<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11343
CORAM HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0615337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1125 SEVENTEENTH STREET
SUITE 1500
DENVER, CO 80202
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (303) 292-4973
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock,
$.001 par value, as of May 8, 1995 was 39,682,277.
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 14,231 $ 13,588
Restricted cash............................................................. 7,349 6,458
Accounts receivable, net of allowance of $18,474 and $17,990................ 106,419 109,087
Investment in available-for-sale securities................................. 15,499 16,546
Inventories................................................................. 11,250 11,864
Prepaid taxes............................................................... 9,739 11,510
Deferred income taxes, net.................................................. 32,538 31,893
Other current assets........................................................ 20,784 7,251
-------- --------
Total current assets..................................................... 217,809 208,197
PROPERTY AND EQUIPMENT, NET.................................................. 23,744 25,902
JOINT VENTURES AND OTHER ASSETS.............................................. 18,073 8,546
DEFERRED INCOME TAXES NON-CURRENT............................................ 556 556
GOODWILL, NET................................................................ 337,269 333,238
-------- --------
TOTAL ASSETS................................................................. $597,451 $576,439
-------- --------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 32,553 $ 27,098
Current maturities of long-term debt........................................ 5,562 5,911
Deferred income taxes....................................................... 5,818 5,788
Liabilities for securities sold under agreement to repurchase............... 7,365 7,430
Reserve for litigation...................................................... 22,647 22,720
Accrued merger and restructuring............................................ 35,958 43,594
Other accrued liabilities................................................... 13,632 11,845
-------- --------
Total current liabilities................................................ 123,535 124,386
REVOLVING LINES-OF-CREDIT.................................................... 122,300 108,099
LONG-TERM DEBT............................................................... 10,801 11,627
MINORITY INTEREST IN CONSOLIDATED JOINT VENTURES............................. 4,729 6,599
OTHER LIABILITIES............................................................ 1,885 1,945
DEFERRED INCOME TAXES NON-CURRENT............................................ 1,522 1,522
STOCKHOLDERS' EQUITY:
Common stock par value $.001, authorized 75,000 shares, issued 39,454
in 1995 and 38,964 in 1994................................................ 39 39
Additional paid-in capital.................................................. 347,071 341,328
Unrealized loss on available-for-sale securities............................ (193) (279)
Retained earnings (deficit)................................................. (14,238) (18,827)
------- -------
Total stockholders' equity............................................... 332,679 322,261
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $597,451 $576,439
======== ========
</TABLE>
See accompanying notes.
1
<PAGE> 3
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1995 1994
---- ----
<S> <C> <C>
NET REVENUE............................................................................. $104,778 $113,065
COST OF SERVICE:
Drugs and supplies..................................................................... 37,227 34,650
Clinical services...................................................................... 38,382 42,365
-------- --------
Total cost of service............................................................... 75,609 77,015
-------- --------
Gross Profit........................................................................... 29,169 36,050
OPERATING EXPENSES:
Selling, general and administrative expenses........................................... 17,885 19,584
Provision for estimated uncollectible accounts......................................... 4,013 4,732
Amortization of goodwill............................................................... 2,790 2,135
Restructuring costs (benefit).......................................................... (4,131) --
-------- --------
Total operating expenses............................................................ 20,557 26,451
-------- --------
OPERATING INCOME........................................................................ 8,612 9,599
OTHER INCOME (EXPENSE):
Interest income........................................................................ 402 715
Interest expense....................................................................... (3,436) (1,168)
Other income........................................................................... 338 151
-------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS....................................... 5,916 9,297
PROVISION (BENEFIT) FOR INCOME TAXES.................................................... (1,105) 3,695
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED JOINT VENTURES.......................... 2,432 2,391
-------- --------
NET INCOME.............................................................................. $ 4,589 $ 3,211
======== ========
NET INCOME PER COMMON SHARE:
Primary................................................................................ $ 0.11 $ 0.08
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Primary................................................................................ 40,939 38,616
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 4
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................. $ 4,589 $ 3,211
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for estimated uncollectible accounts........................................ 4,013 4,732
Depreciation and amortization......................................................... 5,571 5,311
Merger/restructuring benefit.......................................................... (4,131) --
Deferred income taxes, net............................................................ (615) 500
Minority interest in net income of consolidated joint ventures, net................... (493) 469
Equity in net income of unconsolidated joint ventures, net............................ (11) 21
Other, net............................................................................ (29) 43
Change in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable.................................................................. (6,414) (9,355)
Prepaid expenses, inventories and other assets....................................... (7,801) (4,259)
Current and other liabilities and reserve for litigation............................. 6,123 (8,435)
Accrued merger and restructuring..................................................... (7,218) --
-------- -------
Net cash provided (used) by operating activities.................................... (6,416) (7,762)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and maturities of available-for-sale securities..................... 1,133 4,956
Proceeds from sales of property and equipment.......................................... 62 393
Proceeds from sales of joint ventures.................................................. 100 --
Purchases of property and equipment.................................................... (1,251) (2,709)
Payments for acquisition of businesses, net of cash acquired........................... (11,638) (2,682)
Proceeds from sales of businesses...................................................... 729 --
Capital contributions to unconsolidated joint ventures................................. (556) (929)
-------- -------
Net cash used by investing activities............................................... (11,421) (971)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net of repurchases and issuance costs........................... -- 3,586
Borrowing (repayments) of lines of credit, net......................................... 14,180 (14)
Securities sold under agreements to repurchase, net.................................... (65) --
Debt borrowings........................................................................ 24 8,908
Repayment of debt...................................................................... (1,020) (457)
Cash dividends paid.................................................................... -- (1,027)
Exercise of stock options.............................................................. 5,361 68
-------- -------
Net cash provided by financing activities........................................... 18,480 11,064
-------- -------
NET INCREASE IN CASH.................................................................... 643 2,331
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................................... 13,588 17,948
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 14,231 $20,279
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest.............................................................................. $3,954 $1,066
====== ======
Income taxes.......................................................................... $(2,412) $11,648
======== =======
</TABLE>
See accompanying notes.
3
<PAGE> 5
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying unaudited condensed consolidated financial statements
have been prepared by Coram Healthcare Corporation (the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such regulations. The condensed consolidated
financial statements reflect all adjustments and disclosures which are, in the
opinion of management, necessary for a fair presentation. All such adjustments,
other than those relating to the merger, restructuring, special provision for
uncollectible accounts and litigation settlements, are of a normal recurring
nature. The results of operations for the interim periods are not necessarily
indicative of the results of the full fiscal year. Certain December 31, 1994
balance sheet amounts have been reclassified to conform with the March 31, 1995
presentation.
Business Activity. The operations of the Company commenced on July 8,
1994, as a result of a merger (the "Merger") of T(2) Medical, Inc., Curaflex
Health Services, Inc. ("Curaflex"), HealthInfusion, Inc. ("HealthInfusion") and
Medisys, Inc. ("Medisys") (collectively, the "Merged Entities"). Each of those
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>
THREE MONTHS
ENDED MARCH 31,
1994
----
<S> <C>
Net Revenue
T(2)......................................................... $ 58,209
Curaflex..................................................... 24,974
Medisys...................................................... 13,508
HealthInfusion............................................... 16,374
--------
Combined..................................................... $113,065
========
</TABLE>
4
<PAGE> 6
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
Net Income (loss)
<S> <C>
T(2)........................................................ $3,562
Curaflex.................................................... (1,590)
Medisys..................................................... 277
HealthInfusion.............................................. 962
Coram Holding............................................... --
------
Combined.................................................... $3,211
======
</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.
Other Acquisitions. During the three months ended March 31, 1995, the
Company completed six acquisitions totaling $11.6 million, net of cash
acquired, which were accounted for as purchases. 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.
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, reduce
personnel, and eliminate or discontinue investments in certain joint ventures
and other non-infusion facilities. 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 Company
recorded a $4.1 million benefit to the restructuring charge in the first quarter
of 1995 as a result of an unanticipated gain on the sale of Kid's Medical. The
Company had estimated that the sale of Kid's Medical would result in a loss
because Kid's Medical had historically sustained losses and made an
insignificant contribution to the Company's revenue. The unanticipated gain
resulted from (i) positive margins experienced by Kid's Medical in the period
from the date of the estimate through the date of the sale of Kid's Medical and
(ii) the purchase of Kid's Medical by a synergistic buyer. The estimated cost
associated with each component of the Coram Consolidation Plan, recorded in the
third quarter of 1994, including the
5
<PAGE> 7
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
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
======= ======= =======
Change in Estimate, sale of Kid's Medical.................... $(2,700) $(2,700)
======= =======
</TABLE>
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 $9 million and $11 million in the quarters ended
March 31, 1994 and 1995, respectively; 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 July 31, 1995.
Through March 31, 1995, the Company had completed a significant portion
of the branch consolidation process, including the closure of 115 branch
facilities, 2 corporate facilities, and a reduction of approximately 650
employees. The Company has made total payments and total asset disposals through
March 31, 1995, as follows (in thousands):
<TABLE>
<CAPTION>
NON-CASH TOTAL
-------- -----
ACCRUALS/
CASH ASSET WRITEDOWN DISPOSALS RECORDED COMPLETED
---- --------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Merger Costs.................... $25,100 $ 600 $ 600 $25,700 $25,700
======= ======== ======== ======= =======
Personnel Reduction Costs....... $11,200 $ 600 $ 600 $11,800 $11,800
Facility Reduction Costs........ 3,800 16,300 9,600 20,100 13,400
Discontinuance Costs............ 100 32,600 12,300 32,700 12,400
------- -------- -------- ------- -------
Restructuring Costs............. $15,100 $49,500* $22,500* $64,600 $37,600
======= ======== ======== ======= =======
- -----------
</TABLE>
6
<PAGE> 8
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
* The accompanying balance sheet reflects assets net of the $49,500 of
established accruals and reserves. Charges against those established
reserves pertaining to disposals completed through March 31, 1995
aggregate $22,500.
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 March 31, 1995, to complete the Coram
Consolidation Plan.
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 amounts 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. LINES OF CREDIT
On October 17, 1994, the Company entered into a revolving line of
credit agreement to replace its prior borrowing facility. This agreement, which
had a maturity date of June 30, 1996 was amended effective December 31, 1994 on
February 10, 1995. Under this amendment the revolving line of credit was
increased to $150 million from $120 million. Under the credit agreement, the
Company could borrow at either (i) a base rate equal to a spread of zero to
1.25% over the greater of the prime rate or the Federal funds rate plus 0.5%; or
(ii) at the Floating London Interbank Offering Rate ("LIBOR") plus 0.875% to
2.25%.
At March 31, 1995, borrowings under the revolving credit agreement were
$122.3 million of which $108.0 million was outstanding under the LIBOR option at
an all-in rate of 8.375% and $14.3 million was outstanding under the base rate
option at an all-in rate of 10.25%.
7
<PAGE> 9
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
On April 6, 1995, the Company entered into a Senior Credit Facility.
Under the terms of the Senior Credit Facility, the Company has (i) a $200
million term loan facility (the "Term Loan Facility") with a maturity date of
April 6, 2000, and (ii) a $100 million revolving credit facility (the "Revolving
Credit Facility"), with a maturity date of April 6, 2000, of which up to $20
million is available in the form of letters of credit. As of April 30, 1995, the
available borrowing base under the revolving credit facility was $100 million
and the amount borrowed under the term loan facility was $200 million. The loans
under the Senior Credit Facility bear interest at a rate equal to, at the
Company's option, (i) the Alternate Base Rate (as defined hereafter) for the
respective interest period plus the Applicable Margin (as defined hereafter)
("ABR Loans") or (ii) the Eurodollar Rate (as defined hereafter) as determined
by Chemical Bank ("Chemical") for the respective interest period plus the
Applicable Margin ("Eurodollar Loans"). "Applicable Margin" means a percentage
per annum ranging (a) in the case of ABR Loans, from 1.50% to 0.50%, and (b) in
the case of Eurodollar Loans, from 2.50% to 1.50%, in each case based upon the
Company's ability to maintain certain financial ratios determined as provided in
the Credit Agreement. "Alternate Base Rate" means with respect to an interest
period, an interest rate per annum equal to the highest of (i) the rate of
interest publicly announced by Chemical as its prime rate in effect at its
principal office in New York City, (ii) the secondary market rate for three
month certificates of deposit (adjusted for reserves and assessments) plus 1%
and (iii) the federal funds rate in effect from time to time plus 0.5%.
"Eurodollar Rate" means, with respect to an interest period, an interest rate
per annum equal to the product of (a) the LIBOR rate in effect for such interest
period and (b) Statutory Reserves (as defined in the Credit Agreement). The
Senior 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 engage in certain activities. The proceeds of the loans
under the Senior Credit Facility were used to repay amounts outstanding under
the Former Credit Facility, to fund a portion of the cash purchase price for the
Caremark Business and to pay certain expenses in connection therewith.
3. INCOME TAXES
The Company recorded an income tax benefit of $1.1 million for the
three months ended March 31, 1995. The resulting effective income tax benefit
rate is primarily due to the ability to carry back a portion of the Company's
current period tax
8
<PAGE> 10
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
deductible loss to the prior year tax returns of the predecessor companies.
4. 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 insurance carrier), 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 was approved by
the court on May 5, 1995; however, it is subject to 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, 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.
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 warrant
exercised prior to, or exercisable at the end of, the five year term of the
warrants.
The Company believes it has adequate liquidity to pay these settlements
under the Senior Credit Facility.
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.
9
<PAGE> 11
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
5. SUBSEQUENT EVENTS
Caremark Acquisition. In April 1995, the Company acquired substantially
all of the assets used in the alternate site infusion health care business, the
home care management and utilization system business and women's health care
business (collectively "Caremark Business") of Caremark International, Inc. and
its wholly-owned subsidiary, Caremark Inc. ("Caremark"). The acquisition was
accounted for by the purchase method of accounting. It is estimated that the
purchase price of $309 million will exceed the fair market value of the assets
of Caremark by over $190 million and will be recorded as an increase to
goodwill. The results of operations of Caremark will be included with the
results of the Company from April 1, 1995.
Lincare Merger. On April 17, 1995, the Company and Lincare Holdings
Inc. ("Lincare") entered into an Agreement and Plan of Merger pursuant to which
all of Lincare's outstanding common stock would be acquired by the Company in a
tax-free business combination intended to be accounted for as a pooling of
interests. Upon consummation of the merger, shareholders of Lincare will receive
1.5354 shares of the Company's common stock. Historical financial information
presented in reports following the merger will be restated to include Lincare.
10
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
HISTORY
The operations of Coram Healthcare Corporation, a Delaware corporation
("Coram" or the "Company") commenced on July 8, 1994 as a result of a merger
(the "Four-Way Merger") of T(2) Medical, Inc. ("T(2)"), Curaflex Health
Services, Inc. ("Curaflex"), HealthInfusion, Inc. ("HealthInfusion"), and
Medisys, Inc. ("Medisys"), each of which was a publicly held national or
regional provider of alternate site infusion therapy and related services.
Pursuant to the Four-Way Merger, which was accounted for as a pooling of
interests, each of these companies became and is now a wholly-owned subsidiary
of the Company. On September 12, 1994, the Company acquired all of the capital
stock of H.M.S.S., Inc. ("HMSS"), a leading regional provider of home infusion
therapies, in a transaction accounted for as a purchase. On April 6, 1995, the
Company acquired substantially all of the assets used in the alternate site
infusion health care business, the home care management and utilization system
business and women's health care business collectively ("Caremark Business") of
Caremark International, Inc. and its wholly-owned subsidiary, Caremark Inc.
("Caremark"). Upon the consummation of the acquisition (the "Caremark
Transaction"), the Company became the largest provider of alternate site
infusion therapy services in the United States, with branches covering
geographic locations in which over 90% of the population of the United States
resides. 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.
RECENT DEVELOPMENTS
On April 17, 1995, Coram entered into an agreement to merge with
Lincare Holdings Inc. ("Lincare"). Upon the consummation of the merger, the
Company believes it will become the largest provider of alternate site health
care in the United States based on pro forma 1994 net revenue. The combination
of the Company and Lincare is expected to accelerate revenue growth through the
expansion of Lincare's respiratory therapy business into existing Coram markets
and through cross-marketing activities involving Coram and Lincare customer
relationships. Lincare's financial performance is expected to enhance the
Company's financial position by providing additional revenue, earnings and cash
flow and by strengthening key financial ratios. No assurances can be made as to
the amount of revenue growth that can be realized or the level of financial
enhancement that will actually be realized, if any.
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
11
<PAGE> 13
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. Coram
does not anticipate that such divestitures, including Pharmcare, will be
material to its business. As part of its strategy, the Company engages in
acquisition discussions from time to time with alternate site providers, some of
which acquisitions, if consummated, would be material to the Company.
IMPACT OF FOUR-WAY MERGER AND POST FOUR-WAY 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
Four-Way Merger and post-Four-Way Merger transition process.
Coram also recorded charges of $23.2 million, representing the
estimated costs of settling certain pre-Four-Way 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 was as follows: an agreement in principle to settle
the T(2) shareholders litigation in the amount of $19.7 million; the T(2)
Office of Inspector General of the U.S. Department of Health and Human Services
("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 (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 provides 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. 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. The Company anticipates that the branch and
corporate consolidation portions of the Coram
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<PAGE> 14
Consolidation Plan are expected to be substantially completed by the third
quarter of 1995 and that the Coram Consolidation Plan, when fully implemented,
will generate annual cost savings of approximately $70 million. The Company
expects these savings will result from 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 expected to range between $3.0 million and $5.0 million. No
assurances can be given, however, as to the aggregate cost savings to be
achieved by the Company or the timing thereof.
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 Four-Way Merger and the implementation of the Coram Consolidation Plan.
THE CAREMARK TRANSACTION
Effective as of April 1, 1995, Coram acquired the Caremark Business
from Caremark in a transaction accounted for as a purchase for $309 million,
consisting of (i) $209 million in cash and (ii) $100 million principal amount of
Junior Subordinated Payment-In-Kind ("PIK") Notes payable to Caremark,
consisting of a $75 million 7% Convertible Subordinated PIK Note (the "Junior
Convertible Subordinated PIK Note") and a $25 million 12% NonConvertible
Subordinated PIK Note (the "Junior Non-Convertible Subordinated PIK Note"). The
Caremark Transaction was structured as an asset purchase. Accordingly, the
Company assumed only certain specified liabilities of the Caremark Business,
which, in particular, expressly exclude any liabilities associated with the
pending investigation of Caremark by the OIG.
In connection with the Caremark Transaction, the Company repaid all of
its $123.8 million indebtedness under its former credit facility with Toronto
Dominion (Texas) Inc. (the "Former Credit Facility"). The cash paid by the
Company in connection with the Caremark Transaction and the repayment of
indebtedness under the Former Credit Facility, together with related fees and
expenses, were financed through: (i) borrowings under a new credit facility (the
"Senior Credit Facility") with Chemical Bank ("Chemical"), as Agent, providing
for aggregate commitments of up to $300 million, including a $100 million
revolving credit facility, and (ii) $150 million from the issuance of Senior
Subordinated Bridge Notes (the "Bridge Notes").
Effective as of the Caremark Transaction, the Company has become highly
leveraged. The Company believes that its primary liquidity needs will be cost of
debt service, restructuring costs and working capital and 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.
13
<PAGE> 15
The Company believes that the combination of the Company and the
Caremark Business has created 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 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.
IMPACT OF PRICING/VOLUME TRENDS
The Company has recently experienced 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 in late 1994 and the first quarter of 1995. Moreover, alternate site
infusion therapy patient volume has increased since the Four-Way Merger. No
assurance can be given, however, that such trends will continue. The increasing
prevalence and influence of managed care payors are 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 growth in patient volumes
will be necessary to offset lower margins. 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
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<PAGE> 16
pressure in the future. The Health Care Financing Administration ("HCFA") has
issued a proposed rule that would, if implemented, significantly reduce the
amount Medicare would reimburse its beneficiaries for the cost of lithotripsy
procedures performed in an ambulatory surgery center or on an out-patient basis
at a hospital. Such a proposal might result in similar efforts by other
third-party payors to limit reimbursement for lithotripsy procedures. The
Company is in the process of developing new revenue enhancing programs such as
one-stop shopping for managed care payors, physician practice management
services and disease- state carve-outs (i.e., vertical integration along disease
specific categories) to offset future pricing declines.
THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1994
Net Revenue. Net revenue for the first quarter of 1995 decreased by
$8.3 million or 7.3% to $104.8 million compared to the same period in 1994.
Management believes that approximately $5.9 million, or 71% of the decrease, was
attributable to discontinued in-office infusion services ("Intra-Care"). Revenue
also declined as a result of industry pricing pressure, as prices for infusion
therapy services declined in the range of 11% to 12%, with the majority of such
decline occurring during the first and second quarters of 1994. Most of the
remainder of the decrease resulted from restructuring and in some cases
termination of other physician relationships (including in-office infusion
services) which were potentially incompatible with new regulatory requirements.
Gross Profit. Gross profit for the first quarter of 1995 decreased $6.9
million to $29.2 million, a decrease of 19.1%, as compared to the same period in
1994. Gross margin decreased to 27.8% in the first quarter of 1995 compared to
31.9% for the same period in 1994. The primary source of the decrease in gross
profit was related to price reductions resulting from the industry pricing
pressures discussed above. Other causes included therapy and the implementation
of consistent company-wide policies for the recognition of contractual
allowances and policies and procedures related to accounting for inventory.
Offsetting the gross profit decrease was a reduction in clinical services
expenses of $4.0 million resulting from the partial completion of the Coram
Consolidation Plan.
In the first quarter of 1995, the Company converted from five separate
decentralized accounts payable systems to a new centralized system. At the same
time, accounts payable accrual procedures were standardized, resulting in $1.7
million of drugs and supplies being expensed in the first quarter 1995 that were
utilized in prior periods. Adjusting for this charge, the gross margin for the
first quarter of 1995 was 29.5%. The cut-off date for the accrual of liabilities
was shortened from that consistently applied in the past, causing the exclusion
of vendor invoices that would normally have been included at year-end.
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<PAGE> 17
Generally accepted accounting principles would require that the effect of this
error be allocated to the prior periods over which it arose. The Company does
not have the data to determine the effect of applying the new cut-off procedures
on a consistent basis in those prior periods, although it does not believe it
would be material to any individual prior period. Therefore, it has recorded the
full effect in the current quarter.
Operating Expenses. Selling, general and administrative expenses
decreased $1.7 million or 8.7% for the first quarter of 1995 compared to the
same period in 1994. This decrease was primarily due to a $2.1 million credit
pertaining to an agreement by one of the Company's insurance carriers to pay for
certain legal fees incurred in conjunction with the T(2) shareholder litigation.
In addition, a $1.1 million reduction in salaries resulted from the closure of
two corporate offices and the elimination of 100 corporate staff positions and a
$1.4 million reduction in general expenses was realized in connection with the
partial completion of the Coram Consolidation Plan. These reductions were offset
by temporary costs necessary to support the restructuring activities which were
not chargeable to restructuring reserves. These costs included (i) training,
(ii) travel, (iii) consulting fees, (iv) system implementation costs and (v)
additional audit and tax work. Additional costs were incurred during the first
quarter of 1995 associated with the initiation and development of certain
revenue enhancing programs.
A benefit of $4.1 million was recorded to restructuring costs in the
first quarter as a result of the sale of the Company's home pediatrics business
("Kid's Medical") which was originally expected to result in a loss. Kid's
Medical had historically accounted for approximately $5 million in quarterly
gross revenue. In total, operating expenses, including the benefit from the sale
of Kid's Medical, were $5.9 million less in the first quarter of 1995 than in
the same period in the prior year, a decrease of 22.3%.
Operating Income. Operating income for the first quarter of 1995
decreased from the first quarter of 1994 by $1.0 million or 10.3% as a result of
the $6.9 million decrease in gross profit, which was offset, in part, by the
$5.9 million reduction in operating expenses.
Other Income and Expenses. Interest expense increased by $2.3 million
for the first quarter of 1995 over the same period in the prior year primarily
due to increased borrowings by the Company in order to finance acquisitions,
merger costs and other working capital needs.
Provision (Benefit) for Income Taxes. During the first quarter of 1995,
the Company recorded a tax benefit in the amount of $1.1 million compared to a
$3.7 million expense in the same period in the prior year. The tax benefit was
the result of tax
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<PAGE> 18
deductions from the continued consolidation activities of the
Company during the quarter. While no assurance can be given in this regard, it
is expected that these tax deductions will enable Coram to recover taxes that
have been paid in a prior year.
Net Income. Net income for the first quarter of 1995 increased $1.4
million to $4.6 million, an increase of 42.9% as compared to the same period in
1994. Major components of this increase include: (i) the $4.8 million favorable
tax variance, (ii) the $4.1 million benefit from the sale of Kid's Medical and
(iii) the $2.1 million benefit to operating expenses for the legal fees to be
paid by one of Coram's insurers in connection with the T2 shareholders
litigation.
Restructuring costs. Restructuring costs reflect a $4.1 million gain on
the sale of Kid's Medical. The potential divestiture of additional non-strategic
businesses are currently being evaluated. Management monitors restructuring
costs on an ongoing basis and believes that the Coram Consolidation Plan will be
substantially completed by the third quarter of 1995. Currently, management
believes that remaining reserves as of March 31, 1995 are sufficient to provide
for remaining costs to be incurred to complete the Coram Consolidation Plan.
Through March 31, 1995, the Company had completed a significant portion
of the branch consolidation process, including the closure of 115 infusion
branch facilities, two corporate facilities, and a reduction of approximately
650 employees. The following table summarizes the utilization of restructuring
reserves through March 31, 1995 (in thousands):
<TABLE>
<CAPTION>
NON-CASH TOTAL
----------------------------- ---------------------------
ACCRUALS/
CASH ASSET WRITEDOWN DISPOSALS RECORDED COMPLETED
---- --------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Merger Costs................... $25,100 $ 600 $ 600 $25,700 $25,700
======= ======== ======== ======= =======
Personnel Reduction Costs...... $11,200 $600 $600 $11,800 $11,800
Facility Reduction Costs....... 3,800 16,300 9,600 20,100 13,400
Discontinuance Costs........... 100 32,600 12,300 32,700 12,400
------- -------- -------- ------- -------
Restructuring Costs............ $15,100 $49,500* $22,500* $64,600 $37,600
======= ======== ======== ======= =======
</TABLE>
- -------------
* The accompanying balance sheet reflects assets net of the $49,500 of
established accruals and reserves. Charges against those established
reserves pertaining to disposals completed through March 31, 1995
aggregate $22,500.
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 $36.0 million. The Company currently
estimates that future cash expenditures related to that accrual will be made in
the following periods: 75% in 1995, 15% in 1996, 6% 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.
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<PAGE> 19
CERTAIN TRENDS FROM PRIOR QUARTER
Management believes that comparisons of financial results between the
first quarter of 1995 and the first quarter of 1994 should be supplemented in
the case of Coram because, prior to July 8, 1994, the activities of the Company
were conducted separately by each of the predecessor entities. Accordingly, the
following discussion provides certain comparative information between the first
quarter of 1995 and the fourth quarter of 1994.
Net revenue decreased by $8.8 million or 7.7% from the fourth quarter
of 1994. Major sources of the quarter to quarter decrease were the normal
seasonality exhibited by the lithotripsy business, which decreased by $1.7
million, and the closure of Intracare facilities resulting in a revenue decrease
of $1.0 million. The remaining decrease of $6.1 million was a combination of
payor mix, pricing and the seasonality of the infusion business. Gross profit
decreased $4.3 million to $29.2 million or 27.8% of revenue in the first quarter
of 1995 from $33.5 million or 29.5% of revenue in the fourth quarter of 1994.
The decrease is attributable to a $1.7 million one-time out of period cost
related to the standardization of accounts payable accrual procedures in the
first quarter of 1995. Total clinical services costs were reduced by more than
$3.9 million or 9.2% between the fourth quarter of 1994 and the first quarter of
1995, 60% of which was due to a reduction in salaries as non-sales field
positions were eliminated through operation consolidation. The remaining 40%
arose from facility closures which reduced both general support and lease costs.
Operating expenses, including the benefit from the sale of Kid's
Medical, decreased by $9.0 million from the fourth quarter of 1994 to the first
quarter of 1995. The balance of the decrease resulted from permanent reductions
in selling, general and administrative expenses due to the implementation of the
Coram Consolidation Plan, which was offset by a number of one-time or short-term
cost increases associated with establishing a single corporate headquarters and
with increases resulting from continuing merger and acquisition activity.
Partially offsetting both one-time and recurring benefits were one-time or
short-term costs and recurring costs associated with new programs. The Company
incurred short-term costs attributable to consolidation, restructuring, and
merger and acquisition activity totaling approximately $2.0 million to $3.0
million which were expensed in the first quarter of 1995. Selling, general and
administrative expenses were reduced by $4.5 million to $17.9 million from the
fourth quarter of 1994 to the first quarter of 1995. $2.1 million of this
reduction resulted from an insurance carrier's one-time payment of certain legal
fees incurred in connection with the T(2) shareholder litigation. The remaining
$2.4 million resulted from the implementation of the Coram Consolidation Plan.
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<PAGE> 20
Operating income increased by $4.7 million to $8.6 million from the
fourth quarter of 1994 to the first quarter of 1995. This was achieved through
the continuing implementation of the Coram Consolidation Plan, as well as the
recording of one-time favorable transactions in operating expenses related to
legal expenses covered by an insurance carrier and the divestiture of Kid's
Medical, partially offset by short-term and other non-recurring costs described
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities at March
31, 1995 was $37.1 million (including restricted cash of approximately $7.3
million), an increase of $0.5 million from December 31, 1994. The ratio of total
debt to equity was .44 to 1 at March 31, 1995 compared to .42 to 1 at December
31, 1994. The increase in the debt ratio is primarily attributable to borrowings
by the Company under the Former Credit Facility subsequent to the Four-Way
Merger. Working capital at March 31, 1995 was $94.3 million compared to $83.8
million at December 31, 1994. The principal reason for the increase in working
capital is the receivable related to the sale of Kid's Medical.
Cash used by operating activities was $6.4 million for the three months
ended March 31, 1995 compared with $7.8 million for the three months ended March
31, 1994. The reduction in cash used by operating activities is primarily due to
an increase in accounts payable.
Cash used by investing activities was $11.4 million for the three
months ended March 31, 1995 compared with $1.0 million for the three months
ended March 31, 1994. The increase in cash used by investing activities is due
primarily to payments made for the acquisition of businesses.
Cash provided by financing activities was $18.5 million for the three
months ended March 31, 1995 compared with $11.1 million for the three months
ended March 31, 1994. The increase in cash provided by financing activities is
due primarily to an increase in line of credit borrowings and cash provided by
the exercise of stock options, and is partially offset by reduced debt
borrowings.
Under the Senior Credit Facility, the Company has (i) a $200 million
term loan facility (the "Term Loan Facility") with a maturity date of April 6,
2000, and (ii) a $100 million revolving credit facility (the "Revolving Credit
Facility"), with a maturity date of April 6, 2000, of which up to $20 million is
available in the form of letters of credit. As of April 30, 1995, the available
borrowing base under the Revolving Credit Facility was $100 million and the
amount borrowed under the term loan facility was $200 million. The loans under
the Senior Credit Facility bear interest at a rate equal to, at the
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<PAGE> 21
Company's option, (i) the Alternate Base Rate (as defined hereafter) for the
respective interest period plus the Applicable Margin (as defined hereafter)
("ABR Loans") or (ii) the Eurodollar Rate (as defined hereafter) as determined
by Chemical for the respective interest period plus the Applicable Margin
("Eurodollar Loans"). "Applicable Margin" means a percentage per annum ranging
(a) in the case of ABR Loans, from 1.50% to 0.50%, and (b) in the case of
Eurodollar Loans, from 2.50% to 1.50%, in each case based upon Coram's ability
to maintain certain financial ratios determined as provided in the Senior Credit
Facility. "Alternate Base Rate" means with respect to an interest period, an
interest rate per annum equal to the highest of (1) the rate of interest
publicly announced by Chemical as its prime rate in effect at its principal
office in New York City, (2) the secondary market rate for three month
certificates of deposit (adjusted for reserves and assessments) plus 1% and (3)
the federal funds rate in effect from time to time plus 0.5%. "Eurodollar Rate"
means, with respect to an interest period, an interest rate per annum equal to
the product of (a) the LIBOR in effect for such interest period and (b)
Statutory Reserves (as defined in the Senior Credit Facility). The Senior 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 engage in certain activities. The proceeds of the loans under the
Senior Credit Facility were used to repay amounts outstanding under the Former
Credit Facility, to fund a portion of the cash purchase price for the Caremark
Business and to pay certain expenses in connection therewith.
Interest on the $75 million Junior Convertible Subordinated PIK Note is
payable semi-annually at the rate of 7% per annum. The Junior Convertible
Subordinated PIK Note will mature on the earlier to occur of October 1, 2005 or
an event of default. Prior to the second anniversary of the initial date of
issuance, interest is payable in cash or in additional Junior Convertible
Subordinated PIK Notes, at the election of the Company. Thereafter, interest
will be payable in cash, subject to the satisfaction of certain financial tests
set forth in the Senior Credit Facility. The Junior Convertible Subordinated PIK
Note may not be prepaid or redeemed for three years following the initial
issuance date without the written consent of the holder thereof. Thereafter, the
Junior Convertible Subordinated PIK Note is, at the option of Coram, redeemable,
in whole or in part, subject to normal redemption terms and conditions, and
subject to restrictions on optional redemption contained in the Senior Credit
Facility. The Junior Convertible Subordinated PIK Note will be convertible at
the Company's option at any time subsequent to one year following the date of
issuance, in whole or in part, into such number of shares of the Company Common
Stock determined by dividing the aggregate principal amount by the conversion
price in effect at the time of such conversion. The conversion price of the
Junior Convertible Subordinated PIK Note is $27 per share, subject to
adjustment. The Company is
20
<PAGE> 22
required to file, and to use its best efforts to cause to become effective on or
before the first anniversary of the initial date of issuance of the Junior
Convertible Subordinated PIK Note, a registration statement covering the shares
of the Company Common Stock issuable upon conversion thereof. the Company is
required to maintain the effectiveness of such registration statement for a
three-year period following the original effective date of the registration
statement. In the event that there is a change in control (as defined) of Coram,
the holder of the Junior Convertible Subordinated PIK Note may require the
Company to repurchase such note at a purchase price equal to the principal
amount thereof, plus accrued interest thereon.
Interest on the $25 million Junior Non-Convertible Subordinated PIK
Note is payable semi-annually at the rate of 12% per annum. The Junior
Non-Convertible Subordinated PIK Note will mature on the earlier to occur of
September 30, 2005 or an event of default. Prior to the second anniversary of
the initial date of issuance, interest will be payable in cash or in additional
Junior Non-Convertible Subordinated PIK Notes, at the election of the Company.
Thereafter, interest will be payable in cash, subject to satisfaction of certain
financial tests set forth in the Senior Credit Facility. The Junior
Non-Convertible Subordinated PIK Note may be prepaid or redeemed, in whole or in
part, at any time at Coram's option, without penalty or premium, and subject to
restrictions on optional redemption contained in the Senior Credit Facility. In
the event that there is a change in control of the Company, the holder of the
Junior NonConvertible Subordinated PIK Note may require the Company to
repurchase such note at a purchase price equal to the principal amount thereof,
plus accrued interest thereon.
The Bridge Note was issued on April 6, 1995 to an affiliate of DLJ
Bridge, Inc., pursuant to a securities purchase agreement, as an unsecured
obligation of the Company, in a principal amount of $150 million. The Bridge
Note initially bears interest at an annual rate equal to the sum of (i) the rate
of interest publicly announced by The Bank of New York from time to time as its
prime rate plus (ii) 3.00% plus (iii) an additional percentage amount, equal to
1.00% from and including October 5, 1995 and increasing by an additional 0.50%
from and including each quarterly anniversary of such date for as long as the
Bridge Note remain outstanding. Such interest will be payable quarterly in
arrears on the 30th day of March, June, September and December commencing on
June 30, 1995. The principal amount of the Bridge Note, together with any
accrued and unpaid interest thereon, will initially be due and payable in full
on April 5, 1996. Commencing on the six month anniversary of issuance, the
Bridge Note will also bear a duration fee, payable in arrears on October 5, 1995
and on the 5th day of each January, April and July 1996, of 0.25% of the average
aggregate principal amount of the Bridge Note outstanding during the three-month
period (or, in the case of the payment due in October 1995, the six-month
period) then ended. Coram may, at its option, redeem (and does
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<PAGE> 23
intend to redeem as soon as reasonably practicable) the Bridge Note, upon ten
days' notice to the holder of the Bridge Note. The redemption price therefor
will be 100% of the principal amount of the Bridge Note plus accrued and unpaid
interest thereon; provided that the funds for such redemption are raised in a
transaction in which Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ")
or any of its affiliates has acted as exclusive agent or sole underwriter. The
agreement pursuant to which the Bridge Note was issued contains customary
covenants and events of default.
As of March 31, 1995 the Company does not have any material commitments
for capital expenditures. The Company believes its liquidity needs will be met
by the commitments under the Senior Credit Facility; 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 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 March 31, 1995 approximately 56.5% of the assets of the Company
was goodwill. The carrying value of goodwill is reviewed as frequently as the
facts and circumstances suggest that it may be impaired. Any future writedown of
such goodwill by the Company could have a material adverse effect on the
Company's reported financial results. 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.
FUTURE HEALTH CARE 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.
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<PAGE> 24
PART II -- OTHER INFORMATION
ITEM 1. 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 $7.8 million
will be contributed by the Company's insurance carrier), 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 was approved by
the court, on May 5, 1995; however, it is subject to 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, 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.
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 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Reports on Form 8-K
April 6, 1995 Reported Item 2
May 2, 1995 Reported Item 5
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<PAGE> 25
(B)
EXHIBIT NO. DESCRIPTION
11 -- Statement regarding Computation of Per Share Earnings *
27 -- Financial Data Schedules *
- -------------
* Filed in original filing
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORAM HEALTHCARE CORPORATION
By: /s/ RICHARD M. SMITH
--------------------
Richard M. Smith
Chief Financial Officer
April 3, 1996
24
