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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 1-11343
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CORAM HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0615337
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1125 SEVENTEENTH STREET, SUITE 2100 80202
DENVER, COLORADO (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (303) 292-4973
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
Common Stock ($.001 par value per share) New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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RECENT EVENTS
AGREEMENTS WITH DEBT HOLDERS
On April 9, 1999, Coram Healthcare Corporation (the "Company" or "Coram")
entered into Amendment No. 2 (the "Note Amendment") to the Securities Exchange
Agreement (the "Securities Exchange Agreement") dated as of May 6, 1998 among
the Company, Coram, Inc., a wholly-owned subsidiary of the Company, and Cerberus
Partners, L.P., Goldman Sachs Credit Partners, L.P. and Foothill Capital
Corporation (collectively, the "Holders"). The Holders are the holders of the
Company's Series A Senior Subordinated Notes (the "Series A Notes") and Series B
Senior Subordinated Convertible Notes (the "Series B Notes"). Pursuant to the
Note Amendment, the $87.9 million in outstanding principal amount of Series B
Notes will be 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 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. As of April 15, 1999, the
principal amount outstanding under the Series A Notes was approximately $157.6
million.
Assuming that the Holders elected to convert the Series B Notes, and
exercise certain warrants, the Holders would own approximately 48% of the issued
and outstanding Common Stock.
In connection with the Note Amendment, on April 9, 1999 the Company also
entered into an amendment (the "Rights Plan Amendment") to its Stockholder
Rights Agreement, dated as of June 25, 1997 between the Company and BankBoston,
N.A., as Rights Agent (the "Rights Plan"). The Rights Plan Amendment provides an
exemption from the triggering provisions of the plan for the "beneficial
ownership" (as defined under the Rights Plan) of each of the Holders (and their
respective affiliates and associates) arising as a result of such parties'
holdings (1) of the Series B Notes, (2) of warrants to purchase Common Stock
issued in connection with the Company's current and former senior credit
facilities and (3) in certain proprietary and customer accounts. Under the terms
of the Rights Plan Amendment, this exemption ceases to apply if any of such
parties acquires beneficial ownership of additional shares of Common Stock, in
which case such person could be or become an "acquiring person" (within the
meaning of the Rights Plan) as a result of any and all of its holdings if
otherwise meeting the criteria set forth in the Rights Plan. The exemption does
not apply to any persons other than the Holders and their respective affiliates
and associates.
MANAGEMENT
Effective April 23, 1999, Donald J. Amaral turned over his duties as Chief
Executive Officer of the Company to Richard M. Smith, President of the Company.
Mr. Amaral will remain as the Company's Chairman of the Board. Mr. Smith also
became a member of the Company's Board of Directors. In connection with this
realignment of management responsibilities, the employment agreement between the
Company and Mr. Amaral will be amended, and Mr. Smith will enter into an
employment agreement with the Company, as described in Part III, Item 11,
"Compensation of Directors and Executive Officers-Employment Contracts,
Termination of Employment and Change of Control Arrangements," below.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
BOARD OF DIRECTORS
The following table sets forth certain information concerning each member
of the Board of Directors of Coram as of April 28, 1999. Except as provided
below, none of the directors entered into any arrangement or understanding
pursuant to which such person was to serve as a director.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH CORAM DIRECTOR SINCE
---- --- ------------------- --------------
<S> <C> <C> <C>
Donald J. Amaral.......................... 46 Chairman of the Board 1995
William J. Casey.......................... 54 Director 1997
Stephen A. Feinberg....................... 39 Director 1998
Richard A. Fink........................... 44 Director 1994
Stephen G. Pagliuca....................... 44 Director 1994
L. Peter Smith............................ 50 Director 1994
Richard M. Smith.......................... 39 Director, Chief Executive 1999
Officer, and President
</TABLE>
Mr. Amaral was appointed Chairman of the Company's Board of Directors in
September 1997. Mr. Amaral has served as a director of the Company since October
1995, Chief Executive Officer of the Company from October 1995 through April 23,
1999, and as President from October 1995 through December 1997. Previously, he
was President and Chief Operating Officer of OrNda Healthcorp ("OrNda") from
April 1994 to August 1995, and served in various executive positions with Summit
Health Ltd. ("Summit") from October 1989 to April 1994, including President and
Chief Executive Officer between October 1991 and April 1994. Summit was merged
into OrNda in April 1994. Mr. Amaral is also a member of the Board of Directors
of Meditrust Corporation and CareMatrix Corporation.
Mr. Casey has served as a director of Coram since September 1997. Since
1983, Mr. Casey has served as a consultant in the healthcare industry,
specializing in hospital management evaluation, hospital planning, managed care
contracting and turnaround services. From 1986 to the present, Mr. Casey has
also served as Contract Administrator for Emergency Department Physicians'
Medical Group, Inc. and its affiliated medical groups, which provide physician
services to non-governmental facilities. In addition, from 1988 to the present,
Mr. Casey has served as Contract Administrator for NP Medical Group, Inc., which
provides physician services to government facilities. Mr. Casey also serves as a
director of TriCounties Bank.
Mr. Feinberg has served as a director of Coram since June 1998. He was
designated to serve on the Board of Directors pursuant to the Securities
Exchange Agreement. Pursuant to the terms of the Securities Exchange Agreement,
Mr. Feinberg has also been designated as a member of the Audit Committee and the
Compensation Committee. Mr. Feinberg has managed separate pools of capital since
1985. Through Cerberus Capital Management, L.P., and its affiliates, Mr.
Feinberg currently manages approximately ten funds which make investments in
publicly traded and private bank debt, trade claims, large and middle market
bank loans, distressed real estate and public and private equity, including
post-bankruptcy equity.
Mr. Fink has served as a director of Coram since July 1994. Mr. Fink has
been a partner of the law firm of Brobeck, Phleger & Harrison LLP since October
1987 and is currently Chairman of that firm's Business & Technology Group.
Mr. Pagliuca has served as a director of Coram since July 1994. Mr.
Pagliuca founded Information Partners, a venture capital and management buyout
company based in Boston, Massachusetts, in 1989 and has been its Managing
Director since that time, focusing on health care and information industry
private-equity investment opportunities. Mr. Pagliuca is also the Chairman of
the Board of Wesley Jensen Corporation and serves on the Board of Directors of
Dade International, Physicians Quality Care, Inc., Vivra, Inc. and Physio
Control, Inc.
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Mr. L. Peter Smith has served as a director of Coram since July 1994.
Between November 1993 and July 1994, Mr. Smith was a director of Medisys, Inc.
Mr. Smith served as the Managing Partner of AllCare Health Services, Inc., which
was acquired by Medisys in December 1992. Mr. Smith is also Chief Executive
Officer and serves on the Board of Directors of Ralin Medical, Inc., a company
specializing in cardiac disease management. Mr. Smith also serves on the Board
of Directors of Sabratek Corporation and AMSYS, Inc.
Mr. Richard M. Smith has served as the President of Coram since December
1997, and was elected Chief Executive Officer and a director in April 1999. Mr.
Smith also served as Secretary from July 1995 to April 1999. Mr. Smith also
served as Chief Financial Officer from August 1995 to March 1998 prior to which
time he served as Vice President, Tax and Treasury, from October 1994 to August
1995. From November 1993 to October 1994, Mr. Smith served as Vice President,
Finance and Treasurer, and Assistant Secretary, of CoreSource, Inc., a health
care company specializing in third party claims administration, workers
compensation and integrated health delivery systems.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
executive officers of Coram. The executive officers serve at the pleasure of the
Board of Directors of Coram. Biographical information with respect to Richard M.
Smith is set forth under the caption "Board of Directors" above.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH CORAM
---- --- ----------------------
<S> <C> <C>
Richard M. Smith.......................... 39 Chief Executive Officer, President and
Director
Scott R. Danitz........................... 42 Vice President and Controller
Scott T. Larson........................... 36 Senior Vice President, General Counsel and
Secretary
Dominec A. Meffe.......................... 34 President, Coram Prescription Services
division
Vito Ponzio, Jr........................... 44 Senior Vice President, Human Resources
Paul J. Quiner............................ 39 Senior Vice President, Mergers and
Acquisitions
Wendy L. Simpson.......................... 50 Executive Vice President and Chief
Financial Officer
Joseph D. Smith........................... 40 Chief Operating Officer and President,
Resource Network division
</TABLE>
Scott R. Danitz has served as the Company's Vice President and Controller
since January 1998. Previously, Mr. Danitz was employed by First Data
Corporation from 1989 through 1997 and held various positions, the most recent
of which had been Vice President and Controller, Payment Instruments division.
Scott T. Larson has served as the Company's Senior Vice President and
General Counsel since July 1998 and was elected Secretary in April 1999.
Previously, Mr. Larson served as the Company's Vice President and Legal Counsel
from March 1996 to July 1998 and as Assistant General Counsel from July 1994
through February 1996. Between December 1991 and July 1994, Mr. Larson served as
Corporate Counsel and later as Assistant General Counsel for T2 Medical, Inc.
("T2 Medical"). Before joining T2 Medical, Mr. Larson was employed as an
attorney with the Atlanta-based law firm of Alston & Bird.
Dominec A. Meffe has served as the Vice President and General Manager of
the Company's Coram Prescription Services division since November 1997 and was
appointed to serve as the division's President in January 1998. Prior to joining
Coram, Mr. Meffe was the Chief Operating Officer of Columbia Pharmacy Solutions,
the prescription benefit management and mail order pharmacy division of
Columbia/HCA Healthcare Corporation. Mr. Meffe served in that position with
Columbia Pharmacy Solutions from March 1994 to October 1997.
Paul J. Quiner has served as Senior Vice President, Mergers and
Acquisitions since July 1998. Mr. Quiner served as Senior Vice President and
General Counsel of Coram from March 1996 to July 1998 and as Assistant General
Counsel from July 1994 through February 1996. From September 1992 to July 1994,
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Mr. Quiner served as Assistant General Counsel for T2 Medical. Previously, Mr.
Quiner was a partner in the Atlanta-based law firm of Alston & Bird.
Vito Ponzio, Jr. has served as the Company's Senior Vice President, Human
Resources since September 1998. Previously, Mr. Ponzio served as the Company's
Vice President of Human Resources from February 1996 to September 1998 and as
Director of Human Resources from February 1994 to February 1996.
Wendy L. Simpson has served as Executive Vice President and Chief Financial
Officer since March 1998. Previously, Ms. Simpson held the positions of
Executive Vice President, Chief Operating Officer and Chief Financial Officer
for Transitional Hospitals Corporation from July 1994 to July 1997. From March
1991 to June 1994, she was Chief Financial Officer and Principal of Weisman
Taylor Simpson & Sabatino. Ms. Simpson also serves on the Board of Directors of
LTC Properties, Inc., a real estate investment trust.
Joseph D. Smith has served as the Company's Chief Operating Officer since
January 1999 and has been President of the Resource Network division, since
March 1998. Prior to that time, Mr. Smith served as Chief Operating Officer of
the East of the Company beginning in December 1996. Preceding that and since
September 1994, Mr. Smith had served as Area Vice President, Northeast of the
Company. From 1993 until September 1994, Mr. Smith was the Eastern Area Vice
President of H.M.S.S., Inc., a regional home infusion company acquired by Coram
in September 1994.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Coram's directors, executive officers and persons who
beneficially own greater than 10% of a registered class of Coram's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission") and the New York Stock
Exchange ("NYSE"). Based solely upon its review of copies of the Section 16
reports Coram has received and written representations from certain reporting
persons, Coram believes that during its fiscal year ended December 31, 1998, all
of its directors, executive officers and greater than 10% beneficial owners were
in compliance with these filing requirements, with the exception of the
following: (i) Donald J. Amaral filed a late Statement of Changes in Beneficial
Ownership on Form 4 for the 6,081 shares of Common Stock he received in lieu of
salary for February 1998; (ii) Brendan K. Beggin, the Company's former Vice
President of Reimbursement, inadvertently overstated his ownership of shares of
Common Stock by 200 shares on the Initial Statement of Beneficial Ownership of
Securities on Form 3 filed in July 1998 (an amended Form 3 was filed); (iii)
Linda M. McBride filed a late Statement of Changes in Beneficial Ownership on
Form 4 for her June 1998 acquisition under the Company's Employee Stock Purchase
Plan of 100 shares of Common Stock; and (iv) Joseph D. Smith inadvertently
failed to disclose 212 shares of Common Stock in his Annual Statement of
Beneficial Ownership of Securities on Form 5 in December 1997 (an amended Form 5
was filed in 1998).
ITEM 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
COMPENSATION OF DIRECTORS
Fees for Board Service. Under current Company policy, non-employee
directors earn $2,000 for each Board of Directors meeting attended in person and
$750 for each Board of Directors meeting attended by telephone conference call.
No compensation is earned for participating at meetings of committees of the
Board of Directors. Employee directors earn no additional compensation for
services as a director. All directors are entitled to reimbursement for expenses
incurred in connection with attending meetings of the Board of Directors or
committees thereof. Compensation for participation in the Board of Directors is
at the discretion of the Board.
Mr. Amaral, the only director who was also an employee in 1998, received no
additional compensation for service on the Board of Directors. In addition to
the reimbursement of out-of-pocket expenses relating to
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meeting attendance, non-employee directors of Coram earned the following
compensation for Board meetings attended during fiscal 1998:
<TABLE>
<S> <C>
William J. Casey............................................ $14,500
Richard A. Fink............................................. 16,000
Stephen A. Feinberg......................................... 2,250
Stephen G. Pagliuca......................................... 7,250
L. Peter Smith.............................................. 14,500
</TABLE>
Outside Directors' Automatic Option Grant Program. Non-employee members of
the Board of Directors participate in the Automatic Option Grant Program in
effect under the 1994 Stock Option Plan. On the date of each annual meeting of
Coram's stockholders, each individual who will continue to serve as a
non-employee Board member receives a non-statutory stock option to purchase
2,500 shares of Common Stock at an exercise price equal to the fair market value
of the Common Stock on the automatic option grant date. Each individual who
continued to serve as a non-employee Board member on June 24, 1998 received an
automatic option grant under the program for 2,500 shares of Coram Common Stock
at an exercise price of $2.00 per share, the fair market value on such date.
Additionally, each non-employee individual, upon being newly appointed or
elected to Coram's Board of Directors, is automatically granted, at the time of
such initial election or appointment, a non-statutory option to purchase 75,000
shares of Common Stock. In 1998, options to purchase 75,000 shares relating to
newly appointed/elected individuals were granted to Mr. Feinberg upon his
appointment to the Board on June 24, 1998, at an exercise price of $2.00 per
share. With regard to the stock options for both the newly appointed/elected
Board members and the continuing Board members, each option is immediately
exercisable for all of the option shares. However, any shares purchased under
the option will be subject to repurchase by Coram at the original exercise price
paid per share upon the optionee's cessation of Board service prior to vesting
of such shares. The optionee's option shares will vest in a series of equal
monthly installments over twelve (12) months of Board service measured from the
automatic option grant date. The shares subject to each automatic option grant
under the 1994 Stock Option Plan will, however, vest in full upon (i) the
optionee's cessation of Board service due to death or disability, (ii) an
acquisition of Coram by merger or asset sale or (iii) a change in control of
Coram.
Each automatic option granted to the non-employee Board members includes a
limited stock appreciation right which allows the optionee, upon the successful
completion of a hostile tender offer for more than 50% of Coram's outstanding
securities, to surrender that option to Coram, in return for a cash distribution
in an amount per surrendered option share equal to the highest price per share
of Coram Common Stock paid in the tender offer less the exercise price payable
per share.
Other Director Options. In September 1998, the Board granted options to
purchase 75,000 shares of the Company's Common Stock to each of Messrs. Casey,
Fink, L. Peter Smith and Pagliuca at an exercise price of $1.6875 per share.
These options were granted subject to stockholder approval.
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SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the annual and long-term compensation earned
by the Chief Executive Officer serving in that capacity at December 31, 1998,
the four most highly compensated executive officers of the Company (other than
such Chief Executive Officer) who were serving as executive officers of the
Company at the end of 1998 (collectively the "Named Executive Officers") for
services rendered in all capacities to the Company and its subsidiaries for the
years ended December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
NAME AND OTHER ANNUAL STOCK
PRINCIPAL POSITION(1) YEAR SALARY BONUS(2) COMPENSATION(3) OPTIONS(#)
--------------------- ---- -------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Donald J. Amaral................. 1998 $650,000(5) $1,000,000(6) -- --
Director and Chairman 1997 623,076 90,000 -- 300,000
of the Board(4) 1996 600,000 600,000(7) -- --
Richard M. Smith................. 1998 $320,000 $ 187,500(9) $ -- 175,000
Chief Executive Officer, 1997 252,732 250,000 -- 650,000(10)
President and Director(8) 1996 201,458 205,500 -- --
Joseph D. Smith.................. 1998 $264,827 $ 217,500(9) $ -- 50,000
Chief Operating Officer 1997 235,809 50,000 -- 300,000(11)
and President, Resource 1996 148,425 116,750 -- 25,000
Network division
Paul J. Quiner................... 1998 $208,731 $ 138,750(9) $ -- 62,500
Senior Vice President, 1997 185,000 35,000 -- 137,500(12)
Mergers and Acquisitions 1996 180,270 83,750 -- 25,000
Christopher J. York.............. 1998 $264,827 $ 187,500(9) $ -- --
Former Chief Operating 1997 235,809 50,000 -- 325,000(14)
Officer, West(13) 1996 161,501 117,375 -- 50,000
</TABLE>
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(1) Unless otherwise indicated, see information above under captions "Board of
Directors" and "Executive Officers" for employment history.
(2) Unless otherwise indicated, reflects performance, retention and
discretionary bonuses paid in 1998 and 1997 for services rendered to the
Company in 1997 and 1996, respectively.
(3) Does not include perquisites aggregating in dollar value less than the
lesser of $50,000 or 10% of the individual's annual salary and bonus
reported for such individual for the year presented.
(4) Mr. Amaral served as Chief Executive Officer from October 1995 through
April 1999.
(5) Represents base salary received in cash (50%) and Common Stock (50%). The
shares were valued at the time the compensation was paid based upon the
lesser of the closing price of the Common Stock or the average closing
price for the prior 30 days.
(6) Represents payment of a contingent bonus for completing the refinancing of
the Company's debt through the completion of the transactions contemplated
by the Securities Exchange Agreement.
(7) In April 1997, fifty percent of Mr. Amaral's 1996 bonus was paid in cash
and fifty percent was paid in shares of Common Stock of the Company based
on the average closing price of the Company's Common Stock on the NYSE in
the 30-day period immediately preceding the issuance of such shares of
Common Stock.
(8) Mr. Smith was elected to serve as Chief Executive Officer and a director in
April 1999.
(9) Represents retention bonuses earned in 1998 and paid in 1999 except as to
Mr. J. Smith which $30,000 of the amount disclosed represents a performance
bonus earned and paid in 1998.
(10) Consists of 325,000 newly issued stock options under the 1994 Stock Option
Plan and the reissuance of 325,000 stock options under the 1994 Stock
Option Plan.
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(11) Consists of 150,000 newly issued stock options under the 1994 Stock Option
Plan and the reissuance of 150,000 stock options under the 1994 Stock
Option Plan.
(12) Consists of 62,500 newly issued stock options under the 1994 Stock Option
Plan and the reissuance of 75,000 stock options under the 1994 Stock Option
Plan.
(13) Mr. York resigned in February 1999.
(14) Consists of 150,000 newly issued stock options under the 1994 Stock Option
Plan and the reissuance of 175,000 stock options under the 1994 Stock
Option Plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to
each of the Named Executive Officers during the year ended December 31, 1998. In
addition, in accordance with the rules of the Commission, hypothetical gains or
"option spreads" that would exist for the respective options are also shown.
These gains are based on assumed rates of annual compounded stock price
appreciation of 5% and 10% from the date the options were granted over the full
option term. No stock appreciation rights were granted to the Named Executive
Officers during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO PRICE TERM(1)
OPTIONS EMPLOYEES IN PER -------------------------------
NAME GRANTED FISCAL YEAR SHARE EXPIRATION DATE 0% 5% 10%
---- ---------- ------------ -------- --------------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald J. Amaral........ -- --% $ -- -- $-- $ -- $ --
Paul J. Quiner.......... 62,500 2.29 2.000 June 24, 2008 -- 78,612 199,218
Joseph D. Smith......... 50,000 1.83 2.375 March 11, 2008 -- 74,681 189,257
Richard M. Smith........ 175,000 6.40 2.250 August 10, 2008 -- 247,627 627,536
Christopher J. York..... -- -- -- -- -- -- --
</TABLE>
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(1) Potential realizable value is determined by taking the exercise price per
share and applying the stated annual appreciation rate compounded annually
for the term of the option, subtracting the exercise price per share at the
end of the period and multiplying the remaining number by the number of
options granted. Actual gains, if any, on stock option exercises and Common
Stock holdings are dependent on the future performance of the Coram Common
Stock and overall stock market conditions. Does not reflect changes in the
market price of Coram Common Stock subsequent to December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the aggregate number
of options exercised during the year ended December 31, 1998 by each of the
Named Executive Officers and outstanding options held by each such officer at
December 31, 1998. None of the Named Executive Officers exercised any stock
appreciation rights during the 1998 fiscal year. No stock appreciation rights
were held by the Named Executive Officers at the end of the 1998 fiscal year.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Amaral.......... -- -- 2,300,000 200,000 -- --
Paul J. Quiner............ -- -- 83,332 116,668 -- --
Joseph D. Smith........... -- -- 176,562 173,438 -- --
Richard M. Smith.......... -- -- 371,875 453,125 -- --
Christopher J. York....... -- -- 192,707 132,293 -- --
</TABLE>
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(1) Whether an option is "in-the-money" is determined by subtracting the
exercise price of the option from the closing price for the Common Stock as
reported by the NYSE on December 31, 1998 ($1.875). If
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the amount is greater than zero, the option is "in-the-money." For the purpose
of such calculation, the exercise price per share is the applicable exercise
price as of December 31, 1998 and does not reflect market price changes
subsequent to December 31, 1998.
Shares subject to options granted under the 1994 Stock Option Plan to the
Company's Named Executive Officers will immediately vest in full upon (i) an
acquisition of the Company by merger or asset sale in which such options are not
to be assumed by the acquiring entity or, (ii) if such options are so assumed,
the subsequent involuntary termination of the optionee's employment within
eighteen months following such acquisition. In addition, the Compensation
Committee, as the 1994 Stock Option Plan administrator, has the authority to
provide for the accelerated vesting of the shares of the Company's Common Stock
subject to outstanding options held by the Company's executive officers, or any
unvested shares actually held by those individuals under the 1994 Stock Option
Plan, in connection with a hostile take-over of the Company effected through a
successful tender offer for more than 50% of the Company's outstanding
securities or through a change in the majority of the Board as a result of one
or more contested elections for Board membership or in the event such
individual's employment were to be involuntarily terminated following such
hostile take-over.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
The Company has entered into or anticipates entering into employment and/or
severance agreements with its Named Executive Officers and certain other
executive officers as described below.
Donald J. Amaral. On October 13, 1995, Coram entered into an employment
agreement with Donald J. Amaral, for a three-year term commencing on such date,
unless otherwise terminated in accordance with the terms thereof. The Company
extended the agreement to Mr. Amaral to attract and retain his services in light
of the downturn in the Company's business and its uncertain prospects, as he has
been considered critical to Coram's future success in the Company's turn-around
period. Under the agreement, Mr. Amaral initially received a base salary of
$600,000 per annum, and the right to receive a performance bonus based on the
Company's reaching certain performance targets determined annually by the
Compensation Committee. If Mr. Amaral's employment is terminated by the Company
other than for cause or by Mr. Amaral in the event that the Company fails to
comply with any material provision of the agreement, Mr. Amaral will be entitled
to receive his base salary through the longer of (i) the remaining term of the
agreement or (ii) twelve months, plus a bonus payable after the end of each of
the Company's fiscal years thereafter through 1998 in an amount equal to the
average bonus earned by Mr. Amaral during the employment period. Under the
agreement, Mr. Amaral was also granted options to purchase 2,200,000 shares of
Common Stock at $3.45 per share. The options vested and became exercisable in
three equal annual installments upon Mr. Amaral's completion of each year of
service over the three-year period measured from the October 13, 1995 grant
date. Mr. Amaral is also eligible to receive all other benefits generally made
available to the Company's senior executives.
In June 1998, Mr. Amaral's employment agreement was amended to provide for
(i) an increase in Mr. Amaral's base salary from $600,000 per annum to $650,000
per annum, (ii) an extension of the term of Mr. Amaral's employment agreement
until May 15, 2000 and (iii) the grant of options to purchase an additional
300,000 shares of Coram Common Stock at a price of $2.625 per share. Subject to
Mr. Amaral's continued employment with the Company, such options vest and become
exercisable in three equal annual installments on each of the first, second and
third anniversaries of their grant date and immediately vest and become
exercisable in full upon the occurrence of any event resulting in the full
vesting of the original options granted under the employment agreement.
In September 1997, the Board of Directors approved certain contingent
"success fees" payable to Mr. Amaral as follows: (i) $1,000,000 upon the
refinancing of the Company on terms acceptable to the Board of Directors,
payable in two segments (a) $500,000 upon closing of any such refinancing, and
(b) $500,000 six months later provided that Mr. Amaral is still employed by the
Company at that date; and (ii) $4,000,000 upon the sale of the Company on terms
acceptable to the Board of Directors and approved by the Company's stockholders,
which would be payable on the earlier of (a) the first anniversary of the sale
if Mr. Amaral remains employed by the Company or (b) involuntary termination,
other than for cause, of Mr. Amaral following the sale of the Company. The
$1,000,000 success fee relating to the refinancing of the Company's
9
<PAGE> 10
debt in May 1998 pursuant to the Securities Exchange Agreement was paid in a
$500,000 installment in September 1998 and a $500,000 installment in February
1999.
In December 1997, at Mr. Amaral's request, the Board of Directors adopted a
resolution authorizing the payment of Mr. Amaral's salary, effective January 1,
1998, in shares of Common Stock of the Company with the number of shares issued
representing a cash value of the monthly base salary subject to normal or
required payroll deductions. The number of shares issued in payment of such
salary was calculated based on a per share price equal to the lesser of (i) the
closing price of the Company's Common Stock on the last business day of the
month, or (ii) the average closing price of the Company's Common Stock during
the thirty business days ending on the last business day of the month. In 1998,
Mr. Amaral received $325,000, representing salary for the first six months of
1998, in the form of Common Stock. See "Summary Compensation Table."
The Company anticipates entering into an amendment to the employment
agreement with Mr. Amaral to reflect the change in his management
responsibilities effective April 23, 1999. The amendment to his employment
agreement is expected to involve the following: (i) reduction in compensation to
$100,000 annually; (ii) a reduction in services required to no more than sixteen
hours per month; (iii) a fee of $2,500 per day plus expenses if time spent on
Company business exceeds sixteen hours per month; (iv) elimination of the
performance bonus contemplated by the agreement relating to the Company
achieving certain earning targets; and (v) accelerated vesting of all
outstanding options as of the end of the employment term on May 15, 2000.
Other Named Executive Officers. The Company's Compensation Committee has
authorized Company management to enter into employment agreements with Richard
M. Smith, Joseph D. Smith and Paul J. Quiner.
With respect to Richard M. Smith, his employment agreement is expected to
provide for (i) an initial term of three years (through April 30, 2002); (ii)
salary of $425,000 annually; (iii) severance payments equal to a minimum of two
years annual salary; and (iv) a payment of $500,000 upon the occurrence of a
"change of control."
With respect to Joseph D. Smith, his employment agreement is expected to
provide (i) an initial term of two years (through April 30, 2001); (ii) salary
of $310,000 annually; (iii) a severance payment of a minimum of two years annual
salary; and (iv) a payment of $375,000 upon the occurrence of a "change of
control."
With respect to Paul J. Quiner, his employment agreement is expected to
provide (i) an initial term of one year (through April 30, 2000); (ii) salary of
$225,000 annually; (iii) a severance payment of a minimum of one year annual
salary; and (iv) a payment of $150,000 upon the occurrence of a "change of
control."
A "change in control" is defined in each of the agreements for Messrs.
Richard Smith, Quiner and Joseph Smith and other executive officers (as
described below) as (i) a merger or consolidation in which the Company is not
the surviving entity; (ii) the sale, transfer or other disposition of all or
substantially all the assets of the Company; (iii) any reverse merger in which
the Company is the surviving entity but in which securities possessing more than
fifty percent of the total combined voting power of Coram's outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such merger. The severance amounts
represent minimum severance, including health and welfare benefits, due upon
termination by the Company (other than for cause) or involuntary termination
following a "change in control."
In 1997, upon Mr. Smith's promotion to President, Mr. Smith's retention
bonus was increased to a total of $240,000 of which $52,500 remains to be paid
in July 1999. Upon Mr. Quiner's promotion to Senior Vice President, Mergers and
Acquisitions in July 1998, his retention bonus was increased by $30,000, which
will become payable in July 1999.
Other Executive Officers. The Company's Compensation Committee has
authorized Company management to enter into employment and/or severance
agreements with certain other executive officers of the Company. The Company
anticipates entering into an employment agreement with Wendy L. Simpson,
Executive Vice President and Chief Financial Officer of the Company, which is
expected to provide (i) an
10
<PAGE> 11
initial term of two years (through April 30, 2001); (ii) salary of $310,000
annually; (iii) severance payments of a minimum of two years annual salary; and
(iv) a payment of $375,000 upon a "change of control."
Each of the employment agreements with Messrs. Richard Smith, Quiner,
Joseph Smith, and Mrs. Simpson and other executive officers is expected to
contain non-competition covenants that would cover the period of such officer's
employment plus such officer's severance period. The agreements also contain
covenants restricting the solicitation of customers and employees of the
Company.
The Company's Compensation Committee has authorized Company management to
enter into employment agreements and/or severance agreements with certain other
executive officers of the Company. These agreements will provide for minimum
severance payments upon termination of employment and, in certain circumstances,
change of control payments. The aggregate of all such severance and "change of
control" payments to such other executive officers is approximately $836,800.
ITEM 12. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT.
The following table sets forth as of March 31, 1999 (unless otherwise noted
below) the number of shares of outstanding Coram Common Stock beneficially owned
by (i) each person known to Coram to be the owner of more than 5% of the
outstanding Common Stock, (ii) each of the executive officers of the Company,
(iii) each of the Directors of the Company, and (iv) all Directors and executive
officers of Coram as a group. All information is taken from or based upon
ownership filings made by such persons with the Commission or upon information
provided by such persons to Coram.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OF
SHARES OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER(1) COMMON STOCK(2) OUTSTANDING(3)
--------------------------------------- --------------- --------------
<S> <C> <C>
Donald J. Amaral............................................ 2,524,296 4.9%
William J. Casey............................................ 4,191 *
Scott R. Danitz............................................. 7,721 *
Stephen A. Feinberg(4)...................................... 21,103,755 29.9%
Richard A. Fink............................................. 9,791 *
Scott T. Larson............................................. 63,746 *
Dominec A. Meffe............................................ 12,800 *
Vito Ponzio, Jr............................................. 63,341 *
Stephen G. Pagliuca......................................... 9,791 *
Paul J. Quiner.............................................. 102,931 *
Wendy L. Simpson............................................ 165,833 *
Joseph D. Smith............................................. 217,398 *
L. Peter Smith.............................................. 39,872 *
Richard M. Smith............................................ 428,284 *
All executive officers and directors, as a group (14
persons).................................................. 24,753,750 33.4%
Cerberus Entities(4)........................................ 21,103,755 29.9%
Foothill(5)................................................. 8,599,849 14.8%
Goldman, Sachs(6)........................................... 21,023,744 29.8%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the address of each person named above is 1125
Seventeenth Street, Suite 2100, Denver, Colorado 80202.
(2) The aggregate ownership numbers presented include the following shares of
Common Stock subject to options for the following persons: Mr. Amaral
2,400,000; Mr. Casey 2,291; Mr. Danitz 7,291; Mr. Fink 9,791; Mr. Larson
58,333; Mr. Meffe 11,666; Mr. Ponzio 58,564; Mr. Pagliuca 9,791; Mr. Quiner
96,092; Mrs. Simpson 145,833; Mr. Joseph D. Smith 217,186; Mr. L. Peter
Smith 9,791; Mr. Richard M. Smith 426,561. Except as indicated by footnote,
Coram has been advised that the persons and entities named in the table
above have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them. Amounts do not include
shares of Common Stock issued as the Company
11
<PAGE> 12
matching portion under the Company's 401(k) plan with respect to the first
quarter of 1999, which the Company believes is immaterial.
(3) Shares of Common Stock issuable upon exercise of options or warrants or
conversion of securities convertible into shares of Common Stock that are
currently exercisable or exercisable within 60 days are deemed outstanding
for purposes of computing the percentage ownership of the person or entity
holding such options, warrants or convertible securities but not for
purposes of computing the percentage of any other person or entity.
Percentage computations are based on 49,467,504 shares of Common Stock
outstanding as of March 31, 1999.
(4) Information with respect to Stephen A. Feinberg and the Cerberus Entities
are based on the Schedule 13D, Amendment No. 1 and Amendment No. 2 thereto,
dated June 30, 1998, August 26, 1998 and April 9, 1999, respectively, filed
with the Commission. Cerberus Partners, L.P. ("Cerberus") is the holder of
$15,174,268 principal amount of Series B Notes of the Company; Cerberus
International, Ltd. ("International") is the holder of $9,644,090 principal
amount of Series B Notes of the Company; Ultra Cerberus Fund, Ltd. ("Ultra")
is the holder of $989,137 principal amount of Series B Notes of the Company
and certain private investment funds (the "Funds") in the aggregate are the
holder of $7,418,531 principal amount of Series B Notes of the Company. The
Series B Notes are convertible, at the option of the holder thereof, into
shares of Common Stock of the Company at the rate of $2.00 per share. See
"Recent Events." Mr. Feinberg possesses sole power to vote and direct the
disposition of all securities of the Company owned by each of Cerberus,
International, Ultra and the Funds. In addition, $7,238,688 principal amount
of Series B Notes are held of record by Cerberus, with respect to which Mr.
Feinberg exercises sole voting but no investment control over such Series B
Notes and the shares of Common Stock into which such Series B Notes are
convertible. Also, Cerberus, International, Ultra and the Funds are the
holders of warrants to purchase, respectively, 246,637, 327,150, 32,976 and
248,147 additional shares of Common Stock of the Company and Mr. Feinberg
possesses sole voting but no investment control over warrants to purchase an
additional 16,488 shares of Common Stock from the Company and sole voting
but no investment control over the shares of Common Stock underlying such
16,488 warrants. Thus, for the purposes of Rule 13d-3 of the Exchange Act,
Mr. Feinberg is deemed to beneficially own 21,103,754 shares of Common
Stock, or 29.9% of those deemed issued and outstanding pursuant to Rule
13d-3.
Pursuant to an agreement between Cerberus and Goldman Sachs Credit Partners,
L.P. ("GSCP"), dated as of April 22, 1997 (the "GSCP Agreement"), GSCP has
the right to receive the dividends from, and the proceeds from the sale of,
$8,992,159 principal amount (the "GSCP Interest") of the $15,174,268
principal amount of Series B Notes held by Cerberus and the shares of Common
Stock into which such Series B Notes relating to the GSCP Interest are
convertible. In addition, certain unaffiliated entities, in the aggregate,
have the right to receive the dividends from, and the proceeds from the sale
of, $7,238,688 principal amount of Series B Notes and the shares of Common
Stock into which such Series B Notes are convertible and warrants to
purchase 16,488 Shares and the Shares underlying such 16,488 warrants. The
address for Mr. Feinberg and the Cerberus Entities is 450 Park Avenue, 28th
Floor, New York, New York 10022.
(5) Information with respect to Foothill Capital Corporation is based on the
Schedule 13G, Amendment No. 1 and Amendment No. 2 thereto dated June 30,
1998, August 26, 1998 and April 9, 1999, respectively, filed with the
Commission. The Foothill Group, Inc., a Delaware Corporation ("Group"),
Foothill Capital Corporation, a California corporation ("Capital"), Foothill
Partners II, L.P., a Delaware limited partnership ("Partners"), Foothill
Income Trust, L.P., a Delaware limited partnership ("Foothill Trust"), FIT
GP, LLC, a Delaware limited liability company ("FIT") and M. Edward Stearns,
Karen S. Sandler, Dennis R. Ascher, Jeffrey T. Nikora, and John F. Nickoll
(collectively, the "Managing Partners/Members") and Peter E. Schwab and
David C. Hilton (the "Managing Partners") (Group, Capital, Partners,
Foothill Trust, FIT, the Managing Partners/Members and the Managing Partners
are collectively referred to as "Foothill"). Group, the Managing
Partners/Members and the Managing Partners are the general partners of
Partners. Capital is a wholly-owned subsidiary of Group. FIT is the general
partner of Foothill Trust and the Managing Partners/Members are the managing
members of FIT. Accordingly, (i) Group, the Managing Partners/Members and
the Managing Partners may be
12
<PAGE> 13
deemed to beneficially own the shares of Common Stock held by Partners, as its
general partners, (ii) the Managing Partners/Members may be deemed to
beneficially own the shares of Common Stock held by Foothill Trust as the
managing members of the general partner of Foothill Trust, (iii) FIT may be
deemed to beneficially own the shares of Common Stock held by Foothill
Trust, as its general partner, and (iv) Group may be deemed to beneficially
own the shares held by Foothill Capital as its sole shareholder. Foothill
has a beneficial interest in all or part of $16,487,123 principal amount of
the Company's Series B Notes, which are convertible into the Company's
Common Stock at a conversion price of $2.00 per share. See "Recent Events."
In addition, certain Foothill entities own warrants that are exercisable
into shares of the Company's Common Stock. The address for Foothill is
11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025.
(6) Information with respect to Goldman, Sachs is based on Schedule 13D,
Amendment No. 1 and Amendment No. 2 thereto dated June 30, 1998, August 26,
1998 and April 9, 1999, respectively, filed with the Commission. GSCP,
Goldman Sachs Global Holdings L.L.C. ("GSGH"), Goldman, Sachs & Co.
("GS&Co."), and The Goldman Sachs Group, L.P. ("GS Group") are referred to
collectively as "Goldman Sachs."
GSCP, a Bermuda limited partnership, was formed for the purpose of providing
bank debt financing and trading and investing in bank loans, trade claims
and other loans and loan instruments. GSGH, a Delaware limited liability
company, is the sole general partner of GSCP. The managing member of GSGH is
GS Group. The principal business address of GSCP is Conyers, Dill & Pearman,
Church Street, Hamilton HM CX, Bermuda. The principal business address of
GSGH is 85 Broad Street, New York, NY 10004.
GS&Co., a New York limited partnership, is an investment banking firm and a
member of the NYSE and other national exchanges. GS Group, one of the
general partners of GS&Co., owns a 99% interest in GS&Co. GS Group is a
Delaware limited partnership and holding partnership that (directly and
indirectly through subsidiaries or affiliated companies or both) is a
leading investment banking organization. The other general partner of GS&Co.
is The Goldman Sachs & Co. L.L.C., a Delaware limited liability company ("GS
L.L.C."), which is a wholly-owned subsidiary of GS Group and The Goldman
Sachs Corporation, a Delaware corporation ("GS Corp."). GS Corp. is the sole
general partner of GS Group. The principal business address of each of
GS&Co., GS Group, GS L.L.C. and GS Corp. is 85 Broad Street, New York, NY
10004.
Following the transactions under the Securities Exchange Agreement, GSCP
owned (i) $52,837,117.31 principal amount of Series A Notes and
$30,970,375.22 principal amount of Series B Notes directly and (ii)
$15,341,104.08 principal amount of Series A Notes and $8,992,158.80
principal amount of Series B Notes subject to the GSCP Agreement.
As of June 30, 1998, GS&Co. and GS Group beneficially owned 579 shares of
Common Stock of the Company held in client accounts with respect to which
GS&Co. or employees of GS&Co. have voting or investment discretion, or both
("Managed Accounts"). GS&Co. and GS Group each disclaims beneficial
ownership of shares of Common Stock held in Managed Accounts.
On August 26, 1998, GS&Co. acquired warrants (the "New Warrants") giving
GS&Co. the right to acquire 863,588 shares (subject to antidilution and
other adjustments) of Common Stock of the Company (the "New Warrant
Shares"). The New Warrant Shares were issued pursuant to the warrant
agreement dated as of August 26, 1998 to which GSCP and the Company were
party (the "New Warrant Agreement") in connection with the senior loan
agreement dated as of August 20, 1998 to which GSCP and the Company were
party (the "Senior Loan Agreement"). GSCP directed that the New Warrants be
issued to GS&Co.
As of April 9, 1999, GSCP beneficially owned 19,981,267 shares of Common
Stock (representing 28.8% of the Common Stock outstanding), GSGH
beneficially owned 19,981,267 shares of Common Stock (representing 28.8% of
the Common Stock outstanding), GS Group beneficially owned 21,023,744 shares
of Common Stock (representing 29.8% of the Common Stock outstanding), and
GS&Co. beneficially owned 21,023,744 shares of Common Stock (representing
29.8% of the Common Stock outstanding). See "Recent Events."
13
<PAGE> 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
L. Peter Smith also serves on the Board of Directors of Sabratek
Corporation, a manufacturer of medical devices. In December 1998, the Company
agreed to amend its agreement with Sabratek Corporation to be the Company's sole
supplier of multi-therapy infusion pumps and related proprietary telemedicine
technology during the next ten (10) years. This agreement contains a provision
that allows either party to cancel the agreement upon 90 days notice. The
pricing schedule applicable to the infusion pumps and related technology to be
purchased was negotiated by certain of Coram's management after proposals from
other manufacturers for comparable equipment had been solicited. The Company
purchased approximately $7.8 million of multi-therapy infusion pumps and related
proprietary telemedicine technology from Sabratek Corporation in 1998.
Stephen A. Feinberg, a director of the Company, is the managing member of
Cerberus Associates, L.L.C., which is the general partner of Cerberus and the
investment manager for each of International, Ultra and the Funds. Cerberus,
International, Ultra, and the Funds hold $15,174,268, $9,644,090, $989,137 and
$7,418,513 principal amount of the Series B Notes and warrants to purchase
246,637, 327,150, 32,976, and 248,147, shares of Common Stock, respectively.
Cerberus holds approximately $72,546,817 and $8,054,100 principal amount of
Series A Notes and notes under the New Senior Credit Facility, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are re-filed as part of this report to correct
page F-6 Consolidated Statements of Cash Flows, which was amended to correct
supplemental disclosure information for the year ended December 31, 1998:
1. Financial Statements. The following Consolidated Financial
Statements of the Registrant and Report of Independent Auditors are
presented on pages F-1 and thereafter:
Report of Independent Auditors
Consolidated Balance Sheets -- December 31, 1998 and 1997
Consolidated Statements of Operations -- Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- Years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The following Consolidated Financial
Statement Schedule of the Registrant for the years ended December 31, 1998,
1997 and 1996 is presented following the Notes to Consolidated Financial
Statements.
Schedule II -- Valuation and Qualifying Account
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes
thereto.
(c) Exhibits
14
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.48* -- Amendment No. 2, dated as of April 9, 1999 to the
Securities Exchange Agreement, dated May 6, 1998 and
amended as of June 30, 1998, among Coram, Inc., Coram
Healthcare Corporation, Cerberus Partners, L.P., Goldman
Sachs Credit Partners L.P. and Foothill Capital
Corporation.
20.2* -- Amendment No. 1, dated as of April 9, 1999 to Stockholder
Rights Agreement, dated as of June 25, 1997, between
Coram Healthcare Corporation and BankBoston, N.A., as
Rights Agent.
23.1(a) -- Consent of Ernst & Young LLP.
</TABLE>
- ---------------
* Incorporated by reference from Exhibits 1 and 2, respectively, of the
Registrant's Current Report on Form 8-K, dated April 19, 1999.
(a) Filed herewith.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.
CORAM HEALTHCARE CORPORATION
By: /s/ RICHARD M. SMITH
----------------------------------
Richard M. Smith
Chief Executive Officer and
President
By: /s/ WENDY L. SIMPSON
----------------------------------
Wendy L. Simpson
Executive Vice President and
Chief Financial Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DONALD J. AMARAL Chairman of the Board April 30, 1999
- -------------------------------------
Donald J. Amaral
/s/ RICHARD M. SMITH Chief Executive Officer, President April 30, 1999
- ------------------------------------- and Director (Principal Executive
Richard M. Smith Officer)
/s/ WENDY L. SIMPSON Executive Vice President and Chief April 30, 1999
- ------------------------------------- Financial Officer (Principal
Wendy L. Simpson Financial Officer)
/s/ SCOTT R. DANITZ Vice President and Controller April 30, 1999
- ------------------------------------- (Principal Accounting Officer)
Scott R. Danitz
/s/ WILLIAM J. CASEY Director April 30, 1999
- -------------------------------------
William J. Casey
/s/ RICHARD A. FINK Director April 30, 1999
- -------------------------------------
Richard A. Fink
/s/ STEPHEN G. PAGLIUCA Director April 30, 1999
- -------------------------------------
Stephen G. Pagliuca
/s/ L. PETER SMITH Director April 30, 1999
- -------------------------------------
L. Peter Smith
Director
- -------------------------------------
Stephen A. Feinberg
</TABLE>
16
<PAGE> 17
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets -- As of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations -- Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 1998, 1997 and 1996.................... F-5
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II -- Valuation and Qualifying Accounts............ S-1
</TABLE>
F-1
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Coram Healthcare Corporation
We have audited the accompanying consolidated balance sheets of Coram
Healthcare Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Coram
Healthcare Corporation at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Denver, Colorado
March 1, 1999
F-2
<PAGE> 19
CORAM HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 53 $ 108,950
Cash limited as to use.................................... 1,557 1,029
Accounts receivable, net of allowances of $18,128 and
$24,047................................................ 113,697 86,142
Inventories............................................... 27,203 14,277
Deferred income taxes, net................................ 705 3,077
Other current assets...................................... 4,963 9,510
--------- ---------
Total current assets.............................. 148,178 222,985
Property and equipment, net................................. 26,563 20,050
Deferred income taxes, non-current, net..................... 4,365 2,336
Other deferred costs........................................ 5,243 7,668
Goodwill, net of accumulated amortization of $67,247 and
$57,937................................................... 235,696 243,864
Other assets................................................ 17,574 19,917
--------- ---------
Total assets...................................... $ 437,619 $ 516,820
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 52,930 $ 39,084
Accrued compensation...................................... 11,205 7,428
Interest payable.......................................... 4,671 473
Current maturities of long-term debt...................... 260 150,225
Income taxes payable...................................... 300 10,287
Deferred income taxes..................................... 1,060 1,256
Reserve for litigation.................................... 2,987 2,785
Accrued merger and restructuring.......................... 3,935 8,771
Other accrued liabilities................................. 6,271 14,296
--------- ---------
Total current liabilities......................... 83,619 234,605
Long-term debt.............................................. 242,162 150,428
Minority interest in consolidated joint ventures............ 2,024 1,016
Other liabilities........................................... 12,947 1,588
Deferred income taxes, non-current.......................... 4,010 4,157
Commitments and contingencies............................... -- --
--------- ---------
Total liabilities................................. 344,762 391,794
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 49,201 at December 31, 1998 and
48,069 at December 31, 1997............................... 49 48
Additional paid-in capital.................................. 427,133 437,608
Accumulated deficit......................................... (334,325) (312,630)
--------- ---------
Total stockholders' equity........................ 92,857 125,026
--------- ---------
Total liabilities and stockholders' equity........ $ 437,619 $ 516,820
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 20
CORAM HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Net revenue................................................. $526,516 $ 473,141 $529,618
Cost of service............................................. 394,532 337,537 369,337
-------- --------- --------
Gross profit................................................ 131,984 135,604 160,281
Operating expenses:
Selling, general and administrative expenses.............. 96,571 93,167 104,261
Provision for estimated uncollectible accounts............ 15,343 16,209 29,045
Amortization of goodwill.................................. 11,139 13,586 15,259
Provision for (income from) litigation settlements........ -- (156,792) 27,875
Reversal of accrual for restructuring costs............... (3,900) -- --
-------- --------- --------
Total operating expenses.......................... 119,153 (33,830) 176,440
-------- --------- --------
Operating income (loss)..................................... 12,831 169,434 (16,159)
Other income (expenses):
Interest income........................................... 1,102 2,242 1,497
Interest expense.......................................... (32,734) (75,026) (78,767)
Termination fee........................................... -- 15,182 --
Equity in net income of unconsolidated joint ventures..... 69 1,245 991
Gains on sales of businesses.............................. 1,071 26,744 --
Gains (losses) on sales of property and equipment......... (363) (61) 668
Other income, net......................................... 28 333 456
-------- --------- --------
Income (loss) before income taxes and minority interests.... (17,996) 140,093 (91,314)
Income tax expense (benefit).............................. 2,300 7,550 (13,998)
Minority interests in net income of consolidated joint
ventures............................................... 1,399 7,283 7,698
-------- --------- --------
Net income (loss)........................................... $(21,695) $ 125,260 $(85,014)
======== ========= ========
Earnings (loss) per common share............................ $ (0.44) $ 2.64 $ (2.05)
======== ========= ========
Earnings (loss) per common share -- assuming dilution....... $ (0.44) $ 2.30 $ (2.05)
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 21
CORAM HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
COMMON STOCK ADDITIONAL STOCK
--------------- PAID-IN TO BE ACCUMULATED
SHARES AMOUNT CAPITAL ISSUED DEFICIT TOTAL
------ ------ ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996......... 40,369 $40 $370,876 $ -- $(352,876) $ 18,040
Issuance of common stock and
warrants, net............... 2,035 2 19,865 -- -- 19,867
Shares reserved for
litigation.................. -- -- -- 25,625 -- 25,625
Net loss....................... -- -- -- -- (85,014) (85,014)
------ --- -------- -------- --------- --------
Balance, December 31, 1996....... 42,404 42 390,741 25,625 (437,890) (21,482)
Issuance of common stock and
warrants, net............... 665 1 21,247 -- -- 21,248
Issuance of shares reserved for
litigation.................. 5,000 5 25,620 (25,625) -- --
Net income..................... -- -- -- -- 125,260 125,260
------ --- -------- -------- --------- --------
Balance, December 31, 1997....... 48,069 48 437,608 -- (312,630) 125,026
Issuance of common stock and
warrants, net............... 1,132 1 2,225 -- -- 2,226
Warrant cancellation........... -- -- (12,700) -- -- (12,700)
Net loss....................... -- -- -- -- (21,695) (21,695)
------ --- -------- -------- --------- --------
Balance, December 31, 1998....... 49,201 $49 $427,133 $ -- $(334,325) $ 92,857
====== === ======== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 22
CORAM HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (21,695) $ 125,260 $(85,014)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision for estimated uncollectible accounts............ 15,343 16,209 29,045
Depreciation and amortization............................. 28,828 56,068 64,487
Debt interest accrued..................................... 10,280 30,229 23,488
Reversal of accrual for restructuring costs............... (3,900) -- --
Gain on conversion of debt................................ -- -- (1,350)
Litigation settlements not requiring cash................. -- (120,079) 25,625
Minority interest in net income of consolidated joint
ventures, net........................................... (126) (784) (2,946)
Losses (gains) on sales of long-term assets............... 363 (2) (2,400)
Gains on sales of businesses.............................. (1,071) (26,744) --
Equity in net income of unconsolidated joint ventures,
net..................................................... 193 (498) (611)
Other, net................................................ (3,140) 179 --
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable..................................... (43,400) (2,026) 14,029
Prepaid expenses, inventories and other assets.......... (13,178) (9,198) 20,702
Current and other liabilities........................... 25,659 2,132 (22,019)
Accrued merger and restructuring........................ (915) (4,762) (2,817)
--------- --------- --------
Net cash provided (used) by operating activities............ (6,759) 65,984 60,219
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (13,283) (19,149) (6,850)
Cash receipts on sale (payments for acquisitions) of
businesses, net........................................... (3,285) 124,196 4,821
Proceeds from sales of long-term assets..................... 179 680 3,875
Proceeds from long-term receivables......................... -- -- 902
--------- --------- --------
Net cash provided (used) by investing activities............ (16,389) 105,727 2,748
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on issuance of promissory notes.................... 6,000 -- --
Cash consideration for warrant cancellation................. (4,300) -- --
Debt borrowings............................................. 29,250 10,000 --
Repayments of debt.......................................... (115,932) (89,370) (74,630)
Cash paid for debt financing costs.......................... (856) -- (250)
Purchases of ESPP stock and exercise of warrants and
options, net.............................................. 89 1,234 553
--------- --------- --------
Net cash used by financing activities....................... (85,749) (78,136) (74,327)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (108,897) 93,575 (11,360)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 108,950 15,375 26,735
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 53 $ 108,950 $ 15,375
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest.................................................. $ 8,525 $ 12,399 $ 17,719
Income taxes.............................................. 2,470 (1,074) (24,682)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Deferred interest......................................... $ -- $ 4,802 $ 4,968
Warrants issued in connection with debt financing......... 1,863 18,965 10,786
Debt issued in consideration for cancellation of
warrants................................................ 8,400 -- --
Debt issued in consideration for interest payable......... 3,785 -- --
Common stock issued in settlement of litigation........... -- 25,625 1,783
Issuance of stock in connection with acquisitions......... -- 870 819
Capital lease obligations incurred on equipment lease..... -- 41 670
Conversion of long-term debt to common stock.............. -- -- 5,267
Warrants issued to settle litigation...................... -- -- 365
Common stock issued in connection with employment
agreements.............................................. 103 -- 294
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 23
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Business Activity. Coram Healthcare Corporation and its subsidiaries
("Coram" or the "Company") are engaged in three principal lines of business:
alternate site (outside the hospital) infusion therapy and related services,
ancillary network management services, and pharmacy benefit management and
specialty mail-order pharmacy services. Other services offered by Coram include
centralized management, administrative and clinical support for clinical
research trials, medical informatics and non-intravenous home health products
such as durable medical equipment and respiratory therapy services.
Coram delivers its alternate site infusion therapy services through
approximately 90 branch offices located in 44 states and Ontario, Canada.
Infusion therapy involves the intravenous administration of anti-infective
therapy, intravenous immunoglobulin ("IVIG"), chemotherapy, pain management,
nutrition and other therapies.
The Company provides ancillary network management services through its
Resource Network division ("R-Net"), which manages 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 serves its customers through two primary call centers and
three satellite offices.
The Company delivers pharmacy benefit management and specialty mail-order
pharmacy services through its Coram Prescription Services division ("CPS"),
which provides pharmacy benefit management services as well as specialty
mail-order prescription drugs for chronically ill patients from two primary mail
order facilities and three branch locations. 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 mail-order pharmacy services are delivered through
two main facilities which provide centralized distribution, compliance
monitoring, patient education and clinical support to a wide variety of
patients.
Most of the Company's alternate site infusion therapy net revenue is from
third-party payors such as private indemnity insurers, managed care
organizations and governmental payors. Competition in this market, combined with
the efforts by third-party payors to contain or reduce health care costs,
contributed to reduced reimbursement rates for services.
Company History. The Company was formed on July 8, 1994, as a result of a
merger by and among T(2) Medical, Inc. ("T(2) Medical"), Curaflex Health
Services, Inc. ("Curaflex"), HealthInfusion, Inc. ("HealthInfusion") and
Medisys, Inc. ("Medisys") (collectively, the "Merged Entities") (the "Four-Way
Merger"). Each of these companies is a wholly-owned subsidiary of the Company.
The transaction was accounted for as a pooling of interests.
The Company has made a number of acquisitions since commencing operations,
the most significant of which was the acquisition of substantially all of the
assets and the assumption of certain specified liabilities of the alternate site
infusion business and certain related businesses (the "Caremark Business") from
Caremark Inc., a subsidiary of Caremark International, Inc. (collectively
"Caremark") effective April 1, 1995. In addition, Coram acquired H.M.S.S., Inc.
("HMSS"), a leading regional provider of home infusion therapies based in
Houston, Texas, effective September 12, 1994. See Note 6.
In 1997, the Company provided lithotripsy services through a controlling
interest in 11 lithotripsy partnerships, two wholly-owned lithotripsy entities,
a lithotripsy management company and stock in an equipment service company and
certain related assets (the "Lithotripsy Business"). Effective September 30,
1997, the Company completed the sale of all of its Lithotripsy Business other
than its interests in three lithotripsy partnerships. Two of the remaining
partnerships were sold effective October 3, 1997. Effective June 1, 1998, the
Company completed the sale of its remaining lithotripsy partnership.
F-7
<PAGE> 24
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt Restructuring and Refinancing. At December 31, 1997, the Company had
two principal long-term debt instruments, the Former Senior Credit Facility and
the Rollover Note and related warrants, the combined outstanding balance of
which was approximately $299.2 million. During 1998, the Company completed the
restructuring of this debt. The debt restructuring included repayment of all
amounts due under the Former Senior Credit Facility, the consummation of an
exchange of the Rollover Note and related warrants for certain senior
subordinated debt and the execution of a new senior credit facility. See Note 8.
Five-Year Capitated Agreement with Aetna U.S. Healthcare, Inc. In April
1998, the Company entered into a five-year capitated agreement with Aetna U.S.
Healthcare, Inc. ("Aetna USHC") for the management and provision of certain home
health services, including home infusion, home nursing, respiratory therapy,
durable medical equipment, hospice care and home nursing support for several of
Aetna USHC's disease management programs. Effective July 1, 1998, the Company
began receiving capitated payments on a monthly basis for covered members,
assumed certain financial risk for certain home health services and began
providing management services for a network of home health providers through
R-Net. The Company's network of participating providers includes certain
subsidiaries of the Company and it serves certain persons enrolled in Aetna
USHC's HMO-based plans in the eight state area covered under the agreement who
are presently not committed to other networks. Aetna USHC and its affiliated
payors represented 12% of the Company's net revenue in 1998.
Concentration of Credit Risks. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents and accounts receivable. As of December 31, 1998, substantially all
of the Company's cash was deposited with Harris Trust and Savings Bank. Daily
cash balances may be in excess of the FDIC insurance limits, but credit risk is
mitigated as deposits are kept only with high credit quality institutions.
Accounts receivable are primarily from third-party payors, including private
indemnity insurers, managed care organizations and state and federal
governmental payors such as Medicare and Medicaid, and are unsecured. Credit
risk is mitigated by the large number of entities that comprise the third-party
payor base and credit evaluations of patients and third-party payors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation. The consolidated
financial statements include the accounts of Coram, its subsidiaries and joint
ventures which are considered to be under the control of the Company. All
material intercompany accounts and transaction balances have been eliminated in
consolidation. The Company uses the equity method of accounting to account for
investments in entities in which it exhibits significant influence, but not
control, and has an ownership interest of 50% or less.
Reclassifications. Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform to the 1998 presentation.
Revenue Recognition. Revenue is recognized as services are rendered or
products are delivered. Substantially all of the Company's revenue is billed to
third-party payors, including insurance companies, managed care plans,
governmental payors and contracted institutions. Revenue is recorded net of
contractual adjustments and related discounts. Contractual adjustments represent
estimated differences between service revenue at established rates and amounts
expected to be realized from third-party payors under contractual agreements.
Management fees, which are collected from entities managed by the Company, are
based principally on a percentage of the entities' revenue. Management fees were
approximately $0.3 million, $2.0 million and $1.6 million in 1998, 1997 and
1996, respectively.
In certain cases, particularly in the R-Net division, the Company has
agreed to accept fixed fee or capitated fee arrangements. Under a capitated
arrangement, the Company will agree to deliver or arrange for the delivery of
certain home health services required under the payor customer's health plan in
exchange for a fixed per member per month service fee. The total per member per
month fee is calculated using all members
F-8
<PAGE> 25
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
enrolled in the particular health plan as of certain dates. The per member per
month service fees are recognized as revenue in the month the fees are
designated to cover home health services.
Revenue from the Medicare and Medicaid programs accounted for approximately
20%, 21%, and 22% of the Company's net revenue for the years ended December 31,
1998, 1997 and 1996, respectively. Laws and regulations governing the Medicare
and Medicaid programs are complex and subject to interpretation. Management of
the Company believes that it is in compliance with all applicable laws and
regulations. Compliance with such laws and regulations can be subject to future
government review and interpretation as well as significant regulatory action
including fines, penalties, and exclusion from the Medicare and Medicaid
programs.
Cash and Cash Equivalents. Cash equivalents include all highly liquid
investments with an original maturity of three months or less. As of December
31, 1997, the Company had approximately $107.6 million cash held in overnight
funds. Cash held in overnight funds as of December 31, 1998 was minimal. A
portion of the Company's cash balance that was limited as to its use includes
cash of partnerships that may only be used for partnership operations.
Inventories. Inventories, consisting primarily of pharmaceuticals and
medical supplies, are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property and Equipment. Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of one to 10 years for equipment, furniture, fixtures and
vehicles, and 30 to 31.5 years for buildings. Leasehold improvements are
amortized over the shorter of the lease term or estimated useful lives of the
related assets.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP 98-1, Accounting for the Costs of Computer Software
Developed For or Obtained For Internal Use. SOP 98-1, which was adopted by the
Company as of January 1, 1998, requires capitalization of certain costs incurred
in connection with developing or obtaining internal use software. In prior
years, the Company expensed such costs as incurred. SOP 98-1 requires companies
to adopt its provisions as of the beginning of the year and restate previously
reported interim results. In the fourth quarter of 1998, the Company capitalized
certain costs as software to be amortized over three years. The effect of this
accounting change was to decrease the net loss for the year ended December 31,
1998 by approximately $0.6 million.
Goodwill and other Long-Lived Assets. Goodwill represents the excess of the
purchase price over the fair value of net assets acquired through business
combinations accounted for as purchases and is amortized on a straight-line
basis over 25 years. In 1995, the Company implemented Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("Statement 121"). Accordingly, the
carrying value of goodwill and other long-lived assets is reviewed quarterly to
determine if any impairment indicators are present. If it is determined that
such indicators are present and the review indicates that the assets will not be
recoverable, based on undiscounted estimated cash flows over their remaining
depreciation and amortization period, their carrying value is reduced to
estimated fair market value. Impairment indicators include, among other
conditions, cash flow deficits; an historical or anticipated decline in revenue
or operating profit; adverse legal, regulatory or reimbursement developments; or
a material decrease in the fair value of some or all of the assets. A review is
done separately for each of the markets in which the Company operates.
If future cash flows from operations decrease, the Company may be required
to write down its goodwill and other long-lived assets in the future. Any such
write-down could have a material adverse effect on the Company's financial
position and results of operations.
Provision for Estimated Uncollectible Accounts. Management regularly
reviews the collectibility of accounts receivable utilizing system-generated
reports which track collection and write-off activity. Estimated
F-9
<PAGE> 26
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
write-off percentages are then applied to each aging category by payor
classification to determine the allowance for estimated uncollectible accounts.
The allowance for estimated uncollectible accounts is adjusted as needed to
reflect current collection, write-off and other trends, including changes in
assessment of realizable value. While management believes the resulting net
carrying amounts for accounts receivable are fairly stated at each quarter-end
and that the Company has made adequate provision for uncollectible accounts
based on all information available, no assurance can be given as to the level of
future provisions for uncollectible accounts, or how they will compare to the
levels experienced in the past. The Company's ability to successfully collect
its accounts receivable depends, in part, on its ability to adequately supervise
and train personnel in billing and collections, and minimize losses related to
branch consolidations and system changes.
Earnings per Share. In 1997, the Financial Accounting Standards Board
("FASB") issued Statement No. 128, Earnings per Share ("Statement 128").
Statement 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to fully diluted earnings per share under the previous earnings per share
methodology. Earnings per share amounts for all periods presented have been
restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share... $(21,695) $125,260 $(85,014)
======== ======== ========
Denominator:
Weighted average shares............................ 48,870 44,321 41,546
Contingently issuable shares....................... -- 3,142 --
-------- -------- --------
Denominator for basic earnings per share........... 48,870 47,463 41,546
Effect of other dilutive securities:
Stock options...................................... -- 1,292 --
Warrants........................................... -- 5,726 --
-------- -------- --------
Denominator for diluted earnings per
share -- adjusted weighted average shares and
assumed conversion.............................. 48,870 54,481 41,546
======== ======== ========
Earnings (loss) per common share..................... $ (0.44) $ 2.64 $ (2.05)
======== ======== ========
Earnings (loss) per common share -- assuming
Dilution........................................... $ (0.44) $ 2.30 $ (2.05)
======== ======== ========
</TABLE>
In 1997, basic earnings per share data was computed by dividing net income
by the weighted average number of common shares and contingently issuable shares
outstanding during the period. Diluted earnings per share was adjusted for the
assumed conversion of all potentially dilutive securities, including stock
options and warrants to purchase common stock. The 1998 and 1996 computations do
not give effect to options, warrants or the 1998 Series B Senior Subordinated
Convertible Notes, as their effect would have been anti-dilutive.
Comprehensive Income. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"),
which establishes rules for reporting and displaying comprehensive income.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
Comprehensive income is defined as essentially all changes in stockholders'
equity exclusive of transactions with owners (e.g., dividends, stock options)
and includes net income plus changes in certain assets and liabilities that are
reported directly in equity, referred to as "Other Comprehensive Income." Other
Comprehensive Income includes unrealized gains or losses on available-for-sale
securities, translation
F-10
<PAGE> 27
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustments on investments in foreign subsidiaries, and certain changes in
minimum pension liabilities. The Company has no material activity that requires
disclosure under Statement 130.
Segment Reporting. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("Statement 131"), which is effective for years beginning
after December 15, 1997. Statement 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted the new requirements
in 1998. See Note 15.
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 is effective for fiscal years beginning after June 15, 1999. The
Company does not believe that adoption of the new requirement will have a
material 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. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The Company adopted the SOP 98-5 effective January 1, 1999
and such adoption will not have a significant effect on the results of
operations or financial position.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the
reported period. Actual results could differ from those estimates.
3. CAREMARK LITIGATION SETTLEMENT
In June 1997, the Company recorded settlement income of $156.8 million
which represents a $165.0 million settlement with Caremark, less related costs
of $8.2 million. The Company and Caremark settled certain litigation arising out
of the purchase of the Caremark Business in 1995. Under the terms of the
settlement, the Junior Subordinated PIK Notes totaling approximately $100.0
million principal and $20.0 million accrued interest (payable semiannually in
PIK Notes of the same type) were cancelled with all payments thereunder
forgiven. Additionally, Caremark agreed to pay $45.0 million in cash to the
Company, which was received September 2, 1997. Of the $45.0 million cash
received, $3.6 million was placed in escrow pending reconciliation of certain
lockbox issues, which were settled at a nominal gain in June 1998. Additionally,
as part of the settlement, Caremark assigned and transferred to Coram all of
Caremark's claims and causes of action against Caremark's auditors, Price
Waterhouse LLP (now known as PricewaterhouseCoopers LLP) related to the lawsuit.
See Note 12.
4. TERMINATED MERGER WITH IHS
On October 19, 1996, the Company, Integrated Health Services, Inc. ("IHS")
and IHS Acquisition XIX, Inc., a wholly-owned subsidiary of IHS ("Merger Sub"),
entered into a definitive Agreement and Plan of Merger ("the Merger Agreement")
providing for the merger (the "IHS Merger") of Merger Sub with and into the
Company. If the IHS Merger had been consummated, the Company would have become a
wholly-owned subsidiary of IHS.
On March 30, 1997, Coram, IHS and Merger Sub executed an amendment to the
Merger Agreement (the "Amendment"), which was to become effective April 4, 1997.
On April 4, 1997, the Company received from IHS a written notice of termination
of the Amendment and the Merger Agreement. Pursuant to the
F-11
<PAGE> 28
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terms of the Merger Agreement and as a result of such termination, IHS paid the
Company $21.0 million on May 6, 1997. Accordingly, in the second quarter of 1997
the Company recorded other income of $15.2 million, representing the $21.0
million termination fee less legal, professional and other costs related to the
terminated merger of $5.8 million.
5. SALE OF LITHOTRIPSY BUSINESS
In 1996 and 1997, the Company owned two lithotripsy partnerships and a
controlling interest in 11 lithotripsy partnerships. The Company also owned a
lithotripsy management company and a lithotripter maintenance company. On August
20, 1997, the Company signed an agreement with IHS for the sale of the Company's
interest in its thirteen lithotripsy partnerships, the lithotripsy management
company, the stock of its equipment service company and certain related assets
(the "Lithotripsy Business"). Effective September 30, 1997, the Company
completed the transaction as to all of its Lithotripsy Business other than its
interests in three lithotripsy partnerships. The Company's interests in two of
these partnerships were conveyed to IHS effective October 3, 1997. Proceeds on
the sale of the Lithotripsy Business in 1997 totaled $126.6 million and the
Company recognized a gain of $26.7 million.
Effective June 1, 1998, the Company signed an agreement with IHS for the
sale of the Company's remaining lithotripsy partnership for an aggregate
purchase price of $1.0 million payable in common stock of IHS. As a result, the
Company recognized a gain of $0.7 million in 1998.
6. ACQUISITIONS AND RESTRUCTURING
Acquisitions. The acquisition activity during the year ended December 31,
1998 was limited to the completion of the purchase of two infusion branches for
approximately $2.5 million in cash. During 1996, the Company purchased certain
minority interests in two lithotripsy joint ventures for approximately $4.7
million in cash. These acquisitions were accounted for as purchases.
Individually and in the aggregate, the results of operations of these businesses
for periods prior to their acquisition were not material to the Company's
consolidated results of operations.
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 December 31,
1998, the Company may be required to pay under such contingent obligations
approximately $2.2 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. Subject to certain elections
by the Company or the sellers, a maximum of approximately $1.2 million of these
contingent obligations, subject to increase, may be paid in cash. If these
contingent payments are made, they will be recorded as additional goodwill in
the period in which the payment becomes probable. Payments made during the years
ended December 31, 1998, 1997 and 1996 were $0.3 million, $0.6 million and $3.7
million, respectively.
Merger and Restructuring. During September 1994, the Company initiated a
merger and restructuring plan (the "Coram Consolidation Plan") to reduce
operating costs, improve productivity and gain efficiencies through
consolidation of redundant infusion centers and corporate offices, reduction of
personnel, and elimination or discontinuance of investments in certain joint
ventures and other non-infusion facilities. As a result of the Coram
Consolidation Plan, the Company recorded charges of $28.5 million in estimated
merger costs and $95.5 million in estimated restructure costs. During May 1995,
the Company initiated a second restructuring plan (the "Caremark Business
Consolidation Plan") and charged $25.8 million to operations as a restructuring
cost. Certain additional restructuring costs totaling approximately $11.4
million were accounted for as adjustments to the purchase price of the Caremark
Business.
F-12
<PAGE> 29
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For both the Coram and Caremark Business Consolidation Plans, personnel
reduction costs include severance payments, fringe benefits and taxes related to
employees to be terminated, costs of terminating executives and buying out
employment and consulting contracts, and incremental professional fees to
develop and implement the plans. Facility reduction costs consist of the cost of
fulfilling or buying out existing lease commitments on branch facilities and
corporate offices that will be closed as part of the restructuring, reduced by
any sublease income. They also include related costs for equipment leases and
facility closure expenses. Facility reduction costs resulting in non-cash
charges consist principally of the write-down, net of any proceeds on
disposition, of operating assets that have become redundant because of the
consolidation. They also include inventory that has no future value because of
the restructuring. For the Coram Consolidation Plan, merger costs consist of
executive severance payments directly related to the Four-Way Merger based on
the relevant employment agreements, investment banking fees, consulting, legal
and accounting fees and other costs incurred as a direct result of the merger.
Discontinuance costs are principally non-cash and consist of the estimated loss
on the disposal of non-core businesses.
In 1998 and 1997, net revenue of the Company does not include revenue from
non-core businesses that were discontinued or disposed of as part of the Coram
Consolidation Plan. However, 1996 net revenue includes approximately $4.9
million from non-core businesses. Operating results from businesses that were
discontinued or disposed in 1996 were not material.
In December 1998, the Company determined that the Coram Consolidation Plan
was complete. As a result, future cash expenditures were no longer expected and
the Company recognized a restructure reversal benefit of $1.1 million. In
addition, the Company in evaluating the estimated costs to complete the Caremark
Business Consolidation Plan and other accruals, recognized a restructure
reversal benefit of $0.7 million and $2.1 million, respectively, was recorded.
The balance in the "Accrued Merger and Restructuring" liability at December 31,
1998 consists of future cash expenditures related to the Caremark Business
Consolidation Plan of $3.0 million and other accruals of $0.9 million.
Under the two plans, the Company has made total payments, disposals and
reversals through December 31, 1998 as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT
THROUGH DECEMBER 31, 1998 DECEMBER 31, 1998
----------------------------------------------- ----------------------
CASH NON-CASH RESTRUCTURE FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL REVERSAL EXPENDITURES CHARGES
------------ -------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Coram Consolidation Plan:
Merger Costs............. $27,500 $ 600 $28,100 $400 $ -- $28,500
======= ======= ======= ==== ====== =======
Personnel Reduction
Costs................. $20,300 $ 600 $20,900 $300 $ -- $21,200
Facility Reduction
Costs................. 12,015 21,500 33,515 85 -- 33,600
Discontinuance Costs..... 2,000 29,400 31,400 300 -- 31,700
------- ------- ------- ---- ------ -------
Total
Restructuring
Costs.......... $34,315 $51,500 $85,815 $685 $ -- $86,500
======= ======= ======= ==== ====== =======
Caremark Business
Consolidation Plan:
Personnel Reduction
Costs................. $11,300 $ -- $11,300 $ -- $ -- $11,300
Facility Reduction
Costs................. 9,050 3,900 12,950 714 3,036 16,700
------- ------- ------- ---- ------ -------
Total
Restructuring
Costs.......... $20,350 $ 3,900 $24,250 $714 $3,036 $28,000
======= ======= ======= ==== ====== =======
</TABLE>
The Company estimates that the future cash expenditures related to the
Caremark Business Consolidation Plan will be made in the following periods: 47%
through December 31, 1999, 9% through December 31,
F-13
<PAGE> 30
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, 12% through December 31, 2001, and 32% through December 31, 2002, 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 December 31, 1998 to meet future
expenditures related to the Caremark Business Consolidation Plan. However, there
is no assurance that the reserves will be adequate or that the Company will
generate sufficient working capital to meet future expenditures.
7. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Leasehold improvements...................................... $ 4,490 $ 4,567
Equipment and other......................................... 46,273 42,059
Furniture and fixtures...................................... 6,986 6,140
-------- --------
57,749 52,766
Less accumulated depreciation and amortization.............. (31,186) (32,716)
-------- --------
$ 26,563 $ 20,050
======== ========
</TABLE>
The above includes immaterial amounts of equipment under capital leases.
Capital expenditures in 1998 and 1997, respectively, have consisted
primarily of $6.2 million and $13.1 million of multi-therapy infusion pumps and
related equipment and supplies to service the growth in the alternate site
infusion therapy business. In 1998, the Company also purchased $1.9 million of
communication and information systems to more effectively process referrals and
management services in its R-Net division. In 1998 and 1997, the Company
purchased $4.0 million and $2.2 million, respectively, of communication and
information systems related to the growth in the Company's operations.
8. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- ---------
<S> <C> <C>
Series A Senior Subordinated Unsecured Notes................ $153,785 $ --
Series B Senior Subordinated Convertible Notes.............. 87,922 --
New Senior Credit Facility.................................. -- --
Former Senior Credit Facility............................... -- 80,000
Rollover Note, including accrued interest................... -- 219,241
Other obligations, including capital leases, at interest
rates ranging from 6% to 16%, collateralized by certain
property and equipment.................................... 715 1,412
-------- ---------
242,422 300,653
Less current scheduled maturities........................... (260) (150,225)
-------- ---------
$242,162 $ 150,428
======== =========
</TABLE>
F-14
<PAGE> 31
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, 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. Under the outstanding credit and debt agreements, the
Company is precluded from paying cash dividends during the term of indebtedness.
Securities Exchange Agreement. On May 6, 1998, the Company entered into the
Securities Exchange Agreement with the Holders of its 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 principal amount Series A Notes and (ii) $87.9 million in original
principal amount of 8% 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. The
Securities Exchange Agreement in which the Series A Notes and the Series B Notes
were issued contains certain other customary covenants and events of default. At
December 31, 1998, the Company was in compliance with all of these covenants.
Series A Notes. The Series A Notes mature in May 2001 and bear interest at
the rate of 9.875% per annum (subject to adjustment to a maximum of 10.5% on
March 31, 1999 if certain performance standards are not achieved) payable
quarterly in arrears in cash or through the issuance of additional Series A
Notes at the election of the Company. The Holders can require the Company to pay
interest in cash if the Company exceeds a certain interest coverage ratio.
During the year ended December 31, 1998, interest expense on the Series A Notes
was $10.7 million. On July 15, 1998, Series A Notes totaling $3.8 million were
issued in lieu of a cash payment of interest due through such date.
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. During the
year ended December 31, 1998, interest expense on the Series B Notes was $5.0
million. The Series B Notes are convertible into shares of the Company's common
stock at a conversion price (the "Conversion Price") initially equal to $3.00
per share, subject to downward reset to the prevailing market prices (calculated
based on the average of the closing prices for each of the preceding 20 days) on
each of April 13, 1999 and October 13, 1999. The Conversion Price will also be
subject to customary anti-dilution adjustments, including adjustments for sale
of common stock (other than pursuant to existing obligations or employee benefit
plans) at a price below the Conversion Price prevailing at the time of such
sale. Cash will be paid in lieu of fractional shares upon conversion of the
Series B Notes.
The Series A and Series B Notes are redeemable, in whole or in part, at the
option of the Holders thereof in connection with any change of control of the
Company (as defined in the Securities Exchange Agreement), if the Company ceases
to hold and control certain interests in its significant subsidiaries, or upon
the acquisition of the Company or certain of its subsidiaries by a third party.
In such instances, the Series A and Series B Notes are redeemable at 103% of the
then outstanding principal amount plus accrued interest. The Series B Notes are
also redeemable at the option of the Holders thereof upon maturity of the Series
A Notes at the outstanding principal amount thereof plus accrued interest. In
addition, the Series A Notes are callable at 103% of the then outstanding
principal amount plus accrued interest at the option of the Company.
F-15
<PAGE> 32
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 9.25% at December 31, 1998.
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 year ended December 31,
1998, interest and related fees on the New Senior Credit Facility were $0.5
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 deferred costs to be amortized over the life of
the New Senior Credit Facility. The Company charged $0.5 million to interest
expense during the year ended December 31, 1998 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 December 31, 1998, the Holders had issued letters of
credit totaling $18.7 million thereby reducing the Company's availability under
the New Senior Credit Facility by that amount. In addition, the terms of the New
Senior Credit Facility provide for a fee of 1.0% per annum on the outstanding
letter of credit obligations that is due in arrears on the first business day of
each month. The New Senior Credit Facility contains certain other customary
covenants and events of default. At December 31, 1998, the Company was in
compliance with all of these covenants except for the debt ratio covenant for
which the Company received a waiver in March 1999.
Secured Promissory Notes. In July 1998, the Company issued secured
promissory notes (the "Promissory Notes") in the aggregate principal amount of
$6.0 million to the Holders of the Series A and B Notes. The Promissory Notes
matured August 20, 1998 and carried an interest rate of 12% per annum, payable
in cash on the maturity date of the Promissory Notes. In August 1998, the
Company repaid in full all principal and interest totaling approximately $6.1
million.
As of December 31, 1997, the Company's principal credit and debt agreements
consisted of arrangements that were entered into on April 6, 1995, at the time
of the acquisition of the Caremark Business and included (i) borrowings under a
Credit Agreement with Chase Manhattan Bank (formerly Chemical Bank), as Agent,
(the "Former Senior Credit Facility") and (ii) the Rollover Note.
Former Senior Credit Facility. In January 1998, the Company repaid all
principal, interest and related fees totaling approximately $80.1 million due
under the Former Senior Credit Facility and terminated such facility. Interest
on the Former Senior Credit Facility was based on margins over certain domestic
and foreign indices and was accruing at the annual rate of 8.94% upon repayment.
Additionally, in 1995, warrants were issued to the Company's lenders under the
former Senior Credit Facility valued at approximately $8.0 million, their value
at the date of issuance, and were accounted for as interest expense through
March 1997.
F-16
<PAGE> 33
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, the Company incurred interest of approximately $1.6 million and
$5.2 million for the years ended December 31, 1997 and 1996, respectively, in
relation to these warrants.
Rollover Note. Through April 13, 1998, the Rollover Note carried an
interest rate that was based on various indices plus a margin that increased by
0.25% quarterly and was 16.75% upon the effective cancellation date. During the
years ended December 31, 1998, 1997 and 1996, $10.3 million, $30.2 million and
$23.5 million was accrued on the Rollover Note, respectively. The Warrants
related to the Rollover Note were accounted for as interest expense and
additional paid-in capital. Accordingly, the Company recorded interest expense
related to the Warrants of $3.2 million, $18.2 million and $7.3 million in the
years ended December 31, 1998, 1997, and 1996 respectively.
At December 31, 1998, the Company was obligated to make principal payments
on long-term debt outstanding as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999..................................................... $ 260
2000..................................................... 283
2001..................................................... 153,957
2002..................................................... --
2003..................................................... --
Thereafter............................................... 87,922
--------
$242,422
========
</TABLE>
9. INCOME TAXES
The components of the consolidated income tax expense (benefit) were as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ --------
<S> <C> <C> <C>
Current:
Federal................................................ $1,750 $5,000 $(14,000)
State.................................................. 550 2,550 2
------ ------ --------
Total Current.................................. 2,300 7,550 (13,998)
------ ------ --------
Deferred:
Federal................................................ -- -- --
State.................................................. -- -- --
------ ------ --------
Total Deferred................................. -- -- --
------ ------ --------
Income tax expense (benefit)........................... $2,300 $7,550 $(13,998)
====== ====== ========
</TABLE>
F-17
<PAGE> 34
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles the federal statutory rate to the effective
income tax expense (benefit) rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate...................................... (35.0)% 35.0% (35.0)%
Valuation allowance......................................... 34.3 (34.4) 17.9
State income taxes, net of federal income tax benefit....... (0.8) 0.8 --
Goodwill.................................................... 13.1 1.2 2.7
Other....................................................... 0.3 3.1 0.3
----- ----- -----
Effective income tax expense (benefit) rate................. 11.9% 5.7% (14.1)%
===== ===== =====
</TABLE>
The 1998 effective income tax rate is substantially higher than the
statutory rate because the Company is not recognizing the benefit of the current
year loss and is adjusting its estimate for the dispute with the Internal
Revenue Service described below. The 1997 effective income tax rate is
substantially lower than the statutory rate because of the Company's ability to
utilize net operating loss carryforwards which are fully reserved in the
valuation allowance. The income tax benefits recognized in 1996 have been
limited to the estimated amounts recoverable through carryback of losses to the
separate returns of the Company's predecessor entities that were participants in
the Four-Way Merger. Accordingly, the effective income tax rates from that year
differs substantially from the expected combined federal and state income tax
rates calculated using applicable statutory rates.
F-18
<PAGE> 35
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The temporary differences, tax effected, which give rise to the Company's
net deferred tax asset (liability) were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Goodwill, net of amortization............................. $ 49,508 $ 45,505
Restructuring costs....................................... 3,289 4,554
Net operating loss carryforwards.......................... 49,262 43,255
AMT credit carryforwards.................................. 4,478 4,000
Accrued litigation........................................ 1,226 1,143
Allowance for notes receivable............................ 739 --
Allowance for doubtful accounts........................... 7,441 9,870
Intangible assets......................................... 2,906 2,921
Property and equipment writedown.......................... -- 1,272
Accrued bonuses........................................... 1,819 670
Accrued vacation.......................................... 422 636
Other accruals............................................ 1,855 3,694
Other..................................................... 1,446 553
--------- ---------
Total gross deferred tax asset............................ 124,391 118,073
Less valuation allowance.................................. (119,321) (112,660)
--------- ---------
Total deferred tax asset.................................. 5,070 5,413
Deferred tax liabilities:
Property and equipment.................................... (3,841) (3,988)
Amortization of intangibles............................... (169) (169)
Partnerships.............................................. (144) (144)
Other..................................................... (916) (1,112)
--------- ---------
Total deferred tax liabilities............................ (5,070) (5,413)
--------- ---------
Net deferred tax asset (liability)................ $ -- $ --
========= =========
</TABLE>
Deferred tax assets have been limited to amounts expected to be recovered,
offset against deferred tax liabilities that would otherwise become payable in
the carryforward period for 1998 and 1997. The Company believes that realization
of the balance of deferred tax assets is sufficiently uncertain at this time
that they should be offset by a valuation allowance.
As of December 31, 1998, the Company had net operating loss carryforwards
("NOLs") for federal income taxes of approximately $124.7 million which are
available to offset future federal taxable income, expiring in varying amounts
in the years 2002 through 2018. This includes approximately $46.1 million
generated prior to the Four-Way Merger and subject to separate return
limitations of a predecessor company as well as an annual usage limitation of
approximately $4.5 million.
During the year ended December 31, 1996, the Company received a $24.7
million refund related to the carryback of tax losses for its tax years ended
September 30, 1996 and 1995.
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 affect the prior years' tax liability. The Company has
been advised by
F-19
<PAGE> 36
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the IRS that it will receive a notice of deficiency with respect to the proposed
adjustments. The Company will contest the notice of deficiency through
administrative proceedings or litigation, and will vigorously defend its current
position. The most significant proposed adjustment 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. Due to the uncertainty of
final resolution, the Company has established a reserve for these issues. The
Company would, however, be required to pay from its cash resources any
deficiency resulting from resolution of the proposed adjustments, plus interest.
Due to the early phase of this matter and the uncertainties inherent in any
proceeding with the IRS or in litigation, no assurance can be given that the
Company will prevail. 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.
10. RELATED PARTY TRANSACTIONS
Prior to the Four-Way Merger, the Merged Entities entered into agreements
with individuals and/or companies considered to be related parties. The majority
of these individuals and/or companies are no longer related parties as these
individuals are no longer Company employees, officers and/or directors. The
following summarizes the significant related party transactions.
In 1997, the Company's Board of Directors approved a contingent bonus to
Donald J. Amaral, Chairman and Chief Executive Officer for his success in the
financial turnaround of Coram. Under the agreement, subject to certain material
terms and conditions, Mr. Amaral was paid $1.0 million following the refinancing
of the Company's debt and to be paid $4.0 million following a sale of the
Company. The Company recorded a $1.0 million expense for the refinancing payment
in 1998 and paid $0.5 million in 1998 and $0.5 million in the first quarter of
1999. See Note 8.
Certain executive officers and consultants to the Merged Entities had
employment, severance or consulting agreements that entitled such executive
officers or consultants to certain termination, severance and consulting
payments upon consummation of the Four-Way Merger or upon termination of
employment following the Four-Way Merger. In conjunction with the Coram
Consolidation Plan (see Note 6), the Company accrued $18.8 million for the
termination of the existing employment, consulting and/or severance agreements
with these individuals. This accrual was included as a component of the Coram
Consolidation Plan.
A director of the Company is associated with a law firm that rendered
various legal services to the Company. The legal fees to the firm approximated
$0.2 million and $1.7 million during the years ended December 31, 1997 and 1996,
respectively. The legal fees paid in 1998 were minimal.
A director of the Company also serves on the Board of Directors of Sabratek
Corporation ("Sabratek"). In 1997, the Company purchased from Sabratek
approximately $11.5 million in multi-therapy infusion pumps and $4.3 million in
related equipment and supplies. In 1998, the Company purchased $7.8 million from
Sabratek for equipment and supplies.
11. STOCKHOLDERS' EQUITY
At December 31, 1998, the Company was authorized to issue 10 million shares
of preferred stock, $.001 par value, which may be issued at the discretion of
the Company's Board of Directors without further stockholder approval. The Board
of Directors can also determine the preferences, rights, privileges and
restrictions of any series of preferred stock. At December 31, 1998, there were
no shares of preferred stock issued and outstanding.
In 1997, the Company adopted a Stockholder Rights Agreement which provides
for the distribution of one "Right" to purchase a unit equal to one-hundredth of
a share of a newly created series of participating
F-20
<PAGE> 37
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock ("Series X Preferred Stock") for each outstanding share of the
Company's common stock of record on July 9, 1997.
The Rights have an exercise price of $10 per Right, subject to subsequent
adjustment under certain circumstances, and entitle the stockholder to purchase
units of Series X Preferred Stock at an effective discount of 50% of the market
price of the common stock under certain circumstances. Each unit of Series X
Preferred Stock will be entitled to one vote on all matters on which shares of
common stock may vote. This agreement, which was scheduled to expire by its
terms on June 25, 1998 unless extended, was extended by the Company's Board of
Directors for one year in 1998.
The Exchange provided for the cancellation of the Warrants related to the
Rollover Note. In April 1998, the Company cancelled 8.4 million warrants with a
fair value of $12.7 million in exchange for payment of $4.3 million in cash and
$8.4 million in the original principal amount of the Series B Notes.
In August 1998, in connection with its New Senior Credit Facility, the
Company provided for the issuance of the 1998 Warrants to purchase up to
1,900,000 shares of the Company's common stock to the Holders. The 1998 Warrants
have an exercise price of $0.01 per share, subject to customary adjustments.
Stock Option Plans. The Company has elected to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and
related Interpretations in accounting for its employee stock options as
permitted under Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("Statement 123").
In connection with the Four-Way Merger, the Company assumed the outstanding
obligations under the various stock option and stock purchase plans of the
Merged Entities. No further options will be granted under these plans, unless so
determined by the Company's Board of Directors. In addition, the Company
implemented the 1994 Coram Healthcare Corporation Stock Option/Stock Issuance
Plan (the "1994 Plan") and the Coram Employee Stock Purchase Plan (the "Purchase
Plan"). During 1997, the Purchase Plan was amended to increase the number of
common shares issuable from 0.3 million to 1.0 million. The Purchase Plan was
re-activated in January 1998 after a suspension from the fourth quarter of 1996.
The 1994 Plan contains three separate incentive programs which provide for
the granting of stock options to certain officers, key employees, consultants
and non-employee members of the Company's Board of Directors. Coram's 1994 Plan
has authorized the grant of options for up to 10.0 million shares of the
Company's common stock. Options granted under the 1994 Plan may constitute
either incentive stock options, non-statutory options or stock appreciation
rights based on the type of incentive program utilized. For each of the
incentive programs, options may be granted at exercise prices ranging from 85%
to 100% of the fair market value of the Company's stock at the date of grant.
All options granted expire ten years from the date of grant and become
exercisable at varying dates depending upon the incentive program utilized. The
1994 Plan is administered by a committee of the Board of Directors which has the
authority to determine the employees to whom awards will be made and the
incentive program to be utilized.
On May 16, 1997, the Company's Board of Directors recognized that the
exercise price of certain stock options issued under the 1994 Plan were
significantly out of the money as a result of a substantial decline in Coram's
stock price. To better incentivize and retain employees of the Company, options
held by all non-director employees (except the Chief Executive Officer) to
purchase in the aggregate 2.8 million shares of the Company's common stock were
reissued to reflect an exercise price of $2.625 per share, representing the fair
market value of the Company's common stock on the date of such reissuance.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes multiple option pricing
model with the following
F-21
<PAGE> 38
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumptions for 1998, 1997, and 1996, respectively: risk free interest rates
ranging from 4.38% to 5.59%, 5.73% to 6.57%, and 5.26% to 6.54%; a dividend
yield of 0% for each year; volatility factors of the expected market price of
the Company's common stock of .62 for each year; and an expected life of the
option of one year past vesting.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
compensation expense associated with an award is recognized over the vesting
period, the impact on pro forma net income disclosed below may not be
representative of compensation expense in future pro forma years. The Company's
pro forma information is as follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Pro forma income (loss).............................. $(24,364) $120,638 $(90,180)
Pro forma earnings (loss) per common share........... $ (0.50) $ 2.54 $ (2.17)
Pro forma earnings (loss) per share -- assuming
Dilution........................................... $ (0.50) $ 2.23 $ (2.17)
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year......................... 7,561 $3.39 6,611 $5.41 7,145 $ 8.48
Granted:
Price equal to fair
value................... 3,119 2.18 5,153 2.77 1,348 4.93
Exercised................. (1) 2.63 (327) 3.21 (12) 4.53
Forfeited................. (1,458) 4.65 (3,876) 5.98 (1,870) 16.81
------- ------- -------
Outstanding -- end of year..... 9,221 2.77 7,561 3.39 6,611 5.41
======= ======= =======
Exercisable at end of year..... 4,601 3,375 2,264
======= ======= =======
Weighted-average fair value of
options granted during the
year:
Price equal to fair value.... $ 1.05 $ 1.19 $ 2.39
</TABLE>
F-22
<PAGE> 39
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices for options outstanding and the weighted-average remaining
contractual life of those options at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES (000) CONTRACTUAL LIFE EXERCISE PRICE (000) EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.44 - $ 2.00........ 691 9.61 $ 1.81 5 $ 1.97
$ 2.25 - $ 2.25........ 1,597 9.61 2.25 -- --
$ 2.38 - $ 2.38........ 752 9.19 2.38 -- --
$ 2.50 - $ 2.50........ 1,167 8.42 2.50 440 2.50
$ 2.63 - $ 2.63........ 2,320 7.00 2.63 1,745 2.63
$ 2.84 - $ 3.13........ 200 8.96 3.13 50 3.13
$ 3.40 - $ 3.40........ 2,200 6.78 3.40 2,200 3.40
$ 3.50 - $24.02........ 289 7.52 5.74 156 6.47
$30.56 - $30.56........ 2 2.74 30.56 2 30.56
$35.91 - $35.91........ 3 -- 35.91 3 35.91
----- -----
$ 1.44 - $35.91........ 9,221 8.01 2.77 4,601 3.15
===== =====
</TABLE>
Common shares reserved for future issuance include approximately 1.6
million shares related to options outside of the 1994 Plan, 0.5 million shares
related to the Purchase Plan and 6.1 million shares related to stock purchase
warrants. In addition, Donald J. Amaral, Chairman and Chief Executive Officer
received a portion of his 1998 net base salary in approximately 41,900 shares of
common stock. The shares were valued at the time the compensation was paid based
upon the lesser of the closing price of the stock or the average closing price
for the prior 30 days.
Warrants to Purchase Common Stock. The following warrants are outstanding
or issuable at December 31, 1998:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE EXPIRATION DATE
--------- -------------- ---------------
<S> <C> <C> <C>
Issued to lenders under Former
Senior Credit Facility (Note
8).............................. 1,384,616 nominal October 13, 2000
Issued in settlement of T(2)
litigation (Note 12)............ 2,519,834 $22.125 July 10, 1999
Issued in settlement of dispute
with former principals of
Company acquired by T(2) (Note
12)............................. 281,250 $ 4.625 September 30, 1999
Issued by Merged Entities prior to
Four-Way Merger................. 34,718 $12.58 - $18.79 March 6, 2001 to none
Issued to Senior Lenders (Note
8).............................. 1,900,000 $ 0.01 Expiration is earlier of New
Senior Credit Facility
cancellation or termination
date, or maturity of February
26, 2001.
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
Leases. The Company leases office, other operating space and equipment
under various operating and capital leases. The leases provide for monthly
rental payments including real estate taxes and other operating
F-23
<PAGE> 40
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs. Total rental expense for the years ended December 31, 1998, 1997 and 1996
was approximately $11.6 million, $12.2 million and $13.0 million, respectively,
exclusive of amounts charged to restructuring reserves. At December 31, 1998 the
aggregate future minimum lease commitments were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1999....................................................... $252 $10,118
2000....................................................... 252 6,868
2001....................................................... 147 4,439
2002....................................................... -- 1,502
2003....................................................... -- 2,244
Thereafter................................................. -- 797
---- -------
Total minimum lease payments..................... 651 25,968
Less amounts representing interest......................... (87) --
---- -------
Net minimum lease payments................................. $564 $25,968
==== =======
</TABLE>
Capital lease obligations are included in other obligations. Operating
lease obligations include $4.0 million, less $1.7 million of sublease rentals,
accrued for as part of the restructuring costs under the Caremark Business
Consolidation Plan. See Notes 6 and 8.
Employee Benefit Plans. The Merged Entities provided various defined
contribution plans that were available to their employees. Management of the
Company merged these benefit plans during 1995. Eligible employees include all
individuals over the age of 21 who have completed six months of benefit-eligible
service with the Company. The Company offers a matching program of $.50 for
every $1 contributed up to the first 6% of the employee's pay. Employee
contributions vest immediately upon contribution, and the Company's
contributions vest as follows: 1 year 0%, 2 years 25%, 3 years 50%, 4 years 75%
and 5 years 100%. During the years ended December 31, 1998, 1997 and 1996, the
Company's total contributions to these plans were approximately $2.0 million,
$1.7 million and $2.1 million, respectively.
Litigation. On November 21, 1995, a suit captioned William Hall and Barbara
Lisser v. Coram Healthcare Corporation, James W. Sweeney, Patrick Fortune, and
Sam Leno, No 1:95-CV-2994(WHB) was filed in the United States District Court for
the Northern District of Georgia on behalf of a purported class of plaintiffs
who were entitled to receive warrants pursuant to the settlement of In re T(2)
Medical, Inc. Shareholder Litigation. The plaintiffs filed an Amended Class
Action Complaint on February 28, 1996, in which they allege that the defendants
made false and misleading statements that caused a fraud on the market and
artificially inflated the price of the Company's stock during the period from
August 1994 through August 1995. Such Complaint alleges violations of Section
10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5
promulgated thereunder, against all of the defendants. The Complaint also
alleges controlling person liability against the individual defendants under
Section 20(a) of the Exchange Act, and further alleges fraud by all of the
defendants under Georgia law. Finally, the plaintiffs allege a breach of the
covenant of good faith and fair dealing by all defendants. The plaintiffs seek
compensatory damages reflecting the difference in value between the warrants as
issued pursuant to the settlement of In re T(2) Medical, Inc. Shareholder
Litigation with the trading price of the Company's common stock at its actual
price, and the same number of warrants at the same exercise price with the
Company's stock trading at its alleged true value. The defendants filed a motion
to dismiss the Amended Class Action Complaint on March 13, 1996. The Court
granted the Company's motion to dismiss on February 12, 1997. The plaintiffs
appealed the dismissal to the Eleventh Circuit Court of Appeals, which affirmed
the dismissal on October 15, 1998. The plaintiffs filed a petition with the
United States Supreme Court on March 15, 1999 for a writ of certiorari, and the
Company intends to respond to the petition.
F-24
<PAGE> 41
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company intends to vigorously defend itself in the matters described
above and in Note 9. Nevertheless, due to the uncertainties inherent in
litigation and IRS proceedings, the ultimate disposition of the matters
described in the preceding paragraph and in Note 9 cannot presently be
determined. Accordingly, except for the settlement of the Shareholder Litigation
described below, charges recorded for various litigation settlements that are
not individually material to the Company and the reserve established for the tax
case in Note 9, no provision for any loss that may result upon resolution of any
suits or proceedings has been made in the Company's Consolidated Financial
Statements. An adverse outcome in any such litigation or proceedings could be
material to the financial position, results of operations and liquidity of the
Company.
On August 8, 1996, the Company announced an agreement in principle to
settle certain shareholder class action and certain derivative litigation (the
"Shareholder Litigation"). The agreement in principle was approved by the
Colorado District Court on January 24, 1997. As consideration for the
settlement, the Company paid approximately $0.3 million and the Company's
director's and officer's insurance policies paid approximately $22.3 million.
Additionally, the Company was required to adopt certain disclosure policies with
regard to certain public statements. Under the agreement, the Company was
required to issue 5.0 million freely tradable shares of common stock of which
1.5 million shares were issued March 11, 1997 and 3.5 million shares were issued
November 28, 1997. The Company recorded non-cash charges of $25.6 million and a
cash charge of $0.3 million during the year ended December 31, 1996. The $25.6
million, which was recorded in operations as a provision for shareholder
litigation settlement and in stockholders' equity as common stock to be issued,
represents the 5.0 million shares at the stock price of $5.125 per share on the
date the settlement was approved.
In September 1995, as amended on October 6, 1995, the Company filed suit
against Caremark (the "Caremark Litigation") in the San Francisco Superior
Court. The Caremark Litigation and other related issues arose out of the
acquisition of certain assets of Caremark's home infusion business in 1995. On
June 30, 1997, the Company entered into a settlement with Caremark. Under the
terms of the settlement, Junior Subordinated Pay-In-Kind Notes totaling
approximately $100.0 million principal and $20.0 million accrued interest were
canceled with all payments due thereunder forgiven. Additionally, Caremark
agreed to pay $45.0 million in cash that was received on September 2, 1997. Of
the $45.0 million cash received, $3.6 million was placed in escrow pending
reconciliation of certain lockbox issues. As a result the Company recorded
income from litigation settlement of $156.8 million in June of 1997. See Note 3.
On July 7, 1997, the Company filed suit against Price Waterhouse LLP (now
known as PricewaterhouseCoopers LLP) in the Superior Court of San Francisco,
California, seeking damages in excess of $165.0 million. As part of the
settlement that resolved a case filed by the Company against Caremark
International, Inc. and Caremark, Inc. (collectively "Caremark"), Caremark
assigned and transferred to the Company all of Caremark's claims and causes of
action against Caremark's auditors, Price Waterhouse LLP, related to the lawsuit
filed by the Company against Caremark. This assignment of claims includes claims
for damages sustained by Caremark in defending and settling its lawsuit with the
Company. The case was dismissed from the court in California due to
inconvenience for witnesses with a right to re-file in Illinois. The Company
re-filed the lawsuit in state court in Illinois. Price Waterhouse LLP filed a
motion to dismiss the Company's lawsuit in the state court in Illinois on
several grounds, but their motion was denied in March 1999. The lawsuit has
progressed into the discovery stage. There can be no assurance of any recovery
from Price Waterhouse LLP. See Note 3.
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.
F-25
<PAGE> 42
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments included in the Company's assets and current
liabilities (excluding long-term debt) are reflected in the financial statements
at amounts approximating their fair value because of the short-term maturity of
those instruments.
At December 31, 1998 and 1997, the Company's ability to borrow was limited.
At December 31, 1998 and 1997, the Company had total debt carried at $242.4
million and $300.7 million, respectively. At December 31, 1998, the Series A and
Series B Notes were carried at $241.7 million. At December 31, 1997, the Former
Senior Credit Facility was carried at $80.0 million. The Company estimates that
its fair value of these financial instruments approximates their face value
based on the interest rate, security, covenants and remaining term to maturity.
It was not practicable to determine the fair value as of December 31, 1997
of the Rollover Note, carried at $219.2 million. The Rollover Note was cancelled
effective April 1998 pursuant to the Securities Exchange Agreement.
Considerable judgment is required in developing estimates of fair value and
the information furnished above is not meant to be indicative of what such debt
could be settled for. See Note 8.
The Company has investments in unconsolidated entities totaling
approximately $1.2 million at December 31, 1997. Since these entities are all
closely held companies and there are no quoted market prices, it is not
practicable to estimate the fair value of such investments.
14. QUARTERLY RESULTS (IN THOUSANDS, EXCEPT PER COMMON SHARE DATA) (UNAUDITED)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Net revenue...................................... $158,047 $143,607 $117,173 $107,689
======== ======== ======== ========
Gross profit..................................... $ 40,999 $ 34,505 $ 29,291 $ 27,189
======== ======== ======== ========
Net income(loss)................................. $ 806 $ (2,849) $ (4,528) $(15,124)
======== ======== ======== ========
Earnings(loss) per common share.................. $ 0.02 $ (0.06) $ (0.09) $ (0.31)
======== ======== ======== ========
Earnings(loss) per common share -- assuming
dilution...................................... $ 0.02 $ (0.06) $ (0.09) $ (0.31)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Net revenue...................................... $106,913 $121,934 $120,379 $123,915
======== ======== ======== ========
Gross profit..................................... $ 23,949 $ 36,590 $ 35,075 $ 39,990
======== ======== ======== ========
Net income (loss)................................ $(19,226) $ 2,303 $156,771 $(14,588)
======== ======== ======== ========
Earnings (loss) per common share................. $ (0.39) $ 0.05 $ 3.29 $ (0.31)
======== ======== ======== ========
Earnings (loss) per common share -- assuming
dilution...................................... $ (0.39) $ 0.04 $ 2.99 $ (0.31)
======== ======== ======== ========
</TABLE>
In 1998, unusual or infrequently occurring charges included the reversal of
$3.9 million of restructuring reserves in the fourth quarter.
F-26
<PAGE> 43
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997, unusual or infrequently occurring charges included second quarter
income from litigation settlement of $156.8 million and termination fee income
of $15.2 million. In addition, in the third and fourth quarters of 1997, the
Company recorded gains on sales of the Lithotripsy Business of $18.0 million and
$8.7 million, respectively.
The 1997 quarterly net revenue has been restated to conform to the 1998
presentation.
15. 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 Lithotripsy. 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. Lithotripsy derives its revenue from a
non-invasive technique that uses shock waves to disintegrate kidney stones. The
other segment category primarily represents the specialty mail-order pharmacy
and pharmacy benefit management services.
Coram uses earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") for purposes of performance measurement. The accounting
policies of the reportable segments are the same as those described in Note 2.
The measurement basis for segment assets includes net accounts receivable,
inventory, net property and equipment, and other current assets.
Summary information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
INFUSION
Revenue from external customers...................... $396,669 $373,684 $439,250
Intersegment revenue................................. 18,274 13,358 --
Interest income...................................... 72 -- 64
Equity in net income of unconsolidated joint
ventures........................................... 107 636 526
Segment EBITDA profit................................ 61,874 54,935 73,199
Segment assets....................................... 129,070 111,531 118,690
Segment asset expenditures........................... 4,723 12,806 1,810
R-NET
Revenue from external customers...................... $ 81,404 $ 33,669 $ 26,788
Intersegment revenue................................. -- -- --
Interest income...................................... 15 6 11
Equity in net income of unconsolidated joint
ventures........................................... -- -- --
Segment EBITDA profit (loss)......................... 153 (2,024) (1,733)
Segment assets....................................... 16,577 1,568 493
Segment asset expenditures........................... 1,944 70 181
</TABLE>
F-27
<PAGE> 44
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
LITHOTRIPSY
Revenue from external customers...................... * $ 37,282 $ 49,689
Intersegment revenue................................. -- -- --
Interest income...................................... -- 125 187
Equity in net income of unconsolidated joint
ventures........................................... -- 431 358
Segment EBITDA profit................................ * 16,140 22,166
Segment assets....................................... -- 262 22,565
Segment asset expenditures........................... -- 1,452 2,646
ALL OTHER
Revenue from external customers...................... $ 47,785 $ 28,506 $ 13,891
Intersegment revenue................................. 1,534 45 --
Interest income...................................... -- -- --
Equity in net income of unconsolidated joint
ventures........................................... -- -- --
Segment EBITDA profit (loss)......................... 2,000 (1,255) (1,787)
Segment assets....................................... 11,992 4,106 3,826
Segment asset expenditures........................... 403 51 81
</TABLE>
- ---------------
* Represents less than 2% of total category,therefore, no disclosure is made.
F-28
<PAGE> 45
CORAM HEALTHCARE CORPORATION
NOTES TO 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
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Total for reportable segments............................... $496,347 $457,993 $515,727
Other revenue............................................... 49,977 28,551 13,891
Elimination of intersegment revenue......................... (19,808) (13,403) --
-------- -------- --------
Total consolidated revenue.................................. $526,516 $473,141 $529,618
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS
Total EBITDA profit for reportable segments................. $ 62,027 $ 69,051 $ 93,632
Other EBITDA profit (loss).................................. 2,000 (1,255) (1,787)
Goodwill amortization expense............................... (11,139) (13,586) (15,259)
Depreciation and other amortization expense................. (11,302) (12,496) (17,421)
Interest expense............................................ (32,734) (75,026) (78,767)
All other income (expense), net............................. (26,848) 173,405 (71,712)
-------- -------- --------
Income (loss) before income taxes and minority interests.... $(17,996) $140,093 $(91,314)
======== ======== ========
ASSETS
Total assets for reportable segment......................... $145,647 $113,361 $141,748
Other assets................................................ 291,972 403,459 403,561
-------- -------- --------
Consolidated total assets................................... $437,619 $516,820 $545,309
======== ======== ========
</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.
Sales to one customer for the Company's Infusion and R-Net segments
represented approximately 12% of the Company's total consolidated net revenue
for 1998. Sales from the Medicare and Medicaid programs for all segments of the
Company represented 20%, 21% and 22% of the Company's total consolidated net
revenue for 1998, 1997 and 1996, respectively.
F-29
<PAGE> 46
CORAM HEALTHCARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts..... $24,047 $15,343 $-- $(21,262)(1) $18,128
Allowance for long-term receivable....... $ 1,763 $ -- $-- $ -- $ 1,763
Year ended December 31, 1997
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts..... $40,256 $16,209 $-- $(32,418)(2)(1) $24,047
Allowance for long-term receivable....... $ -- $ 1,763 $-- $ -- $ 1,763
Year Ended December 31, 1996
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts..... $63,839 $29,045 $-- $(52,628)(1) $40,256
</TABLE>
- ---------------
(1) Accounts written off, net of recoveries.
(2) Includes a reduction in the reserve of $0.5 million resulting from the sale
of the Lithotripsy Business.
S-1
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.48* -- Amendment No. 2, dated as of April 9, 1999 to the
Securities Exchange Agreement, dated May 6, 1998 and
amended as of June 30, 1998, among Coram, Inc., Coram
Healthcare Corporation, Cerberus Partners, L.P., Goldman
Sachs Credit Partners L.P. and Foothill Capital
Corporation.
20.2* -- Amendment No. 1, dated as of April 9, 1999 to Stockholder
Rights Agreement, dated as of June 25, 1997, between
Coram Healthcare Corporation and BankBoston, N.A., as
Rights Agent.
23.1(a) -- Consent of Ernst & Young LLP.
</TABLE>
- ---------------
* Incorporated by reference from Exhibits 1 and 2, respectively, of the
Registrant's Current Report on Form 8-K, dated April 19, 1999.
(a) Filed herewith.
<PAGE> 1
EXHIBIT 23.1(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 1, 1999, included in the Annual
Report on form 10K of Coram Healthcare Corporation for the year ended December
31, 1998, with respect to the consolidated financial statements and schedule, as
amended, included in this Form 10-K/A.
ERNST & YOUNG LLP
Denver, Colorado
April 30, 1999
