<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 SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-11343
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CORAM HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0615337
(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
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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 9, 1998, was 49,151,524.
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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,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 13,138 $ 108,950
Cash limited as to use.................................... 1,495 1,029
Accounts receivable, net of allowance of $17,154 and
$24,047................................................ 103,879 86,142
Inventories............................................... 20,808 14,277
Deferred income taxes, net................................ 500 3,077
Other current assets...................................... 4,637 9,510
--------- ---------
Total current assets.............................. 144,457 222,985
Property and equipment, net................................. 21,715 20,050
Joint ventures and other assets............................. 18,802 19,917
Deferred income taxes, non-current.......................... 4,596 2,336
Other deferred costs........................................ 6,632 7,668
Goodwill, net of accumulated amortization of $66,274 and
$57,937................................................... 238,497 243,864
--------- ---------
Total assets...................................... $ 434,699 $ 516,820
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 22,510 $ 39,084
Current maturities of long-term debt...................... 480 150,225
Accrued compensation...................................... 10,778 7,428
Income taxes payable...................................... 10,776 10,287
Accrued merger and restructuring.......................... 7,227 8,771
Interest payable.......................................... 4,713 473
Other current liabilities................................. 26,600 18,337
--------- ---------
Total current liabilities......................... 83,084 234,605
Long-term debt, including revolving lines of credit......... 251,494 150,428
Other liabilities........................................... 8,143 6,761
Stockholders' equity:
Preferred stock, par value $.001, authorized 10,000
shares, none issued.................................... -- --
Common stock, par value $.001, authorized 100,000 shares
at September 30, 1998 and December 31, 1997, issued and
outstanding 48,938 at September 30, 1998 and 48,069 at
December 31, 1997...................................... 49 48
Additional paid-in capital................................ 427,060 437,608
Accumulated deficit....................................... (335,131) (312,630)
--------- ---------
Total stockholders' equity........................ 91,978 125,026
--------- ---------
Total liabilities and stockholders' equity........ $ 434,699 $ 516,820
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 3
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net revenue....................................... $143,607 $121,934 $368,469 $ 366,228
Cost of service................................... 109,102 85,344 277,484 254,573
-------- -------- -------- ---------
Gross profit...................................... 34,505 36,590 90,985 111,655
Operating expenses:
Selling, general and administrative expenses.... 24,245 23,729 66,943 70,207
Provision for estimated uncollectible
accounts..................................... 3,897 4,135 11,140 12,527
Amortization of goodwill........................ 2,794 3,611 8,337 10,820
Income from litigation settlement............... -- -- -- (156,792)
-------- -------- -------- ---------
Total operating expense................. 30,936 31,475 86,420 (63,238)
-------- -------- -------- ---------
Operating income.................................. 3,569 5,115 4,565 174,893
Other income (expense):
Interest income................................. 302 89 964 699
Interest expense................................ (6,114) (15,797) (26,372) (55,523)
Termination fee................................. -- -- -- 15,182
Gain on sale of business........................ -- 17,972 -- 17,972
Other income, net............................... 105 601 1,166 1,695
-------- -------- -------- ---------
Income (loss) before income taxes and minority
interests....................................... (2,138) 7,980 (19,677) 154,918
Income tax expense.............................. 450 3,125 1,850 3,375
Minority interests in net income of consolidated
joint ventures............................... 261 2,552 974 7,057
-------- -------- -------- ---------
Net income (loss)................................. $ (2,849) $ 2,303 $(22,501) $ 144,486
======== ======== ======== =========
Earnings (loss) per common share.................. $ (0.06) $ 0.05 $ (0.46) $ 3.06
======== ======== ======== =========
Earnings (loss) per common share -- assuming
dilution........................................ $ (0.06) $ 0.04 $ (0.46) $ 2.72
======== ======== ======== =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net cash (used in) provided by operating activities......... $ (8,876) $ 66,922
Cash flows from investing activities:
Purchases of property and equipment....................... (7,576) (14,561)
Other..................................................... (3,084) (313)
-------- --------
Net cash used in investing activities............. (10,660) (14,874)
-------- --------
Cash flows from financing activities:
Draws on revolving line of credit......................... 17,250 10,000
Repayment of debt......................................... (94,380) (54,003)
Proceeds on issuance of promissory notes.................. 6,000 --
Consideration for warrant cancellation.................... (4,300) --
Other....................................................... (846) 905
-------- --------
Net cash used in financing activities............. (76,276) (43,098)
-------- --------
Net (decrease) increase in cash and cash equivalents........ $(95,812) $ 8,950
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Depreciation and amortization for the three and nine months ended September
30, 1998 and 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
Depreciation.................................... $2,851 $ 3,137 $ 8,787 $ 9,662
Amortization of goodwill........................ 2,794 3,611 8,337 10,820
Financing costs (included in interest
expense)...................................... 256 4,349 5,254 18,933
------ ------- ------- -------
Total................................. $5,901 $11,097 $22,378 $39,415
====== ======= ======= =======
</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 3) resulting in the disposition of net assets totaling approximately
$82.4 million and a receivable on the sale of business of $105.6 million,
which receivable was paid in October 1997.
See accompanying notes.
4
<PAGE> 5
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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. In addition, the Company provides services through two branches
in the province of Ontario, Canada. Other services offered by the Company
include mail-order pharmacy, pharmacy benefit management, ancillary network
management services 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 1997 financial
statements have been reclassified to conform to the 1998 presentation.
Management does not believe the effect of such reclassifications is material.
The results of operations for the interim period ended September 30, 1998, 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, as amended, for
the year ended December 31, 1997.
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 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share ("Statement 128"). Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to fully
diluted earnings per share under the previous earnings per share methodology.
Earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the Statement 128 requirements. The
following table sets forth the computation of basic and diluted earnings per
share for the three and nine months ended September 30, 1998 and 1997 (in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Numerator basic and diluted earnings per share......... $(2,849) $ 2,303 $(22,501) $144,486
======= ======= ======== ========
Denominator:
Weighted average shares.............................. 48,888 44,277 48,731 43,805
Contingently issuable shares......................... -- 3,500 -- 3,458
------- ------- -------- --------
Denominator for basic earnings per share............. 48,888 47,777 48,731 47,263
Effect of other dilutive securities:
Stock options........................................ -- 6,287 -- 5,248
Warrants............................................. -- 1,315 -- 647
------- ------- -------- --------
Denominator for diluted earnings per share --adjusted
weighted average shares and assumed conversion..... 48,888 55,379 48,731 53,158
======= ======= ======== ========
Earnings (loss) per common share....................... $ (0.06) $ 0.05 $ (0.46) $ 3.06
======= ======= ======== ========
Earnings (loss) per common share -- assuming
dilution............................................. $ (0.06) $ 0.04 $ (0.46) $ 2.72
======= ======= ======== ========
</TABLE>
5
<PAGE> 6
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the three months and nine months ended September 30, 1998 and 1997,
basic earnings per share data was computed by dividing net income or loss by the
weighted average number of common shares and contingently issuable shares
outstanding during the period. In 1998, diluted earnings per share computations
do not give effect to stock options, warrants to purchase common stock or
convertible securities, as their effect would have been anti-dilutive. In 1997,
diluted earnings per share is adjusted for the dilutive effect of stock options
and warrants to purchase common stock.
Segment Reporting. Effective January 1, 1998, the Company adopted the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("Statement 131"). Statement 131 superseded FASB Statement No. 14,
Financial Reporting for Segments of a Business Enterprise. Statement 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Statement 131 does not require the disclosure of segment information in the
interim statements in the initial year of adoption. However, if applicable,
comparative information for 1998 interim periods shall be reported in financial
statements for interim periods in 1999.
2. CAREMARK LITIGATION SETTLEMENT
In June 1997, the Company entered into a $165.0 million settlement for
litigation arising out of the purchase of certain assets of the home infusion
business (the "Caremark Business") of Caremark, Inc., a wholly owned subsidiary
of Caremark International, Inc. ("Caremark") in 1995. Under the terms of the
settlement, the Junior Subordinated PIK Notes totaling approximately $100.0
million principal and $20.0 million accrued interest (payable semiannually in
PIK Notes of the same type) were cancelled with all payments thereunder
forgiven. Additionally, Caremark agreed to pay $45.0 million in cash to the
Company, which was received September 2, 1997. Of the $45.0 million cash
received, $3.6 million was placed in escrow pending reconciliation of certain
lockbox issues, which were settled at a nominal gain in June 1998. 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. In June 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. SALE OF LITHOTRIPSY BUSINESS
On August 20, 1997, the Company signed an agreement with Integrated Health
Services, Inc. ("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 the sale of its interests in three lithotripsy partnerships. 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. Accordingly, the Company recognized a gain of $18.0 million on the sale of
business in the quarter ended September 30, 1997.
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, the Company's interests in two of such
partnerships were conveyed to IHS effective October 3, 1997. Due to the
Company's and IHS's inability to obtain the consent of the other partner to the
transfer of Coram's interest therein, the Company's interest in the remaining
partnership was returned to the Company. Effective June 1, 1998, the Company
signed an agreement with IHS for the sale of the Company's remaining lithotripsy
partnership for an aggregate purchase
6
<PAGE> 7
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
price of $1.0 million payable in common stock of IHS. As a result, the Company
recorded other income on the sale of business of $0.7 million in the quarter
ended June 30, 1998.
4. TERMINATED MERGER WITH IHS
On October 19, 1996, the Company, IHS and IHS Acquisition XIX, Inc., a
wholly owned subsidiary of IHS ("Merger Sub") entered into a merger agreement
providing for the merger of Merger Sub with and into the Company. If the 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, 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 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.
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 generally based on
the financial performance of the acquired companies. The Company may be required
to pay approximately $2.2 million, subject to increase, based 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 of such acquired entities, a maximum of approximately $1.3
million of these contingent obligations, subject to increase, may be paid in
cash with the remaining to be paid in shares of common stock of the Company. If
these contingent payments are made, they will be recorded as additional goodwill
in the period in which the payment becomes probable.
Merger and Restructuring. As a result of the formation of Coram in 1994 and
the acquisition of the Caremark Business in 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.
7
<PAGE> 8
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company continually evaluates the accruals and estimated costs to
complete such consolidation plans and may continue to adjust amounts recorded as
contingencies related to lease buyouts, contractual obligations and other
facility reductions. Under the two plans, the Company has made total payments
and asset disposals through September 30, 1998 as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT
CHARGES THROUGH SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------------------------ ----------------------
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES
------------- --------- -------- ------------ -------
<S> <C> <C> <C> <C> <C>
Coram Consolidation Plan:
Merger Costs...................... $27,700 $ 600 $28,300 $ 200 $28,500
======= ======= ======= ====== =======
Personnel Reduction Costs......... $20,300 $ 600 $20,900 $ 300 $21,200
Facility Reduction Costs.......... 12,100 21,500 33,600 -- 33,600
Discontinuance Costs.............. 2,100 29,400 31,500 200 31,700
------- ------- ------- ------ -------
Total Restructuring
Costs................... $34,500 $51,500 $86,000 $ 500 $86,500
======= ======= ======= ====== =======
Caremark Business Consolidation
Plan:
Personnel Reduction Costs......... $11,300 $ -- $11,300 $ -- $11,300
Facility Reduction Costs.......... 9,150 3,900 13,050 3,650 16,700
------- ------- ------- ------ -------
Total Restructuring
Costs................... $20,450 $ 3,900 $24,350 $3,650 $28,000
======= ======= ======= ====== =======
</TABLE>
The balance in the "Accrued merger and restructuring" liability at
September 30, 1998 consists of future cash expenditures of $4.4 million
reflected in the above table and $2.9 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:
17% through September 30, 1999, 8% through September 30, 2000, 20% through
September 30, 2001, and 55% through September 30, 2002, and thereafter. The
Company believes it has adequate reserves as of September 30, 1998, 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. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Series A Senior Subordinated Unsecured Notes................ $153,785 $
Series B Senior Subordinated Convertible Notes.............. 87,922 --
New Senior Credit Facility.................................. 9,250 --
Former Senior Credit Facility............................... -- 80,000
Rollover Note, including accrued interest................... -- 219,241
Other obligations, including capital leases, at interest
rates ranging from 11% to 13%, collateralized by certain
property and equipment.................................... 1,017 1,412
-------- ---------
251,974 300,653
Less current scheduled maturities........................... (480) (150,225)
-------- ---------
$251,494 $ 150,428
======== =========
</TABLE>
8
<PAGE> 9
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the Company's principal credit and debt agreements
consisted of arrangements that were entered into on April 6, 1995, at the time
of the acquisition of the Caremark Business. At December 31, 1997, these
agreements included (i) borrowings under a Credit Agreement with Chase Manhattan
Bank (formerly Chemical Bank), as Agent (the "Former Senior Credit Facility")
and (ii) a subordinated rollover note (the "Rollover Note").
Former Senior Credit Facility. In January 1998, the Company repaid in full
all principal, interest and related fees totaling approximately $80.1 million
due under the Former Senior Credit Facility and terminated such facility.
Interest on the Former Senior Credit Facility was based on margins over certain
domestic and foreign indices and was accruing at the annual rate of 8.94% upon
repayment. Additionally, in 1995, warrants were issued to the Company's lenders
under the Former Senior Credit Facility valued at approximately $8.0 million,
their value at the date of issuance, and were accounted for as interest expense
through March 1997. Accordingly, the Company incurred interest of approximately
$1.7 million during the nine months ended September 30, 1997 in relation to
these warrants.
Rollover Note. Through April 13, 1998, the Rollover Note carried an
interest rate that was based on various indices plus a margin that increased by
0.25% quarterly and was 16.75% upon cancellation effective as of such date.
During the nine months ended September 30, 1998, $10.3 million of interest was
accrued on the Rollover Note. In addition, as long as the Rollover Note was
outstanding, the holders had the right to receive warrants to purchase up to 20%
of the outstanding shares of the common stock of the Company (the "Warrants") on
a fully diluted basis. The Warrants were accounted for as interest expense and
additional paid-in capital. Accordingly, the Company recorded interest expense
related to the Warrants of $3.2 million in the nine months ended September 30,
1998.
Securities Exchange Agreement. On May 6, 1998, the Company entered into a
Securities Exchange Agreement (the "Securities Exchange Agreement") with the
holders of its Rollover Note, Cerberus Partners, L.P., Goldman Sachs Credit
Partners L.P. and Foothill Capital Corporation (collectively the "Holders"). The
Securities Exchange Agreement provides for the cancellation of the Rollover Note
(including deferred interest and fees) and the Warrants in an exchange (the
"Exchange"), effective April 13, 1998, for the payment of $4.3 million in cash
and the issuance by the Company to the Holders of (i) $150.0 million in original
principal amount Series A Senior Subordinated Unsecured Notes (the "Series A
Notes") and (ii) $87.9 million in original principal amount of 8% Series B
Senior Subordinated Convertible Notes (the "Series B Notes"). In addition, under
the Securities Exchange Agreement, the Holders were given the right to approve
certain new debt and the right to name one director to the Company's Board of
Directors, who was elected to the board in June 1998. The Securities Exchange
Agreement in which the Series A Notes and the Series B Notes were issued
contains certain other customary covenants and events of default. At September
30, 1998, the Company was in compliance with all of these covenants.
Exchange; New Senior Credit Facility. The consummation of the Exchange was
contingent upon the satisfaction of certain conditions prior to closing of the
Securities Exchange Agreement on June 30, 1998. All conditions were satisfied
with the exception of the condition requiring the Company to execute an
agreement for a new senior credit facility. Accordingly, on June 30, 1998, the
Company entered into the First Amendment and Waiver (the "Amendment") to the
Securities Exchange Agreement, and the Exchange was consummated. The Amendment
waived the condition under the Securities Exchange Agreement requiring the
Company to execute an agreement for a new senior credit facility on or prior to
June 30, 1998. In addition, under the Amendment, the Holders of the Series A and
Series B Notes agreed to extend the Company up to $60.0 million of senior
secured debt (the "New Senior Credit Facility"), subject to the completion of
definitive agreements on or prior to September 30, 1998. On August 20, 1998, the
Company entered into a definitive agreement for the New Senior Credit Facility
providing for the availability of the $60.0 million facility for acquisitions,
working capital, letters of credit and other corporate purposes. The New Senior
Credit Facility matures February 2001 and bears an interest rate of prime plus
1.5%, payable in arrears on the first
9
<PAGE> 10
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
business day of each month. The interest rate was 9.75% as of September 30,
1998. Under the New Senior Credit Facility, among other nominal fees, the
Company was required to pay an upfront fee of 1.0% or $0.6 million and is liable
for commitment fees on the unused facility of 3/8 of 1.0% per annum, due
quarterly in arrears. During the three and nine months ended September 30, 1998
interest and related fees on the New Senior Credit Facility were $0.2 million.
In addition, the terms of the New Senior Credit Facility provide for the
issuance of warrants to purchase up to 1.9 million shares common stock of the
Company at $0.01 per share (subject to customary adjustments). The warrants were
valued at their fair value at the date of issuance, and will be accounted for as
interest expense. The Company charged $0.1 million to interest expense during
the three and nine months ended September 30, 1998 related to these warrants.
The terms of the New Senior Credit Facility also provide for the issuance of
letters of credit of up to $25.0 million provided that available credit would
not fall below zero. During the quarter and nine months ended September 30,
1998, the Holders issued letters of credit totaling $18.4 million thereby
reducing the Company's availability under the New Senior Credit Facility by that
amount. In addition, the terms of the New Senior Credit Facility provide for a
fee of 1.0% per annum on the outstanding letter of credit obligations that is
due in arrears on the first business day of each month. The New Senior Credit
Facility contains certain other customary covenants and events of default. At
September 30, 1998, the Company was in compliance with all of these covenants.
Series A Notes. The Series A Notes mature on May 2001 and bear interest at
the rate of 9.875% per annum (subject to adjustment to a maximum of 11.125% on
March 31, 1999 if certain performance standards are not achieved), payable
quarterly in arrears in cash or through the issuance of additional Series A
Notes at the election of the Company. The Holders can require the Company to pay
interest in cash if the Company exceeds a certain interest coverage ratio.
During the three months and nine months ended September 30, 1998, interest
expense on the Series A Notes was $3.8 million and $6.9 million, respectively.
On July 15, 1998, Series A Notes totaling $3.8 million were issued in lieu of
cash payment of interest due through such date.
Series B Notes. The Series B Notes mature April 2008 and bear interest at
the rate of 8% per annum, payable quarterly in arrears in cash or through the
issuance of additional Series B Notes at the election of the Company. During the
three months and nine months ended September 30, 1998, interest expense on the
Series B Notes was $1.8 million and $3.3 million, respectively. Pursuant to a
letter agreement dated July 15, 1998 between the Company and the Holders of the
Series B Notes, interest due through July 15, 1998 of $1.8 million was deferred
to the earlier of (i) the completion and funding of the New Senior Credit
Facility or (ii) August 15, 1998 and accrued interest at a rate of 8% per annum
from such date through the date of payment. The interest deferred was paid in
cash on August 14, 1998, thereby eliminating the letter agreement dated July 15,
1998. The Series B Notes are convertible into shares of the Company's common
stock at a conversion price (the "Conversion Price") initially equal to $3.00
per share, subject to downward reset to the prevailing market prices (calculated
based on the average of the closing prices for each of the preceding 20 days) on
each of April 13, 1999 and October 13, 1999. The Conversion Price will also be
subject to customary anti-dilution adjustments, including adjustments for sale
of common stock (other than pursuant to existing obligations or employee benefit
plans) at a price below the Conversion Price prevailing at the time of such
sale. Cash will be paid in lieu of fractional shares upon conversion of the
Series B Notes.
The Series A and Series B Notes are redeemable, in whole or in part, at the
option of the Holders thereof in connection with any change of control of the
Company (as defined in the Securities Exchange Agreement), if the Company ceases
to hold and control certain interests in its significant subsidiaries, or upon
the acquisition of the Company or certain of its subsidiaries by a third party.
In such instances, the Series A and Series B Notes are redeemable at 103% of the
then outstanding principal amount plus accrued interest. The Series B Notes are
also redeemable at the option of the Holders thereof upon maturity of the Series
A Notes at the outstanding principal amount thereof plus accrued interest. In
addition, the Series A Notes are callable, at any time, at 103% of the then
outstanding principal amount plus accrued interest at the option of the Company.
10
<PAGE> 11
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1998, the Company issued secured promissory notes (the "Promissory
Notes") in the aggregate principal amount of $6.0 million to the Holders of the
Series A and B Notes. Proceeds received from the issuance of the Promissory
Notes were used for working capital purposes. The Promissory Notes matured
August 20, 1998 and carried an interest rate of 12% per annum, payable in cash
on the maturity date of the Promissory Notes. In August 1998, the Company used
proceeds from the New Senior Credit Facility to repay in full all principal and
interest totaling approximately $6.1 million, thereby eliminating the Promissory
Notes.
7. LITIGATION
On November 21, 1995, a suit captioned William Hall and Barbara Lisser v.
Coram Healthcare Corporation, James M. Sweeney, Patrick Fortune and Sam Leno,
No. 1:95-CV-2994 (WHB) was filed in the United States District Court for the
Northern District of Georgia on behalf of a purported class of plaintiffs who
were entitled to receive warrants pursuant to the settlement of In Re T2
Medical, Inc. Shareholder Litigation. Plaintiffs filed an Amended Class Action
Complaint on February 28, 1996 in which they alleged that the defendants made
false and misleading statements that caused a fraud on the market and
artificially inflated the price of the Company's stock during the period from
August 1994 through August 1995. Such Complaint alleges violations of Section
10(b) of the Securities Act of 1934 and Rule 10b-5 promulgated thereunder,
against all of the defendants. The Complaint also alleges controlling person
liability against the individual defendants under Section 20(a) of the
Securities Exchange Act, and further alleges fraud by all of the defendants
under Georgia law. Finally, plaintiffs allege a breach of the covenant of good
faith and fair dealing by all defendants. Plaintiffs seek compensatory damages
reflecting the difference in value between the warrants as issued pursuant to
the settlement of In Re T2 Medical, Inc. Shareholder Litigation 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 of the Company's stock trading at its
alleged true value. The defendants filed a motion to dismiss the amended class
action Complaint on March 13, 1996. The Court granted the Company's motion to
dismiss the Complaint on February 12, 1997. The plaintiffs appealed the
dismissal to the Eleventh Circuit of Appeals, and on October 15, 1998, the
Eleventh Circuit denied the plaintiffs' appeal. Subsequently, the plaintiffs
have petitioned the Eleventh Circuit for rehearing of the appeal and have
suggested a rehearing en banc.
The Company intends to defend itself vigorously in this matter. However
because of the uncertainties inherent in litigation, no provision for any loss
that may result from the suit has been made in the Company's Unaudited Condensed
Consolidated Financial Statements. An adverse outcome may have a material impact
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. For a
discussion of certain legal proceedings to which the Company is party, see Part
I -- Item 3. "Legal Proceedings" in the Company's Annual Report on Form 10-K, as
amended for the year ended December 31, 1997.
8. INCOME TAXES
The effective income tax rates for the three months and nine months ended
September 30, 1998 and 1997 differ substantially from the expected combined
federal and state income tax rates calculated using applicable statutory rates
as a result of fully valuing the deferred tax assets.
As of September 30, 1998, deferred tax assets are net of a $124.6 million
valuation allowance. Realization of deferred tax assets is dependent upon the
ability of the Company to generate taxable income in the future.
11
<PAGE> 12
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and other accrued liabilities 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.
As discussed in Note 9 of the Company's Consolidated Financial Statements
in its Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
the Internal Revenue Service (the "IRS") is in the process of examining the
Company's tax return for the year ended September 30, 1995. Although it has
received no formal notice, the Company understands that the IRS has taken the
position that the Company's valuation of warrants issued to purchase the
Company's common stock in the settlement of a class action lawsuit involving the
Company's subsidiary, T(2) Medial, Inc. was overstated. Further, the IRS is
challenging the Company's position that the settlement payments qualified as a
specified liability loss under the net operating loss provisions of the Internal
Revenue Code. The Company believes it could be assessed up to approximately
$12.0 million in additional taxes for the year ended September 30, 1995. The
Company will vigorously oppose the IRS in the event the IRS does formally adopt
such a position. Nevertheless, due to the early phase of this matter and the
uncertainties inherent in any proceeding with the IRS (in the event the IRS does
formally adopt such a position), no assurance can be made that the Company will
prevail.
12
<PAGE> 13
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 that 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. The Company's actual results may vary
materially from the forward-looking statements made in this report due to
important factors such as: recent operating losses and uncertainties associated
with future operating results; substantial leverage; dependence on relationships
with third parties; timing of or ability to complete acquisitions; government
regulation of the home health care industry; and unanticipated impacts from the
Year 2000 Problem, discussed below. 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. The risk factors set
forth in the Company's Annual Report on Form 10-K, as amended, constitute
important cautionary statements identifying important factors that could cause
actual results to differ from those 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's revenue
generation programs include a focus on business relationships where it can
provide high quality of care and operate profitably. Additionally, the Company
continues to emphasize marketing efforts aimed at improving its therapy mix and
physician relationships and also has continued the development of its specialty
programs such as provider network development and management 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 reduction of cost of services and operating expenses,
assessment of poorly performing branches and review of branch efficiencies.
Delivery of quality service is being 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.
Five Year Capitated Agreement with Aetna U.S. Healthcare, Inc. In April
1998, the Company entered into a five year capitated agreement with Aetna U.S.
Healthcare, Inc. ("Aetna USHC") for the management and provision of certain home
health services, including home infusion, home nursing, respiratory therapy,
durable medical equipment, hospice care and home nursing support for several of
Aetna USHC's disease management programs. Effective July 1, 1998, the Company
began earning capitated payments on a monthly basis for covered members, assumed
certain financial risk for certain home health services and began providing
certain management services for a network of home health providers through its
ancillary network management services. The Company's network of participating
providers includes certain subsidiaries of the Company and it serves certain
persons enrolled in Aetna USHC's HMO-based plans in the eight state area covered
under the agreement who are presently not committed to other networks. As of
July 1, 1998 the number of members covered under the agreement in such plans
totaled approximately 2.2 million lives. Based on information available, the
Company estimates future annual revenues of approximately $80.0 million.
Ultimately, profitability under this agreement will depend on the level of
utilization of services and the cost of service to the Company. Based on levels
of activity (number of claims and cost of claims) experienced by the Company to
date, the Company anticipates profitability under this agreement. The levels of
calls received for
13
<PAGE> 14
services are higher than anticipated, however, this information has been shared
with Aetna USHC which has stated that it would, in its discretion, consider an
adjustment to the rates payable to Coram under the agreement. The Company will
continue to monitor the arrangement and the utilization of services by eligible
Aetna USHC members as greater visibility to the data becomes available. However,
no assurance can be given that actual experience will result in the realization
of profitability under this Agreement.
Debt Restructuring and Refinancing. At December 31, 1997, the Company had
two principal long-term debt instruments, the Former Senior Credit Facility and
the Rollover Note and related Warrants, the combined outstanding balance of
which was approximately $300.7 million. During the nine months ended September
30, 1998, the Company completed the restructuring of its debt. The debt
restructuring included repayment of all amounts due under the Former Senior
Credit Facility, the consummation of an exchange of the Rollover Note and
related Warrants for certain subordinated debt and the execution of a New Senior
Credit Facility. As a result of this debt restructuring described more fully in
Note 6 to the Unaudited Condensed Consolidated Financial Statements, the
Company's principal debt instruments at September 30, 1998 include $153.8
million of Series A Senior Subordinated Unsecured Notes, $87.9 million of Series
B Senior Subordinated Convertible Notes and $9.3 million outstanding under the
New Senior Credit Facility. Consequently, the Company experienced a reduction in
interest expense of approximately $9.5 million and $22.3 million, respectively,
during the three months and nine months ended September 30, 1998 compared to the
same periods in 1997.
Strategic Alternatives. Future strategic alternatives considered by the
Company include, among others, the pursuit of opportunities in its 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 business. The Company is also pursuing certain other initiatives such
as the addition of a new Clinical Research and Medical Informatics Division to
assist pharmaceutical, biotech and medical device companies and expedite
clinical research trials. Management believes that completion of the debt
restructuring, combined with the addition of the New Senior Credit Facility,
will allow the Company to pursue these other initiatives. There can be no
assurance that any acquisitions or other strategic alternatives will be
consummated or will be available to the Company on commercially acceptable
terms.
Factors Affecting Recent Operating Results. The most significant factors
affecting the Company's recent operating performance and financial condition are
as follows:
(i) growth in the Company's ancillary network management services with
the addition of the five-year capitation agreement with Aetna USHC in July
1998;
(ii) expansion and improved sales efforts in the Company's mail order
pharmacy and pharmacy benefit management services;
(iii) sale of substantially all of the Company's interest in its
Lithotripsy Business in the third quarter of 1997, with the remaining
interest sold in the second quarter of 1998, allowing the Company to
significantly reduce its debt obligations and its contingent liabilities
associated with the Company's former commitments to its partners in the
Lithotripsy Business;
14
<PAGE> 15
(iv) ongoing pricing pressure in the Company's core infusion business
as a result of an unfavorable shift in payor mix and intense competition
among infusion providers. The following table sets forth the approximate
percentages of the Company's infusion net revenue for the three months
ended September 30, 1998, June 30, 1998, and September 30, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1998 1998 1997
------------- -------- -------------
<S> <C> <C> <C>
Private Indemnity Insurance and Other
Non-contracted Payors........................... 23% 27% 27%
Managed Care Organizations and Other Contracted
Payors.......................................... 54% 47% 45%
Medicare and Medicaid Programs.................... 23% 26% 28%
--- --- ---
Total................................... 100% 100% 100%
=== === ===
</TABLE>
(v) 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, or who have entered into risk bearing relationships with
third-party payors pursuant to which they have been delegated control over
the provision of a wide variety of healthcare services, including the
services offered by the Company.
RESULTS OF OPERATIONS
Certain Quarterly Comparisons (unaudited; in thousands except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1998 1998 1997
------------- -------- -------------
<S> <C> <C> <C>
Net revenue....................................... $143,607 $117,173 $121,934
Cost of service................................... 109,102 87,882 85,344
-------- -------- --------
Gross profit...................................... 34,505 29,291 36,590
Operating expenses:
Selling, general and administrative expenses.... 24,245 21,625 23,729
Provision for estimated uncollectible
accounts..................................... 3,897 3,577 4,135
Amortization of goodwill........................ 2,794 2,778 3,611
-------- -------- --------
Total operating expense................. 30,936 27,980 31,475
-------- -------- --------
Operating income.................................. 3,569 1,311 5,115
Other income (expense):
Interest income................................. 302 218 89
Interest expense................................ (6,114) (6,083) (15,797)
Gain on sale of business........................ -- -- 17,972
Other income, net............................... 105 728 601
-------- -------- --------
Income (loss) before income taxes and minority
interests....................................... (2,138) (3,826) 7,980
Income tax expense.............................. 450 400 3,125
Minority interests in net income of consolidated
joint ventures............................... 261 302 2,552
-------- -------- --------
Net income (loss)................................. $ (2,849) $ (4,528) $ 2,303
======== ======== ========
Earnings (loss) per common share.................. $ (0.06) $ (0.09) $ .05
======== ======== ========
Earnings (loss) per common share -- assuming
dilution........................................ $ (0.06) $ (0.09) $ .04
======== ======== ========
</TABLE>
15
<PAGE> 16
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30,
1998
NET REVENUE. Net revenue increased $26.4 million from $117.2 million in the
quarter ended June 30, 1998 compared to $143.6 million in the quarter ended
September 30, 1998. The increase in net revenue can be attributed to i) an
increase in base infusion business of $7.2 million resulting primarily from an
increase in patient census of 2.5% and a favorable shift in reimbursement
resulting from an increase in the provision of certain medically complex
therapies; ii) an improvement of $16.7 million in the Company's ancillary
network management services attributed primarily to the addition of the
capitated contract with Aetna USHC providing for approximately $20.7 million in
net revenue offset by termination or expiration in its other unprofitable
contractual agreements at the Company's option; and iii) an increase of $2.7
million in the Company's mail order pharmacy and pharmacy benefit management
services resulting from the expansion of services and improved sales efforts.
See also "Factors Affecting Recent Operating Results."
GROSS PROFIT. Gross profit increased $5.2 million from $29.3 million in the
quarter ended June 30, 1998 to $34.5 million in the quarter ended September 30,
1998, while gross margin decreased slightly from 25.0% in the quarter ended June
30, 1998 to 24.0% in the quarter ended September 30, 1998. The decrease in gross
margin results directly from an increase in cost of sales as a percent of
revenue in the ancillary network management services as a result of the
additional capitated contract with Aetna USHC. See "Factors Affecting Recent
Operating Results."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A expense
increased $2.6 million or 12%, from $21.6 million in the quarter ended June 30,
1998 to $24.2 million in the quarter ended September 30, 1998. However, SG&A
expense as a percentage of net revenue declined from 18.5% in the three months
ended June 30, 1998 to 16.9% in the three months ended September 30, 1998. The
change is due primarily to additional operating costs of $1.9 million in the
ancillary network management services resulting from the growth of business
attributable to the addition of the capitated contract with Aetna USHC in July
1998. See also "Factors Affecting Recent Operating Results."
OPERATING INCOME. The Company recorded operating income of $3.6 million
during the quarter ended September 30, 1998 compared to an operating income of
$1.3 million during the quarter ended June 30, 1998. The increase in operating
income is due primarily to the increase in gross profits offset by increased
SG&A costs described above.
NET LOSS. Net loss for the quarter ended September 30, 1998 is $2.8 million
compared to a net loss of $4.5 million for the quarter ended June 30, 1998. As
discussed above, the improvement of $1.7 million can be attributed primarily to
the $5.2 million improvement in gross profit which was partially offset by the
increase in total operating expense of $3.0 million.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997
As previously discussed in "Factors Affecting Recent Operating Results,"
the Company sold substantially all its Lithotripsy Business in 1997, while
retaining its interest in one lithotripsy partnership until it was sold
effective June 1, 1998. During the three months ended September 30, 1997, the
Lithotripsy Business provided net revenue of $13.0 million, gross profit of $8.2
million and operating income of $5.9 million to the Company's operations.
NET REVENUE. Net revenue increased $21.7 million or 17.8%, from $121.9
million in the quarter ended September 30, 1997 to $143.6 million in the quarter
ended September 30, 1998. The change in net revenue can be attributed to i) an
increase in base infusion business of $9.1 million resulting primarily from an
increase in patient census of 7.6% and an increase in the provision of certain
medically complex therapies; ii) an improvement of $19.5 million in the
Company's ancillary network management services attributed primarily to the
addition of the capitated contract with Aetna USHC providing for approximately
$20.7 million in net revenue; iii) an increase of $6.1 million in the Company's
mail order pharmacy and pharmacy benefit management services resulting from the
expansion of services and improved sales efforts; and iv) a decrease in net
revenue of $13.0 million provided by the Company's Lithotripsy Business in 1997.
See "Factors Affecting Recent Operating Results."
16
<PAGE> 17
GROSS PROFIT. Gross profit decreased $2.1 million from $36.6 million or a
gross margin of 30.0% in the quarter ended September 30, 1997 to $34.5 million
or a gross margin of 24.0% in the quarter ended September 30, 1998. The decline
in gross margin resulted primarily from the loss of gross margins provided by
the Lithotripsy Business. Additionally, the Company's ongoing base business
gross margins have decreased from 26% in the quarter ended September 30, 1997 to
24% in the quarter ended September 30, 1998 due primarily to an increase in cost
of sales as a percent of revenue in the ancillary network management services as
a result of the additional capitated contract with Aetna USHC. See "Factors
Affecting Recent Operating Results."
OPERATING INCOME. The Company recorded operating income of $3.6 million
during the quarter ended September 30, 1998 compared to operating income of $5.1
million during the quarter ended September 30, 1997. The decline in operating
income is due primarily to the decrease in gross profits described above.
INTEREST EXPENSE. Interest expense decreased by $9.7 million or 61.3%, from
$15.8 million in the quarter ended September 30, 1997 to $6.1 million in the
quarter ended September 30, 1998. The decline is due primarily to a decrease in
interest expense of $5.5 million resulting from the completion of the Exchange
contemplated by the Securities Exchange Agreement and a decrease of $4.2 million
in interest expense as a result of the payment and termination of the Former
Senior Credit Facility in January 1998. See also "Debt Restructuring and
Refinancing" and 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 also Note 3
to the Unaudited Condensed Consolidated Financial Statements.
INCOME TAX EXPENSE. Income tax expense decreased $2.6 million, from $3.1
million in the quarter ended September 30, 1997 to $0.5 million in the quarter
ended September 30, 1998. The 1997 third quarter expense represents income tax
expense related to the sale of the Lithotripsy Business.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED JOINT VENTURES. Minority
interest expense decreased $2.3 million, from $2.6 million in the quarter ended
September 30, 1997 to $0.3 million in the quarter ended September 30, 1998. The
decrease is due primarily to the sale of substantially all of the Company's
Lithotripsy Business in September 1997. See also Note 3 to the Unaudited
Condensed Consolidated Financial Statements.
NET INCOME (LOSS). During the quarter ended September 30, 1998, the Company
recognized a net loss of $2.8 million compared to a net income of $2.3 million
during the quarter ended September 30, 1997. Excluding the effects of the
non-recurring $18.0 million gain on sale of the Lithotripsy Business recorded in
the quarter ended September 30, 1997, the net loss declined by $12.9 million.
The reduction in net loss can be attributed primarily to the decrease in
interest expense of $9.7 million and the decrease in minority interest expense
of $2.3 million.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
As previously discussed in "Factors Affecting Recent Operating Results,"
the Company sold substantially all its Lithotripsy Business in 1997, while
retaining its interest in one lithotripsy partnership until it was sold
effective June 1, 1998. During the nine months ended September 30, 1998 and
1997, the Lithotripsy Business provided the following to the Company's
operations (in millions):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1998 1997
----- ------
<S> <C> <C>
Net revenue................................................. $0.7 $36.9
Gross profit................................................ 0.4 23.3
Operating income............................................ 0.4 17.4
</TABLE>
17
<PAGE> 18
NET REVENUE. Net revenue increased $2.2 million, from $366.3 million in the
nine months ended September 30, 1997 to $368.5 million in the nine months ended
September 30, 1998. The change in net revenue can be attributed to i) the $36.2
million decrease in net revenue provided by the Company's Lithotripsy Business
in 1997; ii) an increase in base infusion business of $5.4 million resulting
primarily from an increase in patient census of 2.5% and increase in the
provision of certain medically complex therapies; iii) an improvement of $20.7
million in the Company's ancillary network management services attributed
primarily to the addition of the capitated contract with Aetna USHC providing
for approximately $20.7 million in net revenue; and iv) a growth of
approximately $12.6 million in the Company's mail order pharmacy and pharmacy
benefit management services resulting from the expansion of services and
improved cross-selling with infusion business. See "Factors Affecting Recent
Operating Results."
GROSS PROFIT. Gross profit decreased $20.7 million from $111.7 million or a
gross margin of 31% in the nine months ended September 30, 1997 to $91.0 million
or a gross margin of 25% in the nine months ended September 30, 1998. The
decline in gross margin resulted primarily from the loss of gross margins
provided by the Lithotripsy Business. Additionally, the Company's ongoing
business gross margins have decreased from 27% in the nine months ended
September 30, 1997 to 25% in the nine months ended September 30, 1998 due
primarily to an increase in cost of sales as a percent of revenue in the
ancillary network management services as a result of the additional capitated
contract with Aetna USHC. See "Factors Affecting Recent Operating Results."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expense decreased $3.3
million or 4.7%, from $70.2 million in the nine months ended September 30, 1997
to $66.9 million in the nine months ended September 30, 1998. Additionally, SG&A
expense as a percent of net revenue declined from 19.5% in the nine months ended
September 30, 1997 to 16.9% in the nine months ended September 30, 1998. The
change in expense results from a combined reduction of approximately $3.8
million in corporate and field administrative costs including, among other
things, a decrease in collection agency fees and insurance costs, a reduction of
$3.2 million in SG&A costs associated with the Lithotripsy Business offset by
additional operating costs of $2.8 million in the ancillary network management
services resulting from the growth of business attributable to the addition of
the capitated contract with Aetna USHC in July 1998. See also "Factors Affecting
Recent Operating Results."
PROVISION FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS. Provision for estimated
uncollectible accounts decreased $1.4 million, from $12.5 million or 3.4% of net
revenue in the nine months ended September 30, 1997 to $11.1 million or 3.0% of
net revenue in the nine months ended September 30, 1998. Excluding net revenue
provided by the Lithotripsy Business in 1997, provision for uncollectible
accounts was approximately 3.8% of net revenue. The decrease in the provision is
attributed primarily to the growth in revenue provided to the Company under
capitation contracts such as the agreement with Aetna USHC commencing in July
1998. Additionally, the Company's net days sales outstanding ("DSO") remained
constant at 76 days at September 30, 1998 and 1997, respectively. See Note 1 to
the Unaudited Condensed Consolidated Financial Statements -- "Provision for
Estimated Uncollectible Accounts."
AMORTIZATION OF GOODWILL. Amortization of goodwill decreased $2.5 million
or 22.9%, from $10.8 million during the nine months ended September 30, 1997 to
$8.3 million during the nine months ended September 30, 1998. The decrease is
due to the reduction of goodwill associated with the Company's Lithotripsy
Business, a substantial portion of which was sold in September 1997.
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
Litigation. No such income was recognized in the nine months ended September 30,
1998. See Note 2 to the Unaudited Condensed Consolidated Financial Statements.
OPERATING INCOME. The Company recorded operating income of $4.6 million
during the nine months ended September 30, 1998 compared to operating income of
$174.9 million during the nine months ended September 30, 1997. Excluding the
effects of the non-recurring $156.8 million income from the Caremark litigation
settlement recognized in the nine months ended September 30, 1997, operating
income decreased
18
<PAGE> 19
$13.5 million. The reduction in operating income can be attributed to the
decrease in gross profit of $20.7 million offset by a decrease of $7.2 million
in operating expenses described above.
INTEREST EXPENSE. Interest expense decreased by $29.1 million or 52.5%,
from $55.5 million in the nine months ended September 30, 1997 to $26.4 million
in the nine months ended September 30, 1998. The decline is due primarily to a
decrease in interest expense of $9.5 million resulting from the completion of
the Exchange contemplated by the Securities Exchange Agreement and a decrease of
$15.0 million in interest expense as a result of the payment and termination of
the Former Senior Credit Facility in January 1998. Additionally, interest
expense decreased $4.8 million as a result of the cancellation of the Junior
Subordinated Pay-In-Kind notes in conjunction with the settlement of the
Caremark Litigation. See also "Debt Restructuring and Refinancing" and Notes 2
and 6 to the Unaudited Condensed Consolidated Financial Statements.
TERMINATION FEE. During the nine months ended September 30, 1997, the
Company recorded termination fee income, net of related costs, of $15.2 million
in connection with the termination of the proposed merger with IHS. No such
income was recognized in the nine months ended September 30, 1998. See also Note
4 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 sale of business, net of related costs, of $18.0
million in connection with the sale of its Lithotripsy Business.
INCOME TAX EXPENSE. Income tax expense decreased $1.5 million, from $3.4
million in the nine months ended September 30, 1997 to $1.9 million in the nine
months ended September 30, 1998. Income tax expense in the nine months ended
September 30, 1998 resulted from state and local tax obligations as well as a
provision for certain pending examinations while income tax expense for the same
period in 1997 resulted from the sale of substantially all of the Lithotripsy
Business in September 1997. See also Note 9 to the Consolidated Financial
Statements in the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1997.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED JOINT VENTURES. Minority
interest expense decreased $6.1 million, from $7.1 million in the nine months
ended September 30, 1997 to $1.0 million in the nine months ended September 30,
1998. The decrease is due primarily to the sale of substantially all of the
Lithotripsy Business in September 1997. See also Note 3 to the Unaudited
Condensed Consolidated Financial Statements.
NET INCOME (LOSS). During the nine months ended September 30, 1998, the
Company recognized a net loss of $22.5 million compared to a net income of
$144.5 million during the nine months ended September 30, 1997. Excluding the
effects of the non-recurring $156.8 million income from litigation settlement,
the $15.2 million non-recurring termination fee income, and the $18.0 million
non-recurring gain on sale of substantially all of the Lithotripsy Business in
September 1997, the net loss declined by $23.0 million. The change in net loss
can be attributed to the decrease in interest expense of $29.1 million, minority
interest expense of $6.1 million, and operating expenses of $7.1 million offset
by the decline in gross profit of $20.7 million as described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $95.9 million from $109.0
million at December 31, 1997 to $13.1 million at September 30, 1998. The
decrease was primarily due to the repayment of the Former Senior Credit Facility
of $80.0 million and due to cash used in operating and investing activities of
$8.9 million and $10.7 million, respectively. Cash used in operating activities
was primarily for the increase in accounts receivable as a result of internal
growth, the increase in inventory to secure supplies of drugs that may
experience short-term shortages and the increase in liabilities resulting from
the addition of the capitated agreement with Aetna USHC. Cash used in investing
activities was primarily for the purchase of equipment in the Company's infusion
business and equipment purchased to support the agreement with Aetna USHC. See
also "Factors Affecting Recent Operating Results."
With the completion of its debt restructuring, the Company believes that it
has and will continue to have sufficient cash flows to meet current debt
requirements and fund its operations through its cash flows provided
19
<PAGE> 20
by operations as well as amounts available under the New Senior Credit Facility.
As of September 30, 1998, the Company's borrowing base was $54.4 million, as
calculated under certain provisions of the New Senior Credit Facility, of which
$18.4 million was reserved for letters of credit and $9.3 million was utilized
for working capital purposes. There can be no assurance that the future cash
flows from operations or amounts available under the New Senior Credit Facility
will be sufficient to fund its operations or current and future debt
obligations. See also Note 6 of the Notes to Unaudited Condensed Consolidated
Financial Statements.
YEAR 2000 ISSUES
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are commonly referred to as the
"Millennium Bug" or "Year 2000 Problem."
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems to ensure that
the programs and systems will be Year 2000 compliant. The Company presently
believes that its computer systems will be Year 2000 compliant in a timely
manner. However, while the estimated costs of these efforts are not expected to
be material to the Company's financial position or any year's results of
operations, there can be no assurance to this effect.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has commenced the process of modifying, upgrading, and
replacing major systems that have been identified as adversely affected, and
expects to complete this process before March 31, 1999.
Medical Equipment and Systems Other Than Information Technology Systems. In
addition to computers and related systems, the operation of medical equipment,
office and facilities equipment and other common devices may be affected by the
Year 2000 Problem. The Company is currently assessing the potential effect of,
and costs of remediating, the Year 2000 Problem on its office and facilities
equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
Suppliers. The Company has initiated communications with its major
suppliers to identify and, to the extent possible, to resolve issues involving
the Year 2000 Problem. However, the Company has limited or no control over the
actions of these suppliers. Thus, while the Company expects that it will be able
to resolve any significant Year 2000 problems with these systems, there can be
no assurance that these suppliers will resolve any or all Year 2000 Problems
with these systems before the occurrence of a material disruption to the
business of the Company or any of its customers. Any failure of these suppliers
to resolve Year 2000 Problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, and
results of operation.
Third Party Payors. Management believes that the most significant risk to
the Company for the Year 2000 Problem is the effect such issues may have on
third party payors, such as medicare. News reports have indicated that various
agencies of the federal government may have difficulty becoming Year 2000
compliant before the Year 2000. The Company has not yet undertaken to quantify
the effects of such noncompliance or to determine whether such quantification is
even possible. The Company has initiated communications with its third party
payors to identify and, to the extent possible, to resolve issues involving the
Year 2000 Problem. However, the Company has limited or no control over the
actions of these third party payors. Thus, while the Company expects that it
will be able to resolve any significant Year 2000 Problems with these payors,
there can be no assurance that these payors will resolve any or all Year 2000
Problems with their systems before the
20
<PAGE> 21
occurrence of a material disruption to the business of the Company. Any failure
of these third party payors to resolve Year 2000 Problems with their systems in
a timely manner could have a material adverse effect on the Company's business,
financial condition, and results of operation.
Contingency Plans. The Company is currently developing contingency plans to
be implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by March 1999. Depending on systems affected, these plans could include
accelerated replacement of affected equipment or software, short to medium-term
use of back up equipment and software, increased work hours for Company
personnel or use of contract personnel to correct on an accelerated schedule any
Year 2000 Problems that arise. If the Company is required to implement any of
these contingency plans, it could have a material adverse effect on the
Company's financial condition and results of operations.
Management believes that it is not possible to determine with complete
certainty that all Year 2000 Problems affecting the Company have been identified
or corrected. The number of devices that could be affected and the interactions
among these devices are simply too numerous. In addition, the Company cannot
accurately predict how many Year 2000 Problem related failures will occur or the
severity, duration or financial consequences of these inevitable failures.
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. In
1998, a bill was introduced into Congress that would establish a new benefit
under Part B of the Medicare program for certain outpatient prescription drugs
including certain infusion therapies currently covered by the medicare program
and others that are not currently covered. Under this new benefit, a home
infusion supplier would be reimbursed for the acquisition cost of the covered
drugs supplied and for certain other costs related to the administration of the
services. Currently, the Company receives reimbursement for the therapies
currently covered by Medicare pursuant to a schedule of "allowable" charges
established by the Healthcare Financing Administration ("HCFA"). Because many of
the material terms of the proposed benefit are vague, the Company can not
predict the impact that enactment of this legislation would have on the Company,
if any. If the cost of delivering and administering the covered therapies would
be reimbursed at rates below the Company's, adoption and implementation of the
bill would have a material adverse impact on the Company.
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. The Budget
Reconciliation Act provides that Part A home health agency providers and Part B
durable medical equipment suppliers under the Medicare program must post surety
bonds in an amount equal to the greater of 15% of the amount paid to the agency
or branch by Medicare in the previous year (up to a maximum of $3,000,000) or
$50,000, whichever is greater. Posting the bonds will be a prerequisite for
participation in the Medicare program once the implementing regulations take
effect. HCFA issued rules implementing the surety bond requirements for Part A
home health providers, but the effectiveness of the rules has been delayed. HCFA
is reportedly reviewing its rules for Part A home health providers. The Company
has learned that HCFA intends to issue the implementing regulations for Part B
durable medical equipment suppliers after the rules applicable to Part A
providers become effective. Similar surety bond rules are expected to follow as
requirements for participation in various state Medicaid programs. Once the
implementing rules become effective, the Company will pursue the necessary
bonds.
The Company cannot predict whether any of the above referenced bills, rules
or proposals or any other proposals will be adopted. No assurance can be given
that the implementation of the new parenteral and
21
<PAGE> 22
enteral nutrition benefit, the new outpatient prescription drug benefit, 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.
22
<PAGE> 23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 21, 1995, a suit captioned William Hall and Barbara Lisser v.
Coram Healthcare Corporation, James M. Sweeney, Patrick Fortune and Sam Leno,
No. 1:95-CV-2994 (WHB) was filed in the United States District Court for the
Northern District of Georgia on behalf of a purported class of plaintiffs who
were entitled to receive warrants pursuant to the settlement of In Re T2
Medical, Inc. Shareholder Litigation. Plaintiffs filed an Amended Class Action
Complaint on February 28, 1996 in which they alleged that the defendants made
false and misleading statements that caused a fraud on the market and
artificially inflated the price of the Company's stock during the period from
August 1994 through August 1995. Such Complaint alleges violations of Section
10(b) of the Securities Act of 1934 and Rule 10b-5 promulgated thereunder,
against all of the defendants. The Complaint also alleges controlling person
liability against the individual defendants under Section 20(a) of the
Securities Exchange Act, and further alleges fraud by all of the defendants
under Georgia law. Finally, plaintiffs allege a breach of the covenant of good
faith and fair dealing by all defendants. Plaintiffs seek compensatory damages
reflecting the difference in value between the warrants as issued pursuant to
the settlement of In Re T2 Medical, Inc. Shareholder Litigation 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 of the Company's stock trading at its
alleged true value. The defendants filed a motion to dismiss the amended class
action Complaint on March 13, 1996. The Court granted the Company's motion to
dismiss the Complaint on February 12, 1997. The plaintiffs appealed the
dismissal to the Eleventh Circuit of Appeals, and on October 15, 1998, the
Eleventh Circuit denied the plaintiffs' appeal. Subsequently, the plaintiffs
have petitioned the Eleventh Circuit for rehearing of the appeal and have
suggested a rehearing en banc.
The Company intends to defend itself vigorously in this matter. However
because of the uncertainties inherent in litigation, no provision for any loss
that may result from the suit has been made in the Company's Unaudited Condensed
Consolidated Financial Statements. An adverse outcome may have a material impact
to the financial position, results of operations and liquidity of the Company.
The Company is party to various other legal actions arising out of the
normal course of its business. Management believes that the ultimate resolution
of such actions will not have a material adverse effect on the Company's
financial position, results of operations or liquidity of the Company. For a
discussion of certain legal proceedings to which the Company is party, see Part
I -- Item 3. "Legal Proceedings" in the Company's Annual Report on Form 10-K, as
amended for the year ended December 31, 1997.
ITEM 2. CHANGE IN SECURITIES
(C) Sales of Unregistered Securities
In August 1998, in connection with its New Senior Credit Facility, the
Company issued warrants (the "1998 Warrants") to purchase an aggregate of
1,900,000 shares, subject to adjustment, of the Company's common stock to
Cerberus Partners, L.P., Goldman Sachs Credit Partners, L.P., and Foothill
Income Trust, L.P. The 1998 Warrants have an exercise price of $0.01 per share,
subject to adjustment. The Company granted certain demand and "piggy-back"
registration rights to the holders of the 1998 Warrants. The 1998 Warrants were
issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
23
<PAGE> 24
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 -- Prime vendor agreement between Coram Healthcare
Corporation and Cardinal Health. Certain portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment. The entire Exhibit has been filed
confidentially with the Securities Exchange Commission.*
27.1 -- Financial Data Schedule*
27.2 -- Restated Financial Data Schedule*
</TABLE>
- ---------------
* Filed herewith.
(B) Reports on Form 8-K
On September 2, 1998, the Company filed a report on Form 8-K reporting the
completion and receipt of initial funding under a new senior credit facility.
24
<PAGE> 25
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/ WENDY L. SIMPSON
----------------------------------
Wendy L. Simpson
Executive Vice President and
Chief Financial Officer
November 16, 1998
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 -- Prime vendor agreement between Coram Healthcare
Corporation and Cardinal Health. Certain portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment. The entire Exhibit has been filed
confidentially with the Securities Exchange Commission.
27.1 -- Financial Data Schedule
27.2 -- Restated Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
Portions of this Exhibit marked with an * have been omitted
and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment.
PRIME VENDOR AGREEMENT
This agreement is made October 1, 1998, between Coram
Healthcare Corporation ("Coram") and Cardinal Health ("Cardinal"), who hereby
agree as follows:
1. DESIGNATION AS PRIMARY WHOLESALER
During the term of this Agreement, Coram will designate
Cardinal as the primary wholesale pharmaceutical supplier for its
branches, whether now or hereafter owned, managed or operated by Coram
(collectively, the "Facilities" and individually, a "Facility"). A
current list of the Facilities is attached hereto as Appendix A.
Additional alternate care and other health care organizations may be
made parties to this Agreement from time to time subject to the prior
approval of Coram and Cardinal. Coram will use its best efforts to
actively promote the implementation of this Agreement to all
Facilities.
2. SALE OF MERCHANDISE
Coram will purchase from Cardinal during the term of this
agreement its Primary Requirements of pharmaceuticals ("Rx Products")
and, may, at its option, purchase certain other inventory carried by
Cardinal ("Non-Rx Products" and together with Rx Products, collectively
the "Merchandise") for delivery directly to the Facilities. The term
"Primary Requirements" means that Coram will purchase for each Facility
not less than * its requirements of Rx Merchandise from Cardinal.
Cardinal reserves the right at all times to reasonably determine what
Merchandise it will carry based upon product quality, manufacturer
indemnity, insurance, and other policies, and other standards
reasonably determined by it, and may delete from its available
inventory items of Merchandise with limited or no movement activity.
3. PURCHASE PRICE
Coram will pay a purchase price for all Merchandise purchased
under this agreement in an amount equal to Cardinal's Cost minus the
appropriate percentage as found in the Pricing Matrix (Exhibit A)
effective *.
The term "Prepay Deposit" means an amount paid by Coram to
Cardinal, in which Coram hereby grants to Cardinal a security interest.
Cardinal may upon prior notice to Coram apply the Prepay Deposit to the
outstanding invoices due to Cardinal, with any excess refunded to
Coram. Cardinal shall have no obligation to segregate the Prepay
Deposit from its other funds or accounts.
For purposes of this agreement: (a) the term "Cardinal's Cost"
shall mean the manufacturer's published wholesale acquisition cost for
Merchandise at the date of Cardinal's invoice to the Facility, adjusted
to reflect any then-applicable contract pricing,
<PAGE> 2
but without reduction for cash discounts; and (b) the term "Qualified
Monthly Purchases" shall mean all purchases made and paid for by Coram
and/or the Facilities under the terms of this agreement, net of all
returns, credits, rebates, late charges, or other similar items.
Manufacturer off invoice quantity discounts and promotional allowances
will be made available consistent with Cardinal's normal and customary
practices. In order to qualify for this pricing, each Coram facility
must purchase its Primary Requirements from Cardinal and the aggregate
annual volume must remain above *. Failure of Coram to meet either or
both of these basic requirements may result in a change in the pricing
by Cardinal upon 30 days' written notice to Coram.
*
All orders must be electronically transmitted via the
CardinalCHOICE(TM) pharmacy system or other electronic order entry
system approved by Cardinal to qualify for the pricing specified in the
Pricing Matrix. Non-electronically transmitted orders are subject to
Cardinal's Cost plus *.
4. PAYMENT TERMS
*
5. DELIVERY
Cardinal will deliver the Merchandise FOB to the Facilities
and exercise its good faith efforts to provide an efficient delivery
schedule designed to meet the mutual needs of Cardinal and the
Facilities. All deliveries will be accompanied by an invoice and,
except as otherwise provided below, *. Delivery schedules and purchase
order deadlines will be established by the applicable servicing
division of Cardinal. Facilities will be eligible for three (3)
deliveries per week, except that larger volume Facilities may request
five (5) deliveries subject to mutual agreement with the servicing
Cardinal division. Additional deliveries, if required, will incur a
separate delivery charge at Cardinal's cost for such deliveries.
Delivery schedules and purchase order deadlines may be reviewed and
changed from time to time as mutually agreed upon by Cardinal and the
Facilities.
DEA Form 222 may be mailed to the applicable Cardinal
distribution center. Schedule 11 orders will be delivered within one
business day of Cardinal's receipt of a signed original DEA Form 222.
6. OTHER SERVICES
Cardinal will provide comprehensive support services to Coram
and the Facilities in accordance with Cardinal's customary terms and
practices for managed care customers. A list of those programs,
services, and reports is attached as Exhibit B to this agreement.
2
<PAGE> 3
7. EMERGENCY DELIVERIES
Cardinal will provide a twenty-four (24) hour, seven (7) day
per week emergency delivery service. * emergency deliver* per month
will be made free of charge. Thereafter, the courier charge for such
orders will be F.O.B. prepaid and added to the invoice. A listing of
key management personnel and emergency order procedures will be
supplied to each Facility.
8. CONTRACT ADMINISTRATION
Cardinal will recognize and administer the Manufacturer
Contracts subject to their continued validity in accordance with
applicable laws; however, if manufacturers' chargebacks for contract
items submitted by Cardinal are disallowed or unreconcilable, then the
disputed charge will be billed back to Coram. Coram will notify
Cardinal of all manufacturer contracts between Coram or any Facility
and any manufacturer (collectively, "Manufacturer Contracts"). In
addition, Coram or the Facilities will notify Cardinal of all new
Manufacturer Contracts"). In addition, Coram or the Facilities will
notify Cardinal of all new Manufacturer Contracts entered into after
the Commencement Date and all renewals, replacements or terminations of
Manufacturer Contracts not less than 45 days prior to the effective
date of such new Contract, to discontinue the service level provisions
of Section 9 hereof until 45 days after delivery of accurate usage data
for the new items.
In order to facilitate Cardinal's inventory management
requirements, Coram will provide Cardinal with respect to each Facility
accurate six month's usage figures (including NDC numbers) on both
contract and non-contract items in compatible electronic (disk) format
30 days prior to participation under this agreement by that Facility.
All purchases under this agreement by Coram will be for the Facilities'
"own use" as that term is defined in judicial or legislative
interpretation, and Coram will comply with applicable manufacturers'
pricing criteria and policies.
9. SERVICE LEVEL
Cardinal will exercise all reasonable efforts to provide
Facilities with an aggregate average monthly service level on Rx
Products of at least * calculated quarterly in accordance with the
standards and procedures specified in Exhibit C. Failure by Cardinal
through its own fault to maintain an average monthly service level
based on the prior three-month period) of at least * will entitle the
affected Facility to a reduction of * in the Cardinal Cost-plus
percentage applicable for deliveries of Merchandise to that Facility
during the following two-month period.
10. ORDER CONFIRMATION/DROP SHIP INVOICING
Cardinal operates a "Live" inventory system that allocates
inventory at the moment of order transmission. Order allocations are
transmitted to the Facility within approximately 15 minutes of placing
the order and contain invoice level detail.
3
<PAGE> 4
In the event that a discrepancy is identified regarding
invoicing of items drop shipped to the facilities from the manufacturer
or additional information is requested by either party in connection
with such drop shipments, then both parties will use all reasonable
efforts to obtain the information and resolve the discrepancy within
sixty (60) days of notification of such discrepancy or need for such
additional information.
11. RETURN GOODS POLICY
Cardinal will accept Merchandise for return from Facilities in
accordance with the Standard Cardinal Return Goods Policy (the
"Cardinal Returns Policy") in effect from time to time during the term
of this agreement. A current copy of the Cardinal Returns Policy in
effect as of the Commencement Date is attached as Exhibit D. Credits to
be issued to Coram in connection with timely notification by Coram in
accordance with the Cardinal Returns Policy will be made no later than
the tenth (10th) business day following Cardinal's authorization of
such return.
12. TERM
The initial terms of this Agreement will be for a period of
five years beginning October 1, 1998 (the "Commencement Date"). Either
party to this Agreement may effect an early termination of this
agreement upon the default of a material provision of this agreement by
the other party and that party's failure to cure such default within 30
days following written notice from the non-defaulting party.
Notwithstanding the foregoing, either party to this Agreement may
effect an early termination of this Agreement by providing written
notice of termination to the other party at least ninety (90) days
prior to the specified early termination date. Notwithstanding the
foregoing, no termination notice from any Coram to Cardinal will be
effective until such time as Cardinal has received payment for all
amounts due from Coram.
13. NOTICES
Any notice or other communication required or desired to be
given to either party under this Agreement shall be in writing and
shall be deemed given when: (a) deposited in the United States mail,
first-class postage prepaid, and addressed to that party at the address
for such party set forth at the end of this Agreement; (b) delivered to
Federal Express, Airborne, or any other similar express delivery
service for delivery to that party at that address; or (c) sent by
facsimile transmission, with electronic confirmation, to that party at
its facsimile number set forth at the end of this Agreement. Either
party may change its address or facsimile number for notices under this
Agreement by giving the other party notice of such change.
14. TAXES/COMPLIANCE WITH LAWS
Coram will pay when due any sales, use, excise, gross
receipts, or other federal, state, or local taxes or other assessments
(other than any tax based solely on the net
4
<PAGE> 5
income of Cardinal) and related interest and penalties in connection
with or arising out of the transactions contemplated by this Agreement.
If Cardinal pays any such amounts which Coram is obligated to pay under
this section, if any, then Coram will promptly reimburse Cardinal in an
amount equal to the amount so paid by Cardinal.
If an to the extent any discounts, credits, rebates or other
purchase incentives are paid or applied by Cardinal with respect to the
Merchandise purchased under Agreement, then applicable provisions of
the Medicare/Medicaid and state health care fraud and
abuse/anti-kickback laws (collectively, "fraud and abuse laws") may
require disclosure of the applicable price reduction on Coram's claim
or cost reports for reimbursement from governmental or other third
parties. Coram agrees to comply with all applicable provisions of the
fraud and abuse laws and to indemnify and hold Cardinal harmless for
any failure on Coram's part to do so.
15. FORCE MAJEURE
This Agreement constitutes the entire agreement and
understanding of the parties with respect to the subject matter hereof,
and supersedes all prior and contemporaneous agreements, proposals,
bids/bid responses, and understandings between the parties relative to
the subject matter of this Agreement. Neither Cardinal nor Corm may
assign its rights under this Agreement without the written consent of
the other; provided, however, that Cardinal may delegate its rights and
obligations to any entity which is controlled by or under common
control with Cardinal Health, Inc. This Agreement will be binding on,
inure to the benefit of, and be enforceable by and against the
respective successors and assigns of each party to this Agreement.
16. RECORDS AND AUDIT
Cardinal will maintain records pertaining to the
pharmaceutical products purchased by Coram under this Agreement as
required by applicable FDA requirements. Not more than once in any
twelve-month period, and following 60 days' advance written notice to
Cardinal, Coram will have the right to appoint one or more of its
employees or a business contracted by Coram (for which contracted costs
will be paid by Coram) to review those relevant records applicable to
its pharmaceutical purchases for the sole purpose of verifying
compliance with the pricing terms of this Agreement. Any such review
will be limited to twelve months of historical information as of the
date such review begins and will be subject to a confidentiality
agreement mutually agreed to by Cardinal and Coram, prepared by
Cardinal and signed by Coram and its employee(s) and contracted
business, if applicable, who will have access to the information prior
to beginning the review.
17. RETURN OF SOFTWARE
Upon termination of this Agreement for any reason, Coram's
rights as a licensee of the CardinalCHOICE(TM) or other Cardinal
software will automatically expire, and Coram will promptly return such
software to a return location specified by Cardinal.
5
<PAGE> 6
18. ENTIRE AGREEMENT; SUCCESSORS
This Agreement constitutes the entire agreement and
understanding of the parties with respect to the subject matter hereof,
and supersedes all prior and contemporaneous agreements, proposals,
bids/bid responses, and understandings between the parties relative to
the subject matter of this Agreement. Neither Cardinal nor Coram may
assign its rights under this Agreement without the written consent of
the other; provided, however, that Cardinal may delegate its rights and
obligations to any entity which is controlled by or under common
control with Cardinal Health, Inc. This Agreement will be binding on,
inure to the benefit of, and be enforceable by and against the
respective successors and assigns of each party to this Agreement.
19. AMENDMENTS
No changes to this Agreement will be made or be binding on any
party unless made in writing and signed by each party to this
Agreement.
20. WAIVER
The failure of either party to enforce any provision of this
Agreement will not be considered a waiver of any future right to
enforce such provision.
Coram Healthcare Corporation Cardinal Health*
1125 Seventeenth Street, Suite 2100 553 Glendon Court
Denver, Colorado 80202 Dublin, Ohio 43216
Telecopy: (303) 672-8889 Telecopy: (614) 717-_____
By: /s/ By: /s/
------------------------------ ------------------------------
Title: Title:
--------------------------- ---------------------------
* The terms "Cardinal" or "Cardinal Health" shall include the following
affiliated and operating companies: Cardinal Syracuse, Inc., a New York
corporation (Syracuse, New York); Balley Drug Company, a Delaware corporation
(Zanesville, Ohio); Marmac Distributors, Inc., a Connecticut corporation
(Hartford, Connecticut); James W. Daly, Inc., a Massachusetts corporation
(Peabody, Massachusetts); Ohio Valley-Clarksburg, Inc., a Delaware corporation
(Wheeling, West Virginia); Chapman Drug Company, a Tennessee corporation
(Knoxville, Tennessee); Solomons Company, a Georgia corporation (Savannah,
Georgia); National PharmPak Services, Inc., an Ohio corporation (Zanesville,
Ohio); National Specialty Services, Inc., an Ohio corporation (Nashville,
Tennessee); Whitmire Distribution Corporation, a Delaware corporation (Folsom,
California); Behrens, Inc., a Texas corporation (Waco, Texas); William's Drug
distributors, Inc., a Delaware Corporation (Zanesville, Ohio); and any other
affiliate of Cardinal Health, Inc. ("CHI"), an Ohio corporation, as CHI may
designate.
6
<PAGE> 7
EXHIBIT A
Pricing Matrix
*
A-1
<PAGE> 8
EXHIBIT B
Other Services
The services offered in this Agreement are designed to facilitate
aggressive asset management at the Facilities. Additionally, Cardinal offers a
highly sophisticated information system that will assist Coram in evaluating
system wide product movement, pricing, service level, and compliance to group
contracts.
A. The following services will be provided to Coram and each designated
site:
1. Order entry equipment, shelf labels, price stickers and bar
coded labels are available upon request.
2. Reports (available through CardinalCHOICE)
a. Contract Report - printed in alpha sequence
describing contract items available to a specific
institution. Included in this report is the contract
cost NDC#, product description, E.O.E. number,
manufacturer and distribution center availability
(monthly distribution).
b. Monthly Purchase Profile - printed in alpha sequence
defining a twelve (12) month rolling purchase profile
(monthly distribution).
c. DEA Report - a listing of controlled substances
purchased from Cardinal for each month (monthly
distribution).
d. 80/20 Report (dollar volume sequence) - a listing of
all purchases from a previous quarter by descending
dollar volume sequence with units displayed
(quarterly distribution).
e. Vendor Purchase Report - a listing of purchases by
vendor displaying both unit and dollar volume for
the preceding quarter (quarterly distribution).
B. Physical Inventory Report - generated by entering inventory into the
order entry equipment and transmitting with proper code to Cardinal
computer via telephone. A printout will be delivered within seven (7)
days showing description, unit price, extended price and total
inventory. A normal fee of $50 per inventory will be charged. No charge
will be applied if CardinalCHOICE generates the reports.
C. CardinalCHOICE - will be made available to Coram and Facilities
utilizing Cardinal as the preferred vendor. The fee associated with
CardinalCHOICE and future updates will be waived for Coram.
D. CardinalCHOICE HQ - one system will be provided to Coram corporate
office at no charge for the term of the Agreement.
Exhibit B-1
<PAGE> 9
E. Hardware - all hardware and software provided by CHI for use by Coram
in conjunction with this Agreement shall remain the property of
Cardinal health and software shall be returned to Cardinal upon
termination of this Agreement.
F. Sales Representation - upon execution of this Agreement, each site
will have an assigned account representative who specializes in
Alternate Care. A mutually-convenient call schedule will be
established. On these visits, the account representative will review
pertinent contract charges, price increases or decreases, special
"deals" of interest to Coram and returns as required.
Exhibit B-2
<PAGE> 10
EXHIBIT C
Service Level Definition
1. Manufacturer back orders/temporary outs;
2. Non-stock and/or discontinued items due to non-movement or
discontinuation by manufacturer;
3. Rx Products shipped within three (3) working days of initial order
(including those filled by an affiliate of Cardinal) which shall
instead be counted as a line filled;
4. Items where a Facility has failed to provide accurate usage figures;
5. Items where a Facility's historical demand is exceeded by 150% over
the preceding two months;
6. Same item ordered more than once within five days.
The service level guaranty for Facilities added to this Agreement after
the Commencement Date shall commence 60 days following receipt by Cardinal of
accurate usage data. This will allow Cardinal to gain usage information and
adjust inventory levels appropriately.
Coram shall notify Cardinal at least 45 days prior to the expiration of
any manufacturer's contract which is being replaced with a different contract,
and shall cooperate with and assist Cardinal in disposing of any excess
inventory of Merchandise previously stocked at Coram's or a Facility's request.
Failure to comply with these notice requirements shall entitle Cardinal to
discontinue the service level guaranty to the Facilities until 60 days after
delivery of accurate usage data for the new items.
Exhibit C-1
<PAGE> 11
EXHIBIT D
Cardinal Health Returned Goods Policy
(Hospitals, Charitable Institutions, and Other Health Care Entities)
General Policy
Product in "merchantable condition" (as defined below) may generally be returned
to the Cardinal Health Company from which the product was originally purchased
if the return is made within the time frames and subject to the terms and
conditions described below:
Return Made Within Normal Credit Amount
------------------ --------------------
* *
"Merchantable condition" will be determined by Cardinal Health based upon its
ability to return the item to its inventory for resale in the normal course of
its business without special preparation, testing, handling, or expense and will
exclude the following:
A. Any item which has been used or opened, is a partial dispensing unit or
unit of sale, is without all original packaging, labeling, inserts, or
operating manuals, or that is stickered, marked, damaged, defaced, or
otherwise cannot readily be resold by Cardinal for any reason.
B. Short-dated (less than ___ months expiration dating), outdated, or
seasonal product and items purchased on a "special order" basis,
including non-stock and drop ship items.
C. Any sterile or refrigerated merchandise, unless Cardinal is specially
assured that such merchandise was properly stored and protected at all
times and such merchandise is returned separately in a package marked
as such and accompanied by a separate credit request form.
D. Any low stability product, including Epogen(TM), Eminase(TM) or other
products which are usually sensitive to temperature and handling
conditions.
E. Any product not intended for return to a wholesaler in accordance with
the return policies of the applicable manufacturer.
Unmerchantable Product
Any item not eligible for return in accordance with Cardinal's General Policy
(above) will not be accepted for return without special written authorization
and will generally require return directly to the manufacturer. If Cardinal does
participate in the return process for any product not in
Exhibit D-1
<PAGE> 12
"merchantable condition," any return credit to the customer will be based upon
the actual credit issued by the manufacturer and will be subject to a minimum
25% handling charge.
Controlled Substances
Credit for the return of controlled substances requires a separate Merchandise
Return Authorization From (the "MRA Form") and must comply with all federal and
state procedures and requirements in addition to the terms and conditions
described herein.
Shorts and Damaged Merchandise
Claims of order shortages (e.g., invoiced but not received) and damage must
generally be reported within five business days from the applicable invoice
date. Controlled substance shortage claims must be reported immediately per DEA
requirements. Pricing and other errors/mistakes must be reported within 10
business days from the invoice date.
Notice to Manufacturer
Upon approval of the return by Cardinal Health, the customer will be responsible
to: (a) promptly forward a copy of the credit memo and MRA Form to the
applicable manufacturer; (b) retain a copy of the credit memo and MRA Form; and
(c) make such copies available to the manufacturer and to the authorized
federal, state, and local law enforcement officers upon request, all as required
pursuant to FDA guidelines.
Ongoing Assurance and Cardinal Credit Request Form
Prior to returning any product to Cardinal, each customer must execute and
deliver to Cardinal an Ongoing Assurance verifying that all returned merchandise
has been kept under proper conditions for storage, handling, and shipping. All
request for credit must be submitted via EOE, on the CardinalCHOICE(TM) system
or by approved EDI interface. A fully completed MRA Form must accompany all
merchandise to be returned. A fully completed form includes, but is not limited
to, the following information: the invoice number and invoice date for the
merchandise to be returned.
Other Restrictions
This policy is subject to charge without notice by Cardinal Health. This policy
is further subject to modification as may be deemed necessary or appropriate by
Cardinal health to comply with applicable federal and/or state regulations, FDA
guidelines, state law, and other restrictions applicable to returned
merchandise.
Exhibit D-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of Coram Healthcare Corporation for
the nine months ended September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,633
<SECURITIES> 0
<RECEIVABLES> 121,033
<ALLOWANCES> 17,154
<INVENTORY> 20,808
<CURRENT-ASSETS> 144,457
<PP&E> 50,514
<DEPRECIATION> 28,799
<TOTAL-ASSETS> 434,699
<CURRENT-LIABILITIES> 83,084
<BONDS> 251,494
0
0
<COMMON> 49
<OTHER-SE> 91,929
<TOTAL-LIABILITY-AND-EQUITY> 434,699
<SALES> 368,469
<TOTAL-REVENUES> 368,469
<CGS> 277,484
<TOTAL-COSTS> 277,484
<OTHER-EXPENSES> 76,254
<LOSS-PROVISION> 11,140
<INTEREST-EXPENSE> 26,372
<INCOME-PRETAX> (19,677)
<INCOME-TAX> 1,850
<INCOME-CONTINUING> (22,501)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,501)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of Coram Healthcare Corporation for
the nine months ended September 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<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> 53,209
<DEPRECIATION> 35,086
<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> 366,228
<TOTAL-REVENUES> 366,228
<CGS> 254,573
<TOTAL-COSTS> 254,573
<OTHER-EXPENSES> (68,708)
<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> 3.06
<EPS-DILUTED> 2.72
</TABLE>
