<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11343
---------------------
CORAM HEALTHCARE CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0615337
(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
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of November 10, 1999, was 49,597,376.
- --------------------------------------------------------------------------------
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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,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 8,466 $ 53
Cash limited as to use.................................... 544 1,557
Accounts receivable, net of allowance of $21,377 and
$18,128................................................ 126,232 113,697
Inventories............................................... 18,973 27,203
Deferred income taxes, net................................ 290 705
Other current assets...................................... 6,094 4,963
--------- ---------
Total current assets.............................. 160,599 148,178
Property and equipment, net................................. 25,373 26,563
Deferred income taxes, net.................................. 2,287 4,365
Other assets................................................ 17,394 17,574
Other deferred costs........................................ 3,155 5,243
Goodwill, net of accumulated amortization of $75,401 and
$67,247................................................... 227,868 235,696
--------- ---------
Total assets...................................... $ 436,676 $ 437,619
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 55,628 $ 52,930
Accrued compensation...................................... 11,163 11,205
Interest payable.......................................... 5,707 4,671
Current maturities of long-term debt...................... 414 260
Income taxes payable...................................... 472 300
Deferred income taxes..................................... 300 1,060
Reserve for litigation.................................... 1,420 2,987
Accrued merger and restructuring.......................... 6,673 3,935
Other current liabilities................................. 8,699 6,271
--------- ---------
Total current liabilities......................... 90,476 83,619
Long-term debt.............................................. 289,265 242,162
Minority interest in consolidated joint ventures............ 1,427 2,024
Other liabilities........................................... 13,674 12,947
Deferred income taxes....................................... 2,277 4,010
Commitments and contingencies............................... -- --
--------- ---------
Total liabilities................................. 397,119 344,762
Stockholders' equity:
Preferred stock, par value $.001, authorized 10,000
shares, none issued.................................... -- --
Common stock, par value $.001, authorized 100,000 shares,
issued and outstanding 49,598 at September 30, 1999 and
49,201 at December 31, 1998............................ 50 49
Additional paid-in capital................................ 427,377 427,133
Accumulated deficit....................................... (387,870) (334,325)
--------- ---------
Total stockholders' equity........................ 39,557 92,857
--------- ---------
Total liabilities and stockholders' equity........ $ 436,676 $ 437,619
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
1
<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,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue........................................ $143,232 $143,607 $456,983 $368,469
Cost of service.................................... 110,299 108,317 379,960 275,402
-------- -------- -------- --------
Gross profit....................................... 32,933 35,290 77,023 93,067
Operating expenses:
Selling, general and administrative expenses..... 28,290 25,030 80,799 69,025
Provision for estimated uncollectible accounts... 4,168 3,897 12,781 11,140
Amortization of goodwill......................... 2,711 2,794 8,159 8,337
Restructuring costs.............................. 5,100 -- 6,050 --
-------- -------- -------- --------
Total operating expenses................. 40,269 31,721 107,789 88,502
-------- -------- -------- --------
Operating income (loss)............................ (7,336) 3,569 (30,766) 4,565
Other income (expenses):
Interest expense................................. (8,110) (6,114) (22,193) (26,372)
Other income, net................................ 580 407 971 2,130
-------- -------- -------- --------
Loss before income taxes and minority interests.... (14,866) (2,138) (51,988) (19,677)
Income tax expense................................. 125 450 375 1,850
Minority interests in net income of consolidated
joint ventures................................... 176 261 1,182 974
-------- -------- -------- --------
Net loss........................................... $(15,167) $ (2,849) $(53,545) $(22,501)
======== ======== ======== ========
Loss per common share.............................. $ (0.30) $ (0.06) $ (1.08) $ (0.46)
======== ======== ======== ========
Loss per common share -- assuming dilution......... $ (0.30) $ (0.06) $ (1.08) $ (0.46)
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE> 4
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net cash used in operating activities....................... $(21,259) $ (8,876)
Cash flows from investing activities:
Purchases of property and equipment....................... (6,782) (7,576)
Other..................................................... (481) (3,084)
-------- --------
Net cash used in investing activities.................. (7,263) (10,660)
Cash flows from financing activities:
Borrowings on line of credit.............................. 43,000 17,250
Repayment of debt......................................... (6,065) (94,380)
Proceeds on issuance of promissory notes.................. -- 6,000
Consideration for warrant cancellation.................... -- (4,300)
Other..................................................... -- (846)
-------- --------
Net cash provided by (used in) financing activities.... 36,935 (76,276)
-------- --------
Net increase (decrease) in cash and cash
equivalents......................................... $ 8,413 $(95,812)
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 5
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
Business Activity. Coram Healthcare Corporation and its subsidiaries
("Coram" or the "Company") are engaged in four principal lines of business:
alternate site (outside the hospital) infusion therapy and related services,
ancillary network management services, pharmacy benefit management and specialty
mail-order pharmacy services and centralized management, administrative and
clinical support for clinical research trials, and medical informatics services.
Other services offered by Coram include non-intravenous home health products
such as durable medical equipment and respiratory therapy services. See Note 4
and Note 7 to the Unaudited Condensed Consolidated Financial Statements.
Coram delivers its alternate site infusion therapy services through
approximately 88 branch offices located in 43 states and Ontario, Canada.
Infusion therapy involves the intravenous administration of anti-infective
therapy, intravenous immunoglobulin ("IVIG"), chemotherapy, pain management,
nutrition and other therapies.
For all periods presented, the Company provided ancillary network
management services through its Resource Network division ("R-Net"), which
managed networks of home health care providers on behalf of health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), at-risk
physician groups and other managed care organizations. R-Net served its
customers through two primary call centers and three satellite offices. See Note
4 and Note 7 to the Unaudited Condensed Consolidated Financial Statements.
The Company delivers pharmacy benefit management and specialty pharmacy
services through its Coram Prescription Services division ("CPS"). The division
provides services through a centralized mail order pharmacy and service center
in Orlando, Florida; five regional mail order pharmacies in Plainview, New York;
Omaha, Nebraska; Las Vegas, Nevada; Hayward, California; Houston, Texas and one
retail pharmacy in Baltimore, Maryland. The pharmacy benefit management service
provides on-line claims administration, formulary management and certain drug
utilization review services through a nationwide network of retail pharmacies.
CPS's specialty pharmacy services provide centralized distribution, adherence
programs, patient education, and clinical support to patients with high cost,
high risk conditions. See Part I, Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations: "Business Strategy".
Through its Clinical Trials and Informatics division ("CTI Network, Inc."),
the Company provides centralized management and support for clinical research
trials. This division also offers data collection and integration services as
well as pharmaceconomic outcomes and utilization analyses.
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 (the "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. The results
of operations for the interim period ended September 30, 1999, 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, 1998 and subsequent filings on Forms 10-Q and 8-K
filed with the Commission in 1999.
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
4
<PAGE> 6
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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.
Loss per Share. In 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement No. 128, Earnings per Share ("Statement 128"). In
accordance with Statement 128, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. The following table
sets forth the computation of basic and diluted loss per share for the three and
nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Numerator for basic and diluted loss per
share....................................... $(15,167) $(2,849) $(53,545) $(22,501)
======== ======= ======== ========
Weighted average shares -- denominator for
basic earnings per share.................. 49,550 48,888 49,483 48,731
Effect of other dilutive securities:
Stock options............................. -- -- -- --
Warrants.................................. -- -- -- --
-------- ------- -------- --------
Denominator for diluted earnings per share--
adjusted weighted average shares and
assumed conversion........................ 49,550 48,888 49,483 48,731
======== ======= ======== ========
Loss per common share....................... $ (0.30) $ (0.06) $ (1.08) $ (0.46)
======== ======= ======== ========
Loss per common share -- assuming
dilution.................................. $ (0.30) $ (0.06) $ (1.08) $ (0.46)
======== ======= ======== ========
</TABLE>
Diluted loss per share computations do not give effect to stock options or
warrants to purchase common stock as their effect would have been anti-dilutive.
Derivatives and Hedging Activities. In June 1998, the FASB issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"), which requires recording all
derivative instruments as assets or liabilities, measured at fair value.
Statement 133 was effective for fiscal years beginning after June 15, 1999. The
FASB issued, in June 1999, the Statement of Financial Accounting Standards No.
137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement 133. ("Statement 137"), which amends
Statement 133. Statement 137 will apply to all fiscal quarters of all fiscal
years beginning after June 15, 2000. As of September 30, 1999, the Company had
not entered into any derivative and hedging transactions, and as such, the
Company does not believe that adoption of the new requirement will have an
effect on the Company's future financial position or operating results.
Start-up Costs. In 1998, the AICPA issued SOP 98-5 "Reporting on the Costs
of Start-Up Activities," which requires that the costs of start-up activities be
expensed as incurred. Initial adoption of SOP 98-5 was accounted for as a
cumulative effect of an accounting change. The Company adopted the SOP 98-5
effective January 1, 1999 and such adoption did not have a significant effect on
the results of operations or financial position.
2. ACQUISITIONS AND RESTRUCTURING
Acquisitions. 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 levels of the acquired companies. As of
September 30,
5
<PAGE> 7
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
1999, the Company may be required to pay a minimum of approximately $2.0
million, subject to increase based, in certain cases, on the Company or its
subsidiaries exceeding certain revenue or income targets and changes in the
market value of the Company's stock. These minimum contingent obligations have
been recorded as additional goodwill. Subject to certain elections by the
Company or the sellers, a maximum of approximately $1.1 million of these
contingent obligations, subject to increase, may be paid in cash with the
remaining to be paid in common stock of the Company. If these contingent
payments exceed the minimum contingent amounts, they will be recorded as
additional goodwill in the period in which the payment becomes probable.
Payments during the three months ended September 30, 1999 and 1998 totaled $0.1
million each period.
Merger and Restructuring. As a result of the formation of Coram and the
acquisition of substantially all of the assets of the alternate site infusion
business of Caremark, Inc., a subsidiary of Caremark International, Inc. (the
"Caremark Business"), during May 1995, the Company initiated a restructuring
plan (the "Caremark Business Consolidation Plan") and charged $25.8 million to
operations as a restructuring cost. Certain additional restructuring costs
totaling approximately $11.4 million were incurred and accounted for as
adjustments to the purchase price of the Caremark Business in 1995. In December
1998, the Company evaluated the estimated costs to complete the Caremark
Business Consolidation Plan and other accruals and recognized a restructure
reversal benefit of $0.7 million.
Under the Caremark Business Consolidation plan, the Company has made total
payments, disposals and reversals as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT
THROUGH SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
----------------------------------------------- ----------------------
CASH NON-CASH RESTRUCTURE FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL REVERSAL EXPENDITURES CHARGES
------------ -------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Caremark Business
Consolidation Plan:
Personnel Reduction
Costs................... $11,300 $ -- $11,300 $ -- $ -- $11,300
Facility Reduction Costs... 9,547 3,900 13,447 714 2,539 16,700
------- ------ ------- ---- ------ -------
Total Restructuring
Costs............ $20,847 $3,900 $24,747 $714 $2,539 $28,000
======= ====== ======= ==== ====== =======
</TABLE>
During January 1999, the Company adopted a restructuring plan, which was
initiated in the first quarter of 1999. The plan resulted in an organizational
restructure in which $0.9 million of expense was recognized for severance costs.
During July 1999, the Company adopted a restructuring plan associated with
the reorganization of the R-Net division's Whippany, New Jersey call center
operations which was responsible for managing the Aetna Master Agreement. The
plan which was initiated in the third quarter of 1999, and was described in the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999 as a
subsequent event. The plan resulted in a charge of $5.1 million during the
quarter and consisted of $0.8 million for severance, $3.4 million for facility
costs, and $0.9 million for impairment of assets. See Note 4 to the Unaudited
Condensed Consolidated Financial Statements.
The balance in the "Accrued Merger and Restructuring" liability at
September 30, 1999 consists of future cash expenditures related to the Caremark
Business Consolidation Plan of $2.5 million, the January 1999 restructure plan
of $0.1 million, the R-Net restructure plan of $3.9 million and other accruals
of $0.2 million.
6
<PAGE> 8
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The Company estimates that the future cash expenditures related to the
Caremark Business Consolidation Plan, the 1999 restructure plan from the first
quarter of 1999, and the third quarter restructuring associated with the R-Net
Whippany, New Jersey call center operations will be made in the following
periods: 36% through September 30, 2000, 17% through September 30, 2001, 17%
through September 30, 2002, and 30% through September 30, 2003, and thereafter.
3. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Series A Senior Subordinated Unsecured Notes................ $162,162 $153,785
Series B Senior Subordinated Convertible Notes.............. 89,681 87,922
New Senior Credit Facility.................................. 37,000 --
Other obligations, including capital leases, at interest
rates ranging from 6% to 16%, collateralized by certain
property and equipment.................................... 836 715
-------- --------
289,679 242,422
Less current scheduled maturities........................... (414) (260)
-------- --------
$289,265 $242,162
======== ========
</TABLE>
As of September 30, 1999, the Company's principal credit and debt
agreements included (i) a Securities Exchange Agreement (the "Securities
Exchange Agreement"), dated May 6, 1998 with Cerberus Partners, L.P., Goldman
Sachs Credit Partners, L.P. and Foothill Capital Corporation (collectively known
as the "Holders") and the related Series A Senior Subordinated Unsecured Notes
(the "Series A Notes") and the Series B Senior Subordinated Convertible Notes
(the "Series B Notes") contemplated thereby and (ii) a new senior credit
facility with Foothill Income Trust, L.P., Cerberus Partners, L.P. and Goldman
Sachs Credit Partners L.P. (collectively known as the "Lenders") and Foothill
Capital Corporation, as Agent, dated as of August 20, 1998 (the "New Senior
Credit Facility"). Under the outstanding credit and debt agreements, the Company
is precluded from paying cash dividends during the term of the debt agreement.
Securities Exchange Agreement. On May 6, 1998, the Company entered into the
Securities Exchange Agreement with the Holders of its previously outstanding
subordinated rollover note (the "Rollover Note"). 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 Securities Exchange Agreement provided
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 Notes and
(ii) $87.9 million in original principal amount of Series B Notes. In addition,
under the Securities Exchange Agreement, the Holders of the Series A and Series
B Notes 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 and re-elected in August 1999.
On April 9, 1999, the Company entered into Amendment No. 2 (the "Note
Amendment") to the Securities Exchange Agreement with the Holders. Pursuant to
the Note Amendment, the outstanding principal amount of Series B Notes is
convertible into shares of the Company's common stock, par value $.001 per share
(the "Common Stock"), at a price of $2.00 per share (subject to customary
anti-dilution adjustments). Prior to entering into the Note Amendment, the
Series B Notes were convertible into Common Stock at a price of $3.00, which
price was subject to downward (but not upward) adjustment based on prevailing
market prices for the Common Stock on each of April 13, 1999 and October 13,
1999. Based on
7
<PAGE> 9
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
reported closing prices for trading in the Common Stock prior to April 13, 1999,
this conversion price would have been adjusted to below $2.00 on such date had
the Company not entered into the Note Amendment. Pursuant to the Note Amendment,
the parties also increased the interest rate applicable to the Series A Notes
from 9.875% to 11.5% per annum. The Securities Exchange Agreement pursuant to
which the Series A Notes and the Series B Notes were issued contains certain
other customary covenants and events of default. At September 30, 1999, the
Company was in compliance with all of these covenants, other than covenants
relating to certain relationships its Coram Resource Network, Inc. and Coram
Independent Practice Association, Inc. subsidiaries have with certain parties
that were contracted to provide services pursuant to the Master Agreement,
effective May 1, 1998, (the "Master Agreement") with Aetna U.S. Healthcare, Inc.
("Aetna USHC" or "Aetna") and to certain covenants relating to the
capitalization of certain subsidiaries. The Company has, however, received
waivers from its lenders regarding such noncompliance. In addition, the filing
of the voluntary chapter 11 bankruptcy petitions by Coram Resource Network, Inc.
and Coram Independent Practice Association, Inc. could have caused defaults
under the Exchange Agreement had such defaults not been waived. In connection
with such waivers and the waivers provided for certain matters of non-
compliance with certain covenants set forth in the New Senior Credit Facility
(as described below), the Company and the Holders have reached a preliminary
understanding pursuant to which the Holders would agree that no interest on the
Series A and Series B Notes would be due for the period from November 15, 1999
through the earlier of (i) final resolution of the litigation with Aetna or (ii)
May 15, 2000. Furthermore, certain proceeds from the sale of any Company asset
outside of the ordinary course of business would be applied to a partial
redemption of the Series A and the Series B Notes at par in such amounts as the
Holders designate, provided that such application of the proceeds derived from
such sale is waived by the lenders under the New Senior Credit Facility. The
precise terms of such understanding have not been finalized and there can be no
assurance that such understanding will be finalized under such terms or any
similar terms. There can be no assurance as to whether further covenant
violations or defaults will occur in future periods and whether any necessary
waivers will be forthcoming at that time. See Note 4 to the Company's Unaudited
Condensed Consolidated Financial Statements. See Note 4 to the Unaudited
Condensed Consolidated Financial Statements.
Series A Notes. The Series A Notes mature in May 2001 and bore interest at
an initial rate of 9.875% per annum payable quarterly in arrears in cash or
through the issuance of additional Series A Notes at the election of the
Company. Pursuant to the Note Amendment, the parties increased the interest rate
applicable to the Series A Notes to 11.5% per annum. The Holders can require the
Company to pay interest in cash if the Company exceeds a certain interest
coverage ratio. During the quarter ended September 30, 1999, interest expense on
the Series A Notes was approximately $4.6 million. On October 15, 1999,
additional Series A Notes totaling approximately $4.7 million were issued in
lieu of a cash payment of interest due through such date.
As described above, no interest will be due on the outstanding balance
under the Series A Notes for the period from November 15, 1999 through the
earlier of (i) resolution of the litigation with Aetna or (ii) May 15, 2000.
Following the expiration of such period of time, the interest rate applicable to
the Series A Notes shall return to the prior rate, 11.5% per annum.
Series B Notes. The Series B Notes mature in 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. Pursuant
to the Note Amendment, the outstanding principal amount of Series B Notes are
convertible into shares of the Company's Common Stock at a price of $2.00 per
share 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. During the quarter ended September 30, 1999, interest expense on
the Series B Notes was approximately $1.8 million. On October 15,
8
<PAGE> 10
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
1999, additional Series B Notes totaling approximately $1.8 million were issued
in lieu of a cash payment of interest due through such date.
As described above, no interest will be due on the outstanding balance
under the Series B Notes for the period from November 15, 1999 through the
earlier of (i) resolution of the litigation with Aetna or (ii) May 15, 2000.
Following the expiration of such period of time, the interest rate applicable to
the Series B Notes shall return to the prior rate, 8.0% per annum.
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.
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
availability is subject to certain borrowing base calculations as defined in the
underlying agreement. The New Senior Credit Facility matures February 26, 2001
and bears an interest rate of prime plus 1.5%, payable in arrears on the first
business day of each month. The interest rate was 9.75% at September 30, 1999.
The New Senior Credit Facility is secured by the capital stock of the Company's
subsidiaries, as well as the accounts receivable and certain other assets held
by the Company and its subsidiaries. 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 quarter ended September 30,
1999, interest and related fees on the New Senior Credit Facility were
approximately $1.1 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 of common stock of the Company at $0.01 per share, subject to customary
adjustments (the "1998 Warrants"). The 1998 Warrants were valued at their fair
value at the date of issuance, and were accounted for as deferred costs to be
amortized over the life of the New Senior Credit Facility. The Company charged
$0.4 million to interest expense during the quarter ended September 30, 1999
related to the 1998 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. As of September 30, 1999, the
Holders had issued letters of credit totaling approximately $2.5 million thereby
reducing the Company's availability under the New Senior Credit Facility by that
amount. The terms of the New Senior Credit Facility also provide for a fee of
1.0% per annum on the outstanding letter of credit obligations, due in arrears
on the first business day of each month. The terms of the New Senior Credit
Facility also provide for additional fees to be paid on demand to any letter of
credit issuer pursuant to the application and related documentation
9
<PAGE> 11
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
under which such letters of credit are issued. As of September 30, 1999, such
fees were 0.825% per annum on the amount of outstanding letter of credit
obligations. The New Senior Credit Facility contains certain other customary
covenants and events of default. At September 30, 1999, the Company was not in
compliance with all of these covenants. In connection with the understanding
regarding the waivers and interest concession described above applicable to the
Securities Exchange Agreement and the Series A and Series B Notes, the Company
received waivers from its lenders regarding such non-compliance for the period
ended September 30, 1999 and waivers of non-compliance with such covenants for
the period ending December 31, 1999. There can be no assurance as to whether
further covenant violations will occur in periods ending after December 31, 1999
and whether necessary waivers will be forthcoming at that time.
At October 15, 1999, the New Senior Credit Facility had an available
borrowing base of $60.0 million, of which, $37.0 million had been drawn,
including $14.5 million relating to the letters of credit that had been
delivered in accordance with the Master Agreement with Aetna. In addition, after
deducting from the borrowing base the other letters of credit obligations
totaling $2.5 million, the total available under the facility is $20.5 million
as of November 15, 1999.
4. LITIGATION AND CONTINGENCIES
Litigation. As described more fully in the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1999, the Company is involved in a
dispute with the Internal Revenue Service ("IRS") regarding certain substantial
adjustments proposed by the IRS to the prior tax liabilities of the Company. On
May 14, 1999, the Company received a statutory notice of deficiency, and the
alleged deficiency totaled approximately $12.7 million plus interest and
penalties to be determined. The Company is contesting the notice of deficiency
through administrative proceedings and litigation and will vigorously defend its
position. The most significant adjustment proposed by the IRS relates to the
ability of the Company to categorize certain net operating losses as specified
liability losses and offset income in prior years, for which the Company has
previously received refunds in the amount of approximately $12.7 million. On
August 11, 1999, the Company filed a petition with the United States Tax Court
contesting the notice of defiency. On October 4, 1999, the IRS responded to the
petition and requested the petition be denied. Due to the uncertainty of final
resolution, the Company's financial statements include a reserve for these
potential liabilities. No assurance can be given that the Company will prevail
given the early phase of this matter and the uncertainties inherent in any
proceeding with the IRS or in litigation. If the Company does not prevail with
respect to the proposed material adjustments, the financial position and
liquidity of the Company could be materially adversely affected. See Note 5 to
the Company's Unaudited Condensed Consolidated Financial Statements.
As described more fully in the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1999, the Company is suing Price Waterhouse LLP (now
known as PricewaterhouseCoopers LLP) for damages in excess of $165.0 million
regarding certain claims and causes of action of Caremark International, Inc.
and Caremark, Inc. (collectively, "Caremark") against Price Waterhouse LLP,
Caremark's auditors. These claims and causes of action were assigned to the
Company as part of the settlement that resolved a case filed by the Company
against Caremark. The case is now pending in state court in Illinois.
PricewaterhouseCoopers LLP filed a motion to dismiss the Company's lawsuit on
several grounds, but their motion was denied on March 15, 1999. In May, 1999,
PricewaterhouseCoopers LLP filed another motion to dismiss. A hearing on the
motion occurred on October 29, 1999, but the Court declined to rule and
scheduled another hearing on the motion for January 28, 2000. The lawsuit has
otherwise progressed into the discovery stage. There can be no assurance of any
recovery from PricewaterhouseCoopers LLP.
As described more fully in the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1999, the Company is involved in a lawsuit with Aetna
U.S. Healthcare, Inc. ("Aetna"). The Company filed a complaint (the "Coram
Complaint") against Aetna in the United States District Court for the Eastern
10
<PAGE> 12
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
District of Pennsylvania (Civil Action No. 99-CV-3330) on June 30, 1999. The
Coram Complaint sets forth claims against Aetna for fraud, misrepresentation,
breach of contract and rescission relating to the Master Agreement between the
parties for ancillary network management services through Coram's Resource
Network Division ("R-Net"). Coram provided its notice of termination of the
Master Agreement effective June 30, 1999. Under the arrangement, that was
expected to last for five years, Coram managed and provided home health care
services for over 2,000,000 Aetna enrollees in eight states for a stated monthly
fee per enrollee. Coram began serving Aetna enrollees under the Master Agreement
on approximately July 1, 1998. On June 30, 1999, the Company received a copy of
a complaint (the "Aetna Complaint") that had been filed by Aetna on June 29,
1999 in the Court of Common Pleas of Montgomery County, Pennsylvania (Case No.
99-11025). The Aetna Complaint seeks equitable and declaratory relief to compel
the Company to perform under the Agreement, including the payment of
compensation to the healthcare providers that have rendered and continue to
render services to Aetna's health plan members. As stated in the Aetna
Complaint, Aetna disputes the Company's right to terminate the Agreement. Coram
removed the Aetna Complaint to federal court, and the Aetna Complaint is also
pending in the United States District Court for the Eastern District of
Pennsylvania (Civil Action No. 99-CV-3378).
On July 20, 1999, Aetna filed a counterclaim against Coram in the federal
court lawsuit brought by Coram (Civil Action No. 99-CV-3330) and a motion to
dismiss the claims of Coram for fraud, misrepresentation and rescission of the
Master Agreement (Coram has filed an opposition to the motion to dismiss.). In
its counterclaim, Aetna has sued Coram for, among other things, breach of the
Master Agreement and fraudulent misrepresentation, contending Coram never
intended to perform the Master Agreement, defamation, interference with
contractual relations with providers and for interference with prospective
contractual relations with other companies that allegedly bid for the Master
Agreement. Aetna seeks in excess of $100.0 million in the lawsuit, plus punitive
damages.
Various motions have been filed by the parties and others in the lawsuit,
including the motion to dismiss filed by Aetna referenced above, a motion by
Aetna for sanctions and other relief under Rule 11 of the Federal Rules of Civil
Procedure, a motion by Aetna for an equitable accounting and constructive trust
on the assets of Coram and a motion to intervene filed by approximately eight
entities that were providers in the network of providers assembled by the R-Net
in connection with the Master Agreement. Coram has opposed all motions filed by
Aetna. To date, the Court has denied Aetna's Rule 11 motion and the providers'
motion to intervene. In addition, the Court issued a scheduling order that
contemplates a trial in April 2000.
The Company intends to pursue its claims against Aetna vigorously and to
put forth a vigorous defense against all of the claims brought by Aetna against
Coram and the other Coram parties. Due to the uncertainties inherent in
litigation, the ultimate disposition of the Aetna litigation described in the
preceding paragraphs cannot presently be determined and no provision has been
recorded in the Company's Consolidated Financial Statements for any recovery or
loss that may result upon resolution of the Aetna litigation described above. An
adverse outcome in such litigation could have a material adverse effect on the
financial position, results of operations and liquidity of the Company.
On August 19, 1999, a small group of providers filed an involuntary chapter
11 proceeding against Coram Resource Network, Inc. (the "Resource Network"), the
principal Company subsidiary that operates the R-Net division. On November 12,
the Resource Network and Coram Independent Practice Association, Inc. ("CIPA"),
the other Company subsidiary involved in the operation of the R-Net division,
filed voluntary petitions with the United States Bankruptcy Court for the
District of Delaware under chapter 11 of the United States Bankruptcy Code. Due
to the uncertainty of proceedings in the bankruptcy court, the Company cannot
predict what impact such proceedings may have on Coram or its financial
position, results of operations or liquidity.
11
<PAGE> 13
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Apria and one of its affiliates (collectively "Apria") have also filed suit
against the Company, the Resource Network and CIPA in the Superior Court of
Orange County, California (Apria Healthcare, Inc. and Apria Healthcare of New
York State, Inc. v. Coram Healthcare Corporation, Coram Resource Network, Inc.
and Coram Independent Practice Association, Inc., Case No. 813264) regarding
Apria's specific provider claims. Apria's complaint alleges, among other things,
that the Resource Network and CIPA operated as the alter ego of Coram and, as a
result, Coram should be declared responsible for the alleged breaches of the
contracts that the Resource Network and CIPA had with Apria. The complaint
includes requests for declaratory, compensatory and other relief in excess of
$1.4 million. A notice had been filed with the Court notifying it of the
involuntary bankruptcy proceeding filed against the Resource Network and the
matter has, by operation of certain provisions of the United States Bankruptcy
Code, been stayed with respect to the Resource Network. The filing of the
voluntary bankruptcy petition by CIPA will have a similar effect on the claims
against CIPA. Coram filed an answer raising applicable defenses. The Company
will pursue all available grounds for dismissal and defend itself vigorously in
the matter. Due to the uncertainties inherent in litigation, the ultimate
disposition of this matter cannot presently be determined and no provision has
been recorded in the Company's Consolidated Financial Statements for any loss
that may result upon resolution of the litigation with Apria.
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
financial position, results of operations or liquidity of the Company.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of these actions cannot presently be determined.
Contingencies. The Master Agreement between Coram and Aetna provides that
Coram would be financially responsible for certain covered home health services
rendered to covered enrollees in certain Aetna HMO based plans. The Master
Agreement also contemplates that the Company under certain circumstances, would
reimburse Aetna for services paid for directly by Aetna to providers of such
services. These amounts are referred to in the Master Agreement as "leakage."
Aetna withheld certain amounts from each capitation payment made to the Company
as a reserve for the reimbursement of leakage claims. During the term of the
Master Agreement, approximately $5.3 million was withheld by Aetna for payment
of leakage.
The Master Agreement required Aetna to provide the Company with monthly
reports showing its claims for leakage, but Aetna failed to do so. The most
recent report that Aetna did provide purported to show approximately $19.7
million in leakage claims incurred through approximately March 1999, with
potentially more leakage claims to follow. The Company's review of the initial
reports revealed that the reports were inaccurate in various respects. The
Company reported these inaccuracies to Aetna, but received no response. At this
time, the Company cannot determine whether it will be held responsible for the
leakage claims asserted by Aetna due to the uncertainties of litigation and
cannot estimate how much, if any, of the leakage claims are properly the
responsibility of the Company. These matters are among the issues in dispute in
the litigation described above.
5. INCOME TAXES
During the nine months ended September 30, 1999 and 1998, the Company
recorded an income tax expense of $0.4 million and $1.9 million, respectively.
The effective income tax rates for the nine month periods ended September 30,
1999 and 1998 differ substantially from the expected combined federal and state
income tax rates calculated using applicable statutory rates as a result of the
Company providing a full valuation reserve against its deferred tax assets.
As of September 30, 1999, deferred tax assets are net of a $149.9 million
valuation allowance. Realization of deferred tax assets is dependent upon the
ability of the Company to generate taxable income in the future. Deferred taxes
relate primarily to temporary differences consisting, in part, of accrued
restructuring costs, the
12
<PAGE> 14
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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 carryforwards that are
deductible against future taxable income.
In January 1999, the Internal Revenue Service ("IRS") completed the
examination of the federal income tax return of the Company for the year ended
September 30, 1995, and proposed substantial adjustments to the prior tax
liabilities of the Company. The Company has agreed to adjustments of $24.4
million that only affect the net operating loss carryforwards available. The
Company does not agree with the other proposed adjustments regarding the
deduction of warrants, write-off of goodwill and the specified liability portion
of the 1995 loss which would, if the IRS prevails, affect the prior years' tax
liabilities. On May 14, 1999, the Company received a statutory notice of
deficiency with respect to the proposed adjustments. The alleged deficiency
totaled approximately $12.7 million plus interest and penalties to be
determined. The Company is contesting the notice of deficiency through
administrative proceedings and litigation, and will vigorously defend its
position. The most significant adjustment proposed by the IRS relates to the
ability of the Company to categorize certain net operating losses as specified
liability losses and offset income in prior years, for which the Company has
previously received refunds in the amount of approximately $12.7 million. On
August 11, 1999, the Company filed a petition with the United States Tax Court
contesting the notice of defiency. On October 4, 1999, the IRS responded to the
petition and requested the petition be denied. Due to the uncertainty of final
resolution, the Company's financial statements include a reserve for these
potential liabilities. No assurance can be given that the Company will prevail
given the early phase of this matter and the uncertainties inherent in any
proceeding with the IRS or in litigation. If the Company does not prevail with
respect to the proposed material adjustments, the financial position and
liquidity of the Company could be materially adversely affected.
6. INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS
Management regularly evaluates the operating performance of the Company by
reviewing results on a product or service provided basis. The Company's
reportable segments are Infusion, R-Net and CPS. Infusion is the Company's base
business, which derives its revenue primarily from alternate site infusion
therapy. R-Net's revenue is derived primarily from management services offered
to HMOs, PPOs, at-risk physician groups and other managed care organizations for
home health services. CPS primarily provides specialty mail-order pharmacy and
pharmacy benefit management services. The other non-reportable segment
represents lithotripsy services for the three and nine months ended September
30, 1998 and clinical trials and informatics services for the three and nine
months ended September 30, 1999. See Note 4 to the Unaudited Condensed
Consolidated Financial Statements.
Coram uses earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") for purposes of performance measurement. The measurement
basis for segment assets includes net accounts receivable, inventory, net
property and equipment, and other current assets.
13
<PAGE> 15
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Summary information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INFUSION
Revenue from external customers............ $109,434 $100,751 $323,469 $284,275
Intersegment revenue....................... 4,260 4,960 19,665 12,275
Interest income............................ 15 19 60 51
Equity in net income of unconsolidated
joint ventures........................... 193 55 194 102
Segment EBITDA profit...................... 14,783 15,792 38,038 43,813
Segment assets............................. 146,693 122,305 146,693 122,305
Segment asset expenditures................. 835 1,194 3,291 3,487
R-NET
Revenue from external customers............ $ 10,293 $ 29,674 $ 70,125 $ 51,067
Intersegment revenue....................... -- -- -- --
Interest income............................ 9 3 25 10
Equity in net income of unconsolidated
joint ventures........................... -- -- -- --
Segment EBITDA loss........................ (3,613) 893 (28,111) (814)
Segment assets............................. 17,879 9,618 17,879 9,618
Segment asset expenditures................. 67 893 880 1,494
CPS
Revenue from external customers............ $ 22,644 $ 13,169 $ 62,310 $ 32,469
Intersegment revenue....................... 966 427 1,582 927
Interest income............................ -- -- -- --
Equity in net income of unconsolidated
joint ventures........................... -- -- -- --
Segment EBITDA profit...................... 502 723 1,908 1,561
Segment assets............................. 20,283 9,148 20,283 9,148
Segment asset expenditures................. 628 25 1,450 177
ALL OTHER
Revenue from external customers............ $ 861 $ 13 $ 1,079 $ 658
Intersegment revenue....................... -- -- -- --
Interest income............................ -- -- -- --
Equity in net income of unconsolidated
joint ventures........................... -- -- -- --
Segment EBITDA profit (loss)............... 124 1 (79) 294
Segment assets............................. 178 -- 178 --
Segment asset expenditures................. -- -- -- --
</TABLE>
14
<PAGE> 16
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's segment revenue, segment EBITDA profit
(loss), segment assets and other significant items to the corresponding amounts
in the Consolidated Financial Statements are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES
Total for reportable segments.............. $147,597 $148,981 $477,151 $381,013
Other revenue.............................. 861 13 1,079 658
Elimination of intersegment revenue........ (5,226) (5,387) (21,247) (13,202)
-------- -------- -------- --------
Total consolidated revenue....... $143,232 $143,607 $456,983 $368,469
======== ======== ======== ========
LOSS BEFORE INCOME TAXES AND MINORITY
INTERESTS
Total EBITDA profit for reportable
segments................................. $ 11,672 $ 17,408 $ 11,835 $ 44,560
Other EBITDA profit (loss)................. 124 1 (79) 294
Goodwill amortization expense.............. (2,711) (2,794) (8,159) (8,337)
Depreciation and other amortization
expense.................................. (2,763) (2,851) (8,515) (8,788)
Interest expense........................... (8,110) (6,114) (22,193) (26,372)
All other income (expense), net............ (13,078) (7,789) (24,877) (21,034)
-------- -------- -------- --------
Loss before income taxes and minority
interests........................... $(14,866) $ (2,139) $(51,988) $(19,677)
======== ======== ======== ========
ASSETS
Total assets for reportable segments....... $184,855 $141,071 $184,855 $141,071
Other assets............................... 251,821 293,628 251,821 293,628
-------- -------- -------- --------
Consolidated total assets............. $436,676 $434,699 $436,676 $434,699
======== ======== ======== ========
</TABLE>
For each of the years presented, the Company's primary operations and
assets were within the United States. The Company maintains an infusion
operation in Canada; however, the assets and revenue generated from this
business are not material to the Company's operations.
Net revenue from one customer for the Company's reportable segments
represented approximately 8% and 19%, respectively, of the Company's total
consolidated net revenue for the three months ended September 30, 1999 and 1998,
and 15% and 11%, respectively, for the nine months ended September 30, 1999 and
1998. Net revenue from the Medicare and Medicaid programs for the Company's
Infusion and CPS segments represented approximately 19% and 18%, respectively,
of the Company's total consolidated net revenue for the three months ended
September 30, 1999 and 1998, and 18% and 21%, respectively, for the nine months
ending September 30, 1999 and 1998.
7. SUBSEQUENT EVENTS
On October 29, 1999, the Company announced that Donald J. Amaral, the
Company's Chairman of the Board and former Chief Executive Officer, would return
as the Company's Chief Executive Officer on an interim basis as the Company
searches for a new Chief Executive Officer following the departure of Richard M.
Smith.
On November 12, 1999, two Company subsidiaries that comprised the R-Net
division filed voluntary bankruptcy petitions under Chapter 11 of the United
States Bankruptcy Code. See Note 4 to these Unaudited Condensed Consolidated
Financial Statements.
15
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) and information relating to Coram that are based on the beliefs of
the management of Coram as well as assumptions made by and information currently
available to the management of Coram. The Company's actual results may vary
materially from the forward-looking statements made in this report due to
important factors such as: history of operating losses and uncertainties
associated with future operating results; significant outstanding indebtedness;
equity conversion rights held by existing debt holders; limited liquidity;
reimbursement related risks; shifts in the mix of parties that pay for the
Company's services; dependence on relationships with third parties;
concentration of large payors; industry competition; timing of or ability to
complete acquisitions; government regulation of the home health care industry;
the outcome of certain litigation with Aetna and the IRS; dependence on key
personnel; recruitment and retention of trained personnel; potential volatility
of stock price; New York Stock Exchange listing status; and unanticipated
impacts from the Year 2000 Issue. See Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk Factors" in
the Company's Annual Report on Form 10-K, as amended, for the year ended
December 31, 1998. 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 based on currently available
information and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Coram does
not undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Background
General. The Company has been engaged in four principal lines of business:
alternate site (outside the hospital) infusion therapy and related services,
ancillary network management services, pharmacy benefit management and specialty
mail-order pharmacy services and centralized management, administrative and
clinical support for clinical research trials and medical informatics services.
Other services offered by Coram include non-intravenous home health products
such as durable medical equipment and respiratory therapy services.
Business Strategy. The Company's overall business strategy is focused on
the basic factors that could lead to profitability: strategic revenue generation
programs, cost reduction and control, quality improvement and cash collections.
The Company's revenue generation programs include a focus on business
relationships where the Company can provide high quality of care while operating
profitably. In the Company's alternate site infusion therapy business, the
Company is continuing to emphasize marketing efforts aimed at improving its
therapy mix, physician relationships and payor relationships. It also has
continued the development of its specialty programs aimed at serving patients
requiring intravenous nutrition; pre- and post-transplant patients; patients
with HIV/AIDS; and patients with chronic disorders such as hemophilia, immune
deficiencies and alpha-one antitrypsin deficiency. To that end, the Company has
established the Coram Hemophilia Services division to provide focus on
developing a service model geared toward meeting the needs of persons with
hemophilia through a specialized distribution center staffed with experienced
clinicians to serve the division's customers. The Company is developing similar
focus programs for its nutrition and transplant services. Meanwhile, the CPS
division has focused its marketing efforts on smaller health plans, including
companies with self-insured plans, self-funded employer health plans, labor
unions, managed care payors and patient populations with specialized needs such
as pre- and post-transplant patients, patients with HIV/AIDS and chronic
conditions such as diabetes and asthma. The Company is pursuing a plan to expand
the reach of the CPS division by developing the capability to accept orders for
its specialty mail-order pharmacy services over the internet. The site is now
accessable at www.corampharmacy.com and CPS anticipates generating revenues over
the internet beginning in 2000. The Clinical Trials and Informatics division is
directing its marketing efforts toward pharmaceutical and medical device
manufacturers that can benefit from the centralized
16
<PAGE> 18
management, data collection and integration services offered by the Company that
can provide these manufacturers with the opportunity to complete some of the
most challenging aspects of their clinical trials more quickly.
The Company has implemented cost reduction and control programs focused on
the reduction and control of cost of services and operating expenses, assessment
of poorly performing branches and review of branch efficiencies. Delivery of
quality service in the Company's infusion therapy division in particular is
being closely monitored through an internal task force, more rigorous reporting
and independent patient satisfaction surveys. Furthermore, management throughout
the Company is continuing to concentrate on reimbursement by emphasizing
improved billing and cash collections methods and continued assessment of
systems support and support for reimbursement.
Following the filing of voluntary bankruptcy petitions by its Coram
Resource Network, Inc. ("Resource Network") and Coram Independent Practice
Association, Inc. ("CIPA") (collectively, "R-Net") subsidiaries, the Company
anticipates that R-Net will cease offering ancillary network management
services, and the services performed by R-Net will be transitioned back to the
payor customers of R-Net.
The Company has engaged Deutsche Bank Alex. Brown to assess strategic
alternatives for CPS, including the possible sale of CPS to a third party. If
consummated, a sale of CPS could assist the Company in paying down its debt and
improving its financial position.
Strategic alternatives currently being considered by the Company in
addition to the CPS strategic analysis and the Coram Hemophilia Services
division include the continued investment into and development of services
provided by the Clinical Trials and Informatics division. There can be no
assurance that any growth in its local or regional business or other strategic
alternatives will be effected or will be available to the Company on
commercially acceptable terms and there can be no assurance that any investment
capital will be available to the Company.
Factors Affecting Recent Operating Results
Dispute with Aetna U.S. Healthcare, Inc. On June 30, 1999, the Company
notified Aetna that effective immediately Coram had terminated the Master
Agreement. The Company is now in litigation with Aetna, and the case is
presently scheduled for trial in April 2000. See Note 4 to the Unaudited
Condensed Consolidated Financial Statements.
The Company's performance under the Master Agreement during the nine month
period ended September 30, 1999, resulted in losses under the agreement of
approximately $(24.0) million, including costs of services paid and accrued of
approximately $55.4 million. During the three month period ended September 30,
1999, the Company recorded no losses or costs of service related to performance
under the Master Agreement. These figures do not take into account the various
claims of Aetna including its leakage claims. Also, due to the uncertainties of
litigation in calculating these losses Coram did not include as part of the
recognized revenue the amounts previously retained by Aetna for alleged leakage
claims and included only the actual capitation payments received as revenue. As
alleged in the lawsuit, the Company believes that termination of the Master
Agreement was proper based upon non-payments by Aetna and was a necessary step
toward terminating a fraudulently induced contract that was financially
burdensome on the Company. The Company took a charge in its third quarter
financial statements for costs associated with terminating the Master Agreement
in the amount of $5.1 million. See Note 4 to the Unaudited Condensed
Consolidated Financial Statements.
For the three month period ended September 30, 1999, the Company had no
revenue related to performance of the Master Agreement and for the nine month
period ended September 30, 1999 this revenue represented approximately 8% of the
Company's total revenue. Apart from the Master Agreement, Coram's infusion
therapy branches have historically served Aetna enrollees under various
agreements, including a national ancillary services agreement executed in April
1998 for home infusion services furnished to Aetna enrollees not covered by the
Master Agreement. The aggregate revenue of the Company related to all of its
relationships with Aetna for the three and nine months ended September 30, 1999
was approximately 8% and
17
<PAGE> 19
15%, respectively. The Company received notice from Aetna that it terminated the
April 1998 national agreement for infusion services effective April 12, 2000.
The CPS division received notice from Aetna that Aetna did not intend to renew
its agreement with CPS that was scheduled to expire in accordance with its terms
on September 30, 1999.
The termination of the Master Agreement and related dispute with Aetna may
have other negative effects on the Company's Resource Network division and in
the Company's infusion business if, for example, Aetna refuses to pay claims for
the services rendered by Coram to Aetna enrollees that are serviced outside the
Master Agreement or if Aetna causes its newly acquired Prudential affiliates to
cease doing business with Coram. The Company cannot predict the ultimate impact
the dispute with Aetna may have, but if the Company does not prevail in its
dispute with Aetna, the Company could incur additional substantial losses.
Further, the Company anticipates that it will continue to incur significant
legal fees associated with pursuing the litigation related to the dispute with
Aetna.
Other Factors Affecting Recent Operating Results. Other significant factors
currently affecting the Company's operating performance and financial condition
are as follows:
(i) restructure of its credit facilities through the repayment of its
former senior credit facility in January 1998, the exchange of its former
subordinated debt for the issuance of the Series A Notes and the Series B
Notes in June 1998, the establishment of the New Senior Credit Facility in
August 1998 and the setting of the conversion price applicable to the
Series B Notes contemplated by the April 1999 amendment to the Securities
Exchange Agreement offset by the increased interest rate applicable to the
Series A Notes also included in such April 1999 amendment;
(ii) expansion and improved sales efforts in the Company's CPS
division;
(iii) ongoing pricing pressure in the Company's infusion business as a
result of an unfavorable shift in payor mix from private indemnity insurers
to managed care organizations and other contracted payors, and intense
competition among infusion providers. The following table sets forth the
approximate percentages of the Company's infusion therapy net revenue from
certain categories of payors:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
----------------
1999 1998
---- ----
<S> <C> <C>
Private Indemnity Insurance and Other Non-Contracted
Payors..................................................... 21% 23%
Managed Care Organizations and Other Contracted Payors..... 57% 54%
Medicare and Medicaid Programs............................. 22% 23%
--- ---
Total............................................ 100% 100%
=== ===
</TABLE>
(iv) increased competition from hospitals and physicians that 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 that 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 health care services, including the
services offered by the Company; and
(v) increased clinical staffing, delivery, on-call, and other volume
related costs, as well as, increased costs of certain blood and blood
derivative products that are in short supply that have been required by the
increasing numbers of patients served by the Company's infusion division
and the increasing numbers of patients receiving the therapies that require
the products that are in short supply.
On October 26, 1999, the Company received notice that Bayer Corporation,
the manufacturer of Prolastin(R), a drug furnished by the Company to persons
with a chronic condition called alpha-1 antitrypsin defiency, would cease
selling this drug to all traditional suppliers of this drug, including the
Company. Bayer informed the Company and end users of the product that the
product would only be available through an exclusive distribution source
sponsored by Bayer. During the three and nine months ended September 30,
18
<PAGE> 20
1999, revenues from sales of Prolastin(R) and related services were $2.1 million
and $6.6 million, respectively. Because Bayer is the only source for
Prolastin(R), the Company has been forced to make arrangements with its patients
to transition their service to Bayer once the Company's supply of Prolastin(R)
has been depleted. The Company has learned that Bayer may implement similar
distribution programs for other drugs it manufactures, including Gamimune(R).
Results of Operations
Three Months Ended September 30, 1999 Compared With Three Months Ended
September 30, 1998 (unaudited)
Net Revenue. Net revenue decreased $0.4 million or (0.3%), to $143.2
million in the quarter ended September 30, 1999 from $143.6 million in the
quarter ended September 30, 1998. The decrease is primarily due to a (i) $14.0
million decrease in net revenue from the R-Net division primarily relating to
the termination of the Aetna Master Agreement, and (ii) $12.7 million increase
in net revenue from the infusion business and CPS division due to an overall
increase in patients served, generated by internal sales growth. See "Factors
Affecting Recent Operating Results."
Gross Profit. Gross profit decreased $2.3 million, to $32.9 million or a
gross margin of 23.0% in the quarter ended September 30, 1999 from $35.2 million
or a gross margin of 24.5% in the quarter ended September 30, 1998. See "Factors
Affecting Recent Operating Results."
Selling, General and Administrative Expenses. SG&A increased $3.3 million
or 13.2% to $28.3 million in the quarter ended September 30, 1999 from $25.0
million in the quarter ended September 30, 1998. The increase is due primarily
to the growth of the CPS division as well as legal fees incurred in conjunction
with the dispute with Aetna. See "Factors Affecting Recent Operating Results."
Interest Expense. Interest expense increased by $2.0 million to $8.1
million in the three months ended September 30, 1999 from $6.1 million during
the three months ended September 30, 1998. The increase is attributable to the
addition of draws of $22.5 million on the Senior Credit Facility, a $8.3 million
increase in the principal amount outstanding under the Series A Senior
Subordinated Unsecured Notes, a $1.8 million increase in the principal amount
outstanding under the Series B Senior Subordinated Unsecured Notes, and a rate
change on the Series A Notes from 9.875% to 11.5% beginning on April 9, 1999.
The Company anticipates that interest due related to the Series A and
Series B notes will be reduced by as much as $13 million over the six month
period beginning November 15, 1999 as a result of the preliminary understanding
the Company has reached with the Holders of such notes. See Note 3 to the
Unaudited Condensed Consolidated Financial Statements.
Operating Income (Loss). The Company had an operating loss of ($7.3)
million during the three months ended September 30, 1999 compared to operating
income of $3.6 million during the three months ended September 30, 1998. The
decline is due primarily to the decrease in gross profit of $2.4 million and the
increase in SG&A of $3.3 million, as described above.
Restructuring Costs. The Company recorded cost of a restructuring plan
during the third quarter in the amount of $5.1 million associated with the
reorganization of the R-Net division's Whippany, New Jersey call center
operations.
Net Loss. Net loss for the quarter ended September 30, 1999 was ($15.2)
million compared to ($2.8) million for the quarter ended September 30, 1998. As
discussed above, the decline can be attributed to the decrease in operating
income and the increase in interest expense. See "Factors Affecting Recent
Operating Results."
Nine Months Ended September 30, 1999 Compared With Nine Months Ended
September 30, 1998 (unaudited)
Net Revenue. Net revenue increased $88.5 million or 24.0%, to $457.0
million in the nine months ended September 30, 1999 from $368.5 million in the
nine months ended September 30, 1998. The increase is
19
<PAGE> 21
primarily due to a (i) $26.9 million increase in net revenue from the infusion
business primarily due to a 5.5% increase in patient census and partially offset
by an unfavorable shift in payor mix; (ii) $32.2 million increase in net revenue
from the R-Net division primarily relating to the termination of the Aetna
Master Agreement that was subsequently terminated effective June 30, 1999; and
(iii) $28.9 million increase in net revenue from the CPS division resulting from
an increased number of patients served, generated by internal sales growth. See
"Factors Affecting Recent Operating Results."
Gross Profit. Gross profit decreased $16.1 million to $77.0 million or a
gross margin of 16.9% in the nine months ended September 30, 1999 from $93.1
million or a gross margin of 25.3% in the nine months ended September 30, 1998.
The decrease results primarily from the increase in net revenue, discussed
above, in the Infusion and CPS divisions, offset by an increase in cost of
service associated with the Aetna Master Agreement, variable costs that
fluctuate with the number of patients served and higher costs of drugs and
supplies caused by current market shortages of certain blood products. See
"Factors Affecting Recent Operating Results."
Selling, General and Administrative Expenses. SG&A increased $11.8 million
or 17.1%, to $80.8 million in the nine months ended September 30, 1999 from
$69.0 million in the nine months ended September 30, 1998. The increase is due
primarily to the growth of the infusion business, R-Net division, and the CPS
division as well as legal fees incurred in conjunction with the Aetna dispute.
Expenses increased primarily from business growth for salary and benefits along
with costs associated with additional personnel such as additional rent for
office space, telephone, and legal fees incurred in conjunction with the dispute
with Aetna. See "Factors Affecting Recent Operating Results."
Operating Income (Loss). The Company had an operating loss of ($30.8)
million during the nine months ended September 30, 1999 compared to operating
income of $4.6 million during the nine months ended September 30, 1998. The
decrease in operating income is due primarily to the decline in gross profit of
$16.1 million, coupled with an increase of $11.8 million in SG&A for the quarter
ended September 30, 1999.
Restructuring Costs. The Company recorded approximately $0.9 million of
charges in March 1999 relating to reorganization of the Company's management
structure completed during the first quarter of 1999. During the third quarter
of 1999, the Company recorded costs of a restructuring plan in the amount of
$5.1 million associated with the reorganization of the R-Net division's
Whippany, New Jersey call center operations.
Interest Expense. Interest expense decreased by $4.2 million to $22.2
million in the nine months ended September 30, 1999 from $26.4 million during
the nine months ended September 30, 1998. The decrease is due primarily to a
decrease of $10.3 million in interest related to the Rollover Note which was
cancelled in connection with the Securities Exchange Agreement and a decrease of
$3.2 million in interest relating to the Warrants issued under the Rollover
Note, offset by interest related to the Securities Exchange Agreement of $7.1
million. See Note 3 to the Unaudited Condensed Consolidated Financial
Statements.
The Company anticipates that interest due related to the Series A and
Series B notes will be reduced by as much as $13 million over the six month
period beginning November 15, 1999 as a result of the preliminary understanding
the Company has reached with the Holders of such notes. See Note 3 to the
Unaudited Condensed Consolidated Financial Statements.
Net Loss. During the nine months ended September 30, 1999, the Company
recognized a net loss of ($53.5) million compared to a net loss of ($22.5)
million during the nine months ended September 30, 1998. As discussed above, the
decline can be attributed to the decrease in operating income (loss), partially
offset by a decrease in interest expense. See "Factors Affecting Recent
Operating Results."
Liquidity and Capital Resources
The Company uses cash generated from operations and available credit under
the New Senior Credit Facility to fund its working capital requirements and
operations. The Company's working capital as of September 30, 1999 was $70.1
million compared to $64.6 million at December 31, 1998, an increase of $5.5
million. During the nine months ended September 30, 1999, the primary increases
in current assets
20
<PAGE> 22
related to (i) an increase in cash and cash equivalents of $8.4 million; (ii) an
increase in net accounts receivable of $12.5 million, primarily due to an
approximate eight day increase in days sales outstanding (DSO) and additional
sales volume at the CPS division; and (iii) a decrease in inventory of $8.4
million. The increase in cash and cash equivalents was primarily due to
borrowings, net of repayments, on the New Senior Credit Facility. Property and
equipment purchases consisted of $2.8 million for computer systems and software,
$1.8 million for furniture, equipment, and improvements, and the purchase of
durable medical equipment for $2.1 million. Total current liabilities increased
in the nine months ended September 30, 1999 primarily due to an increase in
accounts payable of $2.7 million and an increase in accrued merger and
restructuring costs of $2.7 million.
As of September 30, 1999, the Company did not have any material commitments
for capital expenditures.
Under the terms of the New Senior Credit Facility, the maximum funds
available to the Company (defined as the "Revolving Credit Commitment") is an
amount equal to the lesser of (a) the Company's borrowing base as calculated
pursuant to the agreement or (b) the total revolving credit commitment of $60.0
million. As of September 30, 1999, the Company's Revolving Credit Commitment was
$59.3 million. Offset by letter of credit obligations of $2.5 million and
revolver borrowings of $37.0 million, the total available credit under the New
Senior Credit Facility was $19.8 million as of September 30, 1999. As of October
15, 1999, the Company's Revolving Credit Commitment was $60.0 million. Of that
amount, $37.0 million had been drawn against the New Senior Credit Facility,
which includes $14.5 million relating to the letters of credit that had been
delivered in accordance with the Aetna Master Agreement. In addition, after
deducting the other letters of credit obligations totaling $2.5 million, the
total available under the facility is $20.5 million as of October 15, 1999. As
of September 30, 1999, the Company was not in compliance with certain financial
and other covenants set forth in its principal debt agreements. The Company has
received waivers with regard to such non-compliance. In addition, the Company
has reached an understanding with its lenders pursuant to which they have waived
non-compliance with certain covenants under the New Senior Credit Facility for
the period ending December 31, 1999. The understanding also includes provisions
whereby: (a) no interest would be due on the Series A and Series B Notes for the
period from November 15, 1999 though the earlier of (i) final resolution of the
litigation with Aetna or (ii) May 15, 2000; and (b) certain proceeds from the
sale of any Company asset outside of the ordinary course of business would be
applied to a partial redemption of the Series A and the Series B notes at par in
such amounts as the Holders of the Series A and Series B Notes designate,
provided that such application of the proceeds derived from such sale is waived
by the lenders under the New Senior Credit Facility. The precise terms of such
understanding have not been finalized and there can be no assurance that such
understanding will be finalized under such terms. There can be no assurance as
to whether further covenant violations or defaults will occur in future periods
and whether any necessary waivers will be forthcoming at that time. See Note 3
to the Unaudited Condensed Consolidated Financial Statements.
The Company has experienced pressure on liquidity due to the higher than
expected costs of service as described above with respect to the Master
Agreement and Aetna's draws on letters of credit that increased outstanding debt
by $14.5 million. Although the Company has sought to record a good faith
estimate of all service costs related to the Master Agreement, due to the
uncertainties of litigation, there can be no assurance that the exact amount and
nature of all such costs can be presently identified. The Company is continuing
to assess the impact of the Master Agreement. The Company is also reviewing its
business plan and formulating revised plans for operations and cash flow without
the Master Agreement. The Company is considering strategic alternatives to
provide any needed liquidity including a possible transaction with its CPS
division. There can be no assurance that the Company will be able to obtain any
needed liquidity on commercially acceptable terms.
The Company believes the most significant risk with the Year 2000 problem
is the effect such issues may have on third party payors, such as Medicare.
While all of the effects of such noncompliance have not been identified by the
Company, any failure of these third party payors to resolve Year 2000 problems
in a timely manner could impact the Company's capital availability due to a slow
down in the payment of accounts receivable associated with these payors. While
the Company has not incurred any payment issues to date which management can
directly attribute to the Year 2000 problem in connection with any specific
payor, no
21
<PAGE> 23
assurance can be made that payment issues will not occur. Such an impact could
have a material adverse effect on the Company's ability to generate cash from
operations and require the Company to use available capital from the New Senior
Credit Facility. Significant delays in collecting accounts receivable due to
Year 2000 problems experienced by third party payors could reduce the capital
available to the Company by reducing the borrowing base under the terms of the
New Senior Credit Facility. In addition, such payment delays due to the Year
2000 problem could impact the Company's ability to meet its debt obligations.
Of the $6.7 million of remaining accrued restructure costs, the Company
estimates that the future cash expenditures will be made in the following
periods: 36% through September 30, 2000, 17% through September 30, 2001, 17%
through September 30, 2002, and 30% through September 30, 2003, and thereafter.
Although subject to future adjustment and the Company's ability to successfully
implement its business strategy, the Company believes it has adequate reserves
and liquidity as of September 30, 1999 to meet future expenditures related to
the plans. However, there is no assurance that the reserves will be adequate or
that the Company will generate sufficient working capital to meet future
expenditures.
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.
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 material disruption to its
business. The Company has completed the majority of activity related to the
modification, upgrade or replacement of all major systems that have been
identified as adversely affected by Year 2000. To date, all work has been
completed, fully tested and systems for asset tracking, general accounting,
payroll, branch operations including admissions, pharmacy management, billing,
collections and inventory are fully operational and in compliance. Systems for
the R-Net division are compliant for billing and collections. Systems that
support the CPS division for both the pharmacy benefit management and mail order
pharmacy systems have been completed. Systems that support the Home Medical
Equipment locations have been upgraded and are also in operation. Current plans
call for the Company to complete final systems remediation by September 30,
1999. These areas of remediation include the upgrade of the Resource Network
claims adjudication system, final deployment of our inventory management system,
minor turnkey software upgrades to our data communications hardware and upgrade
or replacement of personal computer equipment that does not support Year 2000
calculations.
Suppliers. At the end of 1998, the Company formally communicated with its
major suppliers to identify any potential adverse situations. During the first
six months of 1999, the Company reviewed these responses and worked 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 believes it
has resolved all significant Year 2000 Problems with these suppliers, there can
be no assurance that these suppliers will resolve any or all Year 2000 Problems
with 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
operations.
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 are having difficulty becoming Year 2000
compliant before the Year 2000. The Company has not yet undertaken
quantification of the effects of such noncompliance or to determine whether such
quantification is even possible. The Company has communicated
22
<PAGE> 24
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 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 operations.
Remediation Costs. The Company is using internal and external resources to
reprogram or replace, test and implement the software and equipment
modifications required under this project. The total cost of the Year 2000
remediation project is estimated at $0.8 million and is being funded through
operating cash flows. As of the nine months ended September 30, 1999, the
Company had incurred approximately $0.6 million related to this remediation
process. Of these costs, $0.5 million has been expensed and $0.2 million was
capitalized as new equipment or software. All of the remaining estimated
remediation costs of $0.1 million relate to equipment and software. This
estimate is being monitored and will be revised in future public filings by the
Company as additional information becomes available.
Contingency Plans. The Company's focus in the area of contingency plans is
primarily on the development of plans to ensure the continuation of patient care
in the event of system failures related to Year 2000 that are beyond our
control. The types of contingencies for which plans are being developed include:
local telephone system failures, local power grid failures and
inadequacy/unavailability of medical supplies. In addition, although the Company
believes that remediation of its internal systems was substantially complete as
of September 30, 1999, contingency plans have also been developed to ensure
appropriate personnel are immediately available to address any situation in the
event of an unanticipated failure.
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 Problems related failures will occur or
the severity, duration or financial consequences of any inevitable failures. The
information set forth herein is designed as a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act of 1998.
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. Various forms of payment control are under consideration, including
competitive bidding by market, expanded fraud and abuse legislation and further
reductions in Medicare and Medicaid reimbursement. On August 5, 1997, President
Clinton signed into law the Balanced Budget Act of 1997 (the "1997 Budget Act"),
which provides for reductions in Medicare and Medicaid spending of more than
$115 billion and $13 billion, respectively, over five years. Congress is
presently considering legislation that would provide limited financial relief
to, among others, certain hospital, home health and skilled nursing facility
providers and home medical equipment suppliers that experienced payment
reductions under the 1997 Budget Act. In particular, one proposal would provide
direct relief for entities such as the Company through an update in the durable
medical equipment ("DME") fee schedule applicable to suppliers under Part B of
the Medicare program.
The Health Care Financing Administration ("HCFA") recently proposed a rule
that would change reimbursement rates for parenteral and enteral nutrients,
equipment and supplies ("PEN"). The preamble to the proposed rule states that it
is intended to be budget neutral in its first year of application, but would set
reimbursement rates at the lower of the applicable rates paid in 1995 or 1998
(adjusted for inflation). The PEN therapies represent the primary therapies for
which the infusion therapy division receives reimbursement from the Medicare
program.
HCFA also has proposed exercising its expanded authority under the 1997
Budget Act to adjust Medicare fee schedule amounts that the agency deems to be
not "inherently reasonable." Under this
23
<PAGE> 25
authority, HCFA or its contractors may impose payment reductions of up to 15% by
providing limited notice; reductions in excess of 15% can be made if notice and
comment is provided in the Federal Register and HCFA meets certain other
criteria. In an August 1999 notice, HCFA proposed inherent reasonableness
payment reductions ranging from 22% to 57% for six items of DME, orthotics,
prosthetics, and supplies. Congress currently is considering proposals that
would restrict or postpone HCFA's use of this inherent reasonableness authority.
In addition, the 1997 Budget Act authorized HCFA to conduct up to five
competitive bidding demonstration projects. The first competitive bidding
project is underway in Polk County, Florida, using payment rates that are
between 13% and 31% lower than Medicare's existing fee schedule for five
categories of medical equipment and supplies (including enteral nutrition
products and supplies). A second competitive bidding project, also covering DME,
is now being planned.
The impact of any payment reductions on the Company cannot be determined at
this time. Moreover, the Company cannot predict whether any pending proposals
will be adopted. No assurance can be given that the implementation of the 1997
Budget Act or any other legislative or regulatory initiatives will not have a
material adverse effect on the business of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses the Company's exposure to market risk related to
changes in interest rates. This discussion contains forward-looking statements
that are subject to risks and uncertainties. Actual results could vary
materially as a result of a number of factors, including but not limited to,
changes in interest rates, and those set forth under Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations:
Background -- Factors Affecting Recent Operating Results."
As of September 30, 1999, the Company had outstanding debt of $289.7
million of which $162.2 million matures in May 2001 bears interest at 11.5% per
annum and $89.7 million matures in April 2008 and bears interest at the rate of
8.0% per annum. On October 15, 1999, Series A and Series B Notes totaling
approximately $4.7 million and $1.8 million, respectively were issued in lieu of
a cash payment of interest due through such date. The Company also has a New
Senior Credit Facility providing for the availability of up to $60.0 million for
acquisitions, working capital, letters of credit and other corporate purposes.
The New Senior Credit Facility matures in February 2001 and bears an interest
rate of prime plus 1.5%, which was 9.75% as of October 15, 1999. As of November
15, 1999, the principal amount outstanding under the New Senior Credit Facility
was approximately $37.0 million. Because substantially all of the interest on
the Company's debt is fixed, a hypothetical 10.0% decrease in interest rates
would not have a material impact on the Company. Increases in interest rates
could, however, increase interest expenses associated with future borrowings by
the Company, if any. The Company does not hedge against interest rate changes.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Descriptions of the material legal proceedings to which the Company is a
party are set forth in Note 4 to the Company's Unaudited Condensed Consolidated
Financial Statements.
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
financial position, results of operations or liquidity of the Company.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of these actions cannot presently be determined.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
Not applicable.
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<PAGE> 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
A discussion of certain matters of potential defaults and non-compliance
with certain covenants contained in the Company's principal debt agreements and
the waivers received relating to such matters is set forth in Note 3 to the
Company's Unaudited Condensed Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on August 5, 1999 to
consider and vote upon:
(1) Election of directors to serve until the 2000 Annual Meeting of
Stockholders and until their successors are duly elected and qualified;
(2) Approval of an amendment to the Company's Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares of
the Company's $.001 par value common stock (the "Common Stock") from
100,000,000 to 150,000,000;
(3) Approval of certain options to purchase shares of the Company's
Common Stock granted to four directors of the Company: Richard A. Fink,
William J. Casey, Stephen G. Pagliuca and L. Peter Smith, on September 9,
1998; and
(4) Ratification of the appointment of Ernst & Young LLP as
independent auditors of the Company of the Company's 1999 fiscal year.
All proposals were approved. The results of the voting are as follows:
<TABLE>
<CAPTION>
TOTAL VOTE TOTAL VOTE
FOR WITHHELD FROM
EACH DIRECTOR EACH DIRECTOR
------------- -------------
<S> <C> <C> <C>
(1) For election as director:
Donald J. Amaral...................................... 39,952,129 1,638,010
William J. Casey...................................... 40,057,928 1,532,211
Stephen A. Feinberg................................... 39,560,382 2,029,757
Richard A. Fink....................................... 40,036,126 1,554,013
Richard M. Smith...................................... 40,039,936 1,550,203
L. Peter Smith........................................ 40,046,634 1,543,505
</TABLE>
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
---------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
(2) Approval of the amendment of the
Company's Restated Certificate of
Incorporation......................... 38,355,670 2,966,475 248,111 19,833
(3) Approval of certain options to
purchase Shares of the Company's
Common Stock.......................... 37,677,435 3,680,313 232,391
(4) Ratification of the appointment of
Ernst & Young LLP..................... 40,640,610 418,363 531,166
</TABLE>
ITEM 5. OTHER INFORMATION
On October 29, 1999, the Company announced that its Chairman of the Board,
Donald J. Amaral would serve as the Company's Chief Executive Officer on an
interim basis following the departure of Richard M. Smith as the Company's Chief
Executive Officer and President. Mr. Smith subsequently resigned his position on
the Board of Directors of the Company and all other offices and directorships
with the Company's subsidiaries.
The Company received a letter from the New York Stock Exchange, Inc. (the
"NYSE") dated October 20,1999, informing the Company that it was "below
criteria" for the new NYSE minimum share price continued listing standard. The
minimum share price of the Company's stock had traded below
25
<PAGE> 27
$1.00 over a 30 trading-day period. The Company has six months from October 20,
1999 to raise the stock price above the $1.00 level both in terms of absolute
value and the 30 trading day average. Failure to restore the stock price within
this period would result in immediate suspension of trading and application to
the Securities and Exchange Commission ("SEC") for delisting. The NYSE's letter
further included an "early warning" regarding the new NYSE continued listing
requirement to maintain not less than $50 million each in stockholder's equity
and market capitalization. As of the filing of the Company's September 30, 1999
Form 10-Q, the Company will not comply with this continued listing requirement
and anticipates receiving another notice from the Exchange. Upon receipt of this
notice, the Company must respond within 45 days with a business plan that
demonstrates compliance with these continued listing standards no later than
within 18 months of receipt of that notice. A Committee of the Exchange will
review the plan and will either accept the plan, at which time the Company will
be subject to quarterly monitoring for compliance with this business plan, or
will not accept the business plan and the Company will be subject to trading
suspension and delisting by the SEC. Additionally, the Company is required to
issue a press release regarding the receipt of this second letter within 45 days
of receipt. Accordingly, the Company has considered certain aspects of a plan it
would submit including the possible sale of its CPS division, to the NYSE and
has investigated other trading alternatives for Company common stock to allow
for the continued trading of its common stock if it is no longer eligible for
trading on the NYSE.
While no assurances can be given, the Company believes that successful
results from strategic alternatives described in this document would allow the
Company to maintain its listing with the NYSE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 -- Letter Amendment to Prime Vendor Agreement with Cardinal
Health, Inc. dated October 14, 1999.
10.2 -- Agreement between the Company and Richard M. Smith, dated
November 11, 1999.
10.3 -- Amendment No. 2 to Employment Agreement between the
Company and Donald J. Amaral, dated as of April 23, 1999.
10.4 -- Employment Agreement, between the Company and Richard M.
Smith, dated as of April 26, 1999.
10.5 -- Employment Agreement, between the Company and Wendy L.
Simpson, dated as of April 26, 1999.
10.6 -- Employment Agreement, between the Company and Joseph D.
Smith, dated as of April 26, 1999.
10.7 -- Form of Indemnification Agreement for Directors and
certain Officers
27 -- Financial Data Schedule
</TABLE>
(B) Reports on Form 8-K.
On August 23, 1999, the Company filed a report on Form 8-K relating to the
filing of an involuntary bankruptcy petition under Chapter 11 of the Bankruptcy
Code against Coram Resource Network, Inc., a subsidiary of the Company.
26
<PAGE> 28
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 15, 1999
27
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 -- Letter Amendment to Prime Vendor Agreement with Cardinal
Health, Inc. dated October 14, 1999.
10.2 -- Agreement between the Company and Richard M. Smith, dated
November 11, 1999.
10.3 -- Amendment No. 2 to Employment Agreement between the
Company and Donald J. Amaral, dated as of April 23, 1999.
10.4 -- Employment Agreement, between the Company and Richard M.
Smith, dated as of April 26, 1999.
10.5 -- Employment Agreement, between the Company and Wendy L.
Simpson, dated as of April 26, 1999.
10.6 -- Employment Agreement, between the Company and Joseph D.
Smith, dated as of April 26, 1999.
10.7 -- Form of Indemnification Agreement for Directors and
certain Officers
27 -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
October 14, 1999
VIA FACSIMILE WITH
HARD COPY TO FOLLOW
VIA OVERNIGHT DELIVERY
(303) 672-8799 AND (303) 672-8889
Wendy Simpson, Chief Financial Officer
Coram Healthcare Corporation
1125 Seventeenth Street, Suite 2100
Denver, Colorado 80202
Dear Ms. Simpson:
In reliance on Coram's agreement to place an additional $2,000,000 on deposit
with Cardinal on Friday, Cardinal decided to deliver Coram's orders from
yesterday, and continue to accept orders from Coram today. Per my voice mail
message to you yesterday, in order for Cardinal to continue to accept orders
from Coram on and after Friday, October 15, Cardinal will require the following
change in terms:
1. Additional Deposit. No later than 2:00 p.m. Friday, October 15, Cardinal must
receive a wire transfer of $2,000,000 to increase Coram's current pay prepay
deposit of $3,500,000 to $5,500,000 (the "Additional Deposit").
2. Credit Limits. In order to maintain Coram's accounts receivable balance at
$5,500,000 on any one day after Cardinal receives the Additional Deposit,
Cardinal will refuse to accept orders for additional merchandise unless and
until good funds are received to increase the prepay deposit to meet the amount
of the additional orders. Cardinal will call Coram by 10:00 a.m. and give Coram
until the close of business on the same day to increase the prepay deposit by
EFT to meet the amount of the additional orders.
3. New Payment Terms. As long as Cardinal receives the Additional Deposit
tomorrow, then on and after October 16, Coram's payment terms will be weekly,
such that purchases made Monday through Friday will be due by EFT the following
Friday. Cardinal will use its best efforts to cause Coram to receive Cardinal's
ATB file in the same format as currently received (or summarized in an Excel
file format which will include the following categories: division, customer #,
invoice #, invoice due date or date, amount of invoice, store #, and any other
information reasonably requested by Coram) no later than the Tuesday prior to
the Friday payment date.
<PAGE> 2
o Page 2 October 14, 1999
4. Payment Terms Transition. Payment for purchases from October 1 through
October 15 will be due October 25. Payment for purchases from October 16 through
October 22 will be due October 29. Payment for purchases from October 23 through
October 29 will be due November 5, and continue thereafter in accordance with
the new payment terms.
5. Reduction in Cost of Goods. As long as Cardinal receives the Additional
Deposit tomorrow, then on and after October 16, Coram's cost of goods will be
reduced by an additional 0.25%.
If we do not receive the additional deposit of $2,000,000 by wire transfer
tomorrow and payment on a going forward basis strictly in accordance with the
new terms and conditions of this letter and in accordance with the terms of the
original agreement, we will refuse additional orders, stop shipment on any
undelivered orders, and the cost of goods will not be reduced. In addition, we
continue to reserve all rights as set forth in our current agreement, including
without limitation the right to place Coram on C.O.D. status, refuse orders,
modify payment terms, cease our supply relationship, terminate the agreement,
and take any other action available to Cardinal in law or equity based on credit
considerations deemed relevant to Cardinal.
Except as modified by this letter, the terms and conditions of that certain
Prime Vendor Agreement dated October 1, 1998, will remain in full force and
effect.
So that we may inform our divisions before end of business today to ship
merchandise ordered today, please evidence your agreement to the terms of this
letter by executing as an authorized officer where noted below, and faxing this
signed letter to John Grimm at 812-246-8809 no later that 6:00 p.m. today.
Sincerely,
Michael B. Yeager
Director, National Account Customer Finance
cc: Bob Roose
John Grimm
Acknowledged and Accepted this 14th day of October, 1999.
CORAM HEALTHCARE CORPORATION
By:
-----------------------------------
Title:
--------------------------------
<PAGE> 1
EXHIBIT 10.2
AGREEMENT
Richard M. Smith ("Smith") and Coram Healthcare Corporation and Coram,
Inc. (collectively "Coram"), desiring to provide for their future cooperation in
light of Mr. Smith's resignation as an employee and officer of Coram and member
of their Boards of Directors, do agree as follows:
1. Except for obligations expressly created by this Agreement, the
parties hereto release and discharge one another from all obligations, claims or
liabilities of any kind whatsoever, known or unknown, based upon or arising out
of any act, event, agreement, transaction or occurrence which occurred or was
entered into prior to the date hereof.
2. The Employment Agreement dated April 26, 1999 between Smith and
Coram ("Employment Agreement") shall govern Smith's rights and obligations as a
former employee of Coram, except that: (a) for purposes of that Agreement Smith
will be treated as having been terminated by Coram without cause, (b) if
requested by Smith, Coram shall make additional tax withholding payments on his
behalf for the 1999 tax year, which payments shall be repaid pro rata from the
amounts he would otherwise receive during the last twelve months of the
Severance Period prescribed in the Employment Agreement and (c) the sum of
$27,645.44, representing Smith's accrued but unpaid time off, shall be paid to
him when this Agreement is no longer revocable pursuant to the provisions of
Paragraph 9, below.
It is understood that Smith's rights under the Employment Agreement are
limited to:
o payment of all amounts of base salary, earned by Smith
through the effective date of his resignation;
o continuation of Smith's base salary at its then current
rate for the duration of the Severance Period described
in Exhibit A to the Employment Agreement ("the Severance
Period") payable in accordance with Coram's normal
payroll practices;
o continuation of all health benefits for the period of
time contemplated for the Severance Period at no cost to
Smith other than the premium payable by Smith pursuant to
the terms of Coram's health benefit plan as consistently
applied among Coram's employees;
o payment during the Severance Period of any life
insurance, disability or other benefits, if any, for
which Smith is now eligible under the terms of Coram's
employee retirement, benefit and welfare programs;
<PAGE> 2
o the right to exercise all options to purchase shares of
common stock of Coram that have been granted to Smith
by Coram that were exerciseable by Smith upon the
effective date of his resignation at any time during
the Severance Period.
3. In the event Smith dies before receiving all sums due him under the
preceding paragraph, the remaining balance shall be paid, without acceleration,
to his estate.
4. Coram will reimburse Smith's reasonable costs for outplacement
assistance up to $25,000. Smith will also be entitled to keep the laptop
computer he has used while a Coram Employee. Except as expressly provided in
this Agreement, or with respect to amounts he is already entitled to receive as
reimbursement for expenses previously incurred, Smith shall have no right to any
other payment or reimbursement by Coram, including any payment for car expense
or access to computer services.
5. The Indemnification Agreement dated October 22, 1999, between Smith
and Coram shall remain in effect, except however, that in any litigation to
which both Coram and Smith are parties, Smith will be represented by Coram's
counsel, at its expense, until and unless a conflict arises between the
interests of Coram and Smith in such litigation. In the event that the firm of
Folger, Levin & Kahn, LLP ceases to represent Smith and Coram in such
litigation, Smith may obtain separate representation, the reasonable cost of
which will be paid by Coram.
6. In addition to the payments set forth in paragraph 2 above, as a
material part of the consideration for this Agreement, Smith agrees that he
will, upon request and reasonable notice, assist Coram in its business,
including assisting its counsel in litigation involving the Company and
providing truthful testimony therein. For such assistance, Smith shall receive
consulting fees of $250 per hour.
7. This Agreement shall bind and inure to the benefit of Coram, its
past and present parents, subsidiaries and affiliates, and all past or present
officers, directors, employees, agents and attorneys of any of the foregoing. It
is specifically understood that this Agreement binds all Coram affiliates listed
on Attachment A, hereto, and that Smith no longer has any employment or other
relationship with any of them.
8. In the negotiation and drafting of this Agreement the parties have
been represented by counsel of their own choosing who have participated in such
drafting. Accordingly, no party is to be favored in the interpretation of any
term of this Agreement.
9. Smith declares that he has been advised by Coram as part of the
negotiation of this Agreement to consult with an attorney prior to executing it,
which he has done, and has been advised by his attorneys with respect to it.
Smith declares that he has been given a reasonable period of time, including at
least 45 days if he so desires, to consider this Agreement before executing it.
This Agreement may be revoked by Smith by delivering written notice of
revocation to Scott Larson, Esq., Coram's General Counsel, at 1125 Seventeenth
St., Suite 2100, Denver, Colorado, on or before the seventh day after he
executes this Agreement. This Agreement shall not become effective or
enforceable until this revocation period has expired. After the revocation
period expires, this Agreement shall be irrevocable.
2
<PAGE> 3
10. The parties hereto waive and elect to forgo any reliance upon any
provision of any law purporting to restrict the effectiveness of a general
release. They recognize that there may be facts, currently unknown to them,
which might have influenced their decision to enter into this Agreement and they
expressly assume that risk and affirm this Agreement notwithstanding that
possibility.
11. This Agreement shall be construed and enforced in accordance with
the laws of the State of Colorado.
12. The parties have entered into this Agreement for the purpose of
resolving their differences and prescribing the terms of their future
co-operation. Neither the execution of this Agreement nor any of its terms is
intended to be, or may be construed as, an admission of any fact or any claim by
any person.
13. Any proceedings to interpret or enforce any provision of this
Agreement shall take place in Denver, Colorado, in an arbitration conducted
under the rules of the American Arbitration Association applicable to
contractual disputes, the outcome of which shall be enforceable in court. In any
such proceedings, the prevailing party shall recover its reasonable expenses
including attorneys' fees.
14. This Agreement constitutes the entire agreement of the parties,
supersedes any and all prior agreements, negotiations and representations and
may not be amended except by a writing signed by the party against which such
amendment is sought to be enforced.
Dated:
--------------
CORAM HEALTHCARE CORPORATION
By
---------------------------------
Its
--------------------------------
Dated:
--------------
CORAM, INC.
By
---------------------------------
Its
--------------------------------
Dated:
--------------
-----------------------------------
Richard M. Smith
3
<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 2
TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (this "Amendment"), dated
as of April 23, 1999 amends that certain Employment Agreement, dated as of
October 13, 1995, as amended as of June 30, 1998 (collectively, the "Employment
Agreement") between Coram Healthcare Corporation, a Delaware corporation (the
"Company") and Donald J. Amaral (the "Executive"), and is made and entered into
with reference to the facts described below. All terms appearing in this
Amendment with initial capitalization shall have the meanings ascribed to them
in the Employment Agreement, unless otherwise defined herein.
RECITALS
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement to revise the duties of the Executive and the related compensation
payable to the Executive to reflect such change and to reflect such other
changes as are set forth in this Amendment;
NOW, THEREFORE, in consideration of the foregoing, the parties hereby
agree as follows:
1. Amendments to Employment Agreement.
1.1 Section 2 of the Employment Agreement is hereby amended by deleting
the entire section and substituting the following in its place:
2. Position and Duties. During the Employment Period,
Executive shall serve as the Chairman of the Board of the Company and
shall have the normal duties, responsibilities and authority of the
Chairman of the Board. In addition, the Executive shall make himself
available to the President, Chief Financial Officer, Chief Operating
Officer and other appropriate members of the senior management team of
the Company to assist in the transition of his duties as Chief
Executive Officer to the President or to another officer designated by
the Company's Board of Directors. The Executive shall also make himself
available to assist in pursuing other Company business as reasonably
requested from time to time by the Company provided that such tasks
shall not require more than two (2) days per month of time from the
Executive. If more than two (2) days of service are performed by the
Executive at Company's request, Company shall pay Executive at the rate
of $2,500 per day.
1.2 Paragraph (a) of Section 3 of the Employment Agreement is hereby
amended by deleting the paragraph in its entirety and substituting the following
in its place:
(a) During the Employment Period, Executive's base salary shall be
$100,000 per annum (the "Base Salary") payable in cash and in accordance with
the Company's general payroll
<PAGE> 2
practices. Executive shall accept such Base Salary in lieu of any other fees
that may be payable to him for his service as a member of the Company's Board of
Directors existing as of the date hereof.
1.3 Paragraph (b) of Section 3 of the Employment Agreement is hereby
amended by deleting the paragraph in its entirety.
1.4 Section 4 of the Employment Agreement is hereby amended by deleting
the second sentence of such Section and replacing it with the following:
Following the termination of the Employment Period,
Executive shall not be required to resign as a
director of the Company and its subsidiaries and may
remain as a director of the Company with the consent
of the remaining members of the Company's Board of
Directors, subject to stockholder approval at the
next meeting of such stockholders at which the
directors are elected.
2. Stock Option Agreement Amendment. The Company and Executive agree to amend
Executive's Stock Option Agreement dated May 16, 1997 to provide that any
options to purchase shares of the Company's $.001 par value common stock that
are scheduled to vest in the year 2000 shall vest and become exercisable on May
14, 2000. In addition, all stock option agreements between Mr. Amaral and the
Company shall be amended to provide that all outstanding options shall remain
exercisable through 5:00 p.m., Denver, Colorado time on May 14, 2001, unless
otherwise terminated in accordance with their terms.
3. Miscellaneous.
3.1 This Amendment shall be binding upon the parties hereto, their
successors, assigns and legal representatives. This Amendment may be executed in
several counterparts, each of which is deemed to be an original and all of which
taken together constitute one and the same agreement among the parties.
3.2 Except as expressly amended by this Amendment, the Employment
Agreement shall continue in full force and effect in accordance with the
provisions thereof. As used in the Employment Agreement, the terms
"hereinafter," "hereto," hereof, and other words of similar import shall, unless
the context otherwise requires, mean the Employment Agreement as amended by this
Amendment. In the event of any conflict or inconsistency between the terms and
conditions of the Employment Agreement and the terms and conditions of this
Amendment, the terms and conditions of this Amendment shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
CORAM HEALTHCARE CORPORATION EXECUTIVE
By:
--------------------------- ----------------------------
Name: Donald J. Amaral
Title:
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of April 26, 1999,
between CORAM HEALTHCARE CORPORATION, a Delaware corporation ("Coram"), and
Richard M. Smith, a resident of Colorado ("Executive").
W I T N E S S E T H:
WHEREAS, Coram and its subsidiaries and affiliates are engaged in
providing (i) alternate site infusion therapy and related home health services,
(ii) ancillary network management services for third party payor customers
relating to their home health benefits, (iii) specialty mail order and
prescription benefit management services, and (iv) certain clinical research and
medical informatics services throughout the United States and in certain parts
of Canada (Coram's Business Lines);
WHEREAS, Executive is considered to be important to the continued
improvement and success of Coram; and
WHEREAS, Coram desires to avail itself of Executive's talents and
expertise in the management of the business of Coram, and to employ him/her in
the capacity and with the responsibilities described on Exhibit A hereto, and
Executive is willing to accept such employment.
NOW, THEREFORE, in consideration of the premises, and other mutual
promises and covenants hereinafter contained, Coram and Executive do hereby
agree, for their mutual benefit, as follows:
SECTION 1. EMPLOYMENT.
Coram shall employ Executive under this Agreement, and Executive
accepts such employment upon the terms and conditions set forth below.
SECTION 2. POSITION AND DUTIES.
During the period that Executive is employed by Coram pursuant to this
Agreement, the Executive shall serve Coram in the capacity and with the title
set forth on Exhibit A hereto. In carrying out his/her duties under this
Agreement, Executive shall have such duties and responsibilities usually
incident to the office to which the Executive has been appointed, together with
such other duties defined by the person to whom the Executive reports. Executive
may also hold similar offices with Coram's subsidiaries and affiliates and/or
their successors. Except as otherwise set forth in this Agreement, Executive
shall perform such duties as may be assigned to him/her from time to time by and
shall report to the officer specified on Exhibit A hereto. Executive shall
devote all of his/her normal working time and best efforts in the best interest
of and on behalf of Coram throughout the time he/she is employed by Coram.
<PAGE> 2
SECTION 3. BASE SALARY AND BENEFITS.
For all services rendered by Executive pursuant to this Agreement,
Coram shall pay Executive the following compensation:
(a) A base salary at the annual rate set forth on Exhibit A hereto,
such salary to be paid in accordance with Coram's general payroll practices. The
officer to whom the Executive reports, Coram's Board of Directors or its
Compensation Committee, as appropriate, shall review the Executive's salary at
least annually, and such reviewing party may make increases but not decreases to
the Executive's salary at its discretion.
(b) Executive shall be entitled to participate in a bonus plan approved
by the Board of Directors as outlined on Exhibit A. Executive shall also be
entitled to any other discretionary bonuses approved by the Board of Directors
or the Compensation Committee.
(c) Subject to Coram's eligibility and qualification requirements for
its management level employees, Executive shall be entitled to participate in
any employee retirement, benefit or welfare, deferred compensation or other
benefit plans provided by Coram to its employees and/or to its senior managers,
such as life insurance, health and dental, retirement savings and disability
plans which Coram has in effect or may adopt from time to time together with any
other benefits described on Exhibit A hereto. In addition, Coram shall provide
Executive the following additional benefits while the Executive is employed with
Coram:
(i) paid time off in accordance with Coram's general
policies and procedures applicable to the paid time
off benefits afforded to Coram's employees;
(ii) payment of dues for such professional societies and
associations of which Executive is a member in
furtherance of his duties hereunder;
(iii) disability insurance coverage paying benefits equal
to at least 90% of Executive's earnings, either
through a corporate group disability insurance plan
or other individual disability plan chosen by Coram;
(iv) reimbursement to Executive of expenses incurred for
the advice of Executive's counsel and/or accountant
not to exceed $5,000 per annum for estate and tax
planning services for the benefit of Executive; and
(v) consideration, at least annually, by the Board of
Directors or its Stock Option Committee for the grant
to Executive of additional options to purchase shares
of common stock of Coram, and participation in any
and all other stock option plans made available to
senior managers of Coram.
(vi) Option to travel First Class on all business trips.
2
<PAGE> 3
(d) Coram shall reimburse Executive for all reasonable expenses
incurred by him/her in the course of performing his/her duties under this
Agreement which are consistent with the Company's policies in effect from time
to time with respect to travel, entertainment, and other business expenses,
subject to Coram's requirements for reporting and documenting such expenses.
(e) For purposes of administration, the terms of this Section 3 shall
be given effect on a pro-rata basis for partial calendar years and otherwise
administered on a calendar year basis.
SECTION 4. TERM AND TERMINATION.
(a) Unless otherwise terminated in accordance with the provisions
hereof, the term of employment provided for in this Agreement shall commence as
of the date first written above, and shall continue in full force and effect for
the period of time specified on Exhibit A hereto (the "Initial Term").
(b) During the Initial Term, the Executive's employment with Coram may
be terminated as follows:
(i) by Coram at any time for "Cause" (as that term is defined
below);
(ii) immediately upon the death of Executive;
(iii) immediately upon the Executive becoming no longer able to
perform his/her duties hereunder due to the "Disability"
(as that term is defined below); or
(iv) immediately upon the voluntary resignation of the
Executive.
In the event the Initial Term is terminated in accordance with this Subsection
(b), Coram shall provide the Executive with all amounts of annual salary and
bonus, if applicable, earned by the Executive through the effective date of
termination if the Executive participates in a bonus plan that operates on a
quarterly, semi-annual or annual basis, the Executive shall be entitled to
receive a pro rata share of the bonus he/she would have received had he/she been
employed throughout the entire bonus measurement period provided that, on the
effective date of termination the Executive was achieving the level of
performance (calculated on a pro rata basis for the time the Executive was
employed during the period in question) required for earning such bonus through
the date of such termination.
(c) Upon the conclusion of the Initial Term, the Executive's employment
status shall be that of an "at will" employee, but the other terms and
conditions of this Agreement shall continue to apply as set forth herein.
Accordingly, the Executive's employment following the Initial Term may be
terminated at any time by either the Executive or Coram upon written notice to
the other party. If the Executive terminates his/her employment with Coram after
the initial Term pursuant to a voluntary resignation or if the Executive's
employment is terminated by virtue of a "Disability" or the Executive's death,
Coram shall provide the Executive or his/her
3
<PAGE> 4
estate with all amounts of annual salary and bonus, if applicable, earned by the
Executive through the effective date of termination if the Executive
participates in a bonus plan that operates on a quarterly, semi-annual or annual
basis, the Executive shall be entitled to receive a pro rata share of the bonus
he/she would have received had he/she been employed throughout the entire bonus
measurement period provided that, on the effective date of termination the
Executive was achieving the level of performance (calculated on a pro rata basis
for the time the Executive was employed during the period in question) required
for earning such bonus through the date of such termination.
If Coram terminates the employment of the Executive at any time during
the Initial Term or thereafter for any reason other than for "Cause," Coram
shall provide the following to the Executive:
(i) payment of all amounts of base salary, earned by the
Executive through the effective date of termination;
(ii) continuation of Executive's base salary at its then
current rate for the duration of the Severance Period
described on Exhibit A hereto (the "Severance
Period"), payable in accordance with Coram's normal
payroll practices;
(iii) continuation of all health benefits for the period of
time contemplated for the Severance Period at no cost
to Executive other than the premium payable by the
Executive pursuant to the terms of Coram's health
benefit plan as consistently applied among Coram's
employees;
(iv) payment during the Severance Period of any life
insurance, disability or other benefits, if any, for
which Executive is then eligible under the terms of
Coram's employee retirement, benefit and welfare;
(v) if the Executive was achieving the level of
performance required (calculated on a pro rata basis
for the time the Executive was employed during the
period in question) for earning such bonus through
the date of such termination, (x) payment of
Executive's bonus through the date of termination,
calculated on the basis of the sum of the total
achievable amounts of each bonus divided by twelve
months, and multiplied by the number of months
employed during such fiscal year through the date of
termination, with any partial month of employment to
be treated as a full month; and (y) continued payment
of the total achievable amounts of each of
Executive's bonuses for the current fiscal year (or,
if greater, of the total achievable amounts of each
of Executive's bonuses in effect for the fiscal year
most recently ended) for the Severance Period if the
Executive was achieving the level of performance
required (calculated on a pro rata basis for the time
the Executive was employed during the period in
question) for earning such bonus through the date of
such termination;
4
<PAGE> 5
(vii) a right to exercise all options to purchase shares of
common stock of Coram that have been granted to
Executive by Coram that are exercisable by the
Executive upon the effective date of termination of
employment at any time during the Severance Period;
and
(vii) any other benefits payable in accordance with Exhibit
A hereto.
For purposes of this Subsection (c), the Executive's employment shall
be deemed to have been terminated if, at any time within twenty four (24) months
following a "Change of Control" of Coram, a "New Management Team" (as that term
is defined below) of Coram requires the Executive to relocate his/her primary
residence or primary work location listed on Exhibit A to a place that is more
than fifty (50) miles from such location. To receive the benefits contemplated
by this Subsection (c), however, the Executive must provide written notice to
Coram stating that the Executive deems his/her employment to have been
terminated as described herein.
SECTION 5. STOCK OPTION AGREEMENT AMENDMENT.
(a) The Company and Executive agree that all stock option
agreements between Mr. Smith and the Company be amended to
provide that all outstanding options exercisable upon the
termination of the term of employment hereunder shall remain
exercisable for one year following the term of Mr. Smith's
employment hereunder. In addition, the agreement is to read
that all options will vest as to 100% of such options upon the
occurrence of a "Change of Control" as defined below.
SECTION 6. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall mean (i) repeated violations by Executive of
Executive's obligations under Section 2 of this Agreement (other than as a
result of incapacity due to physical or mental illness) which violations (A) are
willful and deliberate on Executive's part, (B) are committed in bad faith or
without reasonable belief that such violations are in the best interests of
Coram, and (C) are not remedied in a reasonable period of time after receipt of
written notice from the person to whom the Executive reports designated in
Section 2 above or the Board of Directors of Coram specifying such violations,
or (ii) the conviction of Executive of a felony or any crime involving fraud,
dishonesty or moral turpitude.
(b) "CHANGE IN CONTROL" shall mean:
(i) the acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2)
of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule l3d-3
promulgated under the Exchange Act)
5
<PAGE> 6
of 30% or more of either (A) the shares of the $.001
par value common stock of Coram then outstanding (the
"Outstanding Company Common Stock") through open
market purchases of Common Stock, block transfers of
Common Stock or the acquisition of options, warrants
or other convertible debt or equity instruments,
including, but not limited to the Company's Series B
Senior Subordinated Convertible Notes or otherwise or
(B) the combined voting power of the then outstanding
voting securities of Coram entitled to vote generally
in the election of directors ("the Outstanding
Company Voting Securities"); provided, however, that
for purposes of this subsection (i), the following
acquisitions shall not constitute a Change of
Control: (1) any acquisition directly from Coram, (2)
any acquisition by Coram, (3) any acquisition by any
employee benefit plan (or related trust) sponsored or
maintained by Coram or any corporation controlled by
Coram, (4) any acquisition by the Note Holders (but
not their transferees) as of the date hereof pursuant
to convertible debt instruments or stock warrants
then outstanding, or (5) any acquisition by any
corporation pursuant to a transaction which complies
with clauses (1), (2) and (3) of subsection (iii)
below;
(ii) during any period of two (2) consecutive years,
individuals who at the beginning of such period
constituted Coram's Board of Directors (together with
any new directors whose election to the Board of
Directors or whose nomination for election to the
Board of Directors was approved by a vote of at least
two-thirds of Coram's directors then still in office
who either were directors at the beginning of such
period or whose election or nomination was previously
so approved) and any individual serving during such
period as a member of Coram's Board of Directors
designated pursuant to the Securities Exchange
Agreement, dated as of May 6, 1998, as amended, among
Coram, Coram, Inc. and the Note Holders, cease for
any reason to constitute at least 40 % of Coram's
directors then in office;
(iii) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or
substantially all of the assets of Coram (a "Business
Combination"), in each case, unless, following such
Business Combination, (1) all or substantially all of
the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting
Securities immediately prior to such Business
Combination beneficially own, directly or indirectly,
more than 75% of, respectively, the shares of common
stock then outstanding and the combined voting power
of the then outstanding voting securities entitled to
vote generally in the election of directors, as the
case may be, of the corporation resulting from such
Business Combination (for example, but not by way of
limitation, a corporation which as a result of such
transaction owns Coram or all or substantially all of
Coram's assets either directly or through one or more
subsidiaries) in substantially the same proportions
as their ownership, immediately prior to
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<PAGE> 7
such Business Combination of the Outstanding Company
Common Stock and Outstanding Company Voting
Securities, as the case may be, (2) no party
(excluding any corporation resulting from such
Business Combination or any employee benefit plan (or
related trust) of the company or such corporation
resulting from such Business Combination)
beneficially owns, directly or indirectly, 30% or
more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such
Business Combination or the combined voting power of
the then outstanding voting securities of such
corporation except to the extent that such ownership
existed prior to the Business Combination, and (3) at
least a majority of the non-executive members of the
board of directors of the corporation resulting from
such Business Combination were members of the Board
of Directors of Coram at the time of the execution of
this agreement, or of the action of the Board of
Directors, providing for such Business Combination.
(c) "CODE" shall mean the Internal Revenue Code of 1986 and all
regulations promulgated thereunder, as the same may be amended from time to
time.
(d) "DISABILITY" shall be deemed to have occurred if Executive is
eligible and qualified for disability benefits under any Coram-sponsored
long-term disability program covering Executive. In the absence of a
Coram-sponsored long-term disability program covering Executive, Disability
shall mean the inability of Executive, as determined by the Board of Directors,
to substantially perform (with or without reasonable accommodations as that term
is defined under the Americans with Disabilities Act) the essential functions of
his/her regular duties and responsibilities due to a medically determinable
physical or mental impairment which has lasted (or can reasonably be expected to
last) for a period of six consecutive months.
(e) "NEW MANAGEMENT TEAM" shall refer to any group of senior management
of Coram that does not include Richard M. Smith as Coram's Chief Executive
Officer or President.
(f) "NOTE HOLDERS" shall mean Cerberus Partners, L.P.; Goldman Sachs
Credit Partners, L.P.; Foothill Capital Corporation and their respective
affiliates and associates.
SECTION 7. NON-COMPETITION.
(a) General. Executive and Coram understand and agree that the purpose
of the provisions of this Section 7 is to protect legitimate business interests
of the Company, as more fully described below, and is not intended to impair or
infringe upon Executive's right to work, earn a living, or acquire and possess
property from the fruits of his labor. Executive hereby acknowledges that the
post-employment restrictions set forth in this Section 7 are reasonable and that
they do not, and will not, unduly impair his ability to earn a living after the
termination of this Agreement. Therefore, subject to the limitations of
reasonableness imposed by law, Executive shall be subject to the restrictions
set forth in this Section 7.
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<PAGE> 8
(b) Definitions. The following capitalized terms used in this Section 7
shall have the meanings assigned to them below, which definitions shall apply to
both the singular and the plural forms of such terms:
"Competitive Position" means any employment or engagement as a
consultant with a Competitor in which Executive will use or is likely to use any
Confidential Information or Trade Secrets, or in which Executive has duties for
such Competitor that relate to Competitive Services and that are the same or
similar to those services actually performed by Executive for the Company;
"Competitive Services" means any of Coram's Business Lines for
which the Executive is responsible or with which the Executive was materially
involved.
"Competitor" means any Person engaged, wholly or in part, in
Competitive Services.
"Confidential Information" means all information regarding
Coram, its activities, business or clients that is the subject of reasonable
efforts by Coram to maintain its confidentiality and that is not generally
disclosed by practice or authority to persons not employed by Coram, but that
does not rise to the level of a Trade Secret. "Confidential Information" shall
include, but is not limited to, financial plans and data concerning Coram;
management planning information; business plans; operational methods; market
studies; marketing plans or strategies; product development techniques or plans;
customer lists; details of customer contracts; current and anticipated customer
requirements; past, current and planned research and development; business
acquisition plans; and new personnel acquisition plans. "Confidential
Information" shall not include information that has become generally available
to the public by the act of one who has the right to disclose such information
without violating any right or privilege of Coram. This definition shall not
limit any definition of "confidential information" or any equivalent term under
state or federal law.
"Determination Date" means the date of termination of
Executive's employment with Coram for any reason whatsoever or any earlier date
(during the employment period) of an alleged breach of the Restrictive Covenants
by Executive.
"Person" means any individual or any corporation, partnership,
joint venture, limited liability company, association or other entity or
enterprise.
"Principal or Representative" means a principal, owner,
partner, shareholder, joint venturer, investor, member, trustee, director,
officer, manager, employee, agent, representative or consultant.
"Protected Customers" means any Person to whom Coram has sold
its products or services or solicited to sell its products or services during
the twelve (12) months prior to the Determination Date.
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<PAGE> 9
"Protected Employees" means employees of Coram who were
employed by Coram at any time within six (6) months prior to the Determination
Date.
"Restricted Period" means the entire period of time that the
Executive is employed by Coram whether as an at will employee or otherwise and a
period extending for a period of time equal to the duration of the "Severance
Period" described on Exhibit A from the termination of Executive's employment
with Coram.
"Restricted Territory" means the United States and Ontario,
Canada.
"Restrictive Covenants" means the restrictive covenants
contained in Section 7(c) hereof.
"Trade Secret" means all information, without regard to form,
including, but not limited to, technical or nontechnical data, a formula, a
pattern, a compilation, a program, a device, a method, a technique, a drawing, a
process, financial data, financial plans, product plans, distribution lists or a
list of actual or potential customers, advertisers or suppliers which is not
commonly known by or available to the public and which information: (A) derives
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use; and (B) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy. Without
limiting the foregoing, Trade Secret means any item of Confidential Information
that constitutes a "trade secret(s)" under the common law or statutory law of
the State of Delaware.
(c) Restrictive Covenants.
(i) Restriction on Disclosure and Use of Confidential
Information and Trade Secrets. Executive understands
and agrees that the Confidential Information and
Trade Secrets constitute valuable assets of Coram and
its affiliated entities, and may not be converted to
Executive's own use. Accordingly, Executive hereby
agrees that Executive shall not, directly or
indirectly, at any time during the Term of employment
or at any time thereafter reveal, divulge, or
disclose to any Person not expressly authorized by
Coram in writing any Confidential Information, and
Executive shall not, directly or indirectly, at any
time during the Term of employment or at any time
thereafter use or make use of any Confidential
Information in connection with any business activity
other than that of Coram. Throughout the term of this
Agreement and at all times after the date that this
Agreement terminates for any reason, Executive shall
not directly or indirectly transmit or disclose any
Trade Secret of Coram to any Person, and shall not
make use of any such Trade Secret, directly or
indirectly, for himself or for others, without the
prior written consent of Coram. The parties
acknowledge and agree that this Agreement is not
intended to, and does not, alter either Coram's
rights or Executive's obligations under any state or
federal statutory or common law regarding trade
secrets and unfair trade practices.
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<PAGE> 10
Anything herein to the contrary notwithstanding, Executive shall not be
restricted from disclosing or using Confidential Information that is required to
be disclosed by law, court order or other legal process; provided, however, that
in the event disclosure is required by law, Executive shall provide Coram with
prompt notice of such requirement so that Coram may seek an appropriate
protective order prior to any such required disclosure by Executive.
(ii) Nonsolicitation of Protected Employees. Executive
understands and agrees that the relationship between
Coram and each of its Protected Employees constitutes
a valuable asset of Coram and may not be converted to
Executive's own use. Accordingly, Executive hereby
agrees that during the Restricted Period Executive
shall not directly or indirectly on Executive's own
behalf or as a Principal or Representative of any
Person or otherwise solicit or induce any Protected
Employee to terminate his or her employment
relationship with Coram or to enter into employment
with any other Person.
(iii) Restriction on Relationships with Protected
Customers. Executive understands and agrees that the
relationship between Coram and each of its Protected
Customers constitutes a valuable asset of Coram and
may not be converted to Executive's own use.
Accordingly, Executive hereby agrees that, during the
Restricted Period, Executive shall not, without the
prior written consent of Coram, directly or
indirectly, on Executive's own behalf or as a
Principal or Representative of any Person, solicit,
divert, take away or attempt to solicit, divert or
take away a Protected Customer for the purpose of
providing or selling Competitive Services; provided,
however, that the prohibition of this covenant shall
apply only to Protected Customers with whom Executive
had Material Contact on Coram's behalf during the
twelve (12) months immediately preceding the
termination of his employment hereunder. For purposes
of this Agreement, Executive had "Material Contact"
with a Protected Customer if (a) he had business
dealings with the Protected Customer on Coram's
behalf; (b) he was responsible for supervising or
coordinating the dealings between Coram and the
Protected Customer; or (c) he obtained Trade Secrets
or Confidential Information about the Protected
Customer as a result of his association with Coram.
(iv) Noncompetition with Coram. The parties
acknowledge: (A) that Executive's services
under this Agreement require special
expertise and talent in the provision of
Competitive Services and that Executive will
have substantial contacts with customers,
suppliers, advertisers and vendors of Coram;
(B) that pursuant to this Agreement,
Executive will be placed in a position of
trust and responsibility and he will have
access to a substantial amount of
Confidential Information and Trade Secrets
and that Coram is placing him in such
position and giving him access to such
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<PAGE> 11
information in reliance upon his agreement
not to compete with Coram during the
Restricted Period; (C) that due to his/her
management duties, Executive will be the
repository of a substantial portion of the
goodwill of Coram and would have an unfair
advantage in competing with Coram; (D) that
Executive is capable of competing with
Coram; and (E) that Executive is capable of
obtaining gainful, lucrative and desirable
employment that does not violate the
restrictions contained in this Agreement. In
consideration of the compensation and
benefits being paid and to be paid by Coram
to Executive hereunder, Executive hereby
agrees that, during the Restricted Period,
Executive will not, without prior written
consent of Coram, directly or indirectly
seek or obtain a Competitive Position in the
Restricted Territory with a Competitor;
provided, however, that the provisions of
this Agreement shall not be deemed to
prohibit the ownership by Executive of any
securities of a Competitor of not more than
five percent (5%) of any class of securities
of any corporation having a class of
securities registered pursuant to the
Securities Exchange Act of 1934, as amended.
(d) Enforcement of Restrictive Covenants.
(i) Rights and Remedies Upon Breach. In the event
Executive breaches, or threatens to commit a breach
of, any of the provisions of the Restrictive
Covenants, Coram shall have the following rights and
remedies, which shall be independent of any others
and severally enforceable, and shall be in addition
to, and not in lieu of, any other rights and remedies
available to Coram at law or in equity:
(A) the right and remedy to enjoin,
preliminarily and permanently, Executive
from violating or threatening to violate the
Restrictive Covenants and to have the
Restrictive Covenants specifically enforced
by any court of competent jurisdiction, it
being agreed that any breach or threatened
breach of the Restrictive Covenants would
cause irreparable injury to Coram and that
money damages would not provide an adequate
remedy to Coram; and
(B) the right and remedy to require Executive to
account for and pay over to Coram all
compensation, profits, monies, accruals,
increments or other benefits derived or
received by Executive as the result of any
transactions constituting a breach of the
Restrictive Covenants; and
(C) the right and remedy to suspend payment of
any termination benefit payments (but not
insurance or health benefits) during the
pendency of any good faith dispute regarding
Executive's breach
11
<PAGE> 12
of his/her covenants, provided that all
amounts shall be paid to the Executive if
Executive is found not to have been in
breach of such covenants.
(ii) Severability of Covenants. Executive acknowledges and
agrees that the Restrictive Covenants are reasonable
and valid in time and scope and in all other
respects. The covenants set forth in this Agreement
shall be considered and construed as separate and
independent covenants. Should any part or provision
of any covenant be held invalid, void or
unenforceable in any court of competent jurisdiction,
such invalidity, voidness or unenforceability shall
not render invalid, void or unenforceable any other
part or provision of this Agreement. If any portion
of the foregoing provisions is found to be invalid or
unenforceable by a court of competent jurisdiction
because its duration, the territory, the definition
of activities or the definition of information
covered is considered to be invalid or unreasonable
in scope, the invalid or unreasonable term shall be
redefined, or a new enforceable term provided, such
that the intent of Coram and Executive in agreeing to
the provisions of this Agreement will not be impaired
and the provision in question shall be enforceable to
the fullest extent of the applicable laws.
SECTION 8. ASSIGNMENT.
(a) This Agreement is personal to the Executive and without the prior
written consent of Coram shall not be assignable by the Executive otherwise than
by will or the laws of descent and distribution. This Agreement shall inure to
the benefit of and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
Coram and its successors and assigns.
SECTION 9. ARBITRATION.
(a) To the extent permitted by applicable law, any dispute or
controversy arising under or in connection with this Agreement shall be resolved
exclusively by arbitration using one arbitrator in the city closest to
Executive's primary work location under the auspices of and in accordance with
the Employment Arbitration rules of the American Arbitration Association then in
effect. The agreement set forth herein to arbitrate shall be specifically
enforceable under prevailing arbitration law.
(b) By initialing below, the parties hereto (i) acknowledge that they
have read and understood the provisions of this section regarding arbitration
and (ii) that performance of this Agreement will be in interstate commerce as
that term is used in the Federal Arbitration Act, 9 U.S.C. Section 1 et seq.,
and the parties contemplated substantial interstate activity in the performance
of this Agreement including, but not limited to, interstate travel, the use of
interstate phone lines, the use of the U.S. mail services and other interstate
courier services.
12
<PAGE> 13
[Executive] For Coram:
------------------- -------------------
(c) Notice of the demand for arbitration shall be filed in writing
with the other party to this Agreement and with the American Arbitration
Association. The demand for arbitration shall be made within a reasonable time
after the claim, dispute or other matter in question has arisen, and in no event
shall it be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in question would be
barred by the applicable statute of limitations.
(d) The award rendered by the arbitrator shall be final and judgment
may be entered upon it in accordance with applicable law in any court having
jurisdiction thereof. The findings of fact and conclusions of law of the
arbitrator shall be reduced to writing.
SECTION 10. FEES AND EXPENSES.
In the event Executive incurs legal fees and any other expenses in
seeking to obtain or to enforce any rights or benefits provided by this
Agreement and is successful, in whole or in part, in obtaining or enforcing any
such rights or benefits through settlement, arbitration, or otherwise, Coram
shall pay Executive's reasonable, documented legal fees and expenses incurred in
enforcing this Agreement and the fees of the arbitrator or arbitrators. Except
to the extent provided in the preceding sentence, each party shall pay its own
legal fees and other expenses associated with any dispute.
SECTION 11. CHOICE OF LAW.
Except as otherwise specifically set forth in this Agreement, this
Agreement shall be interpreted, construed and governed in accordance with the
laws of the State of Colorado.
SECTION 12. WAIVER OF BREACH.
Failure of either party to insist, in one or more instances, on
performance by the other in strict accordance with the terms and conditions of
this Agreement shall not be deemed a waiver or relinquishment of any right
granted in this Agreement or of the future performance of any such term or
condition or of any other term or condition of this Agreement, unless such
waiver is contained in a writing signed by the party making the waiver.
SECTION 13. NOTICES.
All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered or three days after mailing if mailed, first class, certified
mail, postage prepaid:
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<PAGE> 14
To Coram: Coram Healthcare Corporation
1125 17th Street, Suite 2100
Denver, CO 80202
ATTN: Legal Department
To Executive: At the address for notices listed in
Exhibit A hereto.
Any party may change the address to which notices, requests, demands
and other communications shall be delivered or mailed by giving notice thereof
to the other party in the same manner provided herein.
SECTION 14. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes any other employment
agreements, letters of understanding, whether written or oral, between the
parties with respect to the matters set forth herein. This Agreement may not be
changed orally, but only by an instrument in writing signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CORAM HEALTHCARE CORPORATION
By:
-------------------------------- ------------------------------
For the Board of Directors [EXECUTIVE]
15
<PAGE> 16
EXHIBIT A
Name and primary residence address for notices:
Richard M. Smith
- ----------------------------------
4280 Star Ranch Road
- ----------------------------------
Colorado Springs, CO 80906
- ----------------------------------
Duration of Initial Term: Through April 30, 2002
Office and Duties: President and Chief Executive Officer
Office of Person to Whom the Executive Reports: Board of Directors
Base Salary: $425,000 per year.
Severance Period: 24 months.
Primary Work Location: Denver, Colorado
Car Allowance: $600 per month
Change of Control Payment: $500,000
Bonus Compensation:
If the Company hits the percentage of its EBITDA target set forth
below, the Executive will be entitled to receive as bonus that percentage of his
Base Salary (as in effect on the last day of the fiscal year in question) set
forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF EBITDA TARGET PERCENTAGE OF BASE SALARY
--------------------------- -------------------------
<S> <C>
100.0% 60%
101.5% 65%
103.0% 70%
104.5% 75%
106.0% 80%
107.5% 85%
109.0% 90%
110.5% 95%
112.0% 100%
</TABLE>
16
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of April 26, 1999,
between CORAM HEALTHCARE CORPORATION, a Delaware corporation ("Coram"), and
Wendy Simpson, a resident of California ("Executive").
W I T N E S S E T H:
WHEREAS, Coram and its subsidiaries and affiliates are engaged in
providing (i) alternate site infusion therapy and related home health services,
(ii) ancillary network management services for third party payor customers
relating to their home health benefits, (iii) specialty mail order and
prescription benefit management services, and (iv) certain clinical research and
medical informatics services throughout the United States and in certain parts
of Canada (Coram's Business Lines);
WHEREAS, Executive is considered to be important to the continued
improvement and success of Coram; and
WHEREAS, Coram desires to avail itself of Executive's talents and
expertise in the management of the business of Coram, and to employ him/her in
the capacity and with the responsibilities described on Exhibit A hereto, and
Executive is willing to accept such employment.
NOW, THEREFORE, in consideration of the premises, and other mutual
promises and covenants hereinafter contained, Coram and Executive do hereby
agree, for their mutual benefit, as follows:
SECTION 1. EMPLOYMENT.
Coram shall employ Executive under this Agreement, and Executive
accepts such employment upon the terms and conditions set forth below.
SECTION 2. POSITION AND DUTIES.
During the period that Executive is employed by Coram pursuant to this
Agreement, the Executive shall serve Coram in the capacity and with the title
set forth on Exhibit A hereto. In carrying out his/her duties under this
Agreement, Executive shall have such duties and responsibilities usually
incident to the office to which the Executive has been appointed, together with
such other duties defined by the person to whom the Executive reports. Executive
may also hold similar offices with Coram's subsidiaries and affiliates and/or
their successors. Except as otherwise set forth in this Agreement, Executive
shall perform such duties as may be assigned to him/her from time to time by and
shall report to the officer specified on Exhibit A hereto. Executive shall
devote all of his/her normal working time and best efforts in the best interest
of and on behalf of Coram throughout the time he/she is employed by Coram.
<PAGE> 2
SECTION 3. BASE SALARY AND BENEFITS.
For all services rendered by Executive pursuant to this Agreement,
Coram shall pay Executive the following compensation:
(a) A base salary at the annual rate set forth on Exhibit A hereto,
such salary to be paid in accordance with Coram's general payroll practices. The
officer to whom the Executive reports, Coram's Board of Directors or its
Compensation Committee, as appropriate, shall review the Executive's salary at
least annually, and such reviewing party may make increases but not decreases to
the Executive's salary at its discretion.
(b) Executive shall be entitled to participate in any bonus plan
approved by the Board of Directors or its Compensation Committee for Coram's
management and shall be eligible for other discretionary bonuses approved by the
Board of Directors or the Compensation Committee.
(c) Subject to Coram's eligibility and qualification requirements for
its management level employees, Executive shall be entitled to participate in
any employee retirement, benefit or welfare, deferred compensation or other
benefit plans provided by Coram to its employees and/or to its senior managers,
such as life insurance, health and dental, retirement savings and disability
plans which Coram has in effect or may adopt from time to time together with any
other benefits described on Exhibit A hereto. In addition, Coram shall provide
Executive the following additional benefits while the Executive is employed with
Coram:
(i) paid time off in accordance with Coram's general policies
and procedures applicable to the paid time off benefits
afforded to Coram's employees;
(ii) payment of dues for such professional societies and
associations of which Executive is a member in furtherance
of his duties hereunder;
(iii) disability insurance coverage paying benefits equal to at
least 75% of Executive's earnings, either through a
corporate group disability insurance plan or other
individual disability plan chosen by Coram;
(iv) reimbursement to Executive of expenses incurred for the
advice of Executive's counsel and/or accountant not to
exceed $5,000 per annum for estate and tax planning
services for the benefit of Executive; and
(v) consideration, at least annually, by the Board of Directors
or its Stock Option Committee for the grant to Executive of
additional options to purchase shares of common stock of
Coram, and participation in any and all other stock option
plans made available to senior managers of Coram.
(d) Coram shall reimburse Executive for all reasonable expenses
incurred by him/her in the course of performing his/her duties under this
Agreement which are consistent with the
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<PAGE> 3
Company's policies in effect from time to time with respect to travel,
entertainment, and other business expenses, subject to Coram's requirements for
reporting and documenting such expenses.
(e) For purposes of administration, the terms of this Section 3 shall
be given effect on a pro-rata basis for partial calendar years and otherwise
administered on a calendar year basis.
SECTION 4. TERM AND TERMINATION.
(a) Unless otherwise terminated in accordance with the provisions
hereof, the term of employment provided for in this Agreement shall commence as
of the date first written above, and shall continue in full force and effect for
the period of time specified on Exhibit A hereto (the "Initial Term").
(b) During the Initial Term, the Executive's employment with Coram may
be terminated as follows:
(i) by Coram at any time for "Cause" (as that term is defined
below);
(ii) immediately upon the death of Executive;
(iii) immediately upon the Executive becoming no longer able to
perform his/her duties hereunder due to the "Disability"
(as that term is defined below); or
(iv) immediately upon the voluntary resignation of the
Executive.
In the event the Initial Term is terminated in accordance with this Subsection
(b), Coram shall provide the Executive with all amounts of annual salary and
bonus, if applicable, earned by the Executive through the effective date of
termination if the Executive participates in a bonus plan that operates on a
quarterly, semi-annual or annual basis, the Executive shall be entitled to
receive a pro rata share of the bonus he/she would have received had he/she been
employed throughout the entire bonus measurement period provided that, on the
effective date of termination the Executive was achieving the level of
performance (calculated on a pro rata basis for the time the Executive was
employed during the period in question) required for earning such bonus through
the date of such termination.
(c) Upon the conclusion of the Initial Term, the Executive's
employment status shall be that of an "at will" employee, but the other terms
and conditions of this Agreement shall continue to apply as set forth herein.
Accordingly, the Executive's employment following the Initial Term may be
terminated at any time by either the Executive or Coram upon written notice to
the other party. If the Executive terminates his/her employment with Coram after
the initial Term pursuant to a voluntary resignation or if the Executive's
employment is terminated by virtue of a "Disability" or the Executive's death,
Coram shall provide the Executive or his/her estate with all amounts of annual
salary and bonus, if applicable, earned by the Executive through the effective
date of termination if the Executive participates in a bonus plan that
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<PAGE> 4
operates on a quarterly, semi-annual or annual basis, the Executive shall be
entitled to receive a pro rata share of the bonus he/she would have received had
he/she been employed throughout the entire bonus measurement period provided
that, on the effective date of termination the Executive was achieving the level
of performance (calculated on a pro rata basis for the time the Executive was
employed during the period in question) required for earning such bonus through
the date of such termination.
If Coram terminates the employment of the Executive at any time during
the Initial Term or thereafter for any reason other than for "Cause," Coram
shall provide the following to the Executive:
(i) payment of all amounts of base salary, earned by the
Executive through the effective date of termination;
(ii) continuation of Executive's base salary at its then current
rate for the duration of the Severance Period described on
Exhibit A hereto (the "Severance Period"), payable in
accordance with Coram's normal payroll practices;
(iii) continuation of all health benefits for the period of time
contemplated for the Severance Period at no cost to
Executive other than the premium payable by the Executive
pursuant to the terms of Coram's health benefit plan as
consistently applied among Coram's employees;
(iv) payment during the Severance Period of any life insurance,
disability or other benefits, if any, for which Executive
is then eligible under the terms of Coram's employee
retirement, benefit and welfare;
(v) if the Executive was achieving the level of performance
required (calculated on a pro rata basis for the time the
Executive was employed during the period in question) for
earning such bonus through the date of such termination,
(x) payment of Executive's bonus through the date of
termination, calculated on the basis of the sum of the
total achievable amounts of each bonus divided by twelve
months, and multiplied by the number of months employed
during such fiscal year through the date of termination,
with any partial month of employment to be treated as a
full month; and (y) continued payment of the total
achievable amounts of each of Executive's bonuses for the
current fiscal year (or, if greater, of the total
achievable amounts of each of Executive's bonuses in effect
for the fiscal year most recently ended) for the Severance
Period if the Executive was achieving the level of
performance required (calculated on a pro rata basis for
the time the Executive was employed during the period in
question) for earning such bonus through the date of such
termination;
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(vi) a right to exercise all options to purchase shares of
common stock of Coram that have been granted to Executive
by Coram that are exercisable by the Executive upon the
effective date of termination of employment at any time
during the Severance Period; and
(vii) any other benefits payable in accordance with Exhibit A
hereto.
For purposes of this Subsection (c), the Executive's employment shall
be deemed to have been terminated if, at any time within twenty four (24) months
following a "Change of Control" of Coram, a "New Management Team" (as that term
is defined below) of Coram requires the Executive to relocate his/her primary
residence or primary work location listed on Exhibit A to a place that is more
than fifty (50) miles from such location. To receive the benefits contemplated
by this Subsection (c), however, the Executive must provide written notice to
Coram stating that the Executive deems his/her employment to have been
terminated as described herein.
SECTION 5. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall mean (i) repeated violations by Executive of
Executive's obligations under Section 2 of this Agreement (other than as a
result of incapacity due to physical or mental illness) which violations (A) are
willful and deliberate on Executive's part, (B) are committed in bad faith or
without reasonable belief that such violations are in the best interests of
Coram, and (C) are not remedied in a reasonable period of time after receipt of
written notice from the person to whom the Executive reports designated in
Section 2 above or the Board of Directors of Coram specifying such violations,
or (ii) the conviction of Executive of a felony or any crime involving fraud,
dishonesty or moral turpitude.
(b) "CHANGE IN CONTROL" shall mean:
(i) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the
meaning of Rule l3d-3 promulgated under the Exchange Act)
of 30% or more of either (A) the shares of the $.001 par
value common stock of Coram then outstanding (the
"Outstanding Company Common Stock") through open market
purchases of Common Stock, block transfers of Common Stock
or the acquisition of options, warrants or other
convertible debt or equity instruments, including, but not
limited to the Company's Series B Senior Subordinated
Convertible Notes or otherwise or (B) the combined voting
power of the then outstanding voting securities of Coram
entitled to vote generally in the election of directors
("the Outstanding Company Voting Securities"); provided,
however, that for purposes of this subsection (i), the
following acquisitions shall not constitute a Change of
Control: (1) any acquisition directly from Coram, (2) any
acquisition by Coram, (3) any acquisition by any employee
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benefit plan (or related trust) sponsored or maintained by
Coram or any corporation controlled by Coram, (4) any
acquisition by the Note Holders (but not their transferees)
as of the date hereof pursuant to convertible debt
instruments or stock warrants then outstanding, or (5) any
acquisition by any corporation pursuant to a transaction
which complies with clauses (1), (2) and (3) of subsection
(iii) below;
(ii) during any period of two (2) consecutive years, individuals
who at the beginning of such period constituted Coram's
Board of Directors (together with any new directors whose
election to the Board of Directors or whose nomination for
election to the Board of Directors was approved by a vote
of at least two-thirds of Coram's directors then still in
office who either were directors at the beginning of such
period or whose election or nomination was previously so
approved) and any individual serving during such period as
a member of Coram's Board of Directors designated pursuant
to the Securities Exchange Agreement, dated as of May 6,
1998, as amended, among Coram, Coram, Inc. and the Note
Holders, cease for any reason to constitute at least 40 %
of Coram's directors then in office;
(iii) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of
the assets of Coram (a "Business Combination"), in each
case, unless, following such Business Combination, (1) all
or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more
than 75% of, respectively, the shares of common stock then
outstanding and the combined voting power of the then
outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the
corporation resulting from such Business Combination (for
example, but not by way of limitation, a corporation which
as a result of such transaction owns Coram or all or
substantially all of Coram's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the
case may be, (2) no party (excluding any corporation
resulting from such Business Combination or any employee
benefit plan (or related trust) of the company or such
corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 30% or more of,
respectively, the then outstanding shares of common stock
of the corporation resulting from such Business Combination
or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that
such ownership existed prior to the Business Combination,
and (3) at least a majority of the non-executive members of
the board of directors of the corporation resulting from
such Business Combination were members of
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the Board of Directors of Coram at the time of the
execution of this agreement, or of the action of the Board
of Directors, providing for such Business Combination.
(c) "CODE" shall mean the Internal Revenue Code of 1986 and all
regulations promulgated thereunder, as the same may be amended from time to
time.
(d) "DISABILITY" shall be deemed to have occurred if Executive is
eligible and qualified for disability benefits under any Coram-sponsored
long-term disability program covering Executive. In the absence of a
Coram-sponsored long-term disability program covering Executive, Disability
shall mean the inability of Executive, as determined by the Board of Directors,
to substantially perform (with or without reasonable accommodations as that term
is defined under the Americans with Disabilities Act) the essential functions of
his/her regular duties and responsibilities due to a medically determinable
physical or mental impairment which has lasted (or can reasonably be expected to
last) for a period of six consecutive months.
(e) "NEW MANAGEMENT TEAM" shall refer to any group of senior management
of Coram that does not include Richard M. Smith as Coram's Chief Executive
Officer or President.
(f) "NOTE HOLDERS" shall mean Cerberus Partners, L.P.; Goldman Sachs
Credit Partners, L.P.; Foothill Capital Corporation and their respective
affiliates and associates.
SECTION 6. NON-COMPETITION.
(a) General. Executive and Coram understand and agree that the purpose
of the provisions of this Section 6 is to protect legitimate business interests
of the Company, as more fully described below, and is not intended to impair or
infringe upon Executive's right to work, earn a living, or acquire and possess
property from the fruits of his labor. Executive hereby acknowledges that the
post-employment restrictions set forth in this Section 6 are reasonable and that
they do not, and will not, unduly impair his ability to earn a living after the
termination of this Agreement. Therefore, subject to the limitations of
reasonableness imposed by law, Executive shall be subject to the restrictions
set forth in this Section 6.
(b) Definitions. The following capitalized terms used in this Section 6
shall have the meanings assigned to them below, which definitions shall apply to
both the singular and the plural forms of such terms:
"Competitive Position" means any employment or engagement as a
consultant with a Competitor in which Executive will use or is likely to use any
Confidential Information or Trade Secrets, or in which Executive has duties for
such Competitor that relate to Competitive Services and that are the same or
similar to those services actually performed by Executive for the Company;
"Competitive Services" means any of Coram's Business Lines for
which the Executive is responsible or with which the Executive was materially
involved.
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"Competitor" means any Person engaged, wholly or in part, in
Competitive Services.
"Confidential Information" means all information regarding
Coram, its activities, business or clients that is the subject of reasonable
efforts by Coram to maintain its confidentiality and that is not generally
disclosed by practice or authority to persons not employed by Coram, but that
does not rise to the level of a Trade Secret. "Confidential Information" shall
include, but is not limited to, financial plans and data concerning Coram;
management planning information; business plans; operational methods; market
studies; marketing plans or strategies; product development techniques or plans;
customer lists; details of customer contracts; current and anticipated customer
requirements; past, current and planned research and development; business
acquisition plans; and new personnel acquisition plans. "Confidential
Information" shall not include information that has become generally available
to the public by the act of one who has the right to disclose such information
without violating any right or privilege of Coram. This definition shall not
limit any definition of "confidential information" or any equivalent term under
state or federal law.
"Determination Date" means the date of termination of
Executive's employment with Coram for any reason whatsoever or any earlier date
(during the employment period) of an alleged breach of the Restrictive Covenants
by Executive.
"Person" means any individual or any corporation, partnership,
joint venture, limited liability company, association or other entity or
enterprise.
"Principal or Representative" means a principal, owner,
partner, shareholder, joint venturer, investor, member, trustee, director,
officer, manager, employee, agent, representative or consultant.
"Protected Customers" means any Person to whom Coram has sold
its products or services or solicited to sell its products or services during
the twelve (12) months prior to the Determination Date.
"Protected Employees" means employees of Coram who were
employed by Coram at any time within six (6) months prior to the Determination
Date.
"Restricted Period" means the entire period of time that the
Executive is employed by Coram whether as an at will employee or otherwise and a
period extending for a period of time equal to the duration of the "Severance
Period" described on Exhibit A from the termination of Executive's employment
with Coram.
"Restricted Territory" means the United States and Ontario,
Canada.
"Restrictive Covenants" means the restrictive covenants
contained in Section 6(c) hereof.
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"Trade Secret" means all information, without regard to form,
including, but not limited to, technical or nontechnical data, a formula, a
pattern, a compilation, a program, a device, a method, a technique, a drawing, a
process, financial data, financial plans, product plans, distribution lists or a
list of actual or potential customers, advertisers or suppliers which is not
commonly known by or available to the public and which information: (A) derives
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use; and (B) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy. Without
limiting the foregoing, Trade Secret means any item of Confidential Information
that constitutes a "trade secret(s)" under the common law or statutory law of
the State of Delaware.
(c) Restrictive Covenants.
(i) Restriction on Disclosure and Use of Confidential
Information and Trade Secrets. Executive understands and
agrees that the Confidential Information and Trade Secrets
constitute valuable assets of Coram and its affiliated
entities, and may not be converted to Executive's own use.
Accordingly, Executive hereby agrees that Executive shall
not, directly or indirectly, at any time during the Term of
employment or at any time thereafter reveal, divulge, or
disclose to any Person not expressly authorized by Coram in
writing any Confidential Information, and Executive shall
not, directly or indirectly, at any time during the Term of
employment or at any time thereafter use or make use of any
Confidential Information in connection with any business
activity other than that of Coram. Throughout the term of
this Agreement and at all times after the date that this
Agreement terminates for any reason, Executive shall not
directly or indirectly transmit or disclose any Trade
Secret of Coram to any Person, and shall not make use of
any such Trade Secret, directly or indirectly, for himself
or for others, without the prior written consent of Coram.
The parties acknowledge and agree that this Agreement is
not intended to, and does not, alter either Coram's rights
or Executive's obligations under any state or federal
statutory or common law regarding trade secrets and unfair
trade practices.
Anything herein to the contrary notwithstanding, Executive shall not be
restricted from disclosing or using Confidential Information that is required to
be disclosed by law, court order or other legal process; provided, however, that
in the event disclosure is required by law, Executive shall provide Coram with
prompt notice of such requirement so that Coram may seek an appropriate
protective order prior to any such required disclosure by Executive.
(ii) Nonsolicitation of Protected Employees. Executive
understands and agrees that the relationship between Coram
and each of its Protected Employees constitutes a valuable
asset of Coram and may not be converted to Executive's own
use. Accordingly, Executive hereby agrees that during the
Restricted Period Executive shall not directly or
indirectly on Executive's own behalf or as a Principal or
Representative of any
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Person or otherwise solicit or induce any Protected
Employee to terminate his or her employment relationship
with Coram or to enter into employment with any other
Person.
(iii) Restriction on Relationships with Protected Customers.
Executive understands and agrees that the relationship
between Coram and each of its Protected Customers
constitutes a valuable asset of Coram and may not be
converted to Executive's own use. Accordingly, Executive
hereby agrees that, during the Restricted Period, Executive
shall not, without the prior written consent of Coram,
directly or indirectly, on Executive's own behalf or as a
Principal or Representative of any Person, solicit, divert,
take away or attempt to solicit, divert or take away a
Protected Customer for the purpose of providing or selling
Competitive Services; provided, however, that the
prohibition of this covenant shall apply only to Protected
Customers with whom Executive had Material Contact on
Coram's behalf during the twelve (12) months immediately
preceding the termination of his employment hereunder. For
purposes of this Agreement, Executive had "Material
Contact" with a Protected Customer if (a) he had business
dealings with the Protected Customer on Coram's behalf; (b)
he was responsible for supervising or coordinating the
dealings between Coram and the Protected Customer; or (c)
he obtained Trade Secrets or Confidential Information about
the Protected Customer as a result of his association with
Coram.
(iv) Noncompetition with Coram. The parties acknowledge: (A)
that Executive's services under this Agreement require
special expertise and talent in the provision of
Competitive Services and that Executive will have
substantial contacts with customers, suppliers, advertisers
and vendors of Coram; (B) that pursuant to this Agreement,
Executive will be placed in a position of trust and
responsibility and he will have access to a substantial
amount of Confidential Information and Trade Secrets and
that Coram is placing him in such position and giving him
access to such information in reliance upon his agreement
not to compete with Coram during the Restricted Period; (C)
that due to his/her management duties, Executive will be
the repository of a substantial portion of the goodwill of
Coram and would have an unfair advantage in competing with
Coram; (D) that Executive is capable of competing with
Coram; and (E) that Executive is capable of obtaining
gainful, lucrative and desirable employment that does not
violate the restrictions contained in this Agreement. In
consideration of the compensation and benefits being paid
and to be paid by Coram to Executive hereunder, Executive
hereby agrees that, during the Restricted Period, Executive
will not, without prior written consent of Coram, directly
or indirectly seek or obtain a Competitive Position in the
Restricted Territory with a
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Competitor; provided, however, that the provisions of this
Agreement shall not be deemed to prohibit the ownership by
Executive of any securities of a Competitor of not more
than five percent (5%) of any class of securities of any
corporation having a class of securities registered
pursuant to the Securities Exchange Act of 1934, as
amended.
(d) Enforcement of Restrictive Covenants.
(i) Rights and Remedies Upon Breach. In the event Executive
breaches, or threatens to commit a breach of, any of the
provisions of the Restrictive Covenants, Coram shall have
the following rights and remedies, which shall be
independent of any others and severally enforceable, and
shall be in addition to, and not in lieu of, any other
rights and remedies available to Coram at law or in equity:
(A) the right and remedy to enjoin, preliminarily and
permanently, Executive from violating or threatening
to violate the Restrictive Covenants and to have the
Restrictive Covenants specifically enforced by any
court of competent jurisdiction, it being agreed
that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury
to Coram and that money damages would not provide an
adequate remedy to Coram; and
(B) the right and remedy to require Executive to account
for and pay over to Coram all compensation, profits,
monies, accruals, increments or other benefits
derived or received by Executive as the result of
any transactions constituting a breach of the
Restrictive Covenants; and
(C) the right and remedy to suspend payment of any
termination benefit payments (but not insurance or
health benefits) during the pendency of any good
faith dispute regarding Executive's breach of
his/her covenants, provided that all amounts shall
be paid to the Executive if Executive is found not
to have been in breach of such covenants.
(ii) Severability of Covenants. Executive acknowledges and
agrees that the Restrictive Covenants are reasonable and
valid in time and scope and in all other respects. The
covenants set forth in this Agreement shall be considered
and construed as separate and independent covenants. Should
any part or provision of any covenant be held invalid, void
or unenforceable in any court of competent jurisdiction,
such invalidity, voidness or unenforceability shall not
render invalid, void or unenforceable any other part or
provision of this Agreement. If any portion of the
foregoing provisions is found to be invalid or
unenforceable
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by a court of competent jurisdiction because its duration,
the territory, the definition of activities or the
definition of information covered is considered to be
invalid or unreasonable in scope, the invalid or
unreasonable term shall be redefined, or a new enforceable
term provided, such that the intent of Coram and Executive
in agreeing to the provisions of this Agreement will not be
impaired and the provision in question shall be enforceable
to the fullest extent of the applicable laws.
SECTION 7. ASSIGNMENT.
(a) This Agreement is personal to the Executive and without the prior
written consent of Coram shall not be assignable by the Executive otherwise than
by will or the laws of descent and distribution. This Agreement shall inure to
the benefit of and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
Coram and its successors and assigns.
SECTION 8. ARBITRATION.
(a) To the extent permitted by applicable law, any dispute or
controversy arising under or in connection with this Agreement shall be resolved
exclusively by arbitration using one arbitrator in the city closest to
Executive's primary work location under the auspices of and in accordance with
the Employment Arbitration rules of the American Arbitration Association then in
effect. The agreement set forth herein to arbitrate shall be specifically
enforceable under prevailing arbitration law.
(b) By initialing below, the parties hereto (i) acknowledge that they
have read and understood the provisions of this section regarding arbitration
and (ii) that performance of this Agreement will be in interstate commerce as
that term is used in the Federal Arbitration Act, 9 U.S.C. Section 1 et seq.,
and the parties contemplated substantial interstate activity in the performance
of this Agreement including, but not limited to, interstate travel, the use of
interstate phone lines, the use of the U.S. mail services and other interstate
courier services.
[Executive] For Coram:
--------------- ----------------
(c) Notice of the demand for arbitration shall be filed in writing
with the other party to this Agreement and with the American Arbitration
Association. The demand for arbitration shall be made within a reasonable time
after the claim, dispute or other matter in question has arisen, and in no event
shall it be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in question would be
barred by the applicable statute of limitations.
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(d) The award rendered by the arbitrator shall be final and judgment
may be entered upon it in accordance with applicable law in any court having
jurisdiction thereof. The findings of fact and conclusions of law of the
arbitrator shall be reduced to writing.
SECTION 9. FEES AND EXPENSES.
In the event Executive incurs legal fees and any other expenses in
seeking to obtain or to enforce any rights or benefits provided by this
Agreement and is successful, in whole or in part, in obtaining or enforcing any
such rights or benefits through settlement, arbitration, or otherwise, Coram
shall pay Executive's reasonable, documented legal fees and expenses incurred in
enforcing this Agreement and the fees of the arbitrator or arbitrators. Except
to the extent provided in the preceding sentence, each party shall pay its own
legal fees and other expenses associated with any dispute.
SECTION 10. CHOICE OF LAW.
Except as otherwise specifically set forth in this Agreement, this
Agreement shall be interpreted, construed and governed in accordance with the
laws of the State of Colorado.
SECTION 11. WAIVER OF BREACH.
Failure of either party to insist, in one or more instances, on
performance by the other in strict accordance with the terms and conditions of
this Agreement shall not be deemed a waiver or relinquishment of any right
granted in this Agreement or of the future performance of any such term or
condition or of any other term or condition of this Agreement, unless such
waiver is contained in a writing signed by the party making the waiver.
SECTION 12. NOTICES.
All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered or three days after mailing if mailed, first class, certified
mail, postage prepaid:
To Coram: Coram Healthcare Corporation
1125 17th Street, Suite 2100
Denver, CO 80202
ATTN: Legal Department
To Executive: At the address for notices listed in Exhibit A
hereto.
Any party may change the address to which notices, requests, demands
and other communications shall be delivered or mailed by giving notice thereof
to the other party in the same manner provided herein.
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SECTION 13. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes any other employment
agreements, letters of understanding, whether written or oral, between the
parties with respect to the matters set forth herein. This Agreement may not be
changed orally, but only by an instrument in writing signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CORAM HEALTHCARE CORPORATION
By:
-------------------------------------- ------------------------------
Chief Executive Officer and President [EXECUTIVE]
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EXHIBIT 10.5 CONTINUED
EXHIBIT A
Name and Primary residence address for notices: Wendy Simpson
5235 Linwood Drive
Los Angeles, CA 90027
Duration of Initial Term: 2 years
Office and Duties: Executive Vice President
and Chief Financial Officer
Office of Person to Whom the Executive Reports: President and CEO
Base Salary: $310,000
Severance Period: 24 months
Primary Work Location: Denver, Colorado
Change of Control Payment: $375,000
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of April 26, 1999,
between CORAM HEALTHCARE CORPORATION, a Delaware corporation ("Coram"), and Joe
Smith, a resident of Pennsylvania ("Executive").
W I T N E S S E T H:
WHEREAS, Coram and its subsidiaries and affiliates are engaged in
providing (i) alternate site infusion therapy and related home health services,
(ii) ancillary network management services for third party payor customers
relating to their home health benefits, (iii) specialty mail order and
prescription benefit management services, and (iv) certain clinical research and
medical informatics services throughout the United States and in certain parts
of Canada (Coram's Business Lines);
WHEREAS, Executive is considered to be important to the continued
improvement and success of Coram; and
WHEREAS, Coram desires to avail itself of Executive's talents and
expertise in the management of the business of Coram, and to employ him/her in
the capacity and with the responsibilities described on Exhibit A hereto, and
Executive is willing to accept such employment.
NOW, THEREFORE, in consideration of the premises, and other mutual
promises and covenants hereinafter contained, Coram and Executive do hereby
agree, for their mutual benefit, as follows:
SECTION 1. EMPLOYMENT.
Coram shall employ Executive under this Agreement, and Executive
accepts such employment upon the terms and conditions set forth below.
SECTION 2. POSITION AND DUTIES.
During the period that Executive is employed by Coram pursuant to this
Agreement, the Executive shall serve Coram in the capacity and with the title
set forth on Exhibit A hereto. In carrying out his/her duties under this
Agreement, Executive shall have such duties and responsibilities usually
incident to the office to which the Executive has been appointed, together with
such other duties defined by the person to whom the Executive reports. Executive
may also hold similar offices with Coram's subsidiaries and affiliates and/or
their successors. Except as otherwise set forth in this Agreement, Executive
shall perform such duties as may be assigned to him/her from time to time by and
shall report to the officer specified on Exhibit A hereto. Executive shall
devote all of his/her normal working time and best efforts in the best interest
of and on behalf of Coram throughout the time he/she is employed by Coram.
<PAGE> 2
SECTION 3. BASE SALARY AND BENEFITS.
For all services rendered by Executive pursuant to this Agreement,
Coram shall pay Executive the following compensation:
(a) A base salary at the annual rate set forth on Exhibit A hereto,
such salary to be paid in accordance with Coram's general payroll practices. The
officer to whom the Executive reports, Coram's Board of Directors or its
Compensation Committee, as appropriate, shall review the Executive's salary at
least annually, and such reviewing party may make increases but not decreases to
the Executive's salary at its discretion.
(b) Executive shall be entitled to participate in any bonus plan
approved by the Board of Directors or its Compensation Committee for Coram's
management and shall be eligible for other discretionary bonuses approved by the
Board of Directors or the Compensation Committee.
(c) Subject to Coram's eligibility and qualification requirements for
its management level employees, Executive shall be entitled to participate in
any employee retirement, benefit or welfare, deferred compensation or other
benefit plans provided by Coram to its employees and/or to its senior managers,
such as life insurance, health and dental, retirement savings and disability
plans which Coram has in effect or may adopt from time to time together with any
other benefits described on Exhibit A hereto. In addition, Coram shall provide
Executive the following additional benefits while the Executive is employed with
Coram:
(i) paid time off in accordance with Coram's general policies
and procedures applicable to the paid time off benefits
afforded to Coram's employees;
(ii) payment of dues for such professional societies and
associations of which Executive is a member in furtherance
of his duties hereunder;
(iii) disability insurance coverage paying benefits equal to at
least 75% of Executive's earnings, either through a
corporate group disability insurance plan or other
individual disability plan chosen by Coram;
(iv) reimbursement to Executive of expenses incurred for the
advice of Executive's counsel and/or accountant not to
exceed $5,000 per annum for estate and tax planning
services for the benefit of Executive; and
(v) consideration, at least annually, by the Board of Directors
or its Stock Option Committee for the grant to Executive of
additional options to purchase shares of common stock of
Coram, and participation in any and all other stock option
plans made available to senior managers of Coram.
(d) Coram shall reimburse Executive for all reasonable expenses
incurred by him/her in the course of performing his/her duties under this
Agreement which are consistent with the
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Company's policies in effect from time to time with respect to travel,
entertainment, and other business expenses, subject to Coram's requirements for
reporting and documenting such expenses.
(e) For purposes of administration, the terms of this Section 3 shall
be given effect on a pro-rata basis for partial calendar years and otherwise
administered on a calendar year basis.
SECTION 4. TERM AND TERMINATION.
(a) Unless otherwise terminated in accordance with the provisions
hereof, the term of employment provided for in this Agreement shall commence as
of the date first written above, and shall continue in full force and effect for
the period of time specified on Exhibit A hereto (the "Initial Term").
(b) During the Initial Term, the Executive's employment with Coram may
be terminated as follows:
(i) by Coram at any time for "Cause" (as that term is defined
below);
(ii) immediately upon the death of Executive;
(iii) immediately upon the Executive becoming no longer able to
perform his/her duties hereunder due to the "Disability"
(as that term is defined below); or
(iv) immediately upon the voluntary resignation of the
Executive.
In the event the Initial Term is terminated in accordance with this Subsection
(b), Coram shall provide the Executive with all amounts of annual salary and
bonus, if applicable, earned by the Executive through the effective date of
termination if the Executive participates in a bonus plan that operates on a
quarterly, semi-annual or annual basis, the Executive shall be entitled to
receive a pro rata share of the bonus he/she would have received had he/she been
employed throughout the entire bonus measurement period provided that, on the
effective date of termination the Executive was achieving the level of
performance (calculated on a pro rata basis for the time the Executive was
employed during the period in question) required for earning such bonus through
the date of such termination.
(c) Upon the conclusion of the Initial Term, the Executive's employment
status shall be that of an "at will" employee, but the other terms and
conditions of this Agreement shall continue to apply as set forth herein.
Accordingly, the Executive's employment following the Initial Term may be
terminated at any time by either the Executive or Coram upon written notice to
the other party. If the Executive terminates his/her employment with Coram after
the initial Term pursuant to a voluntary resignation or if the Executive's
employment is terminated by virtue of a "Disability" or the Executive's death,
Coram shall provide the Executive or his/her estate with all amounts of annual
salary and bonus, if applicable, earned by the Executive through the effective
date of termination if the Executive participates in a bonus plan that
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operates on a quarterly, semi-annual or annual basis, the Executive shall be
entitled to receive a pro rata share of the bonus he/she would have received had
he/she been employed throughout the entire bonus measurement period provided
that, on the effective date of termination the Executive was achieving the level
of performance (calculated on a pro rata basis for the time the Executive was
employed during the period in question) required for earning such bonus through
the date of such termination.
If Coram terminates the employment of the Executive at any time during
the Initial Term or thereafter for any reason other than for "Cause," Coram
shall provide the following to the Executive:
(i) payment of all amounts of base salary, earned by the
Executive through the effective date of termination;
(ii) continuation of Executive's base salary at its then current
rate for the duration of the Severance Period described on
Exhibit A hereto (the "Severance Period"), payable in
accordance with Coram's normal payroll practices;
(iii) continuation of all health benefits for the period of time
contemplated for the Severance Period at no cost to
Executive other than the premium payable by the Executive
pursuant to the terms of Coram's health benefit plan as
consistently applied among Coram's employees;
(iv) payment during the Severance Period of any life insurance,
disability or other benefits, if any, for which Executive
is then eligible under the terms of Coram's employee
retirement, benefit and welfare;
(v) if the Executive was achieving the level of performance
required (calculated on a pro rata basis for the time the
Executive was employed during the period in question) for
earning such bonus through the date of such termination,
(x) payment of Executive's bonus through the date of
termination, calculated on the basis of the sum of the
total achievable amounts of each bonus divided by twelve
months, and multiplied by the number of months employed
during such fiscal year through the date of termination,
with any partial month of employment to be treated as a
full month; and (y) continued payment of the total
achievable amounts of each of Executive's bonuses for the
current fiscal year (or, if greater, of the total
achievable amounts of each of Executive's bonuses in effect
for the fiscal year most recently ended) for the Severance
Period if the Executive was achieving the level of
performance required (calculated on a pro rata basis for
the time the Executive was employed during the period in
question) for earning such bonus through the date of such
termination;
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(vi) a right to exercise all options to purchase shares of
common stock of Coram that have been granted to Executive
by Coram that are exercisable by the Executive upon the
effective date of termination of employment at any time
during the Severance Period; and
(vii) any other benefits payable in accordance with Exhibit A
hereto.
For purposes of this Subsection (c), the Executive's employment shall
be deemed to have been terminated if, at any time within twenty four (24) months
following a "Change of Control" of Coram, a "New Management Team" (as that term
is defined below) of Coram requires the Executive to relocate his/her primary
residence or primary work location listed on Exhibit A to a place that is more
than fifty (50) miles from such location. To receive the benefits contemplated
by this Subsection (c), however, the Executive must provide written notice to
Coram stating that the Executive deems his/her employment to have been
terminated as described herein.
SECTION 5. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
(a) "CAUSE" shall mean (i) repeated violations by Executive of
Executive's obligations under Section 2 of this Agreement (other than as a
result of incapacity due to physical or mental illness) which violations (A) are
willful and deliberate on Executive's part, (B) are committed in bad faith or
without reasonable belief that such violations are in the best interests of
Coram, and (C) are not remedied in a reasonable period of time after receipt of
written notice from the person to whom the Executive reports designated in
Section 2 above or the Board of Directors of Coram specifying such violations,
or (ii) the conviction of Executive of a felony or any crime involving fraud,
dishonesty or moral turpitude.
(b) "CHANGE IN CONTROL" shall mean:
(i) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the
meaning of Rule l3d-3 promulgated under the Exchange Act)
of 30% or more of either (A) the shares of the $.001 par
value common stock of Coram then outstanding (the
"Outstanding Company Common Stock") through open market
purchases of Common Stock, block transfers of Common Stock
or the acquisition of options, warrants or other
convertible debt or equity instruments, including, but not
limited to the Company's Series B Senior Subordinated
Convertible Notes or otherwise or (B) the combined voting
power of the then outstanding voting securities of Coram
entitled to vote generally in the election of directors
("the Outstanding Company Voting Securities"); provided,
however, that for purposes of this subsection (i), the
following acquisitions shall not constitute a Change of
Control: (1) any acquisition directly from Coram, (2) any
acquisition by Coram, (3) any acquisition by any employee
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benefit plan (or related trust) sponsored or maintained by
Coram or any corporation controlled by Coram, (4) any
acquisition by the Note Holders (but not their transferees)
as of the date hereof pursuant to convertible debt
instruments or stock warrants then outstanding, or (5) any
acquisition by any corporation pursuant to a transaction
which complies with clauses (1), (2) and (3) of subsection
(iii) below;
(ii) during any period of two (2) consecutive years, individuals
who at the beginning of such period constituted Coram's
Board of Directors (together with any new directors whose
election to the Board of Directors or whose nomination for
election to the Board of Directors was approved by a vote
of at least two-thirds of Coram's directors then still in
office who either were directors at the beginning of such
period or whose election or nomination was previously so
approved) and any individual serving during such period as
a member of Coram's Board of Directors designated pursuant
to the Securities Exchange Agreement, dated as of May 6,
1998, as amended, among Coram, Coram, Inc. and the Note
Holders, cease for any reason to constitute at least 40 %
of Coram's directors then in office;
(iii) Consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of
the assets of Coram (a "Business Combination"), in each
case, unless, following such Business Combination, (1) all
or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more
than 75% of, respectively, the shares of common stock then
outstanding and the combined voting power of the then
outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the
corporation resulting from such Business Combination (for
example, but not by way of limitation, a corporation which
as a result of such transaction owns Coram or all or
substantially all of Coram's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the
case may be, (2) no party (excluding any corporation
resulting from such Business Combination or any employee
benefit plan (or related trust) of the company or such
corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 30% or more of,
respectively, the then outstanding shares of common stock
of the corporation resulting from such Business Combination
or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that
such ownership existed prior to the Business Combination,
and (3) at least a majority of the non-executive members of
the board of directors of the corporation resulting from
such Business Combination were members of
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the Board of Directors of Coram at the time of the
execution of this agreement, or of the action of the Board
of Directors, providing for such Business Combination.
(c) "CODE" shall mean the Internal Revenue Code of 1986 and all
regulations promulgated thereunder, as the same may be amended from time to
time.
(d) "DISABILITY" shall be deemed to have occurred if Executive is
eligible and qualified for disability benefits under any Coram-sponsored
long-term disability program covering Executive. In the absence of a
Coram-sponsored long-term disability program covering Executive, Disability
shall mean the inability of Executive, as determined by the Board of Directors,
to substantially perform (with or without reasonable accommodations as that term
is defined under the Americans with Disabilities Act) the essential functions of
his/her regular duties and responsibilities due to a medically determinable
physical or mental impairment which has lasted (or can reasonably be expected to
last) for a period of six consecutive months.
(e) "NEW MANAGEMENT TEAM" shall refer to any group of senior management
of Coram that does not include Richard M. Smith as Coram's Chief Executive
Officer or President.
(f) "NOTE HOLDERS" shall mean Cerberus Partners, L.P.; Goldman Sachs
Credit Partners, L.P.; Foothill Capital Corporation and their respective
affiliates and associates.
SECTION 6. NON-COMPETITION.
(a) General. Executive and Coram understand and agree that the purpose
of the provisions of this Section 6 is to protect legitimate business interests
of the Company, as more fully described below, and is not intended to impair or
infringe upon Executive's right to work, earn a living, or acquire and possess
property from the fruits of his labor. Executive hereby acknowledges that the
post-employment restrictions set forth in this Section 6 are reasonable and that
they do not, and will not, unduly impair his ability to earn a living after the
termination of this Agreement. Therefore, subject to the limitations of
reasonableness imposed by law, Executive shall be subject to the restrictions
set forth in this Section 6.
(b) Definitions. The following capitalized terms used in this Section 6
shall have the meanings assigned to them below, which definitions shall apply to
both the singular and the plural forms of such terms:
"Competitive Position" means any employment or engagement as a
consultant with a Competitor in which Executive will use or is likely to use any
Confidential Information or Trade Secrets, or in which Executive has duties for
such Competitor that relate to Competitive Services and that are the same or
similar to those services actually performed by Executive for the Company;
"Competitive Services" means any of Coram's Business Lines for
which the Executive is responsible or with which the Executive was materially
involved.
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"Competitor" means any Person engaged, wholly or in part, in
Competitive Services.
"Confidential Information" means all information regarding
Coram, its activities, business or clients that is the subject of reasonable
efforts by Coram to maintain its confidentiality and that is not generally
disclosed by practice or authority to persons not employed by Coram, but that
does not rise to the level of a Trade Secret. "Confidential Information" shall
include, but is not limited to, financial plans and data concerning Coram;
management planning information; business plans; operational methods; market
studies; marketing plans or strategies; product development techniques or plans;
customer lists; details of customer contracts; current and anticipated customer
requirements; past, current and planned research and development; business
acquisition plans; and new personnel acquisition plans. "Confidential
Information" shall not include information that has become generally available
to the public by the act of one who has the right to disclose such information
without violating any right or privilege of Coram. This definition shall not
limit any definition of "confidential information" or any equivalent term under
state or federal law.
"Determination Date" means the date of termination of
Executive's employment with Coram for any reason whatsoever or any earlier date
(during the employment period) of an alleged breach of the Restrictive Covenants
by Executive.
"Person" means any individual or any corporation, partnership,
joint venture, limited liability company, association or other entity or
enterprise.
"Principal or Representative" means a principal, owner,
partner, shareholder, joint venturer, investor, member, trustee, director,
officer, manager, employee, agent, representative or consultant.
"Protected Customers" means any Person to whom Coram has sold
its products or services or solicited to sell its products or services during
the twelve (12) months prior to the Determination Date.
"Protected Employees" means employees of Coram who were
employed by Coram at any time within six (6) months prior to the Determination
Date.
"Restricted Period" means the entire period of time that the
Executive is employed by Coram whether as an at will employee or otherwise and a
period extending for a period of time equal to the duration of the "Severance
Period" described on Exhibit A from the termination of Executive's employment
with Coram.
"Restricted Territory" means the United States and Ontario,
Canada.
"Restrictive Covenants" means the restrictive covenants
contained in Section 6(c) hereof.
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"Trade Secret" means all information, without regard to form,
including, but not limited to, technical or nontechnical data, a formula, a
pattern, a compilation, a program, a device, a method, a technique, a drawing, a
process, financial data, financial plans, product plans, distribution lists or a
list of actual or potential customers, advertisers or suppliers which is not
commonly known by or available to the public and which information: (A) derives
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use; and (B) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy. Without
limiting the foregoing, Trade Secret means any item of Confidential Information
that constitutes a "trade secret(s)" under the common law or statutory law of
the State of Delaware.
(c) Restrictive Covenants.
(i) Restriction on Disclosure and Use of Confidential
Information and Trade Secrets. Executive understands and
agrees that the Confidential Information and Trade Secrets
constitute valuable assets of Coram and its affiliated
entities, and may not be converted to Executive's own use.
Accordingly, Executive hereby agrees that Executive shall
not, directly or indirectly, at any time during the Term of
employment or at any time thereafter reveal, divulge, or
disclose to any Person not expressly authorized by Coram in
writing any Confidential Information, and Executive shall
not, directly or indirectly, at any time during the Term of
employment or at any time thereafter use or make use of any
Confidential Information in connection with any business
activity other than that of Coram. Throughout the term of
this Agreement and at all times after the date that this
Agreement terminates for any reason, Executive shall not
directly or indirectly transmit or disclose any Trade
Secret of Coram to any Person, and shall not make use of
any such Trade Secret, directly or indirectly, for himself
or for others, without the prior written consent of Coram.
The parties acknowledge and agree that this Agreement is
not intended to, and does not, alter either Coram's rights
or Executive's obligations under any state or federal
statutory or common law regarding trade secrets and unfair
trade practices.
Anything herein to the contrary notwithstanding, Executive shall not be
restricted from disclosing or using Confidential Information that is required to
be disclosed by law, court order or other legal process; provided, however, that
in the event disclosure is required by law, Executive shall provide Coram with
prompt notice of such requirement so that Coram may seek an appropriate
protective order prior to any such required disclosure by Executive.
(ii) Nonsolicitation of Protected Employees. Executive
understands and agrees that the relationship between Coram
and each of its Protected Employees constitutes a valuable
asset of Coram and may not be converted to Executive's own
use. Accordingly, Executive hereby agrees that during the
Restricted Period Executive shall not directly or
indirectly on Executive's own behalf or as a Principal or
Representative of any
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Person or otherwise solicit or induce any Protected
Employee to terminate his or her employment relationship
with Coram or to enter into employment with any other
Person.
(iii) Restriction on Relationships with Protected Customers.
Executive understands and agrees that the relationship
between Coram and each of its Protected Customers
constitutes a valuable asset of Coram and may not be
converted to Executive's own use. Accordingly, Executive
hereby agrees that, during the Restricted Period, Executive
shall not, without the prior written consent of Coram,
directly or indirectly, on Executive's own behalf or as a
Principal or Representative of any Person, solicit, divert,
take away or attempt to solicit, divert or take away a
Protected Customer for the purpose of providing or selling
Competitive Services; provided, however, that the
prohibition of this covenant shall apply only to Protected
Customers with whom Executive had Material Contact on
Coram's behalf during the twelve (12) months immediately
preceding the termination of his employment hereunder. For
purposes of this Agreement, Executive had "Material
Contact" with a Protected Customer if (a) he had business
dealings with the Protected Customer on Coram's behalf; (b)
he was responsible for supervising or coordinating the
dealings between Coram and the Protected Customer; or (c)
he obtained Trade Secrets or Confidential Information about
the Protected Customer as a result of his association with
Coram.
(iv) Noncompetition with Coram. The parties acknowledge: (A)
that Executive's services under this Agreement require
special expertise and talent in the provision of
Competitive Services and that Executive will have
substantial contacts with customers, suppliers, advertisers
and vendors of Coram; (B) that pursuant to this Agreement,
Executive will be placed in a position of trust and
responsibility and he will have access to a substantial
amount of Confidential Information and Trade Secrets and
that Coram is placing him in such position and giving him
access to such information in reliance upon his agreement
not to compete with Coram during the Restricted Period; (C)
that due to his/her management duties, Executive will be
the repository of a substantial portion of the goodwill of
Coram and would have an unfair advantage in competing with
Coram; (D) that Executive is capable of competing with
Coram; and (E) that Executive is capable of obtaining
gainful, lucrative and desirable employment that does not
violate the restrictions contained in this Agreement. In
consideration of the compensation and benefits being paid
and to be paid by Coram to Executive hereunder, Executive
hereby agrees that, during the Restricted Period, Executive
will not, without prior written consent of Coram, directly
or indirectly seek or obtain a Competitive Position in the
Restricted Territory with a
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Competitor; provided, however, that the provisions of this
Agreement shall not be deemed to prohibit the ownership by
Executive of any securities of a Competitor of not more
than five percent (5%) of any class of securities of any
corporation having a class of securities registered
pursuant to the Securities Exchange Act of 1934, as
amended.
(d) Enforcement of Restrictive Covenants.
(i) Rights and Remedies Upon Breach. In the event Executive
breaches, or threatens to commit a breach of, any of the
provisions of the Restrictive Covenants, Coram shall have
the following rights and remedies, which shall be
independent of any others and severally enforceable, and
shall be in addition to, and not in lieu of, any other
rights and remedies available to Coram at law or in equity:
(A) the right and remedy to enjoin, preliminarily and
permanently, Executive from violating or threatening
to violate the Restrictive Covenants and to have the
Restrictive Covenants specifically enforced by any
court of competent jurisdiction, it being agreed
that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury
to Coram and that money damages would not provide an
adequate remedy to Coram; and
(B) the right and remedy to require Executive to account
for and pay over to Coram all compensation, profits,
monies, accruals, increments or other benefits
derived or received by Executive as the result of
any transactions constituting a breach of the
Restrictive Covenants; and
(C) the right and remedy to suspend payment of any
termination benefit payments (but not insurance or
health benefits) during the pendency of any good
faith dispute regarding Executive's breach of
his/her covenants, provided that all amounts shall
be paid to the Executive if Executive is found not
to have been in breach of such covenants.
(ii) Severability of Covenants. Executive acknowledges and
agrees that the Restrictive Covenants are reasonable and
valid in time and scope and in all other respects. The
covenants set forth in this Agreement shall be considered
and construed as separate and independent covenants. Should
any part or provision of any covenant be held invalid, void
or unenforceable in any court of competent jurisdiction,
such invalidity, voidness or unenforceability shall not
render invalid, void or unenforceable any other part or
provision of this Agreement. If any portion of the
foregoing provisions is found to be invalid or
unenforceable
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by a court of competent jurisdiction because its duration,
the territory, the definition of activities or the
definition of information covered is considered to be
invalid or unreasonable in scope, the invalid or
unreasonable term shall be redefined, or a new enforceable
term provided, such that the intent of Coram and Executive
in agreeing to the provisions of this Agreement will not be
impaired and the provision in question shall be enforceable
to the fullest extent of the applicable laws.
SECTION 7. ASSIGNMENT.
(a) This Agreement is personal to the Executive and without the prior
written consent of Coram shall not be assignable by the Executive otherwise than
by will or the laws of descent and distribution. This Agreement shall inure to
the benefit of and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
Coram and its successors and assigns.
SECTION 8. ARBITRATION.
(a) To the extent permitted by applicable law, any dispute or
controversy arising under or in connection with this Agreement shall be resolved
exclusively by arbitration using one arbitrator in the city closest to
Executive's primary work location under the auspices of and in accordance with
the Employment Arbitration rules of the American Arbitration Association then in
effect. The agreement set forth herein to arbitrate shall be specifically
enforceable under prevailing arbitration law.
(b) By initialing below, the parties hereto (i) acknowledge that they
have read and understood the provisions of this section regarding arbitration
and (ii) that performance of this Agreement will be in interstate commerce as
that term is used in the Federal Arbitration Act, 9 U.S.C. Section 1 et seq.,
and the parties contemplated substantial interstate activity in the performance
of this Agreement including, but not limited to, interstate travel, the use of
interstate phone lines, the use of the U.S. mail services and other interstate
courier services.
[Executive] For Coram:
------------------- -------------------
(c) Notice of the demand for arbitration shall be filed in writing
with the other party to this Agreement and with the American Arbitration
Association. The demand for arbitration shall be made within a reasonable time
after the claim, dispute or other matter in question has arisen, and in no event
shall it be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in question would be
barred by the applicable statute of limitations.
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(d) The award rendered by the arbitrator shall be final and judgment
may be entered upon it in accordance with applicable law in any court having
jurisdiction thereof. The findings of fact and conclusions of law of the
arbitrator shall be reduced to writing.
SECTION 9. FEES AND EXPENSES.
In the event Executive incurs legal fees and any other expenses in
seeking to obtain or to enforce any rights or benefits provided by this
Agreement and is successful, in whole or in part, in obtaining or enforcing any
such rights or benefits through settlement, arbitration, or otherwise, Coram
shall pay Executive's reasonable, documented legal fees and expenses incurred in
enforcing this Agreement and the fees of the arbitrator or arbitrators. Except
to the extent provided in the preceding sentence, each party shall pay its own
legal fees and other expenses associated with any dispute.
SECTION 10. CHOICE OF LAW.
Except as otherwise specifically set forth in this Agreement, this
Agreement shall be interpreted, construed and governed in accordance with the
laws of the State of Colorado.
SECTION 11. WAIVER OF BREACH.
Failure of either party to insist, in one or more instances, on
performance by the other in strict accordance with the terms and conditions of
this Agreement shall not be deemed a waiver or relinquishment of any right
granted in this Agreement or of the future performance of any such term or
condition or of any other term or condition of this Agreement, unless such
waiver is contained in a writing signed by the party making the waiver.
SECTION 12. NOTICES.
All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered or three days after mailing if mailed, first class, certified
mail, postage prepaid:
To Coram: Coram Healthcare Corporation
1125 17th Street, Suite 2100
Denver, CO 80202
ATTN: Legal Department
To Executive: At the address for notices listed in Exhibit A
hereto.
Any party may change the address to which notices, requests, demands
and other communications shall be delivered or mailed by giving notice thereof
to the other party in the same manner provided herein.
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SECTION 13. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes any other employment
agreements, letters of understanding, whether written or oral, between the
parties with respect to the matters set forth herein. This Agreement may not be
changed orally, but only by an instrument in writing signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CORAM HEALTHCARE CORPORATION
By:
-------------------------------------- ------------------------------
Chief Executive Officer and President [EXECUTIVE]
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EXHIBIT 10.6 CONTINUED
EXHIBIT A
Name and Primary residence address for notices: Joe Smith
1726 Victoria Circle
Allentown, PA 18103
Duration of Initial Term: 2 years
Office and Duties: Chief Operating Officer and
President, Resource Network
Office of Person to Whom the Executive Reports: President and CEO
Base Salary: $310,000
Severance Period: 24 months
Primary Work Location: Allentown, PA
Car Allowance: $600 per month
Change of Control Payment: $375,000
<PAGE> 1
EXHIBIT 10.7
INDEMNIFICATION AGREEMENT
AGREEMENT, made this _____th day of ____________, 1999, between CORAM
HEALTHCARE CORPORATION, a Delaware corporation ("Coram") and the Subsidiaries of
the Company that are signatories hereto, and ___________________________________
("Indemnitee"). All references to the Company shall be deemed to include each of
the Company's Subsidiaries that is a signatory hereto and predecessors or
successors in interest of the Company.
WHEREAS, it is essential to the Company and its stockholders to attract
and retain qualified and capable directors, officers, employees, agents and
fiduciaries; and
WHEREAS the Certificate of Incorporation of the Company, as amended
(the "Articles") and by-laws (the "By-laws") permit the Company to indemnify and
advance expenses to its directors and officers to the fullest extent authorized
by law and allow the Company to indemnify employees and agents to the fullest
extent authorized by law; and
WHEREAS, it is the policy of the Company to indemnify its directors and
officers so as to provide them with the maximum possible protection permitted by
law; and
WHEREAS, in recognition of Indemnitee's need for protection against
personal liability in order to induce Indemnitee to serve or continue to serve
the Company in an effective manner, and, in the case of directors and officers,
to supplement or replace the Company's directors' and officers' liability
insurance coverage, and in part to provide Indemnitee with specific contractual
assurance that the protection promised by the Articles and By-laws will be
available to Indemnitee (regardless of, among other things, any amendment to or
revocation of the Articles or By-laws or any change in the composition of the
Company's Board of Directors or any acquisition transaction relating to the
Company), the Company wishes to provide the Indemnitee with the benefits
contemplated by this Agreement; and
WHEREAS, as a result of the provision of such benefits Indemnitee has
agreed to serve or to continue to serve the Company;
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1. Definitions. The following terms, as used herein, shall have the
following respective meanings:
(a) An Affiliate: of a specified Person is a Person who directly,
or indirectly through one or more intermediaries, controls or is controlled by,
or is under common control with, the Person specified. The term Associate used
to indicate a
<PAGE> 2
2
relationship with any Person shall mean (i) any corporation or organization
(other than the Company or a Subsidiary) of which such Person is an officer or
partner or is, directly, or indirectly, the Beneficial Owner of ten (10) percent
or more of any class of Equity Securities, (ii) any trust or other estate in
which such Person has a substantial beneficial interest or as to which such
Person serves as trustee or in a similar fiduciary capacity (other than an
Employee Plan Trustee), (iii) any Relative of such Person, or (iv) any officer
or director of any corporation controlling or controlled by such Person.
(b) Arbitration: arbitration to be conducted by a single
arbitrator pursuant to the commercial arbitration rules of the American
Arbitration Association now in effect, which award shall be made within 90 days
following the filing of the demand for arbitration.
(c) Beneficial Ownership: shall be determined, and a Person shall
be the Beneficial Owner of all securities which such Person is deemed to own
beneficially, pursuant to Rule 13d-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (or any successor rule or
statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall
be no successor rule or statutory provision thereto, pursuant to said Rule 13d-3
as in effect on the date hereof; provided, however, that a Person shall, in any
event, also be deemed to be the Beneficial Owner of any Voting Shares: (A) of
which such Person or any of its Affiliates or Associates is, directly or
indirectly, the Beneficial Owner, or (B) of which such Person or any of its
Affiliates or Associates has (i) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants, or options, or otherwise, or (ii) sole or
shared voting or investment power with respect thereto pursuant to any
agreement, arrangement, understanding, relationship or otherwise (but shall not
be deemed to be the Beneficial Owner of any Voting Shares solely by reason of a
revocable proxy granted for a particular meeting of stockholders, pursuant to a
public solicitation of proxies for such meeting, with respect to shares of which
neither such Person nor any such Affiliate or Associate is otherwise deemed the
Beneficial Owner), or (C) of which any other Person is, directly or indirectly,
the Beneficial Owner if such first mentioned Person or any of its Affiliates or
Associates acts with such other Person as a partnership, syndicate or other
group pursuant to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of capital stock of the
Company; and provided further, however, that (i) no director or officer of the
Company, nor any Associate or Affiliate of any such director or officer, shall,
solely by reason of any or all of such directors and officers acting in their
capacities as such, be deemed for any purposes hereof, to be the Beneficial
Owner of any Voting Shares of which any other such director or officer (or any
Associate or Affiliate thereof) is the Beneficial Owner and (ii) no trustee of
an employee stock ownership or similar plan of the Company or any Subsidiary
("Employee Plan Trustee") or any Associate or Affiliate of any such Trustee,
shall, solely by reason of being an Employee Plan Trustee or
<PAGE> 3
3
Associate or Affiliate of an Employee Plan Trustee, be deemed for any purposes
hereof to be the Beneficial Owner of any Voting Shares held by or under any such
plan.
(d) A Change in Control: shall be deemed to have occurred if (A)
any Person (other than (i) the Company or any Subsidiary or (ii) any pension,
profit sharing, employee stock ownership or other employee benefit plan of the
Company or any Subsidiary or any trustee of or fiduciary with respect to any
such plan when acting in such capacity) is or becomes, after the date of this
Agreement, the Beneficial Owner of 20% or more of the total voting power of the
Voting Shares, (B) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election or appointment by the Board of Directors or
nomination or recommendation for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, (C) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the Voting Shares of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting Shares of the
surviving entity) at least 80% of the total voting power represented by the
Voting Shares of the Company or such surviving entity outstanding, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, or (D) there is a change in control
of a nature that would be required to be reported in response to Item 5(f) of
Schedule 14A of Regulation 14 promulgated under the Securities Act of 1934, as
amended, as in effect on the date hereof.
(e) Claim: means any threatened, pending or completed action,
suit, arbitration or proceeding, or any inquiry or investigation, whether
brought by or in the right of the Company or otherwise, that Indemnitee in good
faith believes might lead to the institution of any such action, suit,
arbitration or proceeding, whether civil, criminal, administrative,
investigative or other, or any appeal therefrom.
(f) D&O Insurance: means any valid directors' and officers'
liability insurance policy maintained by the Company for the benefit of the
Indemnitee, if any.
(g) Determination: means a determination, and "Determined" means a
matter which has been determined based on the facts known at the time, by: (i) a
majority vote of directors who are not parties to any action that forms the
basis of any Claim, even though less than a quorum or (ii) by a committee of
such directors designated by a majority of such directors, even though less than
a quorum or (iii) if such a vote is not obtainable, or even if obtainable, if a
vote of such directors so directs, by independent
<PAGE> 4
4
legal counsel in a written opinion, or (iv) by the Special Independent Counsel
(in a written opinion) selected by Indemnitee as set forth in Section 6, or (v)
a majority of the shares present and voting, or (vi) a final adjudication by a
court of competent jurisdiction or by Arbitration.
(h) Equity Security: shall have the meaning given to such term
under Rule 3a11-1 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as in effect on the date hereof.
(i) Excluded Claim: means any payment for Losses or Expenses in
connection with any Claim: (i) based upon or attributable to Indemnitee gaining
in fact any personal profit or advantage to which Indemnitee is not entitled; or
(ii) for an accounting of profits in fact made from the purchase or sale by
Indemnitee of securities of the Company within the meaning of Section 16 of the
Securities Exchange Act of 1934, as amended, or similar provisions of any state
law; or (iii) resulting from Indemnitee's knowingly fraudulent, dishonest or
willful misconduct except to the extent that a court of competition has made a
determination of Good Faith; or (iv) the payment of which by the Company under
this Agreement is not permitted by applicable law.
(j) Expenses: means any reasonable expenses incurred by Indemnitee
as a result of a Claim or Claims made against Indemnitee for Indemnifiable
Events including, without limitation, attorneys' fees and all other costs,
expenses and obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
(k) Fines: means any fine, penalty or, with respect to an employee
benefit plan, any excise tax or penalty assessed with respect thereto.
(l) Good Faith: means a determination by the Chancery Court of
Delaware or the court in which the action or suit that forms the basis of a
Claim determines upon application that, Indemnitee acted in good faith and in a
manner reasonably believed by Indemnitee to be in, or not opposed to, the best
interest of the stockholders of Coram and is fairly and reasonably entitled to
indemnification for such amounts which the court shall deem proper.
(m) Indemnifiable Event: means any event or occurrence, occurring
prior to or after the date of this Agreement, related to the fact that
Indemnitee is or was a director, officer, employee, trustee, agent or fiduciary
of the Company, or is or was serving at the request of the Company as a
director, officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee, including, but not limited
to, any breach of duty, neglect, error, misstatement, misleading
<PAGE> 5
5
statement, omission, or other act done or wrongfully attempted by Indemnitee, or
any of the foregoing alleged by any claimant, in any such capacity.
(n) Losses: means any amounts or sums which Indemnitee is legally
obligated to pay as a result of a Claim or Claims made against Indemnitee for
Indemnifiable Events including, without limitation, damages, judgments and sums
or amounts paid in settlement of a Claim or Claims, and Fines.
(o) Person: means any individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority or other
entity of whatever nature.
(p) Potential Change in Control: shall be deemed to have occurred
if (A) the Company enters into an agreement, the consummation of which would
result in the occurrence of a Change in Control; (B) any Person (including the
Company) publicly announces an intention to take or to consider taking actions
which if consummated would constitute a Change in Control; (C) any Person (other
than (i) the Company or any Subsidiary or (ii) any pension, profit sharing,
employee stock ownership or other employee benefit plan of the Company or any
Subsidiary or any trustee of or fiduciary with respect to any such plan when
acting in such capacity), is or becomes after the date of this Agreement the
Beneficial Owner of 15% or more of the total voting power of the Voting Shares;
or (D) the Board of Directors adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.
(q) Relative: means a Person's spouse, parents, children,
siblings, mothers- and father-in-law, sons- and daughters-in-law, and brothers-
and sisters-in-law.
(r) Reviewing Party: means (i) any appropriate person or body
consisting of a member or members of the Company's Board of Directors or (ii)
any other person or body appointed by the Board who is not a party to the
particular Claim for which Indemnitee is seeking indemnification or (iii) the
Special Independent Counsel referred to in Section 4 or 6.
(s) Subsidiary: means any corporation of which fifty percent of
any class of Equity Security is owned, directly or indirectly, by the Company.
(t) Trust: means the trust established pursuant to Section 7
hereof.
(u) Voting Shares: means any issued and outstanding shares of
capital stock of the Company entitled to vote generally in the election of
directors.
<PAGE> 6
6
(v) Written Request: means written notice containing a schedule
setting forth in reasonable detail the amount expended or incurred and expected
for all Losses and Expenses payable as a result of such Claim, accompanied by a
copy of the relevant bill, agreement or other documentation in support thereof.
2. Basic Indemnification Agreement. In consideration of and as an
inducement to, the Indemnitee rendering valuable services to the Company, the
Company agrees that in the event Indemnitee is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company will indemnify Indemnitee to the fullest extent
authorized by law, against any and all Expenses and Losses (including all
interest, assessments and other charges paid or payable in connection with or in
respect of such Expenses and Losses) of such Claim, whether or not such Claim
proceeds to judgment or is settled or otherwise is brought to a disposition,
subject in each case, to the further provisions of this Agreement.
3. Limitations on Indemnification. Notwithstanding the provisions of
Section 2, Indemnitee shall not be indemnified and held harmless from any Losses
or Expenses (a) which have been Determined, as provided herein, to constitute an
Excluded Claim; (b) to the extent Indemnitee is indemnified by the Company and
has actually received payment pursuant to the Articles and By-laws, D&O
Insurance, or otherwise; or (c) other than pursuant to Section 4(d) or Section
14, in connection with any Claim initiated by Indemnitee, unless the Company has
joined in or the Board of Directors has authorized such Claim.
4. Indemnification Procedures.
(a) Promptly after receipt by Indemnitee of notice of any Claim,
Indemnitee shall, if indemnification with respect thereto may be sought from the
Company under this Agreement, notify the Company of the commencement thereof by
way of a Written Request and Indemnitee agrees not to make any admission (other
than a truthful answer to a question that he or she is required to answer in the
course of a deposition, interrogatory or testimony) or effect any settlement
with respect to such Claim without the consent of the Company, except any Claim
with respect to which the Indemnitee has undertaken the defense in accordance
with Section 4(d).
(b) If, at the time of the receipt of such Written Request, the
Company has D&O Insurance in effect, the Company shall give prompt notice of the
commencement of Claim to the insurers in accordance with the procedures set
forth in the respective policies. The Company shall thereafter take all
necessary or desirable action to cause such insurers to pay, on behalf of
Indemnitee, all Losses and Expenses payable as a result of such Claim.
<PAGE> 7
7
(c) To the extent the Company does not, at the time of the Claim
have applicable D&O Insurance, or if a Determination is made that any Expenses
arising out of such Claim will not be payable under the D&O Insurance then in
effect, the Company shall be obligated to pay the Expenses of any Claim in
advance of the final disposition thereof and the Company, if appropriate, shall
be entitled to assume the defense of such Claim, with counsel satisfactory to
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, the Company will not be liable to
Indemnitee under this Agreement for any legal or other Expenses subsequently
incurred by the Indemnitee in connection with such defense other than reasonable
Expenses of investigation; provided that Indemnitee shall have the right to
employ his or her counsel in such Claim but the fees and expenses of such
counsel incurred after delivery of notice from the Company of its assumption of
such defense shall be at the Indemnitee's expense; provided further that if: (i)
the employment of counsel by Indemnitee has been authorized by the Company, (ii)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense
or that counsel may not be adequately representing Indemnitee; or (iii) the
Company shall not, in fact, have employed counsel to assume the defense of such
action, the reasonable fees and expenses of counsel shall be at the expense of
the Company. The Company shall not be entitled to assume the defense of any
Claim as to which Indemnitee shall have made the conclusion provided for in
clause (ii) above.
(d) All payments on account of the Company's indemnification
obligations under this Agreement shall be made at the earlier of (i) ninety (90)
days after receipt by the Company of Indemnitee's Written Request or (ii) 60
days after any judgment, order, settlement, dismissal, award, conviction,
acceptance of a plea of nolo contendere or its equivalent, or other disposition
or partial disposition of any Claim or any other event which could enable the
Company to render a Determination as to indemnification therefor unless a
Determination is made that the Claims giving rise to Indemnitee's Written
Request are Excluded Claims or otherwise not payable under this Agreement,
provided that all payments on account of the Company's obligation to pay
Expenses under Section 4(c) of this Agreement prior to the final disposition of
any Claim shall be made within 20 days of Indemnitee's Written Request therefor
and such obligation shall not be subject to any such Determination but shall be
subject to Section 4(f) of this Agreement. In the event the Company takes the
position that the Indemnitee is not entitled to indemnification in connection
with the proposed settlement of any Claim or if there is a dispute about a
Determination under this Agreement, (i) the Indemnitee shall have the right at
his or her own expense to undertake defense of any such Claim, insofar as such
proceeding involves Claims against the Indemnitee, without notice to the Company
by way of Written Request, after the Company has notified the Indemnitee in
writing of its contention that the Indemnitee is not entitled to indemnification
and/or (ii) Indemnitee may select a Special Independent Counsel (the "Special
Independent Counsel") to make Determinations with respect to the rights of
Indemnitee to be paid Losses and Expenses under this Agreement. The Special
Independent Counsel shall be selected by Indemnitee
<PAGE> 8
8
and approved by the Company (which approval shall not be unreasonably withheld),
by a court of competent jurisdiction or by Arbitration. The Company shall pay
the reasonable fees of such Special Independent Counsel and shall indemnify such
Special Independent Counsel against any and all reasonable expenses (including
reasonable attorneys' fees), claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto. If it is
subsequently determined in connection with such proceedings that the
Indemnifiable Events are not Excluded Claims and that the Indemnitee, therefore,
is entitled to be indemnified under the provisions of Section 2 hereof, the
Company shall promptly indemnify the Indemnitee and shall pay the Indemnitee
interest at the prime rate announced from time to time by The Chase Manhattan
Bank on such indemnification payments from the date incurred by the Indemnitee.
(e) In the event Indemnitee is unsuccessful on the merits or
otherwise in the defense of any Claim, the Indemnitee shall provide a written
certificate executed by the Indemnitee stating that the Indemnitee has not been
adjudged liable for intentional misconduct, fraud or a knowing violation of the
law in connection with the performance of Indemnitee's duties to the Company or
shall provide a copy of an adjudication by a court of competent jurisdiction of
Good Faith.
(f) Indemnitee hereby expressly undertakes and agrees to reimburse
the Company for all Losses and Expenses paid by the Company in connection with
any Claim against Indemnitee in the event and only to the extent that a
Determination shall have been made by a court of competent jurisdiction in a
decision from which there is no further right to appeal that Indemnitee is not
entitled to be indemnified by the Company for such Losses and Expenses because
the Claim is an Excluded Claim or because Indemnitee is otherwise not entitled
to payment under this Agreement. The Indemnitee's obligation shall be unsecured
and no interest shall be charged thereon.
5. Settlement. The Company shall have no obligation to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of any Claim
effected without the Company's prior written consent. The Company shall not
settle any Claim in which it takes the position that Indemnitee is not entitled
to indemnification in connection with such settlement without the consent of the
Indemnitee, nor shall the Company settle any Claim in any manner which would
impose any Fine or any obligation on Indemnitee, without Indemnitee's written
consent. Neither the Company nor Indemnitee shall unreasonably withhold their
consent to any proposed settlement.
6. Change in Control; Extraordinary Transactions. The Company and
Indemnitee agree that if there is a Change in Control of the Company and there
is a dispute about a Determination under this Agreement, Indemnitee may select a
Special Independent Counsel to make Determinations with respect to the rights of
Indemnitee to be paid Losses and Expenses under this Agreement. The Special
Independent Counsel shall be selected by Indemnitee and approved by the Company
(which approval shall not be unreasonably
<PAGE> 9
9
withheld), by a court of competent jurisdiction or by Arbitration. The Company
shall pay the reasonable fees of such Special Independent Counsel and shall
indemnify such Special Independent Counsel against any and all reasonable
expenses (including reasonable attorneys' fees), claims, liabilities and damages
arising out of or relating to this Agreement or its engagement pursuant hereto.
The Company covenants and agrees that in the event of a Change in
Control of the sort set forth in clause (C) of Section 1(c), the Company will
use its best efforts (a) to have the obligations of the Company under this
Agreement including, but not limited to those under Section 7, expressly assumed
by the surviving, purchasing or succeeding entity, or (b) otherwise to
adequately provide for the satisfaction of the Company's obligations under this
Agreement, in a manner reasonably acceptable to the Indemnitee.
7. Establishment of Trust. In the event of a Potential Change in
Control or a Change in Control, the Company shall, upon written request by
Indemnitee, create a trust (the "Trust") for the benefit of the Indemnitee and
from time to time upon written request of Indemnitee shall fund the Trust in an
amount sufficient to satisfy any and all Losses and Expenses which are actually
paid or which Indemnitee reasonably determines from time to time may be payable
by the Company under this Agreement. The amount or amounts to be deposited in
the Trust pursuant to the foregoing funding obligation shall be determined by
the Reviewing Party. The terms of the Trust shall provide that upon a Change in
Control: (i) the Trust shall not be revoked or the principal thereof invaded
without the written consent of the Indemnitee; (ii) the trustee of the Trust
shall advance, within twenty days of a request by the Indemnitee, any and all
Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the
Trust under the circumstances under which the Indemnitee would be required to
reimburse the Company under Section 4(f) of this Agreement); (iii) the Company
shall continue to fund the Trust from time to time in accordance with the
funding obligations set forth above; (iv) the trustee of the Trust shall
promptly pay to the Indemnitee all Losses and Expenses for which the Indemnitee
shall be entitled to indemnification pursuant to this Agreement; and (v) all
unexpended funds in the Trust shall revert to the Company upon a final
determination by a court of competent jurisdiction, by Arbitration or in a final
decision from which there is no further right of appeal that the Indemnitee has
been fully indemnified under the terms of this Agreement. The Trustee of the
Trust shall be chosen by the Indemnitee.
8. No Presumption. For purposes of this Agreement, the termination of
any Claim by judgment, order, settlement (whether with or without court approval
or that of an arbitrator pursuant to an Arbitration) or conviction, or upon a
plea of nolo contendere, or its equivalent, shall not, of itself, (i) create a
presumption that Indemnitee did not meet any particular standard of conduct or
have any particular belief or that a court or an arbitrator pursuant to an
Arbitration has determined that indemnification is not permitted by applicable
law, including that Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believes to be in or not opposed to the best interest
<PAGE> 10
10
of the Company and (ii) adversely affect the rights of Indemnitee to
indemnification or payments except as may be provided herein.
9. Non-exclusivity, Etc. The rights of the Indemnitee hereunder shall
be in addition to any other rights Indemnitee may have under the Articles, the
By-laws, the Delaware General Corporation Law, any vote of stockholders or
disinterested directors or otherwise, both as to action in the Indemnitee's
official capacity and as to action in any other capacity by holding such office,
and shall continue after the Indemnitee ceases to serve the Company as a
director, officer, employee, agent or fiduciary, for so long as the Indemnitee
shall be subject to any Claim by reason of (or arising in part out of) an
Indemnifiable Event. To the extent that a change in the Delaware General
Corporation Law (whether by statute or judicial decision) permits greater
indemnification by agreement than would be afforded currently under the Articles
and By-laws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
10. Liability Insurance. To the extent the Company maintains D&O
Insurance, Indemnitee, if an officer or director (or former director or officer)
of the Company, shall be covered by such D&O Insurance, in accordance with its
or their terms, to the maximum extent of the coverage available for any director
or officer (or former director or officer) of the Company.
11. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. Partial Indemnity, Etc. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses and Losses of a Claim but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding
any other provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any or all Claims relating
in whole or in part to any Indemnifiable Event or in defense of any issue or
matter therein, including dismissal without prejudice, Indemnitee shall be
indemnified against all Expenses incurred in connection therewith. In connection
with any Determination as to whether Indemnitee is entitled to be indemnified
hereunder the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
13. Liability of Company. The Indemnitee agrees that neither the
stockholders nor the directors nor any officer, employee, representative or
agent of the Company shall be personally liable for the satisfaction of the
Company's obligations under
<PAGE> 11
11
this Agreement and the Indemnitee shall look solely to the assets of the Company
for satisfaction of any claims hereunder.
14. Enforcement,
(a) Indemnitee's right to indemnification and other rights under
this Agreement shall be specifically enforceable by Indemnitee only in the state
or Federal courts of the States of Delaware or Colorado or by Arbitration and
shall be enforceable notwithstanding any adverse Determination by the Company's
Board of Directors, independent legal counsel, the Special Independent Counsel
or the Company's stockholders and no such Determination shall create a
presumption that Indemnitee is not entitled to be indemnified hereunder. In any
such action the Company shall have the burden of proving that indemnification is
not required under this Agreement.
(b) In the event that any action is instituted by Indemnitee under
this Agreement, or to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all costs and expenses, including
counsel fees, incurred by Indemnitee with respect to such action, unless the
court or an arbitrator pursuant to an Arbitration determines that each of the
material assertions made by Indemnitee as a basis for such action were not made
in good faith or were frivolous.
15. Severability. In the event that any provision of this Agreement is
determined by a court to require the Company to do or to fail to do an act which
is in violation of applicable law, such provision (including any provision
within a single section, paragraph or sentence) shall be limited or modified in
its application to the minimum extent necessary to avoid a violation of law,
and, as so limited or modified, such provision and the balance of this Agreement
shall be enforceable in accordance with their terms to the fullest extent
permitted by law.
16. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such State.
17. Consent to Jurisdiction. The Company and the Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the States of Delaware
and Colorado for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement, other than the Indemnitee's election
under the terms of Section 14, and agree that any action instituted under this
Agreement, other than the Indemnitee's election under the terms of Section 14,
shall be brought only in the state and Federal courts of the States of Delaware
and Colorado.
<PAGE> 12
12
18. Notices. All notices, including a Written Request, or other
communications required or permitted hereunder shall be sufficiently given for
all purposes if in writing and personally delivered, telegraphed, telexed, sent
by facsimile transmission or sent by registered or certified mail, return
receipt requested, with postage prepaid addressed as follows, or to such other
address as the parties shall have given notice of pursuant hereto:
(a) If to the Company, to:
Coram Health Care Corp.
1125 Seventeenth Street
Suite 2100
Denver, CO 86202
Attn: General Counsel
(b)(b) If to the Indemnitee, to the address set forth on the
signature page hereto.
19. Counterparts. This Agreement may be signed in counterparts, each of
which shall be an original and all of which, when taken together, shall
constitute one and the same instrument.
20. Successors and Assigns. This Agreement shall be (i) binding upon
all successors and assigns of the Company, including any direct or indirect
successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, and (ii) shall
be binding upon and inure to the benefit of any successors and assigns, heirs,
and personal or legal representatives of Indemnitee.
<PAGE> 13
13
21. Amendment; Waiver. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless made in a writing
signed by each of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
IN WITNESS WHEREOF, the Company and Indemnitee have executed this
Agreement as of the day and year first above written.
INDEMNITEE
---------------------------------------
Address:
---------------------------------------
---------------------------------------
---------------------------------------
CORAM HEALTHCARE CORPORATION
By:
------------------------------------------
Name:
Title:
SUBSIDIARIES ON ATTACHED EXHIBIT A
By:
------------------------------------------
Name:
Title:
<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 QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
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0
0
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