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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 3
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994 Commission file number 1-11343
CORAM HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0615337
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1125 SEVENTEENTH STREET, 15TH FLOOR 80202
Denver, Colorado (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 292-4973
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock ($.001 par value per share) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. / /
BASED ON THE CLOSING PRICE ON MARCH 20, 1995, THE AGGREGATE MARKET
VALUE OF COMMON STOCK HELD BY NONAFFILIATES OF THE REGISTRANT WAS $1,007.8
MILLION.
THE NUMBER OF COMMON SHARES OUTSTANDING OF THE REGISTRANT WAS
39,465,677 AS OF MARCH 20, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED BY PART III IS INCORPORATED BY REFERENCE FROM
THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE COMMISSION
PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER THE END OF THE FISCAL
YEAR COVERED BY THIS REPORT.
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PART I
ITEM 1. BUSINESS.
GENERAL
Coram Healthcare Corporation, a Delaware corporation ("Coram" or the
"Company"), is currently the second largest provider of alternate site (outside
the hospital) infusion therapy and related services in the United States,
operating 140 branches located in 38 states. Infusion therapy involves the
intravenous administration of anti-infective, chemotherapy, pain management,
nutrition, and other therapies. Other services offered by the Company include
the provision of lithotripsy, non-intravenous infusion products and physician
support services. On January 29, 1995, the Company entered into an agreement to
acquire the alternate site infusion business of Caremark International Inc. (the
"Caremark Business.") Upon the consummation of the acquisition of the Caremark
Business, the Company will become the largest provider of alternate site
infusion therapy services in the United States, with the capability of providing
services to approximately 96% of the United States population.
The Company was formed on July 8, 1994 pursuant to a merger (the
"Merger") by and among T(2) Medical, Inc. ("T(2)"), Curaflex Health Services,
Inc. ("Curaflex"), Medisys, Inc. ("Medisys") and HealthInfusion, Inc.
("HealthInfusion"), each of which was a publicly-held national or regional
provider of home infusion therapy and related services. The Merger enabled the
Company to become a national provider of home infusion and other alternate site
health care services. On September 12, 1994, the Company further broadened its
geographic coverage by acquiring H.M.S.S., Inc. ("HMSS"), a leading regional
provider of home infusion therapies based in Houston, Texas. The Company is in
the process of completing a branch and corporate office consolidation of its
five predecessor companies (the "Coram Consolidation Plan") which is expected
to result in significant annual cost savings and operating efficiencies. The
Company expects to implement a similar branch office and consolidation program
after the consummation of the acquisition of the Caremark Business (the
"Caremark Consolidation Plan"), resulting in additional cost savings and
operating efficiencies. The Company is led by a newly formed management team
with extensive background in the health care industry, including James M.
Sweeney, Chairman and Chief Executive Officer.
DELIVERY OF ALTERNATE SITE HEALTH CARE SERVICES
General. Infusion patients are generally referred to the Company
following diagnosis of a specific disease or upon discharge from a hospital.
Either the patient's physician or a managed care payor will generally determine
to which infusion company a patient is referred. The referring physician will
generally determine whether the patient is a candidate for home infusion
treatment or
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outpatient infusion therapy. Because drugs administered intravenously tend to be
more potent and complex than oral drugs, the delivery of intravenous drugs
generally requires patient training, specialized equipment and periodic
monitoring by skilled nurses. Most therapies require either a gravity-based flow
control device or an electro-mechanical pump to meter the drugs. Some therapies
are administered continuously; most however, are taken for a given number of
hours per day. The Company's nurses and pharmacists work with the patient's
doctor to track the patient's condition and update the therapy as necessary.
Treatments can last from a few days to years.
Branch Facilities. The delivery of infusion services is coordinated
through regional infusion centers or "branches," whose functions include (i)
patient intake (usually physician-based), (ii) a pharmacy/mixing facility
staffed by pharmacists and pharmacy technicians, (iii) materials management,
including drug and supply inventory and delivery, (iv) billings, collections and
benefit verification, (v) sales to local referral services, including doctors,
hospitals and payors and (vi) general management. The Company's branch
facilities typically are leased and consist of 2,000 to 20,000 square feet of
office space in suburban office parks in close proximity to major medical
facilities. A typical branch has a fully equipped pharmacy, offices for
administrative personnel and a small storage warehouse. Facilities are staffed
with three to fifteen full-time employees, and a typical branch includes a
manager, a licensed pharmacist, registered nurses and sales and administrative
personnel. Each facility serves the metropolitan area in which it is located,
generally within a two-hour driving radius, as well as outlying locations where
it can arrange appropriate nursing services. Satellite facilities are also used.
These smaller centers contain limited supplies and pharmacy operations, and are
used as dispatch centers serving a specified geographical area. The Company
currently has 40 full centers and 100 satellite centers.
In-Home Patient Care. Before accepting a patient for home infusion
treatment, the staff of the local branch works closely with the patient's
physician or clinicians and hospital personnel in order to assess the patient's
suitability for home care. This assessment process includes an analysis of the
patient's physical condition and of social factors such as the stability of the
patient's home life and the availability of family members or others who can
assist in the administration of the patient's therapy, if necessary. It also
includes a review of compliance with the requirements of the patient's insurance
carrier.
When a patient's suitability for home care has been confirmed, the
patient and the patient's family (or others) receive training and education
concerning the therapy to be administered, including proper infusion technique
and care and use of intravenous devices and other equipment used in connection
with the therapy. Assessment and training are generally performed by the
Company's nurses.
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Prior to the patient receiving treatment services from the Company, the
treating physician devises the patient's plan of care and transmits it to the
local branch's clinical support team, including its nurses and pharmacists. This
team will work with the treating physician to administer the plan of care and
monitor the patient's progress. Throughout the patient's therapy, the local
branch's clinical support team will regularly provide the treating physician
with reports on the patient's condition, allowing the treating physician to play
an active role in the patient's treatment. The treating physician always remains
responsible for the patient's care, including changing the patient's plan of
care to meet the patient's needs and handling patient emergencies.
Upon the patient's arrival home, a nurse from the local branch
typically oversees the administration of the patient's first home infusion
treatment. Thereafter, the frequency of nursing visits depends upon the
particular therapy of the patient involved. During these subsequent visits, the
nurse may check and adjust the patient's infusion site, intravenous lines and
related equipment, obtain blood samples, change the pump settings and/or drug
administration after consulting with the physician and assess the patient's
condition and compliance with the plan of care. The patient's nutrition supplies
and prescription drugs are typically delivered on a weekly basis, depending on
the therapy and the particular drugs being used. Nurses will visit the patient
as needed to monitor the therapy, draw blood tests, check wounds and catheter
insertion points, and check the patient's overall medical condition.
The treating physician remains actively involved in monitoring his or
her patient's treatment by devising the patient's initial plan of treatment,
monitoring the plan's administration and revising the plan as necessary. In
addition, each branch has a medical advisory board comprised of local physicians
who review quality assurance and patient services issues and consult with the
Company on maintaining and improving its quality of care and patient service at
the local level.
Outpatient Facilities. The Company's ambulatory outpatient infusion
therapy centers have proven to be synergistic with its core home infusion
therapy business. Physicians use outpatient facilities to treat their patients
when the patient does not require hospitalization, but is not an ideal candidate
for home care because of severity of illness, complexity of therapy or
environmental concerns. Patients report to the facility for administration of
the required therapy and return home that day. Therapies commonly administered
at outpatient facilities include first dose antibiotics, complex or lengthy
chemotherapy regimens and transfusion of both red blood cells and platelets.
Other procedures may include the insertion of long line venous catheters,
aerosol therapies for prophylaxis and instruction related to such therapies.
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PRODUCTS AND SERVICES OF THE COMPANY
Infusion Therapy. The Company provides a variety of infusion therapies,
principally anti-infective therapy, parenteral nutrition, chemotherapy and pain
management therapy. The initiation and duration of these therapies is determined
by a physician based upon a patient's diagnosis, treatment plan and response to
therapy. Certain therapies, such as anti-infective therapy, are generally used
in the treatment of temporary conditions such as infections, while others, such
as parenteral nutrition, may be required on a long-term or permanent basis. The
infusion therapies are either administered at the patient's home by an employee
of the Company or at a regional outpatient facility operated by the Company. In
patient groups such as immune repressed patients (e.g., AIDS/HIV, cancer and
transplant patients) anti-infective therapy must be provided episodically over
the duration of the primary disease or for the remainder of the patient's life.
The following table sets forth the aggregate percentages of patient
revenues derived by the Company from the designated types of infusion therapies
during the year ended December 31, 1994:
<TABLE>
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Anti-Infective...................................................... 40%
Parenteral and Enteral Nutrition.................................... 27%
Chemotherapy........................................................ 11%
Pain Management..................................................... 10%
Other Therapies..................................................... 12%
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Total............................................................... 100%
====
</TABLE>
Anti-Infective Therapy. Anti-infective therapy is the infusion of
antibacterial, anti-viral or anti-fungal medications into the patient's
bloodstream for the treatment of a variety of infectious diseases, such as
osteomyelitis (bone infections), bacterial endocarditis (infection of the heart
valves), wound infections, infections associated with AIDS and infections of the
kidneys and urinary tract. Generally, intravenous anti-infection drugs are
delivered through a peripheral catheter inserted in a vein in the patient's arm
and are generally more effective when infused directly into the bloodstream than
when taken orally.
Parenteral and Enteral Nutrition. Total parenteral nutrition therapy or
"TPN" involves the intravenous feeding of life-sustaining nutrients to patients
with impaired or altered digestive tracts due to a gastrointestinal illness or
condition, such as an intestinal obstruction or inflammatory bowel disease. The
therapy is administered through a central catheter, surgically implanted into a
major blood vessel to introduce the nutrient solution into the bloodstream. The
nutrient solutions may contain amino acids, dextrose, fatty acids, electrolytes,
trace minerals and vitamins. In many cases, the underlying illness or condition
from which parenteral nutrition patients suffer is recurrent in nature,
requiring periodic re-hospitalization for treatment followed by resumption of
parenteral nutrition at home. Some patients must continue this type of therapy
for life. Enteral nutrition therapy is administered to patients who cannot eat
as a result of an
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obstruction to the upper gastrointestinal tract or other medical condition.
Enteral nutrition therapy is often administered over a long period, generally
for more than six months.
Chemotherapy. Chemotherapy is the administration of cytotoxic drugs to
patients suffering from various types of cancer either alone or as adjuvant (an
immunological agent that increases the antigenic response) to other therapies
such as radiation or surgery. The Company has been advised that breast, lung,
colon, prostate and ovarian cancer, among others, are most conducive to
outpatient chemotherapy treatment. Chemotherapy generally is administered
periodically for several weeks or months. A majority of the nurses employed by
the Company are certified to administer chemotherapy. The nature of drugs that
are used to treat cancer is such that side effects such as nausea and amnesia
occur in most patients. This requires the administration of additional agents to
treat those side effects.
Pain Management Therapy. Pain management therapy is the administration
of analgesic drugs to patients suffering from acute or chronic pain. It is often
administered in conjunction with intravenous chemotherapy or intravenous therapy
given to patients with cancer or AIDS. This type of therapy is often
administered in a way that permits the patient to regulate the infusion of
analgesic drugs in proportion to the severity of the pain the patient
experiences, improving the medical outcome at the same time as drug use is
reduced.
Other Therapies. The Company provides other technologically advanced
therapies such as intravenous inotrope therapy for patients with congestive
heart failure or for those who are awaiting cardiac transplants, intravenous
anti-coagulant therapy for prevention of blood clots, myeloid growth factor
therapy for various anemias, and anti-nauseant therapy for chemotherapy induced
emesis.
Lithotripsy. Lithotripsy is a non-invasive technique that uses shock
waves to disintegrate kidney stones. Depending on the particular lithotripter
used, the patient is sedated using either a general or an epidermal anesthetic
while seated in a bath or lying on a treatment table. The operator of the
lithotripter machine locates the stone using fluoroscopy or ultrasound and
directs the shock waves toward the stone either through the water in the bath or
across a fluid membrane placed next to the patient's body. The shock waves then
fragment the stone thereby enabling the patient to pass the fragments through
his or her urinary tract. Because lithotripsy is non-invasive and is provided on
an outpatient basis, lithotripsy is an attractive alternative to other more
invasive techniques otherwise used in treating urinary tract stones or to
extended hospital stays waiting for the stone to pass.
As of March 1, 1995, the Company owned a controlling interest
in 15 lithotripsy partnerships as well as a wholly owned
lithotripter maintenance company. The Company's lithotripsy
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partnerships currently operate an aggregate of 31 lithotripsy machines that
provide services in 180 locations in 18 states. The other owners of the
partnerships are primarily physicians, many of whom utilize the partnership's
equipment to treat their patients. Ten of the 31 lithotripsy machines are
stationary and located at hospitals or ambulatory surgery centers, while the
other 21 machines are mobile, allowing them to be moved in order to meet patient
needs and market demands. The Company's lithotripsy partnerships typically lease
the machine on a per procedure basis to the hospital, ambulatory surgery center
or other facility providing care to the patient. In some cases, the lithotripsy
partnership bills the patient directly for the use of the partnership's machine.
The Company's agreements with its lithotripsy physician partners
contemplate that the Company will acquire the remaining interest in each
partnership at a defined price in the event that legislation is passed or
regulations are adopted that would prevent the physician from owning an interest
in the partnership and using the partnership's lithotripsy equipment for the
treatment of his or her patients. While current interpretations of existing law
are subject to considerable uncertainty, the Company believes that its
partnership arrangements with physicians in its lithotripsy business are in
compliance with current law. If, however, the Company were required to acquire
the minority interest of its physician partners in each of its lithotripsy
partnerships, the cost would be material to the Company.
The Company's lithotripsy operations have contributed an increasing
amount to the Company's operating income. However, there can be no assurance
that lithotripsy reimbursement rates will remain at their current levels and the
Company believes the amounts the partnerships currently receive for their
machines will be increasingly subject to pricing pressures similar to the
pricing pressures that have been exerted on the Company's infusion therapy
business. Recently, the Health Care Financing Administration ("HCFA") released a
proposed rule reducing the rate at which ambulatory surgery centers and certain
hospitals would be reimbursed for the technical component of a lithotripsy
procedure. The Company cannot predict what the final rate for such reimbursement
will be or what effect, if any, the adoption of this proposed rule would have on
lithotripsy revenues and whether this decreased reimbursement rate will be
applied to lithotripsy procedures performed at hospitals, where a majority of
the Company's lithotripsy machines are currently utilized.
Physician Practice Management Services. The Company is implementing a
physician practice management business that will provide a variety of consulting
and administrative services to small and medium sized physician groups. The
Company estimates that over 80% of the physicians in the United States practice
either alone or in a small group practice. As a result of growing pressure on
physicians to control costs and the rising influence of managed care
organizations, the Company believes that physicians
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have a growing need for external management services. Through its physician
services business, the Company intends to provide consulting and administrative
services in the following areas: development and management; office systems,
including computerization, financial management, billing and collections;
practice marketing and development; other in-office services such as infusion
therapy; mergers, acquisitions, affiliations and ventures; and managed care and
third party payor contract opportunities. Initially, the physician services
business will focus on providing services to the Company's physician network and
their medical specialties. In addition, the Company intends to offer consulting
and management services to service organizations and other health care providers
that will offer a package of health care services to third party payors.
Other Health Care Businesses. In addition to operating infusion therapy
companies and providing the other services described above, the Company was also
involved during 1994 in certain other health care businesses. Such complementary
businesses amounted to less than 1% of the Company's net revenues for the fiscal
year ended December 31, 1994, and some or all of such businesses are under
review for possible divestiture.
ORGANIZATION AND OPERATIONS
General. The Company's alternate site health care business operations
are conducted through approximately 140 branches which are managed through six
area offices reporting to the Vice President of Field Operations. The area
office provides each of its branches with key management direction and support
services. The Company's organizational structure is designed to create operating
efficiencies associated with centralized services and purchasing while also
promoting local decision making. The Company believes that its decentralized
approach to management facilitates high quality local decision making, allows it
to attract and retain experienced local managers and allows it to be responsive
to local market needs.
Operating Systems and Controls. An important factor in the Company's
ability to closely monitor its operating locations will be the reliability of
its management information systems. Besides routine revenue and cost reporting,
the Company is developing a performance model for monitoring district and branch
operations. Actual operating results derived from the Company's management
information systems will be compared to the performance model, enabling all
levels of management to identify areas requiring improvement. The Company
believes that the use of common, specific performance matrixes and the
identification of best demonstrated practices will expedite operating
improvement.
The Company has begun to implement standardized management information
systems throughout the Company. This has enabled the Company to begin
standardizing operating processes, track profit and loss performance by branch,
control and manage accounts
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receivable, process customer orders, reduce administrative overhead and gather
branch operating statistics for comparisons and management decision making.
The Company has recently begun to standardize and simplify its
financial systems. This will enable the Company to access more detailed
financial information and respond accordingly. Moreover, the Company expects
that managed care organizations and other referral sources and health care
providers will benefit from these sophisticated reporting capabilities, thereby
giving the Company a further competitive advantage.
The Company endeavors to ensure that its local managers have the
autonomy and ability to perform effectively by providing them with training,
comprehensive policies and procedures and standardized systems. The Company is
designing management incentive plans that reward performance based on revenue
increases, earnings contribution, accounts receivable collection, inventory
control and control of capital expenditures.
REIMBURSEMENT OF SERVICES
Virtually all of the revenues of the Company are derived from
third-party payors, including private insurers, managed care organizations such
as HMOs and PPOs, and governmental payors such as Medicare and Medicaid. Similar
to other medical service providers, the Company experiences lengthy
reimbursement periods as a result of third-party payment procedures.
Consequently, management of accounts receivable through effective patient
registration, billing, collection and reimbursement procedures is critical to
financial success and continues to be a high priority for all levels of
management. The Company has developed substantial expertise in processing claims
and carefully screens new cases to determine whether adequate reimbursement will
be available. Individual branches are responsible for their own billing and
collections, within strict guidelines. The Company believes that accounts
receivable management is best accomplished at the local level because of direct
relationships with payors and the ability of branch personnel to identify and
react promptly to billing discrepancies.
Medicare has developed a national fee schedule for respiratory therapy,
home medical equipment and infusion therapy which provides reimbursement for 80%
of the amount of any fee on the schedule. The remaining 20% co-insurance portion
is not paid by Medicare. In most cases, Medicaid reimburses the remaining 20%
for "medically indigent" patients. In other cases, the Company bills and
actively monitors other third-party payors or patients responsible for
co-insurance reimbursement.
Reimbursement coverage is provided through private sources, such as
insurance companies, self-insured employers and patients, and through the
federal Medicare and Medicaid programs. Private payors typically reimburse a
higher amount for a given service and
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provide a broader range of benefits than governmental payors, although net
revenues and gross profits from private payors have been affected by the
continuing efforts of private payors to contain or reduce the costs of health
care. An increasing percentage of the Company's private payor revenue has been
derived in recent years from contracts with HMOs, PPOs and other managed care
providers. Although these contracts often provide for negotiated reimbursement
at reduced rates, they generally result in lower bad debts, provide for faster
payment terms and generate a greater volume than other third-party payors.
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 year ended December 31, 1994:
<TABLE>
<S> <C>
Private Insurance and Other Payors.................................... 58%
Medicare and Medicaid Programs........................................ 28%
Managed Care Organizations............................................ 14%
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Total............................................................. 100%
===
</TABLE>
QUALITY ASSURANCE
The Company has established quality assurance programs to ensure that
service standards are implemented and that the objectives of those standards are
met. As of March 1, 1995, all of the branch offices of the Company had received
or are in the process of applying for accreditation by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"). The Company's quality
assurance program also includes quality audits of branches by a member of the
Company's quality assurance department.
COMPETITION
The alternate site health care market is highly competitive and is
experiencing both horizontal and vertical consolidation. Some of the Company's
current and potential competitors include hospital chains and providers of
multiple products and services for the alternate site health care market. On
March 3, 1995, two of the largest companies in the alternate site health care
industry, Abbey and Homedco, announced an agreement to merge in a transaction
that would create the largest alternate site health care provider in the United
States based on pro forma combined 1994 revenues. The size, purchasing power,
ability to bundle products and services; and relationships with physicians and
payors which certain of these providers enjoy make them formidable competitors
to the Company. Moreover, there are relatively few barriers to entry in the
local markets that the Company serves. Local or regional companies have entered
the home health care market in the past and others may do so in the future.
There can be no assurance that the Company will not encounter increased
competition in the future that could limit its ability to maintain or increase
its market share. Such increased competition could have a material adverse
effect on the Company's business and results of operations.
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The Company competes on the basis of a number of factors, including
quality of care and service, reputation within the medical community,
geographical scope and price. As it achieves low cost provider status, the
Company believes that it can compete effectively in each of its service areas
with respect to all of the above factors. The achievement of the operating scale
required to achieve low cost provider status is a critical source of competitive
advantage and a major objective of the Company's consolidation strategy.
Competition within the alternate site health care delivery system has
been affected by the decision of third party payors and their case managers to
become more active in monitoring and directing the care delivered to their
beneficiaries. Accordingly, relationships with such payors and their case
managers and inclusion within preferred provider and other networks of approved
or accredited providers may become a prerequisite to the Company's ability to
serve many of the patients treated by it. Similarly, the ability of the Company
and its competitors to align themselves with other health care service providers
may increase in importance as managed care providers and provider networks seek
out providers who offer a broad range of services that may exceed the range of
services currently offered by the Company.
SALES AND MARKETING
The Company's products and services are marketed through its field
sales force, branch sales personnel and various media formats. Most of the
Company's new patients are referred by hospitals, medical groups, home care
agencies and case managers. The Company's sales force is responsible for
establishing and maintaining referral sources. All sales employees receive a
base salary plus incentive bonuses based on collected net revenue. The Company
recently established improved sales training programs enabling its sales force
to generate more revenue from current referral sources and to assist them in
targeting and developing new referral sources. The Company believes that JCAHO
accreditation of its branches is important to its sales and marketing efforts,
particularly with large customers.
The Company's network of field representatives enables it to market its
home health care services to numerous sources of patient referrals, including
physicians, hospital discharge planners, hospital personnel and HMOs. Marketing
is focused on specific product lines and in specific payor groups. Products such
as physician services and disease state carveouts that are considerably
different than the base infusion therapy and ancillary service business are
supported by specialty marketing and sales support personnel.
As a result of escalating pressures to contain health care costs,
third-party payors are participating to a greater extent in decisions regarding
health care alternatives and are more important in the referral process. In
response, the Company has modified its
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sales and development focus and is aggressively pursuing agreements with third
party payors and is seeking to participate in managed service organizations and
provider networks that will provide high quality, cost effective care. The
Company has recruited a dedicated sales force to enhance the Company's efforts
to market and sell its services to managed care payors. Managed care sales
representatives are deployed in each branch and a separate national accounts
sales force reports to the Vice President, Managed Care Sales and Marketing.
Since commencing such marketing efforts, the Company has successfully negotiated
approximately 400 managed care contracts, including agreements with CIGNA and
Travelers Health Network ("Travelers"). Pursuant to these arrangements, the
Company provides services to members of the managed care organization on a
non-exclusive basis at negotiated prices in specified geographic areas. For
example, the Company was recently awarded a nationwide contract to be one of
three providers authorized to coordinate the delivery of infusion, durable
medical equipment, respiratory therapy, home nursing and other services to the
approximately 5.3 million beneficiaries of Travelers. The Company has
subcontracted for those alternate site services it has agreed to deliver under
the Travelers contract which it is currently unable to provide directly.
CUSTOMERS AND SUPPLIERS
The Company provides alternate site health care services and products
to a large number of patients and no single payor accounted for more than 5% of
the net revenue of the Company during the year ended December 31, 1994,
excluding Medicare and Medicaid payors. The Company purchases products from a
large number of suppliers. The Company considers its relationships with its
vendors to be good and believes that substantially all of its products are
available from alternative sources on terms not materially less favorable to the
Company than its present sources.
GOVERNMENT REGULATION
General. The Company is subject to extensive federal and state
regulation regarding, among other things, fraud and abuse, health and safety,
environmental compliance and toxic waste disposal. In particular, the illegal
remuneration provisions of the Social Security Act and similar state laws impose
civil and criminal sanctions. These sanctions include disqualification from
participation in the Medicare and Medicaid programs for persons who solicit,
offer, receive or pay any remuneration, directly or indirectly, for referring a
patient for treatment which is paid for in whole or in part by Medicare and
Medicaid or for otherwise generating revenue reimbursed by either of these
programs. Due to the breadth of the statutory provisions and the absence in
certain instances of regulations or court decisions addressing many of the
specific arrangements by which the Company conducts its business, it is possible
that the Company's practices might be challenged under these laws and there can
be no assurance that the Company will not be required to change one or more of
its current business
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practices or be subject to sanctions. The Company's revenues and net earnings
could be adversely affected as a result of any such change or sanctions. The
Company believes it complies in all material respects with these and all other
applicable laws and regulations.
In particular, the operations of the Company are subject to federal and
state laws covering the repackaging and dispensing of drugs (including oxygen),
regulating interstate motor-carrier transportation, pharmacies, nursing services
and certain types of home health agency activities. Certain of the employees of
the Company are subject to state laws and regulations governing the ethics and
professional practice of pharmacy and nursing. The failure to obtain, renew or
maintain any of the required regulatory approvals or licenses could adversely
affect the Company's business and could prevent the location involved from
offering products and services to patients. The health care services industry
will continue to be subject to intense regulation at the federal and state
levels, the scope and effect of which cannot be predicted. No assurance can be
given that the activities of the Company will not be reviewed and challenged or
that health care reform, if enacted, will not result in a material adverse
change to the Company.
Fraud and Abuse. The Company's operations are subject to the illegal
remuneration provisions of the Social Security Act (sometimes referred to as the
"anti-kickback" statute) and similar state laws that impose criminal and civil
sanctions on persons who knowingly and willfully solicit, offer, receive or pay
any remuneration, whether directly or indirectly, in return for, or to induce,
the referral of a patient for treatment, or, among other things, the ordering,
purchasing, or leasing, of items or services that are paid for in whole or in
part by Medicare, Medicaid or similar state programs. Violations of the federal
anti-kickback statute are punishable by criminal penalties, including
imprisonment, fines and exclusion of the provider from future participation in
the Medicare and Medicaid programs. Federal enforcement officials also may
attempt to impose civil false claims liability with respect to claims resulting
from an anti-kickback violation. If successful, civil penalties could be
imposed, including assessments of $2,000 per improper claim for payment plus
twice the amount of such claim and suspension from future participation in
Medicare and Medicaid programs. Civil suspension for anti-kickback violations
also can be imposed through an administrative process, without the imposition of
civil monetary penalties. While the federal anti-kickback statute expressly
prohibits transactions that have traditionally had criminal implications, such
as kickbacks, rebates or bribes for patient referrals, its language has been
construed broadly and has not been limited to such obviously wrongful
transactions. Court decisions state that, under certain circumstances, the
statute is also violated when one purpose (as opposed to the "primary" or a
"material" purpose) of a payment is to induce referrals. Congress has frequently
considered federal legislation that would expand the
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<PAGE> 14
federal anti-kickback statute to include the same broad prohibitions regardless
of payor source.
In addition, an increasing number of states in which the Company
operates have laws, which vary from state to state, prohibiting certain direct
or indirect remuneration or fee- splitting arrangements between health care
providers for the referral of patients to a particular provider, including
pharmacies and home health agencies. Possible sanctions for violation of these
restrictions include loss of licensure and civil and criminal penalties. The
Company maintains an internal regulatory compliance review program and has
retained Richard J. Kusserow, the former Inspector General of the U.S.
Department of Health and Human Services, to act as a consultant to assist the
Company in developing its compliance program. There can be no assurance that
such laws will ultimately be interpreted in a manner consistent with the
practices of the Company.
Prohibition on Physician Referrals. Under both the Omnibus Budget
Reconciliation Act of 1993 ("Stark II") and certain state legislation, it is
unlawful for a physician to refer patients for certain designated health
services to an entity with which the physician has a financial relationship. A
"financial relationship" under Stark II is defined as an ownership or investment
interest in, or a compensation arrangement between, the physician and the
entity. The entity is prohibited from claiming payment under the Medicare or
Medicaid programs for services rendered pursuant to a prohibited referral and is
liable for the refund of amounts received pursuant to prohibited claims. The
entity also can receive civil penalties of up to $15,000 per improper claim and
can be excluded from participation in the Medicare and Medicaid programs.
Comparable provisions applicable to clinical laboratory services became
effective in 1992. Stark II provisions which may be relevant to the Company
became effective on January 1, 1995. Because of its broad language Stark II may
be interpreted by the Office of Inspector General ("OIG") of the Department of
Health and Human Services ("HHS") to apply to the Company's operations.
Consequently, Stark II has required the Company to restructure certain existing
compensation agreements with physicians or, in the alternative, to refuse to
accept referrals for designated health services from such physicians to bring
its financial relationships with referring physicians into material compliance
with the provisions of Stark II, including relevant exceptions. The Company has
substantially completed the termination of business arrangements with physicians
that may be questionable in the current regulatory environment, however if the
Company does not achieve such material compliance, and Stark II is broadly
interpreted by HHS to apply to the Company, such application of Stark II could
have a material adverse effect on the Company.
A California statute, which become effective January 1, 1995, makes it
unlawful for a physician who has, or a member of whose immediate family has, a
financial interest with or in an entity to refer a person to that entity for
laboratory, diagnostic nuclear
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<PAGE> 15
medicine, radiation oncology, physical therapy, physical rehabilitation,
psychometric testing, home infusion therapy, or diagnostic imaging goods or
services. Under the statute, "financial interest" includes, among other things,
any type of ownership interest, debt, loan, lease, compensation, remuneration,
discount, rebate, refund, dividend, distribution, subsidy or other form of
direct or indirect payment, whether in money or otherwise, between a physician
and the entity to which the physician makes a referral for the items described
above. The statute also prohibits the entity to which the referral was made from
presenting a claim for payment to any payor for a service furnished pursuant to
a prohibited referral, and prohibits a payor from paying for such a service.
Violation of the statute by a physician is a misdemeanor, and will subject the
physician to civil fines. Violation of the prohibition on submitting a claim in
violation of the statute is a public offense, subjecting the offender to a fine
of up to $15,000 for each violation and possible action against licensure. The
Company believes that other states in which the Company does business have or
are considering similar legislation.
Medicare and Health Care Reform. Because the Medicare program
represents a substantial portion of the federal budget, Congress takes action in
almost every legislative session to modify the Medicare program for the purpose
of reducing the amounts otherwise payable by the program to health care
providers in order to achieve deficit reduction targets, among other reasons.
Legislation or regulations may be enacted in the future that may substantially
reduce the amount paid for the Company's services. Further, statutes or
regulations may be adopted which impose additional requirements in order for the
Company to be eligible to participate in the federal and state payment programs.
Such new legislation or regulations may adversely affect the Company's business
operations. There is significant national concern today about the availability
and rising cost of health care in the United States. It is anticipated that new
federal and/or state legislation will be passed and regulations adopted to
attempt to provide broader and better health care and to manage and contain its
cost. The Company is unable to predict the content of any legislation or what,
if any, changes may occur in the method and rates of its Medicare and Medicaid
reimbursement or in other government regulations that may affect its businesses,
or, whether such changes, if made, will have a material adverse effect on its
revenues and net earnings.
State Laws Regarding Provision of Medicine and Insurance. The laws of
many states prohibit physicians from splitting fees with non-physicians and
prohibit non-physician entities from practicing medicine. These laws vary from
state to state and are enforced by the courts and by regulatory authorities with
broad discretion. Although the Company believes its operations as currently
conducted are in material compliance with existing applicable laws, certain
aspects of the Company's business operations have not been the subject of state
or federal regulatory interpretation. There can be no assurance that review of
the Company's business by courts or regulatory authorities will not result in
determinations that could
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<PAGE> 16
adversely affect the operations of the Company or that the health care
regulatory environment will not change so as to restrict the Company's existing
operations or their expansion. In addition, expansion of the operations of the
Company to certain jurisdictions may require structural and organizational
modifications of the Company's form of relationships with physician groups,
would could have an adverse effect on the Company.
Most states have laws regulating insurance companies and HMOs. The
Company is not qualified in any state to engage in the insurance or HMO
businesses. As the managed care business evolves, state regulators may begin to
scrutinize the practices of, and relationships between, third-party payors,
medical service providers and entities providing management and other services
to medical service providers with respect to the application of insurance and
HMO laws and regulations. The Company does not believe that its practices, which
are consistent with those of other health care companies, would subject it to
such laws and regulations. However, given the limited regulatory history with
respect to such practices, there can be no assurance that states will not
attempt to assert jurisdiction. The Company may be subject to prosecution by
state regulatory agencies, and accordingly may be required to change or
discontinue certain practices which could have a material adverse effect on the
Company.
Pharmacies and Home Health Agencies. All states require pharmacies to
be licensed and all of the Company's pharmacies are licensed in the states in
which they are located. All these pharmacies also have Controlled Substances
Registration Certificates issued by the Drug Enforcement Administration of the
United States Department of Justice. Many states in which the Company operates
also require home infusion companies to be licensed as home health agencies. The
Company's branches are licensed as home health agencies in all such states
except four, where it has applied for licensure. The failure of a branch
facility to obtain, renew or maintain any required regulatory approvals or
licenses could adversely affect its continued expansion and the existing
operations of that branch facility.
Other Regulations. The Company's operations are subject to various
state hazardous waste disposal laws. Those laws as currently in effect do not
classify most of the waste produced during the provision of the Company's
services to be hazardous, although disposal of non-hazardous medical waste is
also subject to regulation. OSHA regulations require employers of workers who
are occupationally subject to blood or other potentially infectious materials to
provide those workers with certain prescribed protections against bloodborne
pathogens. The regulatory requirements apply to all health care facilities,
including the Company's branches, and require employers to make a determination
as to which employees may be exposed to blood or other potentially infectious
materials and to have in effect a written exposure control plan. In addition,
employers are required to provide
15
<PAGE> 17
hepatitis B vaccinations, personal protective equipment, infection control
training, post-exposure evaluation and follow-up, waste disposal techniques and
procedures, and engineering and work practice controls. Employers are also
required to comply with certain record-keeping requirements. The Company
believes it is in material compliance with the foregoing laws and regulations.
Some states have established certificate of need programs regulating the
establishment or expansion of health care facilities, including certain of the
Company's facilities.
The Company believes it is in material compliance with current
applicable laws and regulations. As noted under Item 3 "Legal Proceedings," in
September 1994 the Company entered into a settlement with the OIG regarding an
investigation of T(2)'s financial arrangements with physicians which requires
T(2) to adhere to a compliance program in rendering its services. No assurance
can be made that in the future the Company's business arrangements, past or
present, will not be the subject of an investigation or prosecution by a
federal or state governmental authority. Such investigation could result in
any, or any combination, of the penalties discussed above depending upon the
agency involved in such investigation and prosecution. No assurance can be
given that the Company's activities will not be reviewed or challenged by
regulatory authorities. The Company monitors legislative developments and would
seek to restructure a business arrangement if the Company determined that one
or more of its business relationships placed it in material noncompliance with
such a statute. The health care service industry will continue to be subject to
substantial regulation at the federal and state levels, the scope and effect of
which cannot be predicted by the Company. Any loss by the Company of its various
federal certifications, its authorization to participate in the Medicare and
Medicaid programs or its licenses under the laws of any state or other
governmental authority from which a substantial portion of its revenues are
derived would have a material adverse effect on its business.
POTENTIAL LIABILITY AND INSURANCE
Participants in the health care market are subject to lawsuits alleging
negligence, product liability or other similar legal theories, many of which
involve large claims and significant defense costs. The Company is from time to
time subject to such suits as a result of the nature of its business. The
Company maintains general liability insurance with coverage limits of $1 million
per occurrence and in the aggregate annually, professional liability insurance
on each of its professionals with coverage limits of $1 million per claim and in
the aggregate annually and excess liability coverage of $25 million per
occurrence and in the aggregate annually. In addition, the Company maintains a
$25 million excess umbrella insurance policy that covers liabilities in excess
of the Company's other liability policies subject to certain exclusions. Each of
these policies provides coverage on an "occurrence" basis and has certain
exclusions from coverage. The Company's insurance policies must be renewed
annually.
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<PAGE> 18
A successful claim against the Company in excess of the Company's
insurance coverage could have a material adverse effect upon the Company's
business and results of operations. Claims against the Company, regardless of
their merit or eventual outcome, also may have a material adverse effect upon
the Company's reputation. There can be no assurance that the coverage limits of
the Company's insurance policies will be adequate. While the Company has been
able to obtain liability insurance in the past, such insurance varies in cost,
is difficult to obtain and may not be available in the future on acceptable
terms, if available at all.
EMPLOYEES
As of March 1, 1995, the Company had approximately 2,400 full-time
equivalent employees. None of such employees are currently represented by a
labor union or other labor organization. Approximately 50% of such employees are
nurses and pharmacists, with the remainder consisting primarily of sales and
marketing representatives, reimbursement representatives, financial and systems
professionals and managers. The Company believes that its employee relations are
good.
ITEM 2. PROPERTIES.
The Company's headquarters are temporarily located in Denver, Colorado
and consist of approximately 16,000 square feet of office space leased through
July, 1996. The Company has entered into a ten year lease for 35,000 square feet
of office space in a new headquarters facility near Boulder, Colorado,
commencing July 1996. Pending the closure of such facilities pursuant to the
Consolidation Plan, the Company leases facilities which formerly were the
corporate headquarters of Curaflex, HealthInfusion, Medisys and HMSS. The
Company also owns a building containing approximately 27,000 square feet of
space which formerly served as the headquarters of T(2). As of March 1, 1995,
the Company had 140 branch facilities in the United States.
ITEM 3. LEGAL PROCEEDINGS.
The Company has entered into a Stipulation of Settlement (the
"Stipulation") dated as of January 27, 1995 which sets forth the principal terms
of a proposed settlement of class action shareholder litigation which was
initiated against T(2) in 1992. The settlement provides for the Company to pay
the shareholder class $25 million in cash (of which approximately $9.8 million
will be contributed by the Company's insurance carriers), and to issue warrants
to acquire an aggregate of 2.52 million shares of the Company Common Stock at an
exercise price of $20.25, subject to adjustment. The Stipulation is subject to
the review and approval of the court on May 5, 1995 and certain other
contingencies, and there can be no assurance that the settlement will be
consummated. If the settlement is not consummated and the shareholder claims
continue to be pressed, the resulting distraction of management,
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<PAGE> 19
the costs of defending such claims and the payment of any settlement or damage
award could have a material adverse effect on the Company's results of
operations and financial position.
In September, 1994, T(2) entered into a settlement of an investigation
by the OIG into T(2)'s financial arrangements with physicians (the "T(2) OIG
Settlement"). T(2), in expressly denying liability, agreed to a civil order
which enjoins it from violating federal anti-kickback and false claims laws
related to Medicare/Medicaid reimbursement. The order further requires T(2) to
comply with certain standards when providing management or other services to
physicians. As a result of the T(2) OIG Settlement and the recent legal
proceedings and investigations in which T(2) has been involved, the Company
believes it will be subject to increased federal and state regulatory scrutiny.
The Company is implementing programs to ensure that it is in compliance with
the terms and conditions of the T(2) OIG Settlement and has engaged Richard P.
Kusserow, the former Inspector General of the U.S. Department of Health and
Human Services, as a consultant to assist the Company in developing its
compliance program. However, in the event that T(2) violates the T(2) OIG
Settlement or the Company engages in conduct that violates federal or state
laws, rules or regulations, the Company may be subject to a risk of increased
sanctions or penalties; including, but not limited to, partial or complete
exclusion from the Medicare/Medicaid program.
The Company is subject to certain claims and lawsuits incidental to the
normal course of business, the outcome of which are not determinable at this
time. In the opinion of management, any liability that might be incurred by the
Company upon the resolution of these claims and lawsuits will not, in the
aggregate, have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange
under the symbol "CRH." The following table sets forth the high and low sale
price of the Common Stock as reported on the New York Stock Exchange Composite
Tape for the periods indicated (from the inception of trading on July 11, 1994):
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
CALENDAR YEAR 1994
First Quarter.............................................. -- --
Second Quarter............................................. -- --
Third Quarter (July 11 through September 30)............... 19 1/8 10 1/2
</TABLE>
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<TABLE>
<S> <C> <C>
Fourth Quarter............................................. 18 3/4 14 1/2
CALENDAR YEAR 1995
First Quarter (through March 20, 1995)..................... 26 1/2 15 3/8
</TABLE>
As of March 20, 1995, there were 3,297 record holders of the Company's
Common Stock. On March 20, 1995, the last reported sale price of the Common
Stock on the New York Stock Exchange was $255/8 per share.
The Company has not paid or declared any cash dividends on its capital
stock since its inception. The Company currently intends to retain all future
earnings for use in the expansion and operation of its business. Accordingly,
the Company does not anticipate paying cash dividends on its common stock in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company, contractual restrictions and general business
conditions.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and schedules
and accompanying notes and with "Management's Discussion and Analysis of
Financial Conditions and Results of Operations." Historical financial data for
the Company is based on the combined financial data of the predecessor entities,
and may not be comparable on a year by year basis. Certain data for the Company
prior to the fiscal year ended December 31, 1992 is unavailable based upon the
accounting records of such entities. Amounts are in thousands except per share
data.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-------------------------------------------------------------
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue .................................................. $ 450,496 $ 462,304 $ 413,100 $ 299,851 $ 162,214
Cost of service .............................................. 313,182 285,023 224,356 -- --
--------- --------- --------- --------- ---------
Gross profit ................................................. 137,314 177,281 188,744 -- --
Selling, general and administrative expenses ................. 81,907 75,706 48,927 -- --
Provision for estimated uncollectible accounts ............... 36,817 29,751 24,036 -- --
Amortization of goodwill ..................................... 8,971 7,824 4,832 -- --
Provision for litigation settlements ......................... 23,220 -- -- -- --
Merger costs ................................................. 28,500 2,868 -- -- --
Restructuring costs .......................................... 95,500 1,600 2,385 -- --
--------- --------- --------- --------- ---------
Operating income (loss) ...................................... (137,601) 59,532 108,564 82,144 34,178
Interest income .............................................. 2,469 3,746 4,940 -- --
Interest expense ............................................. (7,414) (3,916) (2,860) -- --
Other income, net ............................................ 865 7,862 3,969 -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes and minority interests ..... (141,681) 67,224 114,613 -- --
Provision (benefit) for income taxes ......................... 26,231 28,848 38,117 -- --
--------- --------- --------- --------- ---------
Minority interest in net income of consolidated joint ventures 12,622 9,715 4,638 -- --
Net income (loss) ............................................ $(128,072) $ 28,661 $ 71,858 $ 56,009 $ 22,412
========= ========= ========= ========= =========
Net income (loss) per common share:
Primary .................................................... $ (3.32) $ 0.76 $ 1.95 $ 1.67 $ 0.82
Weighted average common shares outstanding:
Primary .................................................... 38,633 37,778 36,812 33,632 27,189
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments ...... $ 39,134 $ 50,980 $ -- $ -- $ --
Working capital ...................... 83,395 124,992 165,150 123,543 69,977
Total assets ......................... 576,115 555,877 476,422 334,613 207,340
Long-term debt, net of current portion 108,099 22,093 20,653 15,257 4,121
Stockholders' equity ................. 322,261 438,872 394,514 230,539 143,237
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
HISTORY
The operations of the Company commenced on July 8, 1994 as a result of
a merger of T(2), Curaflex, HealthInfusion, and Medisys, each of which were
publicly held national or regional providers of alternate site infusion therapy
and related services. Pursuant to the Merger, which was accounted for as a
pooling of interests, each of those companies became and are now wholly owned
subsidiaries of the Company. On September 12, 1994, the Company acquired all of
the capital stock of HMSS, a leading regional provider of home infusion
therapies, in a transaction accounted for as a purchase. The Company is led by a
newly formed management team with extensive background in the health care
industry, including James M. Sweeney, Chairman and Chief Executive Officer.
IMPACT OF MERGER AND POST-MERGER CONSOLIDATION
During the quarter ended September 30, 1994, the Company recorded a
special charge of $17.3 million to provide for anticipated uncollectible
accounts and other receivables as a result of the Company's decision to
implement standardized policies for recognition of contractual and other
allowances and to provide for the disruptions experienced before and during the
Merger and post-Merger transition process.
The Company also recorded charges of $23.2 million, representing the
estimated costs of settling certain pre-Merger litigation matters, of which
$5.5 million was a non-cash charge. The non-cash portion of the charge
consisted of $3.0 million for warrants issued and a $2.5 million future cash
obligation. The provision consisted of the following: an agreement in principle
to settle the T(2) shareholders litigation in the amount of $19.7 million; the
T(2) OIG Settlement in the amount of $0.5 million; and the settlement of a
dispute with the former principals of a company acquired by T(2) in 1992 in the
amount of $3.0 million.
During the same quarter, the Company initiated a merger and
restructuring plan to reduce future operating costs, improve productivity and
gain efficiencies through consolidation of redundant infusion centers and
corporate offices, reductions in personnel and elimination or discontinuance of
investments in certain joint ventures and other non-infusion facilities. The
Coram Consolidation Plan provided for the elimination of approximately 100 of
the Company's alternative site infusion branch
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<PAGE> 22
facilities and the consolidation of corporate administrative operations into one
location, with a corresponding significant reduction of branch and corporate
personnel. In connection with the Coram Consolidation Plan, the Company recorded
charges of $28.5 million in estimated merger costs and $95.5 million in
estimated restructuring costs in the quarter ended September 30, 1994, including
charges to assimilate HMSS. Management believes these costs to be non-recurring;
however, actual costs may vary from the recorded charges as the Coram
Consolidation Plan continues. See Note 1 to the Consolidated Financial
Statements--Merger and Restructuring. The Company anticipates that the branch
and corporate consolidation portions of the Coram Consolidation Plan will be
substantially completed by March 31, 1995 and that the Coram Consolidation Plan,
when fully implemented, will generate annual cost savings in excess of $55
million. The Company expects these savings will arise through reductions in
personnel described above and related costs, facilities rent, operating and
depreciation costs, corporate overhead and procurement savings. In the first
half of 1995, these savings will be partially offset by the costs of relocation,
retention and retraining of personnel, currently estimated to be approximately
$3 million.
In the aggregate, the Company recorded non-recurring charges of
approximately $164.5 million in the second and third quarters of 1994 related to
the Merger and the implementation of the Coram Consolidation Plan.
IMPACT OF PRICING/VOLUME TRENDS
Throughout 1993 and early 1994, the Company experienced severe pricing
pressure from payors related to its alternate site infusion therapy services.
The Company believes, however, that short-term pricing declines within
individual payor groups have moderated. Moreover, home infusion therapy patient
volume has increased since the Merger. No assurance can be given, however, that
such trends will continue. The increasing prevalence and influence of managed
care payors is expected to continue to apply pressure on pricing for the
Company's services. The Company believes that alternate site health care
providers will increasingly face lower operating margins as managed care
organizations constitute an increasing percentage of the mix of the industry's
revenues, and that maintaining offsetting growth in patient volumes will be
necessary to offset lower margins. 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 arrangements based on
per member monthly fees. The erosion of historic gross profit margins as a
percentage of revenue has resulted from the pricing pressures discussed above
and a shift in the payor mix, resulting in managed care payors becoming an
increasingly high proportion of the payor mix. These trends, if continued, could
have a material adverse impact on the Company's financial condition and results
of operations. In addition, there can be no assurance that the Company's
lithotripsy operations will not also experience pricing pressure in the future.
HCFA has
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<PAGE> 23
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 out-patient basis
at the hospital. Such a proposal might result in similar efforts by other
third-party payors to limit reimbursement for lithotripsy procedures.
RECENT DEVELOPMENTS
Consistent with the Company's strategy of focusing on its core
businesses, on January 30, 1995, the Company announced that it had reached an
agreement in principle to sell its pediatric home care business known as Kid's
Medical Club to Pediatric Services of America, Inc. ("PSAI") for $13.5 million,
of which the Company will receive proceeds of approximately $9.2 million (net of
advances of approximately $5 million). The Company is also in the process of
soliciting offers for its institutional pharmacy business known as Pharmcare,
Inc. ("Pharmcare"), which had revenues of approximately $20 million and
contributed approximately $0.8 million to the Company's operating income in
1994. The Company expects the sale of Pharmcare to be completed in the second
quarter of 1995. The Company is continuing to evaluate the strategic fit and
short-term value of each of the partnerships and businesses inherited from its
predecessor entities, and management will consider additional divestitures of
other non-strategic businesses during 1995. The Company does not anticipate that
such divestitures, including Kid's Medical Club and Pharmcare, will be material
to its business. As part of its strategy, the Company is continually engaged in
acquisition discussions with alternate site providers, some of which
acquisitions, if consummated, would be material to the Company.
IMPACT OF THE CAREMARK TRANSACTION
On January 29, 1995, the Company entered into an agreement to acquire
the alternate site infusion business of Caremark in a transaction accounted for
as a purchase (the "Caremark Transaction"). Upon completion of the Caremark
Transaction, the Company will be the largest provider of alternate site infusion
therapy services in the United States based on pro forma 1994 net revenue. The
consolidation of the Company and the Caremark Business is expected to result in
certain additional annual cost savings. No assurances, however, can be given as
to the amount of cost savings that actually will be realized from the Coram
Consolidation Plan or the consolidation of the Caremark Business.
The purchase price for the Caremark Business is $310 million, subject
to adjustment, consisting of (i) $210 million in cash and (ii) $100 million
junior subordinated payment-in-kind notes (the "Junior Subordinated PIK Notes").
The Company currently plans to finance the cash portion of the purchase price
for the Caremark Business through the issuance of up to $175 million in
subordinated notes (the "Notes") and through borrowings under a new credit
facility providing for borrowings of up to $300 million, of which
22
<PAGE> 24
$200 million will be term loans and $100 million will be available as revolving
credit loans and letters of credit, with Chemical Bank as Agent (the "Senior
Credit Facility"). A portion of the cash proceeds will be used to repay all of
the Company's indebtedness under its existing credit facility (the "Existing
Credit Facility") which was approximately $108.1 million as of December 31,
1994.
The Company believes that the combination of the Company and the
Caremark Business will create an entity which will be able to leverage its cost
base more efficiently through a reduction in branch facilities, and which is
expected to be able to benefit from significant economies of scale and operating
synergies, particularly with regard to procurement, regulatory compliance and
patient outcomes tracking. Substantial cost savings are expected to be realized
from elimination of geographically duplicative branches, the elimination of
duplicative corporate overhead expenses, procurement savings and the
implementation of the best demonstrated business practices of the Company's
predecessor entities and the Caremark Business (e.g., accounts receivable
collections) throughout the combined entity. No assurances can be made as to the
amount of cost savings, if any, that actually will be realized. The Company
expects to record a charge against earnings in the second quarter of 1995 in
connection with the Caremark Consolidation Plan. The Company, on a preliminary
basis, has estimated that the amount of the charge will be approximately $32
million, of which approximately $12 million is estimated to be non-cash. The
estimated charge consists of personnel and facility reduction costs of
approximately $14 million and approximately $18 million, respectively. Estimated
cost savings are currently expected to approximate $45 million annually. The
Company expects to revise these estimates upon completion of the acquisition of
the Caremark Business, and no assurance can be given as to the amounts of the
actual costs that will be incurred or the amount of savings, if any, that may be
realized.
Upon the consummation of the Caremark Transaction, the Company will be
highly leveraged. Following the Caremark Transaction, the Company believes that
its primary liquidity needs will be cost of debt service, restructuring costs
and working capital. The Company believes that cash generated by operations and
amounts available under the revolving credit portion of the Senior Credit
Facility will be sufficient to meet its liquidity needs. The Company's strategy
includes the attainment of the operating scale required to achieve low cost
provider status through strategic acquisitions. All or a portion of any such
acquisitions may be financed through available credit under the Senior Credit
Facility or, depending upon capital market conditions, the issuance of
additional indebtedness or equity securities or other bank borrowings. At the
closing of the Caremark Transaction, the Company expects to have up to $100
million of unused borrowing capacity under the Senior Credit Facility. The
Senior Credit Facility, and the Notes will include various affirmative, negative
and financial covenants with which the Company must comply, including among
others, a requirement to maintain certain financial ratios and limitations on
23
<PAGE> 25
the Company's ability to incur additional indebtedness and pay dividends.
RESULTS OF OPERATIONS
The following table shows certain items as a percentage of the
Company's net revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
<S> <C> <C> <C>
Net revenue............................................................. 100.0% 100.0% 100.0%
Cost of service......................................................... 69.5 61.6 54.3
----- ----- -----
Gross margin........................................................ 30.5 38.4 45.7
Selling, general and administrative expenses............................ 18.2 16.4 11.8
Provision of estimated uncollectible accounts........................... 8.1 6.4 5.8
Amortization of goodwill................................................ 2.0 1.7 1.2
Provision for litigation settlements.................................... 5.2 -- --
Merger costs............................................................ 6.3 0.6 --
Restructuring costs..................................................... 21.2 0.4 0.6
----- ----- -----
Total operating expenses............................................ 61.0 25.5 19.4
Operating income (loss)............................................. (30.5) 12.9 (26.3)
Interest income......................................................... 0.6 0.8 1.2
Interest expense........................................................ (1.7) (0.9) (0.7)
Other income, net....................................................... 0.2 1.7 0.9
------ ----- -----
Income (loss) before income taxes and minority interests................ (31.4) 14.5 27.7
Provision (benefit) for income taxes.................................... (5.8) 6.2 9.2
Minority interest in net income of consolidated joint ventures (2.8) (2.1) (1.1)
------ ----- -----
Net income (loss)....................................................... (28.4)% 6.2% 17.4%
======= ===== =====
</TABLE>
1994 COMPARED TO 1993
Net Revenue. Net revenue for the year ended December 31, 1994 declined
by 2.6% from the prior year. Net revenue from the Company's home infusion
therapy business declined primarily due to the pricing pressures imposed by
third-party indemnity and managed care payors discussed above, the termination
of certain physician relationships by the Company and the retroactive effect of
case management discounts and larger discounts demanded by industry insurance
carriers. Net revenue from the Company's IntraCare (outpatient infusion therapy)
business declined by approximately $12.2 million due to direct competition from
physicians. This decline in net revenue was offset by a $9.5 million increase in
net revenue from the Company's lithotripsy business and the addition of an
estimated $14 million of net revenue resulting from the HMSS acquisition.
Additional factors affecting 1994 net revenue were the implementation of
consistent Company-wide policies for recognition of contractual and other
allowances, an effort to eliminate unprofitable business relationships and the
renegotiation of physician relationships which were potentially incompatible
with new regulatory requirements. Revenues for the fourth quarter of 1994 were
$113.6 million, as compared to $119.9 million in the third quarter of 1994 on a
pro forma basis including the HMSS acquisition for a full quarter, representing
a decline of 5.3%. While no assurance can be given regarding the Company's
future revenues, management believes that its fourth quarter net revenue may be
a more accurate reflection of the Company's current operating environment than
the Company's 1994 reported revenue taken as a whole.
24
<PAGE> 26
Gross Margin. Gross margin decreased to 30.5% in 1994 from 38.4% in
1993. This decrease was related primarily to the decline in pricing, changes in
payor mix, and the revenue recognition policy changes discussed above and the
fact that branch consolidations and corresponding reductions in fixed costs had
not been fully completed by year end. Other factors that affected gross margin
included patient and therapy mix changes and short-term costs not includable in
the restructuring charges which were necessary to facilitate the integration of
the Company's operating companies. However, despite this year-to-year decrease,
gross margin increased from 28.5% in the third quarter of 1994 to 29.5% in the
fourth quarter of 1994, primarily due to the implementation of the Coram
Consolidation Plan and reduced pricing pressures. The Company expects gross
margin to increase from its current level as cost savings are realized in
connection with the Coram Consolidation Plan.
Selling, General and Administrative Expense. Selling, general and
administrative expenses ("S,G&A") increased 8.2% over the prior year primarily
as a result of the acquisition of HMSS. Excluding duplicative costs related to
the Merger and the acquisition of HMSS, S,G&A expenses for 1994 remained
substantially constant as compared to the prior year. Reductions in overall
payroll and other administrative costs since consummation of the Merger were
partially offset by costs incurred in the same period to establish a new
corporate office prior to the realization of cost savings through planned
reductions of the corporate staffs of the merged companies. Due to the
integration process, certain personnel and professional fees, special incentive
programs, travel, recruiting, relocation and other administrative expenses
charged to operations, but necessary and related to the merger and consolidation
activities, contributed to the increase in S,G&A. The Company estimates that the
incremental expense related to these items was approximately $3.0 million.
Additional costs not anticipated to exceed $4.0 million are expected to be
incurred in the first half of 1995 to complete the consolidation process.
Provision for Estimated Uncollectible Accounts. The provision for
estimated uncollectible accounts increased to $36.8 million in 1994 from $29.7
million in 1993 while going to 8.2% of net revenue in 1994 from 6.4% in 1993.
This increase was due to a special provision of $17.3 million taken in 1994
related to disruptions in the Company's collection activities experienced during
the Merger and post-Merger transaction process. The consolidation process
associated with the merger included a broad restructuring of the Company's
reimbursement organization and systems. This restructuring included the
decentralization of centralized collection activities located in four locations
and the relocation of such activities to the 100 branch locations. A significant
portion of the charge resulted from the effects of the post-merger consolidation
of the predecessor companies' multiple billing systems into, ultimately, one
billing system for use at all locations and consolidations of offices and
changes in personnel performing the billing and collection functions. As the
Coram
25
<PAGE> 27
Consolidation Plan commenced in the quarter ended September 30, 1994, management
noted a significant increase in aging of receivables at various branches, which
management concluded had resulted from distractions related to the merger and
consolidation process, the transfer of billing information and patient files
between branch offices, the termination of certain employees experienced in
billing and collection, and the inability to complete or obtain documentation
necessary to secure payment because of the termination of certain physician
relationships and the elimination of some experienced branch personnel as part
of the consolidation of branches then occurring. The amount of the charge was
determined based on those factors, and also included a provision of $3.4 million
for specific accounts rendered uncollectible because of relationships terminated
as part of the merger. Management believes a minor portion of the overall
provision may also be attributable to the accounting impact of implementing
standardized policies for recognition of contractual and other allowances;
however, the Company is unable to distinguish the impact of this factor in the
Company's overall provision for estimated uncollectible accounts. The Company
believes adequate provision for uncollectible accounts has been made as of
December 31, 1994. However, the Company's ability to successfully collect its
receivables depends, in part, on its ability to adequately supervise and train
personnel in billing and collections, and minimize losses related to branch
consolidations and system changes. Any further disruptions in those processes
could adversely affect the ability of the Company to collect its receivables.
Amortization of Goodwill. Amortization of goodwill increased in 1994 as
a result of a full year of amortization being taken for acquisitions completed
during 1993, as well as the acquisition of HMSS on September 12, 1994.
Provision for Litigation Settlements. The provision for litigation
settlements represents the estimated cash and non-cash costs of settling certain
litigation matters, including the T(2) shareholder litigation, the T(2) OIG
Settlement and the settlement of a dispute with the former principals of a
company acquired by T(2) in 1992.
Operating Income (Loss). The Company incurred an operating loss of
$137.6 million in 1994, compared to operating income of $59.5 million in the
prior year. Excluding the merger, restructuring, litigation charges and special
accounts receivable provision, which were taken as discussed above, and totalled
$164.5 million, the Company's operating income would have been $26.9 million.
The Company's lithotripsy business contributed approximately $19.9 million of
operating income in 1994 (after minority interest of $10.8 million) compared to
a contribution of $15.9 million (after minority interest of $8.9 million) in
1993, excluding the allocation of certain corporate overhead costs. Based on its
current contribution to operating income, any material change in the operations
of the lithotripsy business could have a
26
<PAGE> 28
material adverse effect on the consolidated operating results of the Company.
See "Impact of Pricing/Volume Trends."
Net Interest Expense. Interest expense increased over the prior year
primarily due to increased borrowings used to finance acquisitions, merger costs
and other working capital needs.
Other Income. The higher level of other income in 1993 compared to 1994
is primarily due to the $6.4 million gain realized on the sale of T(2)'s
respiratory business in 1993.
Taxes. The Company's effective tax benefit rate for 1994 was
approximately 17%. The rate was substantially below the expected benefit at
combined statutory federal and state rates due primarily to the
non-deductibility of goodwill amortization, certain merger costs and the
realizability of losses created by certain restructuring, litigation and
receivable charges.
Minority Interest. Minority interest in net income of consolidated
joint ventures increased primarily due to the acquisition of majority interests
in several lithotripsy companies during the latter half of 1993.
1993 COMPARED TO 1992
Net Revenue. Net revenue for the year ended December 31, 1993,
increased by 11.9% over the prior year. The increase was primarily the result of
increased volume from acquisitions, offset by pricing pressures on the Company's
home infusion therapy business imposed by third-party indemnity and managed care
payors. IntraCare net revenue increased approximately $3.5 million over the
prior year while lithotripsy net revenue increased $30.3 million as a result of
both acquisitions and internal growth.
Gross Margin. Gross margin decreased to 38.3% in 1993 from 45.7% in the
prior year due primarily to the pricing pressures discussed above and changes in
patient and therapy mix.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased 54.7% over the prior year to 16.4% of net
revenue compared to 11.8% in the prior year. The increase was primarily the
result of lower than historical revenue gains without a corresponding decrease
in the fixed components of S,G&A as well as legal and accounting fees associated
with a special internal inquiry conducted by T(2).
Provision for Estimated Uncollectible Accounts. The provision for
estimated uncollectible accounts increased to $29.8 million in 1993 from $24.0
million in 1992 while remaining relatively consistent comparing 1993 to 1992 as
a percentage of net revenue, increasing to 6.4% in 1993 from 5.8% in 1992.
27
<PAGE> 29
Operating Income. The Company's operating income in 1993 was $59.5
million compared to $108.6 million in the prior year. The Company's lithotripsy
business contributed approximately $15.8 million of operating income in 1993
(after minority interest of $8.9 million) compared to a contribution of $3.7
million in 1992 (after minority interest of $1.4 million), excluding the
allocation of certain corporate overhead costs and before reflecting the
minority interest in those operating results, which are reflected in the
non-operating section of the Company's consolidated statement of operations.
Other Income. Other income includes net interest expense, compared to
net interest income in the prior year, due primarily to increased borrowings
used to finance acquisitions. Other income in 1993 includes the gain of $6.4
million on the sale of T(2)'s respiratory business.
Minority Interest. Minority interest in net income of consolidated
joint ventures increased primarily due to the acquisition of majority interests
in several lithotripsy companies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable securities at
December 31, 1994 was $36.5 million (including restricted cash of approximately
$6.5 million), a decrease of $19.4 million from December 31, 1993. The ratio of
total debt to equity was 0.5:1 at December 31, 1994 compared to 0.2:1 at
December 31, 1993. The increase in the debt ratio is primarily attributable to
borrowings by the Company under the Existing Credit Facility subsequent to the
Merger. Working capital at December 31, 1994 was $83.4 million compared to $125
million at December 31, 1993. The principal reason for the decrease in working
capital was reserves established by the Company in connection with the Coram
Consolidation Plan and in connection with the settlement of the T(2)
shareholders' litigation.
Cash used by operating activities was $24.8 million for the year ended
December 31, 1994 compared to $44.0 million of cash provided by operating
activities for the year ended December 31, 1993. The decrease of approximately
$68.8 million in cash from operating activities between 1993 to 1994 is
primarily attributable to the Company's lower gross margin for the year ended
December 31, 1994 and cash used to fund merger costs. EBITDA, excluding special
charges recorded in connection with the Coram Consolidation Plan, litigation and
certain other one-time costs, was $37.2 million for the year ended December 31,
1994 compared to $73.3 million for the year ended December 31, 1993. The
decrease of approximately $48.3 million is primarily attributable to the
reduction in gross profit which occurred in the year ended December 31, 1994.
The difference between cash used in operating activities and EBITDA for the year
ended December 31, 1994 is primarily due to cash payments for merger and
restructuring costs of $34.6 million. The primary use of the $56.0 million net
cash used by investing activities was
28
<PAGE> 30
$61.5 million paid for the acquisition of businesses, net of cash acquired. The
primary source of the $76.4 million net cash provided by financing activities
were borrowings under the Company's line of credit.
Under the Existing Credit Facility, the Company has a $150 million
revolving facility, with a maturity date of June 30, 1996, and an available
borrowing base of $120 million as of December 31, 1994. Base rate borrowings (as
defined) are at a rate of zero to 1.25% over the greater of (i) prime rate or
(ii) Federal funds rate plus 0.5%, and LIBOR borrowings (as defined) are at a
rate of LIBOR plus .875% to 2.25%. The Existing Credit Facility is secured by
the stock of all of the Company's subsidiaries and contains standard financial
covenants and conditions limiting the Company's ability to make certain
expenditures. The Existing Credit Facility was predominantly used to repay
amounts outstanding under the lines of credit maintained by the Company's
predecessors prior to the Merger, to enable the Company to acquire HMSS and
certain minority interests in T(2), and to pay certain expenses incurred by the
Company in connection with the Merger and the Coram Consolidation Plan. The
Company expects to incur deferred loan charges of approximately $1.2 million in
order to refinance the Existing Credit Facility.
A number of events in fiscal 1994 had a significant impact on the
Company's financial statements, liquidity and results of operations. These
events included the Merger, the T(2) OIG Settlement and the T(2) shareholders
litigation and the implementation of the Coram Consolidation Plan.
As of December 31, 1994, the Company had recorded restructuring charges
of approximately $95.5 million in connection with the implementation of the
Coram Consolidation Plan. Actual charges against the reserve were $56.8 million,
consisting principally of write downs to discontinue certain non-core
businesses. Of the total non-recurring charges of $164.5 million incurred in
1994 for the settlement of litigation, the Coram Consolidation Plan and the
special provision for uncollectible accounts, approximately $33.0 million of
such charges were paid in cash and charged against the reserves in 1994. The
Company anticipates that the remainder of these charges, totaling approximately
$65.5 million, will be paid from cash from the Company's operations, cost
savings recognized from the Coram Consolidation Plan, proceeds from the sale of
certain non-core businesses and borrowings under the Senior Credit Facility.
The reserve for settlement of the T(2) shareholder litigation
represents the Company's estimate of the net costs of the ultimate disposition
of the litigation based on discussions between the parties regarding the
possible settlement of such litigation. There can be no assurance, however,
that such litigation will be resolved pursuant to the terms currently under
discussio or that the Company's ultimate liability will not exceed such
estimate.
29
<PAGE> 31
The Company's liquidity, including cash provided by operating
activities, anticipated sales of non-core businesses, the realization of certain
tax benefits, the anticipated establishment of the Senior Credit Facility and
the sale of the Convertible Notes and the Notes is believed to be adequate to
finance planned capital expenditures, known operating needs, including the
settlements of the legal proceedings referred to herein, and costs related to
the Coram Consolidation Plan and the Caremark Consolidation Plan for at least
the next twelve months; however, any restrictions on the Company's ability to
access the Senior Credit Facility imposed by the Company's lenders could have a
material adverse impact on the Company's liquidity. As of December 31, 1994 the
Company does not have any material commitments for capital expenditures. As such
the Company will continue to evaluate its capital structure, including the mix
of equity and debt instruments outstanding at any point in time.
As of December 31, 1994, approximately 57.9% of the assets of the
Company consisted of goodwill. It is the Company's policy to review the
recoverability of goodwill at least quarterly. If such review indicates that
goodwill would not be recoverable, based on undiscounted estimated cash flows
over the remaining amortization period, the carrying value of the goodwill would
be reduced to estimated fair market value. Currently, the Company is
implementing the Coram Consolidation Plan which is intended to generate cash
flow from operations which will be sufficient to recover the carrying value of
this goodwill. However, if sufficient cash flow from operations is not achieved,
the Company may be required to write down such goodwill. Any such write down
could have a material adverse effect upon the Company's financial position and
results of operations.
An inability to recover goodwill may be suggested by, 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 goodwill.
STATUS OF CORAM CONSOLIDATION PLAN
Through February 28, 1995 the Company had completed a significant
portion of the branch consolidation process, including the closure of 92 branch
facilities and a reduction of approximately 510 employees.
The following table summarizes the utilization of restructuring
reserves through December 31, 1994 (in millions):
<TABLE>
<CAPTION>
CASH NON-CASH TOTAL
<S> <C> <C> <C>
Personnel Reduction Costs........................... $6.2 $ 0.6 $ 6.8
Facility Reduction Costs............................ 1.2 16.2 17.4
Discontinuance Costs................................ -- 32.6 32.6
---- ----- -----
</TABLE>
30
<PAGE> 32
<TABLE>
<S> <C> <C> <C>
$7.4 $49.4 $56.8
==== ===== =====
</TABLE>
The accrual in the Company's Consolidated Balance Sheet for estimated
future cash expenditures related to the Four-Way merger and the Coram
Consolidation Plan at December 31, 1994 was $42.8 million. The Company currently
estimates that future cash expenditures related to that accrual will be made in
the following periods: 81% in 1995, 11% in 1996, 4% in 1997 and 4% in 1998 and
thereafter. These estimated amounts and the periods in which they will be spent
may change as cost estimates are finalized, and such changes may be material.
The Company believes it has adequate reserves to complete the Coram
Consolidation Plan.
FUTURE HEALTHCARE PROPOSALS AND LEGISLATION
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methodologies and
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they
may have on the Company.
ITEM 8. FINANCIAL STATEMENTS.
Consolidated financial statements of the Company at December 31, 1994,
and 1993 and for the years ended December 31, 1994, 1993 and 1992 and the
independent auditors' report thereon as referenced in Item 14 herein are
incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors and executive officers of the
Company is incorporated herein by reference to the information under the caption
"Management -- Directors and Executive Officers" in the Company's Proxy
Statement for the 1995 Annual Meeting of Stockholders.
31
<PAGE> 33
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is incorporated
herein by reference to the information under the caption "Management
Compensation" in the Company's Proxy Statement for the 1995 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information with respect to security ownership of certain beneficial
owners and management is incorporated herein by reference to the tabulation
under the caption "Voting Securities and Principal Stockholders" in the
Company's Proxy Statement for the 1995 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related
transactions is incorporated herein by reference to this information under the
caption "Certain Transactions" in the Company's Proxy Statement for the 1995
Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) and (d) Financial Statements and Schedules
The financial statements and schedules of the Registrant
listed on the accompanying Index to Financial Statements
and Index to Schedules are filed as part of this Annual
Report.
(b) Reports on Form 8-K:
None.
(c) Exhibits
Included as exhibits are the items listed on the Exhibit
Index. The Registrant will furnish a copy of any of the
exhibits listed below upon payment of $5.00 per exhibit to
cover the costs to the Registrant of furnishing such
exhibit.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
2.1 Agreement and Plan of Merger dated as of February 6, 1994, by
and among the Registrant, T(2), Curaflex, HealthInfusion,
Medisys, T(2) Acquisition Company, CHS Acquisition Company, HII
</TABLE>
32
<PAGE> 34
<TABLE>
<S> <C>
Acquisition Company and MI Acquisition Company (Incorporated by
reference to Exhibit 2.1 of Registration No. 33-53957 on Form
S-4).
2.2 First Amendment to Agreement and Plan of Merger dated as of May
25, 1994, by and among the Registrant, T(2), Curaflex,
HealthInfusion, Medisys, T(2) Acquisition Company, CHS
Acquisition Company, HII Acquisition Company and MI Acquisition
Company (Incorporated by reference to Exhibit 2.2 of
Registration No. 33-53957 on Form S-4).
2.3 Second Amendment to Agreement and Plan of Merger dated as of July
8, 1994 by and between the Registrant, T(2), Curaflex,
HealthInfusion, Medisys, T(2) Acquisition Company, CHS
Acquisition Company, HII Acquisition Company and MI Acquisition
Company (Incorporated by reference to Exhibit 2.3 of the
Registrant's Current Report on Form 8-K dated as of July 15,
1994).
3.1 Certificate of Incorporation of Registrant, as amended through
May 11, 1994 (Incorporated by reference to Exhibit 2.1 of
Registration No. 33-53957 on Form S-4).
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3.2
of Registration No. 33-53957 on Form S-4).
4.1 Form of Common Stock Certificate for the Registrant's common
stock, $.001 par value per share.*
10.1 Amended and Restated Credit Agreement dated as of February 10,
1995, by and among Curaflex, T(2), HealthInfusion, Medisys, and
HMSS as Co-Borrowers, Toronto Dominion (Texas), Inc., as Agent
(the "Amended Credit Agreement"). The exhibits and schedules to
the Amended Credit Agreement are omitted from this Exhibit. The
Company agrees to furnish supplementally any omitted exhibit or
schedule to the Securities and Exchange Commission upon request.*
10.2 Form of Employment Agreement between the Registrant and Charles
A. Laverty (Incorporated by reference to Exhibit 10.1 of
Registration No. 33-53957 on Form S-4).
10.3 Form of Severance/Non-Compete Agreement between the Registrant
and Miles E. Gilman (Incorporated by reference to Exhibit 10.2
of Registration No. 33-53957 on Form S-4).
10.4 Form of Severance/Non-Compete Agreement between the Registrant
and William J. Brummond (Incorporated by reference to Exhibit
10.3 of Registration No. 33-53957 on Form S-4).
10.5 Form of Severance/Non-Compete Agreement between the Registrant
and Tommy H. Carter (Incorporated by reference to Exhibit 10.4
of Registration No. 33-53957 on Form S-4).
10.6 Form of Indemnification Agreement between the Registrant and
each of the Registrant's directors and certain executive
officers.*
10.7 Registrant's 1994 Stock Option/Stock Issuance Plan and related
forms of agreements (Incorporated by reference to Exhibit 10.15
of Registration No. 33-53957 on Form S-4).
10.8 Registrant's Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.16 of Registration No. 33-53957 on
Form S-4).
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
10.9 401(k) Plan of T(2) dated December 8, 1989 (Incorporated herein
by reference to Exhibit 10(s) of T(2)'s Annual Report on Form
10-K for the fiscal year ended September 30, 1989, filed with
the Commission on or about December 29, 1988.
10.10 1988 Stock Option Plan of T(2), as amended and restated as of
July 31, 1990 and as further amended as of (i) August 20, 1991;
(ii) November 12, 1991; and (iii) July 6, 1992 (Incorporated by
reference to Exhibit 10.18 of Registration No. 33-53957 on Form
S-4).
10.11 Curaflex 1989 Stock Option Plan (Incorporated by reference to
Exhibit 10.53 of Registration No. 33-53957 on Form S-4).
10.12 Curaflex Amended 1990 Stock Option Plan (Incorporated by
reference to Exhibit 10.54 of Registration No. 33-53957 on Form
S-4).
10.13 Curaflex Directors' Nonqualified Stock Option Plan (Incorporated
by reference to Exhibit 10.59 of Registration No. 33-53957 on
Form S-4).
10.14 Clinical Homecare Ltd. 1990 Incentive Stock Option Plan, as
amended (Incorporated by reference to Exhibit 10.61 of
Registration No. 33-53957 on Form S-4).
10.15 Clinical Homecare Ltd. 1990 Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.62 of Registration No.
33-53957 on Form S-4).
10.16 1989 Stock Option Plan of Medisys (Incorporated by reference to
Exhibit 10.85 of Registration No. 33-53957 on Form S-4).
10.17 Form of Non-Plan Option Agreement of Medisys (Incorporated by
reference to Exhibit 10.86 of Registration No. 33-53957 on Form
S-4).
11 Statement regarding Computation of Per Share Earnings.*
22.1 Subsidiaries of the Registrant.*
23.1 Consent of Ernst & Young LLP.*
23.2 Consent of Deloitte & Touche LLP.*
23.3 Consent of KPMG Peat Marwick LLP.*
23.4 Consent of Arthur Andersen LLP.*
23.5 Consent of Coopers & Lybrand LLP.*
27 Financial Data Schedule.*
</TABLE>
- ---------------
* Filed in original filing.
34
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on April
3, 1996.
CORAM HEALTHCARE CORPORATION
By: /s/ Richard M. Smith
-------------------------------
Richard M. Smith
Chief Financial Officer
35
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Reports of Independent Auditors.......................................................... F-2
Consolidated Balance Sheets -- As of December 31, 1994 and 1993.......................... F-7
Consolidated Statements of Operations -- Years Ended
December 31, 1994, 1993 and 1992....................................................... F-8
Consolidated Statements of Stockholders' Equity -- Years Ended
December 31, 1994, 1993 and 1992....................................................... F-9
Consolidated Statements of Cash Flows -- Years Ended December 31, 1994, 1993 and 1992 ... F-10
Notes to Consolidated Financial Statements............................................... F-11
Schedule II -- Valuation and Qualifying Accounts......................................... F-32
</TABLE>
F-1
<PAGE> 38
Board of Directors
Coram Healthcare Corporation and subsidiaries
We have audited the accompanying consolidated balance sheet of Coram
Healthcare Corporation and subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. Our audit also included the 1994 financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Coram Healthcare Corporation and subsidiaries at December 31, 1994, and the
consolidated results of their operations and cash flows for the year then ended,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related 1994 financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We also have audited, as to combination only, the accompanying
consolidated balance sheet of Coram Healthcare Corporation and subsidiaries as
of December 31, 1993, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1993. As described in Note 1 to such statements, these
statements have been combined from the financial statements of T(2) Medical,
Inc., Curaflex Health Services, Inc., HealthInfusion, Inc., and Medisys, Inc.
(which are not presented separately herein). The reports of Deloitte & Touche
LLP, as it relates to T(2) Medical, Inc., as of September 30, 1993, and for the
two years in the period ended September 30, 1993, KPMG Peat Marwick LLP, as it
relates to Curaflex Health Services, Inc., Arthur Andersen LLP, as it relates
to HealthInfusion, Inc., and Coopers & Lybrand, as it relates to Medisys, Inc.,
who have audited these statements appear elsewhere herein. In our opinion, the
accompanying consolidated financial statements for 1993 and for the two years
in the period ended
F-2
<PAGE> 39
December 31, 1993 have been properly combined on the basis described in Note 1.
We also audited the adjustments described in Note 1 that were applied
to present the statements of operations, stockholders' equity, and cash flows,
of T(2) Medical, Inc. for each of the two years in the period ended December 31,
1993. In our opinion, such adjustments are appropriate and have been properly
applied.
/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
Orange County, California
February 17, 1995
F-3
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of T(2) Medical, Inc.
We have audited the accompanying consolidated balance sheet of T(2)
Medical, Inc. and its subsidiaries (the "Company") as of September 30, 1993, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the two years in the period ended September 30, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of T(2) Medical, Inc. and
subsidiaries at September 30, 1993, and the results of their operations and
their cash flows for each of the two years in the period ended September 30,
1993 in conformity with generally accepted accounting principles.
As discussed in Note 12, the Company is a defendant in civil suits
filed on behalf of individuals claiming they have purchased Company stock at
various times during the time period from December 2, 1991 through August 12,
1993. The ultimate outcome of the litigation cannot presently be determined.
Accordingly, no provision for any loss that may result upon resolution of these
suits has been made in the accompanying consolidated financial statements.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Atlanta, Georgia
November 17, 1993
(December 23, 1993 as to Note 17)
F-4
<PAGE> 41
Inland Empire Office
One Lakeshore Centre
3281 Guasti Road, Suite 550
Ontario, CA 91761
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Curaflex Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of
Curaflex Health Services, Inc. and subsidiaries as of December 31, 1993, and the
related consolidated statements of operations, common stockholders' equity
(deficit) and cash flows for each of the years in the two-year period ended
December 31, 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects the financial position of Curaflex
Health Services, Inc. and subsidiaries as of December 31, 1993 and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in note 8 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
Ontario, California
February 28, 1994
F-5
<PAGE> 42
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
HealthInfusion, Inc. and subsidiaries:
We have audited the consolidated balance sheet of HealthInfusion, Inc.
(a Florida corporation) and subsidiaries as of December 31, 1993, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of HealthInfusion, Inc.
and subsidiaries as of December 31, 1993 and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1993, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Miami, Florida,
March 18, 1994.
F-6
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Medisys, Inc.:
We have audited the consolidated balance sheet of Medisys, Inc. and
Subsidiaries as of December 31, 1993, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the two-year period then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The 1992 consolidated financial statements of Medisys, Inc. and
Subsidiaries have been restated to give retroactive effect to the merger of
Medisys, Inc. and Subsidiaries and American Home Therapies, Inc., on July 30,
1993, which has been accounted for as a pooling of interests as described in
note 2 to the consolidated financial statements of Medisys, Inc. and
Subsidiaries.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Medisys,
Inc. and Subsidiaries as of December 31, 1993, and the consolidated results of
their operations and their cash flows for each of the years in the two-year
period then ended, in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements of
Medisys Inc., and Subsidiaries, in 1993 the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
/s/ COOPERS & LYBRAND
---------------------
COOPERS & LYBRAND
Minneapolis, Minnesota
February 11, 1994
F-7
<PAGE> 44
CORAM HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
--------------------------
1994 1993
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 13,588 $ 17,948
Restricted cash ............................................................. 6,458 5,023
Accounts receivable, net of allowances of $22,297 in 1994 and $25,076 in 1993 111,000 112,944
Investment in available-for-sale securities ................................. 16,546 33,032
Inventories ................................................................. 11,064 11,158
Prepaid taxes ............................................................... 11,430 --
Deferred income taxes, net .................................................. 31,893 6,726
Other current assets ........................................................ 5,667 5,453
--------- ---------
Total current assets ..................................................... 207,646 192,284
PROPERTY AND EQUIPMENT, NET .................................................. 25,902 42,917
JOINT VENTURES AND OTHER ASSETS .............................................. 8,651 26,558
DEFERRED INCOME TAXES NON-CURRENT ............................................ 557 --
GOODWILL, NET ................................................................ 333,359 294,118
--------- ---------
TOTAL ASSETS ................................................................. $ 576,115 $ 555,877
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 26,897 $ 18,745
Taxes payable ............................................................... -- 3,600
Revolving lines of credit ................................................... -- 15,073
Current maturities of long-term debt ........................................ 5,911 13,684
Deferred income taxes ....................................................... 5,788 5,769
Liabilities for securities sold under agreement to repurchase ............... 7,430 --
Reserve for litigation ...................................................... 22,720 --
Accrued merger and restructuring ............................................ 42,794 --
Other accrued liabilities ................................................... 12,711 10,421
--------- ---------
Total current liabilities ................................................ 124,251 67,292
REVOLVING LINES-OF-CREDIT .................................................... 108,099 22,093
LONG-TERM DEBT ............................................................... 12,718 18,063
MINORITY INTEREST IN CONSOLIDATED JOINT VENTURES ............................. 6,599 6,298
OTHER LIABILITIES ............................................................ 665 499
DEFERRED INCOME TAXES NON-CURRENT ............................................ 1,522 2,760
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.001, authorized 75,000 shares,
issued 38,964 in 1994 and 37,793 in 1993 ................................... 39 38
Additional paid-in capital .................................................. 341,328 328,390
Stock purchase note ......................................................... -- (860)
Unrealized loss on available-for-sale securities ............................ (279) --
Retained earnings (deficit) ................................................. (18,827) 111,304
--------- ---------
Total stockholders' equity ............................................... 322,261 438,872
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................... $ 576,115 $ 555,877
========= =========
</TABLE>
See accompanying notes.
F-8
<PAGE> 45
CORAM HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
NET REVENUE .................................................. $ 450,496 $ 462,304 $ 413,100
COST OF SERVICE .............................................. 313,182 285,023 224,356
--------- --------- ---------
Gross profit ................................................ 137,314 177,281 188,744
OPERATING EXPENSES:
Selling, general and administrative expenses ................ 81,907 75,706 48,927
Provision for estimated uncollectible accounts .............. 36,817 29,751 24,036
Amortization of goodwill .................................... 8,971 7,824 4,832
Provision for litigation settlements ........................ 23,220 -- --
Merger costs ................................................ 28,500 2,868 --
Restructuring costs ......................................... 95,500 1,600 2,385
--------- --------- ---------
Total operating expenses ................................. 274,915 117,749 80,180
--------- --------- ---------
OPERATING INCOME (LOSS) ...................................... (137,601) 59,532 108,564
OTHER INCOME (EXPENSE):
Interest income ............................................. 2,469 3,746 4,940
Interest expense ............................................ (7,414) (3,916) (2,860)
Equity in net income of unconsolidated joint ventures ....... 800 1,357 2,918
Gain (loss) on sales of property and equipment .............. (255) 5,359 (254)
Other income ................................................ 320 1,146 1,305
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS ..... (141,681) 67,224 114,613
PROVISION (BENEFIT) FOR INCOME TAXES ......................... (26,231) 28,848 38,117
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED JOINT VENTURES 12,622 9,715 4,638
--------- --------- ---------
NET INCOME (LOSS) ............................................ $(128,072) $ 28,661 $ 71,858
========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE:
Primary ..................................................... $ (3.32) $ 0.76 $ 1.95
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Primary ..................................................... 38,633 37,778 36,812
========= ========= =========
</TABLE>
See accompanying notes.
F-9
<PAGE> 46
CORAM HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
COMMON STOCK ADDITIONAL STOCK AVAILABLE- RETAINED
------------------ PAID-IN PURCHASE FOR-SALE EARNINGS
SHARES AMOUNT CAPITAL NOTE SECURITIES (DEFICIT) TOTAL
------ ------ ------- ---- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1992 .............. 32,158 $ 32 $ 193,521 $ (860) $ -- $ 37,846 $ 230,539
Issuance of common stock, net ........ 3,954 4 109,890 -- -- -- 109,894
Dividends ............................ -- -- -- -- -- (2,349) (2,349)
Distribution of S Corporation earnings -- -- -- -- -- (15,428) (15,428)
Net income ........................... -- -- -- -- -- 71,858 71,858
------ --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1992 ............ 36,112 36 303,411 (860) -- 91,927 394,514
Issuance of common stock, net ........ 1,681 2 24,979 -- -- -- 24,981
Dividends ............................ -- -- -- -- -- (5,012) (5,012)
Distribution of S Corporation earnings -- -- -- -- -- (4,272) (4,272)
Net income ........................... -- -- -- -- -- 28,661 28,661
------ --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1993 ............ 37,793 38 328,390 (860) -- 111,304 438,872
Issuance of common stock, net ........ 1,171 1 12,938 -- -- -- 12,939
Unrealized loss on available-for-sale
securities .......................... -- -- -- -- (279) -- (279)
Proceeds from stock purchase note .... -- -- -- 860 -- -- 860
Dividends ............................ -- -- -- -- -- (2,059) (2,059)
Net loss ............................. -- -- -- -- -- (128,072) (128,072)
------ --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1994 ............ 38,964 $ 39 $ 341,328 $ -- $ (279) $ (18,827) $ 322,261
====== ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-10
<PAGE> 47
CORAM HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $(128,072) $ 28,661 $ 71,858
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision for estimated uncollectible accounts ................. 19,517 29,751 24,036
Special provision for additional uncollectible amounts ......... 17,300 -- --
Depreciation and amortization .................................. 22,871 18,983 11,876
Income tax benefit of exercise of stock options ................ -- -- 15,464
Merger/restructuring costs not requiring cash .................. 50,100 -- --
Litigation settlements not requiring cash ...................... 5,520 -- --
Deferred income taxes, net ..................................... (26,943) 377 (330)
Minority interest in net income of consolidated joint ventures,
net ............................................................ (978) 1,240 901
(Gain) loss on sales of property and equipment ................. 255 (5,359) 254
(Gain) loss on sales of investments, net ....................... (177) (115) 278
Equity in net income of unconsolidated joint ventures, net ..... 562 406 (1,154)
Other, net ..................................................... 675 (115) 1,165
Change in assets and liabilities, net of acquisitions:
Increase in accounts receivable ............................... (20,597) (17,683) (35,483)
Increase in prepaid expenses, inventories and other assets .... (16,721) (8,360) (13,061)
Decrease in current and other liabilities ..................... (3,112) (3,834) (9,997)
Increase in accrued merger and restructuring .................. 37,787 -- --
Increase in reserve for litigation ............................ 17,200 -- --
--------- --------- ---------
Net cash provided (used) by operating activities ............ (24,813) 43,952 65,807
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities ............ 17,207 -- --
Purchases of available-for-sale securities ..................... (1,000) -- --
Purchases and sales of short-term investments, net ............. -- 35,785 (66,668)
Proceeds from sale of property and equipment ................... 1,100 5,439 150
Proceeds from sales of joint ventures .......................... 1,050 -- --
Purchases of property and equipment ............................ (8,950) (14,701) (11,101)
Payments for acquisition of businesses, net of cash acquired ... (61,450) (60,364) (57,153)
Capital contributions to unconsolidated joint ventures ......... (3,945) (11,897) (7,380)
Distributions of S corporation earnings ........................ -- (4,272) (15,427)
--------- --------- ---------
Net cash used by investing activities ....................... (55,988) (50,010) (157,579)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net of repurchases and issuance costs ... 2,597 1,296 50,887
Borrowings of lines of credit .................................. 120,433 -- --
Repayments of lines of credit .................................. (49,500) -- --
Securities sold under agreements to repurchase ................. 7,430 -- --
Debt borrowings ................................................ 2,180 62,941 22,809
Repayment of debt .............................................. (11,655) (50,823) (49,465)
Cash dividends paid ............................................ (2,059) (5,012) (2,349)
Exercise of stock options ...................................... 7,015 223 291
--------- --------- ---------
Net cash provided by financing activities ................... 76,441 8,625 22,173
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH ................................. (4,360) 2,567 (69,599)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................. 17,948 15,381 84,980
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................ $ 13,588 $ 17,948 $ 15,381
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ...................................................... $ 9,596 $ 3,868 $ 2,963
========= ========= =========
Income taxes .................................................. $ 16,692 $ 32,183 $ 28,174
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of stock in connection with acquisitions .............. $ 4,022 $ 23,331 $ 38,261
========= ========= =========
Capital lease obligations for purchase of property and equipment $ -- $ 1,700 $ --
========= ========= =========
Conversion of preferred stock to common stock .................. $ -- $ -- $ 20,009
========= ========= =========
</TABLE>
See accompanying notes.
F-11
<PAGE> 48
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business Activity
Coram Healthcare Corporation and its subsidiaries ("Coram" or the
"Company") are primarily engaged in providing alternate site infusion therapy
and related services. Other services offered by the Company include the
provision of lithotripsy, non-intravenous infusion products and physician
support services.
The operations of the Company commenced on July 8, 1994, as a result
of a merger of T(2) Medical, Inc. ("T(2)"), Curaflex Health Services, Inc.
("Curaflex"), HealthInfusion, Inc. ("HealthInfusion") and Medisys, Inc.
("Medisys") (collectively, the "Merged Entities"). Each of these companies
became and are now wholly owned subsidiaries of the Company. Each outstanding
share of the Merged Entities was converted, at varying exchange rates, into
shares of the Company's common stock, resulting in the issuance of 38.6 million
shares of Coram common stock. The transaction was accounted for as a pooling of
interests. Accordingly, the accompanying financial information was restated to
include the accounts of the Merged Entities for all periods presented.
The results of operations previously reported by the Merged Entities
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1994 --------------------
(UNAUDITED) 1993 1992
----------------- ---- ----
<S> <C> <C> <C>
Net Revenue:
T(2) ........................... $ 115,770 $ 265,090 $ 264,562
Curaflex ....................... 48,989 89,152 75,127
Medisys ........................ 27,438 51,381 23,662
HealthInfusion ................. 34,515 56,681 49,749
--------- --------- ---------
Combined ...................... $ 226,712 $ 462,304 $ 413,100
========= ========= =========
Net Income (Loss):
T(2) ........................... $ (3,387) $ 35,504 $ 64,859
Curaflex ....................... (4,400) (8,615) (875)
Medisys ........................ 599 652 1,551
HealthInfusion ................. 1,703 1,120 6,323
Coram Holding .................. (304) -- --
--------- --------- ---------
Combined ...................... $ (5,789) $ 28,661 $ 71,858
========= ========= =========
</TABLE>
HMSS Acquisition -- On September 12, 1994, the Company acquired all of
the capital stock of H.M.S.S., Inc. ("HMSS"), an alternate site infusion therapy
provider. The acquisition was accounted for by the purchase method of
accounting, and accordingly, the results of operations of HMSS have been
included in the accompanying consolidated financial statements subsequent to the
date of acquisition. The acquisition was not material to the Company's financial
position or results of operations.
F-12
<PAGE> 49
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other Acquisitions -- During 1994, T(2) completed 55 acquisitions
totaling $22.8 million 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. During the years ended December 31,
1993 and 1992, the Merged Entities completed numerous acquisitions. Acquisitions
accounted for as poolings of interests (four in 1993 and five in 1992) are
reflected in the accounts and operations of the Merged Entities for all periods
presented. Acquisitions accounted for as purchases (15 in 1993 and 14 in 1992)
are included in the operations of the Merged Entities subsequent to the dates of
acquisitions.
As of December 31, 1994, the Company had contingent "earn-out"
obligations in connection with certain of these acquisitions. The Company may be
required to pay under such contingent obligations for years ending after
December 31, 1994, approximately $15.0 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 $8.4 million of
contingent obligations may be paid in cash. If these contingent payments are
paid, they will be recorded as additional costs in excess of fair value in the
period in which the payment becomes probable.
Fiscal Year -- In conjunction with the merger, the Company adopted a
December 31 year end. While Curaflex, HealthInfusion and Medisys previously had
year ends of December 31, T(2) prepared its financial statements on the basis
of a September 30 fiscal year end. The restated financial statements for 1993
and 1992 include previously reported T(2) amounts adjusted to conform to a
December 31 year end. Accordingly, T(2)'s results of operations as previously
reported have been adjusted as follows (in thousands):
<TABLE>
<S> <C>
NET REVENUES:
As previously reported -- fiscal year ended September 30, 1992............... $250,944
As adjusted to conform to the year ended December 31, 1992 .................. $264,562
As previously reported -- fiscal year ended September 30, 1993............... $273,199
As adjusted to conform to the year ended December 31, 1993 .................. $265,090
NET INCOME:
As previously reported -- fiscal year ended September 30, 1992............... $64,959
As adjusted to conform to the year ended December 31, 1992 .................. $64,859
As previously reported -- fiscal year ended September 30, 1993 .............. $41,468
As adjusted to conform to the year ended December 31, 1993 .................. $35,504
</TABLE>
The adjustments made to conform T(2)'s previously reported amounts
reflect the inclusion and exclusion, as necessary, of T(2)'s results of
operations for the quarters ended December 31, 1993, 1992 and 1991.
F-13
<PAGE> 50
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Merger and Restructuring -- During September 1994, the Company
initiated a merger and restructuring plan ("the Coram Consolidation Plan") to
reduce future operating costs, improve productivity and gain efficiencies
through consolidation of redundant infusion centers and corporate offices,
reductions in personnel, and elimination or discontinuance of investments in
certain joint ventures and other non-infusion facilities. The Coram
Consolidation Plan anticipated the costs associated with consummation of the
merger transaction ("Merger Costs"); it also anticipated costs associated with
severance and fringe benefits related to workforce reductions of approximately
630 employees ("Personnel Reduction Costs"), consolidation of existing operating
and corporate office facilities and disposition of redundant equipment and
inventories ("Facility Reduction Costs") and the impact of changes in strategic
direction related to certain non- core businesses ("Discontinuance Costs")
(collectively "Restructuring Costs"). In connection with the Coram Consolidation
Plan, the Company recorded charges of $28.5 million in estimated merger costs
and $92.3 million in estimated restructuring costs. Additionally, upon the
completion of the HMSS acquisition, the Company extended the Coram Consolidation
Plan to include the consolidation of HMSS operations. Accordingly, the Company
recorded estimated restructuring costs of $3.2 million related to the HMSS
transaction. The estimated costs associated with each component of the Coram
Consolidation Plan, including the writedown of existing assets to their
estimated net realizable value were as follows (in thousands):
<TABLE>
<CAPTION>
CASH NON-CASH
EXPENDITURES CHARGES TOTAL
------------ ------- -----
<S> <C> <C> <C>
Merger Costs ............................. $27,900 $ 600 $28,500
======= ======= =======
Personnel Reduction Costs................. $26,200 $ 600 $26,800
Facility Reduction Costs.................. 15,600 16,300 31,900
Discontinuance Costs ..................... 4,200 32,600 36,800
------- ------- -------
Restructuring Costs ...................... $46,000 $49,500 $95,500
======= ======= =======
</TABLE>
Merger costs of $28.5 million consist of executive severance payments
of $11.8 million for payments directly related to the merger based on the forms
of the respective employment agreements, including covenants not to compete, or
prior service provisions, $6.6 million of investment banking fees, $6.9 million
of consulting, legal and accounting fees, and $3.2 million of other costs
incurred as a direct result of the merger.
Personnel reduction costs include severance payments, fringe benefits
and taxes related to employees to be terminated as part of the restructuring,
costs of terminating executives, buying out employment and consulting contracts
as part of the restructuring, and approximately $3.5 million of direct
incremental consulting, legal and accounting fees to develop and implement the
restructuring plan.
F-14
<PAGE> 51
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Facility reduction costs resulting in cash expenditures 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. These branches are located throughout the United States.
The corporate offices are located in Alpharetta, GA, Houston, TX, Miami, FL,
Minneapolis, MN and Ontario, CA. 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. Those assets include pharmacy equipment, office and warehouse
furniture and fixtures, computer hardware and software, and leasehold
improvements. It also includes inventory that has no future value because of the
restructuring.
Discontinuance costs are principally non-cash and consist of the loss
on disposal of non-core businesses. The principal businesses are long-term care
("Pharmcare"), ambulatory surgery centers ("Surgex"), specialized pediatric
services ("Kids Medical") and Northside Diet Center. In addition, there are
several dozen smaller entities, including certain joint ventures and
partnerships, that will be disposed of at losses that are not expected to exceed
$1 million individually or $15.4 million in the aggregate.
Management believes these costs to be non-recurring; however, actual
costs may vary from the recorded charges as the Coram Consolidation Plan
continues. Revenues include revenues from non- core businesses that will not be
continued of approximately $40 million in 1994; operating results were not
material.
Implementation of the Coram Consolidation Plan began in September 1994.
The Coram Consolidation Plan provided for the elimination of approximately 100
of the Company's home infusion branch facilities and the consolidation of
corporate administrative operations into one location, with a corresponding
significant reduction of branch and corporate personnel. The Company anticipates
that the branch and corporate consolidation portions of the Coram Consolidation
Plan will be substantially completed by March 31, 1995.
Through December 31, 1994, the Company had completed a significant
portion of the branch consolidation process, including the closure of 75 branch
facilities and a reduction of approximately 500 employees. The Company has made
total payments and recorded asset write-downs through December 31, 1994, as
follows (in thousands):
F-15
<PAGE> 52
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
CASH NON-CASH TOTAL
---- -------- -----
<S> <C> <C> <C>
Merger Costs ................................. $25,100 $ 600 $25,700
======= ======= =======
Personnel Reduction Costs..................... $ 6,200 $ 600 $ 6,800
Facility Reduction Costs...................... 1,200 16,200 17,400
Discontinuance Costs ......................... -- 32,600 32,600
------- ------- -------
Restructuring Costs .......................... $ 7,400 $49,400 $56,800
======= ======= =======
</TABLE>
The accrued merger and restructuring includes the remaining portion of
the restructuring amount related to the HMSS acquisition.
As a result of the Company's decision to implement standardized
policies for recognition of contractual and other allowances, de-emphasize
certain businesses and provide for the disruptions experienced during the merger
and post-merger transition process, the Company also recorded a special charge
of $17.3 million in September 1994, for anticipated uncollectible accounts and
other receivables. In establishing this reserve, the Company evaluated the aging
of trade receivables since the merger process began and evaluated the impact of
ending relationships with certain centers.
Although subject to future adjustment, management of the Company
believes it had adequate reserves as of December 31, 1994, to complete the Coram
Consolidation Plan.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation -- The
consolidated financial statements include the accounts of Coram, its
subsidiaries and joint ventures in which ownership is 51% or greater. All
material intercompany accounts and transaction balances have been eliminated in
consolidation. The Company uses the equity method of accounting to account for
investments in entities in which it exhibits significant influence and has an
ownership interest of 20 to 50%. The cost method is used to account for
investments in which ownership is less than 20%.
Revenue Recognition -- Revenue is recognized as services are rendered
or products are delivered. Substantially all of the Company's revenue is billed
to third-party payors, including insurance companies, managed care plans,
governmental payors and contracted institutions. Revenue is recorded net of
contractual adjustments and related discounts. Contractual adjustments represent
estimated differences between service revenue at established rates and amounts
expected to be realized from third-party payors under contractual agreements.
Management fees, which are collected from entities managed by the
Company, are based on a percentage of the entities' annual pretax earnings or a
percentage of revenue.
F-16
<PAGE> 53
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Cash and Cash Equivalents -- Cash equivalents include all highly liquid
investments with an original maturity of three months or less. A portion of the
Company's cash balances were restricted as to their use. The restricted balances
totaled approximately $6.5 million and $5.0 million at December 31, 1994 and
1993, respectively.
Investments -- Effective January 1, 1994, the Company adopted Statement
of Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As of December 31, 1994, the Company
had classified all of its investment securities as available-for-sale.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported on a net basis as a separate component of stockholders'
equity until realized. Realized gains and losses on the sale of securities are
computed using the specific identification method.
Provision for Estimated Uncollectible Accounts -- The Company records a
provision for estimated uncollectible accounts for the portion of recognized
revenues which it estimates may not be ultimately collected. The provision
includes any contractual adjustments in excess of those estimated at the time
revenue is recognized and other differences between recorded revenues and
collections from third party payors and patients. The provision and related
allowance are adjusted periodically, based upon the Company's evaluation of
historical collection experience with specific payors for particular services,
anticipated reimbursement levels with specific payors for new services for which
the Company may not have had significant historical collection experience,
industry reimbursement trends and other relevant factors.
Inventories -- Inventories, consisting primarily of pharmaceuticals and
medical supplies, are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of one to 10 years for machinery and equipment, furniture
and fixtures and vehicles, and 30 to 31.5 years for buildings. Leasehold
improvements are amortized over the shorter of the lease term or estimated
useful lives of the related assets.
Goodwill -- 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. At December 31, 1994 and 1993, total accumulated
amortization of
F-17
<PAGE> 54
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
goodwill was approximately $28.4 million and $19.1 million, respectively.
Goodwill from acquisitions consummated prior to the merger and the HMSS
acquisition is amortized over useful lives ranging from 30 to 40 years. Goodwill
will be amortized over an average useful life of approximately 30 years for all
companies purchased subsequent to December 31, 1994. The Company periodically
assesses the recoverability of goodwill at least quarterly and more frequently
if the facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable, as determined based on the
undiscounted cash flows of the entity over the remaining amortization period,
the Company's carrying value of the goodwill is reduced to the estimated fair
value. The Company estimates cash flows using its judgments as to the future
profitability of its operations and the changing dynamics of the healthcare
industry.
An inability to recover goodwill may be suggested by, 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 goodwill.
Income Taxes -- The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes". SFAS 109 requires an asset and liability approach
to financial accounting and reporting for income taxes.
Per Share Data -- Per share data have been computed by dividing net
income or loss by the weighted average number of common and common equivalent
shares outstanding during the period. The weighted average calculation also
includes common shares issuable. Common stock equivalents include dilutive stock
options and warrants. Fully diluted per share calculations are not presented in
the financial statements because the assumed conversions of convertible debt and
any additional incremental shares would be either antidilutive or cause de
minimis dilution.
2. INVESTMENTS
The carrying value of the Company's available-for-sale securities and
their approximate fair values at December 31, 1994 were as follows (in
thousands):
F-18
<PAGE> 55
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED APPROXIMATE
COST LOSSES FAIR VALUE
---- ------ ----------
<S> <C> <C> <C>
U.S. Government agencies ..................................... $ 329 $ 4 $ 325
Asset and mortgage-backed securities.......................... 8,256 171 8,085
U.S. Treasury obligations .................................... 7,531 93 7,438
Corporate obligations ........................................ 704 11 693
Other securities ............................................. 5 -- 5
------- ------- -------
Total .................................................... $16,825 $ 279 $16,546
======= ======= =======
</TABLE>
In accordance with the Company's previous investment accounting policy,
the aggregate carrying value and estimated fair value of investments at December
31, 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
APPROXIMATE
COST FAIR VALUE
---- ----------
<S> <C> <C>
U.S. Government agencies ............................ $ 1,313 $ 1,323
Asset and mortgage-backed securities................. 18,438 18,484
U.S. Treasury obligations ........................... 12,296 12,307
Corporate obligations ............................... 985 986
------- -------
Total ........................................... $33,032 $33,100
======= =======
</TABLE>
The amortized cost and approximate market value of investment
securities at December 31, 1994, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
COST FAIR VALUE
<S> <C> <C>
Due in one year or less ........................................................ $ 5,618 $ 5,574
Due after one year through five years .......................................... 2,951 2,887
Asset and mortgage-backed securities ........................................... 8,256 8,085
------- -------
$16,825 $16,546
======= =======
</TABLE>
On December 28, 1994, the Company entered into an agreement to sell and
repurchase U.S. Treasury obligations totaling approximately $7.4 million. The
liability to repurchase securities sold under this agreement reported as a
current liability in the accompanying consolidated balance sheet because of its
short-term maturity. The related investments were included as available-for-
sale securities at December 31, 1994.
Gross realized gains and losses on sale of available-for-sale
securities were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Gain...................................................................... $ 8 $ 69 $182
Loss...................................................................... $136 $264 $506
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
F-19
<PAGE> 56
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1993
---- ----
<S> <C> <C>
Land and buildings ........................... $ 3,135 $ 3,218
Leasehold improvements ....................... 4,943 4,570
Machinery and equipment ...................... 50,940 51,703
Furniture and fixtures ....................... 5,898 9,848
Vehicles ..................................... 5,493 5,274
------- -------
70,409 74,613
Less accumulated depreciation and amortization 44,507 31,696
------- -------
$25,902 $42,917
======= =======
</TABLE>
4. LINES OF CREDIT AND LONG-TERM DEBT
Lines of credit and Long-term debt were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
---- ----
<S> <C> <C>
Revolving lines of credit ........................................... $108,099 $ 37,166
Subordinated convertible debentures, at 9%, with semi-annual interest
payments, due June 30, 1996, convertible into common stock at the
conversion rate of $16.36 .......................................... 7,000 7,000
Other obligations, including capital leases, at rates ranging from 6%
to 16%, collateralized by certain property and equipment ........... 11,629 24,747
-------- --------
126,728 68,913
Less current maturities ............................................. 5,911 28,757
-------- --------
$120,817 $ 40,156
======== ========
</TABLE>
On October 17, 1994, the Company entered into a $120 million revolving
line of credit agreement to replace its prior borrowing facility. This
agreement, which has a maturity date of June 30, 1996, bears interest at an
adjusted LIBOR and/or base borrowing rates. Base rate borrowings under this
agreement were zero to 1.125% over the greater of 1) prime rate or 2) Federal
funds rate plus 0.5%, and LIBOR borrowings at a rate of floating LIBOR plus
0.875% to 2.125%. The revolving line of credit is collateralized by a pledge of
the stock of the Company's subsidiaries, as well as accounts receivable,
investment securities and all of the general assets of the Company and its
subsidiaries. The agreement also requires the maintenance of certain financial
ratios and contains other restrictive covenants. At December 31, 1994,
borrowings on the revolving line of credit were at a weighted average LIBOR rate
of 7.822%. At December 31, 1994, the available borrowings under the revolving
credit facility, as defined in the Agreement, were approximately $12 million.
On February 10, 1995, the Company entered into an amendment, which had
an effective date of December 31, 1994, to its revolving line of credit
agreement. Under this amendment, the revolving line of credit was increased to
$150 million. The base rate borrowings were adjusted to zero to 1.25% over the
greater of 1) prime rate or 2) Federal funds rate plus 0.5%, and LIBOR
borrowings at a rate of floating LIBOR plus 0.875% to 2.25%. The covenants
include but are not limited to the restrictions in the payment of any dividends.
F-20
<PAGE> 57
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The agreement contains a commitment fee ranging from 0.25% to 0.5% on the unused
balance.
The Company was in compliance with financial ratios and restrictive
covenants at December 31, 1994 and for the year then ended.
At December 31, 1994, the Company was obligated to make principal
payments on long-term debt outstanding as follows (in thousands):
<TABLE>
<S> <C>
Year Ending December 31,
1995............................................. $ 5,911
1996............................................. 117,879
1997............................................. 866
1998............................................. 820
1999 and thereafter.............................. 1,252
--------
$126,728
========
</TABLE>
5. INCOME TAXES
The components of consolidated income tax provision (benefit) were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ......................................... $ 237 $ 27,019 $ 33,138
State ........................................... 68 3,479 4,793
-------- -------- --------
Total ........................................ 305 30,498 37,931
-------- -------- --------
Deferred:
Federal ......................................... $(17,676) $ (1,440) $ 146
State ........................................... (8,860) (210) 40
-------- -------- --------
Total ........................................ (26,536) (1,650) 186
-------- -------- --------
Provision (benefit) for income taxes.......... $(26,231) $ 28,848 $ 38,117
======== ======== ========
</TABLE>
The following table reconciles the effective income tax rate (benefit)
to the federal statutory rate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate .............................. (35.0)% 35.0% 34.0%
Valuation allowance ................................. 15.9 6.8 --
S corporation income ................................ -- (3.0) (4.9)
State income taxes, net of federal income tax benefit (5.4) 5.8 3.9
Non-deductible merger costs ......................... 3.2 0.3 --
Goodwill ............................................ 1.1 2.0 1.1
Other ............................................... 3.1 3.3 0.5
----- ---- ----
Effective income tax rate (benefit) ................. (17.1)% 50.2% 34.6%
===== ==== ====
</TABLE>
The temporary differences, tax effected, which give rise to the
Company's net deferred tax asset (liability) were as follows (in thousands):
F-21
<PAGE> 58
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1993
---- ----
<S> <C> <C>
Deferred tax assets:
Restructuring costs ....................... $ 33,320 $ --
Net operating loss carryforwards........... 14,031 12,358
Accrued litigation ........................ 10,286 69
Allowance for doubtful accounts ........... 11,146 5,656
Accrued vacation .......................... 975 680
Other ..................................... 1,303 383
-------- --------
Total gross deferred tax asset.......... 71,061 19,146
Less valuation allowance ............... (38,611) (12,420)
-------- --------
Net deferred tax asset ................. 32,450 6,726
Deferred tax liabilities:
State taxes ............................... (4,911) (442)
Amortization of intangibles ............... (1,492) (925)
Partnerships .............................. (608) (5,327)
Other ..................................... (299) (1,835)
-------- --------
Total deferred tax liabilities.......... (7,310) (8,529)
-------- --------
Net deferred tax asset (liability).......... $ 25,140 $ (1,803)
======== ========
</TABLE>
During the year ended December 31, 1992, the principal differences
resulting in the deferred income tax provision of $186,000 were not significant.
At December 31, 1994, the Company had net operating loss carryforwards
("NOLs") for federal income taxes of approximately $35 million which are
available to offset future federal taxable income, expiring in the years 2002
through 2008. The NOL carryforwards were generated by Curaflex prior to the
merger. Accordingly, the NOLs contain separate return limitations restricting
their use to Curaflex and its subsidiaries. In addition, the NOLs have a maximum
annual usage limitation of approximately $4.5 million as imposed under Section
382 of the Internal Revenue Code.
For financial reporting purposes, a valuation allowance of
approximately $14 million has been recognized to offset the deferred tax assets
related to these NOLs. An additional valuation allowance has been recognized to
offset the deferred tax assets which cannot be realized as part of the Company's
loss carryback. Both valuation allowances when realized will benefit the
Company's income tax provision.
6. RELATED PARTY TRANSACTIONS
Prior to the merger, the Merged Entities entered into agreements with
individuals and/or companies considered to be related parties. The majority of
these individuals and/or companies are no longer related parties as these
individuals are no longer Company employees, officers and/or directors. The
following summarizes the significant related party transactions:
Receivables from officers and other related parties at December 31,
1993, were approximately $1.6 million.
F-22
<PAGE> 59
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Certain executive officers and consultants to the Merged Entities had
employment, severance or consulting agreements that entitled such executive
officers or consultants to certain termination or severance payments upon
consummation of the merger or upon termination of employment following the
merger. In conjunction with the Coram Consolidation Plan (see Note 1), the
Company accrued $18.8 million for the termination of the existing employment,
consulting and/or severance agreements with these individuals. This accrual is
included as a component of the Coram Consolidation Plan.
All companies managed by the Company are considered related parties.
Management fee revenue from entities managed by the Company was approximately
$28.8 million, $51.6 million and $66.2 million in 1994, 1993 and 1992,
respectively. Receivables from managed companies were $4.8 million and $11.6
million at December 31, 1994 and 1993, respectively.
A former Director of one of the Merged Entities is associated with a
law firm that rendered various legal services to the Company. The legal fees to
the firm approximated $0.2 million in 1994 and $0.3 million in each of the years
1993 and 1992.
A Director of the Company is associated with a law firm that rendered
various legal services to the Company. The legal fees to the firm approximated
$1.4 million during 1994.
Certain former Directors of one of the Merged Entities were employed as
consultants. Consulting fees to these individuals approximated $2.5 million,
$0.3 million and $0.4 million during 1994, 1993, and 1992, respectively.
In 1994, a note receivable totaling $0.4 million from a former Director
of one of the Merged Entities was forgiven by the Company as part of his
severance.
At December 31, 1994, the Company had outstanding loans to certain
members of management approximating $1.5 million. The loans are collateralized
by the individuals' former primary residences and had interest rates ranging
from zero to 6.6% per annum. The principal amount of the loans and all interest
accumulated is due no later than one year from the date of origination.
7. STOCKHOLDERS' EQUITY
At December 31, 1994, the Company was authorized to issue 10 million
shares of preferred stock, $.001 par value, which may be issued at the
discretion of the Company's Board of Directors without further stockholder
approval. The Board can also determine
F-23
<PAGE> 60
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
the preferences, rights, privileges and restrictions of any series of preferred
stock. At December 31, 1994, there were no shares of preferred stock issued and
outstanding.
In accordance with the Merger Agreement, Coram assumed the outstanding
obligations under the various stock option and stock purchase plans of the
Merged Entities. No further options will be granted under these plans, unless so
determined by the Company's Board of Directors. In addition, the Company has
implemented the 1994 Stock Option Plan (the "1994 Plan") and the Coram Employee
Stock Purchase Plan (the "Purchase Plan") pursuant to which an aggregate of up
to 7.9 million shares of common stock are reserved for issuance. In 1994,
options to purchase approximately 5.0 million shares of Coram stock were issued
under the 1994 Plan and no shares were issued under the Purchase Plan.
Common shares reserved for future issuance also include approximately
0.6 million shares related to options outside of the 1994 Plan, 0.4 million
shares related to convertible debt (see Note 4), and 3.2 million shares related
to stock purchase warrants.
Stock Option Plan
The 1994 Plan contains three separate incentive programs which provide
for the granting of stock options to certain officers, key employees,
consultants and non-employee members of Coram's Board of Directors. Options
granted under the 1994 Plan may constitute either incentive stock options,
non-statutory options or stock appreciation rights based on the type of
incentive program utilized. For each of the incentive programs, options may be
granted at exercise prices ranging from 85% to 100% of the fair market value of
the Company's stock at the date of grant. Options granted under the 1994 Plan
expire ten years from the date of grant and become exercisable at varying dates
depending upon the incentive program utilized. The 1994 Plan is administered by
a committee of the Board of Directors. The committee has the authority to
determine the employees to whom awards will be made and the incentive program to
be utilized. During the year ended December 31, 1994 the options granted under
the 1994 Plan were all at 100% of fair market value of the Company's stock at
the date of grant. A summary of the stock option transactions under the prior
stock option plans and the 1994 Plan is as follows (in thousands):
F-24
<PAGE> 61
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
OUTSTANDING PER SHARE
----------- ---------
<S> <C> <C>
Balance at January 1, 1992 ................... 2,750 $0.79 - $49.90
Options granted ............................. 1,469 7.60 - 92.26
Options exercised ........................... (385) 0.79 - 51.19
Options cancelled ........................... (296) 1.38 - 92.26
----- -------------- -----
Balance at December 31, 1992 ................. 3,538 0.79 - 92.26
Options granted ............................. 1,254 9.52 - 41.67
Options exercised ........................... (258) 0.79 - 32.92
Options cancelled ........................... (714) 1.38 - 51.19
----- -------------- -----
Balance at December 31, 1993 ................. 3,820 1.44 - 92.26
Options granted ............................. 5,080 11.00 - 18.41
Options exercised ........................... (867) 1.44 - 19.84
Options cancelled ........................... (914) 1.44 - 92.26
----- -------------- -----
Balance at December 31, 1994 ................. 7,119 $1.44 - $92.26
===== ============== =====
Total options exercisable at December 31, 1994 1,732 $1.44 - $92.26
===== ============== =====
</TABLE>
The Company has an option agreement outside of the 1994 Plan, with a
firm performing consulting services to the Company. An option to purchase 0.6
million shares of the Company's common stock was granted as of November 2, 1994
at an exercise price of $15.63 and expires in November 1999. This option vests
over a 3 year period, commencing in November 1994. It is the Company's policy to
account for these options using the fair value method of measurement at the date
of grant.
Warrants to Purchase Common Stock
In connection with the settlement of certain stockholder litigation the
Company has issued warrants to acquire approximately 0.5 million shares of the
Company's common stock at an exercise price ranging from $18 per warrant,
subject to adjustment. The Company has agreed, subject to court approval and
certain other contingencies, to issue additional warrants to acquire up to 2.5
million shares of the Company's common stock at an exercise price of $20.25 per
warrant, subject to adjustment (see Note 8).
In addition, stock purchase warrants outstanding at December 31, 1994,
which had been issued by the Merged Entities prior to the merger were converted
into warrants to acquire approximately 0.2 million shares of the Company's stock
at a price ranging from $12.58-$29.63 per warrant. Certain of these warrants do
not have an expiration date.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, other operating space and equipment under
various operating and capital leases. The leases provide for monthly rental
payments including real estate taxes and other operating costs. Total rental
expense for 1994, 1993 and 1992 was approximately $14.8 million, $14.3 million
and $10.8 million,
F-25
<PAGE> 62
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
respectively. At December 31, 1994 the aggregate future minimum lease
commitments were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
----- ------
<S> <C> <C>
Year Ending December 31,
1995 ............................................ $ 2,844 $ 7,845
1996 ............................................ 1,376 5,560
1997 ............................................ 617 3,876
1998 ............................................ 484 1,795
1999 and thereafter ............................. -- 957
------- -------
Total minimum lease payments .................... 5,321 20,033
Less amounts representing interest............... 582 --
------- -------
Net minimum lease payments ...................... $ 4,739 $20,033
======= =======
</TABLE>
Capital lease obligations are included in other obligations (see Note
4). The cost and related accumulated depreciation of equipment under capital
leases were approximately $6.6 million and $3.2 million at December 31, 1994.
Employee Benefit Plans
The Merged Entities provide various defined contribution plans that are
available to their employees. Management of the Company intends to merge these
benefit plans during 1995. In general, each plan covers eligible employees, as
defined in the plan documents, and certain plans contain provisions whereby the
Company will contribute specified amounts. During the years ended December 31,
1994, 1993 and 1992, total contributions to these plans were approximately $1.4
million, $1.3 million and $0.9 million, respectively.
Litigation
The Company has entered into a Stipulation of Settlement (the
"Stipulation") dated as of January 27, 1995 which sets forth the principal terms
of a proposed settlement of class action shareholder litigation which was
initiated against T(2) in 1992. The settlement provides for the Company to pay
the shareholder class $25 million in cash (of which approximately $7.8 million
will be contributed by the Company's insurance carriers), and to issue warrants
to acquire an aggregate of approximately 2.5 million shares of the Company
Common Stock at an exercise price of $20.25, subject to adjustment. The Company
has accrued $19.7 million. The detail of this accrual is as follows: $25
million cash, less $7.8 million insurance carrier contribution plus warrants,
valued at $1 each, to acquire 2.5 million shares of the Company's stock. The
Stipulation is subject to the review and approval of the court on May 5, 1995
and certain other contingencies, and there can be no assurance that the
settlement will be consummated.
F-26
<PAGE> 63
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
During September 1994, the Company also settled a dispute with the
former principals of a company acquired by T(2) in 1992 related to the valuation
of that acquisition transaction. The dispute was settled with the Company
issuing to the former principals, warrants to acquire 500,000 shares of the
Company's common stock at an exercise price of $18, subject to adjustment. The
Company is obligated to make a cash payment of up to $4 million to the
warrantholders at the end of the five-year term of the warrants; provided,
however, that the payment will be reduced, dollar-for-dollar, to the extent of
the aggregate positive spread in excess of $16.00 per share on any warrants
exercised prior to, or exercisable at the end of, the five year term of the
warrants. The Company's obligation to make any cash payment terminates if the
Company's stock price exceeds $26.00 for any five consecutive business days
during the term of the warrants. The Company has a litigation accrual of $3.0
million related to this settlement. The detail of this accrual is as follows:
warrants valued at $1 each to acquire 0.5 million shares of the Company's stock,
and the obligation to pay up to $4 million which is valued at the present value
of $2.5 million.
In September 1994, the Company announced that T(2) had agreed to settle
the investigations conducted by Office of the Inspector General ("OIG") of the
U.S. Department of Health and Human Services regarding T(2)'s financial
arrangements with physicians. T(2), in expressly denying liability, agreed to a
civil order which enjoins it from violating federal anti-kickback and false
claims laws related to Medicare/Medicaid reimbursement. The order further
requires T(2) to comply with certain standards when providing management or
other services to physicians. Under the terms of the settlement, T(2) paid the
federal government $500,000 to reimburse the government for the costs of its
investigation and settle its claims. T(2) will continue to participate in the
Medicare/Medicaid programs. On September 30, 1994, the U.S. District Court for
the Northern District of Georgia (Atlanta Division) approved the settlement.
The Company believes it has adequate liquidity to pay these settlements
under the revolving line of credit.
The Company is involved in various legal proceedings incidental to the
normal course of business. While it is not possible to predict the outcome of
such proceedings with certainty, management is of the opinion that their
ultimate disposition will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
Other Commitments
F-27
<PAGE> 64
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company's agreements with its lithotripsy physician partners
contemplate that the Company will acquire the remaining interest in each
partnership at a defined price in the event that legislation is passed or
regulations are adopted that would prevent the physician from owning an interest
in the partnership and using the partnership's lithotripsy equipment for the
treatment of his or her patients. While current interpretations of existing law
are subject to considerable uncertainty, the Company believes that its
partnership arrangements with physicians in its lithotripsy business are in
compliance with current law.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Most of the Company's financial instruments are carried at their fair
value. The Company has estimated the fair value of its financial instruments
whose carrying value differed from fair value using available market information
and appropriate valuation methodologies. Considerable judgment is required in
developing the estimates of fair value presented herein and, therefore, the
values are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
At December 31, 1994, the carrying amount and the estimated fair value
of such financial instruments consisted of the following:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------ ----------
<S> <C> <C>
Investment securities.......................................... $16,546 $16,546
Long-term debt, including current portion...................... $126,728 $127,116
</TABLE>
The estimated fair value of investment securities is based on quoted
market prices and dealer quotes. The estimated fair value of long-term debt was
determined based on interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities. See Note 2 and
Note 4 for additional disclosures relating to the Company's investment
securities and long-term debt, respectively. The Company has investments in
unconsolidated subsidiaries totaling approximately $3.2 million. Since these
subsidiaries are all closely held companies and there are no quoted market
prices, it is not practicable to estimate the fair value of such investments.
The fair value estimates presented herein are based on information
available to management as of December 31, 1994. Management is not aware of any
subsequent factors that would significantly affect the estimated fair value
amounts.
F-28
<PAGE> 65
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. QUARTERLY RESULTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994
Net revenue ................................... $ 113,065 $ 113,647 $ 110,206 $ 113,578
Gross profit .................................. 36,050 36,356 31,432 33,476
Net income (loss) ............................. $ 3,211 $ (9,000) $(121,176) $ (1,107)
========= ========= ========= =========
Net income (loss) per common share:
Primary ...................................... $ 0.08 $ (0.23) $ (3.14) $ (0.03)
========= ========= ========= =========
Year Ended December 31, 1993
Total revenue ................................. $ 113,416 $ 117,885 $ 119,259 $ 111,744
Gross profit .................................. 47,590 48,173 47,881 33,637
Net income (loss) ............................. $ 10,217 $ 12,680 $ 10,235 $ (4,471)
========= ========= ========= =========
Net income (loss) per common share:
Primary ...................................... $ 0.27 $ 0.33 $ 0.27 $ (0.12)
========= ========= ========= =========
</TABLE>
In 1994, unusual or infrequently occurring charges included the
Company's provision for litigation settlements of $17.2 million in the second
quarter and, during the third quarter, a special provision for uncollectible
accounts of $17.3 million, a provision for litigation settlements of $6.0
million and the development and implementation of the Coram Consolidation Plan
which resulted in charges of $28.5 million in estimated Merger Costs and $95.5
million in estimated Restructuring Costs. In 1993 unusual or infrequently
occurring charges included a $6.4 million gain or sale of assets during the
second quarter and charges aggregating $11.3 million for additional provisions
for uncollectible accounts during the fourth quarter.
11. SUBSEQUENT EVENTS
Caremark
In January 1995, the Company announced that it had reached a definitive
agreement to acquire Caremark International Inc.'s alternate site infusion
business. Under the terms of the agreement, the Company will pay Caremark
approximately $310 million, subject to a net asset adjustment of up to $18
million. Consummation of the transaction is subject to the Company obtaining
certain debt financing, which is currently being undertaken, and other normal
closing conditions, including required government approvals. The acquisition
will be accounted for as a purchase and accordingly, Caremark's results of
operations, after consummation of the transaction, will be included in the
Company's operating results. Additionally, effective March 1, 1994 Caremark
acquired the assets and assumed certain liabilities of Critical Care America
("CCA"). The CCA transaction was accounted for using the purchase method of
accounting.
Unaudited pro forma financial position and results of operations of the
Company, as of and for the year ended December 31, 1994, assuming the purchases
of the Caremark Business
F-29
<PAGE> 66
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
and CCA had occurred at the beginning of the period, are as follows (in
thousands):
<TABLE>
<CAPTION>
Unaudited Unaudited Unaudited
Historical Historical Historical Pro Forma Pro Forma
Coram Caremark CCA Adjustments Combined
---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets ......................... $ 207,700 $ 184,900 $ (23,100) $ 369,500
========= ========= ========= =========
Total Assets ........................... $ 576,100 $ 418,700 $ (20,000) $ 974,800
========= ========= ========= =========
Liabilities and Stockholders'
Equity
Total Current Liabilities .............. $ 124,300 $ 81,700 -- $ 206,000
Revolving Lines of Credit
and Long Term Debt .................. 120,800 600 321,900 443,300
Other Liabilities ...................... 8,800 35,300 -- 44,100
Total Stockholders' Equity ............. 322,200 301,100 $(341,900) 281,400
--------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity ................. $ 576,100 $ 418,700 $ (20,000) $ 974,800
========= ========= ========= =========
Net Revenue ............................. $ 450,500 $ 441,900 $ 31,100 $ -- $ 923,500
Cost of Service ......................... 313,200 338,200 26,200 -- 677,600
--------- --------- --------- --------- ---------
Gross profit ............................ 137,300 103,700 4,900 -- 245,900
Total operating expenses ................ 274,900 106,300 8,000 5,800 395,000
--------- --------- --------- --------- ---------
Operating loss .......................... $(137,600) $ (2,600) $ (3,100) $ (5,800) $(149,100)
========= ========= ========= ========= =========
Interest expense, net ................... $ (4,900) $ (500) $ -- (35,000) (40,400)
Net loss ................................ $(128,100) $ (2,400) $ (1,600) $ (33,800) $(165,900)
========= ========= ========= ========= =========
Net loss per common share (primary) $ (4.29)
=========
Weighted average common shares
outstanding (primary) ................. 38,633
=========
</TABLE>
The unaudited historical CCA amounts represent the results of
operations for the two months prior to the CCA acquisition on March 1, 1994.
Subsequent to the acquisition CCA is included in the operations of Caremark.
This pro forma presentation assumes that the Company will obtain
approximately $450 million of debt structured either as a combination of
subordinated debt and convertible notes or entirely subordinated debt. For
purposes of the calculation of interest expense, the Company has assumed an
average interest rate of approximately 10%. The structure of the proposed
financing is currently being negotiated. However, the Company anticipates the
financing will also to provide for the repayment of the outstanding revolving
line of credit totaling approximately $108 million at year end.
The pro forma adjustments to financial position primarily relate to the
increase in debt to be incurred by the Company to finance the acquisition of
Caremark. In addition, the Company expects goodwill associated with the
acquisition to be approximately $250 million, including $196 million of
purchased goodwill. The pro forma adjustments to operational expenses are due to
interest expense on the acquisition debt and adjustments to amortization of the
excess purchase price over the net assets and liabilities assumed and is subject
to change based upon finalizing the purchase agreement, asset valuation and
potential future
F-30
<PAGE> 67
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
restructuring costs. The pro forma adjustments do not give affect to any
benefits derived from the anticipated closures of a substantial number of
branches, reduction of corporate administrative expenses and other savings.
Additionally, interest expense could change significantly depending upon the
structure of the financing which has not yet been determined.
The Company, on a preliminary basis, has estimated that the amount of
the charge will be approximately $32 million, of which approximately $12 million
is estimated to be non-cash. The estimated charge consists of personnel and
facility reduction costs of approximately $14 million and approximately $18
million, respectively. The Company expects to revise these estimates upon
completion of the acquisition of the Caremark Business, and no assurance can be
given as to the amounts of the actual costs that will be incurred or the amount
of savings, if any, that may be realized.
The pro forma financial information does not necessarily reflect the
operations that would have occurred had the companies been combined as a single
entity as of January 1, 1994 and the year ended December 31, 1994.
Kids Medical Club
On January 30, 1995, the Company reached an agreement in principle to
sell its pediatric home care business known as Kid's Medical Club to Pediatric
Services of America, Inc. ("PSAI"). The Company and PSAI simultaneously
announced the formation of a strategic alliance pursuant to which PSAI's
comprehensive pediatric home care services would be included in the Company's
alternate site care network, allowing joint national marketing and capitation
agreements with managed care organizations. The transaction is not material to
the Company's results of operations or financial position.
F-31
<PAGE> 68
CORAM HEALTHCARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
----------- --------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994
Reserve and allowances deducted from asset
accounts:
Allowance for uncollectible accounts............... $25,076 $36,817 $3,901(2) $(46,383)(1) $22,297
2,886(3)
Year Ended December 31, 1993
Reserve and allowances deducted from asset
accounts:
Allowance for uncollectible accounts............... $17,530(2) $29,751 $2,834(2) $(24,788)(1) $25,076
(251)(3)
Year Ended December 31, 1992
Reserve and allowances deducted from asset
accounts:
Allowance for uncollectible accounts............... $18,953(2) $24,036 $1,948(2) $(27,407)(1) $17,530
</TABLE>
- ---------------
(1) Accounts written off, net of recoveries.
(2) Balance acquired in purchase acquisition(s).
(3) Other charges.
F-32
