healthcare Corporation will file its own separate
income tax returns. The issuance of the preferred stock also caused an ownership
change at Coram, Inc. for federal income tax purposes. However, Coram, Inc.
currently operates as a debtor-in-possession under the jurisdiction of the
Bankruptcy Court and it meets certain other bankruptcy related conditions of the
Internal Revenue Code ("IRC"). The bankruptcy provisions of Section 382 of the
IRC impose limitations on the utilization of NOLs and other tax attributes. The
extraordinary gain on troubled debt restructuring
F-20
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
that resulted from the issuance of the Coram, Inc. Series A Cumulative Preferred
Stock is generally not subject to tax pursuant to the cancellation of debt
provisions included in IRC Section 108.
In January 1999, the Internal Revenue Service ("IRS") completed an
examination of the company's federal income tax return for the year ended
September 30, 1995 and proposed substantial adjustments to the prior tax
liabilities. The company has agreed to adjustments of $24.4 million that only
affect available NOLs. Management does not agree with the other proposed
adjustments regarding the deductibility of warrants, write-off of goodwill and
the specified liability portion of the 1995 loss which would, if the IRS
prevails, affect prior years' tax liabilities. In May 1999, the company received
a statutory notice of deficiency with respect to the proposed adjustments. The
alleged deficiency totaled approximately $12.7 million, plus interest and
penalties to be determined. The company is contesting the notice of deficiency
through administrative proceedings and litigation and will vigorously defend its
position. The most significant adjustment proposed by the IRS relates to the
ability of the company to categorize certain NOLs as specified liability losses
and offset income in prior years, for which the company has previously received
refunds in the amount of approximately $12.7 million. In August 1999, the
company filed a petition with the United States Tax Court ("Tax Court")
contesting the notice of deficiency. The IRS responded to the petition and
requested the petition be denied. The Tax Court proceeding is currently stayed
by reason of the Debtors' bankruptcy proceedings. The IRS Appeals office
currently has jurisdiction over this matter. Due to the uncertainties related to
the final resolution of these significant matters, the company's consolidated
financial statements include a reserve for such potential liabilities. No
assurances can be given that the company will prevail given the early phase of
this matter and the uncertainties inherent in any proceedings with the IRS or
related litigation. If the company does not prevail with respect to the proposed
material adjustments, the financial position and liquidity of the company could
be materially adversely affected.
10. RELATED PARTY TRANSACTIONS
In 1997, the company's Board of Directors approved a contingent bonus to
Donald J. Amaral, former Chairman and Chief Executive Officer and current
Director. Under the agreement, subject to certain material terms and conditions,
Mr. Amaral was paid $1.0 million following the successful refinancing of the
company's debt. In connection therewith, the company recorded a $1.0 million
expense for the bonus in 1998 and paid $0.5 million in 1998 and $0.5 million in
the first quarter of 1999.
A director of the company also served on the Board of Directors of
Sabratek Corporation ("Sabratek") from October 1992 through August 23, 1999. In
1997, the company purchased from Sabratek approximately $11.5 million in
multi-therapy infusion pumps and $4.3 million in related equipment and supplies.
In 1999 and 1998, the company purchased equipment and supplies aggregating
approximately $2.8 and $7.8 million, respectively, from Sabratek. Sabratek filed
for Chapter 11 bankruptcy protection on December 17, 1999 and, in connection
therewith, Coram filed a $1.3 million proof of claim in Sabratek's bankruptcy
proceedings for vendor rebates earned but not paid. In January 2000, the assets
and certain liabilities of Sabratek's Device Business were acquired by Baxter
Healthcare Corporation ("Baxter"). Baxter subsequently filed a proof claim of
approximately $0.3 million in the Debtors' bankruptcy proceedings for products
purchased from Sabratek. Management is currently evaluating the validity of
Baxter's proof of claim. No assurances can be given regarding the recoverability
of the company's proof of claim against Sabratek. Notwithstanding the separate
proofs of claim filings, Baxter and the company have an ongoing amicable
business relationship involving drugs, supplies and pumps sold by Baxter to the
company.
The company's current Chairman, Chief Executive Officer and President,
Daniel D. Crowley, owns a consulting company from which the company purchased
services. For the years ended December 31, 2000 and 1999, the company paid
approximately $0.7 million and $0.2 million, respectively, to Mr. Crowley's
consulting company for consulting services and reimbursable expenses. Subsequent
to December 31, 2000 and through April 9, 2001, approximately $0.1 million was
further paid to Mr. Crowley's company for overhead costs of Dynamic Healthcare
Solutions, LLC's Sacramento, California location that are directly attributable
to the duties that Mr. Crowley performed on behalf of Coram in 2001. The terms
and conditions of the underlying consulting agreement were approved by the
company's Board of Directors.
Effective August 2, 2000, the company's Board of Directors approved a
contingent bonus to Mr. Crowley. Under the agreement, subject to certain
material terms and conditions, Mr. Crowley is to be paid $1.8 million following
the successful refinancing of the company's debt. In connection therewith and
the debt to preferred stock exchange discussed in Notes 3 and 8, the company
recorded a $1.8 million reorganization expense for the success bonus in 2000.
Such success bonus will not be payable until such time as the Debtors' or
another interested party's amended plan of reorganization is fully approved by
the Bankruptcy Court.
Effective August 1, 1999, Mr. Crowley and Cerberus Capital Management,
L.P. (an affiliate of Cerberus Partners, L.P. ("Cerberus"), a party to the
company's debtor-in-possession financing agreement, Senior Credit Facility and
Securities Exchange
F-21
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Agreement), executed an employment agreement whereby Mr. Crowley is paid
approximately $1 million per annum plus the potential of performance related
bonus opportunities, equity options and fringe benefits. The services
rendered by Mr. Crowley include, but are not limited to, providing business
and strategic healthcare investment advice to executive management at
Cerberus and its affiliates. Moreover, Mr. Crowley is the Chairman of the
Board of Directors of Winterland Productions, Inc. ("Winterland"), a
privately held affinity merchandise company in which an interest is owned by
an affiliate of Cerberus. On January 2, 2001, Winterland voluntarily filed
for protection under Chapter 11 of the United States Bankruptcy Code in the
Northern District of California.
11. MINORITY INTERESTS
The following summarizes the minority interests in consolidated joint
ventures and preferred stock issued by a subsidiary (in thousands):
December, 31,
2000 1999
------ ------
Series A Cumulative Preferred Stock of Coram, Inc. ....... $5,522 $ --
Majority-owned companies ................................. 456 1,652
------ ------
Total minority interests ................................. $5,978 $1,652
====== ======
On December 29, 2000, Coram, Inc. ("CI"), a wholly-owned subsidiary of
Coram Healthcare Corporation, executed the Exchange Agreement with the Holders
of CI's Securities Exchange Agreement (see Note 8 for further details) to
exchange approximately $97.7 million of the Series A Notes and approximately
$11.6 million of accrued but unpaid interest on the Series A Notes and Series B
Notes in exchange for 905 shares of CI Series A Cumulative Preferred Stock,
$0.001 par value per share, having an aggregate liquidation preference of
approximately $109.3 million (hereinafter referred to as the "Preferred Stock").
The Preferred Stock was issued to the Holders on a pro rata basis. Through an
independent valuation, it was determined that the Preferred Stock had a fair
value of approximately $6.1 million and such amount, offset by certain legal and
other closing costs, net to approximately $5.5 million at December 31, 2000.
The authorized CI Preferred Stock consists of 10,000 shares, and the only
shares issued and outstanding at December 31, 2000 are those pursuant to the
Exchange Agreement. So long as any shares of the Preferred Stock are
outstanding, the Holders are entitled to receive preferential dividends at a
rate of 15% per annum on the liquidation preference amount. Dividends are
payable on a quarterly basis on the last business day of each calendar quarter.
Prior to the effective date of the Debtors' plan of reorganization, dividends
are to be paid in the form of additional shares of Preferred Stock having a
liquidation preference amount equal to such dividend amount. Subsequent to the
effective date of a plan of reorganization, at CI's election, dividends will be
payable in cash or shares of common stock of CI having a fair value equal to
such cash dividend payment, as determined by a consensus of investment banking
firms acceptable to the Holders. In the event of default, the dividend rate
shall increase to 16% per annum until such time that the event of default is
cured. All dividends are to include tax indemnities and gross-up provisions as
are appropriate for transactions of this nature. In-kind dividends earned during
the quarter ended March 31, 2001 aggregated approximately 58 shares and had a
liquidation preference of approximately $7.0 million.
The agreements and bylaws underlying the Preferred Stock include usual and
customary affirmative and negative covenants for a security of this nature,
including, but not limited to (i) providing timely access to certain financial
and business information; (ii) authorization to communicate with independent
certified public accountants with respect to the financial conditions and other
affairs of the company; (iii) maintaining tax compliance; (iv) maintaining
adequate insurance coverage; (v) adherence to limitations on transactions with
affiliates; (vi) adherence to limitations on acquisitions or investments; (vii)
adherence to limitations on the liquidation of assets or businesses; and (viii)
adherence to limitations on entering into additional indebtedness.
Subsequent to the effective date of the Debtors' plan of reorganization,
each share of Preferred Stock will be entitled to one vote and shall vote
together with the shares of CI's common stock on all matters submitted to a vote
of stockholders. The Preferred Stock would have had 47.5% of CI's total voting
power on December 31, 2000; however, such voting rights are temporarily
suspended during the Debtors' bankruptcy proceedings. Subsequent to the
effective date of a plan of reorganization, the Holders will have the right to
appoint three directors out of a total of seven directors to CI's Board of
Directors, and a quorum in meetings of the Board of Directors shall be
constituted by the presence of a majority of the members, at least two of whom
must be directors appointed by the Holders. During the pendency of CI's
bankruptcy proceedings, the Holders have the right to appoint two directors to
CI's Board of
F-22
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Directors. Alternatively, if no Board of Directors representation is elected by
the Holders, they retain the right to appoint one observer.
The Preferred Stock is redeemable at the option of CI, in whole or in
part, at any time, on not less than thirty days prior written notice, at the
liquidation preference amount plus any accrued but unpaid dividends. Redemption
may be made in the form of cash payments only. As of April 2, 2001, the
aggregate Preferred Stock liquidation preference was approximately $116.3
million.
12. STOCK-BASED COMPENSATION
The company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations in accounting for its employee stock options as permitted under
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("Statement 123").
In connection with the Four-Way Merger, the company assumed the
outstanding obligations under the various stock option and stock purchase plans
of the Merged Entities. No further options will be granted under these plans,
unless so determined by the company's Board of Directors. In addition, the
company implemented the 1994 Coram Healthcare Corporation Stock Option/Stock
Issuance Plan (the "1994 Plan") and the Coram Employee Stock Purchase Plan (the
"Purchase Plan"). During 1997, the Purchase Plan was amended to increase the
number of common shares issuable from 0.3 million to 1.0 million. The Purchase
Plan was re-activated in January 1998 after a suspension in the fourth quarter
of 1996. The Purchase Plan was re-suspended in December 1999. As of December 31,
2000, 0.4 million common shares are reserved for future issuance under the
Purchase Plan.
The 1994 Plan contains three separate incentive programs which provide for
the granting of stock options to certain officers, key employees, consultants
and non-employee members of the company's Board of Directors. Coram's 1994 Plan
has authorized the grant of options for up to 10.0 million shares of the
company's common stock. Options granted under the 1994 Plan may constitute
either incentive stock options, non-statutory options or stock appreciation
rights based on the type of incentive program utilized. For each of the
incentive programs, options may be granted at exercise prices ranging from 85%
to 100% of the fair market value of the company's stock at the date of grant.
All options granted expire ten years from the date of grant and become
exercisable at varying dates depending upon the incentive program utilized. The
1994 Plan is administered by a committee of the Board of Directors, which has
the authority to determine the employees to whom awards will be made and the
incentive program to be utilized.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by Statement 123, and has been determined as if the company
had accounted for its employee stock options granted subsequent to December 31,
1994 under the fair value method of that accounting pronouncement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
multiple option pricing model with the following assumptions for 2000, 1999, and
1998, respectively: risk free interest rates ranging from 6.42% to 6.59%, 5.28%
to 6.03%, and 4.38% to 5.59%. Volatility factors of the expected market price of
the company's common stock ranges from 1.0 to 2.0 in 2000 and is equal to 0.95
for 1999 and 0.62 for 1998. For each year presented herein, the expected lives
of the options are one year past vesting and the dividend yield is 0%.
The Black-Scholes option valuation model was developed for use in
estimating the 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 employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
compensation expense associated with an award is recognized over the vesting
period, the impact on pro forma net income (loss) disclosed below may not be
representative of compensation expense in future pro forma years. The company's
pro forma information is as follows (in thousands, except for earnings per share
information):
Years Ended December 31,
-------------------------------
2000 1999 1998
------- -------- --------
Pro forma loss from continuing operations .... $(8,947) $(70,295) $(24,256)
Pro forma loss from continuing operations
per common share (basic and diluted) ....... $ (0.18) $ (1.42) $ (0.50)
F-23
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the company's stock option activity and related information
for the years ended December 31 is as follows (in thousands, except per share
amounts):
2000 1999 1998
------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- --------- ------- --------- ------- ---------
Outstanding--beginning of year ... 9,904 $2.42 9,221 $2.77 7,561 $3.39
Granted:
Price equal to fair value ... 1,133 0.59 3,302 1.41 3,119 2.18
Exercised ................... -- -- -- -- (1) 2.63
Forfeited ................... (3,696) 2.33 (2,619) 2.41 (1,458) 4.65
------ ------ ------
Outstanding--end of year ......... 7,341 2.18 9,904 2.42 9,221 2.77
====== ====== ======
Exercisable at end of year ....... 4,924 5,669 4,601
====== ====== ======
Weighted-average fair value of
options granted during the year:
Price equal to fair value ...... $ 0.42 $ 0.91 $ 1.05
====== ====== ======
Exercise prices for options outstanding and the weighted-average remaining
contractual life of those options at December 31, 2000 are as follows (in
thousands, except per share amounts):
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
$ 0.33 - $ 0.69 .... 802,500 9.15 $ 0.59 1,562 $ 0.63
$ 0.75 - $ 0.75 .... 1,000,000 8.91 $ 0.75 333,333 $ 0.75
$ 0.81 - $ 1.69 .... 738,187 8.57 $ 1.08 303,164 $ 1.19
$ 2.00 - $ 2.25 .... 1,128,421 7.82 $ 2.16 657,827 $ 2.17
$ 2.38 - $ 2.50 .... 345,373 6.51 $ 2.48 312,708 $ 2.49
$ 2.63 - $ 2.63 .... 962,405 5.36 $ 2.63 962,405 $ 2.63
$ 3.13 - $ 3.13 .... 91,666 6.96 $ 3.13 91,666 $ 3.13
$ 3.40 - $ 3.40 .... 2,200,000 4.78 $ 3.40 2,200,000 $ 3.40
$ 4.38 - $20.58 .... 72,222 6.28 $ 5.62 60,968 $ 5.75
$24.02 - $24.02 .... 33 0.77 $24.02 33 $24.02
--------- ---------
$0.33 - $24.02 .... 7,340,807 6.87 $ 2.18 4,923,666 $ 2.73
========= =========
Common shares reserved for future issuance include approximately 1.0
million shares related to options outside of the 1994 Plan. Warrants issued
pursuant to the Former Senior Credit Facility to purchase 1.4 million shares of
common stock at a nominal exercise price expired in October 2000. Warrants
issued by the Merged Entities prior to the Four-Way-Merger to purchase 33,525
shares of common stock with an exercise price of $18.79 expired in March, 2001.
Additional warrants issued prior to the Four-Way-Merger to purchase 1,193 shares
of common stock for $12.58 per share are still outstanding and have no
expiration date. Warrants issued pursuant to the New Senior Credit Facility for
the purchase of 1.9 million shares of common stock at an exercise price of $0.01
per share expired in February 2001 (see Note 8 for further details).
The Debtors' Restated Joint Plan, if approved, would have effectively
eliminated all options and warrants to purchase CHC stock because CHC would be
dissolved as soon as practicable after the effective date of the plan and all
equity interests in CHC would be completely eliminated. Another plan put forth
by the Debtors' management or other interested parties may have a similar
effect, however, appropriate approvals thereof in accordance with the Bankruptcy
Code would be required (see Note 3).
13. COMMITMENTS AND CONTINGENCIES
LEASES. The company leases office and other operating space and equipment
under various operating and capital leases. The leases provide for monthly
rental payments, including real estate taxes and other operating costs. Total
rental expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $10.3 million, $12.2 million and $11.6 million, respectively,
exclusive of amounts charged to restructuring reserves. At December 31, 2000 the
aggregate future minimum lease commitments were as follows (in thousands):
F-24
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Years Ending Capital Operating
December 31, Leases Leases
----------------------------------------- ------- --------
2001 .................................... $ 158 $ 9,890
2002 .................................... 11 7,901
2003 .................................... 11 7,044
2004 .................................... 6 5,188
2005 .................................... -- 3,445
Thereafter .............................. -- 1,006
------- -------
Total minimum lease payments ...... 186 34,474
Less amounts representing interest ...... (13) --
------- -------
Net minimum lease payments .............. $ 173 $34,474
======= =======
Capital lease obligations are included in other debt obligations (see Note
8). Operating lease obligations are net of sublease rentals. Operating lease
obligations include $3.0 million, less $1.0 million of sublease rentals, accrued
as part of the restructuring costs under the Caremark Business Consolidation
Plan and the Coram Restructure Plan. Certain operating leases of the company
provide for standard escalations of lease payments as the lessors' maintenance
costs and taxes increase. As a result of the Debtors' Chapter 11 bankruptcy
proceedings, certain lease agreements are subject to automatic stay provisions,
which preclude the parties under such agreements from taking remedial action in
response to any defaults. Moreover, no amounts are included in the table above
for lease rejections that have been approved by the Bankruptcy Court (see Note
3).
EMPLOYEE BENEFIT PLANS. The Merged Entities provided various defined
contribution plans that were available to their employees. Management merged
these benefit plans in 1995. Eligible employees include individuals over the age
of 21 who have completed six months of benefit-eligible service with the
company. Through September 30, 1999, the company offered a matching contribution
of 50% of the first 6% of the employee's eligible salary. Effective October 1,
1999, Coram amended its defined contribution benefit plan to make the employer
match discretionary and, in connection therewith, no matching contributions have
been made since the plan amendment date. All matching contributions have been in
the form of CHC common stock. Employee contributions vest immediately and the
company's matching contributions vest over a five year period. During the years
ended December 31, 1999 and 1998, the company's matching contributions to the
plan were approximately $1.3 million and $2.0 million, respectively.
LITIGATION
BANKRUPTCY PROCEEDINGS. On August 8, 2000, the Debtors filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court for the District of Delaware, In Re: Coram
Healthcare Corporation and Coram, Inc., Case Nos. 00-3299 (MFW) and 00-3300
(MFW) (collectively the "Chapter 11 Cases"), respectively. The proceedings have
been consolidated for administrative purposes only by the United States
Bankruptcy Court in Delaware and are being administered under the docket of In
Re: Coram Healthcare Corporation, Case No. 00-3299 (MFW). None of the Debtors'
other subsidiaries are a debtor in the proceeding. See Note 3 for further
details.
Except as may otherwise be determined by the Bankruptcy Court overseeing
the Chapter 11 Cases, the protection afforded by Chapter 11 generally
automatically stays any litigation proceedings pending against either or both of
the Debtors. All such claims will be addressed through the proceedings
applicable to the Chapter 11 Cases. The automatic stay would not, however, apply
to actions brought against the company's non-debtor subsidiaries.
OFFICIAL COMMITTEE OF THE EQUITY SECURITY HOLDERS' MATTERS. A committee of
persons claiming to own shares of the company's publicly-traded common stock
(the "Equity Committee") objected to the Restated Joint Plan of reorganization,
contending, among other things, that the company valuation upon which the
Restated Joint Plan of reorganization was premised and the underlying
projections and assumptions were flawed. On December 21, 2000, the Bankruptcy
Court determined not to confirm the Restated Joint Plan. The company and the
Equity Committee are involved in a review of certain company information
regarding, among other things, the Equity Committee's contentions. Additionally,
the Equity Committee filed a motion with the Bankruptcy Court seeking permission
to bring a derivative lawsuit directly against the company's Chief Executive
Officer, a former member of the Board of Directors and Cerberus Partners, L.P.
(a party to the company's debtor-in-possession financing agreement, Senior
Credit Facility and Securities Exchange Agreement). The Equity Committee's
lawsuit alleges a collusive plan whereby the named parties conspired to devalue
the company for the benefit of the company's creditors under the Securities
Exchange Agreement. On February 26, 2001, the Bankruptcy Court ruled that the
Equity Committee's motion would not be productive at that time and, accordingly,
the motion to proceed with the lawsuit was denied without prejudice.
Management cannot predict whether any future objections of the Equity
Committee will be forthcoming or if they would prevent confirmation of a plan of
reorganization, if any, set forth by the Debtors' management. Management also
cannot predict if any other actions of the Equity Committee will have adverse
consequences to the company.
F-25
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RESOURCE NETWORK SUBSIDIARIES' BANKRUPTCY. On November 12, 1999, the
Resource Network Subsidiaries filed voluntary petitions under Chapter 11 of the
United States Code in the United States Bankruptcy Court for the District of
Delaware, Case No. 99-2889 (MFW). On August 19, 1999, a small group of parties
with claims against the Resource Network Subsidiaries filed an involuntary
bankruptcy petition under Chapter 11 against Coram Resource Network, Inc. in the
United States Bankruptcy Court for the District of Delaware. The two proceedings
were consolidated by stipulation of the parties and the case is pending under
the style, IN RE CORAM RESOURCE NETWORK, INC. AND CORAM INDEPENDENT PRACTICE
ASSOCIATION, INC., Case No. 99-2889 (MFW). The Resource Network Subsidiaries are
now being liquidated pursuant to the proceedings. The Chief Restructuring
Officer of the Resource Network Subsidiaries had threatened suit on behalf of
the estates against Coram Healthcare Corporation ("CHC"). The draft complaint
included claims for damages against CHC and certain of its former and current
officers and directors in excess of $41 million. The draft complaint included a
threat to pierce the corporate veil of the Resource Network Subsidiaries to
reach CHC and included claims of breaches by the officers and directors of their
fiduciary duties to the Resource Network Subsidiaries and CHC.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtor's Chapter 11 proceedings seeking, among other things, to have the two
separate bankruptcy proceedings substantively consolidated into one proceeding.
If granted, the Chapter 11 proceedings involving the Resource Network
Subsidiaries and the Chapter 11 proceedings involving the Debtors would have
been combined such that the assets and liabilities of the Resource Network
Subsidiaries would be joined with the assets and liabilities of the Debtors, the
liabilities of the combined entity would be satisfied from their combined funds
and all intercompany claims would be eliminated. Furthermore, the creditors of
both proceedings would have voted on any reorganization plan for the combined
entities. The Resource Network Subsidiaries and the Debtors engaged in discovery
related to this substantive consolidation motion and, in connection therewith,
the parties reached a settlement agreement in November 2000. The settlement
agreement was approved by the Bankruptcy Court in December 2000 and the Debtors
made a payment of $0.5 million to the Resource Network Subsidiaries in January
2001.
Notwithstanding the withdrawal of the substantive consolidation motion,
the Resource Network Subsidiaries still maintain a proof of claim in excess of
$41 million against CHC's estate and the company maintains a reciprocal claim of
approximately the same amount against the Resource Network Subsidiaries' estate.
The ultimate outcome of these claims cannot be predicted with any degree of
certainty but management, in consultation with legal counsel, does not believe
that the final resolution of this matter or other matters raised by the Resource
Network Subsidiaries' Chief Restructuring Officer will have a material adverse
impact on the company's financial position or results of operations.
AETNA U.S. HEALTHCARE, INC. On June 30, 1999, the company filed a
complaint (the "Coram Complaint") against Aetna in the United States District
Court for the Eastern District of Pennsylvania setting forth claims against
Aetna for fraud, misrepresentation, breach of contract and rescission relating
to the Master Agreement between the parties for ancillary network management
services through the Resource Network Subsidiaries. On June 30, 1999, the
company received a copy of a complaint (the "Aetna Complaint") that had been
filed by Aetna on June 29, 1999 in the Court of Common Pleas of Montgomery
County, Pennsylvania. The Aetna Complaint sought specific performance,
injunctive relief and declaratory relief to compel the company to perform under
the Master Agreement, including the payment of compensation to the healthcare
providers that had rendered and continued to render services to Aetna's health
plan members. As stated in the Aetna Complaint, Aetna disputed the company's
right to terminate the Agreement. The company removed the Aetna Complaint to
federal court. On July 20, 1999, Aetna filed a counterclaim against the company
in the federal court lawsuit brought by the company. In its counterclaim, Aetna
sued the company for, among other things, breach of the Master Agreement and
fraudulent misrepresentation, contending the company never intended to perform
under the Master Agreement, defamation, interference with contractual relations
with providers and interference with prospective contractual relations with
other companies that allegedly bid for the Master Agreement.
On April 20, 2000, the company and Aetna reached an amicable resolution to
the then outstanding disputes and, in connection therewith, all claims and
counterclaims amongst the parties were dismissed from the courts of appropriate
jurisdiction. The final resolution of these matters did not have a material
adverse effect on the company's consolidated financial position or results of
operations. The impact of this dispute resolution has been charged to
discontinued operations in the accompanying consolidated financial statements.
APRIA HEALTHCARE, INC. Apria Healthcare, Inc. and one of its affiliates,
Apria Healthcare of New York State, Inc., (collectively "Apria") filed suit
against CHC and the Resource Network Subsidiaries in the Superior Court of
Orange County, California. Apria's claims related to services that were rendered
as part of certain home health provider networks managed by the Resource Network
Subsidiaries. Apria's complaint alleged that, among other things, the Resource
Network Subsidiaries operated as the alter ego of CHC
F-26
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and, as a result, CHC should be declared responsible for the alleged breaches of
the contracts that the Resource Network Subsidiaries had with Apria. The
complaint included requests for declaratory, compensatory and other relief in
excess of $1.4 million. On February 21, 2001, the company and Apria agreed to a
"dismissal without prejudice" from the Superior Court of Orange County,
California with each party responsible for its own legal fees.
TBOB ENTERPRISES, INC. On July 17, 2000, TBOB Enterprises, Inc. ("TBOB")
filed an arbitration demand against CHC (TBOB Enterprises, Inc. f/k/a Medical
Management Services of Omaha, Inc. against Coram Healthcare Corporation, in the
American Arbitration Association office in Dallas, Texas). In its demand, TBOB
claims that the company breached its obligations under an agreement entered into
by the parties in 1996 relating to a prior earn-out obligation of the company
that originated from the acquisition of the claimant's prescription services
business in 1993 by a wholly-owned subsidiary of the company. The company
operated the business under the name Coram Prescription Services ("CPS") and the
assets of the CPS business were sold on July 31, 2000. See Note 5 for further
details. TBOB alleges, among other things, that the company has impaired the
earn-out payments due TBOB by improperly charging certain expenses to the CPS
business and failing to fulfill the company's commitments to enhance the value
of CPS by marketing its services. The TBOB demand alleges damages of more than
$0.9 million. TBOB contends that this amount must be paid in addition to the
final scheduled earn-out payment of approximately $1.3 million that was due in
March 2001. TBOB reiterated its monetary demand through a proof of claim filed
against CHC's estate for the aggregate amount of approximately $2.2 million (the
scheduled earn-out payment plus the alleged damages). The company received a
copy of a letter from TBOB to the American Arbitration Association in which it
is attempting to obtain a refund of the filing fees that TBOB paid in connection
with the arbitration proceeding because the final $1.3 million earn-out payment
that was scheduled for March 2001 and the alleged damages of $0.9 million have
been stayed by operation of the Bankruptcy Code. In February 2001, TBOB withdrew
its arbitration claim due to the ongoing bankruptcy proceedings. Management does
not believe that final resolution of this matter will have a material adverse
impact on the company's financial position or results of operations.
INTERNAL REVENUE SERVICE EXAMINATION. CHC is contesting a notice of
deficiency issued by the Internal Revenue Service through administrative
proceedings and litigation. See Note 9 for further details.
ALAN FURST ET. AL. V. STEPHEN FEINBERG, ET. AL. A complaint was filed
in the United States District Court for the Third District of New Jersey on
November 8, 2000 and an Amended Class Action Complaint was filed on November
15, 2000, alleging that certain current and former officers and directors of
the company and the company's principal lenders, Cerberus Partners, L.P.,
Foothill Capital Corporation and Goldman Sachs & Co., implemented a scheme to
perpetrate a fraud upon the stock market regarding the common stock of CHC. A
second Amended Class Action Complaint was filed on March 21, 2001, which
removed all of the officers and directors of the company as defendants,
except the company's Chief Executive Officer and another current member or
the Board of Directors. Plaintiffs allege that the defendants artificially
depressed the trading price of the company's publicly traded shares and
created the false impression that stockholders' equity was decreasing in
value and was ultimately worthless. Plaintiffs further allege that members of
the class sustained total investment losses of $50 million or more. The
company notified its insurance carrier and intends to avail itself of any
appropriate insurance coverage for its directors and officers who are
vigorously contesting the allegations. Because of the recent nature of this
case, the company cannot predict its outcome nor can it predict the scope and
nature of any indemnification that the directors and officers may have with
the company's insurance carrier.
GENERAL. Management of the company and its subsidiaries intends to
vigorously defend the company in the matters described above. Nevertheless, due
to the uncertainties inherent in litigation, including possible indemnification
against other parties, the ultimate disposition of such matters cannot presently
be determined. Adverse outcomes in some or all of the proceedings could have a
material adverse effect on the financial position, results of operations and
liquidity of the company.
The company and its subsidiaries are also parties to various other legal
actions arising out of the normal course of their businesses, including employee
claims, reviews of cost reports submitted to Medicare and examinations by
regulators such as Medicare and Medicaid fiscal intermediaries and the Health
Care Financing Administration. Management believes that the ultimate resolution
of such other actions will not have a material adverse effect on the financial
position, results of operations or liquidity of the company.
PRICEWATERHOUSECOOPERS. On July 7, 1997, the company filed suit against
Price Waterhouse LLP (now known as PricewaterhouseCoopers) in the Superior Court
of San Francisco, California, seeking damages in excess of $165.0 million. As
part of the settlement that resolved a case filed by the company against
Caremark International, Inc. and Caremark, Inc. (collectively "Caremark"),
Caremark assigned and transferred to the company all of Caremark's claims and
causes of action against Caremark's independent auditors,
PricewaterhouseCoopers, related to the lawsuit filed by the company against
Caremark. This assignment of
F-27
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
claims includes claims for damages sustained by Caremark in defending and
settling its lawsuit with the company. The case was dismissed from the
California court because of inconvenience to witnesses with a right to re-file
in Illinois. The company re-filed the lawsuit in state court in Illinois and
PricewaterhouseCoopers filed a motion to dismiss the company's lawsuit on
several grounds, but their motion was denied on March 15, 1999.
PricewaterhouseCoopers filed an additional motion to dismiss the lawsuit in May
1999, and that motion was dismissed on January 28, 2000. The lawsuit is
currently in the discovery stage and a trial is scheduled to commence after June
22, 2002. There can be no assurance of any recovery from PricewaterhouseCoopers.
GOVERNMENT REGULATION. Under the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly
referred to as "Stark II"), it is unlawful for a physician to refer patients
for certain designated health services reimbursable under the Medicare or
Medicaid programs to an entity with which the physician has a financial
relationship, unless the financial relationship fits within an exception
enumerated in Stark II or regulations promulgated thereunder. A "financial
relationship" under Stark II is defined broadly as an ownership or investment
interest in, or any type of compensation arrangement in which remuneration
flows between the physician and the provider. The company has financial
relationships with physicians and physician owned entities in the form of
medical director agreements and service agreements pursuant to which the
company provides pharmacy products. In each case, the relationship has been
structured, based upon advice of legal counsel, using an arrangement
management believes to be consistent with the applicable exceptions set forth
in Stark II.
In addition, the company is aware of certain referring physicians that
have had financial interests in the company through ownership of shares of the
company's common stock. The Stark II law includes an exception for the ownership
of publicly traded stock in companies with equity above certain levels. This
exception of Stark II requires the issuing company to have stockholders' equity
of at least $75 million either as of the end of its most recent fiscal year or
on average over the last three fiscal years. Due principally to the
extraordinary gain on troubled debt restructuring (see Note 8) and the
disposition of CPS (see Note 5), at December 31, 2000 the company's
stockholders' equity was above the required level. However, in light of the
company's recurring operational losses during each of the years in the three
year period ended December 31, 2000, management's ability to maintain an
appropriate level of stockholders' equity cannot be reasonably assured. The
penalties for failure to comply with Stark II include civil penalties that could
be imposed upon the company or the referring physician, regardless of whether
either the physician or the company intended to violate the law.
Management has been advised by counsel that a company whose stock is
publicly traded has, as a practical matter, no reliable way to implement and
maintain an effective compliance plan for addressing the requirements of Stark
II other than complying with the public company exception. Accordingly, if the
company's common stock remains publicly traded and its stockholders' equity
falls below the required levels, the company would be forced to cease accepting
referrals of patients with government-sponsored benefit programs or run a
significant risk of noncompliance with Stark II. Because referrals of the
company's patients with government-sponsored benefit programs comprise
approximately 23% of the company's consolidated net revenue (excluding CPS) for
the year ended December 31, 2000, discontinuing the acceptance of patients with
government-sponsored benefit programs would have a material adverse effect on
the financial condition, results of operations and cash flows of the company.
Additionally, ceasing to accept such referrals could materially adversely affect
the company's business reputation in the market as it may cause the company to
be a less attractive provider to which a physician could refer his or her
patients. The company previously requested a Stark II waiver from the Healthcare
Financing Administration, but such waiver request was denied.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments included in the company's current assets and
current liabilities (excluding the current portion of long-term debt and
liabilities subject to compromise) are reflected in the financial statements at
amounts approximating their fair value due to their short-term nature.
The company's ability to borrow is limited. At December 31, 2000 and 1999,
total long-term debt, including current maturities, had a carrying value of
approximately $153.6 million and $303.1 million, respectively. At December 31,
2000, as a result of the Debtors' Chapter 11 filings under the United States
Bankruptcy Code and in accordance with the provisions of SOP 90-7, the company's
$61.2 million of Series A Notes and $92.1 million of Series B Notes are
classified as liabilities subject to compromise in the Consolidated Balance
Sheets. See Notes 3 and 8 for further details. At December 31, 1999, management
estimated that the fair value of the company's long-term debt obligations
approximated their carrying value based on their interest rates, covenants and
remaining terms to maturity. As of December 31, 2000, due to the commencement of
the Chapter 11 bankruptcy proceedings and the absence of an approved plan of
reorganization, the fair value of the company's long-term debt cannot be
reasonably estimated.
F-28
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Considerable judgment is required in developing estimates of fair value
and the information furnished above is not meant to be indicative of what such
debt could be settled for.
15. QUARTERLY RESULTS (in thousands, except per share data) (unaudited)
The 1999, and 1998 quarterly results have been restated from the amounts
previously reported by the company on Form 10-Q for consistent presentation with
the fourth quarter of 1999 presentation to reflect the R-Net division as
Discontinued Operations.
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Year Ended December 31, 2000
Net revenue ......................................................... $ 96,934 $ 102,866 $ 130,224 $ 134,796
========= ========= ========= =========
Gross profit ........................................................ $ 27,669 $ 27,199 $ 34,155 $ 34,141
========= ========= ========= =========
Income (loss) from continuing operations before extraordinary gain on
troubled debt restructuring ....................................... $ (12,238) $ 9,200 $ (3,864) $ (1,489)
Income (loss) from discontinued operations .......................... 2,495 324 (98) (3,383)
Extraordinary gain on troubled debt restructuring, net of tax ....... 107,772 -- -- --
--------- --------- --------- ---------
Net income (loss) ................................................... $ 98,029 $ 9,524 $ (3,962) $ (4,872)
========= ========= ========= =========
Earnings (Loss) Per Share:
Basic:
Income (loss) from continuing operations ......................... $ (0.25) $ 0.18 $ (0.08) $ (0.03)
Income (loss) from discontinued operations ....................... 0.05 0.01 -- (0.07)
Extraordinary gain on troubled debt restructuring, net of tax..... 2.17 -- -- --
--------- --------- --------- ---------
Net income (loss) ................................................ $ 1.97 $ 0.19 $ (0.08) $ (0.10)
========= ========= ========= =========
Diluted:
Income (loss) from continuing operations ......................... $ (0.25) $ 0.17 $ (0.08) $ (0.03)
Income (loss) from discontinued operations ....................... 0.05 0.01 -- (0.07)
Extraordinary gain on troubled debt restructuring, net of tax .... 2.17 -- -- --
--------- --------- --------- ---------
Net income (loss) ................................................ $ 1.97 $ 0.18 $ (0.08) $ (0.10)
========= ========= ========= =========
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Year Ended December 31, 1999
Net revenue ......................................................... $ 134,338 $ 132,939 $ 129,571 $ 124,348
========= ========= ========= =========
Gross profit ........................................................ $ 25,700 $ 30,569 $ 28,421 $ 27,628
========= ========= ========= =========
Loss from continuing operations ..................................... $ (45,530) $ (7,210) $ (10,152) $ (5,902)
Income (loss) from discontinued operations .......................... (15,748) (7,957) (27,841) 5,517
--------- --------- --------- ---------
Net loss ............................................................ $ (61,278) $ (15,167) $ (37,993) $ (385)
========= ========= ========= =========
Earnings per share:
Basic and Diluted
Loss from continuing operations .................................. $ (0.91) $ (0.15) $ (0.21) $ (0.12)
Income (loss) from discontinued operations ....................... (0.32) (0.16) (0.56) 0.11
--------- --------- --------- ---------
Net loss ......................................................... $ (1.23) $ (0.31) $ (0.77) $ (0.01)
========= ========= ========= =========
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Year Ended December 31, 1998
Net revenue ......................................................... $ 127,710 $ 113,933 $ 105,552 $ 97,917
========= ========= ========= =========
Gross profit ........................................................ $ 35,028 $ 29,411 $ 27,706 $ 26,231
========= ========= ========= =========
Loss from continuing operations ..................................... $ (71) $ (3,621) $ (3,781) $ (14,114)
Income (loss) from discontinued operations .......................... 877 772 (747) (1,010)
--------- --------- --------- ---------
Net income (loss) ................................................... $ 806 $ (2,849) $ (4,528) $ (15,124)
========= ========= ========= =========
Earnings per share:
Basic and Diluted
Income (loss) from continuing operations ......................... $ -- $ (0.07) $ (0.08) $ (0.29)
Income (loss) from discontinued operations ....................... 0.02 0.02 (0.02) (0.02)
--------- --------- --------- ---------
Net income (loss) ................................................ $ 0.02 $ (0.05) $ (0.10) $ (0.31)
========= ========= ========= =========
In 1998, unusual or infrequently occurring charges in the fourth quarter
included the reversal of $3.9 million of restructuring reserves. In fourth
quarter of 1999, Coram initiated three restructuring plans and charged $5.8
million to continuing operations as restructuring charges. Coram also recognized
an impairment of goodwill and other long-lived assets of $9.1 million in 1999.
In the fourth quarter of 2000, Coram recognized an impairment of goodwill
and other long-lived assets of $8.3 million, a success bonus accrual of $1.8
million (reorganization expense), a recovery of a non-operating receivable of
approximately $2.0 million (other income), life insurance proceeds of $1.0
million (other income), an escrow deposit receivable reserve of approximately
$0.7 million
F-29
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(other expense) and an extraordinary gain on troubled debt restructuring of
approximately $107.8 million, net of tax. In addition, in the fourth quarter's
discontinued operations, Coram recognized $1.3 million in facility cost reserve
reductions as a result of the Debtors' bankruptcy proceedings and $0.8 million
in legal and professional fee reserve reductions due to changes in the estimated
amounts necessary to complete the Resource Network Subsidiaries' Chapter 11
bankruptcy proceedings. See Notes 2, 4, 8 and 11 for further details.
16. INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS
Management regularly evaluates the operating performance of the company by
reviewing results on a product or service basis. The company's reportable
segments are Infusion and CPS. Infusion is the company's base business, which
derives its revenue primarily from alternate site infusion therapy and related
services (including non-intravenous home health products such as durable medical
equipment and respiratory therapy services). CPS, which was divested by the
company on July 31, 2000, primarily provided specialty mail-order pharmacy and
pharmacy benefit management services. The other non-reportable segment
principally represents centralized management, administration and clinical
support for clinical research trials.
Management uses earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA") for purposes of performance
measurement. For the year ended December 31, 2000, corporate costs were
allocated on a revenue basis. For the years ended December 31, 1999 and 1998,
EBITDA has been reclassified to conform to the 2000 presentation. EBITDA
excludes reorganization expenses and merger and restructuring charges. The
measurement basis for segment assets includes net accounts receivable,
inventories, net property and equipment and other current assets.
Summary information by segment is as follows (in thousands):
As of and for the
Years Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
INFUSION
Revenue from external customers ..................... $ 400,601 $ 432,823 $ 396,669
Intersegment revenue ................................ 1,217 22,284 18,274
Interest income ..................................... 84 78 72
Equity in net income of unconsolidated joint
ventures .......................................... 759 442 69
Segment EBITDA profit ............................... 38,631 3,174 35,704
Segment assets ...................................... 108,861 131,893 142,970
Segment asset expenditures .......................... 3,271 5,302 11,153
CPS
Revenue from external customers ..................... $ 61,377 $ 86,625 $ 47,783
Intersegment revenue ................................ 11 2,452 1,534
Interest income ..................................... -- -- --
Equity in net income of unconsolidated joint
ventures .......................................... -- -- --
Segment EBITDA profit (loss) ........................ (1,903) (5,600) (1,144)
Segment assets ...................................... -- 24,003 11,992
Segment asset expenditures .......................... 256 1,645 403
ALL OTHER
Revenue from external customers ..................... $ 2,842 $ 1,748 $ 660
Intersegment revenue ................................ -- -- --
Interest income ..................................... -- -- --
Equity in net income of unconsolidated joint
ventures .......................................... -- -- --
Segment EBITDA profit ............................... 535 145 23
Segment assets ...................................... 212 492 --
Segment asset expenditures .......................... -- -- --
F-30
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of the company's segment revenue, segment EBITDA profit
(loss) and segment assets to the corresponding amounts in the Consolidated
Financial Statements are as follows (in thousands):
As of and for the
Years Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
NET REVENUE
Total for reportable segments ......................................... $ 463,206 $ 544,184 $ 464,260
Other revenue ......................................................... 2,842 1,748 660
Elimination of intersegment revenue ................................... (1,228) (24,736) (19,808)
--------- --------- ---------
Total consolidated revenue ............................................ $ 464,820 $ 521,196 $ 445,112
========= ========= =========
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EXTRAORDINARY GAIN ON TROUBLED DEBT RESTRUCTURING
Total EBITDA profit (loss) for reportable segments ................... $ 36,728 $ (2,426) $ 34,560
Other EBITDA profit ................................................... 535 145 23
Goodwill amortization expense ......................................... (10,227) (10,784) (11,139)
Depreciation and other amortization expense ........................... (10,032) (10,598) (11,033)
Losses on impairment of long-lived assets ............................. (8,323) (9,100) --
Interest expense ...................................................... (26,788) (29,763) (32,734)
Gains on sales of businesses .......................................... 18,649 -- 1,071
Restructuring expense ................................................. -- (5,831) --
Reorganization expenses, net .......................................... (8,264) -- --
All other income, net ................................................. 152 1,473 1,364
--------- --------- ---------
Loss from continuing operations before income taxes, minority interests
and extraordinary gain on troubled debt restructuring ................ $ (7,570) $ (66,884) $ (17,888)
========= ========= =========
ASSETS
Total assets for reportable segments .................................. $ 108,861 $ 155,896 $ 154,962
Other assets .......................................................... 236,515 246,855 266,067
--------- --------- ---------
Consolidated total assets .......................................... $ 345,376 $ 402,751 $ 421,029
========= ========= =========
For each of the years presented, the company's primary operations and
assets were within the United States. The company maintains an infusion
operation in Canada; however, the assets and revenue generated from this
business are not material to the company's consolidated operations.
F-31
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. DEBTOR/NON-DEBTOR FINANCIAL STATEMENTS
In accordance with SOP 90-7, the Debtors are presenting the following
Condensed Consolidating Financial Statements as of and for the year ended
December 31, 2000 (in thousands):
CONDENSED CONSOLIDATING BALANCE SHEET
Debtors Non-Debtors Eliminations Consolidated
--------- ----------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 26,831 $ 428 $ -- $ 27,259
Cash limited as to use ..................................... 233 154 -- 387
Accounts receivable, net of allowances ..................... -- 77,387 -- 77,387
Inventories ................................................ -- 12,796 -- 12,796
Deferred income taxes, net ................................. -- 428 -- 428
Other current assets ....................................... 2,823 1,936 -- 4,759
--------- --------- --------- ---------
Total current assets ............................... 29,887 93,129 -- 123,016
Property and equipment, net .................................. 437 14,855 -- 15,292
Deferred income taxes, net ................................... -- 1,697 -- 1,697
Other deferred costs and intangible assets, net .............. -- 8,448 -- 8,448
Goodwill, net of accumulated amortization .................... -- 193,855 -- 193,855
Investment in and advances to wholly-owned subsidiaries, net.. 244,361 -- (244,361) --
Other assets ................................................. 2,117 951 -- 3,068
--------- --------- --------- ---------
Total assets ....................................... $ 276,802 $ 312,935 $(244,361) $ 345,376
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable ........................................... $ 9,024 $ 12,426 $ -- $ 21,450
Accrued compensation ....................................... 17,029 7,569 -- 24,598
Interest payable ........................................... 4 -- -- 4
Current maturities of long-term debt ....................... -- 179 -- 179
Income taxes payable ....................................... 428 345 -- 773
Deferred income taxes ...................................... -- 52 -- 52
Accrued merger and restructuring costs ..................... 1,036 1,265 -- 2,301
Accrued reorganization costs ............................... 4,831 -- -- 4,831
Other accrued liabilities .................................. 2,823 4,022 -- 6,845
--------- --------- --------- ---------
Total current liabilities not subject to compromise ....... 35,175 25,858 -- 61,033
Liabilities subject to compromise ............................ 159,127 -- -- 159,127
--------- --------- --------- ---------
Total current liabilities .................................... 194,302 25,858 -- 220,160
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities .................... -- 24 -- 24
Minority interests in consolidated joint ventures .......... 5,522 456 -- 5,978
Other liabilities .......................................... -- 13,630 -- 13,630
Deferred income taxes ...................................... -- 2,073 -- 2,073
Net liabilities of discontinued operations ................... -- 26,533 -- 26,533
--------- --------- --------- ---------
Total liabilities .................................. 199,824 68,574 -- 268,398
Net assets, including amounts due to Debtors.................. -- 244,361 (244,361) --
Total stockholders' equity ................................... 76,978 -- -- 76,978
--------- --------- --------- ---------
Total liabilities and stockholders' equity ......... $ 276,802 $ 312,935 $(244,361) $ 345,376
========= ========= ========= =========
F-32
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Debtors Non-Debtors Eliminations Consolidated
--------- ----------- ------------ ------------
Net revenue ............................................................ $ -- $ 464,820 $ -- $ 464,820
Cost of service ........................................................ -- 341,656 -- 341,656
--------- --------- --------- ---------
Gross profit ........................................................... -- 123,164 -- 123,164
Operating expenses:
Selling, general and administrative expenses ......................... 27,231 63,098 -- 90,329
Provision for estimated uncollectible accounts ....................... -- 9,773 -- 9,773
Amortization of goodwill ............................................. -- 10,227 -- 10,227
Restructuring cost recovery .......................................... -- (322) -- (322)
Losses on impairments of long-lived assets ........................... -- 8,323 -- 8,323
--------- --------- --------- ---------
Total operating expenses ..................................... 27,231 91,099 -- 118,330
--------- --------- --------- ---------
Operating income (loss) from continuing operations ..................... (27,231) 32,065 -- 4,834
Other income (expenses):
Interest income ...................................................... 991 -- -- 991
Interest expense ..................................................... (26,754) (34) -- (26,788)
Equity in net income of wholly-owned subsidiaries .................... 51,915 -- (51,915) --
Equity in net income of unconsolidated joint ventures ................ -- 759 -- 759
Gains on sales of businesses ......................................... -- 18,649 -- 18,649
Gains/(losses) on dispositions of property and equipment, net ........ 9 (233) -- (224)
Other income, net .................................................... 281 2,192 -- 2,473
--------- --------- --------- ---------
Income (loss) from continuing operations before reorganization expenses,
income taxes, minority interests and extraordinary gain on troubled
debt restructuring ................................................... (789) 53,398 (51,915) 694
Reorganization expenses, net ........................................... 8,264 -- -- 8,264
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes, minority
interests and extraordinary gain on troubled debt restructuring ...... (9,053) 53,398 (51,915) (7,570)
Income tax expense ................................................... -- 250 -- 250
Minority interests in net income of consolidated joint ventures ...... -- 571 -- 571
--------- --------- --------- ---------
Income (loss) from continuing operations before extraordinary gain on
troubled debt restructuring .......................................... (9,053) 52,577 (51,915) (8,391)
--------- --------- --------- ---------
Discontinued Operations:
Loss from disposal ................................................... -- (662) -- (662)
--------- --------- --------- ---------
Total discontinued operations .......................................... -- (662) -- (662)
--------- --------- --------- ---------
Extraordinary gain on troubled debt restructuring, net of taxes ........ 107,772 -- -- 107,772
--------- --------- --------- ---------
Net income ............................................................. $ 98,719 $ 51,915 $ (51,915) $ 98,719
========= ========= ========= =========
F-33
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Debtors Non-Debtors Consolidated
---------- ----------- ------------
Net cash provided by (used in) continuing operations before
reorganization expenses ................................. $ (26,598) $ 70,742 $ 44,144
Net cash used by reorganization expenses ................... (1,581) -- (1,581)
--------- --------- ---------
Net cash provided by (used in) continuing operations (net
of reorganization expenses) ............................. (28,179) 70,742 42,563
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment ..................... (90) (3,437) (3,527)
Proceeds from sales of businesses ....................... -- 41,513 41,513
Cash advances from wholly-owned subsidiaries ............ 103,120 (103,120) --
Other ................................................... -- (189) (189)
--------- --------- ---------
Net cash provided by (used in) investing activities ........ 103,030 (65,233) 37,797
--------- --------- ---------
Cash flows from financing activities:
Proceeds from promissory notes and other debt obligations 1,500 -- 1,500
Repayment of debt ....................................... (55,130) (432) (55,562)
Payments of debtor-in-possession financing costs
(post-petition) ...................................... (536) -- (536)
Cash distributions paid to minority interests ........... -- (1,405) (1,405)
--------- --------- ---------
Net cash used in financing activities ...................... (54,166) (1,837) (56,003)
--------- --------- ---------
Net increase in cash from continuing operations ............ $ 20,685 $ 3,672 $ 24,357
========= ========= =========
Net cash used in discontinued operations ................... $ -- $ (3,731) $ (3,731)
========= ========= =========
F-34
CORAM HEALTHCARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance At Charged To Charged To Balance At
Beginning Costs And Other End Of
Description Of Period Expenses Accounts Deductions Period
- ----------- --------- -------- -------- ---------- ------
Year ended December 31, 2000
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectible
accounts ....................... $ 30,920 $ 9,773 $ (3,137)(2) $(19,644)(1) $ 17,912
Allowance for long-term
receivable ..................... 1,072 739(5) -- (1,072)(3) 739
Valuation allowance for inventories 525 -- -- (275)(4) 250
Year ended December 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts ....................... $ 14,297 $ 28,310 $ 472 $(12,159)(1) $ 30,920
Allowance for long-term
receivable ..................... 1,763 -- -- (691) 1,072
Valuation allowance for inventories -- 525 -- -- 525
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts ....................... $ 22,716 $ 14,845 $ -- $(23,264)(1) $ 14,297
Allowance for long-term
receivable ..................... 1,763 -- -- -- 1,763
(1) Accounts receivable written off, net of recoveries.
(2) Reclassify certain reserves and adjustments for the disposition of the
Coram Prescription Services division.
(3) Fully reserved vendor rebate receivables written off.
(4) Obsolete inventory written off during the year ended December 31, 2000.
(5) Full reserve for escrow deposit receivable from Integrated Health
Services, Inc. pursuant to the sales of lithotripsy partnerships.
S-1
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------- -------
2.1 -- Agreement and Plan of Merger dated as of February 6, 1994, by
and Among the registrant, T(2), Curaflex, HealthInfusion,
Medisys, T(2) Acquisition company, CHS Acquisition company, HII
Acquisition company and MI Acquisition company (Incorporated
by reference to Exhibit 2.1 of Registration No. 33-53957 on
Form S-4).
2.2 -- First Amendment to Agreement and Plan of Merger dated as of
May 25, 1994, by and among the registrant, T(2) Curaflex,
HealthInfusion, Medisys, T(2) Acquisition company, CHS
Acquisition company, HII Acquisition company and MI
Acquisition company (Incorporated by reference to Exhibit 2.2
of Registration No. 33-53957 on Form S-4).
2.3 -- Second Amendment to Agreement and Plan of Merger dated as of
July 8, 1994 by and among the registrant, T(2), Curaflex,
HealthInfusion, Medisys, T(2) Acquisition company, CHS
Acquisition company, HII Acquisition company and MI
Acquisition company (Incorporated by reference to Exhibit 2.3
of the registrant's Current Report on Form 8-K dated as of
July 15, 1994).
2.4 -- Asset Sale and Note Purchase Agreement, (the "Asset Purchase
Agreement") among the registrant, Caremark International Inc.
and Caremark Inc. dated as of January 29, 1995 (Incorporated
by reference to Exhibit C of the registrant's Current Report
on Form 8-K dated April 6, 1995).(a)
2.5 -- Agreement and Plan of Merger among the registrant, CHC
Acquisition Corp. and Lincare Holdings Inc., (the "Lincare
Merger Agreement") dated as of April 17, 1995 (Incorporated by
reference to Exhibit B of the registrant's Current Report on
Form 8-K dated May 2, 1995).(a)
2.6 -- Agreement and Plan of Merger entered into as of October 19,
1996, Among Coram Healthcare Corporation, Integrated Health
Services, Inc. And IHS Acquisition XIX, Inc. (Incorporated by
reference to Exhibit 2.1 of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996).
2.7 -- Purchase Agreement by and between Integrated Health Services,
Inc., T(2) Medical, Inc., Coram Healthcare Corporation of
Greater New York And Coram Healthcare Corporation.
(Incorporated by reference to Exhibit 2 of the registrant's
Current Report on Form 8-K dated as of August 20, 1997).
2.8 -- Side Agreement dated as of September 30, 1997 among Coram
Healthcare Corporation, T(2) Medical, Inc., Coram Healthcare
Corporation of Greater New York and Integrated Health
Services, Inc. (Incorporated by reference to Exhibit 2.1 of
the registrant's Current Report on Form 8-K dated as of
September 30, 1997).
2.9 -- Purchase Agreement by and between Curaflex Health Services,
Inc., Coram Healthcare Corporation, Curascript Pharmacy, Inc.,
Curascript PBM Services, Inc. and GTCR Fund VI, L.P., dated
July 31, 2000. (Incorporated by reference to Exhibit 2.1 of
the registrant's Current Report on Form 8-K dated as of July
31, 2000).
2.10 -- Debtor-In-Possession Financing Agreement dated August 30,
2000, by and among Coram Healthcare Corporation and Coram,
Inc. and Madeleine L.L.C. (Incorporated by reference to
Exhibit 2.1 of the registrant's Current Report on Form 8-K
dated as of September 13, 2000).
3.1 -- Certificate of Incorporation of registrant, as amended through
May 1, 1994 (Incorporated by reference to Exhibit 3.1 of
Registration No. 33-53957 on Form S-4).
3.2 -- Bylaws of registrant (Incorporated by reference to Exhibit 3.2
of Registration No. 33-53957 on Form S-4).
3.3 -- Certificate of Amendment of the registrant's Certificate of
Incorporation (Incorporated by reference to Exhibit 3.3 of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
4.1 -- Form of Common Stock Certificate for the registrant's common
stock, $.001 par value per share. (Incorporated by reference
to Exhibit 4.1 of the registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).
4.2 -- Form of Common Stock Certificate for the registrant's common
stock, par value $0.001, including legend thereon in respect
of the Stockholder Rights Agreement which exhibit is hereby
incorporated by reference thereto.
4.3 -- Form of Certificate of Designation, Preferences and Rights of
the registrant's Series X Participating Preferred Stock (filed
as Exhibit A to the Stockholder Rights Agreement, which was
filed as Exhibit 1 to the registrant's Current Report on Form
8-K dated as of June 25, 1997, and which exhibit is hereby
incorporated by reference thereto).
4.4 -- Form of Certificate of Designation, Preferences and Relative,
Participating, Optional and Other Special rights of Preferred
Stock and Qualifications, Limitations and Restrictions
Thereof, dated December 29, 2000. (Incorporated by reference
to Exhibit 4.1 of the registrant's Current Report on Form 8-K
dated as of December 28, 2000).
10.1 -- Amended and Restated Credit Agreement dated as of February 10,
1995, by and among Curaflex, T(2), HealthInfusion, Medisys, and
HMSS as Co-Borrowers, Toronto Dominion (Texas), Inc., as Agent
(the "Amended Credit Agreement") (Incorporated by reference to
Exhibit 10.1 of the registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).(a)
10.2 -- Form of Employment Agreement between the registrant and
Charles A. Laverty (Incorporated by reference to Exhibit 10.1
of registration No. 33-53957 on Form S-4).
10.3 -- Form of Severance/Non-Compete Agreement between the registrant
and Miles E. Gilman (Incorporated by reference to Exhibit 10.2
of Registration No. 33-53957 on Form S-4).
10.4 -- Form of Severance/Non-Compete Agreement between the registrant
and William J. Brummond (Incorporated by reference to Exhibit
10.3 of Registration No. 33-53957 on Form S-4).
10.5 -- Form of Severance/Non-Compete Agreement between the registrant
and Tommy H. Carter (Incorporated by reference to Exhibit 10.4
of Registration No. 33-53957 on Form S-4).
10.6 -- Form of Indemnification Agreement between the registrant and
each of the registrant's directors and certain executive
officers. (Incorporated by reference to Exhibit 10.6 of the
registrant's Form 10-K for the year ended December 31, 1994).
Revised Incorporated by reference to Exhibit 10.7 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
10.7 -- Registrant's 1994 Stock Option/Stock Issuance Plan and
related Forms of agreements (Incorporated by reference to
Exhibit 10.15 of Registration No. 33-53957 on Form S-4).
10.8 -- Registrant's Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.16 of Registration No. 33-53957 on
Form S-4).
10.9 -- 401(k) Plan of T(2) dated December 8, 1989 (Incorporated herein
by reference to Exhibit 10(s) of T(2) Annual Report on Form 10-K
for the fiscal year ended September 30, 1989, filed with the
Commission on or about December 29, 1988.)
10.10 -- 1988 Stock Option Plan of T(2), as amended and restated as of
July 31, 1990 and as further amended as of (i) August 20,
1991; (ii) November 12, 1991; and (iii) July 6, 1992
(Incorporated by reference to Exhibit 10.18 of Registration
No. 33-53957 on Form S-4).
10.11 -- Curaflex 1989 Stock Option Plan (Incorporated by reference to
Exhibit 10.53 of Registration No. 33-53957 on Form S-4).
10.12 -- Curaflex Amended 1990 Stock Option Plan (Incorporated by
reference to Exhibit 10.54 of Registration No. 33-53957 on
Form S-4).
10.13 -- Curaflex Directors' Nonqualified Stock Option Plan
(Incorporated by reference to Exhibit 10.59 of Registration
No. 33-53957 on Form S-4).
10.14 -- Clinical Homecare Ltd. 1990 Incentive Stock Option Plan, as
amended (Incorporated by reference to Exhibit 10.61 of
Registration No. 33-53957 on Form S-4).
10.15 -- Clinical Homecare Ltd. 1990 Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.62 of Registration
No. 33-53957 on Form S-4).
10.16 -- 1989 Stock Option Plan of Medisys (Incorporated by reference
to Exhibit 10.85 of Registration No. 33-53957 on Form S-4).
10.17 -- Form of Non-Plan Option Agreement of Medisys (Incorporated by
reference to Exhibit 10.86 of Registration No. 33-53957 on
Form S-4).
10.18 -- Credit Agreement among Coram Healthcare Corporation, Coram,
Inc., the Lenders named therein and Chemical Bank, as
Administrative Agent, Collateral Agent and Fronting Bank (the
"Senior Credit Facility") dated as of April 6, 1995.
(Incorporated by reference to Exhibit D of the registrant's
Current Report on Form 8-K dated April 6, 1995).(a)
10.19 -- First Amendment and Waiver to the Credit Agreement, dated as
of August 9, 1995, together with exhibits hereto, among the
registrant, Coram Inc., each Subsidiary Guarantor (as defined
therein), the Financial Institutions party thereto (as defined
therein), and Chemical Bank as Agent. (Incorporated by
reference to Exhibit 10.19 of the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995).(a)
10.20 -- Second Amendment to the Credit Agreement dated as of September
7, 1995, by and among the registrant, Coram Inc., each
Subsidiary Guarantor (as defined therein), the Financial
Institutions party thereto (as defined therein), and Chemical
Bank as Agent. (Incorporated by reference to Exhibit 10.20 of
the registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).(a)
10.21 -- Third Amendment and Limited Waiver to the Credit Agreement,
dated as of September 29, 1995, by and among
the registrant, Coram Inc., each Subsidiary Guarantor (as
defined therein), the Financial Institutions party thereto (as
defined therein), and Chemical Bank as Agent (Incorporated by
reference to Exhibit 10.21 of the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995).(a)
10.22 -- Fourth Amendment and Limited Waiver to the Credit Agreement
and First Amendment to Security Documents dated as of October
13, 1995, together with selected exhibits thereto, by and
among the registrant, Coram Inc., each Subsidiary Guarantor
(as defined therein), the Financial Institutions Party thereto
(as defined therein) and Chemical Bank as Agent (Incorporated
by reference to the company's Current Report on Form 8-K as
filed October 24, 1995).
10.23 -- Warrant Agreement dated as of October 13, 1995, among the
registrant, Coram Inc., and the other parties specified
therein (Incorporated by reference to the company's Current
Report on Form 8-K as filed October 24, 1995).
10.24 -- Amendment and Limited Waiver to Bridge Securities Purchase
Agreement, dated as of October 13, 1995, by and among the
registrant, Coram Inc., and Donaldson, Lufkin & Jenrette.
(Incorporated by reference to Exhibit 10.24 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).(a)
10.25 -- Form of Employment Agreement, Amendment No. 1 and Amendment
No. 2 dated as of April 23, 1999, of Employment Agreement
between the registrant and Donald J. Amaral. (Incorporated by
reference to Exhibit 10.25 and 10.04 of the registrant's
Quarterly Report on Form 10-Q for the quarters ended September
30, 1995, June 30, 1998, and September 30, 1999,
respectively).
10.26 -- Securities Purchase Agreement ("Securities Purchase
Agreement") and Form of Subordinated Bridge Note, dated as of
April 6, 1995, among Coram Inc., Coram Funding, Inc. and the
registrant (Incorporated by reference to Exhibit E of the
registrant's Current report on Form 8-K dated April 6,
1995).(a)
10.27 -- Exclusive Distribution Agreement--Healthcare Products and
Biomedical Equipment and Services Agreement between Medical
Specialties Distributors, Inc. ("MSD") and Coram, dated as of
June 1, 1996. (Incorporated by reference to Exhibit 10.1 of
the registrant's Quarterly Report on Form 10-Q/A Amendment No.
1 for the quarter ended June 30, 1996).
10.28 -- Medical Specialties Master Service Agreement between MSD and
Coram, dated as of June 1, 1996. (Incorporated by reference to
Exhibit 10.2 of the registrant's Quarterly Report on Form
10-Q/A Amendment No. 1 for the quarter ended June 30, 1996).
10.29 -- Medical Specialties Master Rental Agreement between MSD and
Coram, dated as of June 1, 1996. (Incorporated by reference to
Exhibit 10.3 of the registrant's Quarterly Report on Form
10-Q/A Amendment No. 1 for the quarter ended June 30, 1996).
10.30 -- Coram Healthcare Litigation Memorandum of Understanding
between all Parties to In re Coram Healthcare Corp. Securities
Litigation, Master File No. 95-N-2074 and Shevde v. Sweeney et
al., Civil Action No. 96-N-722, dated as of August 5, 1996.
(Incorporated by reference to Exhibit 10.4 of the registrant's
Quarterly Report on Form 10-Q/A Amendment No. 1 for the
quarter ended June 30, 1996).
10.31 -- Fifth Amendment to the Credit Agreement dated as of
February 6, 1996, by and among the registrant, Coram Inc.,
each Subsidiary Guarantor (as defined therein), the Financial
Institutions party thereto (as described therein), and
Chemical Bank as Agent. (Incorporated by reference to Exhibit
99.1 of the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996).(a)
10.32 -- Sixth Amendment to Credit Agreement dated as of April 19,
1996, by and among the registrant, Coram Inc., each Subsidiary
Guarantor (as defined therein), the Financial Institutions
party thereto (as described therein), and Chemical Bank as
Agent. (Incorporated by reference to Exhibit 99.2 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).(a)
10.33 -- Seventh Amendment to Credit Agreement dated as of July 3,
1996, by and among the registrant, Coram Inc., each Subsidiary
Guarantor (as defined therein), the Financial Institutions
party thereto (as described therein), and Chemical Bank as
Agent. (Incorporated by reference to Exhibit 99.1 of the
registrant's Quarterly Report on Form 10-Q/A Amendment No. 1
for the quarter ended June 30, 1996).(a)
10.34 -- Eighth Amendment to Credit Agreement dated as of December 3,
1996, By and among the registrant, Coram Inc., each Subsidiary
Guarantor as defined therein), the Financial Institutions
party thereto (as described therein), and Chase Manhattan Bank
as Agent.(a)
10.35 -- Ninth Amendment and Limited Waiver to the Credit Agreement
dated as of March 14, 1997, by and among the registrant, Coram
Inc., each Subsidiary Guarantor (as defined therein), the
Financial Institutions party thereto (as described therein),
and Chase Manhattan Bank as Agent.(a)
10.36 -- Amended Agreement, dated as of March 28, 1997 by and among the
registrant, Coram Inc., and Donaldson, Lufkin & Jenrette.(a)
10.37 -- Sabratek Corporation and Coram Healthcare Exclusive Supply
Agreement for IV Infusion Pumps, IV Disposable Sets and
Related Items, dated as of February 26, 1997.
10.38 -- Amendment to 9% Subordinated Convertible Debenture and Notice
of Conversion dated as of June 30, 1996, by and among the
registrant, Coram Inc., and the other parties specified
therein (Incorporated by reference to the company's report on
Form 8-K as filed on July 12, 1996).
10.39 -- Tenth Amendment to Credit Agreement dated June 2, 1997, by and
Among the registrant, Goldman Sachs Credit Partners L.P.,
Coram, Inc., each Subsidiary Guarantor (as defined therein)
and The Chase Manhattan Bank, as administrative agent and
collateral agent for the Lenders named therein, to that
certain Credit Agreement dated as of April 6, 1995, by and
among the registrant, Coram, Inc, each Subsidiary Guarantor
(as defined therein), the Financial Institutions named therein
and the Chase Manhattan Bank, as collateral agent for the
Lenders named therein (Incorporated by reference to Exhibit 99
of the registrant's Current Report on Form 8-K dated as of
June 2, 1997).(a)
10.40 -- Letter Agreement of March 29, 1998 by and among Cerberus
Partners, L.P., Goldman Sachs Credit Partners, L.P. and
Foothill Capital Corporation on the one hand, and Coram
Healthcare Corporation, on the other, deferring the payment of
interest and fees pursuant to (i) the Securities Purchase
Agreement dated as of April 6, 1995 and (ii) the Letter
Agreement dated March 28, 1997 between Coram Funding, Inc. and
Coram Healthcare Corporation. (Incorporated by reference to
Exhibit 10.40
of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.41 -- Prime Vendor Agreement and Letter Amendment, dated October 14,
1999, between Coram Healthcare Corporation and Cardinal
Health, Inc. Certain portions of the Prime Vendor Agreement
have been omitted pursuant to a request for Confidential
treatment. The entire Prime Vendor Agreement has been filed
confidentially with the Securities Exchange Commission.
(Incorporated by reference to Exhibit 10.1 of the registrant's
Quarterly Report on Form 10-Q for the quarters ended September
30, 1998 and 1999, respectively).
10.42 -- Amendment No. 1 and Waiver to the Securities Exchange
Agreement among the registrant, Cerberus Partners, L.P.,
Goldman Sachs Credit Partners L.P., and Foothill Capital
Corporation. (Incorporated by reference to Exhibit 10.01 of
the registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998).
10.43 -- Promissory Notes and Security Agreement dated July 21, 1998
among the registrant and Foothill Capital Corporation, as
collateral agent for Cerberus Partners, L.P., Goldman Sachs
Credit Partners L.P. and Foothill Partners III, L.P. and their
respective successors and assigns. (Incorporated by reference
to Exhibit 10.02 of the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
10.44 -- Request for Deferral of Interest Payment under the Series B
Convertible Subordinated Notes due 2008 and the related
Securities Exchange Agreement, dated May 6, 1998, by and
between Coram, Inc., Coram Healthcare Corporation, Cerberus
Partners, L.P., Goldman SachsCredit Partners, L.P. and
Foothill Capital Corporation, as amended (Incorporated by
reference to Exhibit 10.03 of the registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.45 -- Securities Exchange Agreement among the company, Cerberus
Partners, L.P., Goldman Sachs Credit Partners, L.P., and
Foothill Capital Corporation. (Incorporated by reference to
Exhibit 10.01 of the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).(a)
10.46 -- Form of Letter of Credit required by the Master Agreement by
and between the registrant and its applicable affiliates and
Aetna U.S.Healthcare, Inc. and its applicable affiliates
(Incorporated by reference to Exhibit 10.02 of the
registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998).
10.47 -- Addendum amendment to Sabratek Corporation and Coram
Healthcare for IV Infusion pumps, IV Disposable Sets and
Related Items, dated as of February 26, 1997, as of December
7, 1998.
10.48 -- Employment Agreement and Agreement between the company and
Richard M. Smith, dated as of April 26, 1999 and November 11,
1999, respectively. (Incorporated by reference to Exhibits
10.4 and 10.2, respectively of the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
10.49 -- Employment Agreement, between the company and Wendy L.
Simpson, dated as of April 26, 1999. (Incorporated by
reference to Exhibit 10.5 of the registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999).
10.50 -- Employment Agreement, between the company and Joseph D. Smith,
dated as of April 26, 1999. (Incorporated by reference to
Exhibit 10.6 of the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
10.51 -- Employment Agreement, between the company and Daniel D.
Crowley, dated as of November 30, 1999, together with
Amendment No. 1 thereto.
10.52 -- Employment Agreement, between the company and Allen J.
Marabito, dated as of November 30, 1999, together with
amendment No. 1 thereto.
10.53 -- First Amendment to Prime Vendor Agreement, dated as of January
1, 2000 by and between the company and Cardinal Health, Inc.
10.54 -- Second Amendment to Employment Agreement, between the company
and Daniel D. Crowley, dated as of April 6, 2000.
(Incorporated by reference to Exhibit 10.1 of the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000).
10.55 -- Settlement agreement entered into by and among Coram Resource
Network, Inc., Coram Independent Practice Association, Inc.,
Coram Healthcare Corporation and Coram, Inc. (Incorporated by
reference to Exhibit 10.1 of the registrant's Current Report
on Form 8-K dated as of November 17, 2000).
10.56 -- Amendment No. 4, dated December 29, 2000, in respect of the
Securities Exchange Agreement dated as of May 6, 1998, among
Coram Healthcare Corporation, Coram, Inc., Cerberus Partners,
L.P., Goldman Sachs Credit Partners, L.P. and Foothill Capital
Corporation. (Incorporated by reference to Exhibit 10.1 of the
registrant's Current Report on Form 8-K dated as of December
28, 2000).
10.57 -- Exchange Agreement, dated December 29, 2000, among Coram,
Inc., Goldman Sachs Credit Partners, L.P., Cerberus Partners,
L.P. and Foothill Capital Corporation. (Incorporated by
reference to Exhibit 10.2 of the registrant's Current Report
on Form 8-K dated as of December 28, 2000).
10.58 -- Third Amendment to Employment Agreement, between the company
and Daniel D. Crowley, dated August 2, 2000.*
10.59 -- Employment Agreement, between the company and Scott R. Danitz,
dated August 1, 2000.*
10.60 -- Employment Agreement, between the company and Vito Ponzio, Jr,
dated April 26, 1999.*
10.61 -- Consulting Services Agreement, between the company and Joseph
D. Smith, dated June 30, 2000.*
10.62 -- Consulting Services Agreement, between the company and Donald
J. Amaral, dated May 16, 2000.*
20.1 -- Stockholder Rights Agreement (the "Stockholder Rights
Agreement"), dated as of June 25, 1997, between Coram
Healthcare Corporation and BankBoston, N.A., which includes
the form of Certificate of Designation, Preferences and Rights
setting forth the terms of the Series X Participating
Preferred Stock, par value $0.001 per share, as Exhibit A, the
Summary of Stockholder Rights Agreement as Exhibit B and the
form of Right Certificate as Exhibit C. Pursuant to the
Stockholder Rights Agreement, printed Right Certificates will
not be mailed until as soon as practicable after the earlier
of the tenth business day after public announcement that a
person or group has become an Acquiring Person or the tenth
business day after a person commences, or announces its
intention to commence, a tender offer or exchange offer the
consummation of which would result in such person becoming an
Acquiring Person. (Incorporated by reference Exhibit 1 of the
registrant's Current Report on
Form 8-K dated as of June 25, 1997).
21.1 -- Subsidiaries of the registrant.*
23.1 -- Consent of Ernst & Young LLP.*
(a) Certain exhibits and schedules of this Exhibit have been omitted. The
registrant agrees to furnish supplementally any omitted schedule or
exhibit to the Securities and Exchange Commission.
* Filed herewith.