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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11343
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CORAM HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 33-0615337
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1675 Broadway
Suite 900
Denver, CO 80202
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 292-4973
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 under the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] (On August 8, 2000, the registrant and one
of its wholly-owned subsidiaries filed voluntary petitions under Chapter 11 of
Title 11 of the United States Code in the Bankruptcy Court for the District of
Delaware. Through August 15, 2003, no plan or plans of reorganization have been
confirmed by such court.)
As of August 15, 2003, there were 49,638,452 outstanding shares of the
registrant's common stock, $0.001 par value, which is the only class of voting
stock of the registrant outstanding.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 37,910 $ 30,591
Cash limited as to use............................................. 240 217
Accounts receivable, net of allowances of $20,321 and $22,229...... 105,926 103,498
Inventories........................................................ 11,222 13,160
Deferred income taxes, net......................................... 331 107
Other current assets............................................... 9,095 5,658
------------- ------------
Total current assets............................................. 164,724 153,231
Property and equipment, net........................................... 11,540 10,439
Deferred income taxes, net............................................ 1,459 449
Other deferred costs and intangible assets, net....................... 5,015 5,270
Goodwill, net......................................................... 57,186 57,186
Other assets.......................................................... 5,267 5,064
------------- ------------
Total assets..................................................... $ 245,191 $ 231,639
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable................................................... $ 28,931 $ 27,986
Accrued compensation and related liabilities....................... 27,049 23,882
Current maturities of long-term debt and capital leases............ 254 61
Insurance note payable............................................. 1,994 -
Income taxes payable............................................... 3,986 3,280
Deferred income taxes.............................................. 1,790 556
Accrued merger and restructuring costs............................. 128 190
Accrued reorganization costs....................................... 8,527 7,610
Other current and accrued liabilities.............................. 8,926 8,479
------------- ------------
Total current liabilities not subject to compromise................... 81,585 72,044
Total current liabilities subject to compromise (See Note 2).......... 15,630 15,630
------------- ------------
Total current liabilities............................................. 97,215 87,674
Long-term liabilities not subject to compromise:
Long-term debt and capital leases, less current maturities......... 1,221 73
Minority interests in consolidated joint ventures and
preferred stock issued by a subsidiary........................... 6,187 6,215
Income taxes payable............................................... 16,102 16,130
Other liabilities.................................................. 3,599 3,565
Net liabilities for liquidation of discontinued operations......... 27,275 27,275
------------- ------------
Total liabilities................................................ 151,599 140,932
------------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001, authorized
10,000 shares, none issued....................................... - -
Common stock, par value $0.001, 150,000 shares
authorized, 49,638 shares issued and outstanding................. 50 50
Additional paid-in capital......................................... 427,354 427,354
Accumulated deficit................................................ (333,812) (336,697)
------------- ------------
Total stockholders' equity....................................... 93,592 90,707
------------- ------------
Total liabilities and stockholders' equity....................... $ 245,191 $ 231,639
============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
2003 2002 2003 2002
----------- ---------- ---------- ----------
Net revenue $ 120,345 $ 108,431 $ 233,441 $ 210,413
Cost of service.................................................. 84,488 77,128 170,522 151,429
----------- ---------- ---------- ----------
Gross profit..................................................... 35,857 31,303 62,919 58,984
Operating expenses:
Selling, general and administrative expenses.................. 23,011 21,303 46,018 42,323
Provision for estimated uncollectible accounts................ 4,229 5,102 7,746 8,220
Restructuring cost recoveries................................. - - - (13)
----------- ---------- ---------- ----------
Total operating expenses.................................... 27,240 26,405 53,764 50,530
----------- ---------- ---------- ----------
Operating income from continuing operations...................... 8,617 4,898 9,155 8,454
Other income (expenses):
Interest income............................................... 115 124 194 209
Interest expense (excluding post-petition contractual interest
of approximately $260 and $520 for the three and six months
ended June 30, 2003, respectively, and $3,034 and $6,068 for
the three and six months ended June 30, 2002, respectively).. (368) (396) (710) (761)
Equity in net income of unconsolidated joint ventures.......... 365 251 599 638
Gain on sale of business....................................... - - - 46
Other income (expense), net.................................... (3) 987 (4) 999
----------- ---------- ---------- ----------
Income from continuing operations before reorganization expenses,
income taxes, minority interests and the cumulative effect of
a change in accounting principle............................... 8,726 5,864 9,234 9,585
Reorganization expenses, net...................................... 4,115 523 5,877 2,533
----------- ---------- ---------- ----------
Income from continuing operations before income taxes, minority
interests and the cumulative effect of a change in accounting
principle...................................................... 4,611 5,341 3,357 7,052
Income tax expense................................................ 36 - 71 38
Minority interests in net income of consolidated joint ventures... 169 152 302 375
----------- ---------- ---------- ----------
Income from continuing operations before the cumulative effect of
a change in accounting principle............................... 4,406 5,189 2,984 6,639
Loss from disposal of discontinued operations..................... (2) - (99) -
----------- ---------- ---------- ----------
Income before the cumulative effect of a change in accounting
principle...................................................... 4,404 5,189 2,885 6,639
Cumulative effect of a change in accounting principle............. - - - (71,902)
----------- ---------- ---------- ----------
Net income (loss)................................................. $ 4,404 $ 5,189 $ 2,885 $ (65,263)
=========== ========== ========== ==========
Net Income (Loss) Per Common Share:
Basic and Diluted:
Income from continuing operations............................ $ 0.09 $ 0.10 $ 0.06 $ 0.13
Loss from disposal of discontinued operations................ - - - -
Cumulative effect of a change in accounting principle........ - - - (1.45)
----------- ---------- ---------- ----------
Net income (loss) per common share........................... $ 0.09 $ 0.10 $ 0.06 $ (1.32)
=========== ========== ========== ==========
Weighted average common shares used in the computation of basic
net income (loss) per common share............................. 49,638 49,638 49,638 49,638
=========== ========== ========== ==========
Weighted average common shares used in the computation of diluted
net income (loss) per common share 49,715 49,674 49,683 49,674
=========== ========== ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
3
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------------
2003 2002
---------- ----------
Net cash provided by continuing operations before
reorganization items.......................................... $ 15,817 $ 8,581
Net cash used by reorganization items............................ (5,469) (2,282)
---------- ----------
Net cash provided by continuing operations (net
of reorganization items)...................................... 10,348 6,299
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment........................... (2,943) (2,843)
Proceeds from sale of business................................ - 85
Proceeds from dispositions of property and equipment.......... - 5
---------- ----------
Net cash used in investing activities............................ (2,943) (2,753)
---------- ----------
Cash flows from financing activities:
Principal payments of long-term debt and capital leases....... (57) (38)
Refunds of deposits to collateralize letters of credit........ 413 200
Cash distributions to minority interests...................... (343) (397)
---------- ----------
Net cash provided by (used in) financing activities.............. 13 (235)
---------- ----------
Net increase in cash from continuing operations.................. $ 7,418 $ 3,311
========== ==========
Net cash used in discontinued operations......................... $ (99) $ -
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
4
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF BUSINESS
Business Activity. As of June 30, 2003, Coram Healthcare Corporation
("CHC") and its subsidiaries (collectively "Coram" or the "company") were
engaged primarily in the business of furnishing alternate site (outside the
hospital) infusion therapies, which also include non-intravenous home health
products such as respiratory therapy services and durable medical equipment.
Other services offered by Coram include centralized management, administration
and clinical support for clinical research trials, as well as, outsourced
hospital compounding services. Coram delivers its alternate site infusion
therapy services through 77 branch offices located in 40 states and Ontario,
Canada. Additionally, management plans to open new infusion branches in San
Antonio, Texas and Amherstburg, Ontario Canada on or about October 1, 2003. CHC
and its first tier wholly-owned subsidiary, Coram, Inc. ("CI") (collectively the
"Debtors"), filed voluntary petitions under Chapter 11 of Title 11 of the United
States Code (the "Bankruptcy Code") on August 8, 2000 in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") In re
Coram Healthcare Corporation, Case No. 00-3299 and In re Coram, Inc., Case No.
00-3300 (collectively the "Bankruptcy Cases"). The Bankruptcy Cases have been
consolidated for administrative purposes only by the Bankruptcy Court and are
being jointly administered under the docket of In re Coram Healthcare
Corporation, Case No. 00-3299 (MFW). Commencing on August 8, 2000, the Debtors
operated as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court; however, a Chapter 11 trustee was appointed by the Bankruptcy Court on
March 7, 2002. With the appointment of a Chapter 11 trustee, while still under
the jurisdiction of the Bankruptcy Court, the Debtors are no longer
debtors-in-possession. None of the company's other subsidiaries is a debtor in
the Bankruptcy Cases and, other than Coram Resource Network, Inc. and Coram
Independent Practice Association, Inc. (collectively the "Resource Network
Subsidiaries" or "R-Net"), none of the company's other subsidiaries is a debtor
in any bankruptcy case. See Notes 2 and 3 for further details.
Coram's focus is on its core alternate site infusion therapy business, the
clinical research business operated by its CTI Network, Inc. subsidiary and the
outsourced hospital compounding services provided by its SoluNet LLC subsidiary.
Accordingly, management's primary business strategy is to focus Coram's efforts
on the delivery of its core infusion therapies, such as nutrition,
anti-infective therapies, intravenous immunoglobulin ("IVIG"), pain management
and coagulant and blood clotting therapies for persons with hemophilia.
Management also implemented programs focused on the reduction and control of
operating expenses and other costs of providing services, assessment of
under-performing branches and review of branch efficiencies. Pursuant to this
review, several branches and reimbursement sites have been closed or scaled back
to serve as satellites for other branches/reimbursement sites and personnel have
been eliminated. See Note 5 for further details.
For each of the periods presented, the company's primary operations and
assets were within the United States. The company maintains infusion operations
in Canada; however, assets, revenue and profitability related to the Canadian
businesses are not material to the company's consolidated financial position or
operations.
Concentrations of Revenue and Credit Risk. Substantially all of the
company's revenue is derived from third party payers, including insurance
companies, managed care plans, governmental payers and contracted institutions.
Revenue from the Medicare and Medicaid programs accounted for approximately 26%
of the company's consolidated net revenue for both the three months ended June
30, 2003 and 2002 and such programs comprised approximately 25% of the company's
consolidated net revenue for both the six months ended June 30, 2003 and 2002.
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation and revision. Management believes that the company
is in substantial compliance with all applicable laws and regulations.
Compliance with such laws and regulations can be subject to future government
review and interpretation, as well as, significant regulatory action, including
fines, penalties and exclusion from the Medicare and Medicaid programs. Medicare
accounts receivable represented approximately 32% and 33% of the company's
5
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
consolidated accounts receivable at June 30, 2003 and December 31, 2002,
respectively. No other individual payer exceeded 5% of consolidated accounts
receivable at those dates. However, upon aggregating the individual Medicaid
program accounts receivable for all states where the company does business, such
totals represent approximately 8.8% and 6.7% of consolidated accounts receivable
at June 30, 2003 and December 31, 2002, respectively.
The company is a party to several individual provider contracts that
ultimately fall within the purview of a single national health insurance carrier
that recently commenced implementation of a national ancillary care management
program. In connection therewith, during 2002 such national health insurance
carrier terminated two provider contracts relating to the state of Illinois (one
with the company and one with a non-consolidated joint venture). During the
three months ended June 30, 2003, four additional provider contracts have been
terminated, effective October 1, 2003, with the understanding that the company,
at a minimum, must accept lower reimbursement rates in order for such contracts
to be reinstated. Management is currently considering the company's alternatives
with respect to the terminated contracts, which represented approximately 1.2%
and 1.7% of the company's consolidated net revenue for the six months ended June
30, 2003 and 2002, respectively, and approximately 2.5% and 3.1% of the
company's consolidated accounts receivable at June 30, 2003 and December 31,
2002, respectively. In June 2003, the company entered into a settlement
agreement with one of the individual providers wherein certain aged accounts
receivable were adjudicated and settlement proceeds of approximately $0.6
million were subsequently collected in July 2003. In the aggregate,
approximately 2.9% and 4.0% of the company's consolidated net revenue for the
six months ended June 30, 2003 and 2002, respectively, and approximately 6.6%
and 7.0% of the company's consolidated accounts receivable at June 30, 2003 and
December 31, 2002, respectively, were derived from the individual provider
contracts that are within the purview of this national health insurance carrier.
Management can provide no assurances that the remaining active provider
contracts associated with this national health insurance carrier will continue
under terms that are favorable to the company. Additionally, no assurances can
be given that meaningful collection/settlement activities relative to
outstanding accounts receivable will continue. The termination of additional
provider contracts and/or the inability to collect outstanding accounts
receivable from the individual healthcare plans under this national health
insurance carrier could have a materially adverse impact on the company's
results of operations, cash flows and financial condition.
From time to time, the company negotiates settlements with its third party
payers in order to resolve outstanding disputes, terminate business
relationships or facilitate the establishment of new or enhanced payer
contracts. In connection therewith, the company entered into settlement
agreements with two of its payers (both such payers are affiliated with the
aforementioned national health insurance carrier) and recorded bad debt
recoveries of approximately $0.6 million and $1.1 million during the three and
six months ended June 30, 2003, respectively. The company did not record any
material bad debt expense or recoveries relative to settlement activity during
the three or six months ended June 30, 2002. Furthermore, management is aware of
certain claims, disputes or unresolved matters with third party payers arising
in the normal course of business and, although there can be no assurances,
management believes that the resolution of such matters should not have a
material adverse effect on the company's financial position, results of
operations or cash flows.
In certain cases, the company accepts fixed fee or capitated fee
arrangements. As of June 30, 2003, Coram was a party to only two capitated fee
arrangements. Certain information regarding the company's capitated fee
agreements is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Capitated fee agreements as a percentage
of consolidated net revenue.......... 6.6% 8.2% 6.5% 8.3%
Approximately 5.7% and 6.9% of the company's consolidated net revenue for
the three months ended June 30, 2003 and 2002, respectively, and 5.6% and 7.0%
for the six months ended June 30, 2003 and 2002, respectively,
6
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
related to a capitated fee agreement that provides services to members in the
California marketplace. Additionally, Coram owns 50% of a partnership located in
California that derived approximately 37.1% and 39.2% of its net revenue during
the six months ended June 30, 2003 and 2002, respectively, from services
provided under such capitated fee agreement. The underlying two year agreement
expired by its terms on December 31, 2002 but it is subject to automatic annual
renewals absent a written termination notice from one of the contracting
parties. The company and its partnership continue to render services subject to
the automatic renewal provisions of the contract. On February 28, 2003, the
contracted payer invited Coram, as well as a limited group of other providers,
to respond to a request for proposal ("RFP") that covers the services provided
exclusively by Coram. Subsequent to Coram's written response to the RFP, the
company was invited to participate in oral presentations in May 2003. Management
anticipates that the payer will select a provider or providers no later than
August 2003 and the new contract or contracts will become effective January 1,
2004. Management can provide no assurances that the company will successfully
procure such contract on economic and operational terms that are favorable to
the company. The loss of this capitated fee contract or significant
modifications to the terms and conditions of the existing contract could have a
materially adverse effect on the results of operations, cash flows and financial
condition of the company and its partnership.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared by the company pursuant to the rules and regulations promulgated by the
Securities and Exchange Commission (the "Commission") and reflect all
adjustments and disclosures (consisting of normal recurring accruals and,
effective August 8, 2000, all adjustments and disclosures pursuant to the
adoption of Statement of Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code ("SOP 90-7")) that are, in the opinion
of management, necessary for a fair presentation of the company's consolidated
financial position, results of operations and cash flows as of and for the
interim periods presented herein. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to the applicable regulations of the Commission. The results of
operations for the interim period ended June 30, 2003 are not necessarily
indicative of the results for the full calendar year. The condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the company's Annual Report on Form 10-K/A
Amendment No. 2 for the year ended December 31, 2002.
The condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Bankruptcy Cases and circumstances relating thereto,
including the company's leveraged financial structure and cumulative losses from
operations, such realization of assets and liquidation of liabilities are
subject to significant uncertainty. During the pendency of the Bankruptcy Cases,
the company may sell or otherwise dispose of assets and liquidate or settle
liabilities for amounts other than those reflected in the condensed consolidated
financial statements. Furthermore, a plan or plans of reorganization could
materially change the amounts reported in the condensed consolidated financial
statements, which do not give effect to any adjustments of the carrying value of
assets or liabilities that might be necessary as a consequence of a plan or
plans of reorganization (see Note 2 for further details). The company's ability
to continue as a going concern is dependent upon, among other things,
confirmation of a plan or plans of reorganization, future profitable operations,
the ability to comply with the terms of the company's financing agreements, the
ability to obtain necessary financing to fund a proposed settlement with the
Internal Revenue Service, the ability to remain in compliance with the physician
ownership and referral provisions of the Omnibus Budget Reconciliation Act of
1993 (commonly known as "Stark II") and the ability to generate sufficient cash
from operations and/or financing arrangements to meet its obligations and
capital asset expenditure requirements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
7
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The condensed consolidated financial
statements include the accounts of CHC, its subsidiaries, including CI (CHC's
wholly-owned direct subsidiary), and joint ventures that are considered to be
under the control of CHC. As discussed above, CI is a party to the Bankruptcy
Cases that are being jointly administered with those of CHC in the Bankruptcy
Court. All material intercompany account balances and transactions 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.
Provision for Estimated Uncollectible Accounts. Management regularly
reviews the collectibility of accounts receivable utilizing reports that track
collection and write-off activity. Estimated write-off percentages are then
applied to each aging category by payer classification to determine the
provision for estimated uncollectible accounts. Additionally, the company
establishes supplemental specific reserves for accounts that are deemed
uncollectible due to occurrences such as payer financial distress and payer
bankruptcy filings. The provision for estimated uncollectible accounts is
periodically adjusted to reflect current collection, write-off and other trends.
While management believes the resulting net carrying amounts for accounts
receivable are fairly stated and that the company has adequate allowances for
uncollectible accounts based on all information available, no assurances can be
given as to the level of future provisions for uncollectible accounts or how
they will compare to the levels experienced in the past. The company's ability
to successfully collect its accounts receivable depends, in part, on its ability
to adequately supervise and train personnel in billing and collections, and
maximize integration efficiencies related to reimbursement site consolidations
and information system changes.
Management throughout the company is continuing to concentrate on enhancing
timely reimbursement by emphasizing improved billing and cash collection
methods, continued assessment of reimbursement systems support and concentration
of the company's expertise and managerial resources into certain reimbursement
locations. In connection therewith, see Note 5 for further discussion of certain
critical reimbursement site consolidation activities. Moreover, during the three
months ended June 30, 2003, the company transitioned all active patient accounts
serviced by the Dallas, Texas reimbursement site to other reimbursement sites.
The Dallas site currently maintains a small workforce to support resolution of
certain inactive accounts from the company's other reimbursement centers. By
consolidating to fewer sites, management expects to implement improved training,
more easily standardize "best demonstrated practices," enhance specialization
related to payers such as Medicare and achieve more consistent and timely cash
collections. Management believes that, in the long-term, payers and patients
will receive better, more consistent service. However, no assurances can be
given that the consolidation of the company's Patient Financial Service Centers
(reimbursement sites) and other related activities initiated by management
(e.g., the Dallas reimbursement site realignment, etc.) will be successful in
enhancing timely reimbursement or that the company will not experience a
significant shortfall in cash collections, deterioration in days sales
outstanding ("DSO") and/or unfavorable aging trends in its accounts receivable.
Capitalized Software Development Costs. Capitalized costs related to
software developed and/or obtained for internal use are stated at cost in
accordance with Statement of Position 98-1, Accounting for Computer Software
Developed for or Obtained for Internal-Use ("SOP 98-1"). Amortization is
computed using the straight-line method over estimated useful lives ranging from
one to five years. For the six months ended June 30, 2003 and 2002, software
development costs aggregating approximately $0.1 million and $0.9 million,
respectively, were capitalized in accordance with SOP 98-1.
8
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Stock-Based Compensation. The company elected to measure compensation
expense related to its employee stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and disclose the pro forma impact of accounting for
employee stock-based compensation plans pursuant to the fair value-based
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("Statement 123"). Because the exercise price of
the company's employee stock options equals the market price of the underlying
stock on the date of grant, no APB 25 stock-based compensation expense has been
recognized for the company's stock-based compensation plans in the condensed
consolidated financial statements. Had compensation expense for such plans been
recognized in accordance with the provisions of Statement 123, the company's pro
forma financial results would have been as follows (in thousands, except per
share amounts):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ------------------------------
2003 2002 2003 2002
---------- --------- --------- --------
Net income (loss), as reported.................... $ 4,404 $ 5,189 $ 2,885 $(65,263)
Less: Pro forma stock-based compensation
expense (determined using the fair value method
for all awards)................................. (3) (34) (14) (96)
-------- -------- -------- --------
Pro forma net income (loss)....................... $ 4,401 $ 5,155 $ 2,871 $(65,359)
======== ======== ======== ========
Net income (loss) per common share:
Basic and diluted, as reported.................. $ 0.09 $ 0.10 $ 0.06 $ (1.32)
======== ======== ======== ========
Basic and diluted, pro forma..................... $ 0.09 $ 0.10 $ 0.06 $ (1.32)
======== ======== ======== ========
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
compensation expense associated with an award is recognized over the vesting
period, the impact on pro forma net income (loss) disclosed above may not be
representative of pro forma compensation expense in future periods.
In December 2002, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("Statement 148"). This
accounting pronouncement amends Statement 123 and provides alternative methods
of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. Management evaluated the
various methods of transitioning to Statement 123 as outlined in Statement 148
but concluded that the company will continue to use the intrinsic method
provided in APB 25 as the company's accounting policy for stock-based
compensation plans. The company will continue to provide the pro forma
disclosures required pursuant to Statement 123, as amended.
9
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Net Income (Loss) Per Common Share. Basic net income (loss) per common
share excludes any dilutive effects of stock options, warrants and convertible
securities. The following table sets forth the computations of basic and diluted
net income (loss) per common share for the three and six months ended June 30,
2003 and 2002 (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Numerator for basic and diluted net income (loss)
per common share:
Income from continuing operations....................... $ 4,406 $ 5,189 $ 2,984 $ 6,639
Loss from disposal of discontinued operations........... (2) - (99) -
Cumulative effect of a change in accounting principle... - - - (71,902)
-------- -------- -------- --------
Net income (loss)......................................... $ 4,404 $ 5,189 $ 2,885 $(65,263)
======== ======== ======== ========
Weighted average shares - denominator for basic net
loss per common share .................................. 49,638 49,638 49,638 49,638
Effect of dilutive securities:
Stock options ......................................... 77 36 45 36
-------- -------- -------- --------
Denominator for diluted net income (loss) per common
share - adjusted weighted average shares ............... 49,715 49,674 49,683 49,674
======== ======== ======== ========
Basic and diluted net income (loss) per common share:
Income from continuing operations ..................... $ 0.09 $ 0.10 $ 0.06 $ 0.13
Loss from disposal of discontinued operations ......... - - - -
Cumulative effect of a change in accounting principle.. - - - (1.45)
-------- -------- -------- --------
Net income (loss) $ 0.09 $ 0.10 $ 0.06 $ (1.32)
======== ======== ======== ========
Other Income. During the six months ended June 30, 2002, the company
recorded approximately $1.0 million of other income from the recognition of the
net realizable value of an escrow deposit that related to certain 1997
dispositions of lithotripsy partnerships. The Bankruptcy Court approved the
settlement agreement on August 21, 2002 and, on October 17, 2002, the company
received the settlement proceeds.
Accounting for Asset Retirement Obligations. In June 2001, the FASB issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations ("Statement 143"). Statement 143 requires entities to
record the fair value of legal obligations associated with the retirement of
long-lived tangible assets. The company adopted Statement 143 on January 1,
2003; however, the adoption of this accounting pronouncement had no impact on
the company's financial position and results of operations.
Reporting Extinguishments of Debt. In April 2002, the FASB issued Statement
of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections
("Statement 145"). Statement 145 requires gains and losses on extinguishments of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items, as previously required under Statement of Financial
Accounting Standards No. 4, Reporting Gains and Losses From Extinguishments of
Debt. Extraordinary treatment will be required for certain extinguishments of
debt as provided in Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Statement 145 also (i) amends Statement of Financial Accounting
Standards No 13, Accounting for Leases, to require that certain modifications to
capital leases be treated as sale-leaseback transactions and (ii) modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
(or guarantor). Effective January 1, 2003, the company adopted the provisions of
Statement 145; however, the adoption of such accounting pronouncement had no
impact on the company's financial statement presentation, financial position or
results of operations.
10
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Accounting for Costs Associated with Exit or Disposal Activities. In
October 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities
("Statement 146"). Statement 146 supersedes the Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) ("EITF Issue No. 94-3"). Statement 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than at the date of the entity's commitment to an
exit plan, as prescribed in EITF Issue No. 94-3. Statement 146 is effective for
exit or disposal activities that are initiated after December 31, 2002.
Effective January 1, 2003, the company adopted Statement 146; however, the
adoption of this accounting pronouncement did not have an impact on the
company's financial position or results of operations.
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. In November 2002, the
FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others ("FIN No. 45"). FIN No. 45 elaborates on the disclosure requirements for
annual and interim financial statements of a guarantor and requires that, in
certain cases, a guarantor recognize a liability at the inception of the
guarantee for the fair value of the obligation undertaken. The company adopted
FIN No. 45 on January 1, 2003. The company's financial position and results of
operations were not impacted by the initial adoption of this accounting
pronouncement. However, a guarantee provided to a third party in May 2003 is
reflected in the company's condensed consolidated financial statements in
accordance with FIN No. 45. See Note 10 for further details.
2. REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Background and Certain Important Bankruptcy Court Activity
On August 8, 2000, CHC and CI commenced the Bankruptcy Cases by filing
voluntary petitions under Chapter 11 of the Bankruptcy Code. Following the
commencement of the Bankruptcy Cases, the Debtors operated as
debtors-in-possession subject to the jurisdiction of the Bankruptcy Court;
however, as discussed below, a Chapter 11 trustee was appointed by the
Bankruptcy Court on March 7, 2002. With the appointment of a Chapter 11 trustee,
while still under the jurisdiction of the Bankruptcy Court, the Debtors are no
longer debtors-in-possession. None of the company's other subsidiaries is a
debtor in the Bankruptcy Cases and, other than the Resource Network
Subsidiaries, none of the company's other subsidiaries is a debtor in any
bankruptcy case. The Debtors' need to seek the relief afforded by the Bankruptcy
Code was due, in part, to its requirement to remain compliant with the physician
ownership and referral provisions of Stark II after December 31, 2000 (see
discussion of Stark II in Note 10) and the scheduled May 27, 2001 maturity of
the Series A Senior Subordinated Unsecured Notes. The Debtors sought advice and
counsel from a variety of sources and, in connection therewith, CHC's
Independent Committee of the Board of Directors unanimously concluded that the
bankruptcy and restructuring were the only viable alternatives.
On August 9, 2000, the Bankruptcy Court approved the Debtors' motions for:
(i) payment of all employee wages and salaries and certain benefits and other
employee obligations; (ii) payment of critical trade vendors, utilities and
insurance in the ordinary course of business for both pre and post-petition
expenses; (iii) access to a debtor-in-possession financing arrangement; and (iv)
use of all company bank accounts for normal business operations. In September
2000, the Bankruptcy Court approved the Debtors' motion to reject four
unexpired, non-residential real property leases and any associated subleases.
The rejected leases included underutilized locations in: (i) Allentown,
Pennsylvania; (ii) Denver, Colorado; (iii) Philadelphia, Pennsylvania; and (iv)
Whippany, New Jersey.
The Bankruptcy Court granted the Debtors five extensions of the period of
time that they must assume or reject unexpired leases of non-residential real
property (such extensions expired on January 4, 2001, May 4, 2001, September 3,
2001, January 1, 2002 and May 2, 2002). On May 1, 2002, the Chapter 11 trustee
motioned the Bankruptcy Court to grant a sixth extension through and including
August 27, 2002. The Chapter 11 trustee filed a certificate of no objection on
May 21, 2002 but an enabling order was never issued by the Bankruptcy Court.
11
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
However, on September 6, 2002, December 26, 2002 and July 18, 2003, the
Bankruptcy Court granted three separate motions of the Chapter 11 trustee to
further extend the period of time to assume or reject the aforementioned real
property leases through and including December 31, 2002, June 30, 2003 and
December 31, 2003, respectively.
In September 2000 and October 2000, the Bankruptcy Court approved payments
of up to approximately $2.6 million for retention bonuses payable to certain key
employees. The bonuses were scheduled to be paid in two equal installments
predicated on the date of the Debtors' emergence from bankruptcy. Due to events
that delayed emergence from bankruptcy, the Bankruptcy Court approved early
payment of the first installment to most individuals within the retention
program and such payments, aggregating approximately $0.7 million, were made on
March 15, 2001. In January 2002, when events again delayed the Debtors'
anticipated emergence from bankruptcy, the Debtors requested permission from the
Bankruptcy Court to pay: (i) the remaining portion of the first installment of
approximately $0.5 million to the company's Executive Vice President and its
former Chief Executive Officer and (ii) the full amount of the second
installment. The Debtors also requested authorization to initiate another
retention plan to provide financial incentives not to exceed $1.25 million to
certain key employees during the year ending December 31, 2002. Principally due
to the then pending appointment of a Chapter 11 trustee, on February 12, 2002
the Bankruptcy Court declined to rule on the Debtors' motions. However, on March
15, 2002, after the appointment of a Chapter 11 trustee, the Bankruptcy Court
partially approved the Debtors' motions insofar as all the remaining retention
bonuses were authorized to be paid, exclusive of amounts pertaining to the
company's former Chief Executive Officer. The incremental retention bonuses,
aggregating approximately $0.8 million, were paid on March 25, 2002. The
Bankruptcy Court postponed its rulings on the Debtors' motions pertaining to the
2002 retention plan and payment of the former Chief Executive Officer's
retention amounts. However, as discussed below, the Chapter 11 trustee
subsequently filed, and the Bankruptcy Court approved, a motion to withdraw the
Debtors' motions regarding the 2002 retention plan and the request to pay the
remaining 2000 retention plan amount.
On September 7, 2001, the Bankruptcy Court authorized the Debtors to pay up
to $2.7 million for management incentive plan compensation bonuses pursuant to
the management incentive plan for the year ended December 31, 2000 (the "2000
MIP"). In September 2001, the Debtors paid all participants of the 2000 MIP,
except for approximately $10.8 million attributable to the company's former
Chief Executive Officer.
On March 21, 2001, CHC's Compensation Committee of the Board of Directors
approved a management incentive program for the year ended December 31, 2001
(the "2001 MIP"). Under the terms of the 2001 MIP, the participants thereunder
were authorized to receive an aggregate payment up to approximately $2.5
million. On August 16, 2002, the Chapter 11 trustee filed a motion with the
Bankruptcy Court to make 2001 MIP payments of approximately $1.1 million to the
2001 MIP participants, which excluded certain 2001 MIP amounts as indicated
below. The Bankruptcy Court approved such motion on September 6, 2002 and, in
connection therewith, on or about September 16, 2002 the approved amounts were
paid to the eligible 2001 MIP participants. The Chapter 11 trustee agreed
separately with each of the company's Executive Vice President and its former
Chief Executive Officer: (i) not to request any 2001 MIP payment to the former
Chief Executive Officer and (ii) to request the payment of a portion of the 2001
MIP amount to which the company's Executive Vice President is otherwise
entitled. The Bankruptcy Court's order approving the motion also (i) withdrew a
previous motion made by the Debtors to implement a 2002 key employee retention
plan, (ii) withdrew the Debtors' previous motion requesting permission to pay
the remaining amounts under the first key employee retention plan and (iii)
preserved the rights of the company's Executive Vice President and former Chief
Executive Officer to later seek Bankruptcy Court orders authorizing payment of
amounts due to them under the 2001 MIP. Moreover, the Chapter 11 trustee retains
the right, at his discretion, to request payout of all or any portion of the
remaining unpaid 2001 MIP amounts.
At June 30, 2003, the company has accrued approximately $13.0 million for
unpaid amounts attributable to the company's Executive Vice President and its
former Chief Executive Officer under the aforementioned retention bonus plans
and the 2001 and 2000 MIP programs.
On or about May 9, 2001, the Bankruptcy Court approved the Debtors' motion
requesting authorization to enter into an insurance premium financing agreement
with AICCO, Inc. (the "2001 Financing Agreement") to finance the payment of
premiums under certain of the Debtors' insurance policies. The amount financed
was approximately
12
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
$2.1 million and was paid in eight monthly installments of approximately $0.3
million through December 2001, including interest at a per annum rate of 7.85%.
On May 9, 2002, pursuant to the order authorizing the Debtors to enter into the
2001 Financing Agreement, the Debtors entered into a second insurance premium
financing agreement with Imperial Premium Finance, Inc., an affiliate of AICCO,
Inc., (the "2002 Financing Agreement") to finance the premiums under certain
insurance policies. Pursuant to the terms of the 2002 Financing Agreement, the
Debtors made down payments of approximately $1.5 million and financed
approximately $2.7 million. Commencing on May 15, 2002, the amount financed was
paid in seven monthly installments of approximately $0.4 million, including
interest at a per annum rate of 4.9%. Furthermore, as provided by the Bankruptcy
Court order authorizing the 2001 Financing Agreement, in April 2003 the Debtors
entered into a third premium financing agreement with Imperial Premium Finance,
Inc. (the "2003 Financing Agreement"). The terms of the 2003 Financing Agreement
required the Debtors to remit a down payment of approximately $1.5 million in
May 2003. The amount financed is approximately $2.8 million and, commencing May
15, 2003, is being paid in seven monthly installments of approximately $0.4
million, including interest at a rate of 3.75% per annum. Imperial Premium
Finance, Inc. has the right to terminate the insurance policies and collect the
unearned premiums (as administrative expenses) if the Debtors do not make the
monthly payments called for by the 2003 Financing Agreement. Additionally, the
2003 Financing Agreement is secured by the unearned premiums and any loss
payments under the covered insurance policies.
On October 29, 2001, the Debtors filed a motion with the Bankruptcy Court
requesting approval of an agreement providing a non-debtor subsidiary of the
company with the authority to sell a respiratory and durable medical equipment
business located in New Orleans, Louisiana to a third party. On November 13,
2001, the Bankruptcy Court authorized the Debtors to enter into this agreement.
The sale of such business was finalized in January 2002 at a sales price of
approximately $0.1 million.
The Debtors are currently paying the post-petition claims of their vendors
in the ordinary course of business and are, pursuant to an order of the
Bankruptcy Court, causing their subsidiaries to pay their own debts in the
ordinary course of business. Even though the commencement of the Bankruptcy
Cases constituted defaults under the company's principal debt instruments,
Chapter 11 of the Bankruptcy Code imposes an automatic stay that will generally
preclude the creditors and other interested parties under such arrangements from
taking remedial action in response to any such resulting default without prior
Bankruptcy Court authorization.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Bankruptcy Cases seeking, among other things, to have the Resource Network
Subsidiaries' bankruptcy proceedings substantively consolidated with the
Bankruptcy Cases. The Resource Network Subsidiaries and the Debtors engaged in
discovery related to this substantive consolidation motion and, in connection
therewith, the parties reached a settlement agreement in November 2000, which
was approved by an order of the Bankruptcy Court. Under the terms of the
settlement agreement, the Resource Network Subsidiaries withdrew the substantive
consolidation motion with prejudice. Additionally, the Official Committee of
Unsecured Creditors in the Coram Resource Network, Inc. and Coram Independent
Practice Association, Inc. bankruptcy proceedings filed motions for relief from
the automatic stay to pursue claims against the Debtors and certain of their
operating subsidiaries. The Bankruptcy Court granted such motion on June 6,
2002. See Note 10 for further details.
The Debtors' First Joint Plan of Reorganization and Related Activities
On the same day the Debtors commenced the Bankruptcy Cases, the Debtors
also filed their joint plan of reorganization (the "Joint Plan") and their joint
disclosure statement with the Bankruptcy Court. The Joint Plan was subsequently
amended and restated (the "Restated Joint Plan") and, on or about October 10,
2000, the Restated Joint Plan and the First Amended Disclosure Statement with
respect to the Restated Joint Plan were authorized for distribution by the
Bankruptcy Court. Among other things, the Restated Joint Plan provided for: (i)
a conversion of all of the CI obligations represented by the company's Series A
Senior Subordinated Unsecured Notes (the "Series A Notes") and the Series B
Senior Subordinated Unsecured Convertible Notes (the "Series B Notes") into (a)
a four year, interest only note in the principal amount of $180 million that
would bear interest at the rate of 9% per annum and (b) all of the equity in the
reorganized CI; (ii) the payment in full of all secured, priority and general
unsecured debts of CI; (iii) the payment in full of all secured and priority
claims against CHC; (iv) the impairment of certain
13
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
general unsecured debts of CHC, including, among others, CHC's obligations under
the Series A Notes and the Series B Notes; and (v) the complete elimination of
CHC's equity interests. Furthermore, pursuant to the Restated Joint Plan, CHC
would be dissolved as soon as practicable after the effective date of the
Restated Joint Plan and the common stock of CHC would no longer be publicly
traded. Therefore, under the Restated Joint Plan, as filed, the existing
stockholders of CHC would have received no value for their shares and all of the
outstanding equity of CI, as the surviving entity, would be owned by the holders
of the Series A Notes and the Series B Notes. Representatives of the company
negotiated the principal aspects of the Restated Joint Plan with representatives
of the holders of the Series A Notes and the Series B Notes and the parties to
the Senior Credit Facility prior to the filing of such Restated Joint Plan.
On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that were entitled to a distribution under the Restated Joint Plan. The
Debtors did not send ballots to the holders of unimpaired classes, who were
deemed to accept the Restated Joint Plan, and classes that were not receiving
any distribution, who were deemed to reject the Restated Joint Plan. Eligible
voters responded in favor of the Restated Joint Plan. At a confirmation hearing
on December 21, 2000, the Bankruptcy Court denied confirmation of the Restated
Joint Plan finding, inter alia, that the incomplete disclosure of the
relationship between the Debtors' former Chief Executive Officer and Cerberus
Capital Management, L.P., an affiliate of one of the Debtors' largest creditors,
precluded the Bankruptcy Court from finding that the Restated Joint Plan was
proposed in good faith, a statutory requirement for plan confirmation.
In order for the company to remain compliant with the requirements of Stark
II, on December 29, 2000, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $97.7 million of the Series A Notes and approximately
$11.6 million of contractual unpaid interest on the Series A Notes and the
Series B Notes for 905 shares of Coram, Inc. Series A Cumulative Preferred
Stock, $0.001 par value per share (see Notes 7 and 9 for further details).
Hereafter, the Coram, Inc. Series A Cumulative Preferred Stock is referred to as
the "CI Series A Preferred Stock." The exchange transaction generated an
extraordinary gain on troubled debt restructuring of approximately $107.8
million, net of tax, in 2000. At December 31, 2000, the company's stockholders'
equity exceeded the minimum requirement necessary to comply with the Stark II
public company exemption for the year ended December 31, 2001. See Note 10 for
further discussion regarding Stark II.
The Second Joint Plan of Reorganization and Related Activities
On or about February 6, 2001, the Official Committee of the Equity Security
Holders of Coram Healthcare Corporation (the "Equity Committee") filed a motion
with the Bankruptcy Court seeking permission to bring a derivative lawsuit
directly against the company's former Chief Executive Officer, a former member
of the CHC Board of Directors, Cerberus Partners, L.P., Cerberus Capital
Management, L.P., Cerberus Associates, L.L.C. and Craig Court, Inc. (all the
aforementioned corporate entities being parties to certain of the company's debt
agreements or affiliates of such entities). On February 26, 2001, the Bankruptcy
Court denied such motion without prejudice. On the same day, the Bankruptcy
Court approved the Debtors' motion to appoint Goldin Associates, L.L.C.
("Goldin") as independent restructuring advisor to the CHC Independent Committee
of the Board of Directors (the "Independent Committee"). Among other things, the
scope of Goldin's services included (i) assessing the appropriateness of the
Restated Joint Plan and reporting its findings to the Independent Committee and
advising the Independent Committee regarding an appropriate course of action
calculated to bring the Bankruptcy Cases to a fair and satisfactory conclusion,
(ii) preparing a written report as may be required by the Independent Committee
and/or the Bankruptcy Court and (iii) appearing before the Bankruptcy Court to
provide testimony as needed. Goldin was also appointed as a mediator among the
Debtors, the Equity Committee and other parties in interest.
On April 25, 2001 and July 11, 2001, the Bankruptcy Court extended the
period during which the Debtors had the exclusive right to file a plan of
reorganization to July 11, 2001 and August 1, 2001, respectively. On August 1,
2001, the Bankruptcy Court denied the Equity Committee's motion to terminate the
Debtors' exclusivity periods and file its own plan of reorganization. Moreover,
on August 2, 2001, the Bankruptcy Court extended the Debtors' exclusivity period
to solicit acceptances of any filed plan or plans to November 9, 2001 (the date
to solicit acceptances of the plan for CHC's equity holders was subsequently
extended to November 12, 2001). On or about November 7, 2001, the Debtors filed
a motion seeking to extend the periods to file a plan or plans of reorganization
14
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
and solicit acceptances thereof to December 31, 2001 and March 4, 2002,
respectively. The Bankruptcy Court extended exclusivity to January 2, 2002.
Thereafter, the Debtors' exclusivity period terminated.
Based upon Goldin's findings and recommendations, as set forth in the
Report of Independent Restructuring Advisor, Goldin Associates, L.L.C. (the
"Goldin Report"), on July 31, 2001 the Debtors filed with the Bankruptcy Court a
Second Joint Disclosure Statement, as amended (the "Second Disclosure
Statement"), with respect to their Second Joint Plan of Reorganization, as
amended (the "Second Joint Plan"). The Second Joint Plan, which was also filed
on July 31, 2001, provided for terms of reorganization similar to those
described in the Restated Joint Plan; however, utilizing Goldin's
recommendations, as set forth in the Goldin Report, the following substantive
modifications were included in the Second Joint Plan:
- the payment of up to $3.0 million to the holders of allowed CHC
general unsecured claims;
- the payment of up to $10.0 million to the holders of CHC equity
interests (contingent upon such holders voting in favor of the
Second Joint Plan);
- cancellation of the issued and outstanding CI Series A Preferred
Stock, and
- a $7.5 million reduction in certain performance bonuses payable to the
company's former Chief Executive Officer.
Under certain circumstances, as more fully disclosed in the Second
Disclosure Statement, the general unsecured claim holders could have been
entitled to receive a portion of the $10.0 million cash consideration allocated
to the holders of CHC equity interests.
The Second Joint Plan was subject to a vote by certain impaired creditors
and equity holders and confirmation by the Bankruptcy Court. On September 6,
2001 and September 10, 2001, hearings before the Bankruptcy Court considered the
adequacy of the Second Disclosure Statement. In connection therewith, the Equity
Committee, as well as the Official Committee of Unsecured Creditors in the Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc.
bankruptcy cases, filed objections. Notwithstanding the aforementioned
objections, the Second Disclosure Statement was approved by the Bankruptcy Court
for distribution to holders of certain claims entitled to vote on the Second
Joint Plan. On or about September 21, 2001, the Debtors mailed ballots to those
parties entitled to vote on the Second Joint Plan.
The CHC equity holders voted against confirmation of the Second Joint Plan
and all other classes of claimholders voted in favor of the Second Joint Plan.
If certain conditions of Chapter 11 of the Bankruptcy Code are satisfied, the
Bankruptcy Court can confirm a plan of reorganization notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity holders.
However, on December 21, 2001, after several weeks of confirmation hearings, the
Bankruptcy Court issued an order denying confirmation of the Second Joint Plan
for the reasons set forth in an accompanying opinion. The Debtors appealed the
Bankruptcy Court's order denying confirmation of the Second Joint Plan; however,
such appeal was subsequently dismissed.
In order for the company to remain compliant with the requirements of Stark
II, on December 31, 2001, pursuant to an order of the Bankruptcy Court, CI
exchanged $21.0 million of the Series A Notes and approximately $1.9 million of
contractual unpaid interest on the Series A Notes for approximately 189.6 shares
of CI Series A Preferred Stock (see Notes 7 and 9 for further details). This
transaction generated an extraordinary gain on troubled debt restructuring of
approximately $20.7 million in 2001. At December 31, 2001, the company's
stockholders' equity exceeded the minimum requirement necessary to comply with
the Stark II public company exemption for the year ended December 31, 2002. See
Note 10 for further discussion regarding Stark II.
Appointment of a Chapter 11 Trustee and Bankruptcy Related Activities During the
Year Ended December 31, 2002
On February 12, 2002, among other things, the Bankruptcy Court granted
motions made by the Office of the United States Trustee and two of the Debtors'
noteholders requesting the appointment of a Chapter 11 trustee to oversee the
Debtors during their reorganization process. Additionally, on such date the
Bankruptcy Court denied,
15
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
without prejudice, a renewed motion made by the Equity Committee for leave to
bring a derivative lawsuit against certain of the company's current and former
directors and officers, Cerberus Partners, L.P., Cerberus Capital Management,
L.P., Cerberus Associates, L.L.C., Craig Court, Inc., Goldman Sachs Credit
Partners L.P., Foothill Capital Corporation and Harrison J. Goldin Associates,
L.L.C. (sic) (all the aforementioned corporate entities, except for Harrison J.
Goldin Associates, L.L.C., being parties to certain of the company's debt
agreements or affiliates of such entities). Moreover, on February 12, 2002 the
Bankruptcy Court denied motions filed by the Equity Committee (i) to require the
company to call a stockholders' meeting and (ii) to modify certain aspects of
CI's corporate governance structure.
On March 7, 2002, the Bankruptcy Court approved the appointment of Arlin M.
Adams, Esquire, as the Debtors' Chapter 11 trustee. The Bankruptcy Code and
applicable rules require a Chapter 11 trustee to perform specific duties
relating to the administration of a bankruptcy case. Generally, a Chapter 11
trustee shall investigate the acts, conduct, assets, liabilities, financial
condition and operations of a debtor, and any other matter relevant to the case
or to the formulation of a plan of reorganization. The Bankruptcy Code also
requires a Chapter 11 trustee to, as soon as practicable, file with the
Bankruptcy Court (i) a statement of any investigation so conducted, including
any facts ascertained pertaining to fraud, dishonesty, incompetence, misconduct,
mismanagement or irregularities in the management of the affairs of the debtor,
or to a cause of action available to the estate, and (ii) a plan of
reorganization, or file a report as to why a plan of reorganization would not be
filed. With the appointment of a Chapter 11 trustee, while still under the
jurisdiction of the Bankruptcy Court, the Debtors are no longer
debtors-in-possession.
Furthermore, Chapter 11 of the Bankruptcy Code permits a Chapter 11 trustee
to operate the debtor's business. As with a debtor-in-possession, a Chapter 11
trustee may enter into transactions in the ordinary course of business without
notice or a hearing before the bankruptcy court; however, non-ordinary course
actions still require prior authorization from the bankruptcy court. A Chapter
11 trustee also assumes responsibility for management functions, including
decisions relative to the hiring and firing of personnel. As is the case with
the Debtors, when existing management is necessary to run the day-to-day
operations, a Chapter 11 trustee may retain and oversee such management group.
After a Chapter 11 trustee is appointed, a debtor's board of directors does not
retain its ordinary management powers. While Mr. Adams has assumed the board of
directors' management rights and responsibilities, he is doing so without any
pervasive changes to the company's existing management or organizational
structure, other than, as further discussed below, the acceptance of Daniel D.
Crowley's resignation effective March 31, 2003.
On or about July 24, 2002, the Bankruptcy Court granted a motion submitted
by the Chapter 11 trustee to (i) defer payment on account of certain approved
interim professional fee applications, (ii) defer the Bankruptcy Court's
decisions regarding the allowance or disallowance of compensation and expense
reimbursements requested in certain interim professional fee applications, (iii)
disallow certain professional fee applications requesting payment for
professional services rendered and expense reimbursements subsequent to March 6,
2002 and (iv) disallow certain other professional fee and expense reimbursement
applications. Certain legal counsel engaged during the period the Debtors
operated as debtors-in-possession have filed final fee applications seeking,
inter alia, a final order allowing payment of professional fees and
reimbursement of expenses incurred in connection with the Bankruptcy Cases. The
Chapter 11 trustee filed an omnibus objection to all final professional fee
applications and seeks to adjourn the adjudication of such final professional
fee applications until sometime after confirmation of a plan or plans of
reorganization. Through August 15, 2003, the Bankruptcy Court has adjudicated
only one final fee application. On or about July 24, 2002, the Bankruptcy Court
also approved several motions filed by the Chapter 11 trustee related to
fiduciary and administrative matters, including (i) maintenance of the Debtors'
existing bank accounts, (ii) continued use of the company's business forms and
record retention policies and procedures and (iii) expenditure
authorization/check disbursement policies and procedures.
On October 14, 2002, the Chapter 11 trustee filed a motion with the
Bankruptcy Court requesting approval for the retention of investment bankers and
financial advisors to provide services focusing on the Debtors' restructuring
and reorganization. The services may include, subject to the Chapter 11
trustee's discretion, (i) providing a formal valuation of the Debtors, (ii)
assisting the Chapter 11 trustee in exploring the possible sale of the Debtors
or their assets, (iii) assisting the Chapter 11 trustee in negotiating with
stakeholders and the restructuring of stakeholders'
16
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
claims, and/or (iv) one or more opinions on the fairness, from a financial
perspective, of any proposed sale of the Debtors or restructuring of the
Debtors. Such motion was approved by the Bankruptcy Court on December 2, 2002.
In order for the company to remain compliant with the requirements of Stark
II, on December 31, 2002, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $40.2 million of the Series A Notes, $7.3 million of
accrued but unpaid interest on the Series A Notes, $83.1 million of the Series B
Notes and $16.6 million of accrued but unpaid interest on the Series B Notes for
approximately 1,218.3 shares of Coram, Inc. Series B Cumulative Preferred Stock,
$0.001 par value per share (see Notes 7 and 9 for further details). Hereafter
the Coram, Inc. Series B Cumulative Preferred Stock is referred to as the "CI
Series B Preferred Stock." This transaction generated an extraordinary gain on
troubled debt restructuring of approximately $123.5 million in 2002. At December
31, 2002, the company's stockholders' equity exceeded the minimum requirement
necessary to comply with the Stark II public company exemption for the year
ending December 31, 2003. See Note 10 for further discussion regarding Stark II.
Bankruptcy Related Activities Subsequent to December 31, 2002
Daniel D. Crowley, the former Chief Executive Officer and President of the
company, had an employment contract which expired by its own terms on November
29, 2002. On January 24, 2003, the Chapter 11 trustee filed a motion with the
Bankruptcy Court seeking authorization to enter into a Termination and
Employment Extension Agreement (the "Transition Agreement"), effective January
1, 2003, with Mr. Crowley to have him serve as CHC's Chief Transition and
Restructuring Officer for a term not to exceed the earlier of (i) six months
from January 1, 2003, (ii) the date on which a plan or plans of reorganization
are confirmed by final order of the Bankruptcy Court or (iii) the substantial
consummation of a plan or plans of reorganization. Pursuant to the Transition
Agreement, Mr. Crowley would have continued to render essentially the same
services as previously provided to the company. On March 3, 2003, the Bankruptcy
Court denied the Chapter 11 trustee's motion for authorization to enter into the
Transition Agreement due to the Bankruptcy Court's belief that Mr. Crowley,
contrary to his representations, has continued to seek remuneration from one of
CI's noteholders in connection with efforts undertaken by Mr. Crowley in the
Bankruptcy Cases. Subsequently, Mr. Crowley resigned from the company effective
March 31, 2003. During the period January 1, 2003 through March 31, 2003, the
company paid Mr. Crowley based on the executed Transition Agreement. The Chapter
11 trustee has requested repayment from Mr. Crowley of all amounts paid in the
2003 period for the bi-weekly salary difference between the expired employment
agreement and the Transition Agreement.
On January 14, 2003, the Equity Committee filed a motion with the
Bankruptcy Court seeking an order to (i) immediately terminate Mr. Crowley's
employment with the Debtors and remove him from all involvement in the Debtors'
affairs, (ii) terminate all consulting arrangements between the Debtors and
Dynamic Healthcare Solutions, LLC ("DHS"), a privately held management
consulting and investment firm owned by Mr. Crowley (see Note 4 for further
details), (iii) substantially terminate all future payments to Mr. Crowley and
DHS and (iv) require Mr. Crowley and DHS to return all payments received to
date, except as otherwise authorized by the Bankruptcy Court as administrative
claims. On March 26, 2003, the Bankruptcy Court entered an order denying the
Equity Committee's motion to terminate Mr. Crowley's employment as moot and
reserved its decision on the other relief requested, including disgorgement,
until future litigation, if any, arises.
The employment contract with Allen J. Marabito, Executive Vice President,
General Counsel and Secretary, expired by its terms on November 29, 2002. The
Chapter 11 trustee has agreed to continue Mr. Marabito's employment in his prior
capacity and Mr. Marabito has also assumed the duties and responsibilities
previously performed by Mr. Crowley. Mr. Marabito's employment is at will with a
base salary of $375,000 per annum, plus the same employee benefits as prior to
the expiration of his employment contract. On May 19, 2003, Mr. Marabito
released the company from all contractual obligations pertaining to his
incentive compensation for the year ended December 31, 2002 (i.e., the 2002 MIP
of approximately $1.05 million which remained subject to Chapter 11 trustee and
Bankruptcy Court approvals) and such amount is reflected as a reduction in
general and administrative expenses during the three and six month periods ended
June 30, 2003. In consideration thereof, Mr. Marabito was granted a retention
bonus of $380,000 under the company's 2003 Key Employee Retention Plan discussed
below. The loss of Mr. Marabito's services could have a material adverse effect
on the company.
17
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
On April 7, 2003, the Bankruptcy Court approved a motion filed by the
Chapter 11 trustee to establish the 2003 Key Employee Retention Plan (the "2003
KERP"), which provides for (i) retention bonus payments of approximately $3.1
million to key employees of the company (the "2003 KERP Compensation") and (ii)
other payments of approximately $0.3 million to certain branch management
personnel (the "Branch Incentive Compensation"). Pursuant to the provisions of
the 2003 KERP, the 2003 KERP Compensation is payable in two equal installments
as follows: (i) upon approval of the 2003 KERP by the Bankruptcy Court and (ii)
the earlier of 60 days after confirmation of a plan or plans of reorganization
or December 31, 2003 (the "Second Payment Date"). Should a 2003 KERP
Compensation participant voluntarily leave the company or be terminated for
cause prior to the Second Payment Date, such participant must return any amounts
previously received under the 2003 KERP, less applicable taxes withheld.
Approximately $1.8 million, which represented the first installment under the
2003 KERP Compensation and the entire Branch Incentive Compensation amount, was
paid to the eligible participants in April 2003.
On May 2, 2003, the Chapter 11 trustee filed with the Bankruptcy Court a
proposed joint plan of reorganization with respect to the Debtors and, on June
17, 2003, the Chapter 11 trustee filed an amended proposed joint plan of
reorganization (the "Trustee's Plan"). Additionally, on June 24, 2003 the
Chapter 11 trustee filed the Second Amended Disclosure Statement with Respect to
the Trustee's Plan (the "Trustee's Disclosure Statement"). On June 26, 2003, the
Bankruptcy Court, entered an order (i) approving the Trustee's Disclosure
Statement, (ii) approving the form of the ballot to be distributed in connection
with the voting on the Trustee's Plan, (iii) establishing procedures for
solicitation of votes on the Trustee's Plan, (iv) establishing a voting deadline
and procedures for tabulation of votes on the Trustee's Plan and (v)
establishing the dates and times for the filing of objections to, and scheduling
a hearing on, confirmation of the Trustee's Plan. True and correct copies of the
Trustee's Plan and the Trustee's Disclosure Statement are attached as Exhibits
99.1 and 99.2, respectively, to the Form 8-K filed with the Securities and
Exchange Commission on July 11, 2003.
On December 19, 2002, the Equity Committee filed with the Bankruptcy Court
a proposed plan of reorganization with respect to the Debtors and, on June 17,
2003, the Equity Committee filed a second amended proposed plan of
reorganization (the "Equity Committee's Plan"). Additionally, on June 26, 2003
the Equity Committee filed the Third Amended Disclosure Statement with Respect
to the Equity Committee's Plan (the "Equity Committee's Disclosure Statement").
On June 26, 2003, the Bankruptcy Court entered an order (i) approving the Equity
Committee's Disclosure Statement, (ii) appointing a balloting agent, (iii)
approving the form of the ballot to be distributed in connection with the voting
on the Equity Committee's Plan, (iv) establishing procedures for solicitation of
votes on the Equity Committee's Plan, (v) establishing a voting deadline and
procedures for tabulation of votes on the Equity Committee's Plan and (vi)
establishing the dates and times for the filing of objections to, and scheduling
a hearing on, confirmation of the Equity Committee's Plan, and the objections
thereto filed by the Chapter 11 trustee. True and correct copies of the Equity
Committee's Plan and the Equity Committee's Disclosure Statement are attached as
Exhibits 99.3 and 99.4, respectively, to the Form 8-K filed with the Securities
and Exchange Commission on July 11, 2003.
Pursuant to the Bankruptcy Court's order, a record date of July 1, 2003 was
established for the purpose of determining which holders of equity interests are
entitled to vote on each of the Trustee's Plan and the Equity Committee's Plan.
Additionally, in accordance with the Bankruptcy Court's order, on or about July
14, 2003, the balloting agent transmitted the Chapter 11 trustee's and the
Equity Committee's solicitation packages to certain creditors and interest
holders who may be entitled to vote on each of the respective plans of
reorganization. As of August 15, 2003, voting on each of the plans of
reorganization remains open.
Each of the Trustee's Plan and the Equity Committee's Plan remain subject
to confirmation by the Bankruptcy Court. The hearing to consider confirmation of
each such plan of reorganization and any objections thereto is scheduled
18
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
to commence at 9:30 a.m. Eastern Daylight Time on September 9, 2003. The
deadline to object to confirmation of each of the plans of reorganization was
August 7, 2003 and, in connection therewith, certain objections have been filed
against both plans of reorganization.
Other Bankruptcy-Related Disclosures
Under Chapter 11 of the Bankruptcy Code, certain claims against the Debtors
in existence prior to the filing date are stayed while the Debtors' operations
continue under the purview of a Chapter 11 trustee or as debtors-in-possession.
These claims are reflected in the condensed consolidated balance sheets as
liabilities subject to compromise. Additional claims have arisen since the
filing date and may continue to arise due to the rejection of executory
contracts and unexpired non-residential real property leases and from
determinations by the Bankruptcy Court of allowed claims for contingent,
unliquidated and other disputed amounts. Parties affected by the rejection of an
executory contract or unexpired non-residential real property lease may file
claims with the Bankruptcy Court in accordance with the provisions of Chapter 11
of the Bankruptcy Code and applicable rules. Claims secured by the Debtors'
assets also are stayed, although the holders of such claims have the right to
petition the Bankruptcy Court for relief from the automatic stay to permit such
creditors to foreclose on the property securing their claims. Additionally,
certain claimants have sought relief from the Bankruptcy Court to lift the
automatic stay and continue pursuit of their claims against the Debtors or the
Debtors' insurance carriers. See Note 10 for further details regarding
activities of the Official Committee of Unsecured Creditors of Coram Resource
Network, Inc. and Coram Independent Practice Association, Inc. in the Resource
Network Subsidiaries' bankruptcy proceedings.
The principal categories and balances of Chapter 11 bankruptcy claims
accrued in the condensed consolidated balance sheets at both June 30, 2003 and
December 31, 2002 and included in liabilities subject to compromise are
summarized as follows (in thousands):
Series B Notes in default................................................. $ 9,000
Liabilities of discontinued operations subject to compromise.............. 2,936
Accounts payable.......................................................... 1,390
Earn-out obligation....................................................... 1,268
Accrued merger and restructuring costs (primarily severance liabilities).. 468
Other long-term debt obligations.......................................... 130
Legal and professional liabilities........................................ 98
Other..................................................................... 340
--------------
Total liabilities subject to compromise................................ $ 15,630
==============
In addition to the amounts disclosed in the table above, the holders of the
CI Series A Preferred Stock and the CI Series B Preferred Stock (collectively
the "CI Preferred Stock Holders") continue to assert claims within the
Bankruptcy Cases in the aggregate amount of their cumulative liquidation
preferences. Furthermore, in connection with the note exchange effective on
December 31, 2002, the Bankruptcy Court entered an order granting the exchange,
subject to its comments of record, and further ordered that (i) if equitable or
other relief is sought by any party in interest against the CI Preferred Stock
Holders, all defenses, affirmative defenses, setoffs, recoupments and other such
rights of the Chapter 11 trustee, the CI Preferred Stock Holders and the Debtors
shall be preserved, and all such issues shall be determined, regardless of the
first, second and third note exchanges and (ii) the rights and equity interests
of the CI Preferred Stock Holders are, and in connection with any plan or plans
of reorganization or any other distribution of the Debtors' assets pursuant to
Chapter 11 of the Bankruptcy Code shall remain, senior and superior to the
rights and equity interests of all holders of CI's common stock and all claims
against and equity interests in CHC.
On or about March 28, 2003, the Equity Committee commenced an adversary
proceeding seeking to subordinate the preferred stock interests of Cerberus
Partners, L.P., Goldman Sachs Credit Partners L.P. and Foothill Capital
Corporation in Coram, Inc. to the interests of Coram Healthcare Corporation as
the sole common shareholder of Coram, Inc. Upon motion of the defendants and
after a hearing held on June 5, 2003, the Bankruptcy Court dismissed the
aforementioned adversary proceeding by an order dated June 19, 2003 and
preserved issues concerning post-petition interest for determination in
connection with confirmation hearings on the Trustee's Plan
19
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
and the Equity Committee's Plan, provided that, to the extent that an equitable
objection to confirmation is raised, the Bankruptcy Court will treat the CI
Series A Preferred Stock and the CI Series B Preferred Stock as debt and deal
with the issue of whether post-petition interest will be allowed in accordance
with the provisions of the Bankruptcy Code concerning post-petition interest on
debt.
Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to a plan or plans of
reorganization and review by the Chapter 11 trustee. Therefore, it is not
possible to fully or completely estimate the fair value of the liabilities
subject to compromise at June 30, 2003 and December 31, 2002 due to the
Bankruptcy Cases and the uncertainty surrounding the ultimate amount and
settlement terms for such liabilities.
Reorganization expenses are items of expense or income that are incurred or
realized by the Debtors as a result of the reorganization. These items include,
but are not limited to, professional fees, expenses related to key employee
retention plans, Office of the United States Trustee fees and other expenditures
relating to the Bankruptcy Cases, offset by interest earned on cash accumulated
as a result of the Debtors not paying their pre-petition liabilities during the
pendency of the Bankruptcy Cases. The principal components of reorganization
expenses for the three and six months ended June 30, 2003 and 2002 are as
follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2003 2002 2003 2002
----------- --------- ------------------------
Legal, accounting and consulting fees...... $ 2,878 $ 620 $ 4,732 $ 2,712
Key employee retention plan expenses....... 1,323 - 1,323 -
Office of the United States Trustee fees... 11 11 21 21
Interest income............................ (97) (108) (199) (200)
---------- ----------- ---------- ----------
Total reorganization expenses, net...... $ 4,115 $ 523 $ 5,877 $ 2,533
========== =========== ========== ==========
3. DISCONTINUED OPERATIONS
Prior to January 1, 2000, the company provided ancillary network management
services through the Resource Network Subsidiaries, which managed networks of
home healthcare providers on behalf of HMOs, PPOs, at-risk physician groups and
other managed care organizations. In April 1998, the company entered into a five
year capitated agreement with Aetna U.S. Healthcare, Inc. ("Aetna") (the "Master
Agreement") for the management and provision of certain home health services,
including home infusion, home nursing, respiratory therapy, durable medical
equipment, hospice care and home nursing support for several of Aetna's disease
management programs.
On August 19, 1999, an involuntary bankruptcy petition was filed against
Coram Resource Network, Inc. and, on November 12, 1999, the Resource Network
Subsidiaries filed voluntary bankruptcy petitions under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court. On or about May 31, 2000, the Resource
Network Subsidiaries filed a liquidating Chapter 11 plan and disclosure
statement. Subsequently, on October 21, 2002 the Official Committee of Unsecured
Creditors of Coram Resource Network, Inc. and Coram Independent Practice
Association, Inc. (the "R-Net Creditors' Committee") filed a competing proposed
Liquidating Chapter 11 Plan. A complete description of such plan is set forth in
the disclosure statement filed contemporaneously therewith, which is available
on the docket of the Resource Network Subsidiaries' bankruptcy cases at docket
numbers 1003 and 1004. The Chapter 11 trustee has objected to the disclosure
statement.
The agreements that R-Net had for the provision of ancillary network
management services, including the Aetna Master Agreement, have been terminated
and R-Net is no longer providing any ancillary network management services.
Additionally, all of the R-Net locations have been closed in connection with its
proposed liquidation. Coram employees who were members of the Resource Network
Subsidiaries' Board of Directors resigned and only
20
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
the Chief Restructuring Officer appointed by the Bankruptcy Court remains on the
R-Net Board of Directors to manage the liquidation of the R-Net business.
Following the November 1999 filing of voluntary bankruptcy petitions by the
Resource Network Subsidiaries, Coram accounted for such division as a
discontinued operation. In connection therewith, Coram separately reflected
R-Net's operating results in its consolidated statements of income as
discontinued operations; however, R-Net had no operating activity for the six
months ended June 30, 2003 and 2002. During the six months ended June 30, 2003,
the company recorded a $0.1 million loss from disposal of discontinued
operations related to certain litigation between the R-Net Creditors' Committee
and the Debtors and several of their non-debtor subsidiaries, as well as, legal
costs associated with corresponding indemnifications provided to the company's
officers and directors in the Resource Network Subsidiaries' bankruptcy
proceedings/litigation.
As of June 30, 2003, the company has provided approximately $27.3 million
to fully and completely liquidate the Resource Network Subsidiaries, including
the R-Net Creditors' Committee litigation, legal costs related thereto (beyond
any insurance recoveries that the company may avail itself of), proofs of claims
asserted against the Debtors and other related matters (e.g., R-Net creditors
ultimately may successfully assert claims against the company). See Note 10 for
further details regarding the R-Net Creditors' Committee litigation, the
potential impact of the Trustee's Plan and/or the Equity Committee's Plan (if
confirmed by the Bankruptcy Court) and related matters.
4. RELATED PARTY TRANSACTIONS
The company's former Chairman, Chief Executive Officer and President,
Daniel D. Crowley, owns Dynamic Healthcare Solutions, LLC ("DHS"), a privately
held management consulting and investment firm from which the company purchased
services. Mr. Crowley's employment with the company terminated effective March
31, 2003. Effective with the commencement of the Bankruptcy Cases, DHS employees
who were then serving as consultants to Coram terminated their employment with
DHS and became full time Coram employees. Through March 31, 2003, DHS continued
to bill the company the actual costs it attributed to DHS' Sacramento,
California location where Mr. Crowley and other persons were located and
performed services for or on behalf of the company. Effective April 1, 2003, DHS
and the Chapter 11 trustee entered into a month-to-month lease agreement for
office space at the aforementioned Sacramento, California location where certain
company employees and consultants are located. The rent, including parking and
certain utilities, is approximately $7,900 per month. Subsequent to December 31,
2002 and through August 15, 2003, approximately $0.1 million was paid to DHS in
connection with the aforementioned arrangements. Additionally, during the six
months ended June 30, 2002, the company paid approximately $0.1 million to DHS.
Effective August 2, 2000, the CHC Board of Directors approved a contingent
bonus to Mr. Crowley. Under the agreement, subject to certain material terms and
conditions, Mr. Crowley will have a claim for $1.8 million following the
successful refinancing of the company's debt. In connection therewith and the
December 2000 debt to preferred stock exchange transaction discussed in Notes 2
and 7, the company recorded a $1.8 million reorganization expense for the
success bonus during the year ended December 31, 2000. The success bonus will
not be payable unless and until such time as a plan or plans of reorganization,
which provide for payment of such bonus, are fully approved by the Bankruptcy
Court. Mr. Crowley also has claims for performance bonuses for the years ended
December 31, 2002, 2001 and 2000 aggregating approximately $13.8 million based
on overall company performance under the related Management Incentive Plans. Mr.
Crowley also participated in the company's key employee retention plans. In
connection with the Second Joint Plan, Mr. Crowley voluntarily offered to accept
a $7.5 million reduction in certain performance bonuses, contingent on the
confirmation and consummation of the Second Joint Plan. As discussed in Note 2,
confirmation of the Second Joint Plan was denied by the Bankruptcy Court on
December 21, 2001. Management cannot predict what, if any, reduction in Mr.
Crowley's incentive, retention or success bonuses, which are accrued in the
condensed consolidated financial statements, will result from a final confirmed
plan or plans of reorganization. Mr. Crowley indicated that he reserves the
right to claim the full outstanding amounts of his incentive, retention, success
bonus and other compensation. The Chapter 11 trustee reserves the right to seek
disallowance by the Bankruptcy Court of all such amounts and/or seek
disgorgement in any future litigation.
21
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Effective August 1, 1999, Mr. Crowley and Cerberus Capital Management, L.P.
(an affiliate of Cerberus Partners, L.P. ("Cerberus"), a party to the company's
former debtor-in-possession financing agreement, Senior Credit Facility and
Securities Exchange Agreement), executed an employment agreement whereby Mr.
Crowley was paid approximately $1 million per annum plus potential
performance-related bonuses, equity options and fringe benefits. The services
rendered by Mr. Crowley to Cerberus included, but were not limited to, providing
business and strategic healthcare investment advice to executive management at
Cerberus and its affiliates. Mr. Crowley and Cerberus agreed to suspend their
contract and all related obligations immediately after the Bankruptcy Court's
denial of the Second Joint Plan on December 21, 2001. In September 2002, Mr.
Crowley formally terminated the Cerberus employment contract.
On January 14, 2003, the Equity Committee filed a motion with the
Bankruptcy Court seeking an order to (i) immediately terminate Mr. Crowley's
employment with the Debtors and remove him from all involvement in the Debtors'
affairs, (ii) terminate all consulting arrangements between the Debtors and DHS,
(iii) substantially terminate all future payments to Mr. Crowley and DHS and
(iv) require Mr. Crowley and DHS to return all payments received to date, except
as otherwise authorized by the Bankruptcy Court as administrative claims. On
March 26, 2003, the Bankruptcy Court entered an order denying the Equity
Committee's motion to terminate Mr. Crowley's employment as moot and reserved
its decision on the other relief requested, including disgorgement, until future
litigation, if any, arises.
As further discussed in Note 10, in November 2001 the Official Committee of
Unsecured Creditors of Coram Resource Network, Inc. and Coram Independent
Practice Association, Inc. brought an adversary proceeding in the Bankruptcy
Court against, among other defendants, the Debtors and certain of their
operating subsidiaries, as well as several related parties, including Foothill
Capital Corporation, Foothill Income Trust, L.P., Goldman Sachs Credit Partners
L.P., Cerberus, one of Cerberus' principals, current management, former
management and current and former members of the CHC's Board of Directors.
On March 7, 2002, the Bankruptcy Court approved the appointment of Arlin M.
Adams, Esquire, as the Debtors' Chapter 11 trustee. As more fully discussed in
Note 2, Mr. Adams has assumed the company's Board of Directors' management
rights and responsibilities. Subsequent to Bankruptcy Court appointment, the
Chapter 11 trustee engaged the law firm of Schnader, Harrison, Segal & Lewis LLP
("Schnader Harrison") to provide professional services in connection with the
Bankruptcy Cases. Mr. Adams is of counsel at such law firm. Schnader Harrison
was approved by the Bankruptcy Court as counsel to the Chapter 11 trustee and,
in connection therewith, reimbursement of professional fees and related expenses
are subject to Bankruptcy Court review and approval prior to interim and final
payments by the company. Additionally, Mr. Adams is entitled to compensation and
reimbursement of related expenses attributable to his services on behalf of the
Debtors. Mr. Adams is compensated on an hourly basis at a rate that has been
approved by the Bankruptcy Court. For the six months ended June 30, 2003 and
2002, the company recorded aggregate compensation and reimbursable expenses for
Mr. Adams of approximately $45,000 and $30,000, respectively. In addition, the
company recorded aggregate professional fees and reimbursable expenses during
the six months ended June 30, 2003 and 2002 for Schnader Harrison of
approximately $1,777,000 and $400,000, respectively. Through August 15, 2003,
the company paid $66,974 to Mr. Adams for compensation and reimbursable expenses
incurred from March 7, 2002 to November 30, 2002. Moreover, through August 15,
2003 the company paid $2,056,377 to Schnader Harrison for professional services
rendered and reimbursable expenses incurred from March 7, 2002 to February 28,
2003.
5. MERGER AND RESTRUCTURING RESERVES
In May 1995, as a result of the formation of Coram and the acquisition of
substantially all of the assets of the alternate site infusion business of
Caremark, Inc., a subsidiary of Caremark International, Inc., the company
initiated a restructuring plan (the "Caremark Business Consolidation Plan") and
charged approximately $25.8 million to operations as a restructuring cost.
22
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
During December 1999, the company initiated an organizational restructure
and strategic repositioning plan (the "Coram Restructure Plan") and charged
approximately $4.8 million to operations as a restructuring cost. The Coram
Restructure Plan resulted in the closing of additional facilities and reduction
of personnel. In connection therewith, the company reserved for (i) personnel
reduction costs relating to severance payments, fringe benefits and taxes for
employees that have been or may be terminated and (ii) facility closing costs
that consist of rent, common area maintenance and utility costs for fulfilling
lease commitments of approximately fifteen branch and corporate facilities that
have been or may be closed or downsized. Reserves for facility closing costs are
offset by amounts arising from sublease arrangements, but not until such
arrangements are in the form of signed and executed contracts. As part of the
Coram Restructure Plan, the company informed certain reimbursement sites of
their estimated closure dates and such operations were ultimately closed during
the first half of 2001, including the severance of approximately 80 employees.
Under the Caremark Business Consolidation Plan and the Coram Restructure
Plan, the total charges through June 30, 2003, the estimate of total future cash
expenditures and the estimated total charges are as follows (in thousands):
CHARGES THROUGH JUNE 30, 2003 BALANCES AT JUNE 30, 2003
--------------------------------------- -------------------------
ESTIMATED
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTALS EXPENDITURES CHARGES
----------- ----------- ----------- ----------- -----------
Caremark Business Consolidation Plan:
Personnel reduction costs .................... $ 11,300 $ - $ 11,300 $ - $ 11,300
Facility reduction costs ..................... 10,437 3,900 14,337 260 14,597
----------- ----------- ----------- ----------- -----------
Subtotals .................................. 21,737 3,900 25,637 260 25,897
Coram Restructure Plan:
Personnel reduction costs .................... 2,361 - 2,361 104 2,465
Facility reduction costs ..................... 1,285 - 1,285 232 1,517
----------- ----------- ----------- ----------- -----------
Subtotals .................................. 3,646 - 3,646 336 3,982
----------- ----------- ----------- ----------- -----------
Totals .......................................... $ 25,383 $ 3,900 $ 29,283 596 $ 29,879
=========== =========== =========== ===========
Restructuring costs subject to compromise .... (468)
-----------
Accrued merger and restructuring costs
per the condensed consolidated balance sheet.. $ 128
===========
During the six months ended June 30, 2003, significant items impacting the
restructuring reserves that were not subject to compromise are summarized as
follows (in thousands):
Balance at December 31, 2002 ......................... $ 190
Activity during the six months ended June 30, 2003:
Payments under the plans .......................... (62)
-----------
Balance at June 30, 2003 ............................. $ 128
===========
Management estimates that the future cash expenditures related to the
aforementioned restructuring plans will be made in the following periods: 74%
through June 30, 2004, 20% through June 30, 2005 and 6% through June 30, 2006.
23
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
6. GOODWILL AND OTHER LONG-LIVED ASSETS
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("Statement 142"), which
eliminates the amortization of goodwill and intangible assets with indefinite
useful lives. Statement 142 also requires that goodwill and other intangible
assets with indefinite useful lives be reviewed for impairment at least
annually. The company adopted Statement 142 on January 1, 2002. Pursuant to the
provisions of Statement 142, intangible assets with finite lives continue to be
amortized over their estimated useful lives.
Goodwill. Statement 142 requires the company to test goodwill for
impairment using a two-step process. The first step is a screen for potential
impairment and the second step measures the amount of impairment, if any. As a
result of the initial adoption of Statement 142 in December 2002 (retroactive to
January 1, 2002), the company recognized a transitional goodwill impairment
charge of approximately $71.9 million which, in accordance with Statement 142,
was reflected in the condensed consolidated financial statements as the
cumulative effect of change in an accounting principle and resulted in a
restatement of the company's condensed consolidated income statement for the six
months ended June 30, 2002.
Management selected December 1st as the company's annual goodwill
impairment test date. Separately, management concluded that no indicators of
impairment were in evidence at June 30, 2003 and through August 15, 2003;
however, there can be no assurances that the December 1, 2003 annual impairment
test (including the impact of an enterprise valuation, if necessary) will not
result in a potentially significant incremental impairment of the company's
recorded goodwill. If the company recognizes a material goodwill impairment
charge during 2003, stockholders' equity may be less than $75 million as of
December 31, 2003, at which time the company may not qualify for the public
company exemption of Stark II for the year ending December 31, 2004. The
potential material adverse effects of noncompliance with Stark II on the
company's financial condition and business operations are described in more
detail in Note 10.
Other Intangible Assets. The principal components of intangible assets
other than goodwill are as follows (in thousands):
JUNE 30, 2003 DECEMBER 31, 2002
------------------------------------ ------------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT (AT COST) AMORTIZATION AMOUNT (AT COST) AMORTIZATION
---------------- ---------------- ---------------- ----------------
Commercial payer contracts ........ $ 13,683 $ (13,683) $ 13,683 $ (13,683)
Patient outcomes database ......... 8,386 (3,503) 8,386 (3,296)
Employee noncompete agreements .... 3,343 (3,343) 3,343 (3,342)
---------------- ---------------- ---------------- ----------------
Total intangible assets ........... 25,412 (20,529) 25,412 (20,321)
Other deferred costs .............. 302 (170) 302 (123)
---------------- ---------------- ---------------- ----------------
Total intangible assets and other
deferred costs ................. $ 25,714 $ (20,699) $ 25,714 $ (20,444)
================ ================ ================ ================
Amortization expense related to intangible assets, which is included in
selling, general and administrative expenses, was approximately $0.3 million and
$0.7 million during the six months ended June 30, 2003 and 2002, respectively.
24
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT OBLIGATIONS
Debt obligations are as follows (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
Series B Senior Subordinated Unsecured Convertible Notes (in default at $ 9,000 $ 9,000
June 30, 2003) ...........................................................
Accreditation note payable .................................................. 84 118
Other obligations, including capital leases, at interest rates ranging from
5.0% to 13.1% ........................................................... 1,521 146
------------ ------------
10,605 9,264
Less: Debt obligations subject to compromise ................................ (9,130) (9,130)
Less: Current maturities .................................................... (254) (61)
------------ ------------
Long-term debt and capital leases, less current maturities .................. $ 1,221 $ 73
============ ============
As a result of the Bankruptcy Cases, substantially all short and long-term
debt obligations at the August 8, 2000 filing date have been classified as
liabilities subject to compromise in the condensed consolidated balance sheets
in accordance with SOP 90-7. Under Chapter 11 of the Bankruptcy Code, actions
against the Debtors to collect pre-petition indebtedness are subject to an
automatic stay provision. As of August 8, 2000, the company's principal credit
and debt agreements included (i) a Securities Exchange Agreement, dated May 6,
1998 (the "Securities Exchange Agreement"), with Cerberus Partners, L.P.,
Goldman Sachs Credit Partners L.P. and Foothill Capital Corporation
(collectively the "Holders") and the related Series A Senior Subordinated
Unsecured Notes (the "Series A Notes") and the Series B Senior Subordinated
Unsecured Convertible Notes (the "Series B Notes") and (ii) a Senior Credit
Facility with Foothill Income Trust L.P., Cerberus Partners, L.P. and Goldman
Sachs Credit Partners L.P. (collectively the "Lenders") and Foothill Capital
Corporation as agent thereunder. Subsequent to the petition date, the Debtors
entered into a secured debtor-in-possession financing agreement with Madeleine
L.L.C., an affiliate of Cerberus Partners, L.P. (the "DIP Agreement); however,
such credit facility expired under its terms on August 31, 2001. Pursuant to the
terms and conditions of the aforementioned credit and debt agreements, the
company is precluded from paying cash dividends or making other capital
distributions. Moreover, the Debtors' voluntary Chapter 11 filings caused events
of default to occur under the Securities Exchange Agreement and the Senior
Credit Facility, thereby terminating the Debtors' ability to make additional
borrowings under the Senior Credit Facility through its expiration on February
6, 2001.
The recognition of interest expense pursuant to SOP 90-7 is appropriate
during the Bankruptcy Cases if it is probable that such interest will be an
allowed priority, secured or unsecured claim. The Second Joint Plan (see Note 2
for further details), which was denied by the Bankruptcy Court on December 21,
2001, would have effectively eliminated all post-petition interest on
pre-petition borrowings. The final confirmed plan or plans of reorganization may
have a similar effect on post-petition interest; however, appropriate approvals
thereof in accordance with Chapter 11 of the Bankruptcy Code would be required.
Accreditation Note Payable. In August 2001, CI entered into an agreement
(the "ACHC Agreement") with the Accreditation Commission for Health Care, Inc.
("ACHC") whereby ACHC is to, among other things, provide national accreditation
for Coram as deemed appropriate by ACHC. Under the terms of the ACHC Agreement,
which commenced on the date that it was executed and expires in November 2004,
Coram made an upfront payment and is obligated to make twelve equal non-interest
bearing quarterly payments of approximately $17,000. The total payments to be
made under the ACHC Agreement will aggregate approximately $0.3 million. In the
event of breach or default by either of the parties, CI and/or ACHC may
immediately terminate the ACHC Agreement if the breach or default is not cured
within fifteen days of receipt of written notice from the non-breaching party.
B. Braun Medical, Inc. ("B. Braun") Capital Lease Obligation. In connection
with management's decision to replace the company's entire fleet of Sabratek
Corporation 3030 pole-mounted pumps, the Bankruptcy Court approved a motion on
April 29, 2003 that authorized the company to enter into a three year agreement
with B. Braun
25
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
to lease 1,000 Vista Basic pumps (the "Lease Agreement"). The Lease Agreement,
which became effective in May 2003, includes an aggregate commitment, including
related interest, of approximately $1.5 million. As a result, the company is
required to pay to B. Braun approximately $0.3 million, $0.5 million and $0.7
million during the first, second and third years of the Lease Agreement. Upon
expiration of the Lease Agreement, the company has the option to acquire the
leased Vista Basic pumps at a bargain purchase price of $1 per pump. The Lease
Agreement contains customary covenants and events of default, as well as,
remedies available to B. Braun if the company is in violation thereof,
including, but not limited to, (i) termination of the Lease Agreement, (ii)
return of the leased Vista Basic pumps to B. Braun and/or (iii) recovery from
the company of any unpaid amounts as of the date of default and all amounts
remaining under the unexpired term of the Lease Agreement. Management believes
that the company will comply with the terms and conditions of the Lease
Agreement; however, there can be no assurances thereof or what remedies, if any,
would be invoked by B. Braun in the event of default.
Securities Exchange Agreement. In April 1998, the Securities Exchange
Agreement cancelled a previously outstanding subordinated rollover note, related
deferred interest and fees and related warrants to purchase up to 20% of the
outstanding CHC common stock on a fully diluted basis in exchange for a company
payment of $4.3 million and issuance by the company to the Holders of (i) $150.0
million in principal amount of Series A Notes and (ii) $87.9 million in
principal amount of 8.0% Series B Notes. Additionally, the Holders of the Series
A Notes and the Series B Notes were given the right to approve certain new debt
and the right to name one member of the CHC Board of Directors. Such director
was elected in June 1998 and reelected in August 1999; however, the designated
board member resigned in July 2000 and has not been replaced.
On April 9, 1999, the company entered into Amendment No. 2 (the "Note
Amendment") to the Securities Exchange Agreement with the Holders. Pursuant to
the Note Amendment, the outstanding principal amount of the Series B Notes is
convertible into shares of the company's common stock at a conversion price of
$2.00 per share (subject to customary anti-dilution adjustments). Prior to
entering into the Note Amendment, the Series B Notes were convertible into
common stock at a conversion price of $3.00 per share, which was subject to
downward (but not upward) adjustment based on prevailing market prices for CHC's
common stock on April 13, 1999 and October 13, 1999. Based on reported market
closing prices for CHC's common stock prior to April 13, 1999, this conversion
price would have been adjusted to below $2.00 on such date had the company not
entered into the Note Amendment. Pursuant to the Note Amendment, the parties
also increased the interest rate applicable to the Series A Notes from 9.875% to
11.5% per annum.
On December 28, 2000, the Bankruptcy Court approved the Debtors' request to
exchange a sufficient amount of debt and related accrued interest for Coram,
Inc. Series A Cumulative Preferred Stock in order to maintain compliance with
the physician ownership and referral provisions of Stark II. Hereafter, the
Coram, Inc. Series A Cumulative Preferred Stock is referred to as the "CI Series
A Preferred Stock." On December 29, 2000, the Securities Exchange Agreement was
amended ("Amendment No. 4") and an Exchange Agreement was simultaneously
executed among the Debtors and the Holders. Pursuant to such arrangements, the
Holders agreed to exchange approximately $97.7 million aggregate principal
amount of the Series A Notes and $11.6 million of aggregate contractual unpaid
interest on the Series A Notes and the Series B Notes as of December 29, 2000
for 905 shares of CI Series A Preferred Stock (see Note 9 for further details
regarding the preferred stock). Following the exchange, the Holders retained
approximately $61.2 million aggregate principal amount of the Series A Notes and
$92.1 million aggregate principal amount of the Series B Notes. Pursuant to
Amendment No. 4, the per annum interest rate on both the Series A Notes and the
Series B Notes was adjusted to 9.0%. Moreover, the Series A Notes' and Series B
Notes' original scheduled maturity dates of May 2001 and April 2008,
respectively, were both modified to June 30, 2001. Due to the Holders' receipt
of consideration with a fair value less than the face value of the exchanged
principal and accrued interest, the exchange transaction qualified as a troubled
debt restructuring pursuant to Statement of Financial Accounting Standards No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructurings
("Statement No. 15"). In connection therewith, the company recognized an
extraordinary gain during the year ended December 31, 2000 of approximately
$107.8 million, net of tax.
On December 27, 2001, the Bankruptcy Court approved the Debtors' request to
exchange an additional amount of debt and related contractual unpaid interest
for CI Series A Preferred Stock in an amount sufficient to maintain compliance
with Stark II. In connection therewith, on December 31, 2001 the Securities
Exchange Agreement was
26
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
amended ("Amendment No. 5") and a second Exchange Agreement was simultaneously
executed among the Debtors and the Holders. Pursuant to such arrangements, the
Holders agreed to exchange $21.0 million aggregate principal amount of the
Series A Notes and approximately $1.9 million of aggregate contractual unpaid
interest on the Series A Notes as of December 31, 2001 for approximately 189.6
shares of CI Series A Preferred Stock. Following this second exchange, the
Holders retained approximately $40.2 million aggregate principal amount of the
Series A Notes. Pursuant to Amendment No. 5, the Series A Notes' and Series B
Notes' scheduled maturity date of June 30, 2001 were both modified to June 30,
2002. Due to the Holders receipt of consideration with a fair value less than
the face value of the exchanged principal and accrued interest, the exchange
transaction qualified as a troubled debt restructuring pursuant to Statement No.
15. In connection therewith, the company recognized an extraordinary gain during
the year ended December 31, 2001 of approximately $20.7 million.
On December 31, 2002, with approval from the Bankruptcy Court, the Holders
exchanged an additional amount of debt and related contractual unpaid interest
for Coram, Inc. Series B Cumulative Preferred Stock in an amount sufficient to
maintain compliance with Stark II. Hereafter, the Coram, Inc. Series B
Cumulative Preferred Stock is referred to as the "CI Series B Preferred Stock."
The Securities Exchange Agreement was amended ("Amendment No. 6") on December
31, 2002 and a third Exchange Agreement was simultaneously executed among the
Debtors and the Holders. Pursuant to such arrangements, the Holders agreed to
exchange approximately $40.2 million aggregate principal amount of the Series A
Notes, $7.3 million of aggregate contractual unpaid interest on the Series A
Notes, $83.1 million aggregate principal amount of the Series B Notes and $16.6
million of aggregate contractual unpaid interest on the Series B Notes for
approximately 1,218.3 shares of the CI Series B Preferred Stock. Following this
third exchange, the Holders retain $9.0 million aggregate principal amount of
the Series B Notes and no Series A Notes. Pursuant to Amendment No. 6, the
Series B Notes' scheduled maturity date of June 30, 2002 has been modified to
June 30, 2003. Due to the Holders receipt of consideration with a fair value
less than the face value of the exchanged principal and accrued interest, the
exchange transaction qualified as a troubled debt restructuring pursuant to
Statement No. 15. In connection therewith, the company recognized an
extraordinary gain during the year ended December 31, 2002 of approximately
$123.5 million.
The Securities Exchange Agreement, pursuant to which the Series A Notes and
the Series B Notes were issued, contains customary covenants and events of
default. Upon the Debtors' Chapter 11 bankruptcy filings, the company was in
violation of certain covenants and conditions thereunder; however, such
bankruptcy proceedings have stayed any remedial actions by either the Debtors or
the Holders.
Although the principal amounts under the Series B Notes were not paid on
their scheduled maturity date of June 30, 2003 and, as a result, the company is
in default of the Securities Exchange Agreement, the Holders are stayed from
pursuing any remedies without prior authorization by the Bankruptcy Court. Other
than the default for non-payment of principal on the Series B Notes, management
believes that at June 30, 2003 the company was in compliance with all other
covenants of the Securities Exchange Agreement. However, there can be no
assurances as to whether further covenant violations or events of default will
occur in future periods and whether any necessary waivers would be granted.
The Series B Notes are (and the Series A Notes were) scheduled to pay
interest quarterly in arrears in cash or, at the election of the company,
through the issuance of pari passu debt securities, except that the Holders can
require the company to pay interest in cash if the company exceeds a
predetermined interest coverage ratio. Notwithstanding the contractual terms of
the Securities Exchange Agreement, no cash-basis interest is being paid
subsequent to August 8, 2000 due to the ongoing Bankruptcy Cases. Pursuant to
the troubled debt restructuring rules promulgated under Statement No. 15 and
other accounting rules under SOP 90-7, no interest expense has been recognized
in the company's consolidated financial statements relative to the Series A
Notes and the Series B Notes since December 29, 2000.
The Series B Notes are redeemable, in whole or in part, at the option of
the Holders 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 B Notes are redeemable, subject to prior authorization by the Bankruptcy
Court, at 103% of the then outstanding principal amount, plus accrued interest.
27
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
8. INCOME TAXES
During the six months ended June 30, 2003 and 2002, the company recorded
income tax expense of approximately $71,000 and $38,000, respectively. The
effective income tax rates for the six months ended June 30, 2003 and 2002 are
lower than the statutory rate because the company is able to utilize net
operating loss carryforwards ("NOLs") that are fully reserved in the valuation
allowance. At June 30, 2003, deferred tax assets were net of a valuation
allowance of approximately $159.8 million. Realization of deferred tax assets is
dependent upon the company's ability to generate taxable income in the future.
Deferred tax assets have been limited to amounts expected to be recovered, net
of deferred tax liabilities that would otherwise become payable in the
carryforward period. As management believes that realization of the deferred tax
assets is sufficiently uncertain, they have been wholly offset by valuation
allowances at both June 30, 2003 and December 31, 2002.
Deferred tax assets relate primarily to temporary differences consisting, in
part, of accrued restructuring costs, charges for goodwill and other long-lived
assets, allowances for doubtful accounts, R-Net reserves and other accrued
liabilities that are not deductible for income tax purposes until paid or
realized, certain tax credits and NOLs that may be deductible against future
taxable income. At June 30, 2003, the company had NOLs for federal income tax
purposes of approximately $202.6 million, which may be available to offset
future federal taxable income and expire in varying amounts in the years 2003
through 2023. This NOL balance includes approximately $34.4 million generated by
certain predecessor companies prior to the formation of the company and such
amount is subject to an annual usage limitation of approximately $4.5 million.
In addition, the ability to utilize the full amount of the $202.6 million of
federal NOLs and certain of the company's state NOLs is uncertain due to income
tax rules related to the exchanges of debt and related interest for Coram, Inc.
Series A Cumulative Preferred Stock (the "CI Series A Preferred Stock") in
December 2001 and 2000 and Coram, Inc. Series B Cumulative Preferred Stock (the
"CI Series B Preferred Stock") in December 2002 (See Note 9 for further
details). As of June 30, 2003, the company had alternative minimum tax ("AMT")
credit carryforwards of approximately $2.8 million, which may be available to
offset future regular income taxes and have an indefinite carryforward period.
As a result of the issuance of CI Series A Preferred Stock in December 2000,
the company effectuated a deconsolidation of its group for federal income tax
purposes. Accordingly, subsequent to December 29, 2000 CI filed income tax
returns as the parent company of the new consolidated group and CHC filed its
own separate income tax returns. Pursuant to Internal Revenue Code ("IRC")
Section 382, the issuance of the CI Series A Preferred Stock in December 2000
also caused an ownership change at CI for federal income tax purposes. However,
CI currently operates under the jurisdiction of the Bankruptcy Court and meets
certain other bankruptcy related conditions of the IRC. The bankruptcy
provisions of IRC Section 382 impose limitations on the utilization of NOLs and
other tax attributes. The extraordinary gains on troubled debt restructurings
that resulted from the issuance of CI Series A Preferred Stock in December 2001
and December 2000 and the issuance of CI Series B Preferred Stock in December
2002 are generally not subject to income tax pursuant to the cancellation of
debt provisions included in IRC Section 108; however, such extraordinary gains
could affect the company's NOLs and certain other tax attributes.
In connection with recently enacted legislation, during the year ended
December 31, 2002 the company filed refund claims with the Internal Revenue
Service ("IRS") requesting approximately $1.8 million of previously paid AMT
(the "AMT Refund"). The AMT Refund has been reflected in the condensed
consolidated financial statements and approximately $0.1 million thereof was
received by the company in February 2003.
In January 1999, the IRS completed an examination of the company's federal
income tax return for the year ended September 30, 1995 and proposed substantial
adjustments to prior tax liabilities. The adjustments involve the deductibility
of warrants, write-offs of goodwill and the ability of the company to categorize
certain NOLs as specified liability losses and offset income in prior years. In
May 1999, the company received a statutory notice of deficiency totaling
approximately $12.7 million (obtained from federal tax refunds), plus interest
and penalties to be determined, with respect to certain proposed adjustments
seeking to recover taxes previously refunded. In August 1999, the company filed
a petition with the United States Tax Court (the "Tax Court") contesting the
notice of deficiency. The IRS responded to the petition and requested that the
petition be denied. The Tax Court proceeding is currently stayed by reason of
the Bankruptcy Cases.
28
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Pursuant to standard IRS procedures, the resolution of the issues contained
in the Tax Court petition were assigned to the administrative appeals function
of the IRS. The company reached an agreement in principle with the IRS Appeals
office on the aforementioned issues and subsequently entered into proposed
Decision and Stipulation agreements with the IRS. Hereinafter, the agreement in
principle, the Decision and Stipulation agreements and the deferred payment plan
(as further discussed below) are collectively referred to as the "Proposed
Settlement." The Proposed Settlement would result in (i) a federal tax liability
of approximately $9.9 million, (ii) interest of approximately $9.5 million at
June 30, 2003 and (iii) penalties, if applicable, to be determined by the IRS in
accordance with certain statutory guidelines. In connection therewith, the
condensed consolidated financial statements include short-term and long-term
liability reserves for the Proposed Settlement aggregating approximately $19.4
million, including $0.7 million of interest expense recorded during each of the
six months ended June 30, 2003 and 2002. The federal income tax adjustments
would also give rise to certain incremental state tax liabilities.
In October 2002, the company submitted a deferred payment plan to the IRS,
which was tentatively accepted by the IRS in April 2003, subject to Chapter 11
trustee and Bankruptcy Court approvals. The deferred payment plan contemplates
an initial application of the remaining outstanding AMT Refund of approximately
$1.7 million. Thereafter, the company would make quarterly payments aggregating
approximately $0.7 million until such time as the Proposed Settlement amount,
post-settlement interest and penalties, if any, are fully liquidated. Under the
terms of the deferred payment plan, interest would accrue at a variable rate,
compounded daily, as determined by reference to rates published by the IRS (at
August 15, 2003 the corresponding effective interest rate would have been 7.0%).
The condensed consolidated balance sheets at June 30, 2003 and December 31, 2002
include approximately $3.8 million and $3.1 million, respectively, of short-term
liabilities which represent management's projections of the principal amounts
that will be due within one year of the respective balance sheet dates.
Subject to obtaining necessary approvals from the Joint Committee on
Taxation, the Debtors' Chapter 11 trustee and the Bankruptcy Court, the Decision
and Stipulation agreements will be filed with the Tax Court. The Joint Committee
on Taxation approved the Decision and Stipulation Agreements in September 2002
and the Chapter 11 trustee has approved the Proposed Settlement. The Chapter 11
trustee intends to file a motion in the Bankruptcy Court seeking approval of the
Proposed Settlement. If the Bankruptcy Court does not approve the Proposed
Settlement, the company's financial position and liquidity could be materially
adversely affected.
9. MINORITY INTERESTS
The following summarizes the minority interests in consolidated joint
ventures and preferred stock issued by a subsidiary (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
Preferred stock of Coram, Inc.. $ 5,538 $ 5,538
Majority-owned companies ...... 649 677
------------ ------------
Total minority interests ...... $ 6,187 $ 6,215
============ ============
On December 29, 2000, CI, a wholly-owned subsidiary of Coram Healthcare
Corporation, executed an Exchange Agreement with the parties to CI's Securities
Exchange Agreement (collectively the "Holders") (see Note 7 for further details)
to exchange approximately $97.7 million of the Series A Notes and approximately
$11.6 million of contractual but unpaid interest on the Series A Notes and the
Series B Notes in exchange for 905 shares of CI Series A Cumulative Preferred
Stock, $0.001 par value per share (this preferred stock class is hereinafter
referred to as the "CI Series A Preferred Stock"). Such shares of CI Series A
Preferred Stock were issued to the Holders on a pro rata basis. Through an
independent valuation, it was determined that the 905 shares of CI Series A
Preferred Stock had a fair value of approximately $6.1 million.
29
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
On December 31, 2001, CI executed a second Exchange Agreement with the
Holders (see Note 7 for further details) to exchange $21.0 million of the Series
A Notes and approximately $1.9 million of contractual but unpaid interest on the
Series A Notes for approximately 189.6 shares of CI Series A Preferred Stock.
Such shares of CI Series A Preferred Stock were issued to the Holders on a pro
rata basis. Utilizing an updated independent valuation, it was determined that
the aggregate issued and outstanding CI Series A Preferred Stock at December 31,
2001 had a fair value of approximately $1.9 million and approximately $0.3
million of such amount was allocated to the shares issued in conjunction with
the second Exchange Agreement.
On December 31, 2002, CI executed a third Exchange Agreement with the
Holders (see Note 7 for further details) to exchange approximately $40.2 million
of the Series A Notes, $7.3 million of contractual but unpaid interest on the
Series A Notes, $83.1 million of the Series B Notes and $16.6 million of
contractual but unpaid interest on the Series B Notes for approximately 1,218.3
shares of a new class of CI preferred stock that is subordinate to the CI Series
A Preferred Stock. Such new class of preferred stock, (i.e., the CI Series B
Cumulative Preferred Stock (the "CI Series B Preferred Stock"), $0.001 par value
per share ) was issued on a pro rata basis to the Holders. Through an
independent valuation, it was determined that the 1,218.3 shares of CI Series B
Preferred Stock had no value on the date of issuance (principally due to the
subordination to the CI Series A Preferred Stock).
Hereinafter the CI Series A Preferred Stock and the CI Series B Preferred
Stock are collectively referred to as the CI Preferred Stock. A summary of the
CI Preferred Stock activity and related liquidation preference values through
June 30, 2003 is as follows (in thousands, except share amounts):
CI SERIES A PREFERRED STOCK CI SERIES B PREFERRED STOCK
--------------------------- ---------------------------
LIQUIDATION LIQUIDATION
SHARES PREFERENCES SHARES PREFERENCES
----------- ----------- ----------- -----------
Balances at January 1, 2000 ................ - $ - - $ -
Shares issued pursuant to the Exchange
Agreement dated December 29, 2000 ..... 905.0 109,326 - -
----------- ----------- ----------- -----------
Balances at December 31, 2000 .............. 905.0 109,326 - -
Dividends In-Kind ....................... 146.5 17,700 - -
Shares issued pursuant to the Exchange
Agreement dated December 31, 2001 ..... 189.6 22,901 - -
----------- ----------- ----------- -----------
Balances at December 31, 2001 .............. 1,241.1 149,927 - -
Dividends In-Kind ....................... 210.5 25,428 - -
Shares issued pursuant to the Exchange
Agreement dated December 31, 2002 ..... - - 1,218.3 147,171
----------- ----------- ----------- -----------
Balances at December 31, 2002 .............. 1,451.6 175,355 1,218.3 147,171
Dividends In-Kind ....................... 111.5 13,474 93.6 11,308
----------- ----------- ----------- -----------
Balances at June 30, 2003 .................. 1,563.1 $ 188,829 1,311.9 $ 158,479
=========== =========== =========== ===========
The authorized CI Preferred Stock consists of 10,000 shares, of which 2,500
shares are designated as CI Series A Preferred Stock and 2,500 shares are
designated as CI Series B Preferred Stock. The only shares issued and
outstanding at June 30, 2003 are those issued to the Holders pursuant to the
three aforementioned Exchange Agreements and any corresponding in-kind
dividends. So long as any shares of the CI Preferred Stock are outstanding, the
Holders are entitled to receive preferential dividends at a rate of 15% per
annum on the liquidation preference amounts. Dividends are payable on a
quarterly basis on the last business day of each calendar quarter. Prior to the
effective date of a plan or plans of reorganization, dividends are to be paid in
the form of additional shares of CI Preferred Stock having a liquidation
preference amount equal to such dividend amount. Subsequent to the effective
date of a plan or plans of reorganization, dividends will be payable, at CI's
election, in cash or shares of common stock of CI having a fair value equal to
such cash dividend payment, as determined by a consensus of investment banking
firms acceptable to the Holders. In the event of default, the dividend rate on
the CI Preferred Stock shall increase to 16% per annum until such time that the
event of default is cured. During the year ended
30
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2002, an event of default occurred whereby CI was required to pay
in-kind dividends at the aforementioned default rate for the nine months ended
September 30, 2002. All CI Preferred Stock dividends are to include tax
indemnities and gross-up provisions (computed subsequent to the company's tax
fiscal year end in connection with the preparation of the company's income tax
returns) as are customary for transactions of this nature.
The organizational documents and other agreements underlying the CI
Preferred Stock include usual and customary affirmative and negative covenants
for securities of this nature, including, but not limited to (i) providing
timely access to certain financial and business information; (ii) authorization
to communicate with the company's independent certified public accountants with
respect to the financial condition and other affairs of the company; (iii)
maintaining tax compliance; (iv) maintaining adequate insurance coverage; (v)
adherence to limitations on transactions with affiliates; (vi) adherence to
limitations on acquisitions or investments; (vii) adherence to limitations on
the liquidation of assets or businesses; and (viii) adherence to limitations on
entering into additional indebtedness.
The organizational documents and other agreements underlying the CI
Preferred Stock also include special provisions regarding voting rights. These
provisions include terms and conditions pertaining to certain triggering events
whereby the CI Preferred Stock voting rights would become effective. Generally,
such triggering events include notice of a meeting, distribution of a written
consent in lieu of a meeting, or entry of an order of court compelling a
meeting, of the stockholders or the Board of Directors of CI or CHC: (i) to
approve appointment, removal or termination of any member of the Board of
Directors of CI or CHC; or (ii) to approve any change in the rights of any
person to do so. Triggering events related to a notice of a meeting or the
distribution of a written consent of the stockholders or CI Board of Directors
cannot occur without a majority of the CHC independent directors previously
approving such meeting or written consent. Substantial consummation of a plan or
plans of reorganization will also constitute a triggering event.
On April 12, 2002, the Holders executed a waiver, whereby they agreed to
permanently and irrevocably waive their rights to collectively exercise, upon
the occurrence of a triggering event, in excess of 49% of the voting rights of
the aggregate of all classes of common and preferred shares and any other voting
securities of CI (the "Waiver"), regardless of the number of CI Preferred Stock
shares issued and outstanding. Additionally, pursuant to this permanent and
irrevocable waiver of rights, the Holders waived their rights to collectively
elect or appoint a number of directors that constitutes half or more of the
total number of CI directors. Alternatively, if the holders of the CI Preferred
Stock elect no Board of Directors' representation, then, solely through the CI
Series A Preferred Stock, each of the three Holders shall have the right to
appoint an observer to CI's Board of Directors. The Waiver can only be modified
or amended with the written consent of the Debtors. In connection with the third
Exchange Agreement, the provisions of the Waiver were formally incorporated into
the Second Certificate of Amendment of Certificate of Designation, Preferences
and Relative, Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof of Coram, Inc.
Accordingly, subsequent to the occurrence of a triggering event, each share of
CI Preferred Stock will be entitled to one vote and shall entitle the holder
thereof to vote on all matters voted on by the holders of CI common stock,
voting together as a single class with other shares entitled to vote, at all
meetings of the stockholders of CI. As of June 30, 2003, the Holders had
contingent voting rights aggregating 49% of CI's total voting power. As of such
date, upon the occurrence of a triggering event, the Holders would also have had
the right to appoint three of the seven directors to CI's Board of Directors (a
quorum in meetings of the Board of Directors would have been constituted by the
presence of a majority of the directors, at least two of whom must have been
directors appointed by the Holders). Prior to the occurrence of a triggering
event, solely through the CI Series A Preferred Stock, the Holders have the
right to appoint two directors to CI's Board of Directors.
The CI Preferred Stock is redeemable at the option of CI, in whole or in
part, at any time, on not less than thirty days prior written notice, at the
liquidation preference amount plus any contractual but unpaid dividends.
Redemption may only be made in the form of cash payments.
31
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases. The company leases office and other operating space and equipment
under various operating and capital leases. The leases provide for monthly
rental payments, including real estate taxes and other operating costs. At June
30, 2003, the aggregate future minimum lease commitments were as follows (in
thousands):
CAPITAL OPERATING
YEARS ENDING JUNE 30, LEASES LEASES
- -------------------------------------- --------- ---------
2004 ................................. $ 281 $ 9,015
2005 ................................. 517 6,951
2006 ................................. 737 4,647
2007 ................................. - 2,278
2008 ................................. - 1,371
Thereafter ........................... - 988
--------- ---------
Total minimum lease payments ......... 1,535 $ 25,250
=========
Less amounts representing interest ... (144)
---------
Net minimum lease payments ........... $ 1,391
=========
Capital lease obligations are included in other debt obligations (see Note
7 for further details). Operating lease obligations are net of sublease rentals.
Operating lease obligations include $0.2 million accrued as part of the
restructuring costs under the Caremark Business Consolidation Plan and the Coram
Restructure Plan (see Note 5 for further details). Certain operating leases of
the company provide for standard escalations of lease payments as the lessors'
maintenance costs and taxes increase. As a result of the Bankruptcy Cases,
certain lease agreements are subject to automatic stay provisions, which
preclude the parties under such agreements from taking remedial action in
response to any defaults. Moreover, no amounts are included in the table above
for lease rejections that have been approved by the Bankruptcy Court (see Note 2
for further details).
Letters of Credit. In February 2001, pursuant to an order of the Bankruptcy
Court, the company established irrevocable letters of credit through Wells Fargo
Bank Minnesota, NA ("Wells Fargo"), an affiliate of Foothill Capital Corporation
(a party to the former Senior Credit Facility, the Securities Exchange Agreement
and a holder of both the CI Series A Preferred Stock and the CI Series B
Preferred Stock). Such letters of credit aggregated approximately $0.4 million
at June 30, 2003 and are fully secured by interest-bearing cash deposits held by
Wells Fargo. The outstanding letters of credit have maturity dates in September
2003 ($75,000) and February 2004 ($278,000).
Purchase and Other Commitments. On April 29, 2003 the Bankruptcy Court
approved a motion that allowed the company to assume an agreement with B. Braun
Medical, Inc ("B. Braun") to purchase drugs and supplies (the "Supply
Agreement"). The Supply Agreement expires in February 2005 and, pursuant to its
terms, the company is required to purchase at least 95% of its annual volume
requirements related to twelve product categories from B. Braun. However, the
company has the right to remove any product category from the purview of the
Supply Agreement if such product category is offered by another vendor at
pricing that is 10% lower, in the aggregate, for that entire product category,
provided that B. Braun waives its right to match such pricing. The company also
has the right to terminate the Supply Agreement after sixty days written notice
if B. Braun provides products or services of a quality or technical level that
fail to meet customary standards of the medical industry. However, if the
company terminates the Supply Agreement for any other reason, it must reimburse
B. Braun (i) certain incentives previously paid to the company, which are
calculated at $150,550 per unexpired quarter under the Supply Agreement and (ii)
the greater of $4.0 million or 50% of the company's purchases for the twelve
months immediately preceding the early termination date. Additionally, if it is
determined that the company does not satisfy the 95% purchasing requirement for
any of the twelve product categories and such failure is not related to a lack
of product availability, then the company is required to pay B. Braun an amount
equal to 10% of the previous quarter's
32
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
purchases. Since the inception of the Supply Agreement, no such quarterly
shortfall has been in evidence and, while no assurances can be given, management
does not expect that such circumstances will arise during the remaining term of
the Supply Agreement. Moreover, due to the company's business relationship with
B. Braun and the advantageous drug and supply pricing enjoyed by the company,
management currently has no intentions of terminating the Supply Agreement and,
accordingly, management believes it is unlikely that the early termination
penalties will be invoked. However, if an early contract termination did occur,
the penalties, which would have aggregated approximately $5.0 million at June
30, 2003, would have a material adverse effect on the company's financial
position, liquidity and results of operations.
The Food and Drug Administration recently approved clinical use of Aralast,
which is a new drug used in the treatment of a rare genetic lung disorder known
as Alpha-1 Antitrypsyn Deficiency. Baxter Healthcare Corporation ("Baxter"), the
exclusive Aralast manufacturer, selected the company as one of only three
national distributors of such drug. As a result, Baxter and the company entered
into a purchase agreement (the "Purchase Agreement") wherein Baxter agreed to
sell Aralast to the company on favorable terms and conditions and the company
committed to minimum purchases of approximately $2.6 million (the "Minimum
Aralast Commitment") during the period June 2, 2003 through December 30, 2003.
In the event that the company fails to meet the Minimum Aralast Commitment for
any reason, other than a force majeure or Baxter's termination of the Purchase
Agreement without cause, Baxter will invoice the company a percentage of the
difference between actual purchases and the Minimum Aralast Commitment. As of
August 15, 2003, the remaining amount under the Minimum Aralast Commitment was
approximately $2.4 million. Due to the anticipated clinical demand for Aralast,
management believes that the purchases required to meet the Minimum Aralast
Commitment will reasonably match the expected needs of the company's existing
and prospective patients. However, if the Minimum Aralast Commitment is not
satisfied, the penalty would result in an unfavorable effect on the company's
liquidity and results of operations (e.g., at August 15, 2003, the maximum
potential penalty would have been approximately $240,000).
Effective December 3, 2002, the Chapter 11 trustee and the company entered
into a three year telecommunication services agreement with AT&T Corporation
("AT&T") (the "Master Agreement") whereby the company will receive advantageous
pricing and other favorable terms. Under the terms of the Master Agreement, the
company committed to minimum annual telecommunication service purchases of
approximately $2.2 million (the "Minimum Annual AT&T Commitment") commencing on
the effective date of the Master Agreement. In the event that the company fails
to meet the Minimum Annual AT&T Commitment, AT&T will invoice the company for
the difference between the Minimum Annual AT&T Commitment and the actual
services purchased during such measurement period. Under certain circumstances,
AT&T, at its sole discretion, may reduce the Minimum Annual AT&T Commitment
amount during any given period. Moreover, if certain material conditions are
satisfied, in the third year of the agreement, the company may unilaterally
terminate the contract without penalty. In the event that the Master Agreement
is terminated by the company without cause or by AT&T for cause, the company
will be required to pay an amount equal to 35% of the remaining Minimum Annual
AT&T Commitment for the period in which the termination occurs and for all
unexpired periods under the term of the Master Agreement. As of June 30, 2003,
the company satisfied its purchase obligation for the first annual measurement
period. Although no assurances can be given, management believes that the
company's telecommunication service requirements will be sufficient to meet the
Minimum Annual AT&T Commitment amounts through the remaining term of the Master
Agreement. In the event that the Master Agreement is terminated and the 35%
surcharge is invoked or the Minimum Annual AT&T Commitment is not met in a given
period, the aforementioned AT&T supplemental charges could have a material
adverse effect on the company's liquidity and results of operations.
On May 13, 2003, the Bankruptcy Court approved a motion requesting
authorization to execute certain real property and construction agreements that
pertain to a relocation of the company's information technology and CTI Network,
Inc. operations from their current location in Bannockburn, Illinois to the
company's existing branch location in Mount Prospect, Illinois. The Bannockburn
facility lease expires by its own terms on August 31, 2003 and, as a result of
prior consolidations, the Mount Prospect branch has excess capacity in its
facility. Management projects that aggregate costs of approximately $1.4 million
will be incurred before the end of the third quarter to complete the project
(i.e., renovate the Mount Prospect branch, build a new data center and move the
company's personnel and equipment to Mount Prospect). Through June 30, 2003 and
August 15, 2003, approximately $0.1 million and $0.5 million, respectively, was
paid by the company for such activities.
33
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Guarantees. In May 2003, one of the company's unconsolidated joint ventures
and a related affiliate (collectively the "Joint Venture") entered into a five
year real property lease in connection with the pending consolidation of two
existing Joint Venture locations into one new facility. CI and its Joint Venture
partner have jointly and severally guaranteed the Joint Venture's financial
performance under such real property lease. As of August 15, 2003, the maximum
amount of future payments CI could be required to make through the termination
of the real property lease (exclusive of any amounts potentially recoverable
from CI's Joint Venture partner) was (i) approximately $0.2 million for
recurring monthly lease payments, (ii) approximately $0.1 million in building
construction costs and (iii) certain other presently undeterminable contingent
amounts such as utility costs, common area maintenance charges and landlord
legal fees necessary to assert his rights; however, management estimates such
miscellaneous contingent amounts to be nominal. The fair value of CI's guarantee
has been estimated by management to be less than $0.1 million and has been
accrued as a long-term liability in the company's condensed consolidated
financial statements in accordance with the provisions of FASB Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. In subsequent periods,
management will evaluate and adjust the aforementioned liability in relation to
the changes in the estimated fair value of the guarantee at such future date.
In connection with divestitures of certain operating assets and businesses
in prior years, two separate CI subsidiaries provided the acquirers of such
operating assets and businesses with indemnifications for certain contingent
regulatory liabilities that might arise in connection with the pre-divestiture
activities. As of August 15, 2003, the maximum amount of potential future
payments the CI subsidiaries could be required to make under these
indemnification agreements aggregated approximately $0.2 million, which would be
partially offset by a nominal amount of escrowed funds. No amounts have been
accrued in the company's condensed consolidated financial statements in
connection with such indemnification agreements because management considers the
probability of payment to be remote.
The primary obligor of the Series B Notes is CI; however, such liabilities
are guaranteed by CHC and substantially all of its subsidiaries (see Note 7 for
further details of the Series B Notes). The B. Braun capital lease agreement
discussed in Note 7 was executed by a non-Debtor subsidiary but the obligation
is guaranteed by the Debtors. Additionally, CHC, CI and certain of their
subsidiaries are parties to various real property and personal property
operating lease agreements. In certain circumstances, individual members of the
Coram consolidated group have provided guarantees to third party lessors on
behalf of, or for the benefit of, the primary Coram obligor.
LITIGATION
Bankruptcy Cases. On August 8, 2000, the Debtors commenced the Bankruptcy
Cases. None of the company's other subsidiaries is a debtor in the Bankruptcy
Cases and, other than the Resource Network Subsidiaries, none of the company's
other subsidiaries is a debtor in any bankruptcy case. See Notes 2 and 3 for
further details.
Except as may otherwise be determined by the Bankruptcy Court, the
protection afforded by Chapter 11 of the Bankruptcy Code generally provides for
an automatic stay relative to any litigation proceedings pending against either
or both of the Debtors. All such claims will be addressed through the
proceedings applicable to the Bankruptcy Cases. The automatic stay would not,
however, apply to actions brought against the company's non-debtor subsidiaries.
The Official Committee of the Equity Security Holders of Coram Healthcare
Corporation. The Official Committee of the Equity Security Holders of Coram
Healthcare Corporation (the "Equity Committee") objected to the Restated Joint
Plan and the Second Joint Plan, contending, among other things, that the
valuations upon which such plans of reorganization were premised and the
underlying projections and assumptions were flawed. At various times during
2001, the Debtors and the Equity Committee reviewed certain company information
regarding, among other things, the Equity Committee's contentions. In connection
therewith, on July 30, 2001, the Equity Committee filed a motion to terminate
the Debtors' exclusivity period and file its own plan of reorganization;
however, such motion was denied by the Bankruptcy Court.
34
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Additionally, in February 2001, the Equity Committee filed a motion with
the Bankruptcy Court seeking permission to bring a derivative lawsuit directly
against the company's former Chief Executive Officer, a former member of the CHC
Board of Directors, Cerberus Partners, L.P., Cerberus Capital Management, L.P.,
Cerberus Associates, L.L.C. and Craig Court, Inc. (all the aforementioned
corporate entities being parties to certain of the company's debt agreements or
affiliates of such entities). The Equity Committee's proposed lawsuit alleged a
collusive plan whereby the named parties conspired to devalue the company for
the benefit of the company's creditors under the Securities Exchange Agreement.
On February 26, 2001, the Bankruptcy Court denied the Equity Committee's motion
without prejudice. In January 2002, the Equity Committee filed a substantially
similar motion with the Bankruptcy Court, which additionally named certain
current CHC directors, the company's other noteholders and Harrison J. Goldin
Associates, L.L.C. (sic) as possible defendants. On February 12, 2002, the
Bankruptcy Court again denied the renewed motion without prejudice.
After the Debtors' exclusivity period to file their own plan or plans of
reorganization terminated, on December 19, 2002 the Equity Committee filed with
the Bankruptcy Court a proposed plan of reorganization with respect to the
Debtors, which was subsequently amended. The Equity Committee's Plan
incorporates a variation of the aforementioned proposed derivative lawsuit.
Additionally, on May 2, 2003 the Chapter 11 trustee filed with the Bankruptcy
Court a proposed plan of reorganization with respect to the Debtors, which was
subsequently amended. The Trustee's Plan includes the settlement of certain
claims against the company's noteholders. Each of the Trustee's Plan and the
Equity Committee's Plan is subject to, and contingent upon, confirmation by the
Bankruptcy Court. Management cannot predict whether or not the Trustee's Plan or
the Equity Committee's Plan will be confirmed, the ultimate outcome of each
proposed plan or the resolution of certain filed objections to each plan of
reorganization. See Note 2 for further discussion of the plans of
reorganization.
Resource Network Subsidiaries' Bankruptcy. On August 19, 1999, a small
group of parties with claims against the Resource Network Subsidiaries filed an
involuntary petition pursuant to Section 303 of Chapter 11 of the Bankruptcy
Code against Coram Resource Network, Inc. in the Bankruptcy Court. On November
12, 1999, the Resource Network Subsidiaries filed voluntary petitions under
Chapter 11 of the Bankruptcy Code, Case Nos. 99-2888 (MFW) and 99-2889 (MFW).
The two cases were consolidated for administrative purposes and are now pending
under the docket of In re Coram Resource Network, Inc. and Coram Independent
Practice Association, Inc., Case No. 99-2889 (MFW). On October 21, 2002, the
Official Committee of Unsecured Creditors of Coram Resource Network, Inc. and
Coram Independent Practice Association, Inc. (the "R-Net Creditors' Committee")
filed a proposed Liquidating Chapter 11 Plan. A complete description of such
plan is set forth in the disclosure statement filed contemporaneously therewith,
which is available on the docket of the Resource Network Subsidiaries'
bankruptcy cases at docket numbers 1003 and 1004. The Chapter 11 trustee has
objected to the disclosure statement.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Bankruptcy Cases seeking, among other things, to have the Resource Network
Subsidiaries' bankruptcy proceedings substantively consolidated with the
Bankruptcy Cases. If this motion had been granted, the bankruptcy proceedings
involving the Resource Network Subsidiaries and the Debtors would have been
combined such that the assets and liabilities of the Resource Network
Subsidiaries would have been joined with the assets and liabilities of the
Debtors, the liabilities of the combined entity would have been satisfied from
the combined assets and all intercompany claims would have been eliminated.
Furthermore, the creditors of both proceedings would have voted on any
reorganization plan for the combined entities. The Resource Network Subsidiaries
and the Debtors engaged in discovery related to this substantive consolidation
motion and then reached a settlement agreement in November 2000. The settlement
agreement was approved by the Bankruptcy Court in December 2000 and, in
connection therewith, the Debtors made a payment of $0.5 million to the Resource
Network Subsidiaries' estate in January 2001 and the substantive consolidation
motion was withdrawn with prejudice.
Notwithstanding the withdrawal of the substantive consolidation motion, the
Resource Network Subsidiaries still maintain claims against each of the Debtors'
estates and the company maintains claims against the Resource Network
Subsidiaries' estate. Additionally, the R-Net Creditors' Committee filed
objections to confirmation of the Second Joint Plan, as well as, a motion to
lift the automatic stay in the Debtors' bankruptcy proceedings. On June 6,
35
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
2002, the Bankruptcy Court granted the motion of the R-Net Creditors' Committee
and lifted the automatic stay in the Bankruptcy Cases, thereby allowing the
R-Net Creditors' Committee to pursue its claims against the Debtors.
In November 2001, the R-Net Creditors' Committee filed a complaint in the
Bankruptcy Court, subsequently amended twice, both on its own behalf and as
assignee for causes of action that may belong to the Resource Network
Subsidiaries, which named as defendants the Debtors, several non-debtor
subsidiaries, several current and former directors, current executive officers
of CHC and several other current and former employees of the company. This
complaint, as amended, also named as defendants Cerberus Partners, L.P., Goldman
Sachs Credit Partners L.P., Foothill Capital Corporation and Foothill Income
Trust, L.P. (parties to certain of the company's debt agreements or affiliates
of such entities). The complaint alleges that the defendants violated various
state and federal laws in connection with alleged wrongdoings related to the
operation and corporate structure of the Resource Network Subsidiaries,
including, among other allegations, breach of fiduciary duty, conversion of
assets and preferential payments to the detriment of the Resource Network
Subsidiaries' estates, misrepresentation and fraud, conspiracy, fraudulent
concealment and a pattern of racketeering activity. The complaint seeks damages
in the amount of approximately $56 million and additional monetary and
non-monetary damages, including disallowance of the Debtors' claims against the
Resource Network Subsidiaries, punitive damages and attorneys' fees. The Debtors
initially objected to the complaint in the Bankruptcy Court because management
believed that the complaint constituted an attempt to circumvent the automatic
stay protecting the Debtors' estates; however, the Debtors' non-debtor
subsidiaries have no such protection and, accordingly, they are vigorously
contesting the allegations.
On June 17, 2002, the Chapter 11 trustee agreed to withdraw the Debtors'
objections to the motion of the R-Net Creditors' Committee for leave of court to
file their second amended complaint. On July 25, 2002, by stipulation between
the Chapter 11 trustee and the R-Net Creditors' Committee, the Bankruptcy Court
authorized the R-Net Creditors' Committee to file its second amended complaint.
The parties to (i) the second amended complaint, (ii) the Debtors' motion for an
order expunging the proofs of claims filed by the Resource Network Subsidiaries
and (iii) the Resource Network Subsidiaries' objections to the Debtors' proofs
of claims are proceeding with discovery under a case management order. On
January 10, 2003, the United States District Court for the District of Delaware
(the "District Court") granted motions by some, but not all, of the defendants
for that court to withdraw the adversary proceedings from the jurisdiction of
the Bankruptcy Court. Now pending before the District Court are motions by
various defendants to dismiss some or all counts of the complaint. The company
notified its insurance carrier of the second amended complaint and intends to
avail itself of any appropriate insurance coverage for its directors and
officers, who are also vigorously contesting the allegations.
The Trustee's Plan proposes resolution of substantially all of the
aforementioned Resource Network Subsidiaries' matters through the Settlement
Agreement and Mutual Release arrangement (the "R-Net Settlement Agreement"),
which was executed by the Chapter 11 trustee, the Debtors, the R-Net Creditors'
Committee, the Resource Network Subsidiaries and the Resource Network
Subsidiaries' Chief Restructuring Officer (the "R-Net Restructuring Officer").
Among other things, the R-Net Settlement Agreement provides for (i) the fixing
and allowance of a Resource Network Subsidiaries' general unsecured claim
against the Debtors for $7.95 million, plus interest, under certain
circumstances, at the applicable federal judgment rate, (ii) the fixing and
allowance of the Debtors' general unsecured claim against the Resource Network
Subsidiaries for $1,000 per proof of claim filed, (iii) dismissal of the
aforementioned adversary proceeding with prejudice and (iv) mutual releases from
the parties to the R-Net Settlement Agreement. The R-Net Settlement Agreement is
subject to, and contingent upon, (i) Bankruptcy Court approval in the Bankruptcy
Cases through confirmation of the Trustee's Plan, (ii) Bankruptcy Court approval
in the Resource Network Subsidiaries' bankruptcy proceedings and (iii)
withdrawal, expungement or resolution of a certain Internal Revenue Service
proof of claim filed in the Resource Network Subsidiaries' bankruptcy
proceedings without any payments being required by the Resource Network
Subsidiaries or the R-Net Restructuring Officer. In connection with the above
mentioned conditions precedent to the effectiveness of the R-Net Settlement
Agreement, on August 12, 2003 the R-Net Restructuring Officer and the R-Net
Creditors' Committee jointly filed a motion in the Bankruptcy Court in the
Resource Network Subsidiaries' bankruptcy proceedings requesting approval of the
R-Net Settlement Agreement. Such motion is scheduled for consideration before
the Bankruptcy Court on August 29, 2003. Management cannot predict the outcome
of the confirmation hearings on the Trustee's Plan, whether the Bankruptcy Court
will approve the R-Net Settlement Agreement in the Resource Network
Subsidiaries' bankruptcy proceedings or assess the wherewithal of the parties to
comply with the other conditions precedent to the R-Net Settlement Agreement.
Moreover, management cannot readily determine the amount of recoveries, if any,
that the company may ultimately receive from its insurance carrier.
36
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
The Equity Committee's Plan provides that the Resource Network Subsidiaries
will receive a cash distribution on the effective date of the Equity Committee's
Plan of $7.95 million, plus a distribution of 2% of the net recovery from
certain litigation claims to be prosecuted, but not exceeding $6 million. The
Chapter 11 trustee and other parties-in-interest have objected to the Equity
Committee's Plan because, among other things, they believe such plan improperly
classifies the Resource Network Subsidiaries' claim and the contemplated
distribution to the Resource Network Subsidiaries is not fair and equitable.
TBOB Enterprises, Inc. On July 17, 2000, TBOB Enterprises, Inc. ("TBOB")
filed an arbitration demand against CHC (TBOB Enterprises, Inc. f/k/a Medical
Management Services of Omaha, Inc. against Coram Healthcare Corporation, in the
American Arbitration Association office in Dallas, Texas); however, on July 5,
2001, the company received a letter from TBOB's legal counsel requesting that
the arbitration remain in abeyance pending resolution of the Bankruptcy Cases.
In its demand, TBOB claims that the company breached its obligations under an
agreement entered into by the parties in 1996 relating to an earn-out obligation
of the company that originated from the acquisition of the claimant's
prescription services business in 1993 by a wholly-owned subsidiary of the
company. The company operated the business under the name Coram Prescription
Services ("CPS") and the assets of the CPS business were sold on July 31, 2000.
TBOB alleges, among other things, that the company impaired the earn-out
payments due TBOB by improperly charging certain expenses to the CPS business
and failing to fulfill the company's commitments to enhance the value of CPS by
marketing its services. The TBOB demand alleges damages of more than $0.9
million, in addition to the final scheduled earn-out payment of approximately
$1.3 million that was due in March 2001 (the latter amount is recorded in the
condensed consolidated financial statements). Furthermore, pursuant to the
underlying agreement with TBOB, additional liabilities may result from
post-petition interest on the final scheduled earn-out payment. In accordance
with SOP 90-7, such interest, estimated to aggregate approximately $0.5 million
at June 30, 2003 using the contractual interest rate of 18%, has not been
recorded in the company's condensed consolidated financial statements because
TBOB's claim for interest may ultimately not be sustainable (moreover, both the
Trustee's Plan and the Equity Committee's Plan propose to pay no more than the
federal judgment interest rate, if certain conditions are satisfied). TBOB
reiterated its monetary demand through a proof of claim filed against CHC's
estate for the aggregate amount of approximately $2.2 million (i.e., the
scheduled earn-out payment plus the alleged damages). Any action relating to the
final $1.3 million earn-out payment scheduled for March 2001, the alleged
damages of $0.9 million and any interest accrued thereon have been stayed by
operation of Chapter 11 of the Bankruptcy Code. Management does not believe that
final resolution of this matter will have a material adverse impact on the
company's financial position or results of operations.
Internal Revenue Service ("IRS") Proposed Settlement. The company reached a
proposed settlement with the IRS regarding a notice of deficiency previously
issued by such taxing authority. Moreover, management and the IRS have agreed in
principle to a deferred payment plan. If ultimately approved by the Bankruptcy
Court, the proposed settlement and the deferred payment plan would collectively
result in (i) a federal tax liability of approximately $9.9 million, (ii)
interest of approximately $9.5 million at June 30, 2003 and (iii) penalties, if
applicable, to be determined by the IRS in accordance with certain statutory
guidelines. The condensed consolidated financial statements at June 30, 2003
include approximately $19.4 million in reserves for the proposed settlement with
the IRS. See Note 8 for further details.
Regulatory Audits and Reviews. State Medicaid agencies and their fiscal
intermediaries periodically conduct payment reviews or audits of claims for
services provided to Medicaid beneficiaries. One such audit by the Kansas
Medicaid agency (the "Kansas Agency") identified that certain of the company's
claims were subject to recoupment; however, the Kansas Agency will allow the
company to resubmit certain claims identified during the audit. As a result of
the audit findings, the company established an internal review, refund and
rebilling initiative for certain claims related to one of its billing centers
and, in connection therewith, further possible errors in its Medicaid billing
practices were identified. Management believes the Kansas Agency audit and the
other identified erroneous billing matters are not pervasive throughout the
company's billing centers.
In April 2003, the company was served with a subpoena from a Statewide
Grand Jury pertaining to claims paid to the company for two Rhode Island
Medicaid beneficiaries. The precise nature and extent of the investigation by
Rhode Island governmental authorities and the specific matters before the
Statewide Grand Jury are currently unknown.
37
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
General. Management intends to vigorously defend the company and its
subsidiaries in the matters described above. Nevertheless, due to the
uncertainties inherent in litigation, including possible indemnification of
other parties, the ultimate disposition of such matters cannot presently be
determined. Adverse outcomes in some or all of the proceedings could have a
material adverse effect on the company's financial position, results of
operations and liquidity.
The company and its subsidiaries are also parties to various other actions
arising out of the normal course of their businesses, including employee claims,
reviews of cost reports and billings submitted to Medicare and Medicaid, as well
as, examinations by regulators such as Medicare and Medicaid fiscal
intermediaries and the Centers for Medicare & Medicaid Services ("CMS").
Management believes that the ultimate resolution of such matters will not have a
material adverse effect on the company's financial position, results of
operations or liquidity.
PricewaterhouseCoopers LLP. 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 independent 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 California court because of inconvenience to witnesses with a right to
re-file in Illinois. The company re-filed the lawsuit in state court in Illinois
and PricewaterhouseCoopers LLP filed a motion to dismiss the company's lawsuit
on several grounds, but its motion was denied on March 15, 1999.
PricewaterhouseCoopers LLP filed another motion to dismiss the lawsuit in May
1999 and that motion was dismissed on January 28, 2000. On April 19, 2001,
PricewaterhouseCoopers LLP filed a motion for partial summary judgment with
regard to a portion of Caremark's claims; however, this motion was subsequently
denied. The lawsuit is currently in the discovery stage and a trial date is
being scheduled. Management cannot predict the outcome of this litigation or
whether there will be any recovery from PricewaterhouseCoopers LLP or its
insurance carriers.
Government Regulation. Under the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly referred
to as "Stark II"), it is unlawful for a physician to refer patients for certain
designated health services reimbursable under the Medicare or Medicaid programs
to an entity with which the physician and/or the physician's family, as defined
under Stark II, has a financial relationship, unless the financial relationship
fits within an exception enumerated in Stark II or regulations promulgated
thereunder. A "financial relationship" under Stark II is broadly defined as an
ownership or investment interest in, or any type of compensation arrangement in
which remuneration flows between the physician and the provider. The company has
financial relationships with physicians and physician owned entities in the form
of medical director agreements. In each case, the relationship has been
structured, based upon advice of legal counsel, using an arrangement management
believes to be consistent with the applicable exceptions set forth in Stark II.
In addition, the company is aware of certain referring physicians (or their
immediate family members) that have had financial interests in the company
through ownership of shares of CHC's common stock. The Stark II law includes an
exception for the ownership of publicly traded stock in companies with equity
above certain levels. This Stark II exception requires the issuing company to
have stockholders' equity of at least $75 million either as of the end of its
most recent fiscal year or on average over the last three fiscal years. Due
principally to the extraordinary gains on troubled debt restructurings (see Note
7 for further details), at December 31, 2002 the company's stockholders' equity
was above the required level. As a result, the company is compliant with the
Stark II public company exemption through the year ending December 31, 2003.
Management has been advised by legal counsel that a company whose stock is
publicly traded has, as a practical matter, no reliable way to implement and
maintain an effective compliance plan for addressing the requirements of Stark
II other than complying with the public company exception. Accordingly, if the
company's common stock remains publicly traded and its stockholders' equity
falls below the required levels, the company would be forced to cease accepting
referrals of patients covered by Medicare or Medicaid programs or run a
significant risk of Stark II noncompliance. Because approximately 25% of the
company's consolidated net revenue for both the six months ended June 30, 2003
and the year ended December 31, 2002 relates to patients with such
government-sponsored benefit programs, discontinuing the acceptance of such
patients would have a material adverse effect on the company's financial
condition, results of operations and cash flows. Additionally, ceasing to accept
such patients could materially adversely affect the company's business
reputation in the market as it may cause the company to be a less attractive
provider to which a physician could refer his or her patients.
38
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
11. DEBTOR/NON-DEBTOR CONDENSED FINANCIAL STATEMENTS
The following Condensed Consolidating Balance Sheets as of June 30, 2003 and
December 31, 2002 and the related Condensed Consolidating Statements of
Income/Operations and Cash Flows for the six months ended June 30, 2003 and 2002
are presented in accordance with SOP 90-7.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2003
(UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 36,809 $ 1,101 $ - $ 37,910
Cash limited as to use ..................................... 156 84 - 240
Accounts receivable, net ................................... - 105,926 - 105,926
Inventories ................................................ - 11,222 - 11,222
Deferred income taxes, net ................................. - 331 - 331
Other current assets ....................................... 8,148 947 - 9,095
------------ ------------ ------------ ------------
Total current assets ..................................... 45,113 119,611 - 164,724
Property and equipment, net ................................... 3,705 7,835 - 11,540
Deferred income taxes, net .................................... - 1,459 - 1,459
Other deferred costs and intangible assets, net ............... 132 4,883 - 5,015
Goodwill, net ................................................. - 57,186 - 57,186
Investments in and advances to wholly-owned subsidiaries, net.. 112,232 - (112,232) -
Other assets .................................................. 3,164 2,103 - 5,267
------------ ------------ ------------ ------------
Total assets ............................................. $ 164,346 $ 193,077 $ (112,232) $ 245,191
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable ........................................... $ 13,216 $ 15,715 $ - $ 28,931
Accrued compensation and related liabilities ............... 19,889 7,160 - 27,049
Current maturities of long-term debt and capital leases .... 50 204 - 254
Insurance note payable ..................................... 1,994 - - 1,994
Income taxes payable ....................................... 16 3,970 - 3,986
Deferred income taxes ...................................... - 1,790 - 1,790
Accrued merger and restructuring costs ..................... 109 19 - 128
Accrued reorganization costs ............................... 8,527 - - 8,527
Other current and accrued liabilities ...................... 4,053 5,615 (742) 8,926
------------ ------------ ------------ ------------
Total current liabilities not subject to compromise ........... 47,854 34,473 (742) 81,585
Total current liabilities subject to compromise ............... 15,630 - - 15,630
------------ ------------ ------------ ------------
Total current liabilities ..................................... 63,484 34,473 (742) 97,215
Long-term liabilities not subject to compromise:
Long-term debt and capital leases, less current maturities.. 34 1,187 - 1,221
Minority interests in consolidated joint ventures and
preferred stock issued by a subsidiary ................... 5,538 649 - 6,187
Income taxes payable ....................................... - 16,102 - 16,102
Other liabilities .......................................... 1,698 1,901 - 3,599
Net liabilities for liquidation of discontinued operations.. - 26,533 742 27,275
------------ ------------ ------------ ------------
Total liabilities ........................................ 70,754 80,845 - 151,599
Net assets, including amounts due to Debtors .................. - 112,232 (112,232) -
Total stockholders' equity .................................... 93,592 - - 93,592
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity ................. $ 164,346 $ 193,077 $ (112,232) $ 245,191
============ ============ ============ ============
39
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
(IN THOUSANDS)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 29,675 $ 916 $ - $ 30,591
Cash limited as to use ........................................ 133 84 - 217
Accounts receivable, net ...................................... - 103,498 - 103,498
Inventories ................................................... - 13,160 - 13,160
Deferred income taxes, net .................................... - 107 - 107
Other current assets .......................................... 5,004 654 - 5,658
--------- --------- --------- ---------
Total current assets ........................................ 34,812 118,419 - 153,231
Property and equipment, net ...................................... 3,402 7,037 - 10,439
Deferred income taxes, net ....................................... - 449 - 449
Other deferred costs and intangible assets, net .................. 178 5,092 - 5,270
Goodwill, net .................................................... - 57,186 - 57,186
Investments in and advances to wholly-owned subsidiaries, net .... 118,924 - (118,924) -
Other assets ..................................................... 3,274 1,790 - 5,064
--------- --------- --------- ---------
Total assets ................................................ $ 160,590 $ 189,973 $(118,924) $ 231,639
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable .............................................. $ 15,031 $ 12,955 $ - $ 27,986
Accrued compensation and related liabilities .................. 19,861 4,021 - 23,882
Current maturities of long-term debt and capital leases ....... 51 10 - 61
Income taxes payable .......................................... 30 3,250 - 3,280
Deferred income taxes ......................................... - 556 - 556
Accrued merger and restructuring costs ........................ 171 19 - 190
Accrued reorganization costs .................................. 7,610 - - 7,610
Other current and accrued liabilities ......................... 4,230 4,991 (742) 8,479
--------- --------- --------- ---------
Total current liabilities not subject to compromise .............. 46,984 25,802 (742) 72,044
Total current liabilities subject to compromise .................. 15,630 - - 15,630
--------- --------- --------- ---------
Total current liabilities ........................................ 62,614 25,802 (742) 87,674
Long-term liabilities not subject to compromise:
Long-term debt and capital leases, less current maturities .... 67 6 - 73
Minority interests in consolidated joint ventures and
preferred stock issued by a subsidiary ...................... 5,538 677 - 6,215
Income taxes payable .......................................... - 16,130 - 16,130
Other liabilities ............................................. 1,664 1,901 - 3,565
Net liabilities for liquidation of discontinued operations .... - 26,533 742 27,275
--------- --------- --------- ---------
Total liabilities ........................................... 69,883 71,049 - 140,932
Net assets, including amounts due to Debtors ..................... - 118,924 (118,924) -
Total stockholders' equity ....................................... 90,707 - - 90,707
--------- --------- --------- ---------
Total liabilities and stockholders' equity .................... $ 160,590 $ 189,973 $(118,924) $ 231,639
========= ========= ========= =========
40
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
Net revenue ........................................................ $ - $ 233,441 $ - $ 233,441
Cost of service .................................................... - 170,522 - 170,522
--------- --------- --------- ---------
Gross profit ....................................................... - 62,919 - 62,919
Operating expenses:
Selling, general and administrative expenses .................... 8,676 37,342 - 46,018
Provision for estimated uncollectible accounts .................. - 7,746 - 7,746
--------- --------- --------- ---------
Total operating expenses ...................................... 8,676 45,088 - 53,764
--------- --------- --------- ---------
Operating income (loss) from continuing operations ................. (8,676) 17,831 - 9,155
Other income (expenses):
Interest income ................................................. 143 51 - 194
Interest expense ................................................ (15) (695) - (710)
Equity in net income of wholly-owned subsidiaries ............... 17,399 - (17,399) -
Equity in net income of unconsolidated joint ventures ........... - 599 - 599
Other expense, net .............................................. - (4) - (4)
--------- --------- --------- ---------
Income from continuing operations before reorganization
expenses, income taxes and minority interests ................... 8,851 17,782 (17,399) 9,234
Reorganization expenses, net ....................................... 5,877 - - 5,877
--------- --------- --------- ---------
Income from continuing operations before income taxes
and minority interests .......................................... 2,974 17,782 (17,399) 3,357
Income tax expense ................................................. - 71 - 71
Minority interests in net income of consolidated joint ventures .... - 302 - 302
--------- --------- --------- ---------
Income from continuing operations .................................. 2,974 17,409 (17,399) 2,984
Loss from disposal of discontinued operations ...................... (89) (10) - (99)
--------- --------- --------- ---------
Net income ......................................................... $ 2,885 $ 17,399 $ (17,399) $ 2,885
========= ========= ========= =========
41
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(RESTATED (1) AND UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
Net revenue ........................................................ $ - $ 210,413 $ - $ 210,413
Cost of service .................................................... - 151,429 - 151,429
--------- --------- --------- ---------
Gross profit ....................................................... - 58,984 - 58,984
Operating expenses:
Selling, general and administrative expenses .................... 9,017 33,306 - 42,323
Provision for estimated uncollectible accounts .................. - 8,220 - 8,220
Restructuring cost recoveries ................................... - (13) - (13)
--------- --------- --------- ---------
Total operating expenses ...................................... 9,017 41,513 - 50,530
--------- --------- --------- ---------
Operating income (loss) from continuing operations ................. (9,017) 17,471 - 8,454
Other income (expenses):
Interest income ................................................. 117 92 - 209
Interest expense ................................................ (28) (733) - (761)
Gain on sale of business ........................................ - 46 - 46
Equity in net loss of wholly-owned subsidiaries ................. (53,803) - 53,803 -
Equity in net income of unconsolidated joint ventures ........... - 638 - 638
Other income, net ............................................... 1 998 - 999
--------- --------- --------- ---------
Income (loss) from continuing operations before reorganization
expenses, income taxes, minority interests and the
cumulative effect of a change in accounting principle ........... (62,730) 18,512 53,803 9,585
Reorganization expenses, net ....................................... 2,533 - - 2,533
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes,
minority interests and the cumulative effect of a change in
accounting principle ............................................ (65,263) 18,512 53,803 7,052
Income tax expense ................................................. - 38 - 38
Minority interests in net income of consolidated joint ventures .... - 375 - 375
--------- --------- --------- ---------
Income (loss) from continuing operations before the cumulative
effect of a change in accounting principle ...................... (65,263) 18,099 53,803 6,639
Loss from disposal of discontinued operations ...................... - - - -
--------- --------- --------- ---------
Income (loss) before the cumulative effect of a change in
accounting principle ............................................ (65,263) 18,099 53,803 6,639
Cumulative effect of a change in accounting principle .............. - (71,902) - (71,902)
--------- --------- --------- ---------
Net loss ........................................................... $ (65,263) $ (53,803) $ 53,803 $ (65,263)
========= ========= ========= =========
(1) The company recognized a transitional goodwill impairment charge of
approximately $71.9 million in accordance with the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("Statement 142"), in December 2002; however, such charge was retroactive to
January 1, 2002. In accordance with the provisions of Statement 142, the
transitional goodwill impairment charge was recorded as the cumulative effect of
a change in accounting principle. See Note 6 for further details.
42
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS CONSOLIDATED
-------- ----------- ------------
Net cash provided by (used in) continuing operations
before reorganization items ................................... $ (9,986) $ 25,803 $ 15,817
Net cash used by reorganization items ............................ (5,469) - (5,469)
-------- -------- --------
Net cash provided by (used in) continuing operations
(net of reorganization items) ................................. (15,455) 25,803 10,348
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ........................... (1,428) (1,515) (2,943)
Cash advances from wholly-owned subsidiaries .................. 23,702 (23,702) -
-------- -------- --------
Net cash provided by (used in) investing activities .............. 22,274 (25,217) (2,943)
-------- -------- --------
Cash flows from financing activities:
Principal payments of long-term debt and capital leases ....... (34) (23) (57)
Refunds of deposits to collateralize letters of credit ........ 413 - 413
Cash distributions to minority interests ...................... - (343) (343)
-------- -------- --------
Net cash provided by (used in) financing activities .............. 379 (366) 13
-------- -------- --------
Net increase in cash from continuing operations .................. $ 7,198 $ 220 $ 7,418
======== ======== ========
Net cash used in discontinued operations ......................... $ (64) $ (35) $ (99)
======== ======== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS CONSOLIDATED
-------- ----------- ------------
Net cash provided by (used in) continuing operations
before reorganization items..................................... $ (5,667) $ 14,248 $ 8,581
Net cash used by reorganization items ............................. (2,282) - (2,282)
-------- -------- --------
Net cash provided by (used in) continuing operations
(net of reorganization items) .................................. (7,949) 14,248 6,299
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ............................ (1,779) (1,064) (2,843)
Cash advances from wholly-owned subsidiaries ................... 12,782 (12,782) -
Proceeds from sale of business ................................. - 85 85
Proceeds from dispositions of property and equipment ........... 1 4 5
-------- -------- --------
Net cash provided by (used in) investing activities ............... 11,004 (13,757) (2,753)
-------- -------- --------
Cash flows from financing activities:
Principal payments of long-term debt and capital leases ........ (34) (4) (38)
Refunds of deposits to collateralize letters of credit ......... 200 - 200
Cash distributions to minority interests ....................... - (397) (397)
-------- -------- --------
Net cash provided by (used in) financing activities ............... 166 (401) (235)
-------- -------- --------
Net increase in cash from continuing operations.................... $ 3,221 $ 90 $ 3,311
======== ======== ========
Net cash used in discontinued operations........................... $ - $ - $ -
======== ======== ========
43
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) and information relating to Coram Healthcare Corporation ("CHC")
and its subsidiaries (collectively "Coram" or the "company") that is based on
the beliefs of Coram management, as well as assumptions made by, and information
currently available to, management. The company's actual results may vary
materially from the forward-looking statements made in this report due to
important factors such as the outcome of the bankruptcy cases of CHC and its
first tier wholly-owned subsidiary, Coram, Inc. ("CI") (CHC and CI are
hereinafter collectively referred to as the "Debtors") and certain other
factors, which are described in greater detail in Coram's Annual Report on Form
10-K/A Amendment No. 2 (the "Form 10-K/A") for the year ended December 31, 2002
under Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Risk Factors." When used in this
report, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements reflect the current views of management with respect
to future events based on currently available information and are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the filing date of this report. Management does not undertake
any obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the filing date of this
report or to reflect the occurrence of unanticipated events.
The company's condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Debtors' bankruptcy filings and
circumstances relating thereto, including the company's leveraged financial
structure and cumulative losses from operations, such realization of assets and
liquidation of liabilities are subject to significant uncertainty. During the
pendency of the Debtors' Chapter 11 bankruptcy cases, the company may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the condensed consolidated financial statements.
Furthermore, a plan or plans of reorganization filed in the Chapter 11
bankruptcy cases could materially change the amounts reported in the condensed
consolidated financial statements, which do not give effect to any adjustments
of the carrying value of assets or liabilities that might be necessary as a
consequence of a plan or plans of reorganization (see Note 2 to the company's
condensed consolidated financial statements for further details). The company's
ability to continue as a going concern is dependent upon, among other things,
confirmation of a plan or plans of reorganization, future profitable operations,
the ability to comply with the terms of the company's financing agreements, the
ability to obtain necessary financing to fund a proposed settlement with the
Internal Revenue Service, the ability to remain in compliance with the physician
ownership and referral provisions of the Omnibus Budget Reconciliation Act of
1993 (commonly known as "Stark II") and the ability to generate sufficient cash
from operations and/or financing arrangements to meet its obligations and
capital asset expenditure requirements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
BACKGROUND AND CERTAIN IMPORTANT BANKRUPTCY COURT ACTIVITIES
During 2003 and 2002, Coram was engaged primarily in the business of
furnishing alternate site (outside the hospital) infusion therapy and related
services, including non-intravenous home health products such as respiratory
therapy services and durable medical equipment. Other services offered by Coram
include centralized management, administration and clinical support for clinical
research trials, as well as, outsourced hospital compounding services. Coram
delivers its alternate site infusion therapy services through 77 branch offices
located in 40 states and Ontario, Canada. Additionally, management plans to open
new infusion branches in San Antonio, Texas and Amherstburg, Ontario Canada on
or about October 1, 2003.
44
(I) BACKGROUND AND CERTAIN IMPORTANT BANKRUPTCY COURT ACTIVITY
The Debtors filed voluntary petitions under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") on August 8, 2000 in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") In
re Coram Healthcare Corporation, Case No. 00-3299 and In re Coram, Inc., Case
No. 00-3300 (collectively the "Bankruptcy Cases"). The Bankruptcy Cases have
been consolidated for administrative purposes only by the Bankruptcy Court and
are being jointly administered under the docket of In re Coram Healthcare
Corporation, Case No. 00-3299 (MFW). Commencing on August 8, 2000, the Debtors
operated as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court; however, a Chapter 11 trustee was appointed by the Bankruptcy Court on
March 7, 2002. With the appointment of a Chapter 11 trustee, while still under
the jurisdiction of the Bankruptcy Court, the Debtors are no longer
debtors-in-possession. None of the company's other subsidiaries is a debtor in
the Bankruptcy Cases and, other than Coram Resource Network, Inc. and Coram
Independent Practice Association, Inc. (collectively the "Resource Network
Subsidiaries" or "R-Net"), none of the company's other subsidiaries is a debtor
in any bankruptcy case. See Notes 2 and 3 to the company's condensed
consolidated financial statements for further details.
On August 19, 1999, an involuntary bankruptcy petition was filed against
Coram Resource Network, Inc. and, on November 12, 1999, the Resource Network
Subsidiaries filed voluntary bankruptcy petitions under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court. On or about May 31, 2000, the Resource
Network Subsidiaries filed a liquidating Chapter 11 plan and disclosure
statement. Subsequently, on October 21, 2002 the Official Committee of Unsecured
Creditors of Coram Resource Network, Inc. and Coram Independent Practice
Association, Inc. filed a competing proposed Liquidating Chapter 11 Plan. A
complete description of such plan is set forth in the disclosure statement filed
contemporaneously therewith, which is available on the docket of the Resource
Network Subsidiaries' bankruptcy cases at docket numbers 1003 and 1004. The
Chapter 11 trustee has objected to the disclosure statement. The agreements that
R-Net had for the provision of ancillary network management services have been
terminated and R-Net is no longer providing any ancillary network management
services. Additionally, all of the R-Net locations have been closed in
connection with its proposed liquidation. Coram employees who were members of
the Resource Network Subsidiaries' Board of Directors resigned and only the
Chief Restructuring Officer appointed by the Bankruptcy Court remains on the
R-Net Board of Directors to manage the liquidation of the R-Net business.
(II) THE DEBTORS' FIRST JOINT PLAN OF REORGANIZATION AND RELATED ACTIVITIES
On the same day the Debtors commenced the Bankruptcy Cases, the Debtors
also filed their joint plan of reorganization (the "Joint Plan") and their joint
disclosure statement with the Bankruptcy Court. The Joint Plan was subsequently
amended and restated (the "Restated Joint Plan") and, on or about October 10,
2000, the Restated Joint Plan and the First Amended Disclosure Statement with
respect to the Restated Joint Plan were authorized for distribution by the
Bankruptcy Court. Among other things, the Restated Joint Plan provided for: (i)
a conversion of all of the CI obligations represented by the company's Series A
Senior Subordinated Unsecured Notes (the "Series A Notes") and the Series B
Senior Subordinated Unsecured Convertible Notes (the "Series B Notes") into (a)
a four year, interest only note in the principal amount of $180 million that
would bear interest at the rate of 9% per annum and (b) all of the equity in the
reorganized CI; (ii) the payment in full of all secured, priority and general
unsecured debts of CI; (iii) the payment in full of all secured and priority
claims against CHC; (iv) the impairment of certain general unsecured debts of
CHC, including, among others, CHC's obligations under the Series A Notes and the
Series B Notes; and (v) the complete elimination of CHC's equity interests.
Furthermore, pursuant to the Restated Joint Plan, CHC would be dissolved as soon
as practicable after the effective date of the Restated Joint Plan and the
common stock of CHC would no longer be publicly traded. Therefore, under the
Restated Joint Plan, as filed, the existing stockholders of CHC would have
received no value for their shares and all of the outstanding equity of CI, as
the surviving entity, would be owned by the holders of the Series A Notes and
the Series B Notes. Representatives of the company negotiated the principal
aspects of the Restated Joint Plan with representatives of the holders of the
Series A Notes and the Series B Notes and the parties to the Senior Credit
Facility prior to the filing of such Restated Joint Plan.
On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that were entitled to a distribution under the Restated Joint Plan. The
Debtors did not send ballots to the holders of unimpaired classes, who were
deemed to accept the Restated Joint Plan, and classes that were not receiving
any distribution, who were deemed to reject the Restated
45
Joint Plan. Eligible voters responded in favor of the Restated Joint Plan. At a
confirmation hearing on December 21, 2000, the Bankruptcy Court denied
confirmation of the Restated Joint Plan finding, inter alia, that the incomplete
disclosure of the relationship between the Debtors' former Chief Executive
Officer and Cerberus Capital Management, L.P., an affiliate of one of the
Debtors' largest creditors, precluded the Bankruptcy Court from finding that the
Restated Joint Plan was proposed in good faith, a statutory requirement for plan
confirmation.
In order for the company to remain compliant with the requirements of Stark
II, on December 29, 2000, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $97.7 million of the Series A Notes and approximately
$11.6 million of contractual unpaid interest on the Series A Notes and the
Series B Notes for 905 shares of Coram, Inc. Series A Cumulative Preferred
Stock, $0.001 par value per share (see Notes 7 and 9 to the company's condensed
consolidated financial statements for further details). Hereafter, the Coram,
Inc. Series A Cumulative Preferred Stock is referred to as the "CI Series A
Preferred Stock." The exchange transaction generated an extraordinary gain on
troubled debt restructuring of approximately $107.8 million, net of tax, in
2000. At December 31, 2000, the company's stockholders' equity exceeded the
minimum requirement necessary to comply with the Stark II public company
exemption for the year ended December 31, 2001. See Note 10 to the company's
condensed consolidated financial statements for further discussion regarding
Stark II.
(III) THE SECOND JOINT PLAN OF REORGANIZATION AND RELATED ACTIVITIES
On or about February 6, 2001, the Official Committee of the Equity Security
Holders of Coram Healthcare Corporation (the "Equity Committee") filed a motion
with the Bankruptcy Court seeking permission to bring a derivative lawsuit
directly against the company's former Chief Executive Officer, a former member
of the CHC Board of Directors, Cerberus Partners, L.P., Cerberus Capital
Management, L.P., Cerberus Associates, L.L.C. and Craig Court, Inc. (all the
aforementioned corporate entities being parties to certain of the company's debt
agreements or affiliates of such entities). On February 26, 2001, the Bankruptcy
Court denied such motion without prejudice. On the same day, the Bankruptcy
Court approved the Debtors' motion to appoint Goldin Associates, L.L.C.
("Goldin") as independent restructuring advisor to the CHC Independent Committee
of the Board of Directors (the "Independent Committee"). Among other things, the
scope of Goldin's services included (i) assessing the appropriateness of the
Restated Joint Plan and reporting its findings to the Independent Committee and
advising the Independent Committee regarding an appropriate course of action
calculated to bring the Bankruptcy Cases to a fair and satisfactory conclusion,
(ii) preparing a written report as may be required by the Independent Committee
and/or the Bankruptcy Court and (iii) appearing before the Bankruptcy Court to
provide testimony as needed. Goldin was also appointed as a mediator among the
Debtors, the Equity Committee and other parties in interest.
On April 25, 2001 and July 11, 2001, the Bankruptcy Court extended the
period during which the Debtors had the exclusive right to file a plan of
reorganization to July 11, 2001 and August 1, 2001, respectively. On August 1,
2001, the Bankruptcy Court denied the Equity Committee's motion to terminate the
Debtors' exclusivity periods and file its own plan of reorganization. Moreover,
on August 2, 2001, the Bankruptcy Court extended the Debtors' exclusivity period
to solicit acceptances of any filed plan or plans to November 9, 2001 (the date
to solicit acceptances of the plan for CHC's equity holders was subsequently
extended to November 12, 2001). On or about November 7, 2001, the Debtors filed
a motion seeking to extend the periods to file a plan or plans of reorganization
and solicit acceptances thereof to December 31, 2001 and March 4, 2002,
respectively. The Bankruptcy Court extended exclusivity to January 2, 2002.
Thereafter, the Debtors' exclusivity period terminated.
46
Based upon Goldin's findings and recommendations, as set forth in the
Report of Independent Restructuring Advisor, Goldin Associates, L.L.C. (the
"Goldin Report"), on July 31, 2001 the Debtors filed with the Bankruptcy Court a
Second Joint Disclosure Statement, as amended (the "Second Disclosure
Statement"), with respect to their Second Joint Plan of Reorganization, as
amended (the "Second Joint Plan"). The Second Joint Plan, which was also filed
on July 31, 2001, provided for terms of reorganization similar to those
described in the Restated Joint Plan; however, utilizing Goldin's
recommendations, as set forth in the Goldin Report, the following substantive
modifications were included in the Second Joint Plan:
- the payment of up to $3.0 million to the holders of allowed CHC
general unsecured claims;
- the payment of up to $10.0 million to the holders of CHC equity
interests (contingent upon such holders voting in favor of the
Second Joint Plan);
- cancellation of the issued and outstanding CI Series A Preferred
Stock, and
- a $7.5 million reduction in certain performance bonuses payable to the
company's former Chief Executive Officer.
Under certain circumstances, as more fully disclosed in the Second
Disclosure Statement, the general unsecured claim holders could have been
entitled to receive a portion of the $10.0 million cash consideration allocated
to the holders of CHC equity interests.
The Second Joint Plan was subject to a vote by certain impaired creditors
and equity holders and confirmation by the Bankruptcy Court. On September 6,
2001 and September 10, 2001, hearings before the Bankruptcy Court considered the
adequacy of the Second Disclosure Statement. In connection therewith, the Equity
Committee, as well as the Official Committee of Unsecured Creditors in the Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc.
bankruptcy cases, filed objections. Notwithstanding the aforementioned
objections, the Second Disclosure Statement was approved by the Bankruptcy Court
for distribution to holders of certain claims entitled to vote on the Second
Joint Plan. On or about September 21, 2001, the Debtors mailed ballots to those
parties entitled to vote on the Second Joint Plan.
The CHC equity holders voted against confirmation of the Second Joint Plan
and all other classes of claimholders voted in favor of the Second Joint Plan.
If certain conditions of Chapter 11 of the Bankruptcy Code are satisfied, the
Bankruptcy Court can confirm a plan of reorganization notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity holders.
However, on December 21, 2001, after several weeks of confirmation hearings, the
Bankruptcy Court issued an order denying confirmation of the Second Joint Plan
for the reasons set forth in an accompanying opinion. The Debtors appealed the
Bankruptcy Court's order denying confirmation of the Second Joint Plan; however,
such appeal was subsequently dismissed.
In order for the company to remain compliant with the requirements of Stark
II, on December 31, 2001, pursuant to an order of the Bankruptcy Court, CI
exchanged $21.0 million of the Series A Notes and approximately $1.9 million of
contractual unpaid interest on the Series A Notes for approximately 189.6 shares
of CI Series A Preferred Stock (see Notes 7 and 9 to the company's condensed
consolidated financial statements for further details). This transaction
generated an extraordinary gain on troubled debt restructuring of approximately
$20.7 million in 2001. At December 31, 2001, the company's stockholders' equity
exceeded the minimum requirement necessary to comply with the Stark II public
company exemption for the year ended December 31, 2002. See Note 10 to the
company's condensed consolidated financial statements for further discussion
regarding Stark II.
(IV) APPOINTMENT OF A CHAPTER 11 TRUSTEE AND BANKRUPTCY RELATED ACTIVITIES
DURING THE YEAR ENDED DECEMBER 31, 2002
On February 12, 2002, among other things, the Bankruptcy Court granted
motions made by the Office of the United States Trustee and two of the Debtors'
noteholders requesting the appointment of a Chapter 11 trustee to oversee the
Debtors during their reorganization process. Additionally, on such date the
Bankruptcy Court denied, without prejudice, a renewed motion made by the Equity
Committee for leave to bring a derivative lawsuit against certain of the
company's current and former directors and officers, Cerberus Partners, L.P.,
Cerberus Capital Management, L.P., Cerberus Associates, L.L.C., Craig Court,
Inc., Goldman Sachs Credit Partners L.P., Foothill Capital Corporation and
Harrison J. Goldin Associates, L.L.C. (sic) (all the aforementioned corporate
entities, except for Harrison J. Goldin Associates, L.L.C., being parties to
certain of the company's debt agreements or
47
affiliates of such entities). Moreover, on February 12, 2002 the Bankruptcy
Court denied motions filed by the Equity Committee (i) to require the company to
call a stockholders' meeting and (ii) to modify certain aspects of CI's
corporate governance structure.
On March 7, 2002, the Bankruptcy Court approved the appointment of Arlin M.
Adams, Esquire, as the Debtors' Chapter 11 trustee. The Bankruptcy Code and
applicable rules require a Chapter 11 trustee to perform specific duties
relating to the administration of a bankruptcy case. Generally, a Chapter 11
trustee shall investigate the acts, conduct, assets, liabilities, financial
condition and operations of a debtor, and any other matter relevant to the case
or to the formulation of a plan of reorganization. The Bankruptcy Code also
requires a Chapter 11 trustee to, as soon as practicable, file with the
Bankruptcy Court (i) a statement of any investigation so conducted, including
any facts ascertained pertaining to fraud, dishonesty, incompetence, misconduct,
mismanagement or irregularities in the management of the affairs of the debtor,
or to a cause of action available to the estate, and (ii) a plan of
reorganization, or file a report as to why a plan of reorganization would not be
filed. With the appointment of a Chapter 11 trustee, while still under the
jurisdiction of the Bankruptcy Court, the Debtors are no longer
debtors-in-possession.
Furthermore, Chapter 11 of the Bankruptcy Code permits a Chapter 11 trustee
to operate the debtor's business. As with a debtor-in-possession, a Chapter 11
trustee may enter into transactions in the ordinary course of business without
notice or a hearing before the bankruptcy court; however, non-ordinary course
actions still require prior authorization from the bankruptcy court. A Chapter
11 trustee also assumes responsibility for management functions, including
decisions relative to the hiring and firing of personnel. As is the case with
the Debtors, when existing management is necessary to run the day-to-day
operations, a Chapter 11 trustee may retain and oversee such management group.
After a Chapter 11 trustee is appointed, a debtor's board of directors does not
retain its ordinary management powers. While Mr. Adams has assumed the board of
directors' management rights and responsibilities, he is doing so without any
pervasive changes to the company's existing management or organizational
structure, other than, as further discussed below, the acceptance of Daniel D.
Crowley's resignation effective March 31, 2003.
On or about July 24, 2002, the Bankruptcy Court granted a motion submitted
by the Chapter 11 trustee to (i) defer payment on account of certain approved
interim professional fee applications, (ii) defer the Bankruptcy Court's
decisions regarding the allowance or disallowance of compensation and expense
reimbursements requested in certain interim professional fee applications, (iii)
disallow certain professional fee applications requesting payment for
professional services rendered and expense reimbursements subsequent to March 6,
2002 and (iv) disallow certain other professional fee and expense reimbursement
applications. Certain legal counsel engaged during the period the Debtors
operated as debtors-in-possession have filed final fee applications seeking,
inter alia, a final order allowing payment of professional fees and
reimbursement of expenses incurred in connection with the Bankruptcy Cases. The
Chapter 11 trustee filed an omnibus objection to all final professional fee
applications and seeks to adjourn the adjudication of such final professional
fee applications until sometime after confirmation of a plan or plans of
reorganization. Through August 15, 2003, the Bankruptcy Court has adjudicated
only one final fee application. On or about July 24, 2002, the Bankruptcy Court
also approved several motions filed by the Chapter 11 trustee related to
fiduciary and administrative matters, including (i) maintenance of the Debtors'
existing bank accounts, (ii) continued use of the company's business forms and
record retention policies and procedures and (iii) expenditure
authorization/check disbursement policies and procedures.
On October 14, 2002, the Chapter 11 trustee filed a motion with the
Bankruptcy Court requesting approval for the retention of investment bankers and
financial advisors to provide services focusing on the Debtors' restructuring
and reorganization. The services may include, subject to the Chapter 11
trustee's discretion, (i) providing a formal valuation of the Debtors, (ii)
assisting the Chapter 11 trustee in exploring the possible sale of the Debtors
or their assets, (iii) assisting the Chapter 11 trustee in negotiating with
stakeholders and the restructuring of stakeholders' claims, and/or (iv) one or
more opinions on the fairness, from a financial perspective, of any proposed
sale of the Debtors or restructuring of the Debtors. Such motion was approved by
the Bankruptcy Court on December 2, 2002.
In order for the company to remain compliant with the requirements of Stark
II, on December 31, 2002, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $40.2 million of the Series A Notes, $7.3 million of
accrued but unpaid interest on the Series A Notes, $83.1 million of the Series B
Notes and $16.6 million of accrued but unpaid interest on the Series B Notes for
approximately 1,218.3 shares of Coram, Inc. Series B Cumulative Preferred Stock,
$0.001 par value per share (see Notes 7 and 9 to the company's condensed
consolidated
48
financial statements for further details). Hereafter the Coram, Inc. Series B
Cumulative Preferred Stock is referred to as the "CI Series B Preferred Stock."
This transaction generated an extraordinary gain on troubled debt restructuring
of approximately $123.5 million in 2002. At December 31, 2002, the company's
stockholders' equity exceeded the minimum requirement necessary to comply with
the Stark II public company exemption for the year ending December 31, 2003. See
Note 10 to the company's condensed consolidated financial statements for further
discussion regarding Stark II.
(V) BANKRUPTCY RELATED ACTIVITIES SUBSEQUENT TO DECEMBER 31, 2002
Daniel D. Crowley, the former Chief Executive Officer and President of the
company, had an employment contract which expired by its own terms on November
29, 2002. On January 24, 2003, the Chapter 11 trustee filed a motion with the
Bankruptcy Court seeking authorization to enter into a Termination and
Employment Extension Agreement (the "Transition Agreement"), effective January
1, 2003, with Mr. Crowley to have him serve as CHC's Chief Transition and
Restructuring Officer for a term not to exceed the earlier of (i) six months
from January 1, 2003, (ii) the date on which a plan or plans of reorganization
are confirmed by final order of the Bankruptcy Court or (iii) the substantial
consummation of a plan or plans of reorganization. Pursuant to the Transition
Agreement, Mr. Crowley would have continued to render essentially the same
services as previously provided to the company. On March 3, 2003, the Bankruptcy
Court denied the Chapter 11 trustee's motion for authorization to enter into the
Transition Agreement due to the Bankruptcy Court's belief that Mr. Crowley,
contrary to his representations, has continued to seek remuneration from one of
CI's noteholders in connection with efforts undertaken by Mr. Crowley in the
Bankruptcy Cases. Subsequently, Mr. Crowley resigned from the company effective
March 31, 2003. During the period January 1, 2003 through March 31, 2003, the
company paid Mr. Crowley based on the executed Transition Agreement. The Chapter
11 trustee has requested repayment from Mr. Crowley of all amounts paid in the
2003 period for the bi-weekly salary difference between the expired employment
agreement and the Transition Agreement.
On January 14, 2003, the Equity Committee filed a motion with the
Bankruptcy Court seeking an order to (i) immediately terminate Mr. Crowley's
employment with the Debtors and remove him from all involvement in the Debtors'
affairs, (ii) terminate all consulting arrangements between the Debtors and
Dynamic Healthcare Solutions, LLC ("DHS"), a privately held management
consulting and investment firm owned by Mr. Crowley (see Note 4 to the company's
condensed consolidated financial statements for further details), (iii)
substantially terminate all future payments to Mr. Crowley and DHS and (iv)
require Mr. Crowley and DHS to return all payments received to date, except as
otherwise authorized by the Bankruptcy Court as administrative claims. On March
26, 2003, the Bankruptcy Court entered an order denying the Equity Committee's
motion to terminate Mr. Crowley's employment as moot and reserved its decision
on the other relief requested, including disgorgement, until future litigation,
if any, arises.
The employment contract with Allen J. Marabito, Executive Vice President,
General Counsel and Secretary, expired by its terms on November 29, 2002. The
Chapter 11 trustee has agreed to continue Mr. Marabito's employment in his prior
capacity and Mr. Marabito has also assumed the duties and responsibilities
previously performed by Mr. Crowley. Mr. Marabito's employment is at will with a
base salary of $375,000 per annum, plus the same employee benefits as prior to
the expiration of his employment contract. On May 19, 2003, Mr. Marabito
released the company from all contractual obligations pertaining to his
incentive compensation for the year ended December 31, 2002 (i.e., the 2002 MIP
of approximately $1.05 million which remained subject to Chapter 11 trustee and
Bankruptcy Court approvals) and such amount is reflected in the company's
condensed consolidated statements of income as a reduction in general and
administrative expenses during the three and six month periods ended June 30,
2003. In consideration thereof, Mr. Marabito was granted a retention bonus of
$380,000 under the company's 2003 Key Employee Retention Plan discussed below.
The loss of Mr. Marabito's services could have a material adverse effect on the
company.
On April 7, 2003, the Bankruptcy Court approved a motion filed by the
Chapter 11 trustee to establish the 2003 Key Employee Retention Plan (the "2003
KERP"), which provides for (i) retention bonus payments of approximately $3.1
million to key employees of the company (the "2003 KERP Compensation") and (ii)
other payments of approximately $0.3 million to certain branch management
personnel (the "Branch Incentive Compensation"). Pursuant to the provisions of
the 2003 KERP, the 2003 KERP Compensation is payable in two equal installments
as follows: (i) upon approval of the 2003 KERP by the Bankruptcy Court and (ii)
the earlier of 60 days after confirmation of a plan or plans of reorganization
or December 31, 2003 (the "Second Payment Date").
49
Should a 2003 KERP Compensation participant voluntarily leave the company or be
terminated for cause prior to the Second Payment Date, such participant must
return any amounts previously received under the 2003 KERP, less applicable
taxes withheld. Approximately $1.8 million, which represented the first
installment under the 2003 KERP Compensation and the entire Branch Incentive
Compensation amount, was paid to the eligible participants in April 2003.
On May 2, 2003, the Chapter 11 trustee filed with the Bankruptcy Court a
proposed joint plan of reorganization with respect to the Debtors and, on June
17, 2003, the Chapter 11 trustee filed an amended proposed joint plan of
reorganization (the "Trustee's Plan"). Additionally, on June 24, 2003 the
Chapter 11 trustee filed the Second Amended Disclosure Statement with Respect to
the Trustee's Plan (the "Trustee's Disclosure Statement"). On June 26, 2003, the
Bankruptcy Court, entered an order (i) approving the Trustee's Disclosure
Statement, (ii) approving the form of the ballot to be distributed in connection
with the voting on the Trustee's Plan, (iii) establishing procedures for
solicitation of votes on the Trustee's Plan, (iv) establishing a voting deadline
and procedures for tabulation of votes on the Trustee's Plan and (v)
establishing the dates and times for the filing of objections to, and scheduling
a hearing on, confirmation of the Trustee's Plan. True and correct copies of the
Trustee's Plan and the Trustee's Disclosure Statement are attached as Exhibits
99.1 and 99.2, respectively, to the Form 8-K filed with the Securities and
Exchange Commission on July 11, 2003.
On December 19, 2002, the Equity Committee filed with the Bankruptcy Court
a proposed plan of reorganization with respect to the Debtors and, on June 17,
2003, the Equity Committee filed a second amended proposed plan of
reorganization (the "Equity Committee's Plan"). Additionally, on June 26, 2003
the Equity Committee filed the Third Amended Disclosure Statement with Respect
to the Equity Committee's Plan (the "Equity Committee's Disclosure Statement").
On June 26, 2003, the Bankruptcy Court entered an order (i) approving the Equity
Committee's Disclosure Statement, (ii) appointing a balloting agent, (iii)
approving the form of the ballot to be distributed in connection with the voting
on the Equity Committee's Plan, (iv) establishing procedures for solicitation of
votes on the Equity Committee's Plan, (v) establishing a voting deadline and
procedures for tabulation of votes on the Equity Committee's Plan and (vi)
establishing the dates and times for the filing of objections to, and scheduling
a hearing on, confirmation of the Equity Committee's Plan, and the objections
thereto filed by the Chapter 11 trustee. True and correct copies of the Equity
Committee's Plan and the Equity Committee's Disclosure Statement are attached as
Exhibits 99.3 and 99.4, respectively, to the Form 8-K filed with the Securities
and Exchange Commission on July 11, 2003.
Pursuant to the Bankruptcy Court's order, a record date of July 1, 2003 was
established for the purpose of determining which holders of equity interests are
entitled to vote on each of the Trustee's Plan and the Equity Committee's Plan.
Additionally, in accordance with the Bankruptcy Court's order, on or about July
14, 2003, the balloting agent transmitted the Chapter 11 trustee's and the
Equity Committee's solicitation packages to certain creditors and interest
holders who may be entitled to vote on each of the respective plans of
reorganization. As of August 15, 2003, voting on each of the plans of
reorganization remains open.
Each of the Trustee's Plan and the Equity Committee's Plan remain subject
to confirmation by the Bankruptcy Court. The hearing to consider confirmation of
each such plan of reorganization and any objections thereto is scheduled to
commence at 9:30 a.m. Eastern Daylight Time on September 9, 2003. The deadline
to object to confirmation of each of the plans of reorganization was August 7,
2003 and, in connection therewith, certain objections have been filed against
both plans of reorganization.
(VI) OTHER BANKRUPTCY-RELATED DISCLOSURES
Under Chapter 11 of the Bankruptcy Code, certain claims against the Debtors
in existence prior to the filing date are stayed while the Debtors' operations
continue under the purview of a Chapter 11 trustee or as debtors-in-possession.
These claims are reflected in the company's condensed consolidated balance
sheets as liabilities subject to compromise. Additional claims have arisen since
the filing date and may continue to arise due to the rejection of executory
contracts and unexpired non-residential real property leases and from
determinations by the Bankruptcy
50
Court of allowed claims for contingent, unliquidated and other disputed amounts.
Parties affected by the rejection of an executory contract or unexpired
non-residential real property lease may file claims with the Bankruptcy Court in
accordance with the provisions of Chapter 11 of the Bankruptcy Code and
applicable rules. Claims secured by the Debtors' assets also are stayed,
although the holders of such claims have the right to petition the Bankruptcy
Court for relief from the automatic stay to permit such creditors to foreclose
on the property securing their claims. Additionally, certain claimants have
sought relief from the Bankruptcy Court to lift the automatic stay and continue
pursuit of their claims against the Debtors or the Debtors' insurance carriers.
See Note 10 to the company's condensed consolidated financial statements for
further details regarding activities of the Official Committee of Unsecured
Creditors of Coram Resource Network, Inc. and Coram Independent Practice
Association, Inc. in the Resource Network Subsidiaries' bankruptcy proceedings.
The holders of the CI Series A Preferred Stock and the CI Series B
Preferred Stock (collectively the "CI Preferred Stock Holders") continue to
assert claims within the Bankruptcy Cases in the aggregate amount of their
cumulative liquidation preferences. Furthermore, in connection with the note
exchange effective on December 31, 2002, the Bankruptcy Court entered an order
granting the exchange, subject to its comments of record, and further ordered
that (i) if equitable or other relief is sought by any party in interest against
the CI Preferred Stock Holders, all defenses, affirmative defenses, setoffs,
recoupments and other such rights of the Chapter 11 trustee, the CI Preferred
Stock Holders and the Debtors shall be preserved, and all such issues shall be
determined, regardless of the first, second and third note exchanges and (ii)
the rights and equity interests of the CI Preferred Stock Holders are, and in
connection with any plan or plans of reorganization or any other distribution of
the Debtors' assets pursuant to Chapter 11 of the Bankruptcy Code shall remain,
senior and superior to the rights and equity interests of all holders of CI's
common stock and all claims against and equity interests in CHC.
On or about March 28, 2003, the Equity Committee commenced an adversary
proceeding seeking to subordinate the preferred stock interests of Cerberus
Partners, L.P., Goldman Sachs Credit Partners L.P. and Foothill Capital
Corporation in Coram, Inc. to the interests of Coram Healthcare Corporation as
the sole common shareholder of Coram, Inc. Upon motion of the defendants and
after a hearing held on June 5, 2003, the Bankruptcy Court dismissed the
aforementioned adversary proceeding by an order dated June 19, 2003 and
preserved issues concerning post-petition interest for determination in
connection with confirmation hearings on the Trustee's Plan and the Equity
Committee's Plan, provided that, to the extent that an equitable objection to
confirmation is raised, the Bankruptcy Court will treat the CI Series A
Preferred Stock and the CI Series B Preferred Stock as debt and deal with the
issue of whether post-petition interest will be allowed in accordance with the
provisions of the Bankruptcy Code concerning post-petition interest on debt.
CRITICAL ACCOUNTING POLICIES
The condensed consolidated financial statements include the accounts of CHC,
its subsidiaries, including CI (CHC's wholly-owned direct subsidiary), and joint
ventures that are considered to be under the control of CHC. As discussed above,
CI is a party to the Bankruptcy Cases that are being jointly administered with
those of CHC in the Bankruptcy Court. All material intercompany account balances
and transactions have been eliminated in consolidation. The company uses the
equity method of accounting for investments in entities in which it exhibits
significant influence, but not control, and has an ownership interest of 50% or
less.
Effective August 8, 2000, the company began presenting its consolidated
financial statements in accordance with the provisions of AICPA Statement of
Position 90-7, Financial Reporting by Entities in Reorganization under the
Bankruptcy Code.
Management considers the accounting policies that govern revenue recognition
and the determination of the net realizable value of accounts receivable to be
the most critical accounting policies in relation to the company's
51
consolidated financial statements, as well as those that most require important
and substantive management judgment. Accounting policies that govern the
capitalization of software development costs are also considered critical while
the company is in the process of improving and enhancing its enterprise-wide
information systems. For a description of these critical accounting policies,
refer to Note 2 to the company's audited consolidated financial statements and
"Critical Accounting Policies" under Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Coram's Annual
Report on Form 10-K/A for the year ended December 31, 2002.
Other accounting policies requiring significant judgment are those related
to the measurement and recognition of impairments of goodwill and other
long-lived assets. For a description of these critical accounting policies,
refer to Note 8 to the company's audited consolidated financial statements in
Coram's Annual Report on Form 10-K/A for the year ended December 31, 2002.
Moreover, because the Debtors are operating under Chapter 11 of the Bankruptcy
Code, the fair value of the company's liabilities will be impacted by their
settlement value pursuant to a plan or plans of reorganization set forth by the
Chapter 11 trustee or another interested party in the Bankruptcy Cases and,
ultimately, on decisions of the Bankruptcy Court. As a result, the implied value
of the company's goodwill is premised on several highly judgmental assumptions,
including, among other things, the company's enterprise value and the final
disposition of the company's pre-petition liabilities. Accordingly, the
company's goodwill impairment analysis is subject to the volatility inherent in
the underlying enterprise value determination. If the company recognizes a
material goodwill impairment charge during 2003, stockholders' equity may be
less than $75 million as of December 31, 2003, at which time the company may not
qualify for the public company exemption of Stark II for the year ending
December 31, 2004. The potential material adverse effects of noncompliance with
Stark II on the company's financial condition and business operations are
described in more detail in Note 10 to the company's condensed consolidated
financial statements.
RESULTS OF OPERATIONS
As discussed in Note 3 to the company's condensed consolidated financial
statements, R-Net's operating results are included in discontinued operations;
however, for the three and six months ended June 30, 2003 and 2002 the Resource
Network Subsidiaries had no operations.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Net Revenue. Net revenue increased $11.9 million or 11.0% to $120.3 million
during the three months ended June 30, 2003 from $108.4 million during the three
months ended June 30, 2002. As a result of management's continued focus on the
delivery of the company's core infusion therapies, which include coagulant and
blood clotting ("Factor"), intravenous immunoglobulin ("IVIG"), anti-infective,
pain management and total parenteral nutrition therapies (collectively the "Core
Infusion Therapies"), net revenue from such therapies increased $7.8 million or
10.3% during the three months ended June 30, 2003 from the three months ended
June 30, 2002. Also contributing to the consolidated net revenue increase is a
$3.8 million improvement (approximately 13.2%) in the company's non-core
infusion therapies, such as therapies corresponding to the Food and Drug
Administration ("FDA") approved drugs Synagis and Remicaid. However, no
individual non-core therapy represented more than 5% of the company's net
revenue during the three months ended June 30, 2003 or 2002. The company's Core
Infusion Therapies and non-core infusion therapies aggregated approximately 97%
of net revenue during both such periods.
During the three months ended June 30, 2003 and 2002, approximately $6.9
million and $7.5 million, respectively, of the company's consolidated net
revenue related to a capitated fee agreement that provides services to members
in the California marketplace (the "California Capitated Fee Contract"). The
underlying two year agreement expired by its terms on December 31, 2002 but it
is subject to automatic annual renewals absent a written termination notice from
one of the contracting parties. The company and one of its affiliated California
partnerships continue to render services subject to the automatic renewal
provisions of the contract. On February 28, 2003, the contracted payer invited
Coram, as well as a limited group of other providers, to respond to a request
for proposal ("RFP") that covers the services provided exclusively by Coram.
Subsequent to Coram's written response to the RFP, the company was invited to
participate in oral presentations in May 2003. Management anticipates that the
payer will select a provider or providers no later than August 2003 and the new
contract or contracts will become effective January 1, 2004. Management can
provide no assurances that the company will successfully procure such contract
on economic and operational terms that are favorable to the company. The loss of
the California Capitated
52
Fee Contract or significant modifications to the terms and conditions of such
contract could have a materially adverse effect on the results of operations,
cash flows and financial condition of the company and its partnership. See Note
1 to the company's condensed consolidated financial statements for further
details.
Management was recently notified that, effective October 1, 2003, four
provider contracts that ultimately fall under the purview of a single national
health insurance carrier have been terminated. Additionally, during 2002 two
other provider contract terminations in the state of Illinois (one with the
company and one with an unconsolidated joint venture) were also terminated by
the national health insurance carrier. During the three months ended June 30,
2003 and 2002, the terminated contracts represented approximately $1.1 million
and $1.7 million of consolidated net revenue, respectively, and during the three
months ended June 30, 2003 and 2002, all provider contracts under this national
health insurance carrier represented approximately $2.8 million and $4.4 million
of consolidated net revenue, respectively. See Note 1 to the company's condensed
consolidated financial statements for further details.
Gross Profit. Gross profit increased $4.6 million to $35.9 million or a
gross margin of 29.8% during the three months ended June 30, 2003 from $31.3
million or a gross margin of 28.9% during the three months ended June 30, 2002.
During the three months ended June 30, 2003, the company's gross margin
percentage was favorably impacted by declining acquisition costs for Factor and
IVIG products (principally due to an overall increase in related product
availability in the marketplace during such period). Additionally, gross margin
during the three months ended June 30, 2003 was favorably impacted by a larger
proportion of IVIG and anti-infective therapies in the company's revenue mix
(such therapies generally have a lower product cost as a percentage of net
revenue than the company's non-core therapies). No assurances can be given that
the company will continue to benefit from favorable acquisition costs for Factor
and IVIG products. Price increases or the lack of product availability could
have a materially adverse effect on the company's financial condition, results
of operations and liquidity.
Partially offsetting the aforementioned favorable gross margin trends during
the three months ended June 30, 2003 was an incremental increase of
approximately $1.1 million in nursing and pharmacy salaries and related contract
labor that were precipitated by an overall labor shortage. Additionally, during
2003 the company experienced higher workers' compensation insurance costs and
increased health and welfare self-insurance costs.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
increased $1.7 million or 8.0% to $23.0 million during the three months ended
June 30, 2003 from $21.3 million during the three months ended June 30, 2002.
During 2003, the company incurred incremental costs of (i) $1.2 million to
enhance and reward its sales and marketing force and (ii) $1.1 million in
reimbursement personnel and related temporary labor costs. Additionally, during
2003 the company experienced increased health and welfare self-insurance costs
of $0.3 million and a $0.2 million increase in legal fees relating to certain
ongoing litigation (see Note 10 to the company's condensed consolidated
financial statements for further details of litigation matters).
Partially offsetting the above SG&A expense increases were (i) a $0.8
million decrease in management incentive compensation (principally due to a
reversal of the company's Executive Vice President incentive compensation for
the year ended December 31, 2002, which was recognized during the three months
ended June 30, 2003 (see Note 2 to the company's condensed consolidated
financial statements for further details)), and (ii) a $0.4 million decrease in
depreciation expense primarily related to the implementation of new information
systems during the three months ended June 30, 2002 wherein certain temporary
transitional components of such new information systems became fully depreciated
during that period.
In addition to the aforementioned changes the company experienced an overall
increase in SG&A expenses attributable to revenue growth and inflation.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $4.2 million or 3.5% of net revenue during the three
months ended June 30, 2003, compared to $5.1 million or 4.7% of net revenue
during the three months ended June 30, 2002. The decrease in the provision for
uncollectible accounts as a percentage of revenue during the three months ended
June 30, 2003 is primarily due to the recognition of a $0.6 million recovery
from payer settlement negotiations related to certain of the company's aged
commercial accounts receivable (see Note 1 to the company's condensed
consolidated financial statements for further details). Also contributing to the
decrease in the provision for uncollectible accounts as a percentage of net
revenue was the realization of a modest increase in overall cash collections.
The 2003 provision for estimated uncollectible accounts reflects management's
best estimate of bad debt expense for the year ending December 31, 2003;
however,
53
there can be no assurances that such provisions will be adequate, that favorable
cash collection trends will continue or that factors adversely affecting the
company's bad debt expense will not arise in the future.
Interest Expense. Interest expense was $0.4 million during both the three
months ended June 30, 2003 and 2002. Both periods primarily reflect the
recognition of interest expense on the proposed settlement with the Internal
Revenue Service, which is more fully described in Note 8 to the company's
condensed consolidated financial statements. Both periods also reflect the
non-recognition of interest expense related to certain notes issued in
connection with the Securities Exchange Agreement subsequent to the execution of
debt-for-equity exchange agreements on December 29, 2000, December 31, 2001 and
December 31, 2002, which qualified as troubled debt restructurings (see Notes 7
and 9 to the company's condensed consolidated financial statements for further
details).
Other Income (Expense), Net. During the three months ended June 30, 2002,
the company recognized $1.0 million in other income (expense), compared to a
nominal amount during the three months ended June 30, 2003. During 2002, the
company recorded approximately $1.0 million of other income from the recognition
of the net realizable value of an escrow deposit that related to certain 1997
dispositions of lithotripsy partnerships. The company, with approvals from the
Chapter 11 trustee and the Bankruptcy Court, entered into a settlement agreement
whereby the aforementioned escrow deposit was realized by the company in October
2002.
Reorganization Expenses, Net. During the three months ended June 30, 2003
and 2002, the company recognized $4.1 million and $0.5 million, respectively, of
net reorganization expenses related to the Bankruptcy Cases. These expenses
include, but are not limited to, professional fees, a key employee retention
plan, Office of the United States Trustee fees and other expenditures during the
Chapter 11 bankruptcy proceedings, offset by interest earned on accumulated cash
due to the Debtors not paying their liabilities subject to compromise. The
increased expense during 2003 was partially attributable to a $1.3 million
expense recognized under the 2003 Key Employee Retention Plan, whereas no
comparable expense was incurred during 2002. Moreover, during the three months
ended June 30, 2003 and 2002, the company recorded $2.9 million and $0.6
million, respectively, of bankruptcy-related professional fees. Such
professional fees were higher during 2003 primarily due to the increased level
of legal activity related to the competing plans of reorganization proposed by
the Chapter 11 trustee and the Equity Committee (see Note 2 to the company's
condensed consolidated financial statements for further details about the
competing plans of reorganization).
Income Tax Expense. See Note 8 to the company's condensed consolidated
financial statements for discussion of variances between the statutory income
tax rate and the company's effective income tax rates.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Net Revenue. Net revenue increased $23.0 million or 10.9% to $233.4 million
during the six months ended June 30, 2003 from $210.4 million during the six
months ended June 30, 2002. As a result of management's continued focus on the
delivery of the company's Core Infusion Therapies, net revenue from such
therapies increased $13.4 million or 9.2% during the six months ended June 30,
2003 from the six months ended June 30, 2002. Also contributing to the
consolidated net revenue increase is an $8.9 million improvement (approximately
15.6%) in the company's non-core infusion therapies, such as therapies
corresponding to the FDA approved drugs Synagis and Remicaid. However, no
individual non-core therapy represented more than 5% of the company's net
revenue during the six months ended June 30, 2003 or 2002. The company's Core
Infusion Therapies and non-core infusion therapies aggregated approximately 97%
of net revenue during both such periods.
During the six months ended June 30, 2003 and 2002, approximately $13.1
million and $14.7 million, respectively, of the company's consolidated net
revenue related to the California Capitated Fee Contract. See Note 1 to the
company's condensed consolidated financial statements for further details of
this contract, which is currently subject to an ongoing RFP process.
As discussed above under Net Revenue for the three months ended June 30,
2003 and 2002, certain provider contracts were recently terminated by a national
health insurance carrier. During the six months ended June 30, 2003 and 2002,
the terminated contracts represented approximately $2.9 million and $3.5 million
of consolidated net revenue, respectively, and during the six months ended June
30, 2003 and 2002, all provider contracts under this national health insurance
carrier represented approximately $6.9 million and $8.4 million of consolidated
net revenue, respectively. See Note 1 to the company's condensed consolidated
financial statements for further details.
54
Gross Profit. Gross profit increased $3.9 million to $62.9 million or a
gross margin of 26.9% during the six months ended June 30, 2003 from $59.0
million or a gross margin of 28.0% during the six months ended June 30, 2002.
During the six months ended June 30, 2003, the company's gross margin percentage
was favorably impacted by declining acquisition costs for Factor and IVIG
products (principally due to an overall increase in related product availability
in the marketplace during such period). Additionally, gross margin during the
six months ended June 30, 2003 was favorably impacted by a larger proportion of
IVIG and anti-infective therapies in the company's revenue mix (such therapies
generally have a lower product costs as a percentage of net revenue than the
company's non-core therapies). No assurances can be given that the company will
continue to benefit from favorable acquisition costs for Factor and IVIG
products. Price increases or lack of the product availability could have a
materially adverse effect on the company's financial condition, results of
operations and liquidity.
Notwithstanding the aforementioned favorable gross margin trends during the
six months ended June 30, 2003, the company's overall gross margin percentage
declined primarily due to a $3.4 million charge for the purchase of a
malpractice insurance tail policy. Also adversely effecting the 2003 gross
margin was an incremental increase of approximately $2.7 million in nursing and
pharmacy salaries and related contract labor that were precipitated by an
overall labor shortage. Additionally, during 2003 the company experienced higher
workers' compensation insurance costs and increased health and welfare
self-insurance costs.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
increased $3.7 million or 8.7% to $46.0 million during the six months ended June
30, 2003 from $42.3 million during the six months ended June 30, 2002. During
2003, the company incurred incremental costs of (i) $ 2.1 million to enhance and
reward its sales and marketing force and (ii) $1.9 million in reimbursement
personnel and related temporary labor costs. Additionally, during 2003 the
company experienced increased health and welfare self-insurance costs of $0.3
million and a $0.5 million increase in legal fees relating to certain ongoing
litigation (see Note 10 to the company's condensed consolidated financial
statements for further details of the company's litigation matters).
Partially offsetting the above SG&A expense increases were (i) a $0.7
million decrease in management incentive compensation (principally due to a
reversal of the company's Executive Vice President incentive compensation for
the year ended December 31, 2002, which was recognized during the six months
ended June 30, 2003 (see Note 2 to the company's condensed consolidated
financial statements for further details)), (ii) a $0.5 million decrease in
amortization expense related to the company's commercial payer contracts
intangible asset, which became fully amortized during the six months ended June
30, 2002 and (iii) a $0.3 million decrease in depreciation expense primarily
related to the implementation of new information systems during the six months
ended June 30, 2002 wherein certain temporary transitional components of such
new information systems became fully depreciated during that period.
In addition to the aforementioned changes, the company experienced an
overall increase in SG&A expenses attributable to revenue growth and inflation.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $7.7 million or 3.3% of net revenue during the six
months ended June 30, 2003, compared to $8.2 million or 3.9% of net revenue
during the six months ended June 30, 2002. The decrease in the provision for
uncollectible accounts as a percentage of revenue during the six months ended
June 30, 2003 is primarily due to the recognition of $1.1 million of recoveries
from payer settlement negotiations related to certain of the company's aged
commercial accounts receivable (see Note 1 to the company's condensed
consolidated financial statements for further details). Also contributing to the
decrease in the provision for uncollectible accounts as a percentage of net
revenue was the realization of a modest increase in the company's overall cash
collections. The 2003 provision for estimated uncollectible accounts reflects
management's best estimate of bad debt expense for the year ending December 31,
2003; however, there can be no assurances that such provisions will be adequate,
favorable cash collection trends will continue or that factors adversely
affecting the company's bad debt expense will not arise in the future.
Interest Expense. Interest expense was $0.7 million and $0.8 million during
the six months ended June 30, 2003 and 2002, respectively. Both periods
primarily reflect the recognition of interest expense on the proposed settlement
with the Internal Revenue Service, which is more fully described in Note 8 to
the company's condensed consolidated financial statements. Both periods also
reflect the non-recognition of interest expense related to certain notes issued
in connection with the Securities Exchange Agreement subsequent to the execution
of debt-for-equity
55
exchange agreements on December 29, 2000, December 31, 2001 and December 31,
2002, which qualified as troubled debt restructurings (see Notes 7 and 9 to the
company's condensed consolidated financial statements for further details).
Equity in Net Income of Unconsolidated Joint Ventures. Equity in net income
of unconsolidated joint ventures decreased by a nominal amount during the six
months ended June 30, 2003 compared to the six months ended June 30, 2002.
However, the 2003 results were negatively impacted by the ongoing liquidation of
one of the company's unconsolidated joint ventures in the Chicago, Illinois
marketplace. As of June 30, 2003, substantially all operations of such
unconsolidated joint venture have ceased. Offsetting such unfavorable financial
results were increased earnings from certain other unconsolidated joint
ventures.
Additionally, one of Coram's unconsolidated California partnerships derived
approximately 37.1% and 39.2% of its net revenue during the six months ended
June 30, 2003 and 2002, respectively, from services provided under the
California Capitated Fee Contract. See Note 1 to the company's condensed
consolidated financial statements for further details of this contract, which is
currently subject to an ongoing RFP process.
Gain on Sale of Business. During January 2002, the company finalized the
sale of a respiratory and durable medical equipment business located in New
Orleans, Louisiana to a third party, which resulted in a nominal gain. See Note
2 to the company's condensed consolidated financial statements for further
details.
Other Income (Expense), Net. During the six months ended June 30, 2002, the
company recognized $1.0 million in other income (expense), compared to a nominal
amount during the six months ended June 30, 2003. During 2002, the company
recorded approximately $1.0 million of other income from the recognition of the
net realizable value of an escrow deposit that related to certain 1997
dispositions of lithotripsy partnerships. The company, with approvals from the
Chapter 11 trustee and the Bankruptcy Court, entered into a settlement agreement
whereby the aforementioned escrow deposit was realized by the company in October
2002.
Reorganization Expenses, Net. During the six months ended June 30, 2003 and
2002, the company recognized $5.9 million and $2.5 million, respectively, of net
reorganization expenses related to the Bankruptcy Cases. These expenses include,
but are not limited to, professional fees, a key employee retention plan, Office
of the United States Trustee fees and other expenditures during the Chapter 11
bankruptcy proceedings, offset by interest earned on accumulated cash due to the
Debtors not paying their liabilities subject to compromise. The increased
expense during 2003 was partially attributable to a $1.3 million expense
recognized under the 2003 Key Employee Retention Plan, whereas no comparable
expense was incurred during 2002. Moreover, during the six months ended June 30,
2003 and 2002, the company recorded $4.7 million and $2.7 million, respectively,
of bankruptcy-related professional fees. Such professional fees were higher
during 2003 primarily due to the increased level of legal activity related to
the competing plans of reorganization proposed by the Chapter 11 trustee and the
Equity Committee (see Note 2 to the company's condensed consolidated financial
statements for further details about the competing plans of reorganization).
Income Tax Expense. See Note 8 to the company's condensed consolidated
financial statements for discussion of variances between the statutory income
tax rate and the company's effective income tax rates.
Loss from Disposal of Discontinued Operations. During the six months ended
June 30, 2003, the company recorded a $0.1 million loss from disposal of
discontinued operations. Such amount represents legal costs for certain pending
litigation between the Official Committee of Unsecured Creditors of Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc. and the
Debtors and several of their non-debtor subsidiaries, as well as, legal costs
associated with corresponding indemnifications provided to the company's
officers and directors in the Resource Network Subsidiaries' bankruptcy
proceedings/litigation. See Notes 3 and 10 to the company's condensed
consolidated financial statement for further details.
Cumulative Effect of a Change in Accounting Principle. Effective January 1,
2002, the company recognized a transitional goodwill impairment charge of
approximately $71.9 million related to the adoption of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statement
142"). In accordance with the provisions of Statement 142, such charge was
retroactively recorded in the company's condensed consolidated financial
statements as a cumulative effect of a change in accounting principle during the
six months ended June 30, 2002. See Note 6 to the company's condensed
consolidated financial statements for further details.
56
LIQUIDITY AND CAPITAL RESOURCES
Bankruptcy Proceedings. The Debtors commenced the Bankruptcy Cases by
filing voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on
August 8, 2000. Following the commencement of the Bankruptcy Cases, the Debtors
operated as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court; however, a Chapter 11 trustee was appointed by the Bankruptcy Court on
March 7, 2002. With the appointment of a Chapter 11 trustee, while still under
the jurisdiction of the Bankruptcy Court, the Debtors are no longer
debtors-in-possession. None of the company's other subsidiaries is a debtor in
the Bankruptcy Cases and, other than the Resource Network Subsidiaries, none of
the company's other subsidiaries is a debtor in any bankruptcy case. Although
the filing of the Bankruptcy Cases constitutes an event of default under the
company's principal debt instruments, Section 362 of Chapter 11 of the
Bankruptcy Code imposes an automatic stay that will generally preclude creditors
and other interested parties under such arrangements from taking remedial action
in response to any such default without prior Bankruptcy Court approval. In
addition, the Debtors may reject executory contracts and unexpired leases of
non-residential real property. Parties effected by such rejections may file
claims with the Bankruptcy Court in accordance with the provisions of Chapter 11
of the Bankruptcy Code and the applicable rules. See Note 2 to the company's
condensed consolidated financial statements for further details of the
Bankruptcy Cases.
Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to a plan or plans of
reorganization and review by the Chapter 11 trustee. Therefore, it is not
possible to fully or completely estimate the fair value of the liabilities
subject to compromise at June 30, 2003 due to the Bankruptcy Cases and the
uncertainty surrounding the ultimate amount and settlement terms for such
liabilities.
Credit Facilities, Letters of Credit and other Debt Obligations. During the
six months ended June 30, 2003 and through August 15, 2003, the company was not
a party to any revolving credit, line of credit or similar borrowing facility.
Due to the pendency of the Bankruptcy Cases, the company's ability to borrow or
otherwise enter into new post-petition credit facilities is limited. Moreover,
any new credit facility would require the approval of the Chapter 11 trustee and
the Bankruptcy Court.
The table below summarizes the company's debt, lease and purchase
obligations for the years ending June 30 (in thousands). See Notes 7 and 10 to
the company's condensed consolidated financial statements for further details
regarding such matters. The company intends to finance its debt, lease and
purchase obligations with available cash balances and cash provided by
operations.
Totals 2004 2005 2006 2007 2008 Thereafter
------- ------- ------- ------- ------- ------- -----------
Series B Notes in default ..... $ 9,000 $ 9,000 $ - $ - $ - $ - $ -
Capital leases, excluding
interest .................. 1,391 204 467 720 - - -
Other long-term debt .......... 214 181 33 - - - -
Operating leases .............. 25,250 9,015 6,951 4,647 2,278 1,371 988
Purchase obligations .......... 6,770 3,653 2,200 917 - - -
------- ------- ------- ------- ------- ------- -------
Totals .................... $42,625 $22,053 $ 9,651 $ 6,284 $ 2,278 $ 1,371 $ 988
======= ======= ======= ======= ======= ======= =======
The company's Series B Notes were not paid on their June 30, 2003 scheduled
maturity date; however, the noteholders are stayed from pursuing any remedies
without prior authorization by the Bankruptcy Court. See Note 7 to the company's
condensed consolidated financial statements for further details. Series B Note
repayments, if any, will require approval of both the Chapter 11 trustee and the
Bankruptcy Court because such amount represents a pre-petition liability.
57
In connection with management's decision to replace the company's entire
fleet of Sabratek Corporation 3030 pole-mounted pumps, the Bankruptcy Court
approved a motion on April 29, 2003 that authorized the company to enter into a
three year agreement with B. Braun Medical, Inc. ("B. Braun") to lease 1,000
Vista Basic pumps (the "Lease Agreement"). The Lease Agreement, which became
effective in May 2003, includes an aggregate commitment, including related
interest, of approximately $1.5 million. As a result, the company is required to
pay B. Braun approximately $0.3 million, $0.5 million and $0.7 million during
the first, second and third years of the Lease Agreement. Upon expiration of the
Lease Agreement, the company has the option to acquire the leased Vista Basic
pumps at a bargain purchase price of $1 per pump. The Lease Agreement contains
customary covenants and events of default, as well as, remedies available to B.
Braun if the company is in violation thereof, including, but not limited to, (i)
termination of the Lease Agreement, (ii) return of the leased Vista Basic pumps
to B. Braun and/or (iii) recovery from the company of any unpaid amounts as of
the date of default and all amounts remaining under the unexpired term of the
Lease Agreement. Management believes that the company will comply with the terms
and conditions of the Lease Agreement; however, there can be no assurances
thereof or what remedies, if any, would be invoked by B. Braun in the event of
default.
In February 2001, pursuant to an order of the Bankruptcy Court, the company
established irrevocable letters of credit through Wells Fargo Bank Minnesota, NA
("Wells Fargo"), an affiliate of Foothill Capital Corporation (a party to the
former Senior Credit Facility, the Securities Exchange Agreement and a holder of
certain preferred stock issued by Coram, Inc.). Such letters of credit
aggregated approximately $0.4 million at August 15, 2003 and are fully secured
by interest-bearing cash deposits held by Wells Fargo. The outstanding letters
of credit have maturity dates in September 2003 ($75,000) and February 2004
($278,000). Due to the pendency of the Bankruptcy Cases and the possibility of
drug and supply shortages in the future, the company may be required to enhance
existing letters of credit or establish new letters of credit in order to ensure
the availability of products for its patients' medical needs.
General. The company's condensed consolidated financial statements have
been prepared on a going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. However, as a result of the Bankruptcy Cases and
circumstances relating thereto, including the company's leveraged financial
structure and cumulative losses from operations, such realization of assets and
liquidation of liabilities are subject to significant uncertainty. During the
pendency of the Bankruptcy Cases, the company may sell or otherwise dispose of
assets and liquidate or settle liabilities for amounts other than those
reflected in the condensed consolidated financial statements. Furthermore, a
plan or plans of reorganization could materially change the amounts reported in
the condensed consolidated financial statements, which do not give effect to any
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan or plans of reorganization. See Note 2 to
the company's condensed consolidated financial statements for further details of
the Bankruptcy Cases. The company's ability to continue as a going concern is
dependent upon, among other things, confirmation of a plan or plans of
reorganization, future profitable operations, the ability to comply with the
terms of the company's financing agreements, the ability to obtain necessary
financing to fund a proposed settlement with the Internal Revenue Service, the
ability to remain in compliance with the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly known as
"Stark II") and the ability to generate sufficient cash from operations and/or
financing arrangements to meet its obligations and capital asset expenditure
requirements.
Coram used cash on hand and cash generated from operations to fund its
capital asset purchases, reorganization activities and working capital
requirements for the six months ended June 30, 2003. Working capital increased
approximately $1.9 million to $67.5 million at June 30, 2003 from $65.6 million
at December 31, 2002. This change in working capital is primarily due to: (i) a
$7.3 million increase in cash and cash equivalents, (ii) an increase in net
accounts receivable of $2.4 million, (iii) a $3.4 million increase in other
current assets, (iv) a decrease of $1.9 million in inventories, (v) a $3.2
million increase in accrued compensation and related liabilities, (vi) a $2.0
million increase in an insurance note payable and (vii) a $4.4 million increase
in all other current liabilities, including deferred income taxes.
Cash used in investing activities for the six months ended June 30, 2003 was
approximately $2.9 million, including $1.6 million for property and equipment
purchased in the normal course of business and $1.3 million for the purchase of
1,000 B. Braun Vista Basic pumps.
58
Cash provided by financing activities for the six months ended June 30, 2003
was a nominal amount. However, the components thereof included approximately
$0.4 million related to refunds of deposits to collateralize the company's
letters of credit, offset by cash distributions paid to minority interests of
$0.3 million and debt and capital lease principal repayments of $0.1 million.
Management believes that the net costs for the Bankruptcy Cases will result
in a significant use of cash for the year ending December 31, 2003 and
thereafter. These costs principally consist of professional fees and expenses
and employee retention payments. On or about July 24, 2002, the Bankruptcy Court
granted a motion submitted by the Chapter 11 trustee to (i) defer payment on
account of certain approved interim professional fee applications, (ii) defer
the Bankruptcy Court's decisions regarding the allowance or disallowance of
compensation and expense reimbursements requested in certain interim
professional fee applications, (iii) disallow certain professional fee
applications requesting payment for professional services rendered and expense
reimbursements subsequent to March 6, 2002 and (iv) disallow certain other
professional fee and expense reimbursement applications. Certain legal counsel
engaged during the period the Debtors operated as debtors-in-possession have
filed final fee applications seeking, inter alia, a final order allowing payment
of professional fees and reimbursement of expenses incurred in connection with
the Bankruptcy Cases. The Chapter 11 trustee filed an omnibus objection to all
final professional fee applications and seeks to adjourn the adjudication of
such final professional fee applications until some time after confirmation of a
plan or plans of reorganization. Through August 15, 2003, the Bankruptcy Court
has adjudicated only one final fee application. The company intends to fund the
costs of the Bankruptcy Cases with available cash balances and cash provided by
operations.
Management cannot predict whether any future objections of the Official
Committee of the Equity Security Holders of Coram Healthcare Corporation or any
other interested parties in the Bankruptcy Cases will be forthcoming. Outcomes
unfavorable to the company or unknown additional actions could require the
company to access significant additional funds. See Notes 2 and 10 to the
company's condensed consolidated financial statements for further details.
The former principal supplier of Coram's infusion pumps, Sabratek
Corporation ("Sabratek"), filed for protection under Chapter 11 of the
Bankruptcy Code on December 17, 1999. In January 2000, Baxter Healthcare
Corporation ("Baxter") purchased certain Sabratek assets, including Sabratek's
pump manufacturing division, and continued to produce the related tubing and
infusion sets needed to operate the Sabratek 6060 Homerun Pumps (the "6060
Pumps") that are used by Coram. Management expects that Baxter will extend the
period during which it will produce the tubing and infusion sets necessary for
operation of the 6060 Pumps; however, no assurances can be given that Baxter
will provide such an extension. Moreover, the company's fleet of 6060 Pumps
requires certain costly software and hardware upgrades and such pumps are
currently experiencing significant and recurring repairs that are not covered
under warranty. The upgrades and extensive ongoing repairs will necessitate a
substantial cash outlay by the company and, in the case of upgrades, would
temporarily remove numerous company-owned pumps from revenue-producing
activities (thereby requiring the company to lease incremental pumps on a
month-to-month basis). Given the issues surrounding the 6060 Pumps, management
is currently evaluating several alternatives, including replacement of the
entire fleet of approximately 4,800 units. No assurances can be given that the
company will develop an alternative that will be economically viable, including
identification of a source of long-term financing, or meet with the approval of
the Chapter 11 trustee and the Bankruptcy Court.
On April 7, 2003, the Bankruptcy Court approved a motion filed by the
Chapter 11 trustee to establish the 2003 Key Employee Retention Plan (the "2003
KERP"), which provides for (i) retention bonus payments of approximately $3.1
million to key employees of the company (the "2003 KERP Compensation") and (ii)
other payments of approximately $0.3 million to certain branch management
personnel (the "Branch Incentive Compensation"). Pursuant to the provisions of
the 2003 KERP, the 2003 KERP Compensation is payable in two equal installments
as follows: (i) upon approval of the 2003 KERP by the Bankruptcy Court and (ii)
the earlier of 60 days after confirmation of a plan or plans of reorganization
or December 31, 2003 (the "Second Payment Date"). Should a 2003 KERP
Compensation participant voluntarily leave the company or be terminated for
cause prior to the Second Payment Date, such participant must return any amounts
previously received under the 2003 KERP, less applicable taxes withheld.
Approximately $1.8 million, representing the first installment of the 2003 KERP
Compensation and the entire Branch Incentive Compensation amount, was paid to
the eligible participants in April 2003. The company intends to fund the
remaining 2003 KERP Compensation with available cash balances and cash provided
by operations.
59
The company sponsors a Management Incentive Plan ("MIP"), which provides
for annual bonuses payable to certain key employees. The bonuses are predicated
on overall corporate performance (principally sales of the company's core
infusion therapies, cash collections and earnings before interest expense,
taxes, reorganization expenses, restructuring costs, depreciation and
amortization and certain other non-recurring items), as well as, individual
performance targets and objectives. Pursuant to the terms of their employment
contracts, Daniel D. Crowley, the company's former Chairman of the Board of
Directors, Chief Executive Officer and President, and Allen J. Marabito, the
company's Executive Vice President, maintain contractual claims to receive
unpaid MIP amounts aggregating approximately $13.8 million and $0.4 million,
respectively, for certain periods through December 31, 2002. Payments of (i) the
aforementioned MIP amounts for Messrs. Crowley and Marabito, (ii) $0.8 million
claimed by Mr. Crowley from the first key employee retention plan and (iii) a
$1.8 million refinancing success bonus claimed by Mr. Crowley remain subject to
approval by the Bankruptcy Court and the Chapter 11 trustee. If these claims are
granted, the company intends to fund such amounts with available cash balances
and cash provided by operations.
In connection with the Second Joint Plan, Mr. Crowley voluntarily offered
to accept a $7.5 million reduction in certain performance bonuses, contingent on
the confirmation and consummation of the Second Joint Plan. As discussed in Note
2 to the company's condensed consolidated financial statements, confirmation of
the Second Joint Plan was denied by the Bankruptcy Court on December 21, 2001.
The company cannot predict what, if any, reduction in Mr. Crowley's incentive,
retention or success bonuses, which are accrued in the company's condensed
consolidated financial statements, will result from a final confirmed plan or
plans of reorganization. Mr. Crowley indicated that he reserves the right to
claim the full outstanding amounts of such bonuses and incentive compensation,
as well as, all other compensation. The Chapter 11 trustee reserves the right to
seek disallowance by the Bankruptcy Court of all such amounts and/or seek
disgorgement in any future litigation.
On January 14, 2003, the Equity Committee filed a motion with the
Bankruptcy Court seeking an order to (i) immediately terminate Mr. Crowley's
employment with the Debtors and remove him from all involvement in the Debtors'
affairs, (ii) terminate all consulting arrangements between the Debtors and
Dynamic Healthcare Solutions, LLC ("DHS"), a privately held management
consulting and investment firm owned by Mr. Crowley (see Note 4 to the company's
condensed consolidated financial statements for further details), (iii)
substantially terminate all future payments to Mr. Crowley and DHS and (iv)
require Mr. Crowley and DHS to return all payments received to date, except as
otherwise authorized by the Bankruptcy Court as administrative claims. On March
26, 2003, the Bankruptcy Court entered an order denying the Equity Committee's
motion to terminate Mr. Crowley's employment as moot and reserved its decision
on the other relief requested, including disgorgement, until future litigation,
if any, arises.
In recent years, the company experienced significant increases in insurance
premiums for its Directors and Officers ("D&O"), General and Professional
Liability ("GLPL") and certain other risk management insurance policies. In
connection therewith, in 2001 the Bankruptcy Court approved a motion filed by
the Debtors to enter into an insurance premium financing agreement with AICCO,
Inc. to finance certain GLPL premiums for the 2001 policy year. In April 2003,
pursuant to the order previously entered by the Bankruptcy Court, the Debtors
entered into another premium financing agreement with Imperial Premium Finance,
Inc., an affiliate of AICCO, Inc., (the "2003 Financing Agreement") to finance
the premiums under certain insurance policies. Pursuant to the terms of the 2003
Financing Agreement, the Debtors made a down payment of approximately $1.5
million in May 2003 and financed approximately $2.8 million. Commencing on May
15, 2003, the amount financed is being paid in seven monthly installments of
approximately $0.4 million, including interest at a rate of 3.75% per annum. The
2003 Financing Agreement is secured by the unearned premiums and any loss
payments under the covered insurance policies. In addition, Imperial Premium
Finance, Inc. has the right to terminate the insurance policies and collect the
unearned premiums (as administrative expenses) if the Debtors do not make the
monthly payments called for by the 2003 Financing Agreement. The company
generally funds its insurance premiums and/or related financing agreements with
available cash balances and cash provided by operations. No assurances can be
given that the company will be able to obtain and/or maintain adequate D&O, GLPL
and malpractice insurance coverage beyond the expiration of the current
policies, which is generally in early 2004. In the event that the company is
unable to obtain and/or maintain such insurance at a price that is economically
viable, there could be a material adverse effect on the company's operations and
liquidity.
60
In November 2001, the Official Committee of Unsecured Creditors of Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc.
(collectively the "R-Net Creditors' Committee") filed a complaint in the
Bankruptcy Court, subsequently amended twice, both on its own behalf and as
assignee for causes of action that may belong to the Resource Network
Subsidiaries, which named as defendants the Debtors, several non-debtor
subsidiaries, several current and former directors, current executive officers
of CHC and several other current and former employees of the company. This
complaint, as amended, also named as defendants Cerberus Partners, L.P., Goldman
Sachs Credit Partners L.P., Foothill Capital Corporation and Foothill Income
Trust, L.P. (parties to certain of the company's debt agreements or affiliates
of such entities). The complaint alleges that the defendants violated various
state and federal laws in connection with alleged wrongdoings related to the
operation and corporate structure of the Resource Network Subsidiaries,
including, among other allegations, breach of fiduciary duty, conversion of
assets and preferential payments to the detriment of the Resource Network
Subsidiaries' estates, misrepresentation and fraud, conspiracy, fraudulent
concealment and a pattern of racketeering activity. The complaint seeks damages
in the amount of approximately $56 million and additional monetary and
non-monetary damages, including disallowance of the Debtors' claims against the
Resource Network Subsidiaries, punitive damages and attorneys' fees. The Debtors
initially objected to the complaint in the Bankruptcy Court because management
believed that the complaint constituted an attempt to circumvent the automatic
stay protecting the Debtors' estates; however, the Debtors' non-debtor
subsidiaries have no such protection and, accordingly, they are vigorously
contesting the allegations.
On June 17, 2002, the Chapter 11 trustee agreed to withdraw the Debtors'
objections to the motion of the R-Net Creditors' Committee for leave of court to
file their second amended complaint. On July 25, 2002, by stipulation between
the Chapter 11 trustee and the R-Net Creditors' Committee, the Bankruptcy Court
authorized the R-Net Creditors' Committee to file its second amended complaint.
The parties to (i) the second amended complaint, (ii) the Debtors' motion for an
order expunging the proofs of claims filed by the Resource Network Subsidiaries
and (iii) the Resource Network Subsidiaries' objections to the Debtors' proofs
of claims are proceeding with discovery under a case management order. On
January 10, 2003, the United States District Court for the District of Delaware
(the "District Court") granted motions by some, but not all, of the defendants
for that court to withdraw the adversary proceedings from the jurisdiction of
the Bankruptcy Court. Now pending before the District Court are motions by
various defendants to dismiss some or all counts of the complaint.
The Trustee's Plan proposes resolution of substantially all of the
aforementioned Resource Network Subsidiaries' matters through the Settlement
Agreement and Mutual Release arrangement (the "R-Net Settlement Agreement"),
which was executed by the Chapter 11 trustee, the Debtors, the R-Net Creditors'
Committee, the Resource Network Subsidiaries and the Resource Network
Subsidiaries' Chief Restructuring Officer (the "R-Net Restructuring Officer").
Among other things, the R-Net Settlement Agreement provides for (i) the fixing
and allowance of a Resource Network Subsidiaries' general unsecured claim
against the Debtors for $7.95 million, plus interest, under certain
circumstances, at the applicable federal judgment rate, (ii) the fixing and
allowance of the Debtors' general unsecured claim against the Resource Network
Subsidiaries for $1,000 per proof of claim filed, (iii) dismissal of the
aforementioned adversary proceeding with prejudice and (iv) mutual releases from
the parties to the R-Net Settlement Agreement. The R-Net Settlement Agreement is
subject to, and contingent upon, (i) Bankruptcy Court approval in the Bankruptcy
Cases through confirmation of the Trustee's Plan, (ii) Bankruptcy Court approval
in the Resource Network Subsidiaries' bankruptcy proceedings and (iii)
withdrawal, expungement or resolution of a certain Internal Revenue Service
proof of claim filed in the Resource Network Subsidiaries' bankruptcy
proceedings without any payments being required by the Resource Network
Subsidiaries or the R-Net Restructuring Officer. In connection with the above
mentioned conditions precedent to the effectiveness of the R-Net Settlement
Agreement, on August 12, 2003 the R-Net Restructuring Officer and the R-Net
Creditors' Committee jointly filed a motion in the Bankruptcy Court in the
Resource Network Subsidiaries' bankruptcy proceedings requesting approval of the
R-Net Settlement Agreement. Such motion is scheduled for consideration before
the Bankruptcy Court on August 29, 2003. Management cannot predict the outcome
of the confirmation hearings on the Trustee's Plan, whether the Bankruptcy Court
will approve the R-Net Settlement Agreement in the Resource Network
Subsidiaries' bankruptcy proceedings or assess the wherewithal of the parties to
comply with the other conditions precedent to the R-Net Settlement Agreement.
The Equity Committee's Plan provides that the Resource Network Subsidiaries
will receive a cash distribution on the effective date of the Equity Committee's
Plan of $7.95 million, plus a distribution of 2% of the net recovery from
certain litigation claims to be prosecuted, but not exceeding $6 million. The
Chapter 11 trustee and other parties-in-interest have objected to the Equity
Committee's Plan because, among other things, they believe such plan improperly
classifies the Resource Network Subsidiaries' claim and the contemplated
distribution to the Resource Network Subsidiaries is not fair and equitable.
Through June 30, 2003, the company incurred approximately $1.0 million in
legal fees, including legal fees associated with indemnifications of the
company's directors and officers related to the second amended complaint filed
by the R-Net Creditors' Committee. The company notified its insurance carrier of
the second amended complaint and intends to avail itself of any appropriate
insurance coverage for its directors and officers, who are also
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vigorously contesting the allegations. Management cannot reasonably estimate the
ultimate cash requirements to settle the aforementioned Resource Network
Subsidiaries' matters or any additional cash expenditures that may be required
of the company relative to the liquidation of the Resource Network Subsidiaries
through their bankruptcy proceedings. Moreover, management cannot readily
determine the amount of recoveries, if any, that the company may ultimately
receive from its insurance carrier.
Prior to the appointment of the Chapter 11 trustee, the CHC Board of
Directors approved management's request to upgrade Coram's company-wide
information systems. In connection therewith, the company entered into an
agreement whereby a new financial, materials management, procurement, human
resource and payroll (collectively the "Back Office") software package and
related licenses were procured. The total purchase price for the Back Office
software package was approximately $1.3 million. All of the Back Office modules
were operational before June 30, 2002, except for the human resource and payroll
software modules, which are scheduled to become operational on or about December
31, 2003. Additionally, management finalized negotiations with a third party
vendor for the acquisition of a software system and appropriate upgrades thereto
in order to replace the company's billing, accounts receivable, clinical and
pharmacy systems (collectively the "Front Office") and, in connection therewith,
the Chapter 11 trustee intends to file a motion in the Bankruptcy Court
requesting authorization to enter into a contract with such third party vendor.
Management expects to begin substantive implementation of the Front Office
modules during 2003. In addition to the cost of the aforementioned Back Office
software package, substantial internal and external costs have been and will
continue to be incurred to implement the remaining Back Office (human resource
and payroll modules) and Front Office software solutions, as well as, resolve
certain residual functional issues in the Back Office modules (financial,
materials management and procurement). Internal personnel time and expenses and
external vendor consultation costs aggregating approximately $6.1 million were
incurred through June 30, 2003 on these projects. Through June 30, 2003, the
company also purchased certain hardware necessary to run the new information
systems aggregating approximately $2.9 million; however, supplemental hardware
and peripheral equipment will be required in order to support the new Front
Office software suites. Although management cannot readily determine the
aggregate costs to implement the Back Office and Front Office solutions and
resolve the remaining functional issues in the current operating environment,
the company plans to manage the timing of such efforts in order to fund its
current and future information system requirements, including potentially
substantial supplemental consulting services, with its available cash balances
and cash provided by operations. Any disruptions to transaction processing may
adversely affect management's ability to report, analyze and utilize data for
purposes of making proactive business decisions and complying with various
financial reporting requirements.
On May 13, 2003, the Bankruptcy Court approved a motion requesting
authorization to execute certain real property and construction agreements that
pertain to a relocation of the company's information technology and CTI Network,
Inc. operations from their current location in Bannockburn, Illinois to the
company's existing branch location in Mount Prospect, Illinois. The Bannockburn
facility lease expires by its own terms on August 31, 2003 and, as a result of
prior consolidations, the Mount Prospect branch has excess capacity in its
facility. Management projects that aggregate costs of approximately $1.4 million
will be incurred before the end of the third quarter to complete this project
(i.e., renovate the Mount Prospect branch, build a new data center and move the
company's personnel and equipment to Mount Prospect). Through June 30, 2003 and
August 15, 2003, approximately $0.1 million and $0.5 million, respectively, was
paid by the company for such activities. Management intends to fund the
aforementioned expenditures from available cash balances and cash provided by
operations.
The Bankruptcy Court order approving the B. Braun Lease Agreement further
provided that, among other things, the company could assume an agreement with B.
Braun to purchase drugs and supplies (the "Supply Agreement"). The Supply
Agreement expires in February 2005 and, pursuant to its terms, the company is
required to purchase at least 95% of its annual volume requirements related to
twelve product categories from B. Braun. However, the company has the right to
remove any product category from the purview of the Supply Agreement if such
product category is offered by another vendor at pricing that is 10% lower, in
the aggregate, for that entire product category, provided that B. Braun waives
its right to match such pricing. The company also has the right to terminate the
Supply Agreement after sixty days written notice if B. Braun provides products
or services of a quality or technical level that fail to meet customary
standards of the medical industry. However, if the company terminates the Supply
Agreement for any other reason, it must reimburse B. Braun (i) certain
incentives previously paid to the company, which are calculated at $150,550 per
unexpired quarter under the Supply Agreement and (ii) the greater of $4.0
million or 50% of the company's purchases for the twelve months immediately
preceding the early termination date. Additionally, if it is determined that the
company does not satisfy the 95% purchasing requirement for any of the twelve
product categories and such failure is not related to a lack of product
availability, then the company is
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required to pay B. Braun an amount equal to 10% of the previous quarter's
purchases. Since the inception of the Supply Agreement, no such quarterly
shortfall has been in evidence and, while no assurances can be given, management
does not expect that such circumstances will arise during the remaining term of
the Supply Agreement. Moreover, due to the company's business relationship with
B. Braun and the advantageous drug and supply pricing enjoyed by the company,
management currently has no intentions of terminating the Supply Agreement and,
accordingly, management believes it is unlikely that the early termination
penalties will be invoked. However, if an early contract termination did occur,
the penalties, which would have aggregated approximately $5.0 million at June
30, 2003, would have a material adverse effect on the company's financial
position, liquidity and results of operations.
The Food and Drug Administration recently approved clinical use of Aralast,
which is a new drug used in the treatment of a rare genetic lung disorder known
as Alpha-1 Antitrypsyn Deficiency. Baxter Healthcare Corporation ("Baxter"), the
exclusive Aralast manufacturer, selected the company as one of only three
national distributors of such drug. As a result, Baxter and the company entered
into a purchase agreement (the "Purchase Agreement") wherein Baxter agreed to
sell Aralast to the company on favorable terms and conditions and the company
committed to minimum purchases of approximately $2.6 million (the "Minimum
Aralast Commitment") during the period June 2, 2003 through December 30, 2003.
In the event that the company fails to meet the Minimum Aralast Commitment for
any reason, other than a force majeure or Baxter's termination of the Purchase
Agreement without cause, Baxter will invoice the company a percentage of the
difference between actual purchases and the Minimum Aralast Commitment. As of
August 15, 2003, the remaining amount under the Minimum Aralast Commitment was
approximately $2.4 million. Due to the anticipated clinical demand for Aralast,
management believes that the purchases required to meet the Minimum Aralast
Commitment will reasonably match the expected needs of the company's existing
and prospective patients. However, if the Minimum Aralast Commitment is not
satisfied, the penalty would result in an unfavorable effect on the company's
liquidity and results of operations (e.g., at August 15, 2003, the maximum
potential penalty would have been approximately $240,000).
Effective December 3, 2002, the Chapter 11 trustee and the company entered
into a three year telecommunication services agreement with AT&T Corporation
("AT&T") (the "Master Agreement") whereby the company will receive advantageous
pricing and other favorable terms. Under the terms of the Master Agreement, the
company committed to minimum annual telecommunication service purchases of
approximately $2.2 million (the "Minimum Annual AT&T Commitment") commencing on
the effective date of the Master Agreement. In the event that the company fails
to meet the Minimum Annual AT&T Commitment, AT&T will invoice the company for
the difference between the Minimum Annual AT&T Commitment and the actual
services purchased during such measurement period. Under certain circumstances,
AT&T, at its sole discretion, may reduce the Minimum Annual AT&T Commitment
amount during any given period. Moreover, if certain material conditions are
satisfied, in the third year of the agreement, the company may unilaterally
terminate the contract without penalty. In the event that the Master Agreement
is terminated by the company without cause or by AT&T for cause, the company
will be required to pay an amount equal to 35% of the remaining Minimum Annual
AT&T Commitment for the period in which the termination occurs and for all
unexpired periods under the term of the Master Agreement. As of June 30, 2003,
the company satisfied its purchase obligation for the first annual measurement
period. Although no assurances can be given, management believes that the
company's telecommunication service requirements will be sufficient to meet the
Minimum Annual AT&T Commitment amounts through the remaining term of the Master
Agreement. In the event that the Master Agreement is terminated and the 35%
surcharge is invoked or the Minimum Annual AT&T Commitment is not met in a given
period, the aforementioned AT&T supplemental charges could have a material
adverse effect on the company's liquidity and results of operations.
The company reached a proposed settlement agreement with the Internal
Revenue Service (the "IRS") regarding a notice of deficiency previously issued
by such taxing authority. The proposed settlement agreement was approved by the
Joint Committee on Taxation and the Chapter 11 trustee. Moreover, management and
the IRS have agreed in principle to a deferred payment plan. If approved by the
Bankruptcy Court, the proposed settlement agreement and the deferred payment
plan would collectively result in (i) a federal tax liability of approximately
$9.9 million, (ii) interest of approximately $9.7 million at August 15, 2003 and
(iii) penalties, if applicable, to be determined by the IRS in accordance with
certain statutory guidelines. The federal income tax adjustments would also give
rise to certain incremental state tax liabilities. If the Bankruptcy Court does
not approve the proposed settlement or the deferred payment plan, the financial
position and liquidity of the company could be materially adversely affected.
Additionally, in connection with recently enacted legislation, during the year
ended December 31, 2002 the company filed refund claims with the IRS requesting
approximately $1.8 million of previously paid alternative minimum taxes, of
which approximately $0.1 million was received by the company in February 2003.
See Note 8 to
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the company's condensed consolidated financial statements for further details
regarding the proposed settlement agreement and the deferred payment plan.
State Medicaid agencies and their fiscal intermediaries periodically
conduct payment reviews or audits of claims for services provided to Medicaid
beneficiaries. In connection therewith, certain of the company's claims are
currently being reviewed by, among others, Kansas Medicaid and Rhode Island
Medicaid (see Note 10 to the company's condensed consolidated financial
statements for further details). Although management believes that the company's
billing practices are fundamentally sound and the company is in substantial
compliance with state Medicaid billing requirements, the financial impact of
Medicaid-related regulatory matters, if any, is currently unknown. In the event
that the two aforementioned Medicaid matters or similar reviews/audits by other
agencies result in adverse findings, the company could face civil, criminal
and/or administrative claims for refunds, sanctions and/or penalties in amounts
that, in the aggregate, could be material to its financial condition, results of
operations and liquidity.
The Balanced Budget Act of 1997 (the "BBA"), as amended by the Medicare,
Medicaid and SCHIP Balanced Budget Refinement Act of 1999 (the "BBRA"), required
certified home health agencies participating in Part A of the Medicare program
to post surety bonds in an amount equal to the lesser of 10% of the amount that
Medicare paid to the provider in the prior year or $50,000. The deadline for
securing such bonds has been extended indefinitely while the Centers for
Medicare & Medicaid Services ("CMS") reviews the bonding requirements. CMS has
indicated that the new compliance date will be sixty days after the publication
of the final rule. As of August 15, 2003, the company had only one Medicare Part
A certified home health provider location, which has not obtained a surety bond.
Additionally, as required by the BBA, CMS also intends to issue separate surety
bond regulations applicable to Medicare Part B suppliers. Virtually all of
Coram's branches participate as suppliers in the Medicare Part B program.
Similar bonding requirements are also being reviewed by state Medicaid programs
and at least one state requires Medicaid suppliers to maintain a surety bond.
Although there is currently no federal surety bond requirement in effect for
Medicare Part B suppliers, if such a requirement becomes effective and if Coram
is not able to obtain all of the necessary surety bonds, it may have to cease
its participation in the Medicare and Medicaid programs for some or all of its
branch locations. Depending upon the final regulations, the company may be able
to establish letters of credit for the bonding requirement in whole or in part,
however, such letters of credit may require the use of cash in order to be fully
collateralized. Management also believes that another potential source for
meeting the bonding requirements may be to obtain bonds through a qualified
insurance carrier. However, no assurances can be given that cash generated by
operations, letter of credit availability or bond availability from an insurance
carrier at a reasonable cost will satisfy these surety bond requirements when
they are finalized.
Certain administrative simplification provisions of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") require specified
healthcare entities, including the company, to only use standard medical billing
code sets and make standard electronic transactions available for all billing
transactions. These new provisions are currently scheduled to take effect no
later than October 16, 2003. These changes are having a critical impact on the
company and its market segment because no standard billing mechanisms were
available to the home infusion industry until January 2002. In order to comply
with these new provisions, it may be necessary for the company to renegotiate or
amend a significant number of its commercial payer contracts by October 16,
2003. The standard billing code sets available under the HIPAA provisions may
require that the company separate certain elements of its services, thereby
resulting in possible reductions of the overall revenue that the company may
earn under its payer contracts. Additionally, several large commercial payers
are seeking to attain HIPAA compliance by renewing their contracts with their
providers on terms and conditions that may not be favorable to the provider,
bidding out their provider services through an open proposal process,
terminating existing provider contracts, requiring providers to contract with a
third party administrator at less favorable rates and unilaterally imposing new
billing codes and fee structures on existing providers. Moreover, the company's
payers may experience difficulties and/or distractions as they strive to become
HIPAA compliant, thereby potentially disrupting the company's cash collection
and reimbursement activities. As a result of the aforementioned HIPAA compliance
activities and payer contracting initiatives, the company may not be successful
in negotiating new contracts and/or renewing existing contracts in order to
provide timely and adequate levels of reimbursement and profitability.
The company could also be impacted by Medicare reform legislation under
consideration in the United States Congress. In June 2003, the Senate and the
House of Representatives approved separate versions of sweeping legislation
that, among other things, would provide expanded Medicare prescription drug
coverage, modify payments to Medicare providers and institute administrative
reforms to improve Medicare's operations. In
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particular, both versions would modify the current Part B drug reimbursement
mechanism to further limit payments for drugs while increasing payment rates for
professional services associated with drug administration. Of particular
importance to the company are the proposed substantive Average Wholesale Price
("AWP") methodology changes in each version of the bill (for most of the drugs
that Coram provides to its patients, it is reimbursed by governmental and third
party payers according to rate schedules that are based on the AWP of the drugs
as published by commercial pricing services). As an additional mechanism to
reduce Medicare payments for physician-administered drugs, the House of
Representatives' bill would also authorize the use of competitive bidding for
Part B drugs, similar to specialty pharmacy/specialty distributor arrangements
now used by some commercial health plans. Moreover, both bills include
provisions designed to reduce Medicare reimbursement for durable medical
equipment; savings would be achieved through a seven year freeze in payments
under the Senate bill and through competitive bidding in the House of
Representatives' version. Major differences between the two versions of the bill
must be reconciled before the legislation could be signed into law. It is
uncertain whether legislation ultimately will be enacted and, if so, what
specific provisions would be adopted. Nevertheless, enactment of a Medicare
reform law similar to the legislation currently under consideration, including
substantive changes in the application of AWP for reimbursement purposes, could
have a material adverse impact on the company's Medicare business, financial
condition, results of operations and liquidity.
The company is a party to several individual provider contracts that
ultimately fall within the purview of a single national health insurance carrier
that recently commenced implementation of a national ancillary care management
program. In connection therewith, during 2002 such national health insurance
carrier terminated two provider contracts relating to the state of Illinois (one
with the company and one with a non-consolidated joint venture). During the
three months ended June 30, 2003, four additional provider contracts have been
terminated, effective October 1, 2003, with the understanding that the company,
at a minimum, must accept lower reimbursement rates in order for such contracts
to be reinstated. Management is currently considering the company's alternatives
with respect to the terminated contracts, which represented approximately 0.6%
and 1.1% of the company's consolidated net revenue for the six months ended June
30, 2003 and 2002, respectively, and approximately 2.5% and 3.1% of the
company's consolidated accounts receivable at June 30, 2003 and December 31,
2002, respectively. In June 2003, the company entered into a settlement
agreement with one of the individual providers wherein certain aged accounts
receivable were adjudicated and settlement proceeds of approximately $0.6
million were subsequently collected in July 2003. In the aggregate,
approximately 2.9% and 4.0% of the company's consolidated net revenue for the
six months ended June 30, 2003 and 2002, respectively, and approximately 6.6%
and 7.0% of the company's consolidated accounts receivable at June 30, 2003 and
December 31, 2002, respectively, were derived from the individual provider
contracts that are within the purview of this national health insurance carrier.
Management can provide no assurances that the remaining active provider
contracts associated with this national health insurance carrier will continue
under terms that are favorable to the company. Additionally, no assurances can
be given that meaningful collection/settlement activities relative to
outstanding accounts receivable will continue. The termination of additional
provider contracts and/or the inability to collect outstanding accounts
receivable from the individual healthcare plans under this national health
insurance carrier could have a materially adverse impact on the company's
results of operations, cash flows and financial condition.
Coram maintains systems and processes to collect its accounts receivable as
quickly as possible after the underlying service is rendered. Nevertheless,
there is generally a time lag between when the company pays for the salaries,
supplies and overhead expenses related to the generation of revenue and when the
company collects payments for the services rendered and products delivered.
Consequently, as the company grows its revenue related to its core and non-core
therapies, the need for working capital increases due to the timing difference
between cash received from growth in sales and the cash disbursements required
to pay the expenses associated with such sales. As a result, the amount of cash
generated from collections of accounts receivable may not be sufficient to cover
the expenses associated with the company's business growth.
Management throughout the company is continuing to concentrate on enhancing
timely reimbursement by emphasizing improved billing and cash collection
methods, continued assessment of reimbursement systems support and concentration
of the company's expertise and managerial resources into certain reimbursement
locations. In connection therewith, See Note 5 to the company's condensed
consolidated financial statements for further discussion of certain critical
reimbursement site consolidation activities. Moreover, during the three months
ended June 30, 2003 the company transitioned all active patient accounts
serviced by the Dallas, Texas reimbursement site to other reimbursement sites.
The Dallas site currently maintains a small workforce to support resolution of
certain inactive accounts from the company's other reimbursement centers. By
consolidating to fewer sites, management
65
expects to implement improved training, more easily standardize "best
demonstrated practices," enhance specialization related to payers such as
Medicare and achieve more consistent and timely cash collections. Management
believes that, in the long-term, payers and patients will receive better, more
consistent service. However, no assurances can be given that the consolidation
of the company's Patient Financial Service Centers and other related activities
initiated by management (e.g., the Dallas reimbursement site realignment, etc.)
will be successful in enhancing timely reimbursement or that the company will
not experience a significant shortfall in cash collections, deterioration in
days sales outstanding ("DSO") and/or unfavorable aging trends in its accounts
receivable.
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RELATED PARTY TRANSACTIONS
Refer to Note 4 of the company's condensed consolidated financial
statements, incorporated herein by reference, as well as, Part III and Note 11
to the audited consolidated financial statements included in Coram's Annual
Report on Form 10-K/A for the year ended December 31, 2002, incorporated herein
by reference, for further discussion of related party transactions.
RISK FACTORS
Refer to the caption "Risk Factors" under Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Coram's Annual
Report on Form 10-K/A for the year ended December 31, 2002, incorporated herein
by reference, for further discussion of certain risk factors.
ITEM 3. 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.
As of June 30, 2003, the company had outstanding long-term debt and capital
lease obligations of approximately $10.6 million, including $9.0 million of
long-term debt which matured on June 30, 2003 and bore interest at 9.0% per
annum; however, the $9.0 million was not paid on such date and the creditors'
remedies are currently stayed pursuant to the Bankruptcy Cases. Because
substantially all of the interest on the company's debt is fixed, a hypothetical
10.0% change in interest rates would not have a material impact on the company.
Increases in interest rates could, however, increase interest expense associated
with future borrowings by the company, if any. The company does not hedge
against interest rate changes. See Notes 7 and 10 to the company's condensed
consolidated financial statements for further details regarding its debt and
capital lease obligations.
The debt to equity exchange transactions described in Note 7 to the
company's condensed consolidated financial statements qualified as troubled debt
restructurings pursuant to Statement of Financial Accounting Standards No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings. In
accordance therewith and certain provisions of SOP 90-7, Financial Reporting by
Entities in Reorganization under the Bankruptcy Code, the company will not
recognize any interest expense on the remaining Series B Notes until after
confirmation of a plan or plans of reorganization by the Bankruptcy Court.
ITEM 4. CONTROLS AND PROCEDURES
The company performed an evaluation under the supervision and with the
participation of its management, including the company's Executive Vice
President, who is fulfilling the duties and responsibilities of the Chief
Executive Officer and President of the company, and the Chief Financial Officer,
of the effectiveness of the company's disclosure controls and procedures, as
such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this report. Based upon their evaluation, the company's Executive Vice
President and the Chief Financial Officer concluded that the company's
disclosure controls and procedures effectively ensure that the company records,
processes, summarizes and reports in its public disclosures, including
Securities and Exchange Commission reports, all information: (a) required to be
disclosed, (b) within the time periods specified and (c) pursuant to processes
that enable the company's management, including its principal executive and
financial officers, as appropriate, to make timely decisions regarding
disclosure.
There were no changes in the company's internal control over financial
reporting that occurred during the company's most recent fiscal quarter that
could have materially affected, or are reasonably likely to materially affect,
the company's internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Descriptions of the material legal proceedings to which the company is a
party are set forth in Note 10 to the company's condensed consolidated financial
statements contained in this report and are incorporated herein by reference.
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 be presently determined.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
A discussion of defaults and certain matters of non-compliance with certain
covenants contained in the company's principal debt agreements is set forth in
Note 7 to the company's condensed consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.1 - Purchase Agreement, dated May 29, 2003, by and between
Baxter Healthcare Corporation and Coram, Inc. for the
purchase and sale of certain therapeutics. Certain portions
of the Purchase Agreement have been omitted pursuant to a
request for confidential treatment. The entire Purchase
Agreement has been filed with the Securities and Exchange
Commission.
10.2 - Settlement Agreement and Mutual Release, dated May 2,
2003, by and among Hobart G. Truesdell, in his capacity as
Chief Restructuring Officer of Coram Resource Network, Inc.
and Coram Independent Practice Association, Inc., Coram
Resource Network, Inc., Coram Independent Practice
Association, Inc., the Official Committee of Unsecured
Creditors of Coram Resource Network, Inc. and Coram
Independent Practice Association, Inc., Arlin M. Adams, in
his capacity as Chapter 11 Trustee for the Bankruptcy
Estates of Coram Healthcare Corporation and Coram, Inc.,
Coram Healthcare Corporation and Coram, Inc. This
settlement agreement resolves certain claims and
counterclaims amongst the aforementioned parties.
31.1 - Chief Executive Officer Certification pursuant to Rule
13a-14(a) and Rule 15d-14(a) of Regulation 13a of the
Securities Exchange Act of 1934, as amended.
31.2 - Chief Financial Officer Certification pursuant to Rule
13a-14(a) and Rule 15d-14(a) of Regulation 13a of the
Securities Exchange Act of 1934, as amended.
32.1 - Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 - Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
99.1 - Chapter 11 Trustee's Amended Joint Plan of Reorganization
(incorporated by reference to Exhibit 99.1 of the
registrant's report on Form 8-K filed on July 11, 2003).
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99.2 - Second Amended Disclosure Statement With Respect To The
Chapter 11 Trustee's Amended Joint Plan Of Reorganization
(incorporated by reference to Exhibit 99.2 of the
registrant's report on Form 8-K filed on July 11, 2003).
99.3 - Second Amended Plan of Reorganization Of The Official
Committee Of Equity Security Holders Of Coram Healthcare
Corporation and Coram, Inc. (incorporated by reference to
Exhibit 99.3 of the registrant's report on Form 8-K filed
on July 11, 2003).
99.4 - Third Amended Disclosure Statement Of The Equity
Committee Of Coram Healthcare Corporation In Connection
With The Second Amended Plan Of Reorganization Of Coram
Healthcare Corporation And Coram, Inc. (incorporated by
reference to Exhibit 99.4 of the registrant's report on
Form 8-K filed on July 11, 2003).
(B) Reports on Form 8-K
On June 5, 2003, Coram Healthcare Corporation filed a report on Form
8-K announcing a restatement of its financial results as of and for the
year ended December 31, 2002. Such restatement was attributable to an
error in an enterprise valuation report, dated December 11, 2002,
prepared by certain financial advisors to the Chapter 11 trustee
overseeing the jointly administered bankruptcy cases of Coram
Healthcare Corporation and Coram, Inc.
On July 11, 2003, Coram Healthcare Corporation filed a report on Form
8-K announcing that two competing proposed plans of reorganization had
been filed in the United States Bankruptcy Court for the District of
Delaware in the jointly administered bankruptcy cases of Coram
Healthcare Corporation and Coram, Inc.
SIGNATURES
Pursuant to the requirements 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.
CORAM HEALTHCARE CORPORATION
By: /s/ SCOTT R. DANITZ
----------------------------------
Scott R. Danitz
Senior Vice President,
August 19, 2003 Chief Financial Officer and Treasurer
69
EXHIBIT INDEX
Exhibits
10.1 - Purchase Agreement, dated May 29, 2003, by and between Baxter
Healthcare Corporation and Coram, Inc. for the purchase and sale of
certain therapeutics. Certain portions of the Purchase Agreement
have been omitted pursuant to a request for confidential treatment.
The entire Purchase Agreement has been filed with the Securities and
Exchange Commission.
10.2 - Settlement Agreement and Mutual Release, dated May 2, 2003, by and
among Hobart G. Truesdell, in his capacity as Chief Restructuring
Officer of Coram Resource Network, Inc. and Coram Independent
Practice Association, Inc., Coram Resource Network, Inc., Coram
Independent Practice Association, Inc., the Official Committee of
Unsecured Creditors of Coram Resource Network, Inc. and Coram
Independent Practice Association, Inc., Arlin M. Adams, in his
capacity as Chapter 11 Trustee for the Bankruptcy Estates of Coram
Healthcare Corporation and Coram, Inc., Coram Healthcare Corporation
and Coram, Inc. This settlement agreement resolves certain claims
and counterclaims amongst the aforementioned parties.
31.1 - Chief Executive Officer Certification pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of Regulation 13a of the Securities Exchange Act of
1934, as amended.
31.2 - Chief Financial Officer Certification pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of Regulation 13a of the Securities Exchange Act of
1934, as amended.
32.1 - Chief Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 - Chief Financial Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.
99.1 - Chapter 11 Trustee's Amended Joint Plan of Reorganization
(incorporated by reference to Exhibit 99.1 of the registrant's
report on Form 8-K filed on July 11, 2003).
99.2 - Second Amended Disclosure Statement With Respect To The Chapter 11
Trustee's Amended Joint Plan Of Reorganization (incorporated by
reference to Exhibit 99.2 of the registrant's report on Form 8-K
filed on July 11, 2003).
99.3 - Second Amended Plan of Reorganization Of The Official Committee Of
Equity Security Holders Of Coram Healthcare Corporation and Coram,
Inc. (incorporated by reference to Exhibit 99.3 of the registrant's
report on Form 8-K filed on July 11, 2003).
99.4 - Third Amended Disclosure Statement Of The Equity Committee Of Coram
Healthcare Corporation In Connection With The Second Amended Plan Of
Reorganization Of Coram Healthcare Corporation And Coram, Inc.
(incorporated by reference to Exhibit 99.4 of the registrant's
report on Form 8-K filed on July 11, 2003).