<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11343
CORAM HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 33-0615337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1125 SEVENTEENTH STREET 80202
SUITE 2100 (Zip Code)
DENVER, CO
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (303) 292-4973
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of November 10, 1997, was 44,443,039.
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 24,325 $ 15,375
Restricted cash........................................... 978 3,917
Accounts receivable, net of allowance of $29,309 and
$40,256................................................ 87,724 106,763
Inventories............................................... 12,804 14,268
Receivable from sale of business (See Note 4)............. 105,588 --
Deferred income taxes, net................................ 5,405 4,063
Other current assets...................................... 12,549 11,884
--------- ---------
Total current assets.............................. 249,373 156,270
Property and equipment, net............................... 18,123 16,998
Joint ventures and other assets........................... 20,755 24,654
Other deferred costs including income taxes............... 10,081 13,028
Goodwill, net of accumulated amortization of $55,171 and
$50,500................................................ 256,410 334,359
--------- ---------
Total assets...................................... $ 554,742 $ 545,309
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 34,156 $ 40,350
Current maturities of long-term debt...................... 176,706 198,033
Deferred income taxes..................................... 1,256 1,325
Reserve for litigation.................................... 2,731 3,273
Accrued merger and restructuring.......................... 9,673 13,533
Other accrued liabilities................................. 34,104 32,285
--------- ---------
Total current liabilities......................... 258,626 288,799
Long-term debt, including revolving lines-of-credit....... 150,687 266,641
Minority interest in consolidated joint ventures.......... 1,000 4,544
Other liabilities......................................... 1,488 2,155
Deferred income taxes, non-current........................ 4,157 4,652
Stockholders' equity (deficit):
Preference stock, par value $001, authorized 10,000
shares, non issued.................................... -- --
Common stock, par value $001, authorized 100,000
shares,
issued 44,412 shares in 1997 and 42,404 shares in
1996.................................................. 44 42
Additional paid-in capital............................. 414,207 390,741
Common stock to be issued.............................. 17,937 25,625
Retained deficit....................................... (293,404) (437,890)
--------- ---------
Total stockholders' equity (deficit).............. 138,784 (21,482)
--------- ---------
Total liabilities and stockholders' equity
(deficit)....................................... $ 554,742 $ 545,309
========= =========
</TABLE>
See accompanying notes.
1
<PAGE> 3
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue......................................... $119,516 $131,206 $359,346 $395,940
Cost of service..................................... 82,926 86,591 247,691 275,899
-------- -------- -------- --------
Gross profit........................................ 36,590 44,615 111,655 120,041
Operating expenses:
Selling, general and administrative expenses...... 23,729 26,530 70,207 78,382
Provision for estimated uncollectible accounts.... 4,135 6,766 12,527 22,350
Amortization of goodwill.......................... 3,611 3,619 10,820 11,679
Provision for (income from) litigation
settlement..................................... -- 250 (156,792) 12,750
-------- -------- -------- --------
Total operating (income) expense.......... 31,475 37,165 (63,238) 125,161
-------- -------- -------- --------
Operating income (loss)............................. 5,115 7,450 174,893 (5,120)
Other income (expense):
Interest expense.................................. (15,797) (19,175) (55,523) (58,757)
Termination fee................................... -- -- 15,182 --
Gain on sale of business.......................... 17,972 -- 17,972 --
Other income, net................................. 690 645 2,394 2,208
-------- -------- -------- --------
Income (loss) before income taxes and minority
interest.......................................... 7,980 (11,080) 154,918 (61,669)
Income tax expense (benefit)...................... 3,125 (1,347) 3,375 (14,000)
Minority interest in net income of consolidated
joint ventures................................. 2,552 2,279 7,057 5,770
-------- -------- -------- --------
Net income (loss)......................... $ 2,303 $(12,012) $144,486 $(53,439)
======== ======== ======== ========
Primary earnings (loss) per share................... $ 0.04 $ (0.28) $ 2.72 $ (1.30)
======== ======== ======== ========
Fully diluted earnings per share.................... $ 0.04 $ -- $ 2.68 $ --
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 4
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Net cash provided by operating activities................... $ 66,922 $ 36,516
Cash flows from investing activities:
Purchases of property and equipment....................... (14,561) (3,607)
Payments for acquisition of businesses, net of cash
acquired............................................... (558) (6,783)
Cash provided by sale of businesses....................... -- 12,757
Other..................................................... 245 1,057
-------- --------
Net cash (used in) provided by investing
activities....................................... (14,874) 3,424
Cash flows from financing activities:
Sales of stock, including exercise of stock options....... 905 199
Cash paid for debt restructuring.......................... -- (250)
Draws on revolving line of credit......................... 10,000 --
Repayment of debt......................................... (54,003) (48,007)
-------- --------
Net cash used in financing activities............. (43,098) (48,058)
-------- --------
Net increase (decrease) in cash and cash
equivalents...................................... $ 8,950 $ (8,118)
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Depreciation and amortization (including amortization of financing costs
was $41,417 and $39,211 in the nine months ended September 30, 1997 and 1996,
respectively.
Interest expense for the nine months ended September 30, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
------- -------
<S> <C> <C>
Currently payable........................................... $ 9,724 $14,161
Deferred payment terms...................................... 26,406 23,952
Amortization of warrants and other debt costs............... 19,393 20,644
------- -------
Total interest expense............................ $55,523 $58,757
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
During the nine months ended September 30, 1997, non-cash activity included
the following:
Cancellation of the Company's Junior Subordinated PIK Notes totaling $120.0
million as a result of the litigation settlement with Caremark. See Note 2.
The sale of substantially all of its Lithotripsy Business (defined in Note
4) resulting in the disposition of net assets totaling approximately $82.4
million and a receivable on the sale of business of $105.6 million.
See accompanying notes.
3
<PAGE> 5
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
Business Activity. Coram Healthcare Corporation and its subsidiaries
("Coram" or the "Company") are primarily engaged in providing alternate site
(outside the hospital) infusion therapy and related services throughout the
United States. Other services offered by the Company include mail-order
pharmacy, pharmacy benefit management and other non-intravenous infusion
products and services.
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared by 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 unaudited condensed consolidated
financial statements reflect all adjustments and disclosures that are, in the
opinion of management, necessary for a fair presentation. All such adjustments
are of a normal recurring nature. Certain amounts in the 1996 financial
statements have been reclassified to conform to the 1997 presentation.
Management does not believe the effects of such reclassifications are material.
The results of operations for the interim periods ended September 30, 1997 are
not necessarily indicative of the results of the full fiscal year. For further
information, refer to the audited consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1996.
Provision for Estimated Uncollectible Accounts. Management believes the net
carrying amount of accounts receivable is fairly stated and that the Company has
made adequate provision for uncollectible accounts based on all information
available. However, no assurance can be given as to the level of future
provisions for uncollectible accounts, or how they will compare to the levels
experienced in the past.
Earnings per Share. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings per Share, which the Company will be
required to adopt for its year ending December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options and
warrants will be excluded. If Statement 128 had been in effect during the nine
months ended September 30, 1997, the impact would have resulted in an increase
of $0.34 per share in primary earnings per share. The impact of Statement 128 on
the calculation of fully diluted earnings per share is not expected to be
material.
During the three and nine months ended September 30, 1997, per share data
was computed by dividing net income by the weighted average number of common
shares and common stock equivalents outstanding during the period. Shares
outstanding are adjusted for the dilutive effect of common stock equivalents
which include stock options, warrants to acquire common stock and common shares
to be issued. In the three and nine months ended September 30, 1996, per share
data was computed by dividing net loss by the weighted average number of common
shares outstanding during the period. In 1996, the computation does not give
effect to common stock equivalents (including options, warrants or common shares
to be issued) as their effect would have been anti-dilutive.
2. CAREMARK ACQUISITION & LITIGATION SETTLEMENT
Effective April 1, 1995, the Company acquired substantially all of the
assets of the alternate site infusion business (the "Caremark Business") of
Caremark Inc. which resulted in substantial losses to the Company in 1995 and
1996. The Company filed its initial complaint against Caremark on September 11,
1995. On June 30, 1997, the Company entered into a settlement agreement with
Caremark for $165.0 million. Under the terms of the settlement, Junior
Subordinated Pay-In-Kind Notes ("Junior Subordinated PIK Notes") totaling
approximately $120.0 million as of June 30, 1997 were canceled with all payments
thereunder forgiven and Caremark agreed to pay $45.0 million in cash to the
Company which was received in full on September 2,
4
<PAGE> 6
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
1997. Of the $45.0 million cash received, $3.6 million was placed in escrow
pending reconciliation of certain lockbox issues. Additionally, as part of the
settlement, Caremark assigned and transferred to Coram all of Caremark's claims
and causes of action against Caremark's auditors, Price Waterhouse LLP, related
to the lawsuit. This assignment of claims includes claims for damages sustained
by Caremark in defending and settling the lawsuit. During the quarter ended June
30, 1997, the Company recorded settlement income of $156.8 million which
represents the $165.0 million settlement less related costs of $8.2 million.
3. TERMINATED MERGER WITH IHS
On October 19, 1996, the Company, Integrated Health Services, Inc. ("IHS")
and IHS Acquisition XIX, Inc., a wholly owned subsidiary of IHS ("Merger Sub")
entered into a definitive Agreement and Plan of Merger (the "Merger Agreement")
providing for the merger (the "IHS Merger") of Merger Sub with and into the
Company. If the IHS Merger had been consummated, the Company would have become a
wholly-owned subsidiary of IHS.
On March 30, 1997, Coram, IHS and Merger Sub executed an amendment to the
Merger Agreement (the "Amendment"), which was to become effective April 4, 1997.
On April 4, 1997, the Company received from IHS a written notice of termination
of the Amendment and of the Merger Agreement. Pursuant to the terms of the
Merger Agreement and as a result of such termination, IHS paid the Company $21.0
million on May 6, 1997. Accordingly, in the second quarter of 1997 the Company
recorded other income of $15.2 million, representing the $21.0 million
termination fee less legal, professional and other costs related to the
terminated merger of $5.8 million.
4. SALE OF LITHOTRIPSY BUSINESS
On August 20, 1997 the Company signed an agreement with IHS for the sale of
the Company's interest in its thirteen lithotripsy partnerships, the stock of
its equipment service company and certain related assets (the "Lithotripsy
Business"). Effective September 30, 1997, the Company completed the transaction
as to all of its Lithotripsy Business other than its interests in three
lithotripsy partnerships. Pursuant to a side agreement amending the August 20,
1997 purchase agreement, the Company's interests in the three remaining
partnerships were placed in escrow pending the satisfaction of certain
conditions. Following satisfaction of these conditions, two of the partnerships
were conveyed to IHS effective October 3, 1997 while the Company's interest in
the final partnership was returned to the Company on October 21, 1997 when the
escrow arrangement was terminated.
Proceeds on the sale of the Lithotripsy Business totaled $126.6 million of
which $105.6 million relates to the lithotripsy partnerships conveyed to IHS on
September 30, 1997 and $21.0 million relates to the partnerships conveyed
October 3, 1997. Accordingly, the Company recognized a gain of $18.0 million on
the sale of business in the quarter ended September 30, 1997 and will recognize
a gain of approximately $9.2 million during the quarter ended December 31, 1997.
5. ACQUISITIONS AND RESTRUCTURING
Certain agreements related to previously acquired businesses or interests
therein provide for additional contingent consideration to be paid by the
Company. The amount of additional consideration, if any, is based on the
financial performance of the acquired companies. The Company may be required to
pay approximately $2.5 million, subject to increase, under such contingent
obligations based, in certain cases, on the Company or its subsidiaries
exceeding certain revenue or income targets and changes in the market value of
the Company's stock. Subject to certain elections by the Company or the sellers,
a maximum of approximately $1.6 million of these contingent obligations, subject
to increase, may be paid in cash. If these contingent payments are made, they
will be recorded as additional goodwill in the period in which the payment
becomes probable.
5
<PAGE> 7
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Merger and Restructuring. As a result of the formation of Coram and the
acquisition of the Caremark Business, in 1994 and 1995 the Company initiated the
Coram Consolidation Plan and the Caremark Business Consolidation Plan. These
plans were initiated in order to reduce operating costs, improve productivity
and gain efficiencies through consolidation of redundant infusion centers and
corporate offices, reduction of personnel, and elimination or discontinuance of
investments in certain joint ventures and other non-infusion facilities.
The Company continually evaluates the accruals and estimated costs to
complete the plans and may continue to adjust amounts recorded as contingencies
related to lease buyouts, contractual obligations and other facility reduction
costs are resolved. Under the two plans, the Company has made total payments and
asset disposals through September 30, 1997 as follows (in thousands):
<TABLE>
<CAPTION>
CHARGES THROUGH BALANCE AT
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
--------------------------------- ----------------------
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES
------------ -------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Coram Consolidation Plan:
Merger Costs....................... $27,000 $ 600 $27,600 $ 900 $28,500
======= ======= ======= ====== =======
Personnel Reduction Costs.......... $20,100 $ 600 $20,700 $ 500 $21,200
Facility Reduction Costs........... 11,300 21,500 32,800 800 33,600
Discontinuance Costs............... 1,900 29,400 31,300 400 31,700
------- ------- ------- ------ -------
Total Restructuring
Costs.................... $33,300 $51,500 $84,800 $1,700 $86,500
======= ======= ======= ====== =======
Caremark Business Consolidation Plan:
Personnel Reduction Costs.......... $11,800 $ -- $11,800 $ -- $11,800
Facility Reduction Costs........... 8,250 3,900 12,150 4,050 16,200
------- ------- ------- ------ -------
Total Restructuring
Costs.................... $20,050 $ 3,900 $23,950 $4,050 $28,000
======= ======= ======= ====== =======
</TABLE>
The balance in the "Accrued Merger and Restructuring" liability at
September 30, 1997 consists of future cash expenditures of $6.6 million
referenced above and $3.0 million of other accruals. The Company currently
estimates that the future cash expenditures related to both the Coram and
Caremark Business Consolidation Plans will be made in the following periods: 46%
through September 30, 1998, 9% through September 30, 1999, 4% through September
30, 2000, and 41% through September 30, 2001, and thereafter. Although subject
to future adjustment and the Company's ability to successfully implement its
business strategy, the Company believes it has adequate reserves and liquidity
as of September 30, 1997 to meet future expenditures related to the Coram
Consolidation Plan and the Caremark Business Consolidation Plan. However, there
is no assurance that the reserves will be adequate or that the Company will
generate sufficient working capital to meet future expenditures.
6
<PAGE> 8
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Senior Credit Facility..................................... $ 115,000 $ 157,700
Rollover Note, including accrued interest.................. 210,615 189,013
Junior convertible subordinated PIK note, due October 1,
2005, plus interest payable semiannually at 7%,
convertible into Common Stock at the conversion rate of
$27...................................................... -- 84,609
Junior non-convertible subordinated PIK note, due October
1, 2005, plus interest payable semiannually at 12%....... -- 30,669
Other obligations, including capital leases, at interest
rates ranging from 6% to 16%, collateralized by certain
property and equipment................................... 1,778 2,683
--------- ---------
327,393 464,674
Less current scheduled maturities.......................... (176,706) (198,033)
--------- ---------
$ 150,687 $ 266,641
========= =========
</TABLE>
The Company's principal credit and debt agreements were entered into on
April 6, 1995 at the time of the acquisition of the Caremark Business. At
December 31, 1996, these agreements included (i) borrowings under a Credit
Agreement with Chase Manhattan Bank (formally Chemical Bank) as Agent ("the
Senior Credit Facility") (ii) a Rollover Note ("Rollover Note") issued to an
affiliate of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
(iii) Junior Subordinated PIK Notes.
On March 14, 1997, the Company entered into a Ninth Amendment to the Senior
Credit Facility which extended the maturity date from March 31, 1997 to May 31,
1997. On June 2, 1997, the Company refinanced $150.0 million owed its lenders
under the Senior Credit Facility through a refinancing transaction with Goldman
Sachs Credit Partners L.P. ("GSCP"). GSCP acquired the debt through an
assignment from Chase Manhattan Bank. As a result, the Company and GSCP entered
into a Tenth Amendment to the Senior Credit Facility (the "Amendment"). The
Amendment extended the maturity date of the Senior Credit Facility from May 31,
1997 to the earlier of (i) the date on which any obligation under the Rollover
Note becomes payable in cash (currently March 31, 1998) or (ii) May 31, 1998
(the "Maturity Date"). The Amendment also reinstated the Company's ability to
borrow and repay loans under the revolving portion of the Senior Credit
Facility, allowed the Company to make certain business acquisitions not
previously permitted, modified interest rates and revised certain financial and
other covenants. Interest is based on margins over certain domestic and foreign
indices and was 8.94% as of September 30, 1997. The Senior Credit Facility is
secured by the stock of all of the Company's subsidiaries and a collateral
interest in the Company's principal bank accounts. All net proceeds from sales
of assets, other than those sold in the ordinary course of business, and any
excess cash balances, as modified by the Amendment, must be applied to
prepayment of the Senior Credit Facility. The Senior Credit Facility contains
financial covenants and conditions limiting the Company's ability to engage in
certain activities. The principal covenants relate to maintenance of minimum
levels of operating cash flow and minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA"). At September 30, 1997, the Company was
in compliance with these covenants.
The Rollover Note was originally issued to DLJ as an unsecured obligation
of the Company, in the principal amount of $150.0 million with a maturity date
of October 6, 2000. On May 1, 1997, a group of investors consisting of Cerberus
Partners, L.P., GSCP and Foothill Capital (collectively "the Holders") purchased
the Rollover Note and all of the rights to the warrants thereunder. The interest
rate on the Rollover
7
<PAGE> 9
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Note is based on various indices plus a margin which increases by 0.25%
quarterly, but not to exceed 21% per annum. The rate as of September 30, 1997
and the rate effective for the fourth quarter of 1997 is 16.0% and 16.25%,
respectively. Pursuant to a letter agreement dated March 28, 1997 between the
Company and DLJ, payment of interest on the Rollover Note, the funding fee and
the duration fees which had been due March 31, 1997 was deferred to March 31,
1998. During the quarter and nine months ended September 30, 1997, an additional
$8.2 million and $21.6 million, respectively, was accrued on the Rollover Note
for a total unsecured obligation of $210.6 million (including duration and
funding fees of approximately $5.0 million). The agreement pursuant to which the
Rollover Note was issued contains customary covenants and events of default. At
September 30, 1997, the Company was in compliance with all of these covenants.
DLJ had previously been granted the right to receive certain warrants to
purchase common stock on an accelerated basis (see below), and the right to
appoint one director to the Company's Board of Directors, which occurred in
November 1995. Effective May 1, 1997, DLJ resigned its position on the Company's
Board of Directors concurrent with the sale of the Rollover Note. The Company
believes the Holders do not have the right to appoint a director.
As long as the Rollover Note is outstanding, the Holders have the right to
receive warrants to purchase up to 20% of the outstanding shares of Common Stock
of the Company, on a fully diluted basis, at a nominal exercise price in
accordance with the following table. The schedule, as follows, was accelerated
to commence December 30, 1995 and will continue on that basis until such time as
all deferred interest and duration fees (together with all interest due thereon)
have been paid in full, at which time it will revert back to the original
schedule with no return of issued warrants.
<TABLE>
<S> <C>
0-89 days(Issued December 30, 1995)......................... 0.50%
90-179 days (Issued March 29, 1996)......................... 1.00%
180-269 days (Issued June 27, 1996)......................... 1.00%
270-359 days (Issued September 25, 1996).................... 1.50%
360-449 days (Issued December 24, 1996)..................... 2.00%
450-539 days (Issued March 24, 1997)........................ 2.50%
540-629 days (Issued June 22, 1997)......................... 2.50%
630-719 days (Issued September 20, 1997).................... 3.00%
720-809 days................................................ 3.00%
810 days and thereafter..................................... 3.00%
-----
20.00%
=====
</TABLE>
Warrants issued to the Holders are accounted for as interest expense and
additional paid-in capital. Through September 30, 1997, warrants to purchase
approximately 6.0 million shares of the Company's common stock have been
reserved to satisfy its obligations under the securities purchase agreement
related to the Rollover Note. The value is determined as of the date the
warrants are vested. Interest expense recorded during the quarter and nine
months ended September 30, 1997, related to these warrants, was $2.9 million and
$11.5 million, respectively.
The Company is currently in substantive negotiations with the lenders under
the Senior Credit Facility and the Holders of the Rollover Notes with regard to
restructuring of certain aspects of such debt facility and instruments. Under
the terms currently being negotiated, the Company would be permitted to pay down
permanently its Senior Credit Facility to $80.0 million and would be further
allowed to pay down the Rollover Notes by approximately $100.0 million as well
as defer interest payments under the Rollover Notes to September 30, 1998.
Additionally, the parties are also negotiating permanent reductions in the
number of warrants to purchase shares of the Company's common stock that vest
quarterly so long as the Rollover Notes
8
<PAGE> 10
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
are outstanding, such reductions to be proportionate to any pay down on the
Rollover Notes. However, there is no assurance that any restructuring will be
consummated or, if consummated that it will be on the terms described above.
The Junior Subordinated PIK Notes were issued to Caremark in connection
with the acquisition of the Caremark Business. On June 30, 1997 the Company
entered into a settlement with Caremark. Under the terms of the settlement,
Caremark canceled the Junior Subordinated PIK Notes totaling $120.0 million as
of June 30, 1997, with all payments thereunder forgiven. See Note 2.
7. STOCK OPTION PLANS
On May 16, 1997, the Company's Board of Directors recognized that the
exercise price of certain stock options issued under the 1994 Coram Healthcare
Corporation Stock Option/Stock Issuance Plan were significantly out of the money
as a result of a substantial decline in Coram's stock price. To better
incentivize and retain employees of the Company, options held by substantially
all non-director employees to purchase in the aggregate 2.8 million shares of
the Company's Common Stock were repriced to reflect an exercise price of $2.625
per share, representing the fair market value of the Company's common stock on
the date of such repricing.
8. INCOME TAXES
During the quarter and nine months ended September 30, 1997, the Company
recorded income tax expense of $3.2 million and $3.4 million, respectively. The
effective income tax rates for the quarter and nine months ended September 30,
1997 differ substantially from the statutory rates as a result of the
utilization of net operating loss carry-forwards partially offset by income tax
expense related to the sale of the Lithotripsy Business.
As of September 30, 1997, the Company has deferred tax assets of $5.4
million resulting from deferred tax assets totaling $113.7 million less a $108.3
million valuation allowance. These assets are offset by deferred tax liabilities
of $5.4 million. Realization of deferred tax assets is dependent upon the
ability of the Company to generate taxable income in the future. Deferred taxes
relate primarily to temporary differences consisting, in part, of accrued
restructuring costs, the charge for goodwill and other long-lived assets,
allowances for doubtful accounts that are not deductible for income tax purposes
until paid or realized and to net operating loss carry-forwards that are
deductible against future taxable income.
9. LITIGATION
The Company is a party to certain previously disclosed litigation that
could, if their outcomes were unfavorable, have a material adverse effect on the
Company's financial position, results of operations and liquidity. The Company
intends to vigorously defend itself in these matters. Nevertheless, due to the
uncertainties inherent in litigation, the ultimate disposition of these matters
cannot be presently determined. See also Part II -- Item 1. "Legal Proceedings."
On June 30, 1997, the Company entered into a settlement of a lawsuit filed
against Caremark (the "Caremark Litigation") relating to the acquisition of the
Caremark Business. The Caremark Litigation was originally filed in September
1995 in San Francisco Superior Court. Under the settlement, the Junior
Subordinated PIK Notes totaling $120.0 million as of June 30, 1997 were canceled
with all payments thereunder forgiven. Additionally, Caremark agreed to pay
$45.0 million in cash which was paid in full on September 2, 1997. Of the $45.0
million cash received, $3.6 million was placed in escrow pending reconciliation
of certain lockbox issues. As a result, the Company recorded income from
litigation settlement of $156.8 million during the second quarter of 1997. See
Note 2.
9
<PAGE> 11
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
On July 7, 1997, Coram filed suit against Price Waterhouse LLP in the
Superior Court of San Francisco, California seeking damages in excess of $165.0
million. As part of the settlement of the Caremark Litigation, Caremark assigned
and transferred to Coram all of Caremark's claims and causes of action against
Caremark's auditors, Price Waterhouse LLP as a result of audits and reviews of
Caremark's financial statements. This assignment of claims includes claims for
damages sustained by Caremark in defending and settling the lawsuit.
One of Coram's insurance carriers, which contributed approximately $8.8
million to the settlement of certain shareholder class actions and derivative
litigation (the "Shareholder Litigation") approved in January 1997, asserted its
contractual subrogation rights against the recovery Coram realized in the
settlement of the Caremark Litigation, including any amounts received in
settlement thereof, based on the alleged relationship between the Caremark
Litigation and the Shareholder Litigation. On October 31, 1997, the parties
agreed upon the terms of a mutual release. There can be no assurance that the
other insurance carrier, which paid $15.0 million in settlement of the
Shareholder Litigation, will not pursue similar claims against Coram.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements (as such term is defined in the private Securities Litigation Reform
Act of 1995) and information relating to Coram that are based on the beliefs of
the management of Coram as well as assumptions made by and information currently
available to the management of Coram. When used in this Report, the words
"estimate," "project," "believe," "anticipate," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current views of Coram with respect to future events and are subject
to risks and uncertainties that could cause actual results to differ materially
from those contemplated in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Coram does not undertake any obligation to
release publicly any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
BACKGROUND
Business Strategy. The Company's business strategy is focused on the basic
factors that could lead to profitability: revenue generation programs, cost
reduction, quality improvement and cash collections. The Company continues to
focus on business relationships where it can assure high quality of care and
operate profitably. The Company is continuing to emphasize marketing efforts
aimed at improving its physician relationships and also has continued the
development of its specialty programs such as onestop shopping for managed care
payors, disease-state carve-outs (i.e., vertical integration along
disease-specific categories), transplant programs, mail order prescription and
pharmacy benefit management services and women's health programs. Cost reduction
efforts have focused on field consolidation, reduction of corporate expenses,
assessment of poorly performing branches and a review of branch efficiencies.
Delivery of quality service is being closely monitored through an internal task
force, more rigorous reporting and independent patient satisfaction surveys
gathered throughout the year. Further, management continues to concentrate on
reimbursement through an emphasis on improving billing and cash collections and
continued assessment of systems support for reimbursement. While management
believes the implementation of its business strategy has improved operating
performance, no assurances can be given as to its ultimate success.
With the settlement of the Caremark Litigation and the termination of the
proposed IHS Merger in the nine months ended September 30, 1997, management of
the Company is now focused on strategic alternatives for the Company and its
operations to enable the Company to realize its potential in the changing market
for alternate site infusion therapy services. Future strategic alternatives
currently being considered by the Company include, among others, (i) the pursuit
of opportunities in its core alternate site infusion therapy business, including
consolidation with or acquisition of other companies in its core business or in
businesses complimentary to the Company's core business and (ii) completion of
the refinancing of its debt instruments in the fourth quarter to reduce interest
expense and to prevent further dilution through the issuance of additional
warrants. The Company is pursuing strategic acquisitions and has retained Bear
Stearns & Co. Inc. to assist in its pursuit. There can be no assurance that the
Company will be able to obtain refinancing or effect other strategic
alternatives pursued by the Company on commercially acceptable terms to the
Company.
In addition to the settlement of the Caremark Litigation and the
termination of the proposed IHS Merger, other events that impacted the Company
during the nine months ended September 30, 1997 or may impact the Company in the
future include: (i) completion of the sale of the Lithotripsy Business allowing
the Company to substantially reduce its obligations under its credit
arrangements and its contingent liabilities associated with the Company's former
commitments to its partners in the Lithotripsy Business (ii) pending
negotiations with its principal lenders to restructure certain aspects of its
debt instruments permitting the Company to further pay down its debt obligations
thereby reducing interest expense and preventing further dilution through the
issuance of additional warrants and (iii) recent events negatively impacting
major competitors in the home healthcare industry. Combined, management believes
these factors have improved the Company's financial prospects, improved and
stabilized relationships with payors and referral sources, and improved its
position within the home healthcare industry.
11
<PAGE> 13
Factors Affecting Recent Operating Results. The most significant factors
affecting the Company's recent operating performance and financial condition are
as follows:
(i) settlement of the Caremark Litigation for $165.0 million on June
30, 1997. See Notes 2 and 9 to the Unaudited Condensed Consolidated
Financial Statements. Through 1995 and 1996, the Company suffered a loss of
revenues from under-performance of the Caremark Business compared to
original expectations, a negative impact on revenue referral sources and
employee morale throughout the Company. In addition, the Company incurred
substantial indebtedness to acquire the Caremark Business, which it
expected to service primarily through the operating income and cash flow of
the Caremark Business. With the settlement of the Caremark Litigation, the
Company is now focused on strategic alternatives for the Company and its
operations to seek to realize its potential in the changing market for
alternate site infusion therapy services.
(ii) sale of the Lithotripsy Business in the third quarter of 1997
allowing the Company to substantially reduce its debt obligations and its
contingent liabilities associated with the Company's former commitments to
its partners in the Lithotripsy Business thereby further improving its
financial position.
(iii) distractions in its revenue generation programs in the first and
second quarters of 1997 during the pendency of the IHS Merger which was
terminated April 4, 1997. See Note 3 to the Unaudited Condensed
Consolidated Financial Statements.
(iv) ongoing pricing pressure in the Company's core infusion business
as a result of a continuing shift in payor mix from private indemnity
insurance to managed care and governmental payors and intense competition
among infusion providers.
The following table sets forth the approximate percentages of the
Company's net revenue attributable to private indemnity, managed care and
governmental payors, respectively, for the three months ended, September
30, 1997, June 30, 1997, December 31, 1996 and September 30, 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
SEPTEMBER 30, JUNE 30, DECEMBER 31, SEPTEMBER 30,
1997 1997 1996 1996
------------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Private Indemnity Insurance and
Other Payors.................... 27% 28% 31% 34%
Managed Care Organizations........ 45% 44% 43% 40%
Medicare and Medicaid Programs.... 28% 28% 26% 26%
---- ---- ---- ----
Total................... 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
(v) technological advances in the development of new medical
treatments for complex diseases that reduce the need for certain infusion
therapy services provided by the Company. For example, oral drugs such as
protease inhibitors have assisted persons living with HIV and AIDS to
remain healthier longer.
(vi) increased competition from hospitals and physicians who have
sought to increase the scope of services they offer through their
facilities and offices, including services similar to those offered by the
Company.
Management believes that the Company's financial position and its standing
within the home healthcare industry improved in the quarter ended September 30,
1997 primarily through the stabilization of relationships with payors and
referral sources. Additionally, management believes that its focus on strategic
alternatives for the Company and its operations will positively impact its core
business and operations in future periods. However, there can be no assurance
that the improvement will continue or that factors noted above will not have an
adverse effect on the financial position, results of operations and liquidity of
the Company.
12
<PAGE> 14
RESULTS OF OPERATIONS
Certain Quarterly Comparisons
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED JUNE
30, 1997
The following summarizes the Company's results of operations for the three
months ended September 30 and June 30, 1997 (unaudited; in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ---------
<S> <C> <C>
Net revenue................................................ $119,516 $ 118,115
Cost of service............................................ 82,926 83,040
-------- ---------
Gross profit............................................... 36,590 35,075
Operating expenses:
Selling, general and administrative expenses............. 23,729 22,826
Provision for estimated uncollectible accounts........... 4,135 4,104
Amortization of goodwill................................. 3,611 3,597
Income from litigation settlement........................ -- (156,792)
-------- ---------
Total operating (income) expense................. 31,475 (126,265)
-------- ---------
Operating income........................................... 5,115 161,340
Other income (expense):
Interest expense......................................... (15,797) (18,230)
Termination fee.......................................... -- 15,182
Gain on sale of business................................. 17,972 --
Other income, net........................................ 690 1,057
-------- ---------
Income before income taxes and minority interest........... 7,980 159,349
Income tax expense....................................... 3,125 201
Minority interest in net income of consolidated joint
ventures.............................................. 2,552 2,377
-------- ---------
Net income....................................... $ 2,303 $ 156,771
======== =========
Primary earnings per share................................. $ 0.04 $ 2.99
======== =========
Fully diluted earnings per share........................... $ 0.04 $ 2.99
======== =========
</TABLE>
Net Revenue. Net revenue increased by $1.4 million or 1.2%, from $118.1
million in the second quarter of 1997 to $119.5 million in the third quarter of
1997. The increase is due primarily to a favorable shift in therapy mix to
higher net revenue therapies. See "Factors Affecting Recent Operating Results."
Gross Profit. Gross profit increased by $1.5 million from $35.1 million in
the second quarter of 1997 to $36.6 million in the third quarter of 1997. The
increase is due to the increase of $1.4 million in net revenue described above
and a decrease in cost of service of $0.1 million.
Income From Litigation Settlement. The Company recorded income from
litigation settlement, net of related costs, of $156.8 million in the second
quarter of 1997 in connection with the settlement of the Caremark Litigation.
See Notes 2 and 9 to the Unaudited Condensed Consolidated Financial Statements.
Operating Income. The Company recorded operating income of $5.1 million for
the third quarter of 1997 compared to $161.3 million for the second quarter of
1997. Eliminating the effects of the $156.8 million income from litigation
settlement, operating income for the second quarter of 1997 was $4.5 million.
The increase can be attributed primarily to the increase in net revenue of $1.4
million offset by an $0.9 million increase in SG&A.
Interest Expense. Interest expense decreased by $2.4 million, from $18.2
million in the second quarter of 1997 to $15.8 million in the third quarter of
1997. The decrease was due primarily to a decrease in interest related to the
Junior Subordinated PIK Notes cancelled in the settlement of the Caremark
Litigation in the
13
<PAGE> 15
second quarter of 1997. See Notes 2 and 9 to the Unaudited Condensed
Consolidated Financial Statements. Interest expense currently payable was $3.1
million and $3.3 million in the third and second quarters of 1997, respectively.
The warrants and interest terms on the debt are described in Note 6 to the
Unaudited Condensed Consolidated Financial Statements.
Termination Fee. The Company recorded termination fee income, net of
related costs, of $15.2 million in the second quarter of 1997 in connection with
the termination of the proposed merger with IHS. See Note 3 to the Unaudited
Condensed Consolidated Financial Statements.
Gain On Sale of Business. The Company recorded a gain on the sale of
business, net of related costs, of $18.0 million in the third quarter of 1997 in
connection with the sale of its lithotripsy business. See Note 4 to the
Unaudited Condensed Consolidated Financial Statements.
Income Tax Expense. During the quarter ended September 30, 1997, the
Company recorded income tax expense of $3.1 million compared to income tax
expense of $0.2 million in the quarter ended June 30, 1997. The third quarter
expense represents income tax expense related to the sale of the Lithotripsy
Business.
Net Income. The Company recorded net income of $2.3 million for the third
quarter of 1997 compared with $156.8 for the second quarter of 1997. The change
is due primarily to the $15.2 million termination fee recorded in the quarter
ended June 30, 1997 and the $156.8 million income from litigation settlement and
$18.0 million gain on sale of lithotripsy business recorded in the quarter ended
September 30, 1997.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net Revenue. Net revenue decreased $11.7 million or 8.9%, from $131.2
million in the third quarter of 1996 to $119.5 million in the third quarter of
1997. The decrease is due primarily to an 8.6% decrease in patient census. See
"Factors Affecting Recent Operating Results."
Gross Profit. Gross profit decreased $8.0 million from $44.6 million in the
third quarter of 1997 to $36.6 million in the third quarter of 1997. The
decrease is due primarily to the decrease of $11.7 million in net revenue
described above offset by a decrease in cost of service of $3.7 million. See
"Factors Affecting Recent Operating Results."
Selling, General and Administrative Expenses. SG&A decreased $2.8 million
or 10.6%, from $26.5 million in the third quarter of 1996 to $23.7 million in
the third quarter of 1997. The decrease is due primarily to the continuing
strategy to reduce unnecessary corporate and field administrative costs. In
addition, the Company continues to incur non-recurring collection agency fees.
During the three months ended September 30, 1997 and 1996, SG&A includes $0.9
million and $1.5 million, respectively, for collection agency fees related to
the Company's accounts receivable collection efforts.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $4.1 million or 3.5% of net revenue in the quarter
ended September 30, 1997 compared to $6.8 million or 5.2% of net revenue in the
quarter ended September 30, 1996. The decrease in the provision from the third
quarter of 1996 to the third quarter of 1997 is due primarily to the Company's
concentrated collection efforts over the past year as evidenced by the decrease
in net days sales outstanding ("DSO") from 86 days in the third quarter of 1996
to 76 days in the third quarter of 1997.
Operating Income. The Company recorded operating income of $5.1 million for
the third quarter of 1997 compared to operating income of $7.5 million for the
third quarter of 1996. The decrease is due primarily to the decrease in net
revenue offset in part by the decrease in cost of service, selling, general and
administrative expense and provision for uncollectible accounts.
Interest Expense. Interest expense decreased by $3.4 million, from $19.2
million in the third quarter of 1996 to $15.8 million in the third quarter of
1997. The decrease is due primarily to a decrease in amortization of deferred
financing costs related to the Senior Credit Facility of $2.4 million and a
decrease of $2.3 in interest related to the Junior Subordinated PIK Notes
cancelled in the settlement of the Caremark Litigation in the second quarter of
1997. See Notes 2 and 9 to the Unaudited Condensed Consolidated Financial
Statements. Interest expense currently payable was $3.1 million and $4.1 million
in the third quarter of 1997
14
<PAGE> 16
and 1996, respectively. The warrants and interest terms on the debt are
described in Note 6 to the Unaudited Condensed Consolidated Financial
Statements.
Gain On Sale of Business. In the quarter ended September 30, 1997, the
Company recorded a gain on the sale of business, net of related costs, of $18.0
million in connection with the sale of its Lithotripsy Business. See Note 4 to
the Unaudited Condensed Consolidated Financial Statements.
Income Tax Expense (Benefit). During the quarter ended September 30, 1997,
the Company recorded income tax expense of $3.1 million compared to an income
tax benefit of $1.4 million in the quarter ended September 30, 1996. The 1997
expense represents income tax expense generated by the sale of the Lithotripsy
Business. The 1996 benefit was based on an estimate of 1996 carryback benefits
available.
Net Income (Loss). Net income for the third quarter of 1997 was $2.3
million compared to a net loss of $12.0 million for the third quarter of 1996.
Eliminating the effects of the $18.0 million gain on sale of Lithotripsy
Business recorded in the quarter ended September 30, 1997, net loss was $15.7
million. The change is due primarily to a $8.0 million decrease in gross profit
and income tax benefits of $4.5 million offset by an improvement in SG&A,
provision for uncollectibles, and interest expense totaling $8.8 million.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net Revenue. Net revenue decreased $36.6 million or 9.2%, from $395.9
million in the nine months ended September 30, 1996 to $359.3 million in the
nine months ended September 30, 1997. The decrease is due primarily to a 9.3%
decrease in patient census. See "Factors Affecting Recent Operating Results."
Gross Profit. Gross profit decreased $8.3 million from $120.0 million in
the nine months ended September 30, 1996 to $111.7 million in the nine months
ended September 30, 1997. The decrease is due primarily to the decrease of $36.6
million in net revenue described above offset by a decrease in cost of service
of $28.2 million. See "Factors Affecting Recent Operating Results."
Selling, General and Administrative Expenses. SG&A decreased $8.2 million
or 10.5%, from $78.4 million in nine months ended September 30, 1996 to $70.2
million in the nine months ended September 30, 1997. Excluding the effects of
nonrecurring gains on the disposal of non-core businesses and on the conversion
of certain debentures totaling $3.0 million in the first nine months of 1996,
SG&A expense decreased $11.6 million or 14.8%. The improvement is due primarily
to the Company's continuing strategy to reduce unnecessary corporate and field
administrative costs. However, the Company continues to incur non-recurring
collection agency fees. For the nine months ended September 30, 1997 and 1996,
SG&A includes $2.7 million for collection agency fees related to the Company's
concentrated accounts receivable collection efforts.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $12.5 million or 3.5% of net revenue in the nine
months ended September 30, 1997 compared to $22.4 million or 5.6% of net revenue
in the nine months ended September 30, 1996. The decrease is due primarily to
the Company's concentrated collection efforts over the past year as evidenced by
the decrease in DSO from 86 days as of September 30, 1996 to 76 days as of
September 30, 1997.
Provision for (Income From) Litigation Settlement. During the nine months
ended September 30, 1997, the Company recorded income from litigation
settlement, net of related costs, of $156.8 million in connection with the
settlement of the Caremark lawsuit. During the nine months ended September 30,
1996, the Company recorded a non-cash provision of $12.5 million and a cash
provision of $0.3 million in connection with an agreement to settle certain
shareholder litigation. See Notes 2 and 9 to the Unaudited Condensed
Consolidated Financial Statements.
Operating Income (Loss). The Company recorded operating income of $174.9
million for the nine months ended September 30, 1997 compared to an operating
loss of $5.1 million for the nine months ended September 30, 1996. Eliminating
the effects of the non-recurring $156.8 million income from litigation
settlement recorded in the first nine months of 1997 and the non-recurring
provision for shareholder litigation settlement and gains on conversion of
debentures and on disposal of non-core businesses totaling $9.8 million in the
first nine months of 1996, operating income improved by $13.8 million. The
improvement is due
15
<PAGE> 17
primarily to a decrease in the provision for estimated uncollectible accounts
and SG&A expense totaling $21.4 million.
Interest Expense. Interest expense decreased by $3.3 million, from $58.8
million in the nine months ended September 30, 1996 to $55.5 million in the nine
months ended September 30, 1997. The decline is due to a decrease in
amortization of deferred financing costs and interest of $5.8 million and $3.2
million, respectively, related to the Senior Credit Facility offset by an
increase of $4.7 million and $6.7 million, respectively, relating to the
Rollover Note and related warrants. Interest expense currently payable was $9.7
million and $13.7 million in the nine months ended September 30, 1997 and 1996,
respectively. The warrants and interest terms on the debt are described in Note
6 to the Unaudited Condensed Consolidated Financial Statements.
Termination Fee. The Company recorded termination fee income, net of
related costs, of $15.2 million in the nine months ended September 30, 1997 in
connection with the termination of the proposed merger with IHS. See Note 3 to
the Unaudited Condensed Consolidated Financial Statements.
Gain On Sale of Business. In the nine months ended September 30, 1997, the
Company recorded a gain on the sale of business, net of related costs, of $18.0
million in connection with the sale of its Lithotripsy Business. See Note 4 to
the Unaudited Condensed Consolidated Financial Statements.
Income Tax Expense (Benefit). During the nine months ended September 30,
1997, the Company recorded income tax expense of $3.4 million compared to an
income tax benefit of $14.0 million in the nine months ended September 30, 1996.
The 1997 expense represents income tax expense related to the sale of the
Lithotripsy Business. The 1996 benefit was based on an estimate of 1996
carryback benefits available.
Net Income (Loss). Net income for the first nine months of 1997 was $144.5
million compared to a net loss of $53.4 million for the first nine months of
1996. Excluding the effects of the non-recurring income from litigation
settlement, gain on sale of substantially all of the Lithotripsy Business and
termination fee totaling $190.0 million in the first nine months of 1997 and the
non-cash provision for shareholder litigation and gains on conversion of
debentures, and disposal of non-core businesses totaling $9.8 million in the
first nine months of 1996, net loss increased by $1.9 million. The change was
due primarily to the $17.4 million decrease in income tax benefits offset by a
decrease in SG&A, provision for uncollectible accounts, and interest expense of
$11.6 million, $9.8 million and $3.2 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $8.9 million from $15.4
million at December 31, 1996 to $24.3 million at September 30, 1997. The
increase in cash and cash equivalents was due primarily to cash provided by
operating activities of $66.9 million offset by cash used in investing
activities of $14.9 million and cash used in financing activities of $43.1
million. Cash provided by operating activities of $66.9 million was composed
primarily of (i) $21.0 million payment received as a result of the termination
of the proposed merger with IHS (ii) $41.4 million received from Caremark as a
result of the settlement of the Caremark Litigation and (iii) approximately
$19.1 million of cash received in excess of cash disbursements due to improved
cash collections of accounts receivable and decreased disbursement levels offset
by approximately $4.1 million in deferred financing fees related to the Senior
Credit Facility. Cash used in investing activities is due primarily to the
purchase of fixed assets (mainly new infusion pumps) totaling $14.6 million.
Cash used in financing activities consists primarily of debt repayments of $54.0
million offset by additional borrowings of $10.0 million.
On June 2, 1997, the Company refinanced $150.0 million owed its lenders
under the Senior Credit Facility through a refinancing transaction with GSCP.
GSCP acquired the debt through an assignment from Chase Manhattan Bank. As a
result, the Company and GSCP entered into a Tenth Amendment to the Senior Credit
Facility. The Amendment extends the maturity date of the Senior Credit Facility
from May 31, 1997 to the Maturity Date as defined in Note 6 of the Unaudited
Condensed Consolidated Financial Statements (currently March 31, 1998). The
amendment also reinstated the Company's ability to borrow and repay loans under
the revolving portion of the Senior Credit Facility, allowed the Company to make
certain business
16
<PAGE> 18
acquisitions not previously permitted, modified interest rates and revised
certain financial and other covenants. In addition to the Senior Credit
Facility, interest and fees accrued on the Rollover Notes are due March 31,
1998.
On June 30, 1997, the Company entered into a settlement agreement with
Caremark. Under the terms of the settlement, the Junior Subordinated PIK Notes
totaling approximately $120.0 million as of June 30, 1997 were canceled with all
payments thereunder forgiven and Caremark agreed to pay $45.0 million in cash
which was paid in full on September 2, 1997. Of the $45.0 million cash received,
$3.6 million was placed in escrow pending reconciliation of certain lockbox
issues. During the quarter ended June 30, 1997, the Company recorded settlement
income of $156.8 million. See Note 2 and 9 of the Unaudited Condensed
Consolidated Financial Statements. Upon receipt of the cash proceeds due to the
Company in the settlement of the Caremark Litigation, the Company applied
substantially all net cash proceeds to reduce outstanding debt thereby reducing
its overall debt obligations by $150.0 million.
On August 20, 1997 the Company signed an agreement with IHS for the sale of
the Lithotripsy Business. Effective September 30, 1997, the Company completed
the transaction as to all of its Lithotripsy Business other than its interests
in three lithotripsy partnerships. Pursuant to a side agreement amending the
August 20, 1997 purchase agreement, the Company's interests in three remaining
partnerships were placed in escrow pending the satisfaction of certain
conditions. Following satisfaction of these conditions, two of the partnerships
were conveyed to IHS effective October 3, 1997 while the Company's interest in
the final partnership was returned to the Company on October 21, 1997 when the
escrow arrangement was terminated.
The Company received the cash proceeds from this transaction as follows:
$105.6 million on October 2, 1997 and $21.0 million on October 6, 1997.
Substantially all of the cash proceeds will be used to reduce the Company's
obligations under its credit arrangements. See Note 4 to the Unaudited Condensed
Consolidated Financial Statements. In addition, under the August 20, 1997
purchase agreement, IHS agreed to assume the Company's commitments to its
partners that it would purchase their interests in the Lithotripsy Business upon
the occurrence of certain events.
The Company is currently in substantive negotiations with the lenders under
the Senior Credit Facility, and the Holders of the Rollover Notes with regard to
restructuring of certain aspects of such debt facility and instruments. Under
the terms currently being negotiated, the Company would be permitted to pay down
permanently its Senior Credit Facility to $80.0 million and would be further
allowed to pay down the Rollover Notes by approximately $100.0 million as well
as defer interest payments under the Rollover Notes from March 31, 1998 to
September 30, 1998. Additionally, the parties are also negotiating permanent
reductions in the number of warrants to purchase shares of the Company's common
stock that vest quarterly so long as the Rollover Notes are outstanding, such
reductions to be proportionate to any pay down on the Rollover Notes. However,
there is no assurance that any restructuring will be consummated or, if
consummated that it will be on the terms described above.
In addition to the restructuring negotiations discussed above, the Company
is currently evaluating other strategic alternatives in meeting scheduled
maturities of principal and interest. These strategic alternatives include but
are not limited to additional equity or debt financing or sale of its remaining
lithotripsy partnership. There can be no assurance that any financing sources
will be available to the Company or, if available, will be available on
commercially acceptable terms to the Company. As of October 31, 1997 and since
October 13, 1995, the Company has met all scheduled payments, resulting in a
$150.0 million reduction in balance of the Senior Credit Facility.
The strategic alternatives which the Company is seeking include, but are
not limited to, the pursuit of opportunities in its core alternate site infusion
therapy business, including consolidation with or acquisition of other companies
in its core business or in businesses complimentary to the Company's core
business. These future acquisitions, if consummated, may require a change in
capital structure or equity and debt financing. There can be no assurance that
any such consolidations or acquisitions will occur. Additionally, if they occur
there can be no assurance that the financing sources will be available to the
Company or, if available, will be available on commercially acceptable terms to
the Company.
17
<PAGE> 19
FUTURE HEALTH CARE PROPOSALS AND LEGISLATION
In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would effect
major changes in the health care system, either nationally or at the state
level. Among the proposals under consideration are various insurance market
reforms, forms of price control, expanded fraud and abuse and anti-referral
legislation and further reductions in Medicare and Medicaid reimbursement. Most
recently, on August 5, 1997, President Clinton signed into law the Budget
Reconciliation Act of 1997, which provides for reductions in Medicare and
Medicaid of over $115 billion and $13 billion, respectively, over five years.
The impact of these reductions on the health care industry in general and the
Company specifically cannot be determined at this time. Further, the Company
cannot predict whether any of the above proposals or any other proposals will be
adopted. No assurance can be given that the implementation of the Budget
Reconciliation Act or any other reforms will not have a material adverse effect
on the business of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
18
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
One of Coram's insurance carriers, which contributed approximately $8.8
million to the settlement of certain shareholder class actions and derivative
litigation approved in January 1997, asserted its contractual subrogation rights
against the recovery Coram realized in the settlement of a lawsuit filed against
Caremark based on the alleged relationship between the Caremark Litigation and
the Shareholder Litigation. On October 31, 1997, the parties agreed upon the
terms of a mutual release. There can be no assurance that the other insurance
carrier, which paid $15.0 million in settlement of the Shareholder Litigation,
will not pursue similar claims against Coram.
The Company is also a party to various other legal actions arising out of
the normal course of its business. Management believes that the ultimate
resolution of such other actions, except as previously disclosed, will not have
a material adverse effect on the Company's financial position, results of
operations and liquidity of the Company.
ITEM 2. CHANGE IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on September 16, 1997
to consider and vote upon:
(1) Election of directors to serve until the 1998 Annual Meeting of
Stockholders and until their successors are duly elected and qualified;
(2) Approval of an amendment to the Company's Certificate of
Incorporation to increase the number of shares of authorized common stock
from 75,000,000 to 100,000,000;
(3) Approval of an amendment to the Coram Healthcare Corporation
Employee Stock Purchase Plan increasing the number of shares of common
stock available for issuance thereunder from 300,000 to 1,300,000; and
(4) Ratification of the appointment of Ernst and Young LLP as
independent auditors of the Company for the Company's 1997 fiscal year.
All proposals were approved. The results of the voting are as follows:
<TABLE>
<CAPTION>
TOTAL VOTE FOR TOTAL VOTE WITHHELD
EACH DIRECTOR FROM EACH DIRECTOR
-------------- -------------------
<S> <C> <C> <C>
(1) For election as director:
Donald J. Amaral................................. 35,421,884 619,133
Richard A. Fink.................................. 35,225,678 815,339
Stephen G. Pagliuca.............................. 35,421,124 619,893
L. Peter Smith................................... 35,426,875 614,142
Arne T. Alsin.................................... 35,430,793 610,224
William J. Casey................................. 35,431,680 609,337
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ---------- ----------
<S> <C> <C> <C> <C>
(2) Approval of the amendment of the Company's
Certificate of Incorporation............... 34,172,552 1,711,512 156,953
(3) Approval of the amendment of the Company's
Employee Stock Purchase Plan............... 34,373,975 1,453,559 213,483
(4) Ratification of the appointment of Ernst &
Young LLP.................................. 35,724,698 116,167 200,152
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11 -- Statement Re: Earnings Per Share
27 -- Financial Data Schedule
</TABLE>
(B) Reports on Form 8-K
On August 25, 1997, the Company filed a report on Form 8-K reporting a
definitive agreement with Integrated Health Services, Inc. for the sale of
Coram's Lithotripsy Business as discussed in Note 3 to the Unaudited Condensed
Consolidated Financial Statements.
On October 15, 1997, the Company filed a report on Form 8-K announcing the
completion of the sale of its Lithotripsy Business to Integrated Health
Services, Inc. as discussed in Note 4 to the Unaudited Condensed Consolidated
Financial Statements.
20
<PAGE> 22
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
November 12, 1997
21
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
11 -- Statement Re: Earnings Per Share
27 -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT (11) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ---------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding. . . . . 44,277 42,233 43,805 41,258
Common stock to be issued . . . . . 3,500 - 3,458 -
Net effect of dilutive stock
options and warrants - based
on the treasury stock method
using average market price . . . 7,602 - 5,895 -
------------- --------------- --------------- ---------------
Total . . . . . . . . . . . . . . . 55,379 42,233 53,158 41,258
============= =============== =============== ===============
Net income (loss) . . . . . . . . . $ 2,303 $(12,012) $144,486 $ (53,439)
============= =============== =============== ===============
Income (loss) per share . . . . . . $ 0.04 $ (0.28) $ 2.72 $ (1.30)
============= =============== =============== ===============
Fully Diluted:
Average shares outstanding. . . . . 44,277 42,233 43,805 41,258
Common stock to be issued . . . . . 3,500 - 3,458 -
Net effect of dilutive stock
options and warrants - based
on the treasury stock method
using quarter-end market
price which is greater than
average market price . . . . . . 8,172 - 6,699 -
------------- --------------- --------------- ---------------
Total . . . . . . . . . . . . . . . 55,949 42,233 53,962 41,258
============= =============== =============== ===============
Net income (loss) . . . . . . . . . $ 2,303 $(12,012) $144,486 $ (53,439)
============= =============== =============== ===============
Income per share. . . . . . . . . . $ 0.04 $ - $ 2.68 $ -
============= =============== =============== ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 25,303
<SECURITIES> 0
<RECEIVABLES> 222,621
<ALLOWANCES> 29,309
<INVENTORY> 12,804
<CURRENT-ASSETS> 249,373
<PP&E> 81,342
<DEPRECIATION> 63,219
<TOTAL-ASSETS> 554,742
<CURRENT-LIABILITIES> 258,626
<BONDS> 150,687
0
0
<COMMON> 44
<OTHER-SE> 138,740
<TOTAL-LIABILITY-AND-EQUITY> 554,742
<SALES> 359,346
<TOTAL-REVENUES> 359,346
<CGS> 247,691
<TOTAL-COSTS> (63,238)
<OTHER-EXPENSES> 19,975
<LOSS-PROVISION> 12,527
<INTEREST-EXPENSE> 55,523
<INCOME-PRETAX> 154,918
<INCOME-TAX> 3,375
<INCOME-CONTINUING> 144,486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144,486
<EPS-PRIMARY> 2.72
<EPS-DILUTED> 2.68
</TABLE>
