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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 30, 1999
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Coram Healthcare Corporation
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(Exact name of registrant as specified in its charter)
Delaware 1-11343 33-0615337
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(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.
of incorporation)
1125 17th Street, Suite 2100, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
(303) 292-4973
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(Registrant's telephone number)
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Item 5. Other Events.
Litigation. On June 30, 1999, Coram Healthcare Corporation
(the "Company" or "Coram") filed a complaint (the "Coram Complaint") against
Aetna U.S. Healthcare, Inc. ("Aetna") in the United States District Court for
the Eastern District of Pennsylvania (Civil Action No. 99-CV-3330). The Coram
Complaint sets forth claims against Aetna for fraud, misrepresentation, breach
of contract and rescission relating to the Master Agreement between the parties,
effective May 1, 1998 (the "Agreement") for ancillary network management
services through Coram's Resource Network Division ("R-Net"). Coram provided its
notice of termination of the Agreement effective June 30, 1999.
Under the anticipated five-year Agreement, Coram managed and
provided home health care services for over 2,000,000 Aetna enrollees in eight
states for a fixed monthly fee per enrollee. Coram began serving Aetna enrollees
under the Agreement on July 1, 1998.
As stated in the Coram Complaint, Aetna wrongfully induced
Coram to enter into the Agreement by, among other things, misrepresenting and
understating utilization of home health care services. Utilization has been
substantially higher than Aetna represented at the commencement of the
Agreement. As also stated in the Coram Complaint, Aetna has breached the
Agreement in several respects, including its failure to pay amounts due under
the Agreement totaling in excess of $10,000,000. Furthermore, Aetna's
misrepresentations induced Coram to expend additional amounts for the
infrastructure necessary to perform its duties under the Agreement. In the
lawsuit, Coram is seeking compensatory and punitive damages in excess of
$50,000,000. Based on recent communications with Aetna and the action taken by
Aetna as discussed below, Coram expects that Aetna will deny Coram's claims and
potentially pursue its own alleged claims of $30,000,000 or more.
On June 30, 1999, the Company received a copy of a complaint
(the "Aetna Complaint") that had been filed by Aetna on June 29, 1999 in the
Court of Common Pleas of Montgomery County, Pennsylvania (Case No. 99-11025).
The Aetna Complaint seeks equitable and declaratory relief to compel the Company
to perform under the Agreement, including the payment of compensation to the
healthcare providers that have rendered and continue to render services to
Aetna's health plan members. As stated in the Aetna Complaint, Aetna disputes
the Company's right to terminate the Agreement and Aetna has petitioned the
court for injunctive relief to require Coram to continue performing its duties
under the Agreement. On July 2, 1999, Coram removed the lawsuit filed by Aetna
to federal court (the U.S. District Court for the Eastern District of
Pennsylvania). Aetna has filed a motion to remand the action to state court on
the grounds that there is allegedly no federal jurisdiction or, alternatively,
to enjoin Coram's termination of the Agreement.
The Company intends to pursue its claims against Aetna
vigorously and to defend against any claims Aetna may assert against the Company
relating to the Agreement. Additionally, the Company intends to defend
vigorously the claims made and relief sought in the Aetna Complaint.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of the matters described in the preceding paragraphs cannot
presently be determined. An adverse outcome in such litigation would have a
material adverse effect on the financial position, results of operations and
liquidity of the Company.
Effects on the Company. Revenues relating to the Agreement
with Aetna represented approximately 8% and 16% of the Company's total revenues
for the year ended December 31, 1998 and the quarter ended March 31, 1999,
respectively. Coram's branches also
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serve Aetna enrollees not covered by the Agreement. Including such revenues, the
aggregate revenues relating to all of the Company's relationships with Aetna
represented approximately 12% and 20% of the Company's total revenues for the
year ended December 31, 1998 and the quarter ended March 31, 1999, respectively.
The termination of the Agreement and related dispute with
Aetna over the Agreement and the effectiveness of the termination thereof may
have other negative effects on business in the R-Net Division and in the
Company's core infusion business if, for example, Aetna refuses to pay claims
for the services rendered by Coram to Aetna enrollees that are serviced outside
of the Agreement, or if Aetna causes its soon to be acquired Prudential
affiliates to cease doing business with Coram. The Company is unable to predict
the impact of any such negative events. Nevertheless, the loss of revenues
relating to the Aetna relationship will have a material adverse effect on
revenue of the Company.
The contracts with network providers generally provide that
upon termination of the Agreement, Aetna becomes financially responsible for
services rendered by network providers. Although Aetna disputes the Company's
termination of the Agreement, the Company believes that its termination of the
Agreement was legally valid, thereby terminating its financial responsibility
for services provided after June 30, 1999.
On July 2, 1999, the federal district court (in the
proceedings filed by Aetna in state court and removed to federal court) issued
an order requiring that the parties preserve the status quo. Coram intends to
advise both Aetna and the district court on July 13, 1999 that, absent reaching
an accommodation with Aetna, Coram can no longer agree to pay network providers
for services rendered pursuant to the Agreement. Because the payments by Aetna
to Coram under the Agreement are substantially less than the costs incurred by
Coram for services and related additional infrastructure, the Company does not
have the financial capacity to continue to pay network providers for services at
the level experienced or projected under the Agreement.
Based upon the Company's analysis of information recently
supplied by Aetna relating to "leakage" (i.e., payments made by Aetna for home
health care services rendered to covered enrollees for which Aetna is seeking to
hold the Company financially responsible under the Agreement) and assuming the
information provided is correct and the Company does not prevail on its claims
in the lawsuits, the Company expects to have incurred substantial losses under
the Agreement for services rendered through June 30, 1999. The Company
anticipates recording a provision for such losses in the quarter ended June 30,
1999. Further, if the Company does not prevail in its dispute with Aetna and the
court determines that the Company is financially responsible for services
performed after June 30, 1999 under the Agreement, the Company would expect to
incur additional losses, which could be substantial.
Absent reaching an accommodation with Aetna, the losses
relating to the Agreement, together with any related loss of revenue from Aetna
and other customers, will result in the Company's violation of certain financial
covenants under the senior credit facility. The Company has discussed the
dispute and the related litigation with its senior lenders and intends to seek
waivers for compliance with certain financial covenants that will be violated as
a result of the litigation and anticipated loss for the quarter ended June 30,
1999. There can be no assurance that the senior lenders will waive compliance
with any financial covenants for the June 30, 1999 quarter or will provide other
waivers if further covenant violations occur in future quarters.
The Company intends to continue to pursue aggressively
opportunities in its core home infusion business, Coram Prescription Services
Division and Clinical Research and Medical Informatics Division to attempt to
diminish the negative impact of the termination of the Agreement.
The Company has delivered certain irrevocable letters of
credit in the aggregate amount of $14,500,000 to Aetna pursuant to the Agreement
to provide security for the
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payment of network providers under the Agreement. The Company has advised Aetna
and the banks that issued such letters of credit that any draw on the letters of
credit by Aetna would be wrongful. The Company is seeking a determination in its
lawsuit against Aetna that Aetna may not draw under such letters of credit.
This Report on Form 8-K contains certain "forward-looking
statements" (as such term is defined in the Private Securities Litigation Reform
Act of 1995) and information relating to Coram that are based on the beliefs of
management of Coram as well as assumptions made by and information currently
available to the management of Coram. The Company's actual results may vary
materially from the forward-looking statements made in this report due to
important factors such as: history of operating losses and uncertainties
associated with future operating results; significant outstanding indebtedness;
equity conversion rights held by existing debt holders; limited liquidity;
reimbursement-related risks; shifts in the mix of parties that pay for the
Company's services; dependence on relationships with third parties; uncertain
future liabilities under capitation arrangements; concentration of large payors;
industry and competition; timing of or ability to complete acquisitions;
government regulation of the home healthcare industry; certain legal proceedings
and uncertainties inherent in litigation; dependence on key personnel;
recruitment and retention of trained personnel; potential volatility of stock
price; New York Stock Exchange listing status; and unanticipated impacts from
the Year 2000 issue. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors" in the Company's
Annual Report on Form 10-K, as amended, for the year ended December 31, 1998.
When used in this report, the words "estimate," "project", "believe,"
"anticipate," "intend," "expect" and similar expressions are intended to
identify forward-looking statements. Such statements reflect the current views
of Coram with respect to future events based on currently available information
and are subject to risks and uncertainties that could cause actual results to
differ materially from those contemplated in such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. Coram does not undertake any
obligation to release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Item 7. Exhibits.
99.1 Form of press release dated June 30, 1999
(filed herewith).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized.
CORAM HEALTHCARE CORPORATION
By: /s/ WENDY L. SIMPSON
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Wendy L. Simpson
Executive Vice President and
Chief Financial Officer
Dated: July 12, 1999
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EXHIBIT INDEX
99.1 Form of press release dated June 30, 1999 (filed herewith).
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EXHIBIT 99.1
PRESS RELEASE
Coram Healthcare Terminates Resource Network Master Agreement and Files $50
Million Lawsuit Against Aetna U.S. Healthcare
DENVER, CO--June 30, 1999--Coram Healthcare Corporation (NYSE: CRH)
announced today that it has sued Aetna U.S. Healthcare, Inc. ("Aetna") in the
United States District Court for the Eastern District of Pennsylvania. The
complaint includes claims against Aetna for fraud, misrepresentation, breach of
contract and rescission relating to the Master Agreement between the parties,
effective May 1, 1998 (the "Agreement") for ancillary network management
services through its Resource Network Division. Coram provided its notice of
termination of the Agreement effective today. As stated in the complaint, Aetna
wrongfully induced Coram to enter into the Agreement by, among other things,
misrepresenting and understating the utilization of home health care services by
its own enrollees. As further stated in the complaint, utilization has been
substantially higher than Aetna represented at the commencement of the
Agreement. In the lawsuit, Coram seeks compensatory and punitive damages in
excess of $50 million. Based on recent communications with Aetna, Coram expects
that Aetna will deny Coram's claims and may pursue its own alleged claims of $30
million or more. Prior to filing the complaint, Coram was negotiating with Aetna
over the disputes. During such discussions and without any disclosure to Coram,
Aetna filed its own complaint against Coram in the Court of Common Pleas,
Montgomery County, Pennsylvania, setting forth claims for specific performance,
injunctive relief and declaratory relief. Pursuant to its complaint, Aetna seeks
an adjudication that Coram may not terminate the Agreement and is required to
continue to perform under the Agreement. "We were disappointed that Aetna would
file its complaint while we were simultaneously negotiating with Aetna, without
any disclosure whatsoever to Coram that it intended to file a complaint," said
Richard M. Smith, Coram's Chief Executive Officer and President. Under the
Agreement which was anticipated to be five years, Coram managed and provided
home health care services for over 2 million Aetna enrollees in eight states for
a fixed monthly fee per enrollee. Coram began serving Aetna enrollees under the
Agreement on July 1, 1998. "Our complaint against Aetna underscores our
commitment to our patients, employees and stockholders to preserve the financial
health of our company," said Richard M. Smith, Coram's Chief Executive Officer
and President. "The higher utilization pattern we have experienced during the
term of the Agreement has rendered the Agreement infeasible, and we have been
unable, despite numerous attempts, to resolve our dispute with Aetna without
legal action. We are disappointed in Aetna. Nevertheless, we remain committed to
continuing to manage and provide high quality medical services to Aetna's
enrollees even in the face of this action while we attempt professionally to
transfer to Aetna the administrative services contemplated by the Agreement."
Although Coram has provided notice of termination of the Agreement, Coram
intends to continue to arrange for the provision of the home health care
services through the network of home health care providers during the month of
July, 1999, pending transfer of the management of the home health care services
to Aetna. Coram has offered to work closely with Aetna to assure that the
transition is conducted smoothly
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and efficiently without disruption of patient care or of the network of home
health care providers. In this regard, the contracts with the network providers
provide for a transition to Aetna, and Coram has asked Aetna to confirm that
Coram should continue to authorize network providers to render home health care
services, subject to payment by Aetna. Coram has, however, advised Aetna that it
will not be financially responsible for the provision of home health care
services after the termination date, and that the financial responsibility lies
with Aetna. "The Agreement with Aetna has been material to Coram's total
revenue," Mr. Smith continued. "Coram's branches also serve Aetna enrollees not
covered by this Agreement. The loss of revenues relating to the Agreement,
together with the potential loss of Aetna business, should Aetna seek to
terminate that business, will have a material adverse effect on our revenue. In
spite of the termination of the Agreement, we have capital available under our
credit agreement to continue to operate our business, and we are very encouraged
by the continued support of our lending group. This event will not deter Coram
from pursuing its goals aggressively and maintaining focus on the long term
success of the Company." "We continue to be encouraged by the increased internal
growth of our home infusion therapy business," Mr. Smith added. "We are serving
more medically complex patients and continue to take market share from our
competitors and sign new contracts with managed care and other payers. Our Coram
Prescription Services division continues to grow rapidly in both the mail order
pharmacy and pharmacy benefit management businesses and will be able to transact
business through the Internet during the third quarter of 1999. Our newly formed
Clinical Research and Medical Informatics Division has been successfully
launched, and we anticipate substantial growth in this division in 1999 and
beyond." Coram Healthcare is a leading provider of home infusion therapy with
operations in over 90 locations in 44 states and Ontario, Canada. Through its
Resource Network Division, the Company manages networks of home health providers
on behalf of managed care plans and other payers. Coram Prescription Services
provides pharmacy benefit management services and mail order prescription
services for patients with chronic conditions. The Clinical Research and Medical
Informatics Division provides home care and product development services for
pharmaceutical, biotechnology and medical device companies sponsoring clinical
trials. Note: Except for historical information, all other statements provided
in this press release are "forward-looking" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company's actual results may vary
materially from the forward-looking statements made above due to important
factors such as the Company's history of operating losses and uncertainties
associated with future operating results; significant outstanding indebtedness;
equity conversion rights held by existing debt holders; limited liquidity;
reimbursement-related risks; shifts in the mix of parties that pay for the
Company's services; dependence upon relationships with third parties; uncertain
future liabilities under capitation arrangements; concentration of large payors;
the intensely competitive industry; the timing of or ability to complete
acquisitions; government regulation of the home health care industry; certain
legal proceedings; dependence on key personnel; recruitment and retention of
trained personnel; potential volatility of stock price; New York Stock Exchange
listing status; and unanticipated impacts from the Year 2000 issue. These and
other risk factors that could affect Coram's financial results are further
described in the Company's Form 10-K Annual Report, as amended, Form 10-Q
Quarterly Reports, and Form 8-K Current Reports on file with the Securities and
Exchange Commission.
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