<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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>
<S> <C>
DELAWARE 33-0615357
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1125 SEVENTEENTH STREET
SUITE 2100
DENVER, CO 80202
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 292-4973
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of May 12, 1997, was 44,180,725.
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,512 $ 15,375
Restricted cash........................................... 2,050 3,917
Accounts receivable, net of allowance of $37,992 and
$40,256................................................ 101,740 106,763
Inventories............................................... 14,375 14,268
Prepaid taxes............................................. 11 62
Deferred income taxes, net................................ 3,491 4,063
Other current assets...................................... 14,731 11,822
--------- ---------
Total current assets.............................. 152,910 156,270
Property and equipment, net................................. 16,019 16,998
Joint ventures and other assets............................. 24,234 24,654
Deferred income taxes, non-current.......................... 1,330 1,914
Other deferred costs........................................ 4,805 11,114
Goodwill, net of accumulated amortization of $54,112 and
$50,500................................................... 331,031 334,359
--------- ---------
Total assets................................................ $ 530,329 $ 545,309
========= =========
LIABILITIES & STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 33,540 $ 40,350
Current maturities of long-term debt...................... 204,321 198,033
Deferred income taxes..................................... 1,325 1,325
Reserve for litigation.................................... 2,677 3,273
Accrued merger and restructuring.......................... 11,492 13,533
Other accrued liabilities................................. 29,662 32,285
--------- ---------
Total current liabilities......................... 283,017 288,799
Long-term debt, including revolving lines of credit......... 268,683 266,641
Minority interest in consolidated joint ventures............ 4,186 4,544
Other liabilities........................................... 1,485 2,155
Deferred income taxes, non-current.......................... 3,496 4,652
Stockholders' deficit:
Preferred stock par value $.001, authorized 10,000 shares,
none issued............................................ -- --
Common Stock, par value $.001, authorized 75,000 shares,
issued 44,181 shares in 1997 and 42,404 shares in
1996................................................... 44 42
Additional paid-in capital................................ 403,958 390,741
Common stock to be issued................................. 17,938 25,625
Retained deficit.......................................... (452,478) (437,890)
--------- ---------
Total stockholders' deficit....................... (30,538) (21,482)
--------- ---------
Total liabilities and stockholders' deficit................. $ 530,329 $ 545,309
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 3
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Net revenue................................................. $121,715 $131,625
Cost of service............................................. 81,725 98,159
-------- --------
Gross profit................................................ 39,990 33,466
Operating expenses:
Selling, general and administrative expenses.............. 23,652 25,277
Provision for estimated uncollectible accounts............ 4,288 8,752
Amortization of goodwill.................................. 3,612 4,301
-------- --------
Total operating expenses.......................... 31,552 38,330
-------- --------
Operating income (loss)..................................... 8,438 (4,864)
Other income (expense):
Interest expense.......................................... (21,496) (19,029)
Other income, net......................................... 647 650
-------- --------
Loss before income taxes and minority interest.............. (12,411) (23,243)
Income tax (benefit) expense.............................. 49 (7,416)
Minority interest in net income of consolidated joint
ventures............................................... 2,128 2,074
-------- --------
Net loss.................................................... $(14,588) $(17,901)
======== ========
Net loss per share.......................................... $ (0.34) $ (0.44)
======== ========
Weighted average common shares outstanding.................. 42,890 40,652
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Net cash provided by operating activities................... $ 3,356 $ 1,479
Cash flows from investing activities:
Purchases of property and equipment....................... (1,332) (395)
Payments for acquisition of businesses, net of cash
acquired............................................... -- (2,659)
Proceeds from sale of businesses.......................... -- 984
Other..................................................... (686) 269
------- -------
Net cash used by investing activities............. (2,018) (1,801)
------- -------
Cash flows from financing activities:
Sales of stock, including exercise of stock options....... 384 180
Repayment of debt......................................... (585) (3,569)
------- -------
Net cash used by financing activities............. (201) (3,389)
------- -------
Net increase (decrease) in cash and cash equivalents........ $ 1,137 $(3,711)
======= =======
</TABLE>
SUPPLEMENTAL INFORMATION:
Depreciation and amortization (including amortization of financing costs)
was $17,137 and $16,597 in the three-month periods ended March 31, 1997 and
1996, respectively.
Interest expense for the three months ended March 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Currently payable...................................... $ 3,275 $ 4,960
Deferred payment terms................................. 8,882 7,675
Amortization of warrants and other debt costs.......... 9,339 6,394
------- -------
Total interest expense....................... $21,496 $19,029
======= =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 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 the provision of
lithotripsy, mail-order pharmacy, pharmacy benefit management and other
non-intravenous infusion products and services.
The operations of 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., HealthInfusion, Inc. and Medisys, Inc. (collectively the "Merged
Entities"). Each of these companies is a wholly-owned subsidiary of the Company.
The transaction was accounted for as a pooling of interests.
The Company has made a number of acquisitions since commencing operations,
the most significant of which was the acquisition of substantially all of the
assets and the assumption of certain specified liabilities of the alternate site
infusion business and certain related businesses (the "Caremark Business") from
Caremark Inc., a subsidiary of Caremark International, Inc. (collectively
"Caremark") effective April 1, 1995. In addition, Coram acquired H.M.S.S., Inc.
("HMSS"), a leading regional provider of home infusion therapies based in
Houston, Texas, effective September 12, 1994. See Note 3 for further
information.
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 which are, in the
opinion of management, necessary for a fair presentation. All such adjustments,
other than those relating to retirement of debt, restructuring, termination of
the proposed merger with Integrated Health Services and litigation settlements,
are of a normal recurring nature. Certain amounts in the 1996 financial
statements have been reclassified to conform to the 1997 presentation. The
effects are not material. The results of operations for the interim period ended
March 31, 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.
Goodwill and Other Long-Lived Assets. Goodwill represents the excess of
the purchase price over the fair value of net assets acquired through business
combinations accounted for as purchases and is amortized on a straight-line
basis over the expected periods to be benefited. In 1995 the Company implemented
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Accordingly, the carrying value of goodwill and other long-lived assets is
reviewed quarterly to determine if any impairment indicators are present. If it
is determined that such indicators are present and the review indicates that the
assets will not be recoverable, based on undiscounted estimated cash flows over
their remaining depreciation and amortization period, their carrying values are
reduced to estimated fair market value. Impairment indicators include, among
other conditions, cash flow deficits; an historic or anticipated decline in
revenue or operating profit; adverse legal, regulatory or reimbursement
developments; accumulation of costs significantly in excess of amounts
originally expected to acquire the asset; or a material decrease in the fair
value of some or all of the assets.
The evaluation of the recoverability of goodwill is significantly affected
by estimates of future cash flows from each of the Company's market areas. If
estimates of future cash flows from operations decrease, the Company may be
required to write down its goodwill and other long-lived assets in the future.
Any such write-down could have a material adverse effect on the Company's
financial position and results of operations.
5
<PAGE> 6
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
As of October 1, 1995, the Company reduced the remaining useful lives for
goodwill to 25 years because of uncertainties in the Company's business
environment and recent adverse operating results. Prior to that date, goodwill
was amortized over useful lives ranging from 30 to 40 years. The Company
believes that the home health care market in which it operates provides
significant long-term business opportunities over an indeterminate period.
However, it also recognizes that competitive, legislative and technological
changes could affect the value of the relationships that its recorded goodwill
represents. The timing and extent of the effect, if any, of these uncertainties
beyond that experienced by the Company to date cannot be determined at this
time.
The Company believes that its goodwill is defined by its
relationships -- substantially all of which are non-contractual -- with
physicians, medical groups, hospitals, case managers and managed care
organizations and other referral sources to the Company in the marketplace.
Provision for Estimated Uncollectible Accounts. Management regularly
reviews the collectibility of accounts receivable utilizing system-generated
reports which track collection and write-off activity. Estimated write-off
percentages are then applied to each aging category by payor classification to
determine the allowance for estimated uncollectible accounts. The allowance for
estimated uncollectible accounts is adjusted as needed to reflect current
collection, write-off and other trends, including changes in assessment of
realizable value. While management believes the resulting net carrying amounts
for accounts receivable are fairly stated at each quarter-end and that the
Company has made adequate provision for uncollectible accounts based on all
information available, no assurance can be given as to the level of future
provisions for uncollectible accounts, or how they will compare to the levels
experienced in the past.
Earnings per Share. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings per Share, which is required to be
adopted on 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. The impact of Statement 128 on the calculation of primary
earnings per share and fully diluted earnings per share for the quarters ended
March 31, 1997 and 1996, respectively is not expected to be material.
2. CONTEMPLATED 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. As of March 31, 1997 the Company had incurred
and capitalized costs of $5.8 million related to the IHS Merger.
On March 30, 1997, Coram, IHS and Merger Sub executed an amendment to the
Merger Agreement (the "Amendment"), which was to become effective at 5:00 p.m.
E.S.T. on Friday, April 4, 1997 ("the Effective Date"). 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, IHS paid
the Company $21.0 million on May 6, 1997. The payment will be recorded during
the second quarter of 1997 as other income net of expenses incurred.
3. ACQUISITIONS AND RESTRUCTURING
Acquisition of Caremark Business. Effective April 1, 1995, the Company
acquired the Caremark Business for $209 million in cash and $100 million
aggregate principal amount of Junior Subordinated Pay-In-Kind Notes (the "Junior
Subordinated PIK Notes"). The Company assumed only certain specified liabilities
6
<PAGE> 7
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
of the Caremark Business, which expressly excluded any liabilities associated
with the government investigation of Caremark, which was settled by Caremark in
June 1995. The transaction was accounted for as a purchase.
The Company commenced a comprehensive examination of its business and
operations following the second quarter of 1995, which revealed that the
Caremark Business was significantly weaker than indicated by its 1994 financial
statements. The revenue of the acquired Caremark Business had declined
significantly in the second quarter of 1995 from $96.1 million (as reported by
Caremark) in the first quarter of 1995 to approximately $83.0 million in the
second quarter, or a 13.6% decline. The severity and persistence of the
under-performance of the Caremark Business and the negative impact of the June
1995 guilty plea by Caremark to criminal felony charges on the Company's
referral sources and employee morale, neither of which were expected at the time
of the acquisition, became evident in the third quarter of 1995. The Company
expected the combined business to grow and expected to realize substantial cost
savings, principally through elimination of geographically duplicative branches
and consolidation of corporate functions. However, for the years ended December
31, 1996 and 1995, revenue was significantly lower than the pro forma combined
1994 revenue of $924 million. The anticipated cost savings have been offset by
that revenue decline, and the Company has incurred substantial losses since the
acquisition of the Caremark Business. During 1995, the Company reduced the
valuation of the acquired receivables by an aggregate of $37.0 million and
charged that amount to operations when it concluded that certain receivables for
services rendered prior to April 1, 1995 were uncollectible and its sole source
of recovery was its lawsuit against Caremark. The Company filed its initial
complaint against Caremark on September 11, 1995. See Note 6 and Part II -- Item
1, "Legal Proceedings."
During the quarters ended March 31, 1997 and 1996, the Company's
acquisition activity was limited to the purchase in 1996 of a minority interest
for approximately $0.5 million.
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 $2.9 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 $1.9 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. Payments made during the three months ended March 31, 1997 and
1996 totaled $0.2 million and $2.2 million, respectively.
Merger and Restructuring. During September 1994, the Company initiated a
merger and restructuring plan (the "Coram Consolidation Plan") 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. As a result of the Coram
Consolidation Plan, the Company recorded charges of $28.5 million in estimated
merger costs and $95.5 million in estimated restructure costs. During May 1995,
the Company initiated a second restructuring plan (the "Caremark Business
Consolidation Plan") and charged $25.8 million to operations as a restructuring
cost. Certain additional restructuring costs totaling approximately $11.4
million were accounted for as adjustments to the purchase price of the Caremark
Business.
For both the Coram and the Caremark Business Consolidation Plans, personnel
reduction costs include severance payments, fringe benefits and taxes related to
employees to be terminated, costs of terminating executives and buying out
employment and consulting contracts, and incremental professional fees to
develop and implement the plans. Facility reduction costs consist of the cost of
fulfilling or buying out existing lease
7
<PAGE> 8
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
commitments on branch facilities and corporate offices that will be closed as
part of the restructuring, reduced by any sublease income. They also include
related costs for equipment leases and facility closure expenses. Facility
reduction costs resulting in non-cash charges consist principally of the
write-down, net of any proceeds on disposition, of operating assets that have
become redundant because of the consolidation. They also include inventory that
has no future value because of the restructuring. For the Coram Consolidation
Plan, merger costs consist of executive severance payments directly related to
the Four-Way Merger based on the relevant employment agreements, investment
banking fees, consulting, legal and accounting fees and other costs incurred as
a direct result of the merger. Discontinuance costs are principally non-cash and
consist of the estimated loss on the disposal of non-core businesses.
Net revenue of the Company includes revenue from non-core businesses that
were discontinued or disposed of as part of the Coram Consolidation Plan
approximating $4.8 million in the three months ended March 31, 1996. Operating
results from businesses that were discontinued or disposed were not material.
The Company had substantially completed the consolidation process
contemplated by both the Coram and Caremark Business Consolidation Plans in
1995. During 1995, a pre-tax charge of $25.8 million for estimated costs related
to the Caremark Business Consolidation Plan was charged to operations as a
restructuring cost, offset by a $19.6 million benefit recorded based on a
continuous evaluation of the accruals and estimated costs to complete the plans.
No amounts were recorded subsequent to December 31, 1995, however, the
Company 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 March 31, 1997 as follows (in thousands):
<TABLE>
<CAPTION>
CHARGES THROUGH BALANCE AT
MARCH 31, 1997 MARCH 31, 1997
--------------------------------- ----------------------
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES
------------ -------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Coram Consolidation Plan:
Merger Costs.............................. $26,700 $ 600 $27,300 $1,200 $28,500
======= ======= ======= ====== =======
Personnel Reduction Costs................. $19,900 $ 600 $20,500 $ 700 $21,200
Facility Reduction Costs.................. 10,900 21,500 32,400 1,200 33,600
Discontinuance Costs...................... 1,400 29,400 30,800 900 31,700
------- ------- ------- ------ -------
Total Restructuring Costs......... $32,200 $51,500 $83,700 $2,800 $86,500
======= ======= ======= ====== =======
Caremark Business Consolidation Plan:
Personnel Reduction Costs................. $11,800 $ -- $11,800 $ -- $11,800
Facility Reduction Costs.................. 7,800 3,900 11,700 4,500 16,200
------- ------- ------- ------ -------
Total Restructuring Costs......... $19,600 $ 3,900 $23,500 $4,500 $28,000
======= ======= ======= ====== =======
</TABLE>
The balance in the "Accrued Merger and Restructuring" liability at March
31, 1997 consists of future cash expenditures of $8.5 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: 47% in 1997, 14% in
1998, 3% in 1999 and 36% in 2000 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
March 31, 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.
8
<PAGE> 9
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Senior Credit Facility...................................... $ 157,700 $ 157,700
Rollover Note, including accrued interest (Bridge Note
through April 6, 1996).................................... 195,546 189,013
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, including accrued interest........................... 86,064 84,609
Junior non-convertible subordinated PIK note, due October 1,
2005, plus interest payable semiannually at 12%, including
accrued interest.......................................... 31,562 30,669
Other obligations, including capital leases, at interest
rates ranging from 6% to 16%, collateralized by certain
property and equipment.................................... 2,132 2,683
--------- ---------
473,004 464,674
Less current scheduled maturities........................... (204,321) (198,033)
--------- ---------
$ 268,683 $ 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. The cash
paid by the Company in connection with the acquisition of the Caremark Business
and the repayment of amounts outstanding under a prior credit facility, together
with related fees and expenses, were financed through: (i) borrowings of
approximately $205 million under a Credit Agreement with Chase Manhattan Bank
(formerly Chemical Bank) as Agent (the "Senior Credit Facility") and (ii) $150
million from the issuance of a subordinated bridge note (the "Bridge Note") to
an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). On
October 13, 1995, the Company and its lenders under its Senior Credit Facility
and its Bridge Note agreed to a restructuring of the major terms of both
agreements, as outlined below, which provided a new $25.0 million credit line
(the "Overline"), terminated the unused portion of the existing revolving debt
commitments of approximately $64.2 million and redefined certain financial
covenants. In return, the lenders received warrants to purchase 2.6 million
shares of common stock of the Company or, at the option of the lenders, 6% of
the shares of Coram Inc., a wholly owned subsidiary of the Company and the
immediate parent of the Company operating subsidiaries, exercisable at a nominal
price over five years. The Company is currently precluded from declaring or
paying dividends on its capital stock.
On March 14, 1997, the Company entered into a Ninth Amendment to the Credit
Agreement which extended the maturity date of the Senior Credit Facility from
March 31, 1997 to May 31, 1997. At March 31, 1997, under the amended terms of
the Senior Credit Facility, the Company had $157.7 million outstanding with a
final maturity date of May 31, 1997. The $25 million Overline expired with no
borrowing outstanding thereunder on December 31, 1996. Interest is based on
margins over certain domestic and foreign indices and was 8.13% on March 31,
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 defined, 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
revenue, minimum cash receipts, maximum cash disbursements and minimum earnings
before interest, taxes, depreciation and amortization ("EBITDA"). At March 31,
1997, the Company was in compliance with all of these covenants. The Company is
currently in discussions with the
9
<PAGE> 10
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
lenders under the Senior Credit Facility. The discussions involve a request for
an extension until March 31, 1998, more operating flexibility and permission to
invest in certain acquisitions. The Company believes that it will be successful
in extending the Senior Credit Facility, however, there are no assurances that
the Company will receive the extension under the requested terms.
The warrants issued to the Company's lenders under the Senior Credit
Facility were valued at $8.0 million, their fair value at date of issuance, and
are being accounted for as interest expense over the remaining term of the
Senior Credit Facility. In the three months ended March 31, 1997 and 1996, $1.2
million and $1.4 million, respectively, was charged to interest expense related
to these warrants.
The Bridge Note was issued on April 6, 1995 to DLJ, as an unsecured
obligation of the Company in the principal amount of $150 million. The Bridge
Note was not repaid in full on its April 6, 1996 due date, and a Rollover Note
(the "Rollover Note") which matures on October 6, 2000 was issued for the
outstanding principal on the Bridge Note. The interest rate on the Rollover Note
is based on various indices plus a margin which increases by 0.25% quarterly,
but not to exceed 21% per annum. The rate as of March 31, 1997 was approximately
14%. Payment of interest on the Bridge and Rollover Notes and the duration fee
which had been due quarterly have been deferred to March 31, 1998. During the
three months ended March 31, 1997 and 1996, an additional $6.5 million and $5.1
million, respectively, were accrued on the Bridge Note for a total unsecured
obligation in the amount of $195.6 million (including a funding fee of
approximately $5.0 million due upon issuance of the Rollover Note which has also
been deferred). The agreement pursuant to which the Bridge Note and Rollover
Note were issued contains customary covenants and events of default. At March
31, 1997, the Company was in compliance with all of these covenants. On May 1,
1997 a group of investors consisting of Cerberus Partners, L.P., Goldman Sachs
Credit Partners, L.P. and Foothill Capital (collectively "the Holders")
purchased the Rollover Note and all of the rights to the warrants thereunder.
DLJ had previously been granted the right to receive certain warrants on an
accelerated basis (see below), and the right to appoint one director to the
Company's Board of Directors, 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 that 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................................................ 2.50%
630-719 days................................................ 3.00%
720-809 days................................................ 3.00%
810 days and thereafter..................................... 3.00%
-----
20.00%
=====
</TABLE>
10
<PAGE> 11
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Warrants issued to the Holders are accounted for as interest expense and
additional paid-in capital. Through March 31, 1997, warrants on approximately
3.6 million shares of the Company's Common Stock have been reserved in escrow
with a value of $16.0 million. The value was determined as of the date the
shares were issued. Interest expense recorded during the three months ended
March 31, 1997 and 1996, related to these warrants, was $1.5 million and $0.9
million, respectively.
The Junior Subordinated PIK Notes were issued to Caremark in connection
with the acquisition of the Caremark Business (See Note 3). Through April 6,
1997, interest on the Junior Subordinated PIK Notes is payable in Junior
Subordinated PIK Notes of the same type. Thereafter, interest will be payable in
cash unless such payment is precluded by subordination provisions of
indebtedness senior to the Junior Subordinated PIK Notes, in which case interest
is payable in Junior Subordinated PIK Notes of the same type. No principal or
interest payments may be made if there is a default, or an event of default, on
indebtedness senior to the Junior Subordinated PIK Notes (the Senior Credit
Facility and Rollover Note). In the event that there is a change in control of
the Company, the holder of the Junior Subordinated PIK Notes may require the
Company to repurchase such notes at a purchase price equal to the principal
amount thereof, plus accrued interest thereon.
The Junior Convertible Subordinated PIK Note may not be prepaid or redeemed
prior to April 6, 1998 without the written consent of the holder thereof.
Thereafter, the Junior Convertible Subordinated PIK Note is, at the option of
the Company, redeemable, in whole or in part, subject to normal redemption terms
and conditions. The Junior Convertible Subordinated PIK Note is convertible, at
the holder's option, in whole or in part. The conversion price of the Junior
Convertible Subordinated PIK Note is $27 per share, subject to adjustment.
The Junior Non-Convertible Subordinated PIK Note may be prepaid or
redeemed, in whole or in part, at any time at the Company's option, without
penalty or premium, and subject to restrictions on optional redemption contained
in the Senior Credit Facility.
5. INCOME TAXES
During the three months ended March 31, 1997 and 1996, the Company recorded
an income tax expense of $0.1 million and an income tax benefit of $7.4 million,
respectively. The income tax benefit recognized has been limited to the
estimated amounts recoverable through carryback of losses to the separate
returns of the Merged Entities. Accordingly, the effective income tax benefit
rates for the three month periods ended March 31, 1997 and 1996 differ
substantially from the expected combined federal and state income tax benefit
rates calculated using applicable statutory rates.
Deferred tax assets are net of a $161.7 million valuation allowance.
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 carryforwards that are deductible against future
taxable income.
6. LITIGATION
The Company is a party to certain lawsuits that could, if their outcomes
were unfavorable, have a material adverse effect on the Company's financial
position, results of operations and liquidity. These lawsuits include (i) a
lawsuit filed by the Company against Caremark, and a lawsuit and a
cross-complaint filed by Caremark against the Company, relating to the
acquisition of the Caremark Business ("Caremark Litigation"); and (ii) actions
by plaintiffs in the shareholder litigation which was initiated against T(2) in
1992, related to the T(2) Settlement Agreement. The Company intends to
vigorously defend itself in these matters.
11
<PAGE> 12
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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 August 8, 1996, the Company announced an agreement in principle to
settle certain shareholder class actions and certain derivative litigation
("Shareholder Litigation"). The agreement in principle was approved by the
Colorado District Court on January 24, 1997. As consideration for the
settlement, the Company paid approximately $1.3 million, of which $1.0 million
was reimbursed by the Company's director's and officer's insurance policies, and
the director's and officer's insurance policies paid $22.3 million, including
the $1.0 million payment to the Company referenced above. Additionally, the
Company was required to adopt certain disclosure policies with regard to certain
public statements. Under the agreement the Company is required to issue 5.0
million freely tradable shares of Common Stock of which 1.5 million shares were
issued March 11, 1997. The remaining 3.5 million shares are expected to be
issued in the second or third quarters of 1997. The agreement contained several
contingencies, all of which were satisfied at the time of court approval. The
Company recorded non-cash charges of $25.6 million and a cash charge of $0.3
million during the year ended December 31, 1996. The $25.6 million, which was
recorded in operations as a provision for shareholder litigation settlement and
in stockholders equity as common stock to be issued, represents the 5.0 million
shares at the stock price of $5.125 per share on the date the settlement was
approved.
One of Coram's insurance carriers, which contributed approximately $8.8
million to the settlement of shareholder litigation approved in January 1997
(the "Shareholder Litigation"), has asserted its contractual subrogation rights
against any recovery Coram may realize in the Caremark Litigation, including any
amounts received in settlement thereof, based on the alleged relationship
between the Caremark Litigation and the Shareholder Litigation. The carrier
alleges that this claim should be submitted to binding arbitration. As of the
date hereof, no date has been set to hear such claim. If the carrier prevails,
upon the resolution of the Caremark Litigation such carrier may be entitled to
receive a portion of the proceeds, if any, to Coram up to the approximated $8.8
million such carrier contributed to the settlement of the Shareholder
Litigation. 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.
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. Despite declining revenue as a result of the factors
described below, the Company has experienced positive trends recently as a
result of the business strategy which it has been implementing since September
of 1995. The 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
12
<PAGE> 13
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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 one-stop shopping for managed
care payors, disease-state carve-outs (i.e., vertical integration along
disease-specific categories), transplant programs, mail order oral prescription
drug 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.
Factors Adversely Affecting Recent Operating Results. The most significant
factor affecting the Company's performance and financial condition is the
underperformance of the Caremark Business from what the Company expected at the
time of acquisition. 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. However, the revenue of
the acquired Caremark Business declined significantly after the acquisition in
the second quarter of 1995. Caremark Business revenue declined from $96.1
million (as reported by Caremark) in the first quarter of 1995 to approximately
$83.0 million in the second quarter, or a 13.6% decline. Management believes
that this trend has continued through the first quarter of 1997. However,
because of the consolidation of the Caremark Business branches and the former
Coram branches, the decline in Caremark Business revenue since the second
quarter of 1995 cannot be precisely quantified at this time. Further, the
Company believes the guilty plea by Caremark related to criminal felony charges
in June 1995 has negatively impacted revenue referral sources and employee
morale throughout the Company, further contributing to a loss of revenue. In
addition, during the first quarter of 1996, Caremark announced a settlement with
private indemnity payors with whom Caremark did business before selling the
Caremark Business to the Company. The Company believes the causes underlying the
Caremark settlements have also had an adverse effect on its business. See Note 3
to the Unaudited Condensed Consolidated Financial Statements -- "Acquisition of
Caremark Business."
Another factor which the Company believes has adversely affected Coram's
results of operations since October 1996 was the pendency of the IHS Merger
which the Company entered into on October 19, 1996. If the IHS Merger had been
consummated, the Company would have become a wholly-owned subsidiary of IHS. The
IHS Merger was anticipated to close on or before March 31, 1997 with a provision
in the Merger Agreement which allowed, under certain circumstances, for an
extension until May 31, 1997. However, on April 4, 1997, the Company received
from IHS a notice of termination (the "Notice") of the Merger Agreement. See
Note 2 for further information.
In addition, the Company continues to experience ongoing pricing pressure
in its 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. To date, the Company's
arrangements with managed care organizations have mostly been on a discounted
fee-for-service basis; the Company does not currently have any material
capitated arrangements.
13
<PAGE> 14
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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, March 31, 1997, December 31,
1996 and March 31, 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
--------- ------------ ---------
<S> <C> <C> <C>
Private Indemnity Insurance and Other Payors...... 29% 33% 39%
Managed Care Organizations........................ 43% 40% 34%
Medicare and Medicaid Programs.................... 28% 27% 27%
--- --- ---
Total................................... 100% 100% 100%
=== === ===
</TABLE>
The Company has also experienced a disruption in certain relationships as a
result of its headcount reductions and consolidation. Further, the Company has
experienced increased competition from hospitals and physicians who have sought
to increase the scope of services they offer through their facilities and
offices, including services similar to those offered by the Company. There can
be no assurance that these factors will not continue to have an adverse effect
on the financial position, results of operations and liquidity of the Company.
In addition, the Company has experienced modest downward pricing pressures
in certain of its lithotripsy operations. These operations may continue to
experience pricing pressures in the future. The Health Care Financing
Administration has issued a proposed rule that would, if implemented,
significantly reduce the amount Medicare would reimburse its beneficiaries for
the cost of lithotripsy procedures performed in an ambulatory surgery center or
on an outpatient basis at a hospital. Such a proposal might result in similar
efforts by other third-party payors to limit reimbursement for lithotripsy
procedures.
14
<PAGE> 15
RESULTS OF OPERATIONS
CERTAIN QUARTERLY COMPARISONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED DECEMBER 31,
1996
The following summarizes the Company's results of operations for the three
months ended March 31, 1997 and December 31, 1996 (unaudited; in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Net revenue................................................. $121,715 $126,029
Cost of service............................................. 81,725 85,788
-------- --------
Gross profit................................................ 39,990 40,241
Operating expenses:
Selling, general and administrative expenses.............. 23,652 25,878
Provision for estimated uncollectible accounts............ 4,288 6,696
Amortization of goodwill.................................. 3,612 3,580
Provision for shareholder litigation settlement........... -- 15,125
-------- --------
Total operating expenses.......................... 31,552 51,279
-------- --------
Operating income (loss)..................................... 8,438 (11,038)
Other income (expense):
Interest expense.......................................... (21,496) (20,010)
Other income, net......................................... 647 1,403
-------- --------
Loss before income taxes and minority interest.............. (12,411) (29,645)
Income tax expense........................................ 49 2
Minority interest in net income of consolidated joint
ventures............................................... 2,128 1,928
-------- --------
Net loss.................................................... $(14,588) $(31,575)
======== ========
Net loss per share.......................................... $ (0.34) $ (0.75)
======== ========
Weighted average common shares outstanding.................. 42,890 42,404
======== ========
</TABLE>
Net Revenue. Net revenue decreased by $4.3 million or 3.4%, from $126.0
million in the fourth quarter of 1996 to $121.7 million in the first quarter of
1997. The home infusion business accounted for virtually all of the decrease due
primarily to the impact of the under-performance of the Caremark Business. In
addition, the Company experienced distractions in its revenue generation
programs during the fourth quarter of 1996 and the first quarter of 1997 due to
the contemplated IHS Merger. The Company also continues to experience ongoing
pricing pressure as a result of a continuing shift in payor mix from private
indemnity insurance to managed care organizations. Net revenue from private
indemnity insurance decreased from approximately 33.0% for the quarter ended
December 31, 1996 to approximately 29.0% for the quarter ended March 31, 1997,
while net revenue from managed care organizations increased from approximately
40.0% for the quarter ended December 31, 1996 to approximately 43.0% for the
quarter ended March 31, 1997. See "Factors Adversely Affecting Recent Operating
Results."
Gross Profit. Gross profit decreased slightly from $40.2 million in the
fourth quarter of 1996 to $40.0 million in the first quarter of 1997 although
the gross margin improved slightly from 31.9% in the fourth quarter of 1996 to
32.9% in the first quarter of 1997. This was due primarily to the decrease in
revenue of $4.3 million offset by a $4.1 million decrease in cost of service.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") decreased $2.2 million from $25.9 million in
the fourth quarter of 1996 to $23.7 million in the first quarter of 1997. The
decrease is due primarily to the Company's continuing strategy to reduce
unnecessary corporate and
15
<PAGE> 16
field administrative costs. However, the Company continues to incur
non-recurring legal expenses and collection agency fees. For the quarters ended,
March 31, 1997 and December 31, 1996, SG&A includes $0.7 million and $2.0
million, respectively, for collection agency fees related to the Company's
concentrated accounts receivable collection efforts and $0.7 million and $2.1
million, respectively, of legal fees incurred to defend the Company in various
legal matters. See "Business Strategy" and Part II -- Item 1. "Legal
Proceedings."
Provision for Estimated Uncollectible Accounts. The provision for
estimated uncollectible accounts was $4.3 million or 3.5% of net revenue for the
quarter ended March 31, 1997 and $6.7 million or 5.3% of net revenue for the
quarter ended December 31, 1996. During the third and fourth quarters of 1996,
management initiated a new program whereby collection teams comprised of
external collection agencies were engaged to concentrate on collecting accounts
greater than 90 days old. The increased cash collection effort resulted in
increased cash collection calls, commitments for payment and charges to the
Company's established reserves. The Company's allowance for uncollectible
accounts was $37.9 million, or 27.2% of gross accounts receivable at March 31,
1997 compared to $40.3 million, or 27.4% of gross accounts receivable at
December 31, 1996. See Note 1 to the unaudited condensed consolidated financial
statements -- "Provision for Estimated Uncollectible Accounts."
Provision for Shareholder Litigation Settlement. The Company recorded a
non-cash provision of $15.1 million during the fourth quarter of 1996 in
connection with the agreement in principle to settle certain shareholder
litigation. See Part II -- Item 1. "Legal Proceedings" and Note 6 to the
unaudited condensed consolidated financial statements.
Operating Income (Loss). The Company recorded operating income of $8.4
million for the first quarter of 1997 compared to an operating loss of $11.0
million in the fourth quarter of 1996. Eliminating the effects of the $15.1
million non-cash provision for shareholder litigation settlement, operating
income for the quarter ended December 31, 1996 was $4.1 million.
Other Income (Expense). Interest expense increased by $1.5 million, from
$20.0 million in the fourth quarter of 1996 to $21.5 million in the first
quarter of 1997. The increase was due primarily to an increase in interest
expense related to the warrants issued to the Holder of the Rollover Notes of
$1.9 million. Interest expense currently payable was $3.3 million and $3.6
million, respectively, in the first quarter of 1997 and the fourth quarter of
1996. The warrants and interest terms on the debt are described in Note 4 to the
unaudited condensed consolidated financial statements.
Net Loss. The Company recorded a net loss of $14.6 million for the first
quarter of 1997 compared with a net loss of $31.6 million for the fourth quarter
of 1996. The improvement resulted primarily from the $15.1 million decrease in
the provision for shareholder litigation settlement, the $2.2 million decrease
in SG&A and the $2.4 million decrease in the provision for estimated
uncollectible accounts.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
Net Revenue. Net revenue decreased $9.9 million, or 7.5%, from $131.6
million in the first quarter of 1996 to $121.7 million in the first quarter of
1997. The home infusion therapy business accounted for the majority of this
decrease primarily as a result of the impact of the continuing under-performance
of the Caremark Business. See "Factors Adversely Affecting Recent Operating
Results." In addition, the Company experienced distractions in its revenue
generation programs during the first quarter of 1997 due to the contemplated IHS
Merger. Also contributing to the decrease in net revenue was the sale or
discontinuance of non-strategic or unprofitable businesses of approximately $2.6
million and the elimination of unprofitable contractual relationships since the
beginning of 1995. These decreases were offset by an increase in prescription
services revenue of approximately $1.9 million.
Gross Profit. Gross profit increased by $6.5 million, or 19.5%, from $33.4
million in the first quarter of 1996 to $39.9 million in the first quarter of
1997. In addition, the gross margin increased from 25.4% in the first quarter of
1996 to 32.9% in the first quarter of 1997. This improvement is due to the
decrease in clinical
16
<PAGE> 17
services expense from 39.1% of net revenue in the first quarter of 1996 to 30.8%
of net revenue in the first quarter of 1997.
Selling, General and Administrative Expenses. SG&A decreased $1.6 million,
from $25.3 million in the first quarter of 1996 to $23.7 million in the first
quarter of 1997. The decrease 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 legal expenses and
collection agency fees. For the quarters ended, March 31, 1997 and March 31,
1996, SG&A includes $0.7 million and $0.2 million, respectively, for collection
agency fees related to the Company's concentrated accounts receivable collection
efforts and $0.7 million and $1.3 million, respectively, of legal fees incurred
to defend the Company in various legal matters. See "Business Strategy" and Part
II--Item 1. "Legal Proceedings."
Provision for Estimated Uncollectible Accounts. The provision for
estimated uncollectible accounts was $4.3 million, or 3.5% of net revenue in the
quarter ended March 31, 1997 compared to $8.8 million, or 6.6% of net revenue in
the quarter ended March 31, 1996. The Company's allowance for uncollectible
accounts was $37.9 million, or 27.2% of gross accounts receivable at March 31,
1997 compared to $63.3 million, or 32.5% of gross accounts receivable at March
31, 1996. See Note 1 to the Unaudited Condensed Consolidated Financial
Statements -- "Provision for Estimated Uncollectible Accounts." The decrease in
the provision from the first quarter of 1996 to the first quarter of 1997 is due
primarily to the Company's concentrated collection efforts over the past year.
Operating Income (Loss). The Company recorded operating income of $8.4
million for the first quarter of 1997 compared to an operating loss of $4.9
million in the first quarter of 1996. The improvement in operating results was
due to a $6.5 million improvement in gross profit and a $4.5 million decrease in
the provision for estimated uncollectible accounts which are discussed above.
Other Income (Expense). Interest expense increased by $2.5 million, from
$19.0 million in the first quarter of 1996 to $21.5 million in the first quarter
of 1997. This increase is due primarily to increases in interest expense of $3.5
million related to warrants and $1.4 million related to interest recorded on the
Rollover Note, offset by a $1.5 million decrease in interest expense related to
the Senior Credit Facility. The warrants and interest terms on the debt are
described in Note 4 to the unaudited condensed consolidated financial
statements.
Income Tax Benefit. During the first quarter of 1996, the Company recorded
an income tax benefit of $7.4 million based on carryback benefits available in
relation to estimated pre-tax results for the year, exclusive of any significant
unusual items. There was no benefit recorded in the first quarter of 1997.
Net Loss. Net loss for the first quarter of 1997 was $14.6 million
compared to $17.9 million for the first quarter of 1996. The improvement was due
primarily to the $6.5 million increase in gross profit, the $1.6 million
decrease in SG&A and the $4.5 million decrease in the provision for estimated
uncollectible accounts offset by a $2.5 million increase in interest expense and
a $7.5 million decrease in the income tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at March 31, 1997 were $16.5
million (excluding restricted cash of $2.1 million which consists principally of
cash held by consolidated partnerships that may only be used for partnership
operations).
The Company's cash and cash equivalents increased $1.1 million from $15.4
million at December 31, 1996 to $16.5 million at March 31, 1997. The increase in
cash and cash equivalents was due primarily to cash provided by operating
activities of $3.4 million due primarily to improved collections of accounts
receivable and decreased disbursement levels from cost containment measures. The
Company's improved collections have included a large number of older accounts.
As the Company collects or writes off its older accounts, its rate of cash
collections in relation to net revenue billed may decrease in future periods.
The increase in cash provided by operating activities was offset by cash used by
investing activities of $2.0 million for the three months ended March 31, 1997
which was consistent with the $1.8 million at March 31, 1996.
17
<PAGE> 18
On February 26, 1997, the Company agreed to purchase up to $13.0 million of
multi-therapy infusion pumps and related proprietary telemedicine technology
over the next six to nine months from Sabratek Corporation. The Company expects
to pay for the pumps out of cash flow from operations, however, it would seek to
finance the purchase of these pumps, if necessary, to improve the Company's
liquidity.
On March 14, 1997 the Company entered into the Ninth Amendment to Credit
Agreement which extended the maturity date of the Senior Credit Facility from
March 31, 1997 to May 31, 1997. The Company is currently in discussions with the
lenders under the Senior Credit Facility. The discussions involve a request for
an extension until March 31, 1998, more operating flexibility and permission to
invest in certain acquisitions. The Company believes that it will be successful
in extending the Senior Credit Facility, however, there are no assurances that
the Company will receive the extension under the requested terms. On March 28,
1997, the Company and the holder of the Rollover Notes entered into a letter
agreement to defer all interest and fees due on March 31, 1997 until March 31,
1998. The Company is also pursuing discussions with the Holders of the Rollover
Notes to discuss its strategic alternatives. These strategic alternatives
include but are not limited to additional equity or debt financing or sales of
other non-core assets, including its lithotripsy businesses. The sale by the
Company of its interests in the lithotripsy partnerships would require the
consent of the partners of each partnership. There can be no assurance that the
Company would be able to obtain such consent or 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 May 10, 1997 and since October 13, 1995,
the Company has met all scheduled payments, resulting in a $85.0 million
reduction of the principal balance of the Senior Credit Facility.
Joint venture agreements within the Company's lithotripsy operations
contemplate that, in certain situations, the Company would be required to
purchase the minority interests in such joint ventures. During 1996, the Company
acquired certain minority interests in two additional partnerships for
approximately $4.7 million in cash. If, however, Coram were required to acquire
the minority interest of its physician partners in each of its lithotripsy
partnerships, the cost, in the aggregate, would be material to the Company. In
addition there is no assurance that the Company will have the resources to make
the required payments or that the lenders under the Senior Credit Facility will
approve the required payments.
FUTURE HEALTH CARE PROPOSALS AND LEGISLATION
In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would effect
major changes in the health care system, either nationally or at the state
level. Among the proposals under consideration are various insurance market
reforms, forms of price control, expanded fraud and abuse and anti-referral
legislation and further reductions in Medicare and Medicaid reimbursement. The
Company cannot predict whether any of the above proposals or any other proposals
will be adopted, and if adopted, no assurance can be given that the
implementation of such reforms will not have a material adverse effect on the
business of the Company.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1995, the Company and certain of its officers and directors were
named as defendants in 20 civil suits filed on behalf of individuals claiming to
have purchased and sold Coram Common Stock during the time period from
approximately February 16, 1995 through August 11, 1995. The suits were filled
in the United States District Court for the District of Colorado (the "Colorado
District Court") and were consolidated into one suit captioned, In Re: Coram
Healthcare Corporation Securities Litigation, Master File No. 95-N-2074. The
complaint seeks certification of a plaintiff's class. In general, the complaint
alleged that the defendants made false and misleading statements to the public
regarding, among other things, projected earnings, anticipated cost savings and
proposed mergers. The complaint asserted claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 of the
Securities and
18
<PAGE> 19
Exchange Commission, and seeks unspecified compensatory damages, attorney's fees
and costs. The Company sought coverage under its directors and officers
insurance policies for any settlements, judgments, and costs of defense in
connection with these cases, within outstanding policy limits.
On November 2, 1995, a shareholder derivative suit captioned Martin J.
Siegal, on behalf of Coram Healthcare Corporation v. James Sweeney, et al.,
Civil Action No. 14646 was filed in the Court of Chancery of the State of
Delaware asserting substantially similar factual allegations as the suits
described in the preceding paragraph, and seeking a judgment against the
individual defendants to account to Coram for all damages sustained by Coram as
a result of their alleged actions.
On March 29, 1996, a shareholder derivative suit captioned Nirmala Shevde,
on behalf of Coram Healthcare Corporation v. James Sweeney, et al., File No.
96-N-722, was filed in the United States District Court for the District of
Colorado. The complaint set forth substantially the same allegations as those
made in the derivative lawsuit previously filed in Delaware, and sought
substantially similar relief.
On August 8, 1996, the Company announced an agreement in principle to
settle the shareholder class actions and certain derivative litigation. The
agreement in principle was approved by the Colorado District Court on January
24, 1997. As consideration for the settlement, the Company paid approximately
$1.3 million, of which $1.0 million was reimbursed by the Company's Director's
and Officer's insurance policies, and the Director's and Officer's insurance
policies paid $22.3 million, including the $1.0 million payment to the Company
referenced above. Additionally, the Company was required to adopt certain
disclosure policies with regard to certain public statements. Under the
agreement, the Company is required to issue 5.0 million freely tradable shares
of Common Stock of which 1.5 million shares were issued March 11, 1997. The
remaining 3.5 million shares are expected to be issued in the second or third
quarters of 1997. The agreement contained several contingencies, all of which
were satisfied at the time of court approval. The Company recorded non-cash
charges of $25.6 million and a cash charge of $0.3 million during the year ended
December 31, 1996. The $25.6 million charge, which was recorded in operations as
a provision for shareholder litigation settlement and in shareholders equity as
common stock to be issued, represents the 5.0 million shares at the stock price
of $5.125 per share on the date the settlement was approved.
On September 11, 1995, as amended on October 6, 1995, the Company filed
suit against Caremark (the "Caremark Litigation") alleging fraudulent
misrepresentations of the value of accounts receivable and amount of revenue,
concealment of important information concerning a criminal investigation of
Caremark's business practices and other material misrepresentations and breaches
of contract terms. The suit seeks relief in the form of damages, including
damages to the Company's business resulting from the misrepresentations and
breaches by Caremark. In the complaint, filed in the Superior Court of the State
of California in the City and County of San Francisco, the Company alleges,
among other things, that Caremark used improper accounting practices that
resulted in overstating Caremark's revenues. The complaint further alleges that
Caremark falsely represented that the Office of the Inspector General
investigation involving Caremark was not going to harm the value of the Caremark
Business sold to the Company.
The Company's complaint notes that Caremark represented that the Caremark
Business had net assets on December 31, 1994 of $329.3 million, including $140.2
million in accounts receivable and $200.1 million in goodwill, and that its
financial statements presented fairly in all material respects the financial
position and results of operations. The Company alleges in its complaint that
these representations, among others, were false, giving rise to claims for
breach of contract and fraud. The Company seeks compensatory and punitive
damages. There is a trial date of June 2, 1997.
One of Coram's insurance carriers, which contributed approximately $8.8
million to the settlement of the shareholder litigation approved in January 1997
(the "Shareholder Litigation") has asserted its contractual subrogation rights
against any recovery Coram may realize in the Caremark Litigation, including any
amounts received in settlement thereof, based on the alleged relationship
between the Caremark Litigation and the Shareholder Litigation. The carrier
alleges that this claim should be submitted to binding arbitration. As of the
date hereof, no date has been set to hear such claim. If the carrier prevails,
upon the resolution of the Caremark Litigation such carrier may be entitled to
receive a portion of the proceeds, if any, to Coram up to the $8.8 million such
carrier contributed to the settlement of the Shareholder Litigation. There can
be no
19
<PAGE> 20
assurance that the other insurance carrier, which paid $15 million in settlement
of the Shareholder Litigation, will not pursue similar claims against Coram.
On October 12, 1995, Caremark filed suit against the Company in the United
States District Court for Northern District of Illinois (File No. 95-C-5878)
alleging fraudulent misrepresentation in its purchase of the Caremark Business
and seeking damages of at least $100 million and punitive damages. That suit was
dismissed on December 22, 1995, but the Seventh Circuit Court of Appeals
reversed the ruling, concluding that Caremark's amended complaint should not be
dismissed at the pleading stage. The Court of Appeals did not address the merits
of Caremark's claims in the amended complaint. On January 17, 1996, Caremark
also filed a cross-complaint against the Company in the Superior Court of the
State of California in and for the City and County of San Francisco (File No.
972431) stating allegations similar to those in the Illinois suit and seeking
damages of at least $150 million and punitive damages. Caremark subsequently
dismissed all but one of its claims (in which it seeks approximately $15.0
million) in the San Francisco lawsuit.
On May 19, 1995, a judgment was entered dismissing with prejudice a class
action suit, which had been initiated against T(2) in 1992, based on the terms
of a settlement agreement, pursuant to which the Company paid $25.7 million into
escrow for the shareholder class in cash (of which approximately $7.8 million
was contributed by the Company's insurance carriers) and issued warrants to
acquire an aggregate of approximately 2.5 million shares of common Stock at an
exercise price of $22.25 per share. On August 29, 1995, the plaintiffs filed a
Motion to Enforce Stipulation of Settlement in which they alleged that the value
of the warrants for Coram Common Stock which they received pursuant to the
settlement had been artificially inflated due to the alleged fraud of the
Company and certain of its officers and directors. On October 12, 1995, the
court denied the Motion. The plaintiffs filed a Notice of Appeal from the
Court's Order with the Eleventh Circuit Court of Appeals on November 3, 1995.
The Company has moved for dismissal of the appeal on procedural grounds, and has
opposed the appeal on substantive grounds. The plaintiffs have filed a motion
seeking consolidation of this appeal with their appeal of the Hall case
described below, which the court denied. During the pendency of this appeal, the
district court ordered that both the cash and warrants previously placed in
escrow be distributed to the shareholders pursuant to the terms of the
settlement.
On November 21, 1995, a separate action seeking relief (substantially
similar to that sought in the preceding paragraph) was filed in the United
States District Court for the Northern District of Georgia: William Hall and
Barbara Lisser v. Coram Healthcare Corporation, et al. (File No. 1:950-CV-2994).
This action was brought on behalf of a purported class of plaintiffs who were
entitled to receive warrants pursuant to the settlement of the T(2) shareholder
litigation described above. Plaintiffs filed an amended complaint on February
28, 1996, in which they allege that the defendants made false and misleading
statements which caused a fraud on the market and artificially inflated the
price of the Company's Common Stock during the period from August 1994 through
August 1995. The complaint alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, fraud and breach of the covenant of good faith
and fair dealing. Plaintiffs seek compensatory damages reflecting the difference
in value between the warrants as issued with the trading price of the Company's
Common Stock at its actual price and the same number of warrants at the same
exercise price with the Company's Common Stock trading at its alleged true
value. The defendants filed a motion to dismiss the complaint on March 13, 1996,
and the motion was granted. However, Plaintiffs have appealed the dismissal to
the Eleventh Circuit Court of Appeals.
Since late 1993, the Securities and Exchange Commission ("SEC") has been
conducting a formal investigation into the events that led to the restatement of
T(2)'s financial statements from the periods ended December 31, 1992 and March
31, 1993 and certain other matters. The SEC has subpoenaed certain information
and T(2) has responded.
The Company intends vigorously to defend itself in these matters.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of the litigation described in the preceding paragraphs cannot
presently be determined. Accordingly, except as noted above concerning the
settlement of the shareholder litigation, and charges recorded for various
litigation settlements that are not individually material to the Company, no
provision for any loss or recovery that may result upon resolution of the suits
has been made in
20
<PAGE> 21
the consolidated financial statements. An adverse outcome could be material to
the financial position, results of operations and liquidity of the Company.
The Company is also a party to various other legal actions arising out of
the normal course of its business. Management believes that the ultimate
resolution of such other actions will not have a material adverse effect on the
Company's financial position, results of operations and liquidity of the
Company. Nevertheless, due to the uncertainties inherent in litigation, the
ultimate disposition of these actions cannot presently be determined.
ITEM 2. CHANGE IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 -- Financial Data Schedule
</TABLE>
- ---------------
* Previously Filed.
(B) Reports on Form 8-K
On April 9, 1997, the Company filed a report on Form 8-K reporting the
termination of the definitive Agreement and Plan of Merger with IHS signed on
October 19, 1996 as discussed in Note 2 to the Unaudited Condensed Consolidated
Financial Statements.
21
<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
May 15, 1997
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,562
<SECURITIES> 0
<RECEIVABLES> 139,732
<ALLOWANCES> 37,992
<INVENTORY> 14,375
<CURRENT-ASSETS> 152,910
<PP&E> 100,145
<DEPRECIATION> 84,126
<TOTAL-ASSETS> 530,329
<CURRENT-LIABILITIES> 283,017
<BONDS> 268,683
0
0
<COMMON> 44
<OTHER-SE> (30,582)
<TOTAL-LIABILITY-AND-EQUITY> 530,329
<SALES> 121,715
<TOTAL-REVENUES> 121,715
<CGS> 81,725
<TOTAL-COSTS> 31,552
<OTHER-EXPENSES> 20,849
<LOSS-PROVISION> 4,288
<INTEREST-EXPENSE> 21,496
<INCOME-PRETAX> (12,411)
<INCOME-TAX> 49
<INCOME-CONTINUING> (14,588)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,588)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
