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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, 1998
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:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock ($.001 par value per share) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
As of March 25, 1999, there were outstanding 49,426,422 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 New York Stock Exchange on March 25,
1999, was approximately $78.7 million.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
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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 ("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. The Company's actual results may vary materially from the
forward-looking statements made in this report due to important factors such as:
history of operating losses and uncertainties associated with future operating
results; significant outstanding indebtedness; limited liquidity; reimbursement
related risks; dependence on relationships with third parties; timing of or
ability to complete acquisitions; government regulation of the home health care
industry; and unanticipated impacts from the Year 2000 Issue. 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 Coram 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. Coram does not undertake any obligation to release publicly 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. The Company is engaged in three principal lines of
business: alternate site (outside the hospital) infusion therapy and related
services, ancillary network management services, and pharmacy benefit management
and specialty mail-order pharmacy services. Other services offered by Coram
include centralized management, administrative and clinical support for clinical
research trials, medical informatics and non-intravenous home health products
such as durable medical equipment and respiratory therapy services.
Coram delivers its alternate site infusion therapy services through
approximately 90 branch offices located in 44 states and Ontario, Canada.
Infusion therapy involves the intravenous administration of anti-infective
therapy, intravenous immunoglobulin ("IVIG"), chemotherapy, pain management,
nutrition and other therapies.
The Company provides ancillary network management services through its
Resource Network division ("R-Net"), which manages networks of home health care
providers on behalf of health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs"), at-risk physician groups and other managed care
organizations. R-Net serves its customers through two primary call centers and
three satellite offices.
The Company delivers pharmacy benefit management and specialty mail-order
pharmacy services through its Coram Prescription Services division ("CPS"),
which provides pharmacy benefit management services as well as specialty
mail-order prescription drugs for chronically ill patients from two primary mail
order facilities and four branch locations. The pharmacy benefit management
service provides 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 are delivered through
two main facilities which provide centralized distribution, compliance
monitoring, patient education and clinical support to a wide variety of
patients.
Business Strategy. The Company's overall business strategy is focused on
the basic factors that could lead to profitability: strategic revenue generation
programs, cost reduction and control, quality improvement
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and cash collections. The Company's revenue generation programs are focused on
business relationships where the Company can provide high quality care while
operating profitably. In the Company's alternate site infusion therapy business,
the Company is continuing to emphasize marketing efforts aimed at improving its
therapy mix, physician relationships and payor relationships. It has also
continued the development of its specialty programs aimed at serving patients
requiring intravenous nutrition; pre- and post-transplant patients; patients
with HIV/AIDS; and patients with chronic disorders such as hemophilia, immune
deficiencies and alpha-one antitrypsin deficiency. The R-Net division remains
focused on marketing to HMOs, PPOs, at-risk physician groups and other managed
care payors desiring to reduce their overall health care expenditures through
management of the home health services utilized by their members. Meanwhile, the
CPS division has focused its marketing efforts on smaller health plans,
including companies with self-insured plans, self funded employer health plans,
labor unions, managed care payors and patient populations with specialized needs
such as pre- and post- transplant patients, patients with HIV/AIDS and chronic
conditions such as diabetes and asthma. In 1999, the Company intends to expand
the reach of the CPS division by developing the capability to accept orders for
its specialty mail-order pharmacy services over the Internet.
The Company has implemented cost reduction and control programs focused on
the reduction and control of cost of services and operating expenses, assessment
of poorly performing branches and review of branch efficiencies. Delivery of
quality service in the Company's infusion therapy division in particular is
being closely monitored through an internal task force, rigorous reporting and
independent patient satisfaction surveys. Furthermore, management throughout the
Company is continuing to concentrate on reimbursement by emphasizing improved
billing and cash collections methods and continued assessment of systems support
for reimbursement.
In 1998, the Company established a Mergers and Acquisitions Department
which has evaluated numerous potential acquisitions in markets that would permit
the Company to grow its local or regional business either through one of its
three principal lines of business or through complimentary home health services
such as respiratory therapy, durable medical equipment and home health nursing.
Other strategic alternatives have also been reviewed. No material strategic
acquisitions were made in 1998, and there can be no assurance that any
acquisitions or other strategic alternatives will be consummated or will be
available to the Company on commercially acceptable terms.
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."
COMPANY HISTORY
The Company was formed on July 8, 1994 as a result of a merger (the
"Four-Way Merger") by and among T(2) Medical, Inc. ("T(2) Medical"), Curaflex
Health Services, Inc. ("Curaflex"), Medisys, Inc. ("Medisys") and
HealthInfusion, Inc. ("HealthInfusion"), 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 a wholly-owned subsidiary of the
Company. This transaction was accounted for as a pooling of interests.
The Company has 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. (the "Caremark Business"), effective April 1, 1995. In
addition, the Company acquired H.M.S.S., Inc. ("HMSS"), a leading regional
provider of home infusion therapies based in Houston, Texas, effective September
12, 1994. As a result of these acquisitions, the Company became a leading
provider of alternate site infusion therapy services in the United States based
on geographic service area and total revenue.
As of January 1, 1997, the Company provided lithotripsy services through a
controlling interest in 11 lithotripsy partnerships and two wholly-owned
lithotripsy entities. The Company also owned a lithotripsy management company
and a lithotripter maintenance company. Lithotripsy is a non-invasive technique
that uses shock waves to disintegrate kidney stones. On August 20, 1997, the
Company signed an agreement with Integrated Health Services, Inc. ("IHS") for
the sale of the Company's interest in its thirteen lithotripsy
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partnerships, the lithotripsy management company, the stock of its equipment
service company and certain related assets (the "Lithotripsy Business").
Effective September 30, 1997, the Company completed the transaction as to all of
its Lithotripsy Business other than its interests in three lithotripsy
partnerships. Pursuant to a side agreement amending the August 20, 1997 purchase
agreement, the Company's interests in the three remaining partnerships were
placed in escrow pending the satisfaction of certain conditions. Following
satisfaction of these conditions, two of the partnerships were conveyed to IHS
effective October 3, 1997. Due to the Company's and IHS's inability to obtain
the consent of the other partner to the transfer of Coram's interest therein,
the Company retained its interest in the remaining partnership. Effective June
1, 1998, the Company completed the sale of its remaining lithotripsy partnership
to IHS. See Note 5 to the Company's Consolidated Financial Statements.
DELIVERY OF ALTERNATE SITE INFUSION SERVICES
General. Infusion patients are primarily referred to the Company following
diagnosis of a specific disease or upon discharge from a hospital. The treating
physician will generally determine whether the patient is a candidate for home
infusion treatment. Typically a hospital discharge planner, the patient's
physician or a managed care payor 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 periodic monitoring by skilled nurses and pharmacists. Most
therapies require either a gravity-based flow control device or an
electro-mechanical pump to monitor the drugs. Some therapies are administered
continuously; most, however, are given for prescribed periods of time. Coram's
nurses and pharmacists work with the patient's doctor to track 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 the lifetime of the patient.
Branch Facilities. The delivery of infusion services is coordinated through
local or regional infusion centers, or "branches," that provide the following
functions: (i) patient intake and monitoring; (ii) drug mixing and preparation
by pharmacists and pharmacy technicians; (iii) clinical pharmacy services; (iv)
nursing services; (v) materials management, including drug and supply inventory
and delivery; (vi) billing, collections and benefit verification; (vii)
marketing to local referral sources, including doctors, hospitals and payors;
and (viii) general management. The Company's branch facilities typically are
leased and generally consist of 1,500 to 36,000 square feet of office space in
suburban office parks, often in close proximity to major medical facilities. A
typical branch has a fully equipped pharmacy, offices for administrative
personnel and a storage warehouse. A typical branch employs a branch manager,
licensed pharmacists, pharmacy technicians, registered nurses, and selling and
administrative personnel. Each branch 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.
Satellite branches are also used. These smaller branches contain limited
supplies and pharmacy operations and are used as support centers to respond to
patient needs in specific geographical areas.
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 clinicians and hospital personnel in order to assess the patient's
suitability for home care. This assessment process includes but is not limited
to an analysis of the patient's physical and emotional condition and of social
factors such as the safety and cleanliness of the home environment and the
availability of family members or others who can assist in the administration of
the patient's therapy, if necessary. Patient assessment also includes a
verification of a patient's eligibility and benefits package through the
patient's insurance carrier, managed care provider or governmental payor.
When a patient's suitability for home care has been confirmed, the patient
and the patient's designated care-giver receives training and education
concerning the therapy to be administered, including the proper infusion
technique and care and use of intravenous devices and other equipment used in
connection with the therapy. The environmental assessment and training are
generally performed by the Company's nurses.
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Prior to the patient receiving treatment services from the Company, the
treating physician develops the patient's plan of care and communicates it to
the local branch's clinical support team, including its nurses and pharmacists.
This team will work with the treating physician and the managed care
coordinator, if applicable, to administer the plan of care and monitor the
patient's progress. Throughout the patient's therapy, the local branch's
clinical support team will regularly provide the treating physician and the
managed care coordinator with reports on the patient's condition, maintaining an
information flow that allows the treating physician to actively manage the
patient's treatment. The treating physician always remains responsible for the
patient's care, including changing the patient's plan of care to meet the
patient's needs.
Upon the patient's arrival home, a nurse from the local branch typically
oversees the administration of the patient's first home infusion treatment.
Thereafter, the frequency of nursing visits depends upon the particular therapy
the patient is receiving. During these subsequent visits, the nurse may check
and adjust the patient's infusion site, intravenous lines and related equipment,
obtain blood samples, change the pump settings and/or drug administration and
assess the patient's condition and compliance with the plan of care. The
patient's supplies and drugs are typically delivered on a weekly basis depending
on the therapy and the particular drugs being administered. The treating
physician and the managed care coordinator, if applicable, remain actively
involved in the patient's treatment by monitoring the administration of the plan
of care and revising the plan as necessary.
ALTERNATE SITE INFUSION THERAPY PRODUCTS AND SERVICES
General. Coram provides a variety of infusion therapies, principally
anti-infective therapy, IVIG and nutrition. The initiation and duration of these
therapies is determined by a physician based upon a patient's diagnosis,
treatment plan and response to therapy. Certain therapies, such as
anti-infective therapy, are generally used in the treatment of temporary
conditions such as infections, while others, such as nutrition, may be required
on a long-term or permanent basis. The infusion therapies are administered at
the patient's home by the patient, the designated care-giver or an employee or
agent of the Company. In patient groups such as immune suppressed patients
(e.g., AIDS/HIV, cancer and transplant patients), anti-infective therapy may be
provided periodically over the duration of the primary disease or for the
remainder of the patient's life.
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 diseases, such as
osteomyelitis (bone infections), bacterial endocarditis (infection of the heart
valves), wound infections, infections associated with AIDS and cancer and
infections of the kidneys and urinary tract. Generally, intravenous
anti-infective drugs are delivered through a peripheral catheter inserted in a
vein in the patient's arm. Anti-infective drugs are generally more effective
when infused directly into the bloodstream than when taken orally.
IVIG. IVIG therapy involves the administration of a blood derivative
product (gammaglobulins) which is administered to patients with immune
deficiencies conditions. IVIG therapy is most commonly administered to patients
with primary immune deficiencies or autoimmune disorders. 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.
During 1997 and 1998, the Company experienced difficulties in obtaining IVIG due
to a national shortage of this product and has therefore increased its inventory
of this product to meet demand. The ongoing shortage of IVIG may make it harder
to service patients, which may adversely impact the Company's future results of
operations.
Nutrition Therapy. Total parenteral nutrition therapy or "TPN" involves the
intravenous feeding of life-sustaining nutrients to patients with impaired or
altered digestive tracts due to a gastrointestinal illness or conditions such as
an intestinal obstruction or inflammatory bowel disease. The therapy is
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
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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.
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, generally for more
than six months.
Biotherapy. The Company provides patients with biological response
modifiers, colony stimulating factors, erythropoietin and interferons. In
addition, the Company provides growth hormone therapies.
Other Therapies. The Company provides other technologically advanced
therapies such as 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. Hydration therapy is
often administered in conjunction with intravenous chemotherapy. In addition,
the Company provides other therapies for diseases such as hemophilia and
alpha-1-antitrypsin deficiency. Currently, each such therapy amounted to less
than 5% of the Company's infusion therapy net revenue for each of the years
ended December 31, 1998 and 1997. The Company continually evaluates new infusion
therapies and intends to add therapies which enable it to continue to provide
full service to its patients and payors. For example, the Company has developed
a program and is treating pre- and post-transplant patients. This treatment
program includes proprietary patient assessment and monitoring protocols and the
delivery of a wide range of intravenous and oral medications.
Clinical Research and Medical Informatics Services. 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 and Medical Informatics division and began devoting additional
resources to and actively marketing its capabilities in this arena. Through its
national network of over 1,100 full-time equivalent alternate site infusion
nurses and pharmacists, utilizing integrated information systems, Coram 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 services
such as therapy administration, specimen collection, patient education and
training, patient assessments and data collection; (v) providing alternate site
pharmacy services; and (vi) providing patient screening and surveying services.
Through Coram's Clinical Research and Medical Informatics division, clinical
data from the infusion therapy business integrated data warehouse can be
analyzed to provide information necessary to make important product development
and marketing decisions by biopharmaceutical and managed care organizations. The
Clinical Research and Medical Informatics division provides data collection and
integration services as well as pharmaceoconomic, outcomes and utilization
analyses. Additionally, Coram has developed a proprietary reporting system, the
Corameters(R) Utilization and Outcomes Reporting System, to demonstrate resource
utilization trends in alternate site settings. This division also provides
reports to facilitate the satisfaction of certain reporting requirements of the
Health Plan Employer Data and Information Set ("HEDIS") and the "ORYX"
initiative of the Joint Commission on the Accreditation of Health Care
Organizations ("JCAHO").
R-NET: ANCILLARY NETWORK MANAGEMENT SERVICES
R-Net offers 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 December 31, 1998, R-Net was
providing its services to its customers' plans that covered approximately 3.5
million lives. Typically, a network of home health services providers managed by
the R-Net division include 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 is contracted with R-Net and receives referrals
of patients from R-Net. Where appropriate, the Company's infusion and CPS
divisions participate in the networks established by R-Net.
As in the Company's infusion therapy business, patients in need of home
health services are referred to R-Net following diagnosis of a specific disease
or upon discharge from a hospital. R-Net intake personnel
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receive these referrals from physicians, hospital discharge personnel and other
referral sources. The intake personnel then review the treatment ordered and
confirm the member's eligibility and availability of a home health benefit. If
the care ordered is not covered, the referral source is notified so that the
referral source may make other arrangements to obtain the prescribed service. If
the care ordered is covered and the patient is eligible, the network provider
selected for the patient will render the care ordered, submit their claims for
reimbursement to R-Net and receive payment from R-Net for the services rendered.
R-Net also offers certain utilization management, utilization review and
outcomes reporting services to its payor customers. If requested by its
customer, R-Net may, in certain instances, review the necessity or propriety of
the medical treatments or services prescribed by comparing them with clinical
pathways or other utilization guidelines adopted by the relevant payor customer.
If the treatments ordered do not conform to the applicable guidelines, R-Net
will notify the payor by making a negative recommendation. In turn, the payor's
medical director or care management personnel will determine whether the care is
medically necessary and communicate the ultimate coverage decision to the
patient and R-Net. R-Net typically requires its payor customers to provide fee
for service reimbursement for any services authorized by the payor's medical
director that are beyond the scope of the patient's health plan benefit. R-Net
also provides many of its payor customers with outcomes reports. These reports
identify home health service utilization by the payor's members. The goal of
these reports is to assist R-Net's payor customers in achieving cost
efficiencies while obtaining appropriate clinical outcomes.
CPS: PHARMACY BENEFIT MANAGEMENT AND SPECIALTY MAIL-ORDER PHARMACY SERVICES
CPS offers its 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. Its pharmacy
benefit management services include on-line claims administration, formulary
management and drug utilization review through a nationwide network of over
40,000 retail pharmacies. As of December 31, 1998, the Company had approximately
35 such arrangements in place for pharmacy benefit management services.
CPS's specialty mail-order pharmacy service offers centralized
distribution, compliance monitoring, patient education and clinical support to
patients with specialized needs. In particular, CPS has focused its marketing
efforts on serving patients enrolled with its pharmacy benefit management
customers and patients with diabetes, organ transplants, HIV/AIDS, growth
deficiencies and other chronic conditions. As of December 31, 1998, CPS served
approximately 9,000 patients per month with its specialty mail-order pharmacy
services.
CPS is currently developing the capability to receive orders for its
specialty mail-order pharmacy products, supplies and services over the Internet.
CPS anticipates entering this "E-commerce" market by the third quarter of 1999.
ALTERNATE SITE INFUSION THERAPY ORGANIZATION AND OPERATIONS
General. In the first quarter of 1999, the Company undertook an
organizational realignment to effect a functional reporting structure. The
Company's alternate site infusion therapy business operations are conducted
through approximately 90 branches. The branches are divided into four geographic
areas. Each area has an Area Vice-President of Operations who reports to the
Senior Vice-President of Operations, and an Area Vice-President of Sales who
reports to the Senior Vice-President of Sales. The Senior Vice-Presidents report
to the Company's Chief Operating Officer. The Company's new organizational
structure was designed to create operating and decision making efficiencies
associated with operating and managing the Company. The Company believes that
the functional approach to management better facilitates high quality local
decision making, which allows it to attract and retain experienced local
managers and be responsive to local market needs.
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 its field operations in its infusion business. Actual operating
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results derived from its management information systems are compared to the
performance model, enabling management to identify opportunities for increased
efficiency and productivity. The Company believes that the use of standardized,
specific performance matrices and the identification of best demonstrated
practices facilitates operating improvement.
The Company endeavors to ensure that its local managers have the
appropriate authority and ability to perform effectively by providing them with
training, comprehensive policies and procedures and standardized systems. The
Company has designed various management incentive plans that reward performance
based on revenue, accounts receivable collection, inventory control and
contribution of earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA").
R-NET ORGANIZATION AND OPERATIONS
General. The R-Net division is operated from its two primary call centers
and three satellite offices. The division's call center located in Whippany, New
Jersey was opened in 1998 for the purposes of replacing its former Totowa, New
Jersey call center and providing a suitable facility for rendering the services
required of R-Net under the Master Agreement with Aetna U.S. Healthcare, Inc.
("Aetna USHC") that was signed in April 1998. R-Net also maintains a call center
in Houston, Texas. Together, R-Net's primary call centers provide administrative
services for the division and management and intake services for several payor
customers. The R-Net division's satellite offices are devoted to servicing the
members of only one or two local customers.
The R-Net division's sales and operations are directed by the Company's
Chief Operating Officer. All R-Net sales personnel report to a Vice President of
Sales for the division who reports to the Company's Chief Operating Officer. All
other R-Net functions report to the Senior Vice President of Operations.
Reporting to the Senior Vice President of Operations are a Vice President of
Operations and the directors of reimbursement and provider relations.
Operating Systems and Controls. All R-Net facilities use the same
information system. In 1998, the division implemented a new communications
system that permits R-Net personnel to process referrals while receiving the
order from the referral source. R-Net intake personnel can input information
regarding the service referral and access the most cost effective and
appropriate provider of care available within the R-Net provider network.
R-Net's information system permits R-Net to coordinate referral dispatch, case
authorization, benefit level review and claims payment functions electronically.
CPS ORGANIZATION AND OPERATIONS
General. In 1998, the CPS division operated from its centralized facility
located in Omaha, Nebraska. In March 1999, CPS opened a new centralized pharmacy
location in Orlando, Florida. Ultimately, the Orlando facility will replace the
Nebraska facility as the primary CPS call center and specialty mail-order
pharmacy location. However, the Company intends to keep the Omaha facility open
to service specific payor and clinical needs. In addition, the Company maintains
four other satellite pharmacy operations to permit the Company to satisfy
specific local customer and payor requirements. One of the satellite pharmacies
functions as a walk-in retail pharmacy and is located in a large hospital.
Operating Systems and Controls. CPS utilizes a management information
system that was developed specifically for supporting its business operations.
The system facilitates referral intake, benefit authorizations, member
eligibility and claims submission functions.
The CPS division is managed by a division President who reports to the
Company's President. Reporting to the CPS President is a Vice President of
Operations and a Vice President of Marketing. Each of these Vice Presidents has
directors and managers reporting to them that handle specific operations and
sales tasks.
REIMBURSEMENT OF SERVICES
Virtually all of Coram's operating revenue in each of its lines of business
is derived from third-party payors, including private insurers, managed care
organizations such as HMOs and PPOs, at-risk physician
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groups, and governmental payors such as Medicare and Medicaid. Similar to other
medical service providers, the Company 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. The Company has developed substantial expertise in processing claims
and carefully screening new cases to determine whether adequate reimbursement
will be available.
In certain instances, particularly in the R-Net division, the Company has
agreed to accept fixed fee or capitated fee arrangements. Under a capitated fee
arrangement, the Company will agree to deliver or arrange for the delivery of
certain home health services required under the payor 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, the Company typically reviews utilization data provided by the payor
customer and/or other available utilization data obtained by the Company through
the prior operation of R-Net business or through other sources. 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 payor customer. Furthermore, the
Company obtains stop-loss insurance to protect it from unanticipated losses
associated with the cost of treatments for a particular patient with
extraordinary needs or for the cost of treatments provided to all patients
enrolled in a customer's plan. As of December 31, 1998, the Company was a party
to 12 capitated arrangements, including the five-year capitated agreement that
was signed with Aetna USHC in April 1998 for R-Net Services. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Background."
Private indemnity payors typically reimburse at a higher amount for a given
service and provide a broader range of benefits than governmental and managed
care payors, although net revenue and gross profits from private and other
third-party non-governmental payors have been affected by the continuing efforts
to contain or reduce reimbursement for health care. An increasing percentage of
Coram's revenue has been derived in recent years from agreements with HMOs,
PPOs, other managed care providers and other contracted payors. 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. Reimbursement coverage is
provided through private sources, such as insurance companies, self-insured
employers and patients, and through the Medicare and Medicaid programs. The
Healthcare Financing Administration ("HCFA") 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. A substantial amount of the revenue the
Company receives from the Medicare program originates from the Part B program.
The remaining 20% co-insurance portion is the obligation of secondary insurance
and/or the patient.
QUALITY ASSURANCE
Coram has established quality improvement programs for its infusion therapy
business that implement service standards and enable the Company to monitor
whether the objectives of those standards are met. As of December 31, 1998, the
corporate office and 79 branches, including related satellite locations, had
been surveyed by JCAHO. All of the branches re-surveyed received accreditation,
32 of which were accredited with commendation, the highest award possible. As of
March 15, 1999, six branches that were recently acquired or established had not
been surveyed. In 1999, the Company began triennial re-surveys including the
newly acquired and established branches.
An integral part of Coram's quality efforts is the branch team that meets
regularly to perform, among others, the following functions:
1. Evaluate branch programs, policies and procedures.
2. Provide ongoing direction to the quality improvement efforts.
3. Evaluate patient satisfaction activities and results.
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4. Assist in development of new programs or procedures to meet recognized
needs within the branch or community which it serves.
5. Evaluate the branch staff efforts related to professional and clinical
issues.
6. Identify and monitor key performance areas of operations.
In addition, Coram's Clinical Services Department assists branch management
in assessing the levels of service being provided.
COMPETITION
The alternate site infusion therapy, ancillary network management services
and pharmacy benefit management and specialty mail-order pharmacy markets are
all highly competitive. Some of Coram's current and potential competitors in
these lines of business include (i) integrated providers of alternate site
health care services; (ii) hospitals; (iii) local providers of multiple products
and services for the alternate site health care market; (iv) physicians and
physician organizations such as independent practice associations and multi-
specialty group practices; (v) large national mail order pharmacies, including
mail order pharmacies affiliated with or owned by managed care organizations;
and (vi) retail pharmacy stores. The Company has experienced increased
competition, particularly 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
the Company.
The Company competes on a number of factors, including quality of care and
service, reputation within the medical community, geographical scope and price.
Competition within the Company's three principal lines of business have been
affected by the decision of third-party payors and their case managers to become
more active in monitoring and directing the care delivered to their
beneficiaries. Accordingly, relationships with such payors and their case
managers and inclusion within preferred provider and other networks of approved
or accredited providers may become a prerequisite to Coram's ability to continue
to serve many of its patients. Similarly, the ability of the Company to align
itself with other health care 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 the Company.
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
health care 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 sales,
loss of market acceptance of the Company's services and price competition. The
Company 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 effect on the business, financial condition and results of
operations of the Company. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations: Risk Factors -- Intensely
Competitive Industry."
SALES AND MARKETING
The Company's alternate site infusion therapy products and services are
marketed through its field sales force, branch sales personnel and various media
formats to its primary referral sources. 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. The R-Net and CPS
divisions each have their own dedicated sales forces that market each division's
services to certain payor customers. In addition, these division sales people
pursue customers identified by the sales personnel employed by the Company's
infusion therapy division. The Company's sales forces in each of its lines of
business are responsible for establishing and maintaining referral sources. All
sales employees receive a base salary plus incentive compensation based on
profitable revenue growth.
The Company'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
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insurance companies. Marketing is focused on presenting the Company's clinical
expertise tailored to the different customer interests with a specific emphasis
on key therapies. Products and services that are outside of base infusion
therapy are supported by specialty marketing and sales support personnel.
As a result of escalating pressures to contain health care costs,
third-party payors are participating to a greater extent in decisions regarding
health care alternatives using their significant bargaining power to secure
discounts and to direct referrals of their enrollees to providers. In response,
Coram has modified its sales and development focus to aggressively pursue
agreements with third-party payors, managed care organizations and provider
networks that provide high quality, cost-effective care. The Company 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 payors. In the Company's infusion
therapy division, managed care sales representatives are deployed in each market
and at the corporate level with additional resources focused on large national
payors. The Company is currently focusing its efforts in its infusion therapy
business on increasing referrals through selected managed care agreements with
the goal of being the exclusive infusion provider as well as selling specialty
programs such as nutrition, chronic care and transplant services to these key
customers.
CUSTOMERS AND SUPPLIERS
The Company provides alternate site home health care services and products
to a large number of patients. Excluding Medicare and Medicaid, which
collectively represented 20% of net revenue for 1998, and Aetna USHC and its
affiliated payors, which represented 12% of net revenue for 1998 under its
arrangement with the R-Net division and other service agreements with the
Company, no other single payor accounted for more than 5% of Coram's net revenue
for 1998. The Company purchases products from a large number of suppliers and
considers its relationships with its vendors to be good. The Company believes
that substantially all of its products are available from alternative sources
with terms consistent in all material respects to its present agreements.
GOVERNMENT REGULATION
General. The federal government and all states in which Coram currently
operates regulate various aspects of the Company'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. The Company is
also subject to fraud and abuse and self referral laws, which affect its
business relationships with physicians and other health care providers and
referral sources and its reimbursement from government payors. 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
employees of the Company are subject to state laws and regulations governing the
ethics and professional practice of pharmacy and nursing.
The Company may also be required to obtain certification or register 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 health care 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 the Company's business and could prevent the location involved from
offering products and services to patients. Coram's operating results could be
adversely affected, directly or indirectly, as a result of any such sanctions.
The Company believes it complies in all material respects with these and all
other applicable laws and regulations. The health care 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 assurance can be given
that the activities of the Company will not be reviewed and challenged or that
government sponsored health care reform, if enacted, will not result in a
material adverse change to the Company.
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Fraud and Abuse. The Company'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
health care 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 the federal health care programs.
Federal health care programs have been defined to include any plan or program
that provides health benefits which is funded by the United States Government
and commonly include Medicare, Medicaid and Civilian Health and Medical Program
of the Uniformed Services ("CHAMPUS"), among others. Civil suspension for
anti-kickback violations can also be imposed through an administrative process,
without the imposition of civil monetary penalties. In addition, violations of
the anti-kickback statute may be prosecuted as false claims under Medicare law,
the penalties for which include return of payments received, fines and exclusion
from participation. 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 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 payor source.
In addition to the payment or receipt of illegal remuneration for the
referral or generation of Medicare or Medicaid business, the fraud and abuse law
covers 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 health care providers for the referral
of patients to a particular provider, including pharmacies and home health
agencies. Possible sanctions for violation 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 ("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 the Company'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 services agreements pursuant to which the Company provides
pharmacy or R-Net ancillary network management services. In each case the
relationship has been structured using an arrangement the Company 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.
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 receive civil penalties of up to $15,000 per
improper claim and can be excluded from participation in the Medicare and
Medicaid programs on physician self-referrals, with similar penalties. In
addition, a number of the states in which the Company operates have similar
prohibitions on
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physician self referrals with similar penalties. Although the Company 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 monetary
penalties and exclusion from the Medicare and Medicaid programs. The Health
Insurance Portability and Accountability Act of 1996 created two new federal
crimes: "Health Care Fraud" and "False Statements Relating to Health Care
Matters." The Health Care Fraud statute prohibits knowingly and willfully
executing a scheme or artifice to defraud any health care 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 health care 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 policy decision to
significantly increase the financial resources allocated to enforcing the
general fraud and abuse laws. In addition, private insurers and various state
enforcement agencies have increased their level of scrutiny of health care
claims in an effort to identify and prosecute fraudulent and abusive practices
in the health care area. A failure to comply with any of the fraud and abuse
laws could have a material adverse effect on the Company.
Medicare and Health Care Reform. As part of the Balance Budget Act of 1997
(the "BBA"), Congress made numerous changes that affect the participation of
Part A certified home health agency providers and Part B suppliers like the
Company in the Medicare program.
Pursuant to regulations proposed under the BBA, Part A certified home
health agencies will be required, 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 such entities' performance and compliance with Medicare program rules and
requirements. The regulations applicable to Medicare certified home health
providers, as originally published, would require 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 deadline for securing such bonds has been
extended indefinitely, while HCFA reviews the bonding requirements. HCFA has
indicated that the new compliance date will be sixty days after the publication
of the final rule. The Company 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 March 25, 1999, the Company had only five
Medicare certified home health providers, none of which has obtained a surety
bond.
The Company understands that HCFA will be issuing separate surety bond
regulations applicable to Part B durable medical equipment suppliers. If the
regulations applicable to Part B suppliers are similar to those published for
Part A providers, the Company would be required to post bonds for each of its
branches that participate in the Part B program in the same amounts as those
described above for Part A home health service providers. Virtually all of the
Company's branch offices participate as suppliers in the Part B Medicare
program. Similar bonding requirements are being required by state Medicaid
programs. If the Company is required to post surety bonds under the Medicare and
Medicaid programs for each of its Part A home health agency providers and Part B
durable medical equipment supplier locations, the Company will be required to
obtain bonds in the minimum face amount of approximately $17.5 million. If the
Company is not able to obtain all of the necessary bonds, it may have to cease
its participation in the Medicare and Medicaid programs for some or all of its
branch locations. 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. In addition, the BBA eliminated the consumer price index
updates for payments for durable medical equipment and "reasonable charge"
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payments for parenteral and enteral nutrients, supplies and equipment for the
next five years, thereby "freezing" the payment amount for such items until the
year 2003. The BBA also initiated the implementation of a prospective payment
system for home health services for cost reporting periods beginning on or after
October 1, 1999 and certain demonstration projects for competitive bidding of,
at a minimum, oxygen and oxygen equipment, through December 31, 2002. While the
details of the prospective payment and competitive bidding systems are unclear,
there can be no assurance that adoption of these systems, and the reductions and
freezes described above, will not result in a material decrease in the amount of
reimbursement the Company 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 the Company may provide in the future.
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 its business operations. There is significant national concern
today about the availability and rising cost of health care 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 health
care services and to manage and contain its cost. The Company 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 its 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 Coram believes its
operations as currently conducted are in material compliance with existing
applicable laws, certain aspects of the Company's business operations have not
been subject to state or federal regulatory interpretation. There can be no
assurance that review of the Company's business by courts or regulatory
authorities will not result in determinations that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change so as to restrict its existing operations or its expansion.
Most states have laws regulating insurance companies and HMOs. The Company
is not qualified in any state to engage in either the insurance or HMO business,
but the Company has registered one of its subsidiaries as a risk-taking
preferred provider organization in one state due to proposed activities under an
R-NET relationship with a licensed insurance organization. As managed care
penetration increases, state regulators are beginning to scrutinize the
practices of and relationships among third-party payors, 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. The Company
believes that its practices are consistent with those of other health care
companies and do not constitute licensable HMO or insurance activities. To the
extent such licenses may be required, the Company will make the necessary
filings and registrations to achieve compliance with applicable law. 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 the Company and/or its
customers, the Company may be compelled to restructure or refrain from engaging
in certain business practices.
Pharmacies and Home Health Agencies. All of Coram's pharmacies are licensed
in the states in which they are located and in the states where its products are
delivered. All of these pharmacies also have Controlled Substances Registration
Certificates 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
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Company's services to be hazardous, although disposal of non-hazardous medical
waste is also subject to regulation. 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 health care
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 techniques and procedures, and
engineering and work practice controls. Employers are also required to comply
with certain recordkeeping requirements. The Company believes it is in material
compliance with the foregoing laws and regulations.
T(2) Medical Settlement. In September 1994, T(2) Medical, entered into a
settlement agreement with the United States (the "T(2) OIG Settlement
Agreement") settling claims arising out of an investigation by the Department of
Health and Human Services Office of Inspector General ("OIG") into certain
operations of T(2) Medical, which occurred prior to the Four-Way Merger. T(2)
Medical, in expressly denying liability, agreed to a civil order which enjoins
it from violating federal anti-kickback and false claims laws related to
Medicare/ Medicaid reimbursement. The T(2) OIG Settlement Agreement imposes
certain restrictions upon the types of relationship that T(2) Medical may have
with referring physicians and imposes a five-year reporting obligation upon T(2)
Medical. During 1994 and the first quarter of 1995, the Company restructured or
terminated a large number of relationships with physicians in order to meet the
requirements of the T(2) OIG Settlement Agreement, Stark II and Coram's own
compliance standards. The Company has implemented measures to ensure compliance
with the T(2) OIG Settlement Agreement and has engaged Richard P. Kusserow, the
former Inspector General of the Department of Health and Human Services, as a
consultant to assist the Company in its continued development and administration
of its compliance program. The Company's internal regulatory compliance review
program is intended to deal with compliance issues under the T(2) OIG Settlement
Agreement and with other legal, regulatory and ethical compliance issues.
However, no assurance 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 investigation could
result in any, or any combination, of the penalties discussed above depending
upon the agency involved in such investigation and prosecution.
The Company regularly monitors legislative developments and would seek to
restructure a business arrangement if it was determined that any of its business
relationships placed it in material noncompliance with any applicable statute or
regulation. The health care service 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 the Company. Any loss by the Company 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 revenues are
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 -- Governmental Regulation."
EMPLOYEES
As of December 31, 1998, Coram had approximately 3,000 full-time equivalent
employees (3,600 full and part-time employees). None of the Company's employees
is currently represented by a labor union or other labor organization, or
covered by a collective bargaining agreement. Approximately 36% of the 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. The Company believes that its employee
relations are good.
ITEM 2. PROPERTIES.
The Company's headquarters are located in Denver, Colorado and consist of
approximately 27,000 square feet of office space leased through August 1999. The
Company has signed a letter of intent to renew its Denver lease for an
additional two-year term. The R-Net division's principal office and call center
located in
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Whippany, New Jersey occupies approximately 40,000 square feet of office space
leased through August 2004. The CPS division's call center and specialty mail
order pharmacy facility located in Orlando, Florida occupies approximately
26,000 square feet of office space leased through February 2006. As of March 15,
1999, the Company as a whole had approximately 100 facilities throughout the
United States and Canada, totaling approximately 1.0 million square feet of
facility space with monthly rent aggregating approximately $0.9 million. The
Company believes that the loss of the lease on any one facility would not
materially effect the Company.
ITEM 3. LEGAL PROCEEDINGS.
On November 21, 1995, a suit captioned William Hall and Barbara Lisser v.
Coram Healthcare Corporation, James W. Sweeney, Patrick Fortune, and Sam Leno,
No 1:95-CV-2994(WHB) was filed in the United States District Court for the
Northern District of Georgia on behalf of a purported class of plaintiffs who
were entitled to receive warrants pursuant to the settlement of In re T(2)
Medical, Inc. Shareholder Litigation. The plaintiffs filed an Amended Class
Action Complaint on February 28, 1996, in which they allege that the defendants
made false and misleading statements that caused a fraud on the market and
artificially inflated the price of the Company's stock during the period from
August 1994 through August 1995. Such Complaint alleges violations of Section
10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5
promulgated thereunder, against all of the defendants. The Complaint also
alleges controlling person liability against the individual defendants under
Section 20(a) of the Exchange Act, and further alleges fraud by all of the
defendants under Georgia law. Finally, the plaintiffs allege a breach of the
covenant of good faith and fair dealing by all defendants. The plaintiffs seek
compensatory damages reflecting the difference in value between the warrants as
issued pursuant to the settlement of In re T(2) Medical, Inc. Shareholder
Litigation with the trading price of the Company's common stock at its actual
price, and the same number of warrants at the same exercise price with the
Company's stock trading at its alleged true value. The defendants filed a motion
to dismiss the Amended Class Action Complaint on March 13, 1996. The Court
granted the Company's motion to dismiss on February 12, 1997. The plaintiffs
appealed the dismissal to the Eleventh Circuit Court of Appeals, which affirmed
the dismissal on October 15, 1998. The plaintiffs filed a petition with the
United States Supreme Court on March 15, 1999 for a writ of certiorari, and the
Company intends to respond to the petition.
In January 1999, the Internal Revenue Service ("IRS") completed the
examination of the federal income tax return of the Company for the year ended
September 30, 1995, and proposed substantial adjustments to the prior tax
liabilities of the Company. The Company has agreed to adjustments of $24.4
million that only affect the net operating loss carryforwards available. The
Company does not agree with the other proposed adjustments regarding the
deduction of warrants, write-off of goodwill and the specified liability portion
of the 1995 loss which affects the prior year's tax liability. The Company has
been advised by the IRS that it will receive a notice of deficiency with respect
to the proposed adjustments. The Company intends to contest the notice of
deficiency through administrative proceedings or litigation, and will vigorously
defend its current position. The most significant proposed adjustment relates to
the ability of the Company to categorize certain net operating losses 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. Due to the uncertainty of final resolution, the Company's financial
statements include a reserve for these issues. The Company would, however, be
required to pay from its cash resources any deficiency resulting from resolution
of the proposed adjustments, plus interest. Due to the early phase of this
matter and the uncertainties inherent in any proceeding with the IRS or in
litigation, no assurance can be given that the Company will prevail. If the
Company does not prevail with respect to the proposed material adjustments, the
financial position and long-term liquidity of the Company could be materially
adversely affected. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations: Risk Factors -- Certain Legal
Proceedings," and Note 9 to the Company's Consolidated Financial Statements.
The Company intends vigorously to defend itself in the matters described
above. Nevertheless, due to the uncertainties inherent in litigation and IRS
proceedings, the ultimate disposition of the matters described in the preceding
paragraphs cannot presently be determined. Accordingly, except for the
settlement of the
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Shareholder Litigation described in Note 12 to the Company's Consolidated
Financial Statements, charges recorded for various litigation settlements that
are not individually material to the Company and the reserve established for the
tax case as discussed above, no provision for any loss that may result upon
resolution of any suits or proceedings has been made in the Company's
Consolidated Financial Statements. An adverse outcome in any such litigation or
proceedings could have a material adverse effect to the financial position,
results of operations and liquidity of the Company.
On July 7, 1997, the Company filed suit against Price Waterhouse LLP (now
known as PricewaterhouseCoopers LLP) 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 auditors, PricewaterhouseCoopers LLP, 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 court in California
because of inconvenience to witnesses with a right to re-file in Illinois. The
Company re-filed the lawsuit in state court in Illinois. PricewaterhouseCoopers
LLP filed a motion to dismiss the Company's lawsuit in the state court in
Illinois on several grounds, but their motion was denied on March 15, 1999. The
lawsuit has progressed into the discovery stage. There can be no assurance of
any recovery from PricewaterhouseCoopers LLP. See Note 3 and Note 12 to the
Company's Consolidated Financial Statements.
The Company is also a party to various other legal actions arising out of
the normal course of its business. 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.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of these actions cannot presently be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Company's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol "CRH". The following table sets forth the high and low
sale prices of the common stock as reported on the New York Stock Exchange
Composite Tape for the periods indicated:
HIGH LOW
---- ---
Calendar Year 1997
First Quarter...................................... 5 7/8 3 3/4
Second Quarter..................................... 4 1 1/4
Third Quarter...................................... 5 3/16 3 1/8
Fourth Quarter..................................... 5 2 3/4
Calendar Year 1998
First Quarter...................................... 3 3/8 2 1/8
Second Quarter..................................... 3 1 1/2
Third Quarter...................................... 2 11/16 1 5/16
Fourth Quarter..................................... 2 9/16 1 5/16
As of March 25, 1999, there were 5,137 record holders of the Company's
common stock. On March 25, 1999, the last reported sale price of the common
stock on the NYSE was $1.6875 per share.
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The Company 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. The Company currently intends to retain all future
earnings for use in the operation of its business. Accordingly, the Company 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 of its borrowing agreements, future earnings, operations,
capital requirements, the general financial condition of the Company,
contractual restrictions and general business conditions.
The Company did not sell any of its equity securities in the three months
ended December 31, 1998 that were not registered under the Securities Act of
1933 (the "Act"), as amended. The Company issued 38,495 shares of the Company's
common stock on March 1, 1999 in reliance upon exemptions provided by Sections
4(2) and 3(b) of the Act and the regulations promulgated thereunder, in
satisfaction of the Company's obligation under an agreement entered into by one
of the Company's predecessors in connection with its acquisition of a mail order
pharmacy business.
The continued listing criteria of the NYSE require the Company to satisfy
certain maintenance standards, including $12.0 million in net tangible assets
and an average pre-tax income of $0.6 million. The Company has been advised by
the NYSE that it does not currently meet such continued listing criteria. The
Company must meet such continued listing criteria or other performance criteria
acceptable to the NYSE to maintain its listing on the NYSE. The Company is
reporting its performance and discussing its listing status with the NYSE. There
can be no assurance that the Company will be able to maintain its listing with
the NYSE. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations: Risk Factors -- New York Stock Exchange
("NYSE") Continued Listing Criteria; Risks, Relating to Listing."
The holders of the Company'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, such 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 New Senior Credit Facility pursuant to
which they were issued warrants to purchase 1.9 million shares of the Company's
common stock. In certain circumstances and depending upon possible adjustments
to the conversion price of the Series B Notes that are scheduled to first take
effect on April 13, 1999, such holders may be in a position to influence the
business and affairs of the Company and, in certain circumstances and assuming
conversion of the Series B Notes and exercise of related warrants, such holders
may own collectively 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 -- Equity Conversion Rights
Held by Existing Debt Holders" and Note 8 to the Company's Consolidated
Financial Statements.
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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.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- --------- ---------
INCOME STATEMENT DATA:
Net revenue............................. $526,516 $473,141 $ 529,618 $ 608,618 $ 453,145
Cost of service......................... 394,532 337,537 369,337 465,743 315,831
-------- -------- --------- --------- ---------
Gross profit.......................... 131,984 135,604 160,281 142,875 137,314
Operating expenses:
Selling, general and administrative
expenses........................... 96,571 93,167 104,261 133,037 81,907
Provision for estimated uncollectible
accounts........................... 15,343 16,209 29,045 68,912 36,817
Amortization of goodwill.............. 11,139 13,586 15,259 15,307 8,971
Charge for long-lived assets and
acquired receivables:
Goodwill and other long-lived
assets(1)........................ -- -- -- 166,373 --
Valuation of acquired
receivables(2)................... -- -- -- 37,000 --
Merger expenses(3).................... -- -- -- -- 28,500
Provision for (income from) litigation
settlements(4)..................... -- (156,792) 27,875 -- 23,220
Restructuring costs, net(5)........... (3,900) -- -- 6,158 95,500
-------- -------- --------- --------- ---------
Total operating expenses...... 119,153 (33,830) 176,440 426,787 274,915
-------- -------- --------- --------- ---------
Operating income (loss)................. 12,831 169,434 (16,159) (283,912) (137,601)
Interest income....................... 1,102 2,242 1,497 1,531 2,469
Interest expense(6)................... (32,734) (75,026) (78,767) (49,741) (7,414)
Gains on sales of businesses(7)....... 1,071 26,744 -- -- --
Termination fee(8).................... -- 15,182 -- -- --
Other income (expense), net........... (266) 1,517 2,115 (2,117) 865
-------- -------- --------- --------- ---------
Income (loss) before income taxes and
minority interests.................... (17,996) 140,093 (91,314) (334,239) (141,681)
Income tax expense (benefit).......... 2,300 7,550 (13,998) (11,154) (26,231)
Minority interest in net income of
consolidated joint ventures........ 1,399 7,283 7,698 10,964 12,622
-------- -------- --------- --------- ---------
Net income (loss)....................... $(21,695) $125,260 $ (85,014) $(334,049) $(128,072)
======== ======== ========= ========= =========
Earnings (loss) per common share........ $ (0.44) $ 2.64 $ (2.05) $ (8.39) $ (3.32)
======== ======== ========= ========= =========
Earnings (loss) per common share --
assuming dilution..................... $ (0.44) $ 2.30 $ (2.05) $ (8.39) $ (3.32)
======== ======== ========= ========= =========
Cash dividends per common share(9)...... -- -- -- -- --
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 53 $108,950 $ 15,375 $ 26,735 $ 30,134
Working capital (deficit)............... 64,559 (11,620) (132,529) 37,422 83,811
Total assets............................ 437,619 516,820 545,309 687,849 576,439
Long-term debt, net of current
portion(10)........................... 242,162 150,428 266,641 439,309 119,726
Stockholders' equity (deficit).......... 92,857 125,026 (21,482) 18,040 322,261
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20
- - ---------------
Earnings per common share amounts prior to 1997 have been restated to
comply with Statement of Financial Accounting Standards No. 128, Earnings Per
Share ("Statement 128"). For further discussion of earnings per share and the
impact of Statement 128, see the notes to the Company's Consolidated Financial
Statements. The financial data prior to 1998 has been restated to conform with
the 1998 presentation.
(1) In 1995, Coram recorded an impairment loss of $166.4 million related to its
home infusion business, of which $158.1 million related to goodwill and
$8.3 million related to other long-lived assets.
(2) In 1995, Coram reduced the valuation of the acquired receivables related to
the Caremark Business by an aggregate of $37.0 million, as certain
receivables for services rendered prior to the acquisition date of April 1,
1995 were determined to be uncollectible.
(3) Coram recorded merger costs of $28.5 million in 1994 related to the
Four-Way Merger. This included executive severance payments directly
related to the merger based on the respective employment agreements,
investment banking fees, consulting, legal and accounting fees and other
costs incurred as a direct result of the Four-Way Merger.
(4) In 1994, the $23.2 million provision for litigation settlements represents
the cash and non-cash costs of settling certain litigation matters which
arose prior to the Four-Way Merger. The $27.9 million provision for
litigation settlements in 1996 includes a non-cash provision of $25.6
million and a cash provision of $0.3 million related to an agreement to
settle certain stockholder class actions and certain derivative litigation.
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 Business in 1995.
(5) In 1994, as a result of the Four-Way Merger, Coram initiated a merger and
restructuring plan (the "Coram Consolidation Plan") and recorded an
estimated cost to complete the Coram Consolidation Plan of $95.5 million.
In 1998, it was determined that the plan was substantially complete and the
reserve was reversed. See Note 6 to the Company's Consolidated Financial
Statements.
(6) Interest expense increased significantly in 1995 due to increased
borrowings to finance the acquisition of the Caremark Business and other
acquisitions, merger costs and other working capital requirements, as well
as the related amortization of deferred financing costs and warrants.
Interest expense decreased significantly in 1998 due to a repayment of the
Company's Former Senior Credit Facility and a restructuring of its
subordinated debt.
(7) In 1998 and 1997, the Company sold its Lithotripsy Business to IHS and
recorded a gain on sale of $0.7 million and $26.7 million, respectively.
(8) In 1997, the Company received $21.0 million from the termination of a
merger agreement with IHS. As a result, the Company recorded other income
of $15.2 million, representing the $21.0 million termination fee less
related costs.
(9) Excludes dividends paid by predecessor entities prior to the July 1994
Four-Way Merger.
(10) On October 13, 1995, two major lenders of the Company, who issued credit in
connection with the acquisition of the Caremark Business, agreed to
restructure major terms of their debt agreements. As a result of the
restructuring, the maturity date was shortened. In March 1996, Coram
reclassified a portion of the long-term balance to current. The current
portion of long-term debt was $0.3 million, $150.2 million, $198.0 million,
$67.1 million and $5.9 million at December 31, 1998, 1997, 1996, 1995 and
1994, respectively. In 1998, the Company's debt instruments were
restructured and the maturity dates were extended.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 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. The Company's actual results may vary materially from the
forward-looking statements made in this report due to important factors such as:
history of operating losses and uncertainties associated with future operating
results; significant outstanding indebtedness; limited liquidity; reimbursement
related risks; dependence on relationships with third parties; timing of or
ability to complete acquisitions; government regulation of the home health care
industry; and unanticipated impacts from the Year 2000 Issue. 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 Coram 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. Coram
does not undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
BACKGROUND
General. The Company is engaged in three principal lines of business:
alternate site (outside the hospital) infusion therapy and related services,
ancillary network management services, and pharmacy benefit management and
specialty mail-order pharmacy services. Other services offered by Coram include
centralized management, administrative and clinical support for clinical
research trials, medical informatics and non-intravenous home health products
such as durable medical equipment and respiratory therapy services.
Business Strategy. The Company's overall business strategy is focused on
the basic factors that could lead to profitability: strategic revenue generation
programs, cost reduction and control, quality improvement and cash collections.
The Company's revenue generation programs include a focus on business
relationships where the Company can provide high quality of care while operating
profitably. In the Company's alternate site infusion therapy business, the
Company is continuing to emphasize marketing efforts aimed at improving its
therapy mix, physician relationships and payor relationships. It also has
continued the development of its specialty programs aimed at serving patients
requiring intravenous nutrition; pre- and post-transplant patients; patients
with HIV/AIDS; and patients with chronic disorders such as hemophilia, immune
deficiencies and alpha-one antitrypsin deficiency. The R-Net division remains
focused on marketing to HMOs, PPOs, at-risk physician groups and other managed
care payors desiring to reduce the overall cost of their health care
expenditures through management of the home health services utilized by their
members. Meanwhile, the CPS division has focused its marketing efforts on
smaller health plans, including companies with self-insured plans, self-funded
employer health plans, labor unions, managed care payors and patient populations
with specialized needs such as pre- and post-transplant patients, patients with
HIV/AIDS and chronic conditions such as diabetes and asthma. In 1999, the
Company intends to expand the reach of the CPS division by developing the
capability to accept orders for its specialty mail-order pharmacy services over
the Internet.
The Company has implemented cost reduction and control programs focused on
the reduction and control of cost of services and operating expenses, assessment
of poorly performing branches and review of branch efficiencies. Delivery of
quality service in the Company's infusion therapy division in particular is
being closely monitored through an internal task force, more rigorous reporting
and independent patient satisfaction surveys. Furthermore, management throughout
the Company is continuing to concentrate on reimbursement by emphasizing
improved billing and cash collections methods and continued assessment of
systems support and support for reimbursement. 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.
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22
Events that impacted the Company in 1998 or which may impact the Company in
the future include the restructuring of the former credit facilities of the
Company and related reduction of interest expense, and entering into a five-year
capitated agreement with Aetna USHC. Strategic alternatives currently being
considered by the Company include, among others: (i) the evaluation of potential
acquisitions in markets that would permit the Company to grow its local or
regional business either through one of its three principal lines of business or
through complimentary home health services such as respiratory therapy, durable
medical equipment and home health nursing; (ii) the entrance into the E-commerce
market which would allow the CPS division to receive orders over the Internet;
and (iii) the continued investment into and development of services provided by
the Clinical Research and Medical Informatics division. Combined, management
believes that the foregoing will improve the Company's financial prospects,
improve and stabilize relationships with payors and referral sources, and
improve its position within the alternate site health care services industry.
There can be no assurance that any acquisitions or other strategic
alternatives will be consummated or will be available to the Company on
commercially acceptable terms.
Factors Affecting Recent Operating Results. The most significant factors
affecting the Company's operating performance and financial condition are as
follows:
(i) restructure of its credit facilities through the repayment of its
former senior credit facility in January 1998, the exchange of its former
subordinated debt for the issuance of the Series A Notes and the Series B
Notes in June 1998 and the establishment of the New Senior Credit Facility
in August 1998;
(ii) growth in the Company's R-Net division with the addition of the
five-year capitated agreement with Aetna USHC beginning in July 1998;
(iii) expansion and improved sales efforts in the Company's CPS
division;
(iv) sale of substantially all of the Company's interest in its
Lithotripsy Business in the third quarter of 1997, with the remaining
interest sold in the second quarter of 1998, allowing the Company to
significantly reduce its debt obligations and its contingent liabilities
associated with the Company's former commitments to its partners in the
Lithotripsy Business;
(v) ongoing pricing pressure in the Company's infusion business as a
result of an unfavorable shift in payor mix from private indemnity insurers
to managed care organizations and other contracted payors, 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 payors for the years ended December 31, 1998, 1997
and 1996:
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -----
Private Indemnity Insurance and Other Non-Contracted
Payors.............................................. 25% 27% 33%
Managed Care Organizations and Other Contracted
Payors.............................................. 51% 45% 40%
Medicare and Medicaid Program......................... 24% 28% 27%
--- --- ---
Total....................................... 100% 100% 100%
=== === ===
(vi) 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-bearing relationships with
third-party payors pursuant to which they have been delegated control over
the provision of a wide variety of health care services, including the
services offered by the Company.
RESULTS OF OPERATIONS
Certain capitalized terms used herein have the meaning set forth in the
Notes to the Consolidated Financial Statements.
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23
The following table shows certain items as a percentage of the Company's
net revenue for the periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
----- ----- -----
Net revenue................................................. 100.0% 100.0% 100.0%
Cost of service............................................. 74.9 71.3 69.7
----- ----- -----
Gross profit................................................ 25.1 28.7 30.3
Operating expenses:
Selling, general and administrative expenses.............. 18.3 19.7 19.6
Provision for estimated uncollectible accounts............ 2.9 3.4 5.5
Amortization of goodwill.................................. 2.1 2.9 2.9
Provision for (income from) litigation settlement......... -- (33.1) 5.3
Reversal of accrual for restructuring costs............... (0.7) -- --
----- ----- -----
Total operating expenses.......................... 22.6 (7.1) 33.3
----- ----- -----
Operating income (loss)..................................... 2.5 35.8 (3.0)
Other income (expenses):
Interest income........................................... 0.2 0.5 0.3
Interest expense.......................................... (6.2) (15.9) (14.9)
Termination fee........................................... -- 3.2 --
Equity in net income of unconsolidated joint ventures..... -- 0.3 0.2
Gains on sales of businesses.............................. 0.2 5.6 --
Gains (losses) on sale of property and equipment.......... (0.1) -- 0.1
Other income (expense), net............................... -- 0.1 0.1
----- ----- -----
Income (loss) before income taxes and minority interests.... (3.4) 29.6 (17.2)
Income tax expense (benefit).............................. 0.4 1.6 (2.6)
Minority interests in net income of consolidated joint
ventures............................................... 0.3 1.5 1.5
----- ----- -----
Net income (loss)................................. (4.1)% 26.5% (16.1)%
===== ===== =====
1998 Compared to 1997
Sale of Lithotripsy Business. As previously discussed in "Factors Affecting
Recent Operating Results," and in Note 5 to the Company's Consolidated Financial
Statements, the Company sold substantially all of its Lithotripsy Business in
1997. The Lithotripsy Business provided the following to the Company's
operations (in millions):
YEAR ENDED
DECEMBER 31,
-------------
1998 1997
---- -----
Net revenue................................................. $0.7 $37.3
Gross profit................................................ 0.4 23.5
Operating income............................................ 0.4 17.6
The following discussion of 1998 to 1997 includes separate disclosure of
the impact of the Lithotripsy Business for conformity of the periods presented.
Consolidated Net Revenue. Net revenue increased $53.4 million or 11.3% from
$473.1 million in 1997 to $526.5 million in 1998. The increase in Net Revenue
Excluding the Lithotripsy Business of $90.0 million was offset by a decline in
net revenue as a result of sale of the Lithotripsy Business, as noted above.
Net Revenue Excluding the Lithotripsy Business. Net revenue increased $90.0
million or 20.6%, from $435.8 million in 1997 to $525.8 million 1998. The net
revenue increase can be attributed to i) an increase in alternate site infusion
therapy business of $27.9 million resulting primarily from an increase in
patient census of 4.0%; ii) an improvement of $47.7 million in the R-Net
division attributed primarily to the addition of the
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capitated contract with Aetna USHC; and iii) an increase in the CPS division
resulting from expansion of services and improved sales efforts.
Consolidated Gross Profit. Gross profit decreased $3.6 million from $135.6
million or a gross margin of 28.7% in 1997 to $131.9 million or a gross margin
of 25.1% in 1998. The increase in Gross Profit Excluding the Lithotripsy
Business of $19.5 was offset by a reduction due to the sale of the Lithotripsy
Business of $23.1 million. The gross margin percent decrease is due to the sale
of the Lithotripsy Business which had a higher gross margin percentage than the
other lines of business in 1998.
Gross Profit Excluding the Lithotripsy Business. Gross profit increased
$19.5 million from $112.1 million or a gross margin of 25.7% in 1997 to $131.6
million or a gross margin of 25.0% in 1998. The increase results primarily from
the increase in net revenue noted above.
Consolidated Selling, General and Administrative ('SG&A") Expenses. SG&A
increased $3.4 million or 3.7% from $93.2 million in 1997 to $96.6 million in
1998. The sale of the Lithotripsy Business contributed to a $3.2 million
decrease offsetting the increase noted in Selling, General and Administrative
Expenses Excluding the Lithotripsy Business.
SG&A Expenses Excluding the Lithotripsy Business. SG&A increased $6.6
million or 7.3%, from $90.0 million in 1997 to $96.6 million in 1998. However,
SG&A was 18.4% of net revenue in 1998 compared to 20.6% of net revenue in 1997.
The decrease in SG&A as a percent of net revenue is attributable to the R-Net
division's increase in net revenue in excess of the $6.5 million increase in
SG&A.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $16.1 million or 3.7% of net revenue in 1997 compared
to $15.3 million or 2.9% of net revenue in 1998. The decrease is due primarily
to the Company's continuing concentration on collection efforts and an increase
in the capitated portion of net revenue in 1998. The sale of the Lithotripsy
Business did not have a material impact on the decrease.
Consolidated Amortization of Goodwill. Amortization of goodwill decreased
$2.4 million from $13.6 million in 1997 to $11.1 million in 1998 due to the sale
of the Lithotripsy Business which had $2.6 million of goodwill amortization in
1997.
Amortization of Goodwill Excluding the Lithotripsy Business. Amortization
of goodwill increased $0.1 million from $11.0 million in 1997 to $11.1 million
in 1998. The increase in amortization is due to the minimal acquisition activity
in 1998.
Provision for (Income From) Litigation Settlement. During 1997, The Company
recorded income from litigation settlement, net of related costs, of $156.8
million in connection with the settlement of a lawsuit against Caremark
resulting from the purchase of the Caremark Business in 1995 (the "Caremark
Lawsuit"). See Notes 3 and 12 to the Company's Consolidated Financial
Statements.
Reversal of Accrual for Restructuring Costs. The Company substantially
completed the consolidation plans reserved for in 1994 and 1995 and has reversed
restructure charges of $3.9 million in 1998. See Note 6 to the Company's
Consolidated Financial Statements.
Consolidated Operating Income. The Company recorded operating income of
$169.4 million for 1997 compared to $12.8 million for 1998. The decrease is due
to the $143.3 million net operating income decrease noted below and the sale of
the Lithotripsy Business which had $17.6 million of operating income in 1997.
Operating Income Excluding the Lithotripsy Business. The Company recorded
operating income of $151.8 million for 1997 compared to $12.5 million for 1998.
The decrease is due primarily to non-recurring income of $156.8 million from the
settlement of the Caremark Lawsuit offset by the growth of operations in 1998 of
$13.5 million.
Interest Expense. Interest expense decreased by $42.3 million or 56.4%,
from $75.0 million in 1997 to $32.7 million in 1998 due primarily to decreases
of $24.1 million resulting from the completion of the restructuring of the
Company's former credit facilities, $4.8 million related to the payment-in-kind
notes issued in 1995 in connection with the acquisition of the Caremark Business
and forgiven in June 1997 as part
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of the settlement of the Caremark Lawsuit and $9.3 million resulting from the
payment and termination of the Former Senior Credit Facility. See Notes 3 and 8
to the Company's Consolidated Financial Statements.
Gains On Sales of Businesses. In 1997, the Company recorded a gain on the
sale of business, net of related costs, of $26.7 million in connection with the
sale of its Lithotripsy Business.
Termination Fee. The Company recorded termination fee income, net of
related costs, of $15.2 million in 1997 in connection with the termination of
the proposed merger with IHS. See Note 4 to the Company's Consolidated Financial
Statements.
Income Tax Expense. During 1998, the Company recorded income tax expense of
$2.3 million compared to $7.5 million in 1997. The 1997 income tax expense is
related to the gain on the sale of the Lithotripsy Business and income from
settlement of the Caremark Lawsuit.
Consolidated Net Income (Loss). During 1998, the Company recognized a net
loss of $21.7 million compared to net income of $125.3 million for 1997. In
addition to the explanation of the change noted below, the Lithotripsy Business
contributed $11.7 million of net income in 1997.
Net Income (Loss) Excluding the Lithotripsy Business. During 1998, the
Company recognized a net loss of $22.0 million compared to net income of $113.5
million for 1997. As discussed above, the change in net income is primarily due
to income from litigation settlement, gain on sale of business and termination
fee totaling $198.7 million in 1997 offset by an increase in operating income
before income from litigation settlement of $13.5 million and a reduction of
1998 expenses for interest of $42.3 million and income taxes of $5.2 million.
1997 Compared to 1996
The Lithotripsy Business. As previously discussed in "Factors Affecting
Recent Operating Results," the Company sold its Lithotripsy Business in 1997.
The Lithotripsy Business provided the following to the Company's operations (in
millions):
YEAR ENDED
DECEMBER 31,
-------------
1997 1996
----- -----
Net revenue................................................. $37.3 $49.7
Gross profit................................................ 23.5 27.4
Operating income............................................ 17.6 21.8
Because the Lithotripsy Business was included in 1997 operating results for
substantially the entire year, the following discussion includes the results of
the Lithotripsy Business in 1997 and 1996.
Net Revenue. Net revenue decreased $56.5 million or 10.7%, from $529.6
million in 1996 to $473.1 million 1997. The decrease was due primarily to a 9.1%
decrease in patient census as well as a continued shift in payor mix from
private indemnity insurance to managed care. See "Factors Affecting Recent
Operating Results."
Gross Profit. Gross profit decreased $24.7 million from $160.3 million or a
gross margin of 30.3% in 1996 to $135.6 million or a gross margin of 28.7% in
1997. The decrease was due primarily to the decrease of $56.5 million in net
revenue described above offset by a decline in cost of service of $31.8 million.
Selling, General and Administrative Expenses. SG&A decreased $11.1 million
or 10.6%, from $104.3 million in 1996 to $93.2 million in 1997. Excluding the
effects of nonrecurring gains on the disposal of businesses and on the
conversion of certain debentures totaling $3.0 million in 1996, SG&A expense
decreased $14.1 million or 13.1%. The improvement was due primarily to the
Company's continuing strategy to reduce corporate and field administrative
costs.
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Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $16.2 million or 3.4% of net revenue in 1997 compared
to $29.1 million or 5.5% of net revenue in 1996. The decrease was due primarily
to the Company's concentrated collection efforts during 1997.
Amortization of Goodwill. Amortization of goodwill decreased $1.7 million
or 11.0%, from $15.3 million in 1996 to $13.6 million in 1997. The decrease in
amortization was due to the sale of the Company's Lithotripsy Business in 1997.
See "Factors Affecting Recent Operating Results" and Note 5 to the Company's
Consolidated Financial Statements.
Provision for (Income From) Litigation Settlement. During 1997, the Company
recorded income from litigation settlement, net of related costs, of $156.8
million in connection with the settlement of the Caremark Lawsuit. During 1996,
the Company recorded a non-cash provision of $25.6 million and a cash provision
of $0.3 million in connection with an agreement to settle certain shareholder
class action and certain derivative litigation ("the Shareholder Litigation").
Under the agreement, the Company was required to issue 5.0 million freely
tradable shares of common stock of which 1.5 million shares were issued March
11, 1997 and 3.5 million shares were issued November 28, 1997. Additionally, a
$2.0 million charge was recorded in 1996 related to various other litigation
settlements. See Notes 3 and 12 to the Company's Consolidated Financial
Statements.
Operating Income (Loss). The Company recorded operating income of $169.4
million for 1997 compared to an operating loss of $16.2 million for 1996. The
increase was due primarily to non-recurring income of $156.8 million from the
settlement in 1997 and the non-recurring provision for shareholder litigation of
$27.9 million in 1996.
Interest Expense. Interest expense decreased by $3.8 million or 4.7%, from
$78.8 million for 1996 to $75.0 million for 1997. The decline was due primarily
to a decrease in interest related to the pay-in-kind notes issued in connection
with the acquisition of the Caremark Business. In June 1997, pursuant to the
settlement of the Caremark Lawsuit, the pay-in-kind notes totaling approximately
$100.0 million in principal and $20.0 million accrued interest were canceled.
Interest on the Company's former senior credit facility for the years ended
December 31, 1997 and 1996 was $11.3 million and $16.4 million, respectively.
See Notes 3 and 8 to the Company's Consolidated Financial Statements.
Gains On Sales of Businesses. In 1997, the Company recorded a gain on the
sale of business, net of related costs, of $26.7 million in connection with the
sale of its Lithotripsy Business. See "Factors Affecting Recent Operating
Results" and Note 5 to the Company's Consolidated Financial Statements.
Termination Fee. The Company recorded termination fee income, net of
related costs, of $15.2 million in 1997 in connection with the termination of
the proposed merger with IHS. See Note 4 to the Company's Consolidated Financial
Statements.
Income Tax Expense (Benefit). During 1997, the Company recorded income tax
expense of $7.6 million compared to an income tax benefit of $14.0 million in
1996. The 1997 income tax expense was related to the gain on the sale of the
Lithotripsy Business and income from settlement of the Caremark Litigation. The
1996 benefit was based on an estimate of 1996 carryback benefits available.
Net Income (Loss). Net income for 1997 was $125.3 million compared to a net
loss of $85.0 million for 1996. As discussed above, the change in net income was
primarily due to non-recurring items totaling $198.7 million in 1997 and $27.9
million in 1996.
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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.
1998 QUARTER ENDED 1997 QUARTER ENDED
----------------------------------------- ------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
-------- -------- -------- -------- -------- -------- --------- --------
Net revenue........................... $158,047 $143,607 $117,173 $107,689 $106,913 $121,934 $ 120,379 $123,915
Cost of service....................... 117,048 109,102 87,882 80,500 82,964 85,344 85,304 83,925
-------- -------- -------- -------- -------- -------- --------- --------
Gross profit.......................... 40,999 34,505 29,291 27,189 23,949 36,590 35,075 39,990
Operating expenses:
Selling, general and administrative
expenses.......................... 29,628 24,245 21,625 21,073 22,960 23,729 22,826 23,652
Provision for estimated
uncollectible accounts............ 4,203 3,897 3,577 3,666 3,682 4,135 4,104 4,288
Amortization of goodwill............ 2,802 2,794 2,778 2,765 2,766 3,611 3,597 3,612
Provision for (income from)
litigation settlements............ -- -- -- -- -- -- (156,792) --
Reversal of accrual for
restructuring costs............... (3,900) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------- --------
Total operating Expense....... 32,733 30,936 27,980 27,504 29,408 31,475 (126,265) 31,552
-------- -------- -------- -------- -------- -------- --------- --------
Operating income (loss)............... 8,266 3,569 1,311 (315) (5,459) 5,115 161,340 8,438
Other income (expenses):
Interest income..................... 138 302 218 444 1,543 89 425 185
Interest expense.................... (6,362) (6,114) (6,083) (14,175) (19,503) (15,797) (18,230) (21,496)
Termination fee..................... -- -- -- -- -- -- 15,182 --
Equity in net income of
unconsolidated joint ventures..... 69 -- -- -- 166 236 555 288
Gains on sales of businesses........ 25 -- 746 300 37 255 (384) 31
Gain (loss) on sale of property and
equipment......................... (363) -- -- -- 8,772 17,972 -- --
Other income, net................... (92) 105 (18) 33 (381) 110 461 143
-------- -------- -------- -------- -------- -------- --------- --------
Income (loss) before income taxes and
minority interests.................. 1,681 (2,138) (3,826) (13,713) (14,825) 7,980 159,349 (12,411)
Income tax expense (benefit)........ 450 450 400 1,000 4,175 3,125 201 49
Minority interest in net income of
consolidated joint ventures....... 425 261 302 411 226 2,552 2,377 2,128
-------- -------- -------- -------- -------- -------- --------- --------
Net income (loss)..................... $ 806 $ (2,849) $ (4,528) $(15,124) $(19,226) $ 2,303 $ 156,771 $(14,588)
======== ======== ======== ======== ======== ======== ========= ========
Earnings (loss) per common share...... $ 0.02 $ (0.06) $ (0.09) $ (0.31) $ (0.39) $ 0.05 $ 3.29 $ (0.31)
======== ======== ======== ======== ======== ======== ========= ========
Earnings (loss) per common share --
assuming dilution................... $ 0.02 $ (0.06) $ (0.09) $ (0.31) $ (0.39) $ 0.04 $ 2.99 $ (0.31)
======== ======== ======== ======== ======== ======== ========= ========
The quarterly results have historically varied based upon unusual and
infrequently occurring charges. See Note 14 to the Company's Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Overview. The Company uses cash generated from operations and available
credit under the New Senior Credit Facility to fund its working capital
requirements and operations. The Company's working capital as of December 31,
1998 was $64.6 million compared to a deficit at December 31, 1997 of $(11.6)
million, an increase of $76.2 million. As of December 31, 1998 the Company's
borrowing base available under the terms of the New Senior Credit Facility was
$56.9 million. Offset by letter of credit obligations of $18.7 million, the
total available credit under the New Senior Credit Facility was $38.2 million as
of December 31, 1998.
The Company from time to time evaluates strategic alternatives for
operating and growing its business. The strategic alternatives which the Company
considers include, but are not limited to, the pursuit of opportunities in its
alternate site infusion therapy business, including consolidation with or the
acquisition of other companies in its infusion business or in businesses
complimentary to the Company's infusion business.
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Any such future acquisitions may require a change in the Company's capital
structure and may entail additional equity and/or debt financing. There can be
no assurance that any such consolidations or acquisitions will occur. Even if a
strategic transaction becomes available, there can be no assurance that the
necessary financing will be available to the Company on commercially acceptable
terms.
The Company continues to have discussions with commercial as well as
investment banks regarding the availability of alternative capital markets
financing for refinancing of the Company's debt. While the Company cannot
predict future financing availability or pricing, it believes that the improving
operations of the Company as well as its continued discussions with financing
resources are positioning the Company to be prepared to take advantage of and
secure financing when appropriate.
As of December 31, 1998 the Company did not have any material commitments
for capital expenditures.
Working Capital. In comparing the year end 1998 with 1997, the primary
changes of current assets were: an increase in accounts receivable of $43.4
million due to increases in sales volume; an increase in inventories and other
current assets of $13.2 million, primarily due to the purchase of certain factor
products that are in short supply and are required to meet future needs as
anticipated by the Company based on current patient volume; and, offset by a
decrease in cash and cash equivalents of $108.9 million due to the pay down of
debt, net of borrowings of $80.7 million; payments for acquisitions of
businesses of $3.3 million; and purchases of property and equipment of $13.3
million. Significant property and equipment purchases of approximately $1.9
million were made for the establishment of the R-Net office in Whippany, New
Jersey for office equipment, communications systems and software, computer
systems and software to meet major business agreements; and the purchase of
medical pumps for $4.1 million to service current Company infusion requirements
for 1998 and 1999 and other Company operating equipment of $5.6 million.
Total current liabilities changed in 1998 primarily due to: a decrease in
current maturities of long-term debt of $150.0 million primarily from repaying
the former senior credit facility of $80.1 million and the restructuring of debt
under the Company's former debt instruments of $87.9 million; and an increase in
accounts payable and other current liabilities of $17.8 million primarily due to
liabilities associated with the R-Net operations.
Year 2000 Issues. The Company believes the most significant risk with the
Year 2000 Problem is the effect such issues may have on third party payors, such
as Medicare. See "Risk Factors." While all of the effects of such noncompliance
have not been identified by the Company, any failure of these third party payors
to resolve Year 2000 Problems in a timely manner could impact the Company's
capital requirements due to a slow down in the payment of accounts receivable
associated with these payors. While the Company has not incurred any payment
issues to date directly related to the Year 2000 Problem, no assurance can be
made that payment issues will not occur. Such an impact could have a material
adverse effect on the Company's ability to generate cash from operations and
require the Company to use available capital from the New Senior Credit
Facility. Significant delays in collecting accounts receivable due to Year 2000
Problems experienced by third party payors could reduce the capital available to
the Company by reducing the borrowing base under the terms of the New Senior
Credit Facility. In addition, such payment delays due to the Year 2000 Problem
could impact the Company's ability to fund future debt obligations.
Part A and Part B Medicare Surety Bonds. As previously discussed under Item
1. Government Regulation, HCFA is reviewing the bonding requirements for
providers of home health services and suppliers of durable medical equipment, as
a condition of their participation in Part A and Part B of the Medicare program.
The compliance date for having the necessary bonds in place will be sixty days
after the publication of the final rule. The Company has estimated that it would
be required to obtain bonds in the minimum face amount of approximately $17.5
million, if and when such regulations are finalized. Such amounts may be funded
in whole or in part through cash generated from operations or the New Senior
Credit Facility. Any use of the New Senior Credit Facility could reduce amounts
available under this 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 compliance would reduce any available amounts of capital under the
New Senior Credit Facility to fund other capital requirements. The Company also
believes that another potential source for meeting a bonding requirement would
be to obtain bonds through a qualified insurance carrier. No assurance can be
given that capital generated by operations, or
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security under the New Senior Credit Facility, or coverage from an insurance
carrier will be available at a reasonable cost to satisfy these requirements, if
finalized.
Accounts Receivable -- Recent Trends, Conditions and Impact. The Company
maintains systems and processes to collect its accounts receivable as quickly as
possible after the underlying service is rendered. Based upon home health
industry reports, the Company believes that it has one of the lowest days
outstanding in accounts receivable in its industry. Nevertheless, the spread
between collection of payment for service and the Company's payment for
salaries, supplies and overhead to that service exceeds 40 days. As such, as the
Company grows its revenue, the amount of working capital availability increases.
However, due to the timing difference between cash realized from the growth in
sales and expense 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 and the New Senior Credit Facility is used at that time.
The use of the New Senior Credit Facility to fund operations would make less
capital available to finance acquisitions or other capital requirements under
current financing arrangements. If the Company incurs a significant increase in
its days outstanding of accounts receivable, the borrowing base under the terms
of the New Senior Credit Facility could be reduced, which in turn would reduce
the amount of available credit under the facility.
While working capital requirements improved in 1998 over 1997, the overall
use of cash from operations for 1998 was $(6.8) million. As a result, the
Company used available capital under the New Senior Credit Facility to fund a
portion of its operating growth during 1998. If the Company continues to use
cash from operations, no assurances can be made that the current available
capital under the New Senior Credit Facility would be sufficient to fund all the
operating requirements of the Company.
YEAR 2000 ISSUES
Background. Some computers, software and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are commonly referred to as the
"Millennium Bug" or "Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems to ensure that
the programs and systems will be Year 2000 compliant.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has commenced the process of modifying, upgrading, and
replacing major systems that have been identified as adversely affected. To
date, internal financial systems have been modified for asset tracking, general
ledger accounting and payroll. Current plans call for the Company to complete
other major systems remediation by September 30, 1999.
Medical Equipment and Systems Other Than Information Technology Systems. In
addition to computers and related systems, the operation of medical equipment,
office and facilities equipment and other common devices may be affected by the
Year 2000 Problem. The Company is currently assessing the potential effect of,
and costs of remediating, the Year 2000 Problem on its office and facilities
equipment through certification by manufacturers and vendors. However, the
Company has limited control over the actions of these manufactures and vendors.
Thus, while the Company expects that it will be able to resolve any significant
Year 2000 Problems identified with this equipment, there can be no assurance
that the manufacturers or vendors will resolve any or all Year 2000 Problems
with any of their equipment. Current plans for the Company to complete this
assessment and remediation are anticipated to be September 30, 1999. Any failure
of these manufacturers or vendors to resolve Year 2000 Problems with their
products in a timely manner could have a material adverse effect on the
Company's business, financial condition, and results of operations.
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Suppliers. The Company has initiated communications with its major
suppliers to identify and, to the extent possible, to resolve issues involving
the Year 2000 Problem. However, the Company has limited or no control over the
actions of these suppliers. Thus, while the Company expects that it will be able
to resolve any significant Year 2000 Problems with these systems by September
30, 1999, there can be no assurance that these suppliers will resolve any or all
Year 2000 Problems with any of its customers. Any failure of these suppliers to
resolve Year 2000 Problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Third Party Payors. Management believes that the most significant risk to
the Company for the Year 2000 Problem is the effect such issues may have on
third party payors, such as Medicare. News reports have indicated that various
agencies of the federal government are having difficulty becoming Year 2000
compliant before the Year 2000. The Company has not yet undertaken
quantification of the effects of such noncompliance or to determine whether such
quantification is even possible. The Company has initiated communications with
its third party payors to identify and, to the extent possible, to resolve
issues involving the Year 2000 Problem. However, the Company has limited or no
control over the actions of these third party payors. Thus, while the Company
expects that it will be able to resolve any significant Year 2000 Problems with
these payors, there can be no assurance that these payors will resolve any or
all Year 2000 Problems with their systems before the occurrence of a material
disruption to the business of the Company. Any failure of these third party
payors to resolve Year 2000 Problems with their systems in a timely manner could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Remediation Costs. The Company is using internal and external resources to
reprogram or replace, test and implement the software and equipment
modifications required under this project. The total cost of the Year 2000
project is estimated at $0.8 million and is being funded through operating cash
flows. As of December 31, 1998, the Company has incurred approximately $0.3
million related to this remediation process. Of these costs, $0.2 million has
been expensed and $0.1 million was capitalized as new equipment or software. Of
the remaining estimated remediation costs of $0.5 million, expenses are
estimated to be $0.3 million with capitalized equipment and software costs
estimated at $0.2 million. This estimate is being monitored and will be revised
in future public filings by the Company as additional information becomes
available.
Contingency Plans. The Company is currently assessing the development of
contingency plans to be implemented as part of its efforts to identify and
correct Year 2000 Problems affecting its internal systems. As the Company
anticipates remediation completion by September 30, 1999, its contingency plans
have not been formulated in detail as the date of this report. Depending on
systems affected, these plans could include accelerated replacement of affected
equipment or software, short to medium-term use of backup equipment and
software, increased work hours for Company personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000 Problems that
arise. To date, none of these type of actions has been called for, however, no
assurance can be given that such resolution will not be required. If the Company
is required to implement any of these type of contingency plans, it could have a
material adverse effect on the Company's financial condition and results of
operations.
Management believes that it is not possible to determine with complete
certainty that all Year 2000 Problems affecting the Company have been identified
or corrected. The number of devices that could be affected and the interactions
among these devices are simply too numerous. In addition, the Company cannot
accurately predict how many Year 2000 Problems related failures will occur or
the severity, duration or financial consequences of any inevitable failures.
RISK FACTORS
History of Operating Losses; Future Operating Results Uncertain
During the year ended December 31, 1998, the Company recorded operating
income of $12.8 million and net loss of $21.7 million. The net loss in 1998 was
primarily due to interest expense of $32.7 million. During the year ended
December 31, 1997, the Company recorded operating income of $169.4 million and
net income of $125.3 million. Net income in 1997 included non-recurring income
of $156.8 million income from settlement of the Caremark Lawsuit, $26.8 million
gain on sale of the Lithotripsy Business and $15.2 million
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termination fee income. Excluding these non-recurring charges, the Company
recognized operating income of $12.6 million and a net loss of $73.5 million in
1997. The net loss in 1997 was primarily due to interest expense of $75.0
million. Numerous other factors have affected the Company's performance and
financial condition to date, including, among others (i) ongoing pricing
pressure in the Company's infusion therapy business as a result of a continuing
shift in payor mix from private indemnity insurance to managed care and
governmental payors 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 the Company; and (iii) increased
competition from hospitals and physicians which have entered into risk bearing
relationships with third-party payors pursuant to which they have been delegated
control over the provision of a wide variety of health care services, including
the services offered by the Company.
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.
Significant Outstanding Indebtedness
The Company incurred a significant amount of long-term debt in connection
with the acquisition of the Caremark Business. As of December 31, 1998, the
Company's consolidated long-term indebtedness was $242.2 million, and its
consolidated stockholders' equity was $92.9 million. At December 31, 1998, there
was $87.9 million principal outstanding in the form of Series B Notes at 8.0%
interest, and $153.8 million principal outstanding in the form of Series A Notes
at 9.875% interest. The degree to which the Company is in debt could impair the
Company's ability to finance, through its own cash flow or from additional debt
or equity financing, its future operations or pursue its business strategy. Its
indebtedness may also make the Company more vulnerable to economic downturns,
competitive and payor pricing pressures, adverse changes in government
regulation or other adverse events or circumstances. See "Liquidity and Capital
Resources." and Note 8 in the Company's Consolidated Financial Statements.
Equity Conversion Rights Held by Existing Debt Holders
Cerberus Partners, L.P., Goldman Sachs Credit Partners, L.P. and Foothill
Capital Corporation (collectively, the "Series B Holders") are holders of the
Company's Series B Notes, with an outstanding principal balance of $87.9
million. The Series B Notes mature April 2008, subject to the obligation of the
Company to offer to prepay all Series B Notes on the date of maturity of the
Series A Notes. The Series B Notes are currently convertible into shares of
common stock of the Company at a price of $3.00 per share (subject to adjustment
as discussed below). In addition, the Series B Holders are holders of warrants
to purchase more than 1.9 million shares of common stock of the Company at an
exercise price of $.01 per share. Based upon the number of shares of common
stock currently outstanding, the Series B Holders at a $3.00 conversion price
beneficially own in the aggregate approximately 39.0% of the shares of common
stock of the Company.
From April 13, 1999 through October 12, 1999, the conversion price of the
Series B Notes will equal the lesser of (i) $3.00 per share and (ii) the price
established on April 13, 1999 based on the average closing price of the
Company's common stock during a 20-day trading period immediately preceding
April 13, 1999 (the "First Reset Price"). From and after October 13, 1999, the
conversion price of the Series B Notes will be adjusted to the lesser of (y) the
First Reset Price and (z) the price established on October 13, 1999 based on the
average closing price of the Company's common stock during a 20-day trading
period immediately preceding October 13, 1999 (the "Second Reset Price").
Depending upon each reset price, the Series B Holders may beneficially own more
than 39.0% of the outstanding common stock of the Company.
The Series B Holders are also holders of the Company's Series A Notes with
an outstanding principal balance of $153.8 million and, directly or through
affiliates, are lenders to the Company under the New Senior Credit Facility. The
Series A Notes mature in May 2001 and the New Senior Credit Facility matures in
February 2001. As holders of the Series A Notes and Series B Notes, and as
lenders pursuant to the New
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Senior Credit Facility, the Series B Holders are entitled to the benefits of
various restrictive covenants, and their consent is required to be obtained for
the Company to engage in various activities and transactions.
Although the Series B Holders are entitled to elect only one member of the
Board of Directors of the Company, the Series B Holders may be in a position to
influence the business and affairs of the Company. Assuming the Series B Holders
elected to convert the Series B Notes and exercise the warrants, the Series B
Holders would own a minimum of approximately 39.0% of the issued and outstanding
common stock, and in the event that the Series B Holders convert the Series B
Notes, exercise the warrants and vote similarly, the Series B Holders would be
in a position to generally control the affairs of the Company as well as the
outcome of stockholder votes, including votes concerning the election of
directors, the adoption of amendments to the Company's Certificate of
Incorporation or By-laws and the approval of significant corporate transactions,
including a sale of substantially all of the Company's assets or merger of the
Company. Such control could also have the effect of delaying or preventing a
change in control of the Company.
Liquidity; Need For Additional Financing
With the completion of its debt restructuring, the Company believes that it
has sufficient operating cash flow, together with amounts available under the
New Senior Credit Facility, to meet current debt requirements and fund its
ongoing operations. As of March 26, 1999, the Company's borrowing base under the
New Senior Credit Facility was $60.0 million, of which $19.6 million was
reserved for letters of credit and $15.0 million was outstanding. Consequently,
$25.4 million of credit remained available. Because the borrowing base
fluctuates based on the amount and age of the Company's accounts receivable and
certain other factors, decreases in sales or significant increases in the number
of days required to collect the Company's accounts receivable may reduce the
amount of credit available to the Company to fund its operations or pursue its
business strategy. There can be no assurance that the amounts available under
the New Senior Credit Facility, together with the cash flows from operations,
will be sufficient to fund the Company's operations, business strategy or
current and future debt obligations. See Note 8 in the Company's Consolidated
Financial Statements.
Reimbursement Related Risks
A substantial portion of the Company's revenue is attributable to payments
received from third-party payors, including Medicare and Medicaid programs and
private insurers. For 1998, approximately 24% of the Company's net revenue in
its infusion therapy business was derived from the Medicare and Medicaid
programs. Congressional Budget Office statistics which were released on March
12, 1999 indicate that the changes in the way Medicare pays for home health care
benefits provided for in the BBA have resulted in a significant reduction of the
Medicare home health program. The levels of revenue and profitability of the
Company have been and will continue to be subject to the effect of changes in
coverage or payment rates by third-party payors. Such changes could have a
material adverse effect on the business, results of operation or financial
condition of the Company.
Additionally, managed care payors and even traditional indemnity insurers
increasingly are requesting fee structures and other arrangements providing for
the assumption by health care providers of all or a portion of the financial
risk of providing care (e.g., capitation). Capitation arrangements are
increasingly becoming a material component of the Company's revenues. No
assurance can be given that pricing pressures will not continue or that the
Company's business, financial condition and results of operations will not be
adversely affected by such trends. A rapid increase in the percentage of revenue
derived from managed care payors without a corresponding decrease in the
Company's operating costs could have an adverse impact on the Company's profit
margins.
Payor Mix Shift
Since the inception of the Company in 1994, the Company has been
experiencing a shift in its payor sources from private indemnity payors to
governmental and managed care payors. Private indemnity payors typically
reimburse at a higher amount for a given service and provide a broader range of
benefits than
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governmental and managed care payors. Under the BBA, Congress 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 the Company for its services. Moreover, intense competition among
providers of health care services have encouraged managed care payors to
continue to reduce the prices paid for services, including the services offered
by the Company. Accordingly, the ongoing shift of services delivered to persons
covered under benefit plans funded by governmental or managed care payors could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Concentration Of Large Payors
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 health care economy. Managed
care plans have continued to consolidate to enhance their ability to influence
the delivery of health care services and to exert pressure to control health
care costs. The Company has more than 800 contractual arrangements with managed
care organizations and other parties. The contractual arrangements the Company
has with Aetna USHC and its affiliated payors represented approximately 12% of
the Company's net revenue in 1998. Other than Aetna USHC, no other contractual
managed care arrangement individually accounted for more than 5% of the
Company's net revenues in 1998; however, 10 managed care customers (other than
Aetna USHC) accounted in the aggregate for approximately 16% of the Company's
infusion therapy net revenue in 1998. The loss of Aetna USHC or these other
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
Intensely Competitive Industry
The Company competes in the alternate site infusion therapy, ancillary
network management services and pharmacy benefit management and specialty
mail-order pharmacy markets, each of which is highly competitive. Some of the
Company's current and potential competitors include (i) integrated providers of
alternate site health care services; (ii) hospitals; (iii) local providers of
multiple products and services offered for the alternate site health care
market; (iv) physicians and physician owned organizations such as independent
practice associations and multi-specialty group practices; (v) large national
mail order pharmacies, including mail order pharmacies affiliated with or owned
by managed care organizations; and (vi) retail pharmacy stores. The Company has
experienced increased competition, particularly in its alternate site infusion
therapy business, from hospitals and physicians that have sought to increase the
scope of services offered through their 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 of the Company's 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
traditional indemnity and managed care payors.
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. The Company
expects its competitors to continue to improve their service offerings and price
competitiveness. The Company also expects its competitors to develop new
strategic relationships with providers, referral sources and payors, which could
result in increased in competition. The introduction of new and enhanced
services, acquisitions and industry consolidation and the development of
strategic relationships by the Company's competitors could cause a decline in
sales or loss of market acceptance of the Company's services or price
competition, or make the Company's services less attractive. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See Item 1. "Competition," "Business Strategy" and "Factors
Affecting Recent Operating Results."
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Dependence On Relationships With Third Parties
The profitability of the Company's business depends in part on its ability
to establish and maintain close working relationships with managed care
organizations, private and governmental third-party payors, 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 in general, and with
physicians and physician groups in particular. 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 such existing relationships or the
failure to continue to develop such relationships in the future could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business Strategy."
Certain Legal Proceedings
As described in Item 3. Legal Proceedings, the Company is a party to
several legal disputes, including two material legal disputes. In the suit
captioned William Hall and Barbara Lisser v. Coram Healthcare Corporation, et.
al., the Company is a defendant in a purported class action regarding conduct
that allegedly occurred in 1994 and 1995. The Company's motion to dismiss the
action was granted by the federal District Court in 1997 and the dismissal was
affirmed by the Eleventh Circuit Court of Appeals in 1998. The plaintiffs have
filed a petition with the United States Supreme Court for a writ of certiorari
and the Company intends to respond. The other dispute centers around the
Company's federal income tax return files for its tax year ended September 30,
1995. The Company expects the Internal Revenue Service (the "IRS") to claim more
than $12.7 million in back tax adjustments plus interest. The Company disagrees
with the position taken by the IRS.
The Company intends to defend itself vigorously in these matters.
Nevertheless, due to the uncertainties inherent in litigation, the Company can
not predict the outcome of either of these matters. If the Company does not
prevail in either or both of these matters, the financial condition, results of
operations and liquidity of the Company may be materially adversely affected.
Year 2000 Compliance
As the Year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and computer operating
systems ("Computer Systems"), and other operating equipment ("Equipment") which
use embedded computer chips can accommodate this date value. The Year 2000 issue
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's Computer Systems that
have date-sensitive software or embedded chips may recognize a date using "00"
as the Year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company's plan to resolve the Year 2000 issue (the "Year 2000 Plan")
involves the following four phases: assessment, remediation, testing and
implementation of contingency plans. In addition to the Company's internal
initiatives, the Company has requested information about the Year 2000
compliance status of its material suppliers and payors through
internally-developed Year 2000 surveys and written warranty information. The
Company has also sought to gather information about the Year 2000 compliance
status of the federal and state Medicare and Medicaid agencies with which it
conducts business through its Year 2000 surveys and through research of external
information sources, including government sources. Based solely on such inquiry
and research and the Company's Year 2000 assessment to date, management does not
currently believe that the Company shall incur significant operating expenses or
be required to invest heavily in Computer System improvements or Equipment
relating to the Year 2000 Issue; however, the Company does expect to experience
payment delays, particularly from federal and state welfare programs.
Significant payment delays could reduce the level of accounts receivable
included in the borrowing base under the New
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Senior Credit Facility, which would adversely affect the level of credit
available to the Company and the Company's liquidity. It is impossible to
quantify the effects of any payment delays at this time, but the Company will
continue to monitor and update Year 2000 compliance efforts of the Company and
of its material suppliers and payors. The failure of the Company or others with
whom the company does business or depends on reimbursements to properly manage
the Year 2000 issue could result in a material adverse effect on the business,
financial condition, and results of operations and liquidity of the Company.
Dependence On Key Personnel; Changes In Management
The Company is substantially dependent upon the services of its key
executive officers, which include Donald J. Amaral, Chairman and Chief Executive
Officer, Richard M. Smith, President, Wendy L. Simpson, Executive Vice President
and Chief Financial Officer, Joseph D. Smith, Chief Operating Officer and Dom A.
Meffe, President, CPS. The loss of services of any of these executives could
have a material adverse affect on the Company. The Company's future growth and
success depends, in large part, upon its ability to obtain, 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.
Recruitment and Retention of Trained Personnel
The Company's continued operation of its 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 states in which the Company has operations, are
currently experiencing a shortage of these licensed professionals. The Company
has been affected by this shortage, and has experienced higher contract labor
costs as a result. A continued prolonged shortage of either or both of these
types of professionals could have a material adverse effect on the Company's
business, results of operations and financial condition.
Potential Volatility Of Stock Price
There has historically been and may continue to be significant volatility
in the market price for the Company's common stock. Factors such as actual or
anticipated fluctuations in the Company's operating results, new products or
services introduced or new contracts entered into by the Company or its
competitors, conditions and trends in the health care industry including changes
in government reimbursement policies, adoption of new accounting standards
affecting the health care industry, changes in financial estimates by securities
analysts, proposed or anticipated business combinations including the Company,
general market conditions and other factors could cause the market price of the
Company'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 health care
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 the Company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
New York Stock Exchange ("NYSE") Continued Listing Criteria; Risks, Relating
to Listing
As discussed in Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters, the Company does not currently meet the continuing
listing standards of the NYSE. If the Company is unable to maintain its listing
with the NYSE, the Company anticipates that it would apply to list its common
stock on the American Stock Exchange ("AMEX") or the NASDAQ Stock Market
("NASDAQ"). There can be no assurance that the Company would be eligible for
listing on the AMEX or NASDAQ at the time of application. If the Company's
common stock is not listed on an exchange or NASDAQ, the Company's common stock
would trade in the over-the-counter market, which may adversely affect the
market price for and liquidity of the Company's common stock.
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Government Regulation
General. The Company's health care services business is subject to
extensive and frequently changing state and federal regulation. The Company 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 the Company's activities include regulations 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. The Company 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, pharmacy 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, failure of the Company to comply with such laws could
adversely affect the Company's ability to continue to provide, or receive
reimbursement for, its equipment, products and services, and also could subject
the Company and its officers and employees to civil and criminal penalties.
There can be no assurance 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 the Company and its business.
Medicare and Medicaid Regulations. As a provider of services under the
Medicare and Medicaid programs, the Company is subject to federal laws and
regulations governing reimbursement procedures and practices. These laws include
the Medicare and Medicaid fraud and abuse statutes and regulations, which
prohibit 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 government health care 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 federal government enacted the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") expanding 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
payors; 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.
While the Company 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 (or the
offer of) anything of value in return for, or to induce, a referral for health
care 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 state laws vary from state to state, are often vague and have been
interpreted inconsistently 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
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37
enforcement agencies have recently increased their scrutiny of health care
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 have increasingly focused on the home health care industry. For
example, the government has implemented Operation Restore Trust, a federal
investigatory initiative focused on home health, home medical equipment and
skilled nursing facility providers, and have expanded this program to 12 new
states, as well as implementing "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 adjustments in future payments. There
can be no assurance that the Company will not become the subject of a regulatory
or other investigation or proceeding or that its interpretations of applicable
health care laws and regulations will not be challenged. The defense of any such
challenge could result in substantial cost to the Company and diversion of
management's time and attention. Any such challenge, should it ultimately be
sustained or not, could have a material adverse effect on the Company.
Medicare Certification. Federal regulations governing the Medicare program
are also applicable to the Company. Regulations for Medicare reimbursement
include an annual review of health care facilities and personnel and provide
criteria for coverage and reimbursement. The Company is Medicare certified to
provide nursing services in five states and the District of Columbia. A loss of
Medicare certification of the Company's branch location could have a material
adverse effect on the Company.
Permits and Licensure. Many states require companies providing pharmacy
services, home infusion therapy products and services, home health care
services, and other products and services of the type offered by the Company to
be licensed. Through its subsidiaries, the Company currently is licensed under
state law to provide nursing services in 23 states and currently is licensed to
provide pharmacy services in 49 states. The Company provides unit dose
medications by mail order to various states. The Company has obtained or, in
certain cases, is in the process of obtaining, licenses for its mail order
pharmacy services from such states.
Certificates of Need. Many states require companies providing home health
care services, home infusion therapy and other services of the type offered by
the Company 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 the Company
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 the Company will be able to obtain
required certificates of need and the failure to obtain such certificates of
need could adversely affect the Company's ability to grow its business.
Health Care Reform
In recent years, the health care industry has undergone significant changes
driven by various efforts to reduce costs, including efforts at national health
care reform, trends toward managed care, limits in Medicare coverage and
reimbursement levels, consolidation of health care distribution companies and
collective purchasing arrangements by office-based health care practitioners.
The impact of third-party pricing pressures and low barriers to entry have
dramatically reduced profit margins for health care providers. Continued growth
in managed care and capitated plans have pressured health care providers to find
ways of becoming more cost competitive. This has also led to consolidation of
health care providers in the Company's market areas. The Company's inability to
react effectively to these and other changes in the health care industry could
adversely affect its operating results.
In addition, political, economic and regulatory influences are subjecting
the health care 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 health care system. It is possible that
health care reform at the federal or state level, whether implemented through
legislation or through action by federal or state administrative agencies, would
require the Company to make significant changes in the way it conducts business.
Certain aspects of health care reform such as proposed reductions in Medicare
and Medicaid
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payments, if successfully developed and adopted, could have a material effect
upon the Company's business. The Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care 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 the Company's business, results of operations, and
financial condition.
Potential Professional Liability and Products Liability Exposure; Insurance
The services performed and products sold by the Company 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
the Company or that the Company will be able to obtain insurance in the future
at commercially reasonable rates or in adequate amounts. The Company 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.
Changes In Technology; Potential Obsolescence
The alternate site infusion business of the Company 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 the infusion therapy business of the Company.
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, 1998, the Company had outstanding debt of $242.4 million
of which $153.8 of this outstanding debt that matures in May 2001 bears interest
at 9.875% per annum (subject to adjustment to a maximum of 10.5% on March 31,
1999 if certain performance standards are not achieved) and $87.9 of the
outstanding debt matures in April 2008 and bears interest at the rate of 8% per
annum. The Company also has a New Senior Credit Facility providing for the
availability of up to $60.0 million for acquisitions, working capital, letters
of credit and other corporate purposes. The facility matures in February 2001
and bears an interest rate of prime plus 1.5%, which was 9.25% as of December
31, 1998. As of December 31, 1998, the Company has no outstanding obligation
under the facility. Because substantially all of the interest on the Company's
debt is fixed, a hypothetical 10.0% decrease 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.
ITEM 8. FINANCIAL STATEMENTS.
The Company's Consolidated Financial Statements, Notes to Consolidated
Financial Statements and financial statement schedule at December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996 and the Report of
Independent Auditors as indicated on the Index to Financial Statements and
Schedule on page F-1.
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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.
Information with respect to directors and executive officers of the Company
is incorporated herein by reference to the information under the caption
"Management -- Directors and Executive Officers" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
ITEM 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
Information with respect to executive compensation is incorporated herein
by reference to the information under the caption "Management Compensation" in
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is incorporated herein by reference to the tabulation under the
caption "Voting Securities and Principal Stockholders" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the information under the caption
"Certain Transactions" in the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders.
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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, 1998 and 1997
Consolidated Statements of Operations -- Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- Years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The following consolidated financial
statement schedule of the Registrant for the years ended December 31, 1998,
1997 and 1996 is presented following the Notes to Consolidated Financial
Statements.
Schedule II -- Valuation and Qualifying Account
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) 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)
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EXHIBIT
NUMBER EXHIBIT
------- -------
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 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 Exhibit
2.1 of the Registrant's Current Report on Form 8-K dated
as of September 30, 1997).
3.1 -- Certificate of Incorporation of Registrant, as amended
through May 11, 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).
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).
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EXHIBIT
NUMBER EXHIBIT
------- -------
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).
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)
41
43
EXHIBIT
NUMBER EXHIBIT
------- -------
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 and Amendment No. 1 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 and June 30,
1998, 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).
42
44
EXHIBIT
NUMBER EXHIBIT
------- -------
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 Exhibit 99 of the
Registrant's Current Report on Form 8-K dated as of June
2, 1997).(a)
43
45
EXHIBIT
NUMBER EXHIBIT
------- -------
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 between Coram Healthcare
Corporation and Cardinal Health. Certain portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment. The entire Exhibit 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
quarter ended September 30, 1998).
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 Sachs Credit 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.*
44
46
EXHIBIT
NUMBER EXHIBIT
------- -------
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.*
27.1 -- Financial Data Schedule.*
27.2 -- Restated Financial Data Schedules.*
- - ---------------
(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.
45
47
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 March
31, 1999.
CORAM HEALTHCARE CORPORATION
By: /s/ DONALD J. AMARAL
----------------------------------
Donald J. Amaral
Chairman and Chief Executive
Officer
By: /s/ WENDY L. SIMPSON
----------------------------------
Wendy L. Simpson
Executive Vice President and
Chief Financial Officer
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/ DONALD J. AMARAL Chairman and Chief Executive Officer March 31, 1999
- - ----------------------------------------------------- (Principal Executive Officer)
Donald J. Amaral
/s/ RICHARD M. SMITH President and Secretary March 31, 1999
- - -----------------------------------------------------
Richard M. Smith
/s/ WENDY L. SIMPSON Executive Vice President and Chief March 31, 1999
- - ----------------------------------------------------- Financial Officer (Principal
Wendy L. Simpson Financial Officer)
/s/ SCOTT R. DANITZ Vice President and Controller March 31, 1999
- - ----------------------------------------------------- (Principal Accounting Officer)
Scott R. Danitz
/s/ WILLIAM J. CASEY Director March 31, 1999
- - -----------------------------------------------------
William J. Casey
/s/ RICHARD A. FINK Director March 31, 1999
- - -----------------------------------------------------
Richard A. Fink
/s/ STEPHEN G. PAGLIUCA Director March 31, 1999
- - -----------------------------------------------------
Stephen G. Pagliuca
/s/ L. PETER SMITH Director March 31, 1999
- - -----------------------------------------------------
L. Peter Smith
/s/ STEPHEN FEINBERG Director March 31, 1999
- - -----------------------------------------------------
Stephen Feinberg
46
48
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets -- As of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations -- Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 1998, 1997 and 1996.................... F-5
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II -- Valuation and Qualifying Accounts............ S-1
F-1
49
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Coram
Healthcare Corporation at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Denver, Colorado
March 1, 1999
F-2
50
CORAM HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31,
---------------------
1998 1997
--------- ---------
Current assets:
Cash and cash equivalents................................. $ 53 $ 108,950
Cash limited as to use.................................... 1,557 1,029
Accounts receivable, net of allowances of $18,128 and
$24,047................................................ 113,697 86,142
Inventories............................................... 27,203 14,277
Deferred income taxes, net................................ 705 3,077
Other current assets...................................... 4,963 9,510
--------- ---------
Total current assets.............................. 148,178 222,985
Property and equipment, net................................. 26,563 20,050
Deferred income taxes, non-current, net..................... 4,365 2,336
Other deferred costs........................................ 5,243 7,668
Goodwill, net of accumulated amortization of $67,247 and
$57,937................................................... 235,696 243,864
Other assets................................................ 17,574 19,917
--------- ---------
Total assets...................................... $ 437,619 $ 516,820
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 52,930 $ 39,084
Accrued compensation...................................... 11,205 7,428
Interest payable.......................................... 4,671 473
Current maturities of long-term debt...................... 260 150,225
Income taxes payable...................................... 300 10,287
Deferred income taxes..................................... 1,060 1,256
Reserve for litigation.................................... 2,987 2,785
Accrued merger and restructuring.......................... 3,935 8,771
Other accrued liabilities................................. 6,271 14,296
--------- ---------
Total current liabilities......................... 83,619 234,605
Long-term debt.............................................. 242,162 150,428
Minority interest in consolidated joint ventures............ 2,024 1,016
Other liabilities........................................... 12,947 1,588
Deferred income taxes, non-current.......................... 4,010 4,157
Commitments and contingencies............................... -- --
--------- ---------
Total liabilities................................. 344,762 391,794
Stockholders' equity:
Preferred stock, par value $.001, authorized 10,000 shares,
none issued............................................... -- --
Common stock, par value $.001, authorized 100,000 shares,
issued and outstanding 49,201 at December 31, 1998 and
48,069 at December 31, 1997............................... 49 48
Additional paid-in capital.................................. 427,133 437,608
Accumulated deficit......................................... (334,325) (312,630)
--------- ---------
Total stockholders' equity........................ 92,857 125,026
--------- ---------
Total liabilities and stockholders' equity........ $ 437,619 $ 516,820
========= =========
See accompanying notes to consolidated financial statements.
F-3
51
CORAM HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- --------- --------
Net revenue................................................. $526,516 $ 473,141 $529,618
Cost of service............................................. 394,532 337,537 369,337
-------- --------- --------
Gross profit................................................ 131,984 135,604 160,281
Operating expenses:
Selling, general and administrative expenses.............. 96,571 93,167 104,261
Provision for estimated uncollectible accounts............ 15,343 16,209 29,045
Amortization of goodwill.................................. 11,139 13,586 15,259
Provision for (income from) litigation settlements........ -- (156,792) 27,875
Reversal of accrual for restructuring costs............... (3,900) -- --
-------- --------- --------
Total operating expenses.......................... 119,153 (33,830) 176,440
-------- --------- --------
Operating income (loss)..................................... 12,831 169,434 (16,159)
Other income (expenses):
Interest income........................................... 1,102 2,242 1,497
Interest expense.......................................... (32,734) (75,026) (78,767)
Termination fee........................................... -- 15,182 --
Equity in net income of unconsolidated joint ventures..... 69 1,245 991
Gains on sales of businesses.............................. 1,071 26,744 --
Gains (losses) on sales of property and equipment......... (363) (61) 668
Other income, net......................................... 28 333 456
-------- --------- --------
Income (loss) before income taxes and minority interests.... (17,996) 140,093 (91,314)
Income tax expense (benefit).............................. 2,300 7,550 (13,998)
Minority interests in net income of consolidated joint
ventures............................................... 1,399 7,283 7,698
-------- --------- --------
Net income (loss)........................................... $(21,695) $ 125,260 $(85,014)
======== ========= ========
Earnings (loss) per common share............................ $ (0.44) $ 2.64 $ (2.05)
======== ========= ========
Earnings (loss) per common share -- assuming dilution....... $ (0.44) $ 2.30 $ (2.05)
======== ========= ========
See accompanying notes to consolidated financial statements.
F-4
52
CORAM HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON
COMMON STOCK ADDITIONAL STOCK
--------------- PAID-IN TO BE ACCUMULATED
SHARES AMOUNT CAPITAL ISSUED DEFICIT TOTAL
------ ------ ---------- -------- ----------- --------
Balance, January 1, 1996......... 40,369 $40 $370,876 $ -- $(352,876) $ 18,040
Issuance of common stock and
warrants, net............... 2,035 2 19,865 -- -- 19,867
Shares reserved for
litigation.................. -- -- -- 25,625 -- 25,625
Net loss....................... -- -- -- -- (85,014) (85,014)
------ --- -------- -------- --------- --------
Balance, December 31, 1996....... 42,404 42 390,741 25,625 (437,890) (21,482)
Issuance of common stock and
warrants, net............... 665 1 21,247 -- -- 21,248
Issuance of shares reserved for
litigation.................. 5,000 5 25,620 (25,625) -- --
Net income..................... -- -- -- -- 125,260 125,260
------ --- -------- -------- --------- --------
Balance, December 31, 1997....... 48,069 48 437,608 -- (312,630) 125,026
Issuance 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)
------ --- -------- -------- --------- --------
Balance, December 31, 1998....... 49,201 $49 $427,133 $ -- $(334,325) $ 92,857
====== === ======== ======== ========= ========
See accompanying notes to consolidated financial statements.
F-5
53
CORAM HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (21,695) $ 125,260 $(85,014)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision for estimated uncollectible accounts............ 15,343 16,209 29,045
Depreciation and amortization............................. 28,828 56,068 64,487
Debt interest accrued..................................... 10,280 30,229 23,488
Reversal of accrual for restructuring costs............... (3,900) -- --
Gain on conversion of debt................................ -- -- (1,350)
Litigation settlements not requiring cash................. -- (120,079) 25,625
Minority interest in net income of consolidated joint
ventures, net........................................... (126) (784) (2,946)
Losses (gains) on sales of long-term assets............... 363 (2) (2,400)
Gains on sales of businesses.............................. (1,071) (26,744) --
Equity in net income of unconsolidated joint ventures,
net..................................................... 193 (498) (611)
Other, net................................................ (3,140) 179 --
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable..................................... (43,400) (2,026) 14,029
Prepaid expenses, inventories and other assets.......... (13,178) (9,198) 20,702
Current and other liabilities........................... 25,659 2,132 (22,019)
Accrued merger and restructuring........................ (915) (4,762) (2,817)
--------- --------- --------
Net cash provided (used) by operating activities............ (6,759) 65,984 60,219
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (13,283) (19,149) (6,850)
Cash receipts on sale (payments for acquisitions) of
businesses, net........................................... (3,285) 124,196 4,821
Proceeds from sales of long-term assets..................... 179 680 3,875
Proceeds from long-term receivables......................... -- -- 902
--------- --------- --------
Net cash provided (used) by investing activities............ (16,389) 105,727 2,748
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on issuance of promissory notes.................... 6,000 -- --
Cash consideration for warrant cancellation................. (4,300) -- --
Debt borrowings............................................. 29,250 10,000 --
Repayments of debt.......................................... (115,932) (89,370) (74,630)
Cash paid for debt financing costs.......................... (856) -- (250)
Purchases of ESPP stock and exercise of warrants and
options, net.............................................. 89 1,234 553
--------- --------- --------
Net cash used by financing activities....................... (85,749) (78,136) (74,327)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (108,897) 93,575 (11,360)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 108,950 15,375 26,735
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 53 $ 108,950 $ 15,375
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest.................................................. $ 13,636 $ 12,399 $ 17,719
Income taxes.............................................. 2,470 (1,074) (24,682)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Deferred interest......................................... $ -- $ 4,802 $ 4,968
Warrants issued in connection with debt financing......... 1,863 18,965 10,786
Debt issued in consideration for cancellation of
warrants................................................ 8,400 -- --
Debt issued in consideration for interest payable......... 3,785 -- --
Common stock issued in settlement of litigation........... -- 25,625 1,783
Issuance of stock in connection with acquisitions......... -- 870 819
Capital lease obligations incurred on equipment lease..... -- 41 670
Conversion of long-term debt to common stock.............. -- -- 5,267
Warrants issued to settle litigation...................... -- -- 365
Common stock issued in connection with employment
agreements.............................................. 103 -- 294
See accompanying notes to consolidated financial statements.
F-6
54
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Business Activity. Coram Healthcare Corporation and its subsidiaries
("Coram" or the "Company") are engaged in three principal lines of business:
alternate site (outside the hospital) infusion therapy and related services,
ancillary network management services, and pharmacy benefit management and
specialty mail-order pharmacy services. Other services offered by Coram include
centralized management, administrative and clinical support for clinical
research trials, medical informatics and non-intravenous home health products
such as durable medical equipment and respiratory therapy services.
Coram delivers its alternate site infusion therapy services through
approximately 90 branch offices located in 44 states and Ontario, Canada.
Infusion therapy involves the intravenous administration of anti-infective
therapy, intravenous immunoglobulin ("IVIG"), chemotherapy, pain management,
nutrition and other therapies.
The Company provides ancillary network management services through its
Resource Network division ("R-Net"), which manages networks of home health care
providers on behalf of health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs"), at-risk physician groups and other managed care
organizations. R-Net serves its customers through two primary call centers and
three satellite offices.
The Company delivers pharmacy benefit management and specialty mail-order
pharmacy services through its Coram Prescription Services division ("CPS"),
which provides pharmacy benefit management services as well as specialty
mail-order prescription drugs for chronically ill patients from two primary mail
order facilities and three branch locations. The pharmacy benefit management
service provides 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 are delivered through
two main facilities which provide centralized distribution, compliance
monitoring, patient education and clinical support to a wide variety of
patients.
Most of the Company's alternate site infusion therapy net revenue is from
third-party payors such as private indemnity insurers, managed care
organizations and governmental payors. Competition in this market, combined with
the efforts by third-party payors to contain or reduce health care costs,
contributed to reduced reimbursement rates for services.
Company History. The Company was formed on July 8, 1994, as a result of a
merger by and among T(2) Medical, Inc. ("T(2) Medical"), Curaflex Health
Services, Inc. ("Curaflex"), HealthInfusion, Inc. ("HealthInfusion") and
Medisys, Inc. ("Medisys") (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. 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. See Note 6.
In 1997, the Company provided lithotripsy services through a controlling
interest in 11 lithotripsy partnerships, two wholly-owned lithotripsy entities,
a lithotripsy management company and stock in an equipment service company and
certain related assets (the "Lithotripsy Business"). Effective September 30,
1997, the Company completed the sale of all of its Lithotripsy Business other
than its interests in three lithotripsy partnerships. Two of the remaining
partnerships were sold effective October 3, 1997. Effective June 1, 1998, the
Company completed the sale of its remaining lithotripsy partnership.
F-7
55
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt Restructuring and Refinancing. At December 31, 1997, the Company had
two principal long-term debt instruments, the Former Senior Credit Facility and
the Rollover Note and related warrants, the combined outstanding balance of
which was approximately $299.2 million. During 1998, the Company completed the
restructuring of this debt. The debt restructuring included repayment of all
amounts due under the Former Senior Credit Facility, the consummation of an
exchange of the Rollover Note and related warrants for certain senior
subordinated debt and the execution of a new senior credit facility. See Note 8.
Five-Year Capitated Agreement with Aetna U.S. Healthcare, Inc. In April
1998, the Company entered into a five-year capitated agreement with Aetna U.S.
Healthcare, Inc. ("Aetna USHC") 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 USHC's disease management programs. Effective July 1, 1998, the Company
began receiving capitated payments on a monthly basis for covered members,
assumed certain financial risk for certain home health services and began
providing management services for a network of home health providers through
R-Net. The Company's network of participating providers includes certain
subsidiaries of the Company and it serves certain persons enrolled in Aetna
USHC's HMO-based plans in the eight state area covered under the agreement who
are presently not committed to other networks. Aetna USHC and its affiliated
payors represented 12% of the Company's net revenue in 1998.
Concentration of Credit Risks. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents and accounts receivable. As of December 31, 1998, 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 payors, including private
indemnity insurers, managed care organizations and state and federal
governmental payors such as Medicare and Medicaid, and are unsecured. Credit
risk is mitigated by the large number of entities that comprise the third-party
payor base and credit evaluations of patients and third-party payors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and 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.
Reclassifications. Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform to the 1998 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 payors, including insurance companies, managed care plans,
governmental payors 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 payors under contractual agreements.
Management fees, which are collected from entities managed by the Company, are
based principally on a percentage of the entities' revenue. Management fees were
approximately $0.3 million, $2.0 million and $1.6 million in 1998, 1997 and
1996, respectively.
In certain cases, particularly in the R-Net division, the Company has
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 services required under the payor 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
F-8
56
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Revenue from the Medicare and Medicaid programs accounted for approximately
20%, 21%, and 22% of the Company's net revenue for the years ended December 31,
1998, 1997 and 1996, respectively. Laws and regulations governing the Medicare
and Medicaid programs are complex and subject to interpretation. Management of
the Company believes that it 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. As of December
31, 1997, the Company had approximately $107.6 million cash held in overnight
funds. Cash held in overnight funds as of December 31, 1998 was minimal. A
portion of the Company's cash balance that was limited as to its use includes
cash of partnerships that may only be used for partnership operations.
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 10 years for equipment, furniture, fixtures and
vehicles, and 30 to 31.5 years for buildings. Leasehold improvements are
amortized over the shorter of the lease term or estimated useful lives of the
related assets.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP 98-1, Accounting for the Costs of Computer Software
Developed For or Obtained For Internal Use. SOP 98-1, which was adopted by the
Company as of January 1, 1998, requires capitalization of certain costs incurred
in connection with developing or obtaining internal use software. In prior
years, the Company expensed such costs as incurred. SOP 98-1 requires companies
to adopt its provisions as of the beginning of the year and restate previously
reported interim results. In the fourth quarter of 1998, the Company capitalized
certain costs as software to be amortized over three years. The effect of this
accounting change was to decrease the net loss for the year ended December 31,
1998 by approximately $0.6 million.
Goodwill and other Long-Lived Assets. Goodwill represents the excess of the
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. In 1995, the Company implemented Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("Statement 121"). Accordingly, 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 market value. Impairment indicators include, among other
conditions, cash flow deficits; an 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 markets in which the Company operates.
If future cash flows from operations decrease, the Company may be required
to write down its goodwill and other long-lived assets in the future. Any such
write-down could have a material adverse effect on the Company's financial
position and results of operations.
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
F-9
57
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
write-off percentages are then applied to each aging category by payor
classification to determine the allowance for estimated uncollectible accounts.
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 assurance 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. In 1997, the Financial Accounting Standards Board
("FASB") issued Statement No. 128, Earnings per Share ("Statement 128").
Statement 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to fully diluted earnings per share under the previous earnings per share
methodology. Earnings per share amounts for all periods presented have been
restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
1998 1997 1996
-------- -------- --------
Numerator for basic and diluted earnings per share... $(21,695) $125,260 $(85,014)
======== ======== ========
Denominator:
Weighted average shares............................ 48,870 44,321 41,546
Contingently issuable shares....................... -- 3,142 --
-------- -------- --------
Denominator for basic earnings per share........... 48,870 47,463 41,546
Effect of other dilutive securities:
Stock options...................................... -- 1,292 --
Warrants........................................... -- 5,726 --
-------- -------- --------
Denominator for diluted earnings per
share -- adjusted weighted average shares and
assumed conversion.............................. 48,870 54,481 41,546
======== ======== ========
Earnings (loss) per common share..................... $ (0.44) $ 2.64 $ (2.05)
======== ======== ========
Earnings (loss) per common share -- assuming
Dilution........................................... $ (0.44) $ 2.30 $ (2.05)
======== ======== ========
In 1997, basic earnings per share data was computed by dividing net income
by the weighted average number of common shares and contingently issuable shares
outstanding during the period. Diluted earnings per share was adjusted for the
assumed conversion of all potentially dilutive securities, including stock
options and warrants to purchase common stock. The 1998 and 1996 computations do
not give effect to options, warrants or the 1998 Series B Senior Subordinated
Convertible Notes, as their effect would have been anti-dilutive.
Comprehensive Income. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"),
which establishes rules for reporting and displaying comprehensive income.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
Comprehensive income is defined as essentially all changes in stockholders'
equity exclusive of transactions with owners (e.g., dividends, stock options)
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
F-10
58
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Segment Reporting. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("Statement 131"), which is effective for years beginning
after December 15, 1997. Statement 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted the new requirements
in 1998. See Note 15.
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 is effective for fiscal years beginning after June 15, 1999. The
Company does not believe that adoption of the new requirement will have a
material effect on the Company's future financial position or operating results.
Start-up Costs. In 1998, the AICPA issued SOP 98-5 "Reporting on the Costs
of Start-Up Activities," which requires that the costs of start-up activities be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The Company adopted the SOP 98-5 effective January 1, 1999
and such adoption will not have a significant effect on the results of
operations or financial position.
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. CAREMARK LITIGATION SETTLEMENT
In June 1997, the Company recorded settlement income of $156.8 million
which represents a $165.0 million settlement with Caremark, less related costs
of $8.2 million. The Company and Caremark settled certain litigation arising out
of the purchase of the Caremark Business in 1995. Under the terms of the
settlement, the Junior Subordinated PIK Notes totaling approximately $100.0
million principal and $20.0 million accrued interest (payable semiannually in
PIK Notes of the same type) were cancelled with all payments thereunder
forgiven. Additionally, Caremark agreed to pay $45.0 million in cash to the
Company, which was received September 2, 1997. Of the $45.0 million cash
received, $3.6 million was placed in escrow pending reconciliation of certain
lockbox issues, which were settled at a nominal gain in June 1998. Additionally,
as part of the settlement, Caremark assigned and transferred to Coram all of
Caremark's claims and causes of action against Caremark's auditors, Price
Waterhouse LLP (now known as PricewaterhouseCoopers LLP) related to the lawsuit.
See Note 12.
4. TERMINATED MERGER WITH IHS
On October 19, 1996, the Company, Integrated Health Services, Inc. ("IHS")
and IHS Acquisition XIX, Inc., a wholly-owned subsidiary of IHS ("Merger Sub"),
entered into a definitive Agreement and Plan of Merger ("the Merger Agreement")
providing for the merger (the "IHS Merger") of Merger Sub with and into the
Company. If the IHS Merger had been consummated, the Company would have become a
wholly-owned subsidiary of IHS.
On March 30, 1997, Coram, IHS and Merger Sub executed an amendment to the
Merger Agreement (the "Amendment"), which was to become effective April 4, 1997.
On April 4, 1997, the Company received from IHS a written notice of termination
of the Amendment and the Merger Agreement. Pursuant to the
F-11
59
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terms of the Merger Agreement and as a result of such termination, IHS paid the
Company $21.0 million on May 6, 1997. Accordingly, in the second quarter of 1997
the Company recorded other income of $15.2 million, representing the $21.0
million termination fee less legal, professional and other costs related to the
terminated merger of $5.8 million.
5. SALE OF LITHOTRIPSY BUSINESS
In 1996 and 1997, the Company owned two lithotripsy partnerships and a
controlling interest in 11 lithotripsy partnerships. The Company also owned a
lithotripsy management company and a lithotripter maintenance company. On August
20, 1997, the Company signed an agreement with IHS for the sale of the Company's
interest in its thirteen lithotripsy partnerships, the lithotripsy management
company, the stock of its equipment service company and certain related assets
(the "Lithotripsy Business"). Effective September 30, 1997, the Company
completed the transaction as to all of its Lithotripsy Business other than its
interests in three lithotripsy partnerships. The Company's interests in two of
these partnerships were conveyed to IHS effective October 3, 1997. Proceeds on
the sale of the Lithotripsy Business in 1997 totaled $126.6 million and the
Company recognized a gain of $26.7 million.
Effective June 1, 1998, the Company signed an agreement with IHS for the
sale of the Company's remaining lithotripsy partnership for an aggregate
purchase price of $1.0 million payable in common stock of IHS. As a result, the
Company recognized a gain of $0.7 million in 1998.
6. ACQUISITIONS AND RESTRUCTURING
Acquisitions. The acquisition activity during the year ended December 31,
1998 was limited to the completion of the purchase of two infusion branches for
approximately $2.5 million in cash. During 1996, the Company purchased certain
minority interests in two lithotripsy joint ventures for approximately $4.7
million in cash. These acquisitions were accounted for as purchases.
Individually and in the aggregate, the results of operations of these businesses
for periods prior to their acquisition were not material to the Company's
consolidated results of operations.
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,
1998, the Company may be required to pay under such contingent obligations
approximately $2.2 million subject to increase based, in certain cases, on the
Company or its subsidiaries exceeding certain revenue or income targets and
changes in the market value of the Company's stock. Subject to certain elections
by the Company or the sellers, a maximum of approximately $1.2 million of these
contingent obligations, subject to increase, may be paid in cash. If these
contingent payments are made, they will be recorded as additional goodwill in
the period in which the payment becomes probable. Payments made during the years
ended December 31, 1998, 1997 and 1996 were $0.3 million, $0.6 million and $3.7
million, respectively.
Merger and Restructuring. During September 1994, the Company initiated a
merger and restructuring plan (the "Coram Consolidation Plan") to reduce
operating costs, improve productivity and gain efficiencies through
consolidation of redundant infusion centers and corporate offices, reduction of
personnel, and elimination or discontinuance of investments in certain joint
ventures and other non-infusion facilities. As a result of the Coram
Consolidation Plan, the Company recorded charges of $28.5 million in estimated
merger costs and $95.5 million in estimated restructure costs. During May 1995,
the Company initiated a second restructuring plan (the "Caremark Business
Consolidation Plan") and charged $25.8 million to operations as a restructuring
cost. Certain additional restructuring costs totaling approximately $11.4
million were accounted for as adjustments to the purchase price of the Caremark
Business.
F-12
60
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For both the Coram and Caremark Business Consolidation Plans, personnel
reduction costs include severance payments, fringe benefits and taxes related to
employees to be terminated, costs of terminating executives and buying out
employment and consulting contracts, and incremental professional fees to
develop and implement the plans. Facility reduction costs consist of the cost of
fulfilling or buying out existing lease commitments on branch facilities and
corporate offices that will be closed as part of the restructuring, reduced by
any sublease income. They also include related costs for equipment leases and
facility closure expenses. Facility reduction costs resulting in non-cash
charges consist principally of the write-down, net of any proceeds on
disposition, of operating assets that have become redundant because of the
consolidation. They also include inventory that has no future value because of
the restructuring. For the Coram Consolidation Plan, merger costs consist of
executive severance payments directly related to the Four-Way Merger based on
the relevant employment agreements, investment banking fees, consulting, legal
and accounting fees and other costs incurred as a direct result of the merger.
Discontinuance costs are principally non-cash and consist of the estimated loss
on the disposal of non-core businesses.
In 1998 and 1997, net revenue of the Company does not include revenue from
non-core businesses that were discontinued or disposed of as part of the Coram
Consolidation Plan. However, 1996 net revenue includes approximately $4.9
million from non-core businesses. Operating results from businesses that were
discontinued or disposed in 1996 were not material.
In December 1998, the Company determined that the Coram Consolidation Plan
was complete. As a result, future cash expenditures were no longer expected and
the Company recognized a restructure reversal benefit of $1.1 million. In
addition, the Company in evaluating the estimated costs to complete the Caremark
Business Consolidation Plan and other accruals, recognized a restructure
reversal benefit of $0.7 million and $2.1 million, respectively, was recorded.
The balance in the "Accrued Merger and Restructuring" liability at December 31,
1998 consists of future cash expenditures related to the Caremark Business
Consolidation Plan of $3.0 million and other accruals of $0.9 million.
Under the two plans, the Company has made total payments, disposals and
reversals through December 31, 1998 as follows (in thousands):
BALANCE AT
THROUGH DECEMBER 31, 1998 DECEMBER 31, 1998
----------------------------------------------- ----------------------
CASH NON-CASH RESTRUCTURE FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL REVERSAL EXPENDITURES CHARGES
------------ -------- ------- ----------- ------------ -------
Coram Consolidation Plan:
Merger Costs............. $27,500 $ 600 $28,100 $400 $ -- $28,500
======= ======= ======= ==== ====== =======
Personnel Reduction
Costs................. $20,300 $ 600 $20,900 $300 $ -- $21,200
Facility Reduction
Costs................. 12,015 21,500 33,515 85 -- 33,600
Discontinuance Costs..... 2,000 29,400 31,400 300 -- 31,700
------- ------- ------- ---- ------ -------
Total
Restructuring
Costs.......... $34,315 $51,500 $85,815 $685 $ -- $86,500
======= ======= ======= ==== ====== =======
Caremark Business
Consolidation Plan:
Personnel Reduction
Costs................. $11,300 $ -- $11,300 $ -- $ -- $11,300
Facility Reduction
Costs................. 9,050 3,900 12,950 714 3,036 16,700
------- ------- ------- ---- ------ -------
Total
Restructuring
Costs.......... $20,350 $ 3,900 $24,250 $714 $3,036 $28,000
======= ======= ======= ==== ====== =======
The Company estimates that the future cash expenditures related to the
Caremark Business Consolidation Plan will be made in the following periods: 47%
through December 31, 1999, 9% through December 31,
F-13
61
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, 12% through December 31, 2001, and 32% through December 31, 2002, and
thereafter. Although subject to future adjustment and the Company's ability to
successfully implement its business strategy, the Company believes it has
adequate reserves and liquidity as of December 31, 1998 to meet future
expenditures related to the Caremark Business Consolidation Plan. However, there
is no assurance that the reserves will be adequate or that the Company will
generate sufficient working capital to meet future expenditures.
7. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
DECEMBER 31,
-------------------
1998 1997
-------- --------
Leasehold improvements...................................... $ 4,490 $ 4,567
Equipment and other......................................... 46,273 42,059
Furniture and fixtures...................................... 6,986 6,140
-------- --------
57,749 52,766
Less accumulated depreciation and amortization.............. (31,186) (32,716)
-------- --------
$ 26,563 $ 20,050
======== ========
The above includes immaterial amounts of equipment under capital leases.
Capital expenditures in 1998 and 1997, respectively, have consisted
primarily of $6.2 million and $13.1 million of multi-therapy infusion pumps and
related equipment and supplies to service the growth in the alternate site
infusion therapy business. In 1998, the Company also purchased $1.9 million of
communication and information systems to more effectively process referrals and
management services in its R-Net division. In 1998 and 1997, the Company
purchased $4.0 million and $2.2 million, respectively, of communication and
information systems related to the growth in the Company's operations.
8. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
DECEMBER 31,
--------------------
1998 1997
-------- ---------
Series A Senior Subordinated Unsecured Notes................ $153,785 $ --
Series B Senior Subordinated Convertible Notes.............. 87,922 --
New Senior Credit Facility.................................. -- --
Former Senior Credit Facility............................... -- 80,000
Rollover Note, including accrued interest................... -- 219,241
Other obligations, including capital leases, at interest
rates ranging from 6% to 16%, collateralized by certain
property and equipment.................................... 715 1,412
-------- ---------
242,422 300,653
Less current scheduled maturities........................... (260) (150,225)
-------- ---------
$242,162 $ 150,428
======== =========
F-14
62
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, 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 known as the
"Holders") and the related Series A Senior Subordinated Unsecured Notes (the
"Series A Notes") and the Series B Senior Subordinated Convertible Notes (the
"Series B Notes") contemplated thereby and (ii) a new senior credit facility
with Foothill Income Trust, L.P., Cerberus Partners, L.P. and Goldman Sachs
Credit Partners L.P. (collectively known as the "Lenders") and Foothill Capital
Corporation, as Agent. Under the outstanding credit and debt agreements, the
Company is precluded from paying cash dividends during the term of indebtedness.
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"). As long as the Rollover Note was outstanding, the Holders
had the right to receive warrants to purchase up to 20% of the outstanding
shares of the common stock of the Company (the "Warrants") on a fully diluted
basis. The Securities Exchange Agreement provided for the cancellation of the
Rollover Note (including deferred interest and fees) and the Warrants in an
exchange (the "Exchange"), effective April 13, 1998, 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 Series A Notes and (ii) $87.9 million in original
principal amount of 8% Series B Notes. In addition, under the Securities
Exchange Agreement, the Holders of the Series A and 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, who was elected to the board in June 1998. The
Securities Exchange Agreement in which the Series A Notes and the Series B Notes
were issued contains certain other customary covenants and events of default. At
December 31, 1998, the Company was in compliance with all of these covenants.
Series A Notes. The Series A Notes mature in May 2001 and bear interest at
the rate of 9.875% per annum (subject to adjustment to a maximum of 10.5% on
March 31, 1999 if certain performance standards are not achieved) payable
quarterly in arrears in cash or through the issuance of additional Series A
Notes at the election of the Company. The Holders can require the Company to pay
interest in cash if the Company exceeds a certain interest coverage ratio.
During the year ended December 31, 1998, interest expense on the Series A Notes
was $10.7 million. On July 15, 1998, Series A Notes totaling $3.8 million were
issued in lieu of a cash payment of interest due through such date.
Series B Notes. The Series B Notes mature in April 2008 and bear interest
at the rate of 8% per annum, payable quarterly in arrears in cash or through the
issuance of additional Series B Notes at the election of the Company. During the
year ended December 31, 1998, interest expense on the Series B Notes was $5.0
million. The Series B Notes are convertible into shares of the Company's common
stock at a conversion price (the "Conversion Price") initially equal to $3.00
per share, subject to downward reset to the prevailing market prices (calculated
based on the average of the closing prices for each of the preceding 20 days) on
each of April 13, 1999 and October 13, 1999. The Conversion Price will also be
subject to customary anti-dilution adjustments, including adjustments for sale
of common stock (other than pursuant to existing obligations or employee benefit
plans) at a price below the Conversion Price prevailing at the time of such
sale. Cash will be paid in lieu of fractional shares upon conversion of the
Series B Notes.
The Series A and Series B Notes are redeemable, 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 Series A and Series B Notes are redeemable 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 callable at 103% of the then outstanding
principal amount plus accrued interest at the option of the Company.
F-15
63
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exchange; New Senior Credit Facility. The consummation of the Exchange was
contingent upon the satisfaction of certain conditions prior to closing of the
Securities Exchange Agreement on June 30, 1998. All conditions were satisfied
with the exception of the condition requiring the Company to execute an
agreement for a new senior credit facility. Accordingly, on June 30, 1998, the
Company entered into the First Amendment and Waiver (the "Amendment") to the
Securities Exchange Agreement, and the Exchange was consummated. The Amendment
waived the condition under the Securities Exchange Agreement requiring the
Company to execute an agreement for a new senior credit facility on or prior to
June 30, 1998. In addition, under the Amendment, the Holders of the Series A and
Series B Notes agreed to extend the Company up to $60.0 million of senior
secured debt (the "New Senior Credit Facility"), subject to the completion of
definitive agreements on or prior to September 30, 1998. On August 20, 1998, the
Company entered into a definitive agreement for the New Senior Credit Facility
providing for the availability of the $60.0 million facility for acquisitions,
working capital, letters of credit and other corporate purposes. The
availability is subject to certain borrowing base calculations as defined in the
underlying agreement. The New Senior Credit Facility matures February 26, 2001
and bears an interest rate of prime plus 1.5%, payable in arrears on the first
business day of each month. The interest rate was 9.25% at December 31, 1998.
The New Senior Credit Facility is 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. Under the New Senior Credit Facility, among
other nominal fees, the Company was required to pay an upfront fee of 1.0% or
$0.6 million and is liable for commitment fees on the unused facility of 3/8 of
1.0% per annum, due quarterly in arrears. During the year ended December 31,
1998, interest and related fees on the New Senior Credit Facility were $0.5
million. In addition, the terms of the New Senior Credit Facility provide for
the issuance of warrants to purchase up to 1.9 million shares of common stock of
the Company at $0.01 per share, subject to customary adjustments (the "1998
Warrants"). The 1998 Warrants were valued at their fair value at the date of
issuance, and were accounted for deferred costs to be amortized over the life of
the New Senior Credit Facility. The Company charged $0.5 million to interest
expense during the year ended December 31, 1998 related to the 1998 Warrants.
The terms of the New Senior Credit Facility also provide for the issuance of
letters of credit of up to $25.0 million provided that available credit would
not fall below zero. As of December 31, 1998, the Holders had issued letters of
credit totaling $18.7 million thereby reducing the Company's availability under
the New Senior Credit Facility by that amount. In addition, the terms of the New
Senior Credit Facility provide for a fee of 1.0% per annum on the outstanding
letter of credit obligations that is due in arrears on the first business day of
each month. The New Senior Credit Facility contains certain other customary
covenants and events of default. At December 31, 1998, the Company was in
compliance with all of these covenants except for the debt ratio covenant for
which the Company received a waiver in March 1999.
Secured Promissory Notes. In July 1998, the Company issued secured
promissory notes (the "Promissory Notes") in the aggregate principal amount of
$6.0 million to the Holders of the Series A and B Notes. The Promissory Notes
matured August 20, 1998 and carried an interest rate of 12% per annum, payable
in cash on the maturity date of the Promissory Notes. In August 1998, the
Company repaid in full all principal and interest totaling approximately $6.1
million.
As of December 31, 1997, the Company's principal credit and debt agreements
consisted of arrangements that were entered into on April 6, 1995, at the time
of the acquisition of the Caremark Business and included (i) borrowings under a
Credit Agreement with Chase Manhattan Bank (formerly Chemical Bank), as Agent,
(the "Former Senior Credit Facility") and (ii) the Rollover Note.
Former Senior Credit Facility. In January 1998, the Company repaid all
principal, interest and related fees totaling approximately $80.1 million due
under the 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.
Additionally, in 1995, warrants were issued to the Company's lenders under the
former Senior Credit Facility valued at approximately $8.0 million, their value
at the date of issuance, and were accounted for as interest expense through
March 1997.
F-16
64
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, the Company incurred interest of approximately $1.6 million and
$5.2 million for the years ended December 31, 1997 and 1996, respectively, in
relation to these warrants.
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 and was 16.75% upon the effective cancellation date. During the
years ended December 31, 1998, 1997 and 1996, $10.3 million, $30.2 million and
$23.5 million was accrued on the Rollover Note, respectively. The Warrants
related to the Rollover Note were accounted for as interest expense and
additional paid-in capital. Accordingly, the Company recorded interest expense
related to the Warrants of $3.2 million, $18.2 million and $7.3 million in the
years ended December 31, 1998, 1997, and 1996 respectively.
At December 31, 1998, the Company was obligated to make principal payments
on long-term debt outstanding as follows (in thousands):
YEAR ENDING
DECEMBER 31,
------------
1999..................................................... $ 260
2000..................................................... 283
2001..................................................... 153,957
2002..................................................... --
2003..................................................... --
Thereafter............................................... 87,922
--------
$242,422
========
9. INCOME TAXES
The components of the consolidated income tax expense (benefit) were as
follows (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ --------
Current:
Federal................................................ $1,750 $5,000 $(14,000)
State.................................................. 550 2,550 2
------ ------ --------
Total Current.................................. 2,300 7,550 (13,998)
------ ------ --------
Deferred:
Federal................................................ -- -- --
State.................................................. -- -- --
------ ------ --------
Total Deferred................................. -- -- --
------ ------ --------
Income tax expense (benefit)........................... $2,300 $7,550 $(13,998)
====== ====== ========
F-17
65
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles the federal statutory rate to the effective
income tax expense (benefit) rate:
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
Federal statutory rate...................................... (35.0)% 35.0% (35.0)%
Valuation allowance......................................... 34.3 (34.4) 17.9
State income taxes, net of federal income tax benefit....... (0.8) 0.8 --
Goodwill.................................................... 13.1 1.2 2.7
Other....................................................... 0.3 3.1 0.3
----- ----- -----
Effective income tax expense (benefit) rate................. 11.9% 5.7% (14.1)%
===== ===== =====
The 1998 effective income tax rate is substantially higher than the
statutory rate because the Company is not recognizing the benefit of the current
year loss and is adjusting its estimate for the dispute with the Internal
Revenue Service described below. The 1997 effective income tax rate is
substantially lower than the statutory rate because of the Company's ability to
utilize net operating loss carryforwards which are fully reserved in the
valuation allowance. The income tax benefits recognized in 1996 have been
limited to the estimated amounts recoverable through carryback of losses to the
separate returns of the Company's predecessor entities that were participants in
the Four-Way Merger. Accordingly, the effective income tax rates from that year
differs substantially from the expected combined federal and state income tax
rates calculated using applicable statutory rates.
F-18
66
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The temporary differences, tax effected, which give rise to the Company's
net deferred tax asset (liability) were as follows (in thousands):
DECEMBER 31,
---------------------
1998 1997
--------- ---------
Deferred tax assets:
Goodwill, net of amortization............................. $ 49,508 $ 45,505
Restructuring costs....................................... 3,289 4,554
Net operating loss carryforwards.......................... 49,262 43,255
AMT credit carryforwards.................................. 4,478 4,000
Accrued litigation........................................ 1,226 1,143
Allowance for notes receivable............................ 739 --
Allowance for doubtful accounts........................... 7,441 9,870
Intangible assets......................................... 2,906 2,921
Property and equipment writedown.......................... -- 1,272
Accrued bonuses........................................... 1,819 670
Accrued vacation.......................................... 422 636
Other accruals............................................ 1,855 3,694
Other..................................................... 1,446 553
--------- ---------
Total gross deferred tax asset............................ 124,391 118,073
Less valuation allowance.................................. (119,321) (112,660)
--------- ---------
Total deferred tax asset.................................. 5,070 5,413
Deferred tax liabilities:
Property and equipment.................................... (3,841) (3,988)
Amortization of intangibles............................... (169) (169)
Partnerships.............................................. (144) (144)
Other..................................................... (916) (1,112)
--------- ---------
Total deferred tax liabilities............................ (5,070) (5,413)
--------- ---------
Net deferred tax asset (liability)................ $ -- $ --
========= =========
Deferred tax assets have been limited to amounts expected to be recovered,
offset against deferred tax liabilities that would otherwise become payable in
the carryforward period for 1998 and 1997. The Company believes that realization
of the balance of deferred tax assets is sufficiently uncertain at this time
that they should be offset by a valuation allowance.
As of December 31, 1998, the Company had net operating loss carryforwards
("NOLs") for federal income taxes of approximately $124.7 million which are
available to offset future federal taxable income, expiring in varying amounts
in the years 2002 through 2018. This includes approximately $46.1 million
generated prior to the Four-Way Merger and subject to separate return
limitations of a predecessor company as well as an annual usage limitation of
approximately $4.5 million.
During the year ended December 31, 1996, the Company received a $24.7
million refund related to the carryback of tax losses for its tax years ended
September 30, 1996 and 1995.
In January 1999, the Internal Revenue Service ("IRS") completed the
examination of the federal income tax return of the Company for the year ended
September 30, 1995, and proposed substantial adjustments to the prior tax
liabilities of the Company. The Company has agreed to adjustments of $24.4
million that only affect the net operating loss carryforwards available. The
Company does not agree with the other proposed adjustments regarding the
deduction of warrants, write-off of goodwill and the specified liability portion
of the 1995 loss which affect the prior years' tax liability. The Company has
been advised by
F-19
67
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the IRS that it will receive a notice of deficiency with respect to the proposed
adjustments. The Company will contest the notice of deficiency through
administrative proceedings or litigation, and will vigorously defend its current
position. The most significant proposed adjustment relates to the ability of the
Company to categorize certain net operating losses 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. Due to the uncertainty of
final resolution, the Company has established a reserve for these issues. The
Company would, however, be required to pay from its cash resources any
deficiency resulting from resolution of the proposed adjustments, plus interest.
Due to the early phase of this matter and the uncertainties inherent in any
proceeding with the IRS or in litigation, no assurance can be given that the
Company will prevail. 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
Prior to the Four-Way Merger, the Merged Entities entered into agreements
with individuals and/or companies considered to be related parties. The majority
of these individuals and/or companies are no longer related parties as these
individuals are no longer Company employees, officers and/or directors. The
following summarizes the significant related party transactions.
In 1997, the Company's Board of Directors approved a contingent bonus to
Donald J. Amaral, Chairman and Chief Executive Officer for his success in the
financial turnaround of Coram. Under the agreement, subject to certain material
terms and conditions, Mr. Amaral was paid $1.0 million following the refinancing
of the Company's debt and to be paid $4.0 million following a sale of the
Company. The Company recorded a $1.0 million expense for the refinancing payment
in 1998 and paid $0.5 million in 1998 and $0.5 million in the first quarter of
1999. See Note 8.
Certain executive officers and consultants to the Merged Entities had
employment, severance or consulting agreements that entitled such executive
officers or consultants to certain termination, severance and consulting
payments upon consummation of the Four-Way Merger or upon termination of
employment following the Four-Way Merger. In conjunction with the Coram
Consolidation Plan (see Note 6), the Company accrued $18.8 million for the
termination of the existing employment, consulting and/or severance agreements
with these individuals. This accrual was included as a component of the Coram
Consolidation Plan.
A director of the Company is associated with a law firm that rendered
various legal services to the Company. The legal fees to the firm approximated
$0.2 million and $1.7 million during the years ended December 31, 1997 and 1996,
respectively. The legal fees paid in 1998 were minimal.
A director of the Company also serves on the Board of Directors of Sabratek
Corporation ("Sabratek"). 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 1998, the Company purchased $7.8 million from
Sabratek for equipment and supplies.
11. STOCKHOLDERS' EQUITY
At December 31, 1998, the Company was authorized to issue 10 million shares
of preferred stock, $.001 par value, which may be issued at the discretion of
the Company's Board of Directors without further stockholder approval. The Board
of Directors can also determine the preferences, rights, privileges and
restrictions of any series of preferred stock. At December 31, 1998, there were
no shares of preferred stock issued and outstanding.
In 1997, the Company adopted a Stockholder Rights Agreement which provides
for the distribution of one "Right" to purchase a unit equal to one-hundredth of
a share of a newly created series of participating
F-20
68
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock ("Series X Preferred Stock") for each outstanding share of the
Company's common stock of record on July 9, 1997.
The Rights have an exercise price of $10 per Right, subject to subsequent
adjustment under certain circumstances, and entitle the stockholder to purchase
units of Series X Preferred Stock at an effective discount of 50% of the market
price of the common stock under certain circumstances. Each unit of Series X
Preferred Stock will be entitled to one vote on all matters on which shares of
common stock may vote. This agreement, which was scheduled to expire by its
terms on June 25, 1998 unless extended, was extended by the Company's Board of
Directors for one year in 1998.
The Exchange provided for the cancellation of the Warrants related to the
Rollover Note. In April 1998, the Company cancelled 8.4 million warrants with a
fair value of $12.7 million in exchange for payment of $4.3 million in cash and
$8.4 million in the original principal amount of the Series B Notes.
In August 1998, in connection with its New Senior Credit Facility, the
Company provided for the issuance of the 1998 Warrants to purchase up to
1,900,000 shares of the Company's common stock to the Holders. The 1998 Warrants
have an exercise price of $0.01 per share, subject to customary adjustments.
Stock Option Plans. 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 from the fourth quarter of 1996.
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.
On May 16, 1997, the Company's Board of Directors recognized that the
exercise price of certain stock options issued under the 1994 Plan were
significantly out of the money as a result of a substantial decline in Coram's
stock price. To better incentivize and retain employees of the Company, options
held by all non-director employees (except the Chief Executive Officer) to
purchase in the aggregate 2.8 million shares of the Company's common stock were
reissued to reflect an exercise price of $2.625 per share, representing the fair
market value of the Company's common stock on the date of such reissuance.
Pro forma information regarding net income and earnings 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 Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes multiple option pricing
model with the following
F-21
69
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumptions for 1998, 1997, and 1996, respectively: risk free interest rates
ranging from 4.38% to 5.59%, 5.73% to 6.57%, and 5.26% to 6.54%; a dividend
yield of 0% for each year; volatility factors of the expected market price of
the Company's common stock of .62 for each year; and an expected life of the
option of one year past vesting.
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 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,
------------------------------
1998 1997 1996
-------- -------- --------
Pro forma income (loss).............................. $(24,364) $120,638 $(90,180)
Pro forma earnings (loss) per common share........... $ (0.50) $ 2.54 $ (2.17)
Pro forma earnings (loss) per share -- assuming
Dilution........................................... $ (0.50) $ 2.23 $ (2.17)
A summary of the Company's stock option activity, and related information
for the years ended December 31 is as follows:
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------- --------- ------- --------- ------- ---------
Outstanding -- beginning of
year......................... 7,561 $3.39 6,611 $5.41 7,145 $ 8.48
Granted:
Price equal to fair
value................... 3,119 2.18 5,153 2.77 1,348 4.93
Exercised................. (1) 2.63 (327) 3.21 (12) 4.53
Forfeited................. (1,458) 4.65 (3,876) 5.98 (1,870) 16.81
------- ------- -------
Outstanding -- end of year..... 9,221 2.77 7,561 3.39 6,611 5.41
======= ======= =======
Exercisable at end of year..... 4,601 3,375 2,264
======= ======= =======
Weighted-average fair value of
options granted during the
year:
Price equal to fair value.... $ 1.05 $ 1.19 $ 2.39
F-22
70
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices for options outstanding and the weighted-average remaining
contractual life of those options at December 31, 1998 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES (000) CONTRACTUAL LIFE EXERCISE PRICE (000) EXERCISE PRICE
- - --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 1.44 - $ 2.00........ 691 9.61 $ 1.81 5 $ 1.97
$ 2.25 - $ 2.25........ 1,597 9.61 2.25 -- --
$ 2.38 - $ 2.38........ 752 9.19 2.38 -- --
$ 2.50 - $ 2.50........ 1,167 8.42 2.50 440 2.50
$ 2.63 - $ 2.63........ 2,320 7.00 2.63 1,745 2.63
$ 2.84 - $ 3.13........ 200 8.96 3.13 50 3.13
$ 3.40 - $ 3.40........ 2,200 6.78 3.40 2,200 3.40
$ 3.50 - $24.02........ 289 7.52 5.74 156 6.47
$30.56 - $30.56........ 2 2.74 30.56 2 30.56
$35.91 - $35.91........ 3 -- 35.91 3 35.91
----- -----
$ 1.44 - $35.91........ 9,221 8.01 2.77 4,601 3.15
===== =====
Common shares reserved for future issuance include approximately 1.6
million shares related to options outside of the 1994 Plan, 0.5 million shares
related to the Purchase Plan and 6.1 million shares related to stock purchase
warrants. In addition, Donald J. Amaral, Chairman and Chief Executive Officer
received a portion of his 1998 net base salary in approximately 41,900 shares of
common stock. The shares were valued at the time the compensation was paid based
upon the lesser of the closing price of the stock or the average closing price
for the prior 30 days.
Warrants to Purchase Common Stock. The following warrants are outstanding
or issuable at December 31, 1998:
EXERCISE PRICE
SHARES PER SHARE EXPIRATION DATE
--------- -------------- ---------------
Issued to lenders under Former
Senior Credit Facility (Note
8).............................. 1,384,616 nominal October 13, 2000
Issued in settlement of T(2)
litigation (Note 12)............ 2,519,834 $22.125 July 10, 1999
Issued in settlement of dispute
with former principals of
Company acquired by T(2) (Note
12)............................. 281,250 $ 4.625 September 30, 1999
Issued by Merged Entities prior to
Four-Way Merger................. 34,718 $12.58 - $18.79 March 6, 2001 to none
Issued to Senior Lenders (Note
8).............................. 1,900,000 $ 0.01 Expiration is earlier of New
Senior Credit Facility
cancellation or termination
date, or maturity of February
26, 2001.
12. COMMITMENTS AND CONTINGENCIES
Leases. The Company leases office, 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
F-23
71
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs. Total rental expense for the years ended December 31, 1998, 1997 and 1996
was approximately $11.6 million, $12.2 million and $13.0 million, respectively,
exclusive of amounts charged to restructuring reserves. At December 31, 1998 the
aggregate future minimum lease commitments were as follows (in thousands):
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
1999....................................................... $252 $10,118
2000....................................................... 252 6,868
2001....................................................... 147 4,439
2002....................................................... -- 1,502
2003....................................................... -- 2,244
Thereafter................................................. -- 797
---- -------
Total minimum lease payments..................... 651 25,968
Less amounts representing interest......................... (87) --
---- -------
Net minimum lease payments................................. $564 $25,968
==== =======
Capital lease obligations are included in other obligations. Operating
lease obligations include $4.0 million, less $1.7 million of sublease rentals,
accrued for as part of the restructuring costs under the Caremark Business
Consolidation Plan. See Notes 6 and 8.
Employee Benefit Plans. The Merged Entities provided various defined
contribution plans that were available to their employees. Management of the
Company merged these benefit plans during 1995. Eligible employees include all
individuals over the age of 21 who have completed six months of benefit-eligible
service with the Company. The Company offers a matching program of $.50 for
every $1 contributed up to the first 6% of the employee's pay. Employee
contributions vest immediately upon contribution, and the Company's
contributions vest as follows: 1 year 0%, 2 years 25%, 3 years 50%, 4 years 75%
and 5 years 100%. During the years ended December 31, 1998, 1997 and 1996, the
Company's total contributions to these plans were approximately $2.0 million,
$1.7 million and $2.1 million, respectively.
Litigation. On November 21, 1995, a suit captioned William Hall and Barbara
Lisser v. Coram Healthcare Corporation, James W. Sweeney, Patrick Fortune, and
Sam Leno, No 1:95-CV-2994(WHB) was filed in the United States District Court for
the Northern District of Georgia on behalf of a purported class of plaintiffs
who were entitled to receive warrants pursuant to the settlement of In re T(2)
Medical, Inc. Shareholder Litigation. The plaintiffs filed an Amended Class
Action Complaint on February 28, 1996, in which they allege that the defendants
made false and misleading statements that caused a fraud on the market and
artificially inflated the price of the Company's stock during the period from
August 1994 through August 1995. Such Complaint alleges violations of Section
10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5
promulgated thereunder, against all of the defendants. The Complaint also
alleges controlling person liability against the individual defendants under
Section 20(a) of the Exchange Act, and further alleges fraud by all of the
defendants under Georgia law. Finally, the plaintiffs allege a breach of the
covenant of good faith and fair dealing by all defendants. The plaintiffs seek
compensatory damages reflecting the difference in value between the warrants as
issued pursuant to the settlement of In re T(2) Medical, Inc. Shareholder
Litigation with the trading price of the Company's common stock at its actual
price, and the same number of warrants at the same exercise price with the
Company's stock trading at its alleged true value. The defendants filed a motion
to dismiss the Amended Class Action Complaint on March 13, 1996. The Court
granted the Company's motion to dismiss on February 12, 1997. The plaintiffs
appealed the dismissal to the Eleventh Circuit Court of Appeals, which affirmed
the dismissal on October 15, 1998. The plaintiffs filed a petition with the
United States Supreme Court on March 15, 1999 for a writ of certiorari, and the
Company intends to respond to the petition.
F-24
72
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company intends to vigorously defend itself in the matters described
above and in Note 9. Nevertheless, due to the uncertainties inherent in
litigation and IRS proceedings, the ultimate disposition of the matters
described in the preceding paragraph and in Note 9 cannot presently be
determined. Accordingly, except for the settlement of the Shareholder Litigation
described below, charges recorded for various litigation settlements that are
not individually material to the Company and the reserve established for the tax
case in Note 9, no provision for any loss that may result upon resolution of any
suits or proceedings has been made in the Company's Consolidated Financial
Statements. An adverse outcome in any such litigation or proceedings could be
material to the financial position, results of operations and liquidity of the
Company.
On August 8, 1996, the Company announced an agreement in principle to
settle certain shareholder class action and certain derivative litigation (the
"Shareholder Litigation"). The agreement in principle was approved by the
Colorado District Court on January 24, 1997. As consideration for the
settlement, the Company paid approximately $0.3 million and the Company's
director's and officer's insurance policies paid approximately $22.3 million.
Additionally, the Company was required to adopt certain disclosure policies with
regard to certain public statements. Under the agreement, the Company was
required to issue 5.0 million freely tradable shares of common stock of which
1.5 million shares were issued March 11, 1997 and 3.5 million shares were issued
November 28, 1997. The Company recorded non-cash charges of $25.6 million and a
cash charge of $0.3 million during the year ended December 31, 1996. The $25.6
million, which was recorded in operations as a provision for shareholder
litigation settlement and in stockholders' equity as common stock to be issued,
represents the 5.0 million shares at the stock price of $5.125 per share on the
date the settlement was approved.
In September 1995, as amended on October 6, 1995, the Company filed suit
against Caremark (the "Caremark Litigation") in the San Francisco Superior
Court. The Caremark Litigation and other related issues arose out of the
acquisition of certain assets of Caremark's home infusion business in 1995. On
June 30, 1997, the Company entered into a settlement with Caremark. Under the
terms of the settlement, Junior Subordinated Pay-In-Kind Notes totaling
approximately $100.0 million principal and $20.0 million accrued interest were
canceled with all payments due thereunder forgiven. Additionally, Caremark
agreed to pay $45.0 million in cash that was received on September 2, 1997. Of
the $45.0 million cash received, $3.6 million was placed in escrow pending
reconciliation of certain lockbox issues. As a result the Company recorded
income from litigation settlement of $156.8 million in June of 1997. See Note 3.
On July 7, 1997, the Company filed suit against Price Waterhouse LLP (now
known as PricewaterhouseCoopers LLP) 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 auditors, Price Waterhouse LLP, 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 court in California due to
inconvenience for witnesses with a right to re-file in Illinois. The Company
re-filed the lawsuit in state court in Illinois. Price Waterhouse LLP filed a
motion to dismiss the Company's lawsuit in the state court in Illinois on
several grounds, but their motion was denied in March 1999. The lawsuit has
progressed into the discovery stage. There can be no assurance of any recovery
from Price Waterhouse LLP. See Note 3.
The Company is also a party to various other legal actions arising out of
the normal course of its business. 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.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of these actions cannot presently be determined.
F-25
73
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments included in the Company's assets and current
liabilities (excluding long-term debt) are reflected in the financial statements
at amounts approximating their fair value because of the short-term maturity of
those instruments.
At December 31, 1998 and 1997, the Company's ability to borrow was limited.
At December 31, 1998 and 1997, the Company had total debt carried at $242.4
million and $300.7 million, respectively. At December 31, 1998, the Series A and
Series B Notes were carried at $241.7 million. At December 31, 1997, the Former
Senior Credit Facility was carried at $80.0 million. The Company estimates that
its fair value of these financial instruments approximates their face value
based on the interest rate, security, covenants and remaining term to maturity.
It was not practicable to determine the fair value as of December 31, 1997
of the Rollover Note, carried at $219.2 million. The Rollover Note was cancelled
effective April 1998 pursuant to the Securities Exchange Agreement.
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. See Note 8.
The Company has investments in unconsolidated entities totaling
approximately $1.2 million at December 31, 1997. Since these entities are all
closely held companies and there are no quoted market prices, it is not
practicable to estimate the fair value of such investments.
14. QUARTERLY RESULTS (IN THOUSANDS, EXCEPT PER COMMON SHARE DATA) (UNAUDITED)
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Year Ended December 31, 1998
Net revenue...................................... $158,047 $143,607 $117,173 $107,689
======== ======== ======== ========
Gross profit..................................... $ 40,999 $ 34,505 $ 29,291 $ 27,189
======== ======== ======== ========
Net income(loss)................................. $ 806 $ (2,849) $ (4,528) $(15,124)
======== ======== ======== ========
Earnings(loss) per common share.................. $ 0.02 $ (0.06) $ (0.09) $ (0.31)
======== ======== ======== ========
Earnings(loss) per common share -- assuming
dilution...................................... $ 0.02 $ (0.06) $ (0.09) $ (0.31)
======== ======== ======== ========
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Year Ended December 31, 1997
Net revenue...................................... $106,913 $121,934 $120,379 $123,915
======== ======== ======== ========
Gross profit..................................... $ 23,949 $ 36,590 $ 35,075 $ 39,990
======== ======== ======== ========
Net income (loss)................................ $(19,226) $ 2,303 $156,771 $(14,588)
======== ======== ======== ========
Earnings (loss) per common share................. $ (0.39) $ 0.05 $ 3.29 $ (0.31)
======== ======== ======== ========
Earnings (loss) per common share -- assuming
dilution...................................... $ (0.39) $ 0.04 $ 2.99 $ (0.31)
======== ======== ======== ========
In 1998, unusual or infrequently occurring charges included the reversal of
$3.9 million of restructuring reserves in the fourth quarter.
F-26
74
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997, unusual or infrequently occurring charges included second quarter
income from litigation settlement of $156.8 million and termination fee income
of $15.2 million. In addition, in the third and fourth quarters of 1997, the
Company recorded gains on sales of the Lithotripsy Business of $18.0 million and
$8.7 million, respectively.
The 1997 quarterly net revenue has been restated to conform to the 1998
presentation.
15. INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS
Management regularly evaluates the operating performance of the Company by
reviewing results on a product or service provided basis. The Company's
reportable segments are Infusion, R-Net, and Lithotripsy. Infusion is the
Company's base business which derives its revenue primarily from alternate site
infusion therapy. R-Net's revenue is derived primarily from management services
offered to HMOs, PPOs, at-risk physician groups and other managed care
organizations for home health services. Lithotripsy derives its revenue from a
non-invasive technique that uses shock waves to disintegrate kidney stones. The
other segment category primarily represents the specialty mail-order pharmacy
and pharmacy benefit management services.
Coram uses earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") for purposes of performance measurement. The accounting
policies of the reportable segments are the same as those described in Note 2.
The measurement basis for segment assets includes net accounts receivable,
inventory, 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,
------------------------------
1998 1997 1996
-------- -------- --------
INFUSION
Revenue from external customers...................... $396,669 $373,684 $439,250
Intersegment revenue................................. 18,274 13,358 --
Interest income...................................... 72 -- 64
Equity in net income of unconsolidated joint
ventures........................................... 107 636 526
Segment EBITDA profit................................ 61,874 54,935 73,199
Segment assets....................................... 129,070 111,531 118,690
Segment asset expenditures........................... 4,723 12,806 1,810
R-NET
Revenue from external customers...................... $ 81,404 $ 33,669 $ 26,788
Intersegment revenue................................. -- -- --
Interest income...................................... 15 6 11
Equity in net income of unconsolidated joint
ventures........................................... -- -- --
Segment EBITDA profit (loss)......................... 153 (2,024) (1,733)
Segment assets....................................... 16,577 1,568 493
Segment asset expenditures........................... 1,944 70 181
F-27
75
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
LITHOTRIPSY
Revenue from external customers...................... * $ 37,282 $ 49,689
Intersegment revenue................................. -- -- --
Interest income...................................... -- 125 187
Equity in net income of unconsolidated joint
ventures........................................... -- 431 358
Segment EBITDA profit................................ * 16,140 22,166
Segment assets....................................... -- 262 22,565
Segment asset expenditures........................... -- 1,452 2,646
ALL OTHER
Revenue from external customers...................... $ 47,785 $ 28,506 $ 13,891
Intersegment revenue................................. 1,534 45 --
Interest income...................................... -- -- --
Equity in net income of unconsolidated joint
ventures........................................... -- -- --
Segment EBITDA profit (loss)......................... 2,000 (1,255) (1,787)
Segment assets....................................... 11,992 4,106 3,826
Segment asset expenditures........................... 403 51 81
- - ---------------
* Represents less than 2% of total category,therefore, no disclosure is made.
F-28
76
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's segment revenue, segment EBITDA profit
(loss), segment assets and other significant items to the corresponding amounts
in the Consolidated Financial Statements are as follows (in thousands):
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
REVENUES
Total for reportable segments............................... $496,347 $457,993 $515,727
Other revenue............................................... 49,977 28,551 13,891
Elimination of intersegment revenue......................... (19,808) (13,403) --
-------- -------- --------
Total consolidated revenue.................................. $526,516 $473,141 $529,618
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS
Total EBITDA profit for reportable segments................. $ 62,027 $ 69,051 $ 93,632
Other EBITDA profit (loss).................................. 2,000 (1,255) (1,787)
Goodwill amortization expense............................... (11,139) (13,586) (15,259)
Depreciation and other amortization expense................. (11,302) (12,496) (17,421)
Interest expense............................................ (32,734) (75,026) (78,767)
All other income (expense), net............................. (26,848) 173,405 (71,712)
-------- -------- --------
Income (loss) before income taxes and minority interests.... $(17,996) $140,093 $(91,314)
======== ======== ========
ASSETS
Total assets for reportable segment......................... $145,647 $113,361 $141,748
Other assets................................................ 291,972 403,459 403,561
-------- -------- --------
Consolidated total assets................................... $437,619 $516,820 $545,309
======== ======== ========
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 operations.
Sales to one customer for the Company's Infusion and R-Net segments
represented approximately 12% of the Company's total consolidated net revenue
for 1998. Sales from the Medicare and Medicaid programs for all segments of the
Company represented 20%, 21% and 22% of the Company's total consolidated net
revenue for 1998, 1997 and 1996, respectively.
F-29
77
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, 1998
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts..... $24,047 $15,343 $-- $(21,262)(1) $18,128
Allowance for long-term receivable....... $ 1,763 $ -- $-- $ -- $ 1,763
Year ended December 31, 1997
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts..... $40,256 $16,209 $-- $(32,418)(2)(1) $24,047
Allowance for long-term receivable....... $ -- $ 1,763 $-- $ -- $ 1,763
Year Ended December 31, 1996
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts..... $63,839 $29,045 $-- $(52,628)(1) $40,256
- - ---------------
(1) Accounts written off, net of recoveries.
(2) Includes a reduction in the reserve of $0.5 million resulting from the sale
of the Lithotripsy Business.
S-1
78
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 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 Exhibit
2.1 of the Registrant's Current Report on Form 8-K dated
as of September 30, 1997).
3.1 -- Certificate of Incorporation of Registrant, as amended
through May 11, 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).
79
EXHIBIT
NUMBER EXHIBIT
------- -------
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).
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).
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).
80
EXHIBIT
NUMBER EXHIBIT
------- -------
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)
81
EXHIBIT
NUMBER EXHIBIT
------- -------
10.25 -- Form of Employment Agreement and Amendment No. 1 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 and June 30,
1998, 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)
82
EXHIBIT
NUMBER EXHIBIT
------- -------
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 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 between Coram Healthcare
Corporation and Cardinal Health. Certain portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment. The entire Exhibit 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
quarter ended September 30, 1998).
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).
83
EXHIBIT
NUMBER EXHIBIT
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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 Sachs Credit 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.*
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.*
27.1 -- Financial Data Schedule.*
27.2 -- Restated Financial Data Schedules.*
- - ---------------
(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.