<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q/A
---------------------
AMENDMENT NO. 1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
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
CORAM HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0615357
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1125 SEVENTEENTH STREET
SUITE 1500
DENVER, CO 80202
(Address of principal executive office) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (303) 292-4973
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, as of, May 14, 1996 was 40,796,074.
================================================================================
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 23,024 $ 26,735
Restricted cash................................................... 7,802 25,349
Accounts receivable, net of allowance of $63,340 and $63,839...... 131,811 153,825
Inventories....................................................... 19,166 17,798
Prepaid taxes..................................................... 23,661 9,975
Deferred income taxes, net........................................ 3,405 10,428
Other current assets.............................................. 18,656 11,935
--------- ---------
Total current assets...................................... 227,525 256,045
Property and equipment, net......................................... 23,231 29,276
Joint ventures and other assets..................................... 32,349 31,573
Other deferred costs................................................ 17,567 23,266
Goodwill, net of accumulated amortization of $39,501 and $36,915.... 339,109 347,689
--------- ---------
Total assets........................................................ $ 639,781 $ 687,849
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 37,208 $ 63,839
Current maturities of long-term debt.............................. 251,018 67,099
Deferred income taxes............................................. 9,855 10,428
Accrued merger and restructuring.................................. 24,626 27,392
Other accrued liabilities......................................... 43,848 49,865
--------- ---------
Total current liabilities................................. 366,555 218,623
Long-term debt...................................................... 261,026 439,309
Minority interest in consolidated joint ventures.................... 6,245 7,018
Other liabilities................................................... 2,364 4,859
Stockholders' equity:
Preference stock par value $.001, authorized 10,000, none
issued......................................................... -- --
Common stock, par value $.001, authorized 75,000 shares, issued
40,796 shares in 1996 and 40,369 shares in 1995................ 41 40
Additional paid-in capital........................................ 374,327 370,876
Retained earnings (deficit)....................................... (370,777) (352,876)
--------- ---------
Total stockholders' equity................................ 3,591 18,040
--------- ---------
Total liabilities and stockholders' equity.......................... $ 639,781 $ 687,849
========= =========
</TABLE>
See accompanying notes.
1
<PAGE> 3
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Net revenue............................................................ $131,625 $104,778
Cost of service........................................................ 98,159 75,609
-------- --------
Gross profit........................................................... 33,466 29,169
Operating expenses:
Selling, general and administrative expenses......................... 25,277 17,885
Provision for estimated uncollectible accounts....................... 8,752 4,013
Amortization of goodwill............................................. 4,301 2,790
Restructuring costs (benefit)........................................ -- (4,131)
-------- --------
Total operating expenses..................................... 38,330 20,557
-------- --------
Operating income (loss)................................................ (4,864) 8,612
Other income (expense):
Interest expense..................................................... (19,029) (3,436)
Other income (expense), net.......................................... 650 740
-------- --------
Income (loss) before income taxes and minority interests............... (23,243) 5,916
Income tax benefit................................................... (7,416) (1,105)
Minority interest in net income of consolidated joint ventures....... 2,074 2,432
-------- --------
Net income (loss)...................................................... $(17,901) $ 4,589
======== ========
Net income (loss) per share............................................ $ (0.44) $ 0.11
======== ========
Weighted average common shares outstanding............................. 40,652 40,939
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 4
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
------- --------
<S> <C> <C>
Net cash provided (used) by operating activities........................ $ 1,479 $ (6,416)
Cash flows from investing activities:
Purchases of property and equipment................................... (395) (1,251)
Payments for acquisition of businesses, net of cash acquired.......... (2,659) (11,638)
Proceeds from sale of businesses...................................... 984 829
Other................................................................. 269 639
------- --------
Net cash used by investing activities......................... (1,801) (11,421)
------- --------
Cash flows from financing activities:
Sales of stock, including exercise of stock options................... 180 5,361
Borrowings (repayments) of lines of credit, net....................... -- 14,180
Repayment of debt..................................................... (3,569) (1,020)
Other................................................................. -- (41)
------- --------
Net cash provided (used) by financing activities.............. (3,389) 18,480
------- --------
Net increase (decrease) in cash and cash equivalents.................... $(3,711) $ 643
======= ========
</TABLE>
See accompanying notes.
SUPPLEMENTAL INFORMATION:
Depreciation and amortization (including amortization of financing costs)
was $16,597 and $5,571 in the three-month periods ended March 31, 1996 and March
31, 1995, respectively.
Interest expense in the first quarter of 1996 consisted of $4,960 currently
payable, $7,675 with deferred payment terms and $6,394 amortization of warrants
and other debt costs. In the same period of 1995, $2,893 of interest expense was
currently payable, and $543 related to amortization of other debt costs.
3
<PAGE> 5
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. BASIS OF PRESENTATION
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared by Coram Healthcare Corporation (the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such regulations. The
condensed consolidated financial statements reflect all adjustments and
disclosures which are, in the opinion of management, necessary for a fair
presentation. All such adjustments, other than those relating to restructuring
in 1995, are of a normal recurring nature. The results of operations for the
interim periods are not necessarily indicative of the results of the full fiscal
year. For further information, refer to the consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1995.
Goodwill and Other Long-Lived Assets. Goodwill represents the excess of the
purchase price over the fair value of net assets acquired through business
combinations accounted for as purchases and is amortized on a straight-line
basis over the expected periods to be benefited. In 1995 the Company implemented
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Accordingly, the carrying value of goodwill and other long-lived assets is
reviewed quarterly to determine if any impairment indicators are present. If it
is determined that such indicators are present and the review indicates that the
assets will not be recoverable, based on undiscounted estimated cash flows over
their remaining depreciation and amortization period, their carrying value is
reduced to estimated fair market value. Impairment indicators include, among
other conditions, cash flow deficits; an historic or anticipated decline in
revenue or operating profit; adverse legal, regulatory or reimbursement
developments; accumulation of costs significantly in excess of amounts
originally expected to acquire the asset; or a material decrease in the fair
value of some or all of the assets. The Company believes that its goodwill is
defined by the relationships -- substantially all of which are
non-contractual -- with physicians, medical groups, hospitals, case managers and
managed care organizations and other referral sources to the Company in the
marketplace.
As of October 1, 1995, the Company reduced the remaining useful lives for
goodwill to 25 years because of uncertainties in the Company's business
environment and recent adverse operating results. Prior to that date, goodwill
was amortized over useful lives ranging from 30 to 40 years. The change in
estimated useful lives increased amortization expense by approximately $0.9
million during the first quarter of 1996. In the third quarter of 1995, the
Company recorded an impairment loss of $166.4 million related to goodwill
($158.1 million) and other long-lived assets ($8.3 million). This was based on a
review of each of the 51 market areas in which the Company operates its home
infusion business and separately for the lithotripsy business and each of the
Company's other businesses. The Company has continued to review goodwill and
other long-lived assets on this basis for the quarter ended March 31, 1996. The
Company believes that most of the impairment loss recorded relates to the assets
recorded as part of the acquisition of the Caremark Business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Background -- Goodwill and Other Long-Lived Assets."
The evaluation of the recoverability of goodwill is significantly affected
by estimates of future cash flows from each of the Company's market areas. If
estimates of future cash flows from operations decrease, the Company may be
required to write down its goodwill and other long-lived assets in the future.
Any such write-down could have a material adverse effect on the Company's
financial position and results of operations.
Provision for Estimated Uncollectible Accounts. Management regularly
reviews the collectibility of accounts receivable and makes adjustments to the
provision for estimated uncollectible accounts as needed to reflect current
collection and other trends and changes in assessment of realizable value.
Management believes the resulting net carrying amounts for accounts receivable
are fairly stated at each quarter-end based on all
4
<PAGE> 6
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information then available. The Company has continued to become more
sophisticated in its approach to the estimation process as it gains experience
with estimates for the consolidated entities. While management believes the
Company has made adequate provision for uncollectible accounts based on all
information available, no assurance can be given as to the level of future
provisions for uncollectible accounts, or how they will compare to the levels
experienced in the past. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Background -- Provision for
Estimated Uncollectible Accounts."
2. ACQUISITIONS AND RESTRUCTURINGS
Acquisition of Caremark Business. As further discussed in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Background -- Acquisition of Caremark Business" effective April 1,
1995, the Company acquired substantially all of the assets used in the alternate
site infusion and certain related businesses (collectively the "Caremark
Business") of Caremark Inc. ("Caremark"), a California corporation and
wholly-owned subsidiary of Caremark International, Inc. ("Caremark
International"), for $209 million in cash and $100 million aggregate principal
amount of Junior Subordinated Pay-In-Kind Notes (the "Junior Subordinated PIK
Notes"), plus assumption of specified liabilities of the Caremark Business. The
Company assumed only certain specified liabilities of the Caremark Business,
which expressly excluded any liabilities associated with the government
investigation of Caremark, which was settled by Caremark in June 1995.
The cost in excess of identifiable net assets acquired of $166.4 million
was allocated to goodwill. In the third quarter of 1995, it was determined that
the incremental goodwill added in the acquisition of the Caremark Business had
no value and a substantial portion of that goodwill was written off as part of
the impairment loss on the Company's long-lived assets. See Note 1, "Goodwill
and Other Long-Lived Assets" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Background -- Goodwill and
Other Long-Lived Assets." At the same time, the Company reduced the valuation of
the acquired receivables by an aggregate of $37.0 million and charged that
amount to operations in the third quarter of 1995 when it concluded that its
sole source of recovery was its lawsuit against Caremark. The Company filed a
complaint against Caremark on September 11, 1995. See Part II, Item 1. "Legal
Proceedings."
Other Acquisitions. During the three months ended March 31, 1995, the
Company completed six acquisitions totaling $11.6 million, net of cash acquired,
which were accounted for as purchases. Individually and in the aggregate, the
acquisitions were not considered material to the Company's financial position or
results of operations. The acquisition activity in the quarter ended March 31,
1996 was limited to the purchase of a minority interest for approximately $0.5
million.
Certain of the Company's historical purchase agreements provide for
additional contingent consideration. The amount of additional consideration, if
any, is based on the financial performance levels of the acquired companies. The
Company may be required to pay under such contingent obligations approximately
$6.3 million subject to increase based, in certain cases, on the Company or its
subsidiaries exceeding certain revenue or income targets and changes in the
market value of the Company's stock. Subject to certain elections by the Company
or the sellers, a maximum of approximately $4.6 million of contingent
obligations may be paid in cash. If these contingent payments are made, they
will be recorded as additional goodwill in the period in which the payment
becomes probable. Payments made during the quarter ended March 31, 1996 totaled
$2.2 million.
Merger and Restructuring. The operations of the Company commenced July 8,
1994 as a result of the merger of four predecessor entities (the "Four-Way
Merger"). During September 1994, the Company initiated a merger and
restructuring plan (the "Coram Consolidation Plan") to reduce operating costs,
5
<PAGE> 7
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
improve productivity and gain efficiencies through consolidation of redundant
infusion centers and corporate offices, reduction of personnel, and elimination
or discontinuance of investments in certain joint ventures and other
non-infusion facilities. Under the Coram Consolidation Plan 136 branch
facilities were closed; 20 were downsized; five corporate facilities were
consolidated into one; and, there was a reduction of approximately 700
full-time-equivalent employees.
For both the Coram and the Caremark Business Consolidation Plans (discussed
below) personnel reduction costs include severance payments, fringe benefits and
taxes related to employees to be terminated, costs of terminating executives and
buying out employment and consulting contracts, and incremental professional
fees to develop and implement the plans. Facility reduction costs consist of the
cost of fulfilling or buying out existing lease commitments on branch facilities
and corporate offices that will be closed as part of the restructuring, reduced
by any sublease income. It also includes related costs for equipment leases and
facility closure expenses. Facility reduction costs resulting in non-cash
charges consist principally of the write-down, net of any proceeds on
disposition, of operating assets that have become redundant because of the
consolidation. It also includes inventory that has no future value because of
the restructuring. For the Coram Consolidation Plan, merger costs consist of
executive severance payments directly related to the merger based on the
relevant employment agreements, investment banking fees, consulting, legal and
accounting fees and other costs incurred as a direct result of the merger.
Discontinuance costs are principally non-cash and consist of the estimated loss
on the disposal of non-core businesses.
The Company has substantially completed the consolidation process
contemplated by the Coram Consolidation Plan, and during 1995, recorded a $10.4
million restructuring benefit. Of this amount, $4.1 million was recorded in the
first quarter of 1995 related to specialized pediatric services provided by the
Company's partially owned subsidiary, Pediatric Partners, Inc. doing business as
Kids Medical Club ("Kids Medical"). As of March 31, 1996, the disposition of the
remaining non-core businesses contemplated by the Coram Consolidation Plan was
substantially completed other than the Company's interest in Surgex, Inc. Net
revenue of the Company includes revenue from non-core businesses that were
discontinued or disposed of as part of the Coram Consolidation Plan
approximating $0.3 million and $9.0 million in the quarters ended March 31, 1996
and 1995, respectively. Operating results of those non-core businesses were not
material. A substantial portion of the remaining cash expenditures relate to
severance and lease costs that will be paid in future periods. The Company may
continue to adjust amounts recorded as contingencies related to proceeds on
certain disposals of non-core business are resolved and lease buyouts and other
facility reduction costs are finalized. The Company has made total payments and
total asset disposals through March 31, 1996, as follows (in thousands):
<TABLE>
<CAPTION>
CHARGES THROUGH BALANCE AT
MARCH 31, 1996 MARCH 31, 1996
--------------------------------- ----------------------
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES
------------ -------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Merger Costs........................ $25,900 $ 600 $26,500 $2,200 $28,500
======= ======= ======= ====== =======
Personnel Reduction Costs........... 19,200 600 19,800 1,100 20,900
Facility Reduction Costs............ 8,600 21,500 30,100 2,900 33,000
Discontinuance Costs................ 0 29,900 29,900 2,300 32,200
------- ------- ------- ------ -------
Total Restructuring Costs........... $27,800 $52,000 $79,800 $6,300 $86,100
======= ======= ======= ====== =======
</TABLE>
During May 1995, the Company initiated a second restructuring plan (the
"Caremark Business Consolidation Plan") which was contemplated by the Company
prior to the acquisition of the Caremark Business. The estimated costs
associated with the Caremark Business Consolidation Plan, charged to operations
as a restructuring cost in the second quarter of 1995, aggregated $25.8 million,
consisting of
6
<PAGE> 8
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated cash expenditures of $12.4 million for personnel reduction costs and
estimated facility reduction costs of $13.4 million ($6.8 million estimated to
be cash expenditures and $6.6 million estimated to be non-cash charges).
Certain additional restructuring costs were accounted for as adjustments to
the purchase price of the Caremark Business. These costs consisted of the
personnel reduction costs of former Caremark employees of $4.8 million, the
facility lease buyout and closure expenses of former Caremark facilities of $2.7
million and vendor contract cancellation charges of former Caremark vendors of
$3.9 million. Those costs, all expected to be cash expenditures, totaled
approximately $11.4 million.
The Company has substantially completed the consolidation process
contemplated by the Caremark Business Consolidation Plan, and in the fourth
quarter of 1995, recorded a $9.2 million benefit to the $37.2 million estimated
cost recorded in the second and third quarters of 1995. A substantial portion of
the remaining cash expenditures relates to severance and lease costs that will
be paid in future periods. The Company may continue to adjust amounts recorded
as contingencies related to lease buyouts and other facility reduction costs are
finalized.
The Company has made total payments and total asset disposals through March
31, 1996, as follows (in thousands):
<TABLE>
<CAPTION>
CHARGES THROUGH BALANCE AT
MARCH 31, 1996 MARCH 31, 1996
--------------------------------- ----------------------
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES
------------ -------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Personnel Reduction Costs........... $ 9,600 $ -- $ 9,600 $ 1,000 $10,600
Facility Reduction Costs............ 3,900 3,900 7,800 9,600 17,400
------- ------ ------- ------- -------
Total Restructuring Costs........... $13,500 $3,900 $17,400 $10,600 $28,000
======= ====== ======= ======= =======
</TABLE>
Although subject to future adjustment, the Company believes it has adequate
reserves and liquidity as of March 31, 1996 to meet future expenditures related
to the Coram Consolidation Plan and the Caremark Business Consolidation Plan.
7
<PAGE> 9
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Senior Credit Facility....................................... $224,700 $227,200
Bridge Note, including accrued interest...................... 165,269 159,767
Junior convertible subordinated PIK note, due October 1,
2005, plus interest payable semiannually at 7%, convertible
into common stock at the conversion rate of $27, including
accrued interest........................................... 80,342 77,625
Junior non-convertible subordinated PIK note, due October 1,
2005, plus interest payable semi-annually at 12%, including
accrued interest........................................... 28,090 26,500
Subordinated convertible debentures, due June 30, 1996, plus
interest payable semiannually at 9%, convertible into
common stock at the conversion rate of $16.36.............. 6,767 6,618
Other obligations, including capital leases, at interest
rates ranging from 6% to 16%, collateralized by certain
property and equipment..................................... 6,876 8,698
-------- --------
512,044 506,408
Less current scheduled maturities............................ 251,018 67,099
-------- --------
$261,026 $439,309
======== ========
</TABLE>
The Company's principal credit and debt agreements were entered into on
April 6, 1995 at the time of the acquisition of the Caremark Business. The cash
paid by the Company in connection with the acquisition of the Caremark Business
and the repayment of amounts outstanding under a prior credit facility, together
with related fees and expenses, were financed through: (i) borrowings of
approximately $205 million under a Credit Agreement with Chemical Bank as Agent
(the "Senior Credit Facility") and (ii) $150 million from the issuance of a
subordinated bridge note (the "Bridge Note") to an affiliate of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"). On October 13, 1995, the
Company and its lenders under its Senior Credit Facility and its Bridge Note
agreed to a restructuring of the major terms of both agreements. The amendments
to the Senior Credit Facility postponed the first principal payment from
September 30, 1995 until March 31, 1996, provided a new $25 million credit line
(the "Overline") and re-defined certain financial covenants. The maturity date
of the Senior Credit Facility was shortened from April 6, 2000 to March 31,
1997, and the unused portion of the existing revolving debt commitments of
approximately $64.2 million was terminated. In return, the senior lenders
received warrants to purchase 2,569,342 shares of common stock of the Company
or, at the option of the lenders, 6% of the shares of Coram Inc., a wholly owned
subsidiary of the Company and the parent of the Company's operating
subsidiaries, exercisable at a nominal price over five years. The lender under
the Bridge Note agreed to defer the due date of all interest payments to March
31, 1997. This lender had previously been granted the right to receive certain
warrants on an accelerated basis (see below), and the right to appoint one
director to the Company's Board of Directors.
Under the terms of the Senior Credit Facility as amended, the Company has
$224.7 million outstanding with a final maturity date of March 31, 1997, and $25
million available, with no amounts borrowed thereunder at March 31, 1996, under
the Overline revolving credit line that matures on December 31, 1996. Interest
is based on margins over certain domestic or foreign indices. The weighted
average interest rate on the Senior Credit Facility borrowings at March 31,
1996, was 8.02%. The Senior Credit Facility is secured by the stock of all of
the Company's subsidiaries and a collateral interest in the Company's principal
bank accounts. All net
8
<PAGE> 10
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proceeds from sales of assets, other than those sold in the ordinary course of
business, and any excess cash balances, as defined, must be applied to the
Senior Credit Facility. The Senior Credit Facility contains financial covenants
and conditions limiting the Company's ability to engage in certain activities.
The principal covenants relate to maintenance of minimum revenue, minimum cash
receipts, maximum level of cash disbursements and minimum earnings before
interest, taxes, depreciation and amortization.
The warrants issued to the Company's lenders under the Senior Credit
Facility were valued at $8.0 million, their fair value at date of issuance, and
are being accounted for as interest expense over the remaining term of the
Senior Credit Facility. In the first quarter of 1996, $1.4 million was charged
to interest expense related to these warrants.
The Company has contracts expiring in September 1996 limiting its net
interest expense on $100 million of its Senior Credit Facility if the foreign
index upon which its interest rates are based rises above certain levels. At
March 31, 1996, the foreign index was approximately .53% below the contract
rate. The unamortized cost and fair value of those contracts are immaterial.
The Bridge Note was issued on April 6, 1995 to an affiliate of DLJ, as an
unsecured obligation of the Company in a principal amount of $150 million. The
Bridge Note was not repaid in full on its April 6, 1996 due date, and a Rollover
Note (the "Rollover Note") which matures on October 6, 2000 was issued for the
outstanding principal on the Bridge Note. The Bridge Note bore interest at an
annual rate based on prime rate plus a margin, 12.75% at March 31, 1996, and a
quarterly duration fee of 0.25% of the average principal amount outstanding. The
interest rate on the Rollover Note is based on various indices plus a margin
which increases by 0.25% quarterly, but not to exceed 21% per annum. The rate as
of April 6, 1996 was approximately 14.0%. Payment of interest on the Bridge and
Rollover Notes and the duration fee which had been due quarterly have been
deferred to March 31, 1997. During the quarter ended March 31, 1996, an
additional $5.1 million was accrued on the Bridge Note to DLJ for a total
unsecured obligation in the amount of $165.3 million. A funding fee of
approximately $5.0 million due upon issuance of the Rollover Note was also
deferred. The agreement pursuant to which the Bridge Note and Rollover Note were
issued contains customary covenants and events of default
In August 1995, DLJ's right to appoint one member of the Company's Board of
Directors was accelerated and such director was appointed in November 1995. As
long as the Rollover Note is outstanding, DLJ will receive warrants to purchase
up to 20% of the outstanding shares of Common stock of the Company at a nominal
exercise price in accordance with the following table. The schedule, as follows,
has been accelerated to commence December 30, 1995 and will continue on that
basis until such time as all deferred interest and duration fees (together with
all interest due thereon) have been paid in full, at which time it will revert
back to the original schedule with no return of issued warrants.
<TABLE>
<S> <C>
0-89 days (Issued December 30, 1995)................................. 0.50%
90-179 days (Issued March 29, 1996).................................. 1.00%
180-269 days......................................................... 1.00%
270-359 days......................................................... 1.50%
360-449 days......................................................... 2.00%
450-539 days......................................................... 2.50%
540-629 days......................................................... 2.50%
630-719 days......................................................... 3.00%
720-809 days......................................................... 3.00%
810 days and thereafter.............................................. 3.00%
-----
20.00%
=====
</TABLE>
9
<PAGE> 11
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrants issued to DLJ will be accounted for as interest expense. Through
March 31, 1996, warrants on approximately 0.6 million shares of the Company's
common stock have been issued with a value of $3.2 million. Interest expense
recorded during the quarter ended March 31, 1996, related to these warrants, was
$0.9 million.
The Junior Subordinated PIK Notes were issued to Caremark in connection
with the acquisition of the Caremark Business. See Note 2. Prior to April 6,
1997, interest on the Junior Subordinated PIK Notes is payable in Junior
Subordinated PIK Notes of the same type. Thereafter, interest will be payable in
cash unless such payment is precluded by subordination provisions of
indebtedness senior to the Junior Subordinated PIK Notes, in which case interest
is payable in Junior Subordinated PIK Notes of the same type. No principal or
interest payments may be made if there is a default, or an event of default, on
indebtedness senior to the Junior Subordinated PIK Notes. In the event that
there is a change in control of the Company, the holder of the Junior
Subordinated PIK Notes may require the Company to repurchase such notes at a
purchase price equal to the principal amount thereof, plus accrued interest
thereon.
The Junior Convertible Subordinated PIK Note may not be prepaid or redeemed
prior to April 6, 1998 without the written consent of the holder thereof.
Thereafter, the Junior Convertible Subordinated PIK Note is, at the option of
the Company, redeemable, in whole or in part, subject to normal redemption terms
and conditions. The Junior Convertible Subordinated PIK Note is convertible, at
the holder's option, at any time subsequent to April 6, 1996, in whole or in
part. The conversion price of the Junior Convertible Subordinated PIK Note is
$27 per share, subject to adjustment. The Company has filed a registration
statement, which is not yet effective, covering the shares of the Company's
Common Stock issuable upon conversion. The Company is required to maintain the
effectiveness of that registration statement for a three-year period following
its original effective date.
The Junior Non-Convertible Subordinated PIK Note may be prepaid or
redeemed, in whole or in part, at any time at the Company's option, without
penalty or premium, and subject to restrictions on optional redemption contained
in the Senior Credit Facility.
4. INCOME TAXES
During the three months ended March 31, 1996, the Company recorded an
income tax benefit of $7.4 million compared with a $1.1 million benefit recorded
in the comparable period of the prior year. The income tax benefit recognized in
both periods has been limited to the estimated amounts recoverable through
carryback of losses to the separate returns of the Company's predecessor
entities that were participants in the Four-Way Merger. Accordingly, the
effective income tax (benefit) rates for the three-month periods ended March 31,
1996 and 1995 differ substantially from the expected combined federal and state
income tax (benefit) rates calculated using applicable statutory rates. In 1996,
the Company has based its tax benefit recognized in the first quarter on the
expected total benefit for the year in relation to its estimated pre-tax results
for the year.
The Company has reduced its net deferred tax assets to zero by a valuation
allowance of $159.3 million to limit deferred tax assets to amounts expected to
be recovered through (a) carryback of taxable losses and resulting recovery of
income taxes previously paid by predecessor entities and (b) offset against
deferred tax liabilities that would otherwise become payable in the carryforward
period. Realization of deferred tax assets is dependent upon the ability of the
Company to generate taxable income in the future. Deferred taxes relate
primarily to accrued restructuring costs, goodwill written off, allowances for
doubtful accounts that are not deductible for income tax purposes until paid or
realized and to net operating loss carryforwards that are deductible against
future taxable income.
10
<PAGE> 12
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LITIGATION
The Company is party to several lawsuits that could, if their outcomes were
unfavorable, have a material adverse effect on the Company's financial position,
results of operations and liquidity. These lawsuits include (i) 21 civil suits
(which were consolidated into one suit) filed by individuals claiming to have
purchased and sold Common Stock during a specified period in 1995, asserting
claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 of the
Commission; (ii) two shareholders' derivative actions asserting substantially
similar factual allegations; (iii) a lawsuit filed by the Company against
Caremark Inc. and Caremark International, Inc. (collectively "Caremark"), and a
lawsuit and a cross-complaint filed by Caremark against the Company, relating to
the acquisition of the Caremark Business; and (iv) actions by plaintiffs in the
shareholder litigation which was initiated against T(2) in 1992, related to the
T(2) Settlement Agreement. The Company intends to vigorously defend itself in
these matters. Nevertheless, due to the uncertainties inherent in litigation,
the ultimate disposition of these matters cannot be presently determined. See
also Part II -- Item 1. "Legal Proceedings."
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
General. The operations of the Company, which is a Delaware corporation
commenced on July 8, 1994 as a result of the Four-Way Merger of T(2) Medical,
Inc. ("T(2)") , Curaflex Health Services, Inc., HealthInfusion, Inc., and
Medisys, Inc. (collectively, the "Merged Entities"), each of which was a
publicly-held national or regional provider of alternate site infusion therapy
and related services. Pursuant to the Four-Way Merger, which was accounted for
as a pooling of interests, each of the Merged Entities became and is now an
indirect wholly-owned subsidiary of the Company. On September, 12, 1994, the
Company acquired all of the capital stock of H.M.S.S., Inc., a regional provider
of alternate site infusion therapy, in a transaction accounted for as a
purchase. Following the merger, the Company initiated the Coram Consolidation
Plan and recorded significant non-recurring restructuring costs related to it.
The Coram Consolidation Plan, which has been substantially completed, included
consolidation of infusion centers and corporate offices, personnel reductions
and elimination or discontinuance of certain business activities. The Coram
Consolidation Plan is further described in Note 3 to the Unaudited Condensed
Consolidated Financial Statements.
Acquisition of Caremark Business. Effective April 1, 1995, the Company
acquired the Caremark Business for cash and notes. The Company assumed only
certain specified liabilities of the Caremark Business, which expressly excluded
any liabilities associated with the government investigation of Caremark which
was settled by Caremark in June 1995. The acquisition was accounted for by the
purchase method of accounting and the results of the Caremark Business have been
included in the accompanying consolidated financial statements since the date of
acquisition. See Note 2 to the Unaudited Condensed Consolidated Financial
Statements, "Acquisition of Caremark Business."
In connection with the acquisition of the Caremark Business, the Company
repaid all of its indebtedness under its then existing credit facility. The cash
paid by the Company in connection with the acquisition of the Caremark Business
and the repayment of indebtedness, together with related fees and expenses, were
financed through: (i) borrowings of approximately $205 million under the Senior
Credit Facility and (ii) $150 million from the issuance of the Bridge Note to an
affiliate of DLJ.
During May 1995, the Company initiated the Caremark Business Consolidation
Plan which was contemplated by the Company prior to the acquisition of the
Caremark Business. The Caremark Business Consolidation Plan included
consolidation of infusion centers and corporate offices, and reorganization of
the Caremark Business reimbursement function from a centralized to a
decentralized function. It also included the conversion of the Company's billing
and accounts receivable system to the Caremark Business system. The Caremark
Business Consolidation Plan, which has been substantially completed, is further
described in Note 3 to the Unaudited Condensed Consolidated Financial
Statements.
The Company commenced a comprehensive examination of its business and
operations following the end of its 1995 second quarter, which revealed that the
Caremark Business was significantly weaker than indicated by its 1994 financial
statements. The revenue of the acquired Caremark Business had declined
significantly in the second quarter of 1995 from $96.1 million (as reported by
Caremark) in the first quarter of 1995 to approximately $83.0 million in the
second quarter, or a 13.6% decline. The severity and persistence of the
underperformance of the Caremark Business and the negative impact of the June
1995 guilty plea by Caremark to criminal felony charges on the Company's
referral sources and employee morale, neither of which were expected at the time
of the acquisition, became evident in the third quarter. The Company expected
the combined business to grow and expected to realize substantial cost savings,
principally through elimination of geographically duplicative branches and
consolidation of corporate functions. However, in the third quarter of 1995, on
an annualized basis, revenue was almost one-third lower than the pro forma
combined 1994 revenue of almost $900 million. The anticipated cost savings in
the Coram Consolidation Plan and the Caremark Business Consolidation Plan have
been offset by that revenue decline, and the Company has incurred substantial
losses since the acquisition of the Caremark Business.
12
<PAGE> 14
A business plan completed by the Company at the end of the third quarter of
1995 showed operating results and cash flows far below amounts estimated at the
time the Caremark Business was acquired, causing the Company to re-examine
whether the acquisition cost of the Caremark Business would be recovered from
incremental cash flows. According to the plan, there were no such incremental
cash flows. As a result, the Company believes that it substantially overpaid for
the Caremark Business due to inaccuracies in Caremark's representations and
warranties. The Company further believes that its sole source of recovery of the
purchase price in excess of the identifiable net assets acquired, as well as its
other damages, is through its litigation against Caremark, the outcome of which
is uncertain at this time. See Note 1 to the Unaudited Condensed Consolidated
Financial Statements, "Goodwill and Other Long-Lived Assets" and "Goodwill and
Other Long-Lived Assets," below, and Part II, Item 1, "Legal Proceedings."
Business Strategy. The Company's strategy, which it has been in the process
of implementing since September of 1995, is focused on the basic factors that
could lead to profitability: revenue generation, cost reduction, quality
improvement and cash collections. To generate increased revenue, the Company is
redirecting its marketing efforts towards improving its physician relationships
in addition to developing new programs such as one-stop shopping for managed
care payors and disease-state carve-outs (i.e., vertical integration along
disease-specific categories). Cost reduction efforts are focused on field
consolidation, reduction of corporate expenses, assessment of poor performing
branches and a review of branch efficiencies. Delivery of quality service will
be closely monitored through an internal task force and more rigorous reporting.
Management is concentrating on improved reimbursement through an emphasis on
improving billing and cash collections and continued assessment of systems
support for reimbursement. While management believes the implementation of this
strategy has improved and will continue to improve the Company's operations and
financial performance, no assurances can be given as to its ultimate success.
Goodwill and Other Long-Lived Assets. At March 31, 1996 the Company had
goodwill of $339.1 million, or 53.0% of its assets. It is the Company's policy
to review the recoverability of goodwill and other long-lived assets quarterly
to determine if any impairment indicators are present. If it is determined that
such indicators are present and the review indicates that goodwill and other
long-lived assets will not be recoverable, based on undiscounted estimated
future net cash flows over their remaining depreciation and amortization period,
their carrying value is reduced to estimated fair market value. Impairment
indicators include, among other conditions, cash flow deficits; an historic or
anticipated decline in revenues or operating profits; adverse legal, regulatory
or reimbursement developments; accumulation of costs significantly in excess of
amounts originally expected to acquire the asset; or a material decrease in the
fair value of some or all of the assets. The Company performs its review for
each of the market areas in which the Company operates its home infusion
business and separately for the lithotripsy business and each of the Company's
other businesses. Most of the Company's goodwill and a significant portion of
its other long-lived assets relate to the home infusion business.
See Note 1 to the Unaudited Condensed Consolidated Financial Statements,
"Goodwill and Other Long-Lived Assets" for information on additions to goodwill
in connection with the acquisition of the Caremark Business, and the impairment
loss recorded in the quarter ended September 30, 1995.
The Company continues to closely monitor its remaining goodwill and other
long-lived assets. The evaluation of the recoverability of goodwill is
significantly affected by estimates of future cash flows from each of the
Company's market areas. If estimates of future cash flows from operations
decrease, the Company may be required to further write down its goodwill and
other long-lived assets in the future. Any such write-down could have a material
adverse effect on the financial position and results of operations of the
Company.
Provision for Estimated Uncollectible Accounts. See Note 1 to the Unaudited
Condensed Consolidated Financial Statements -- Provision for Estimated
Uncollectible Accounts for information concerning management's regular review of
the collectibility of accounts receivable.
In the third quarter of 1995, the Company charged to income an additional
provision for estimated uncollectible accounts of $20 million related to changes
in the reimbursement function and the billing and accounts receivable system and
a $37 million reduction in the carrying value of the accounts receivable
acquired from Caremark.
13
<PAGE> 15
In the first quarter of 1996, the provision for uncollectible accounts as a
percentage of net revenue was 6.6%. In the first, second, third and fourth
quarters of 1995, the provisions for uncollectible accounts, excluding the $20
million recorded in September 1995 mentioned above, aggregated 3.8%, 7.1%, 8.1%
and 8.0% of 1995 year-to-date net revenues, respectively; for the third and
fourth quarters including the $20 million additional provision, they were 12.6%
and 11.4% respectively of year-to-date net revenues. The decrease in the
provision from the fourth quarter of 1995 to the first quarter of 1996 is due to
the Company's continued efforts to improve the collectibility of its accounts
receivable. In part, the higher level of provisions in the second, third and
fourth quarters of 1995 resulted from the acquisition of the Caremark Business
as of April 1, 1995. The annual provision for estimated uncollectible accounts
recorded by Caremark International Inc. ranged from 5.1% to 7.4%, excluding the
effect of the $37.0 million adjustment to the valuation of the acquired
receivables. In contrast, the annual provision for estimated uncollectible
accounts by the companies that were parties to the Four-Way Merger generally
aggregated between 4.3% and 6.4% of net revenues in the three-year period
preceding the Four-Way Merger in July 1994.
For receivables maintained on the Caremark Business receivables system
which the Company has adopted as its primary billing system, the Company
utilizes system-generated reports which track collection activity to calculate
historical write-off percentages for specific aging categories to establish the
allowance for estimated uncollectible receivables.
Receivables originated by the former Coram branches that were not
originally billed on the Caremark Business billing system are maintained
separately on the former Coram receivables system, since it has not been
practicable to transfer these balances to the Caremark Business receivables
system. The Company has developed a methodology which was first used in the
quarter ended September 30, 1995 to derive specific estimated loss percentages
for each aging category based on information from operating and field finance
personnel to calculate the provision for estimated uncollectible accounts. Prior
to that, the allowance for estimated uncollectible accounts for accounts
receivable maintained on the former Coram receivables system had been determined
based on overall review of trends in days-sales-outstanding ("DSO"), write-offs,
and agings of the accounts receivable.
Coram Consolidation Plan and Caremark Business Consolidation Plan. In the
quarters ended September 30, 1994 and June 30, 1995, the Company recorded
significant restructuring costs related to the Coram and the Caremark Business
Consolidation Plans. The Plans and their status are described in Note 2 to the
Unaudited Condensed Consolidated Financial Statements.
The accrual in the Company's Unaudited Condensed Consolidated Balance Sheet
for estimated future cash expenditures related to the Four-Way Merger and the
Coram Consolidation Plan and Caremark Business Consolidation Plan at March 31,
1996 was $19.1 million. The Company currently estimates that future cash
expenditures related to that accrual will be made in the following periods: 56%
in 1996, 25% in 1997, 10% in 1998 and 9% in 1999 and thereafter. These estimated
amounts and the periods in which they will be spent may change based on future
experience, but the Company does not currently expect expenditures to exceed the
amount provided.
Factors Adversely Affecting Recent Operating Results. The most significant
factor affecting the Company's performance and financial condition during the
second, third and fourth quarters of 1995 and the first quarter of 1996 was the
underperformance of the Caremark Business from what the Company expected at the
time of acquisition. The revenue of the acquired Caremark Business declined
significantly after the acquisition in the second quarter of 1995. Caremark
Business revenue declined from $96.1 million (as reported by Caremark) in the
first quarter of 1995 to approximately $83.0 million in the second quarter, or a
13.6% decline. Management believes that this trend continued through the first
quarter of 1996. However, because of the consolidation of the Caremark Business
branches and the former Coram branches, the declines in Caremark business
revenues in the third and fourth quarters of 1995 and the first quarter of 1996
cannot be precisely quantified at this time.
The Company incurred substantial indebtedness to acquire the Caremark
Business, which it expected to service primarily through the operating income
and cash flow of the Caremark Business. This fact combined with the significant
underperformance of the Caremark Business materially and adversely affected the
14
<PAGE> 16
Company's financial condition and results of operations. Further, the Company
believes the guilty plea by Caremark related to criminal felony charges in June
1995 has negatively impacted revenue referral sources and employee morale
throughout the Company, further contributing to a loss of revenues. In addition,
during the first quarter of 1996, Caremark announced a settlement with private
payors with whom Caremark did business before selling the Caremark Business to
the Company. The Company believes the causes underlying the settlement have also
had an adverse effect on its business.
Other factors which adversely affected the Company's results of operations
were the Company's implementation of a policy of terminating physician
arrangements and certain businesses which it inherited from the Merged Entities
which were potentially in conflict with new federal and state laws and the
obligation of the Company's subsidiary, T(2), under its September 1994 OIG
Settlement Agreement. The Company terminated substantially all the physician
relationships it believed were inconsistent with Stark II by December 31, 1994.
Many of the other physician arrangements were terminated in the fourth quarter
of 1994 and the first quarter of 1995. Subsequently, the Company lost a number
of historical referral sources, eliminated unprofitable contractual
relationships, and sold or discontinued non-strategic or unprofitable
businesses, which, when combined with the loss of the terminated businesses, has
adversely affected revenues from the first quarter of 1995 to the first quarter
of 1996. In addition, the Company has experienced ongoing pricing pressures in
its core infusion business as a result of a continuing shift in payor mix from
private insurance to managed care payors and intense competition among infusion
providers.
To date, the Company's arrangements with managed care organizations have
mostly been on a discounted fee-for-service basis; the Company does not
currently have any significant capitated arrangements. The Company has also
experienced a disruption in certain relationships as a result of its headcount
reductions and consolidation. Further, the Company has experienced increased
competition from hospitals and physicians who have sought to increase the scope
of services through their offices, including services similar to those offered
by the Company. There can be no assurance that these factors will not continue
to have an adverse effect on the financial position, results of operations and
liquidity of the Company.
In addition, the Company has experienced modest downward pricing pressures
in its lithotripsy operations. These operations may continue to experience
pricing pressures in the future. HCFA has issued a proposed rule that would, if
implemented, significantly reduce the amount Medicare would reimburse its
beneficiaries for the cost of lithotripsy procedures performed in an ambulatory
surgery center or on an outpatient basis at a hospital. Such a proposal might
result in similar efforts by other third-party payors to limit reimbursement for
lithotripsy procedures.
To counter the above factors, the Company completed a major restructuring
of the terms of its debt in October 1995 and has adopted a business plan, as
discussed above, focused on the basic factors that could lead to profitability
for the Company: revenue generation, cost reduction, quality improvement and
cash collections. While management believes the implementation of this business
plan will improve the Company's operations and financial performance, no
assurances can be given as to its ultimate success.
15
<PAGE> 17
RESULTS OF OPERATIONS
CERTAIN QUARTERLY COMPARISONS
FIRST QUARTER ENDED MARCH 31, 1996 COMPARED WITH FOURTH QUARTER ENDED DECEMBER
31, 1995
The following summarizes the Company's results of operations for the
quarters ended March 31, 1996 and December 31, 1995 (unaudited; in thousands,
except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Net revenue.................................................. $131,625 $153,715
Cost of service.............................................. 98,159 116,588
-------- --------
Gross profit................................................. 33,466 37,127
Operating expenses:
Selling, general and administrative expenses............... 25,277 32,990
Provision for estimated uncollectible accounts............. 8,752 12,333
Amortization of goodwill................................... 4,301 4,820
Restructuring costs (benefit), net......................... -- (15,203)
-------- --------
Total operating expenses........................... 38,330 34,940
-------- --------
Operating income (loss)...................................... (4,864) 2,187
Other income (expense):
Interest expense........................................... (19,029) (18,116)
Other income (expense), net................................ 650 631
-------- --------
Loss before income taxes and minority interests.............. (23,243) (15,298)
Provision (benefit) for income taxes....................... (7,416) 156
Minority interest in net income of consolidated joint
ventures................................................ 2,074 2,195
-------- --------
Net loss..................................................... $(17,901) $(17,649)
======== ========
Net loss per share........................................... $ (0.44) $ (0.44)
======== ========
Weighted average common shares outstanding................... 40,652 40,369
======== ========
</TABLE>
Net Revenue. Net revenue for the first quarter of 1996 decreased by $22.1
million or 14.4% compared with the fourth quarter of 1995. The home infusion
therapy business accounted for the majority of this decrease. This was primarily
due to an approximate 7.0% decrease in patient census, caused by the loss of
certain contracts and a decrease in referrals. The Company has also continued to
experience pricing pressures in its home infusion therapy business and also
experienced an unfavorable shift in payor mix from private insurance to managed
care payors (see below). In addition, the Company has continued to eliminate
unprofitable contractual relationships and has sold or discontinued
non-strategic or unprofitable businesses. See "Factors Adversely Affecting
Recent Operating Results."
The following table sets forth the approximate percentages of the Company's
net revenue attributable to private, governmental and managed care payors,
respectively, for the first quarter of 1996 and the fourth quarter of 1995:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Private Insurance and Other Payors........................... 39% 41%
Managed Care Organizations................................... 34% 32%
Medicare and Medicaid Programs............................... 27% 27%
--- ---
Total.............................................. 100% 100%
</TABLE>
16
<PAGE> 18
Gross Profit. Gross profit for the first quarter of 1996 decreased $3.7
million or 9.9% compared with the fourth quarter of 1995. However the gross
profit percentage improved from 24.2% of net revenue in the fourth quarter of
1995 to 25.4% in the first quarter of 1996. This improvement is primarily due to
a $5.7 million or 10.8% decrease in drugs and supplies expense.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") decreased $7.7 million or 23.4% for the first
quarter of 1996 compared with the fourth quarter of 1995. The decrease is due
primarily to the Company's continuing strategy to cut corporate and field costs.
See "Business Strategy." In addition, the first quarter of 1996 included a
non-recurring $1.6 million gain on the disposal of non-core businesses as
compared with a $1.4 million loss on the disposal of a branch recorded in the
fourth quarter of 1995.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $8.8 million, or 6.6% of net revenue for the quarter
ended March 31, 1996 compared to $12.3 million, or 8.0% of net revenue for the
quarter ended December 31, 1995. The decrease in the provision is due to the
Company's continued efforts to improve the collectibility of its accounts
receivable. This is evidenced by a decrease in net DSO from 98 days in the
fourth quarter of 1995 to 91 days in the first quarter of 1996.
Operating Income (Loss). The Company recorded an operating loss of $4.9
million for the first quarter of 1996 compared to operating income of $2.2
million in the fourth quarter of 1995. Eliminating the effect of a $15.2 million
restructuring benefit related to the restructuring and merger costs of the Coram
and Caremark Consolidation Plans recorded in the fourth quarter of 1995, the
operating results improved by $8.2 million from the fourth quarter of 1995 to
the first quarter of 1996.
Provision (Benefit) for Income Taxes. During the first quarter of 1996, the
Company recorded a tax benefit of $7.4 million versus a $0.2 million tax expense
in the fourth quarter of 1995. The 1996 benefit is based on a current estimate
of 1996 carryback benefits available in relation to estimated pre-tax results
for the year.
Net Loss. Net loss for the first quarter of 1996 was $17.9 million compared
to $17.6 for the fourth quarter of 1995. Eliminating the effects of the $15.2
million restructuring benefit recorded in the fourth quarter of 1995, the net
loss decreased by $15.0 million. This was due primarily to a $5.3 million
decrease in SG&A expenses, a $3.6 million decrease in the provision for
uncollectibles and an income tax benefit of $7.4 million recorded in the first
quarter of 1996.
FIRST QUARTER ENDED MARCH 31, 1996 COMPARED WITH FIRST QUARTER ENDED MARCH 31,
1995.
Net Revenue. Net revenue for the first quarter of 1996 increased by $26.8
million or 25.6% compared with the first quarter of 1995. The acquisition of the
Caremark Business accounted for the increase. However, on a pro forma combined
basis including the Caremark Business in the first quarter of 1995, as reported
by Caremark, net revenue decreased 34.5% from the first quarter of 1995 to the
first quarter of 1996 primarily as a result of the factors discussed above under
"Factors Adversely Affecting Recent Operating Results." The increase was also
offset by the sale or discontinuance of non-strategic or unprofitable businesses
of approximately $11.0 million and the elimination of unprofitable contractual
relationships since the beginning of 1995.
Gross Profit. Gross profit for the first quarter of 1996 increased $4.3
million or 14.7% compared with the first quarter of 1995. The acquisition of the
Caremark Business accounted for the increase. However, on a pro forma combined
basis including the Caremark Business in the first quarter of 1995, as reported
by Caremark, gross profit decreased 32.2% for the reasons discussed under the
caption "Factors Adversely Affecting Recent Operating Results."
Selling, General, and Administrative Expenses. SG&A increased $7.4 million
or 41.3% for the first quarter of 1996 compared with the first quarter of 1995.
The increase is due to the acquisition of the Caremark Business. However, on a
pro forma combined basis including the Caremark Business in the first quarter of
1995 as reported by Caremark, SG&A expenses decreased $6.8 or 21.2%. This is due
primarily to the Company's continuing strategy to cut corporate and field costs.
See "Business Strategy." In addition the first quarter of 1996 included a
non-recurring $1.6 million gain on the disposal of non-core businesses.
17
<PAGE> 19
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $8.8 million, or 6.6% of net revenue for the quarter
ended March 31, 1996 compared to $4.0 million, or 3.8% of net revenue for the
quarter ended March 31, 1995. The increase in the provision is due primarily to
the higher level of revenue and refinements in the Company's evaluation process.
Amortization of Goodwill. Amortization of goodwill increased $1.5 million
from 1995 primarily as a result of shortening goodwill amortization lives to 25
years.
Restructuring Costs. A benefit of $4.1 million was recorded to
restructuring costs related to the Coram Consolidation Plan in the first quarter
of 1995 as a result of the sale of Kids Medical.
Operating Income (Loss). The Company recorded an operating loss of $4.9
million for the first quarter of 1996 compared to operating income of $8.6
million in the first quarter of 1995. The decrease is due primarily to lower
gross margins, higher SG&A expenses, higher provisions for uncollectible
accounts and higher amortization of goodwill in the first quarter of 1996
compared to the first quarter of 1995.
Other Income (Expenses). Interest expense increased by $15.6 million for
the first quarter of 1996 compared with the same period in 1995 due to increased
borrowings by the Company to finance acquisitions, merger costs and working
capital needs.
Provision (Benefit) for Income Taxes. During the first quarter of 1996, the
Company recorded a tax benefit of $7.4 million, as compared with a $1.1 million
benefit in the same period of the prior year.
Net Loss. Net loss for the first quarter of 1996 increased by $22.5 million
compared with the same period in 1995. The increase was primarily due to the
$15.6 million increase in interest expense, and the generally higher level of
expense in relation to revenue in 1996 than 1995 (discussed above). This was
partially offset by an increase in the tax benefit recorded from $1.1 million in
the first quarter of 1995 to $7.4 million in the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at March 31, 1996, were $23.0
million (excluding restricted cash of $7.8 million which consists principally of
cash held by partnerships that may only be used for partnership operations).
During the three months ended March 31, 1996, the Company generated cash
flow from operations of $1.5 million compared with negative cash flow of $6.4
million for the three months ended March 31, 1995 due to improved collections on
accounts receivable, and decreased disbursement levels. Cash used by investing
activities was $1.8 million for the three months ended March 31, 1996 compared
to $11.4 million for the three months ended March 31, 1995 due to lower business
acquisitions and earn-out agreements. Cash used by financing activities was $3.4
million for the three months ended March 31, 1996, compared with cash provided
of $18.5 million for the three months ended March 31, 1995, due to repayment of
borrowings under the Senior Credit Facility in 1996 as compared with debt
borrowings in 1995.
As of March 31, 1996, the Company does not have any material commitments
for capital expenditures.
The Company believes that it has adequate working capital to meet its cash
requirements through March 31, 1997, provided that the objectives in the
business plan are achieved. The failure of the Company to achieve the objectives
set forth in the business plan could have a material adverse affect on the
Company's financial position, results of operations and liquidity. Moreover, it
may still be necessary for the Company to arrange additional equity or debt
financing or make additional sales of non-core assets, including its lithotripsy
businesses, in order to meet scheduled maturities of principal and interest
commencing December 31, 1996. There can be no assurance that such financing will
be available to the Company.
On March 30, 1996, the Company sold its ownership interest in a physician
practice and as of March 31, 1996 had substantially terminated its physician
practice management services operation. Revenue from these businesses was $17.9
million and the operating loss was $1.3 million in 1995. Net proceeds of
approximately $7.6 million were applied as a prepayment in early April of the
Company's debt payment due April 30, 1996.
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The Company is currently evaluating strategic alternatives concerning its
lithotripsy business and has engaged an investment bank for that purpose. No
agreement or understanding currently exists to divest the lithotripsy business,
however. The lithotripsy business had net revenue and pre-tax income of $12.2
million and $3.6 million for the first quarter of 1996. No assurance can be
given as to whether the business will be sold or the proceeds that may be
realized. Proceeds realized, if any, will be applied to reduce amounts
outstanding under the Company's Senior Credit Facility.
Joint venture agreements within the Company's lithotripsy operations
contemplate that, in certain situations, the Company would be required to
repurchase the minority interests in such joint ventures. During 1995, the
Company purchased one partnership minority interest for $9.0 million and in the
first quarter of 1996, the Company acquired the minority interest in one
additional partnership for approximately $.5 million in cash. The Company has
also agreed to acquire the minority interest in one additional partnership,
subject to the consent of the Company's lenders for approximately $4.2 million
in cash or shares of Company's Common Stock.
FUTURE HEALTH CARE PROPOSALS AND LEGISLATION
In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would effect
major changes in the health care system, either nationally or at the state
level. Among the proposals under consideration are various insurance market
reforms, forms of price control, expanded fraud and abuse and anti-referral
legislation and further reductions in Medicare and Medicaid reimbursement. The
Company cannot predict whether any of the above proposals or any other proposals
will be adopted, and if adopted, no assurance can be given that the
implementation of such reforms will not have a material adverse effect on the
business of the Company.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1995, the Company and certain of its officers and directors were
named as defendants in 21 civil suits filed on behalf of individuals claiming to
have purchased and sold Coram Common Stock during the time period from
approximately February 16, 1995 through August 11, 1995. The suits were filed in
the United States District Court for the District of Colorado and have been
consolidated into one suit captioned, In Re: Coram Healthcare Corporation
Securities Litigation, Master File No. 95-N-2074. The complaint seeks
certification of a plaintiff's class. In general, the complaints allege that the
defendants made false and misleading statements to the public regarding, among
other things, projected earnings, anticipated cost savings, and proposed
mergers. The complaints assert claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 of the Securities
and Exchange Commission, and seek unspecified compensatory damages, attorneys'
fees and costs. The Company will seek coverage under existing directors and
officers insurance policies for any settlements, judgments, and costs of defense
in connection with these cases, within outstanding policy limits. There can be
no assurance, however, that such insurance coverage will be adequate to cover
all potential liabilities and costs that may be incurred.
On November 2, 1995, a shareholder derivative suit captioned Martin J.
Siegal v. James Sweeney, et al., and Coram Healthcare Corporation, Civil Action
No. 14646 was filed in the Court of Chancery of the State of Delaware asserting
substantially similar factual allegations as the suits described in the
preceding paragraph, and seeking a judgment against the individual defendants to
account to Coram for all damages sustained by Coram as a result of their alleged
actions.
On September 11, 1995 as amended on October 6, 1995, the Company filed suit
against Caremark Inc. and Caremark International, Inc. (collectively,
"Caremark") alleging fraudulent misrepresentations of the value of accounts
receivable and amounts of revenues, concealment of important information
concerning a criminal investigation of Caremark's business practices, and other
material misrepresentations and breaches of contract terms. The suit seeks
relief in the form of damages, including damages to the Company's business
resulting from the misrepresentations and breaches by Caremark. In the
complaint, filed in the Superior Court
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of the State of California in and for the City and County of San Francisco, the
Company alleges that Caremark used improper accounting practices that resulted
in overstating Caremark's revenues. The complaint further alleges that Caremark
falsely represented that the OIG investigation involving Caremark was not going
to harm the value of the Caremark Business sold to the Company.
The Company's complaint notes that Caremark represented that it had net
assets on December 31, 1994 of $329.3 million, including $140.2 million in
accounts receivable and $200.1 million in goodwill and that its financial
statements presented fairly in all material respects the financial position and
results of operations. The Company alleges in its complaint that these
representations, among others, were false, giving rise to claims for breach of
contract and fraud. The Company seeks compensatory and punitive damages. A trial
date on the Company's claims has been set for February 1997.
On October 12, 1995, Caremark Inc. and Caremark International, Inc. filed
suit against the Company in the United States District Court for Northern
District of Illinois (File No. 95-C-5878) alleging fraudulent misrepresentation
in its purchase of the Caremark Businesses and seeking damages of at least $100
million and punitive damages. That suit was dismissed on December 22, 1995. The
matter is now on appeal. On January 17, 1996, Caremark Inc. filed a
cross-complaint against the Company in the Superior Court of the State of
California in and for the City and County of San Francisco (File No. 972431)
stating allegations similar to those in the Illinois suit and seeking damages of
at least $150 million and punitive damages.
On May 19, 1995, a judgment was entered dismissing with prejudice the class
action shareholder litigation which was initiated against T(2) in 1992. Based on
the terms of the settlement, the Company paid the shareholder class $25.0
million in cash (of which approximately $7.8 million was contributed by the
Company's insurance carriers), and issued warrants to acquire an aggregate of
approximately 2.5 million shares of Common Stock at an exercise price of $22.25
per share. On August 29, 1995, the plaintiffs filed a Motion to Enforce
Stipulation of Settlement in which they alleged that the value of the warrants
for Coram Common Stock which they received pursuant to the settlement had been
artificially inflated during the period of settlement negotiations due to the
alleged fraud of the Company and certain of its officers and directors. On
October 12, 1995, the court denied the Motion. Plaintiffs filed a Notice of
Appeal from the Court's Order with the Eleventh Circuit Court of Appeals on
November 3, 1995 which the Company is seeking to have dismissed. The Company
intends to vigorously oppose the appeal.
On November 21, 1995, a separate action seeking substantially similar
relief against the Company and certain of its current or former officers and
directors was filed in the United States District Court for the Northern
District of Georgia on November 21, 1995: William Hall and Barbara Lisser v.
Coram Healthcare Corporation, et al., (File No. 1:950-CV-2994). This action was
brought on behalf of a purported class of plaintiffs who were entitled to
receive warrants pursuant to the settlement of the T(2) shareholder litigation
described above. Plaintiffs filed an amended complaint on February 28, 1996, in
which they allege that the defendants made false and misleading statements which
caused a fraud on the market and artificially inflated the price of the
Company's Common Stock during the period from August 1994 through August 1995.
The complaint alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, fraud and breach of the covenant of good faith and fair
dealing. Plaintiffs seek compensatory damages reflecting the difference in value
between the warrants as issued with the trading price of the Company's Common
Stock at its actual price and the same number of warrants at the same exercise
price with the Company's Common Stock trading at its alleged true value. The
defendants filed a motion to dismiss the complaint on March 13, 1996.
On March 29, 1996, a shareholder derivative suit captioned Nirmala Shevde,
on behalf of Coram Healthcare Corporation v. James Sweeney, et al., File No.
96-N-722, was filed in the United States District Court for the District of
Colorado. The complaint sets forth substantially the same allegations as those
made in the derivative lawsuit previously filed in Delaware, and seeks
substantially similar relief.
The Company intends to vigorously defend itself in these matters.
Nevertheless, due to the uncertainties inherent in the early stages of
litigation, the ultimate disposition of the litigation described in the
preceding paragraphs cannot presently be determined. Accordingly, no provision
for any loss or recovery that may result
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upon resolution of the suits has been made in the consolidated financial
statements. An adverse outcome could be material to the financial position,
results of operations and liquidity of the Company.
Since late 1993, the SEC has been conducting a formal investigation into
the events that led to the restatement of T(2)'s financial statements for the
periods ended December 31, 1992 and March 31, 1993 and certain other matters.
The SEC has subpoenaed certain information and T(2) has responded.
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
Company's financial position and results of operations and liquidity of the
Company.
ITEM 2. CHANGE IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit
<TABLE>
<S> <C>
* 27 -- Financial Data Schedule
* 99.1 -- Fifth Amendment to Credit Agreement Dated as of February 6, 1996,
including Exhibit A -- Subsidiaries of Coram Healthcare Corporation.
* 99.2 -- Sixth Amendment to Credit Agreement Dated as of April 19, 1996,
including Exhibit A -- Subsidiaries of Coram Healthcare Corporation.
</TABLE>
- ---------------
* Previously Filed.
(B) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORAM HEALTHCARE CORPORATION
By: /s/ RICHARD M. SMITH
Richard M. Smith
Chief Financial Officer
June 5, 1996
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