<PAGE> 1
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11343
------------------------
CORAM HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0615337
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1125 SEVENTEENTH STREET
SUITE 2100
DENVER, CO 80202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 292-4973
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of April 30, 2000, was 49,638,452.
- --------------------------------------------------------------------------------
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 149 $ 6,242
Cash limited as to use.................................... 859 1,004
Accounts receivable, net of allowance of $31,163 and
$30,448................................................ 108,013 107,406
Inventories............................................... 19,059 22,966
Deferred income taxes, net................................ 415 364
Other current assets...................................... 6,816 5,614
--------- ---------
Total current assets.............................. 135,311 143,596
Property and equipment, net................................. 21,343 22,198
Deferred income taxes, net.................................. 1,661 1,481
Other deferred costs........................................ 1,897 2,434
Goodwill, net of accumulated amortization of $80,605 and
$78,027................................................... 213,544 216,062
Other assets................................................ 16,119 17,451
--------- ---------
Total assets...................................... $ 389,875 $ 403,222
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 29,659 $ 36,090
Accrued compensation...................................... 9,707 11,273
Interest payable.......................................... 7,884 5,100
Current maturities of long-term debt...................... 568 390
Income taxes payable...................................... 228 240
Deferred income taxes..................................... 919 419
Accrued merger and restructuring.......................... 5,705 7,392
Other accrued liabilities................................. 9,535 9,666
Net liabilities of discontinued operations................ 36,446 34,518
--------- ---------
Total current liabilities......................... 100,651 105,088
Long-term debt.............................................. 299,149 302,662
Minority interest in consolidated joint ventures............ 1,302 1,652
Other liabilities........................................... 14,197 14,092
Deferred income taxes, non-current.......................... 1,158 1,427
Commitments and contingencies............................... -- --
--------- ---------
Total liabilities................................. 416,457 424,921
Stockholders' deficit:
Preferred stock, par value $.001, authorized 10,000
shares, none issued.................................... -- --
Common stock, par value $.001, authorized 100,000 shares,
issued and outstanding 49,638 at March 31, 2000 and at
December 31, 1999...................................... 50 50
Additional paid-in capital................................ 427,388 427,399
Accumulated deficit....................................... (454,020) (449,148)
--------- ---------
Total stockholders' deficit....................... (26,582) (21,699)
--------- ---------
Total liabilities and stockholders' deficit....... $ 389,875 $ 403,222
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE> 3
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Net revenue................................................. $134,796 $124,348
Cost of service............................................. 100,655 96,720
-------- --------
Gross profit................................................ 34,141 27,628
Operating expenses:
Selling, general and administrative expenses.............. 23,456 18,941
Provision for estimated uncollectible accounts............ 3,243 4,048
Amortization of goodwill.................................. 2,578 2,732
Restructuring costs....................................... -- 950
-------- --------
Total operating expenses.......................... 29,277 26,671
-------- --------
Operating income from continuing operations................. 4,864 957
Other income (expenses):
Interest expense.......................................... (6,676) (6,559)
Other income, net......................................... 404 203
-------- --------
Loss from continuing operations before income taxes and
minority interests........................................ (1,408) (5,399)
Income tax expense.......................................... 100 75
Minority interests in net income of consolidated joint
ventures.................................................. (19) 428
-------- --------
Loss from continuing operations after income taxes and
minority interests........................................ (1,489) (5,902)
Discontinued Operations:
Income from operations.................................... -- 5,517
Loss from disposal........................................ (3,383) --
-------- --------
Net Loss.................................................... $ (4,872) $ (385)
======== ========
Basic and Diluted Earnings (Loss) Per Share:
Loss from continuing operations........................... $ (0.03) $ (0.12)
Income (loss) from discontinued operations................ (0.07) 0.11
-------- --------
Net loss.................................................. $ (0.10) $ (0.01)
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
------- --------
(UNAUDITED)
<S> <C> <C>
Net cash provided by (used in) continuing operations........ $ 2,115 $(13,928)
Cash flows from investing activities:
Purchases of property and equipment....................... (1,143) (2,449)
Other..................................................... 21 (312)
------- --------
Net cash used in investing activities.................. (1,122) (2,761)
Cash flows from financing activities:
Borrowings on line of credit.............................. 1,500 21,000
Repayment of debt......................................... (7,130) (6,064)
------- --------
Net cash provided by (used in) financing activities.... (5,630) 14,936
------- --------
Net decrease in cash from continuing operations...... $(4,637) $ (1,753)
======= ========
Net cash provided by (used in) discontinued
operations.......................................... $(1,456) $ 5,517
======= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2000
1. BASIS OF PRESENTATION
Business Activity. Coram Healthcare Corporation and its subsidiaries
("Coram" or the "company"), as of March 31, 2000, were engaged in two principal
lines of business: alternate site (outside the hospital) infusion therapy and
related 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 information 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 80 branch offices located in 41 states and Ontario, Canada. In
December 1999, Coram announced that it was repositioning its business to focus
on its core alternate site infusion therapy business and the clinical research
and medical informatics business operated by its subsidiary, CTI Network, Inc.
("CTI"). Accordingly, Coram's primary business strategy is to focus its efforts
on the delivery of its core infusion therapies, such as nutrition,
anti-infective therapies, intravenous immunoglobulin ("IVIG"), therapy for
persons receiving transplants, and coagulant and blood clotting therapies for
persons with hemophilia. Coram has also implemented programs focused on the
reduction and control of the cost of providing services and operating expenses,
assessment of under performing branches and review of branch efficiencies.
Pursuant to this review, several branches have been closed or scaled back to
serve as satellites for other branches and personnel have been eliminated. See
Note 3. Most of the company's alternate site infusion therapy net revenue is
from third-party payers such as private indemnity insurers, managed care
organizations and governmental payers.
The company delivers pharmacy benefit management and specialty mail-order
pharmacy services through its Coram Prescription Services business ("CPS"),
which provides pharmacy benefit management services as well as specialty
mail-order prescription drugs for chronically ill patients from one primary mail
order facility, four satellite mail order facilities, and one retail pharmacy.
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 its six facilities, which provide distribution,
compliance monitoring, patient education and clinical support to a wide variety
of patients. In August 1999, the company announced that it had hired an
investment advisor to assist it in pursuing strategic alternatives for CPS. With
the assistance of its investment advisor, the company is currently conducting an
auction of the CPS business. Meanwhile, other businesses of Coram are being
reviewed for divestiture or liquidation.
Prior to January 1, 2000, the company provided ancillary network management
services through its subsidiaries, Coram Resource Network, Inc. and Coram
Independent Practice Association, Inc. (the "Resource Network Subsidiaries" or
"R-Net"), which managed networks of home health care providers on behalf of
HMOs, PPOs, at-risk physician groups and other managed care organizations. R-Net
served its customers through two primary call centers and three satellite
offices. In April 1998, the company entered into a five-year capitated agreement
with Aetna U.S. Healthcare, Inc. ("Aetna") (the "Master Agreement") 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's disease management
programs. Effective July 1, 1998, the company began receiving capitated payments
on a monthly basis for members covered under the Master Agreement, 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
agreements that R-Net had for the provision of ancillary network management
services have been terminated, and R-Net is no longer providing any ancillary
network management services. Coram and Aetna were previously involved in
litigation over the Master Agreement, and the litigation was resolved and the
case was dismissed on April 20, 2000. See Note 5. The R-Net business is being
liquidated and the
5
<PAGE> 6
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Resource Network Subsidiaries' filed voluntary bankruptcy petitions on November
12, 1999 with the U.S. Bankruptcy Court for the District of Delaware under
Chapter 11 of the U.S. Bankruptcy Code. See Note 2.
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared by the company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such regulations. The unaudited condensed consolidated
financial statements reflect all adjustments and disclosures that are, in the
opinion of management, necessary for a fair presentation. All such adjustments
are of a normal recurring nature. The results of operations for the interim
period ended March 31, 2000, are not necessarily indicative of the results of
the full fiscal year. For further information, refer to the audited consolidated
financial statements and notes thereto included in the company's Annual Report
on Form 10-K, for the year ended December 31, 1999.
Provision for Estimated Uncollectible Accounts. Management believes the
net carrying amount of accounts receivable is fairly stated and that the company
has made adequate provision for uncollectible accounts based on all information
available. However, no assurance can be given as to the level of future
provisions for uncollectible accounts, or how they will compare to the levels
experienced in the past.
Loss per Share. In 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement No. 128, Earnings per Share ("Statement 128"). In
accordance with Statement 128, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. The following table
sets forth the computation of basic and diluted earnings (loss) per share for
the three months ended March 31, 2000 and 1999 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Numerator for basic and diluted earnings (loss) per share
Loss from continuing operations........................... $(1,489) $(5,902)
Income (loss) from discontinued operations................ (3,383) 5,517
------- -------
Net loss.................................................... $(4,872) $ (385)
======= =======
Weighted average shares -- denominator for basic
earnings (loss) per share................................. 49,638 49,402
Effect of other dilutive securities:
Stock options............................................. -- --
Warrants.................................................. -- --
------- -------
Denominator for diluted earnings (loss) per share --adjusted
weighted average shares and assumed conversion............ 49,638 49,402
======= =======
Basic and Diluted Earnings (Loss) Per Share:
Loss from continuing operations........................... $ (0.03) $ (0.12)
Income (loss) from discontinued operations................ (0.07) 0.11
------- -------
Net Loss.................................................. $ (0.10) $ (0.01)
======= =======
</TABLE>
Diluted earnings (loss) per share computations do not give effect to stock
options, warrants or the Series B Senior Subordinated Convertible Notes, as
their effect would have been anti-dilutive.
6
<PAGE> 7
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Derivatives and Hedging Activities. In June 1998, the FASB issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement 133"), which requires recording
all derivative instruments as assets or liabilities, measured at fair value.
Statement 133 was effective for fiscal years beginning after June 15, 1999. The
FASB issued, in June 1999, the Statement of Financial Accounting Standards No.
137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement 133. ("Statement 137"), which amends
Statement 133. Statement 137 will apply to all fiscal quarters of all fiscal
years beginning after June 15, 2000. As of March 31, 2000, the company had not
entered into any derivative and hedging transactions, and as such, the company
does not believe that adoption of the new requirement will have an effect on the
company's future financial position or operating results.
2. LOSS ON DISCONTINUED OPERATIONS
In November 1999, following the filing of voluntary bankruptcy petitions
for the Resource Network Subsidiaries, Coram disclosed as Net liabilities of
Discontinued Operations in the Condensed Consolidated Financial Statements, the
excess of R-Net's liabilities over assets. Coram also reflected separately
R-Net's operating results in the Condensed Consolidated Statement of Operation
as Discontinued Operations.
The Loss from Operations of Discontinued Operations of R-Net reflected in
the company's Condensed Consolidated Statement of Operations includes the
following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Net Sales................................................ $ -- $36,606
======= =======
Gross Profit............................................. $ -- $10,511
======= =======
Profit from Operations of Discontinued Operations........ $ -- $ 5,517
======= =======
</TABLE>
The $3.4 million Loss from Disposal of Discontinued Operations of the
segment includes for the three months ended March 31, 2000 additional reserves
for litigation and other wind-down costs.
The components of the net liabilities of the discontinued operations
included in the Condensed Consolidated Balance Sheets are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Cash................................................. $ 1,682 $ 2,022
Accounts Receivable, net............................. -- --
Other Current Assets................................. 5 --
Property, Plant, & Equipment, net.................... -- --
Intercompany payable................................. (65) (437)
Accounts payable..................................... (32,426) (31,490)
Accrued expenses..................................... (5,642) (4,613)
-------- --------
Net liabilities of Discontinued Operations........... $(36,446) $(34,518)
======== ========
</TABLE>
7
<PAGE> 8
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS AND RESTRUCTURING
Acquisitions. Certain agreements, related to previously acquired
businesses or interests therein, provide for additional contingent consideration
to be paid by the company. The amount of additional consideration, if any, is
generally based on the financial performance levels of the acquired companies.
As of March 31, 2000, the company may be required to pay, under such contingent
obligations, approximately $1.7 million which is subject to increase based on
the company or its subsidiaries exceeding certain revenue or income targets and
changes in the market value of the company's stock. Subject to certain elections
by the company or the sellers, approximately $0.8 million of these contingent
obligations, subject to increase, may be paid in cash. In the period these
payments become probable, they are recorded as additional goodwill. Payments
made during the three months ended March 31, 2000 and 1999 were $0.1 million and
$0.2 million, respectively.
Merger and Restructuring. As a result of the formation of Coram and the
acquisition of substantially all of the assets of the alternate site infusion
business of Caremark, Inc., a subsidiary of Caremark International, Inc. (the
"Caremark Business"), during May 1995, the company initiated a restructuring
plan (the "Caremark Business Consolidation Plan") and charged $25.8 million to
operations as a restructuring cost. Certain additional restructuring costs
totaling approximately $11.4 million were incurred and accounted for as
adjustments to the purchase price of the Caremark Business in 1995. In December
1998 and 1999, the company evaluated the estimated costs to complete the
Caremark Business Consolidation Plan and other accruals and recognized a
restructure reversal benefit of $0.7 million and $0.2 million, respectively.
During January 1999, the company undertook an organizational realignment to
affect a functional reporting structure (the "Field Reorganization Plan") and
charged $1.0 million to operations as a restructuring cost. The Field
Reorganization Plan's restructuring cost relates to severance payments, fringe
benefits and taxes for approximately 25 employees. As of March 2000, the Field
Reorganization Plan was complete and future cash expenditures were no longer
expected.
During December 1999, the company initiated an organizational restructure
and strategic repositioning plan (the "Coram Restructure Plan") and charged $4.8
million to operations as a restructuring cost. The Coram Restructure Plan will
result in the closing of facilities and reduction of personnel. Personnel
reduction costs of $2.5 million include severance payments, fringe benefits and
taxes related to over 200 employees that have been or may be terminated in
accordance with the Coram Restructure Plan. Facility closing costs include $2.3
million of rent, common area maintenance and utility costs, offset by sublease
arrangements as applicable, for fulfilling lease commitments on approximately
fifteen branch and corporate facilities that have been or may be closed or
downsized as part of the restructuring.
During July 1999, the company adopted a restructuring plan associated with
the reorganization of the R-Net call center operations responsible for managing
the Master Agreement with Aetna (the "R-Net Restructure Plan"). The R-Net
Restructure Plan resulted in an initial charge to operations of $5.1 million. In
November 1999, prior to the R-Net decision to file voluntary Chapter 11
bankruptcy petitions, the company evaluated the estimated cost to complete the
R-Net Plan and revised the initial charge to $4.3 million, which consisted of
accruals for restructuring of $2.8 million for facility costs and $0.6 million
for personnel reduction costs, and a loss on impairment of assets charge for
$0.9 million. As a result of the R-Net liquidation as described in Note 1, these
charges are included in the Loss from Discontinued Operations for the year-ended
December 31, 1999 and the related restructuring accrual and impairment of fixed
assets is reflected in the net liability of discontinued operations as of
December 31, 1999.
8
<PAGE> 9
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Under the Caremark Business Consolidation Plan, the Field Reorganization
Plan and the Coram Restructure Plan, the company has made total payments,
disposals and reversals as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT
THROUGH MARCH 31, 2000 MARCH 31, 2000
----------------------------------------------- ---------------------
CASH NON-CASH RESTRUCTURE FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL REVERSAL EXPENDITURE CHARGES
------------ -------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Caremark Business Consolidation
Plan:
Personnel Reduction Costs....... $11,300 $ -- $11,300 $ -- $ -- $11,300
Facility Reduction Costs........ 9,742 3,900 13,642 943 2,115 16,700
------- ------ ------- ---- ------ -------
Total Restructuring Costs.... $21,042 $3,900 $24,942 $943 $2,115 $28,000
======= ====== ======= ==== ====== =======
Field Reorganization Plan:
Personnel Reduction Costs....... $ 950 $ -- $ 950 $ -- $ -- $ 950
------- ------ ------- ---- ------ -------
Total Restructuring Costs.... $ 950 $ -- $ 950 $ -- $ -- $ 950
======= ====== ======= ==== ====== =======
Coram Restructure Plan:
Personnel Reduction Costs....... $ 1,209 $ -- $ 1,209 $ -- $1,353 $ 2,562
Facility Reduction Costs........ 242 -- 242 -- 2,053 2,295
------- ------ ------- ---- ------ -------
Total Restructuring Costs.... $ 1,451 $ -- $ 1,451 $ -- $3,406 $ 4,857
======= ====== ======= ==== ====== =======
</TABLE>
The balance in the "Accrued Merger and Restructuring" liability at March
31, 2000 consists of future cash expenditures related to the Caremark Business
Consolidation Plan of $2.1 million, the Coram Restructure Plan of $3.4 million,
and other accruals of $0.2 million. The other accruals are for estimated
expenditures for other closed facilities and personnel reduction costs.
The company estimates that the future cash expenditures related to the
restructuring plans stated above will be made in the following periods: 47%
through March 31, 2001, 18% through March 31, 2002, 18% through March 31, 2003,
and 17% thereafter.
4. LONG-TERM DEBT
Long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Series A Senior Subordinated Unsecured Notes......... $168,423 $166,825
Series B Senior Subordinated Convertible Notes....... 92,084 91,474
New Senior Credit Facility........................... 38,500 44,000
Other obligations, including capital leases, at
interest rates ranging from 11% to 15%,
collateralized by certain property and equipment... 710 753
-------- --------
299,717 303,052
Less current scheduled maturities.................... (568) (390)
-------- --------
$299,149 $302,662
======== ========
</TABLE>
As of March 31, 2000, 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
9
<PAGE> 10
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Series B Senior Subordinated Unsecured 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 and reelected in August 1999.
On April 9, 1999, the company entered into Amendment No. 2 (the "Note
Amendment") to the Securities Exchange Agreement with the Holders. Pursuant to
the Note Amendment, the outstanding principal amount of Series B Notes is
convertible into shares of the company's common stock, par value $.001 per share
(the "Common Stock"), at a price of $2.00 per share (subject to customary
anti-dilution adjustments). Prior to entering into the Note Amendment, the
Series B Notes were convertible into Common Stock at a price of $3.00, which
price was subject to a downward (not upward) adjustment based on prevailing
market prices for the Common Stock at April 13, 1999 and at 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. The Securities Exchange Agreements,
pursuant to which the Series A Notes and the Series B Notes were issued,
contains certain other customary covenants and events of default. At March 31,
2000, the company was in compliance with all of these covenants, other than
covenants relating to certain contractual relationships its Coram Resource
Network, Inc. and Coram Independent Practice Association, Inc. subsidiaries had
with certain parties that were contracted to provide services pursuant to the
Master Agreement, effective May 1, 1998, with Aetna and to certain covenants
relating to the capitalization of certain subsidiaries. The company has,
however, received waivers from its lenders regarding such noncompliance. In
addition, the filing of the voluntary chapter 11 bankruptcy petitions by Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc. caused
defaults under the Exchange Agreement; however, such defaults were waived by the
Lenders. In connection with such waivers and the waivers provided for certain
matters of non-compliance with certain covenants set forth in the New Senior
Credit Facility (as described below), the company and the Holders entered into
an amendment on November 15, 1999 pursuant to which the Holders agreed that no
interest on the Series A and Series B Notes would be due for the period from
November 15, 1999 through the earlier of (i) final resolution of the litigation
with Aetna or (ii) May 15, 2000. The Aetna litigation was settled on April 20,
2000, and, as a result, the obligation to pay interest on the Series A and
Series B Notes resumed as of such date. There can be no assurance as to whether
further covenant violations or defaults will occur in future periods and whether
any necessary waivers will be forthcoming at that time.
Series A Notes. The Series A Notes mature in May 2001 and bore interest at
an initial rate of 9.875% per annum payable quarterly in arrears in cash or
through the issuance of additional Series A Notes at the election of the company
except that Holders can require the company to pay interest in cash if the
company
10
<PAGE> 11
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
exceeds a certain interest coverage ratio. Pursuant to the Note Amendment, the
parties increased the interest rate applicable to the Series A Notes to 11.5%
per annum. During the quarter ended March 31, 2000, interest expense on the
Series A Notes was approximately $3.3 million.
As described above, no interest was due on the outstanding balance under
the Series A Notes from November 15, 1999 through April 20, 2000, the date the
litigation with Aetna was resolved. The interest rate currently applicable to
the Series A Notes is 11.5% per annum.
Series B Notes. The Series B Notes mature in April 2008 and bear interest
at the rate of 8% per annum, payable quarterly in arrears in cash or through the
issuance of additional Series B Notes at the election of the company. Pursuant
to the Note Amendment, the outstanding principal amount of Series B Notes are
convertible into shares of the company's Common Stock at a price of $2.00 per
share subject to customary anti-dilution adjustments including adjustments for
sale of common stock other than pursuant to existing obligations or employee
benefit plans at a price below the conversion price prevailing at the time of
such sale. During the quarter ended March 31, 2000, interest expense on the
Series B Notes was $1.7 million.
As described above, no interest was due on the outstanding balance under
the Series B Notes from November 15, 1999 through April 20, 2000, the date the
litigation with Aetna was resolved. The interest rate currently applicable to
the Series B Notes is 8.0% per annum.
The Series A and Series B Notes are redeemable, in whole or in part, at the
option of the Holders thereof in connection with any change of control of the
company (as defined in the Securities Exchange Agreement), if the company ceases
to hold and control certain interests in its significant subsidiaries, or upon
the acquisition of the company or certain of its subsidiaries by a third party.
In such instances, the Series A and Series B Notes are redeemable at 103% of the
then outstanding principal amount plus accrued interest. The Series B Notes are
also redeemable at the option of the Holders thereof upon maturity of the Series
A Notes at the outstanding principal amount thereof plus accrued interest. In
addition, the Series A Notes are callable at 103% of the then outstanding
principal amount plus accrued interest at the option of the company.
Exchange; New Senior Credit Facility. The consummation of the Exchange was
contingent upon the satisfaction of certain conditions prior to closing of the
Securities Exchange Agreement on June 30, 1998. All conditions were satisfied
with the exception of the condition requiring the company to execute an
agreement for a new senior credit facility. Accordingly, on June 30, 1998, the
company entered into the First Amendment and Waiver (the "Amendment") to the
Securities Exchange Agreement, and the Exchange was consummated. The Amendment
waived the condition under the Securities Exchange Agreement requiring the
company to execute an agreement for a new senior credit facility on or prior to
June 30, 1998. In addition, under the Amendment, the Holders of the Series A and
Series B Notes agreed to extend the company up to $60.0 million of senior
secured debt (the "New Senior Credit Facility"), subject to the completion of
definitive agreements on or prior to September 30, 1998. On August 20, 1998, the
company entered into a definitive agreement for the New Senior Credit Facility
providing for the availability of the $60.0 million facility for acquisitions,
working capital, letters of credit and other corporate purposes. The
availability is subject to certain borrowing base calculations as defined in the
underlying agreement. The New Senior Credit Facility matures February 26, 2001
and bears an interest rate of prime plus 1.5%, payable in arrears on the first
business day of each month. The interest rate was 10.5% at March 31, 2000. The
New Senior Credit Facility is secured by the capital stock of the company's
subsidiaries, as well as the accounts receivable and certain other assets held
by the company and its subsidiaries. Under the New Senior Credit Facility, among
other nominal fees, the company was required to pay an upfront fee of 1.0% or
$0.6 million and is liable for commitment fees on the unused facility of 3/8 of
1.0% per annum, due quarterly in arrears. During the quarter ended March 31,
2000, interest and related fees on the New Senior Credit Facility were $1.6
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").
11
<PAGE> 12
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The 1998 Warrants were valued at their fair value at the date of issuance, and
were accounted for as deferred costs to be amortized over the life of the New
Senior Credit Facility. The company charged $0.4 million to interest expense
during the quarter ended March 31, 2000 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 March 31, 2000, the Holders had issued letters of credit
totaling $2.7 million thereby reducing the company's availability under the New
Senior Credit Facility by that amount. The terms of the New Senior Credit
Facility also provide for a fee of 1.0% per annum on the outstanding letter of
credit obligations that is due in arrears on the first business day of each
month. The terms of the New Senior Credit Facility also provide for additional
fees to be paid on demand to any letter of credit issuer pursuant to the
application and related documentation under which such letters of credit are
issued. As of March 31, 2000, such fees were 0.825% per annum on the amount of
outstanding letter of credit obligations. The New Senior Credit Facility
contains certain other customary covenants and events of default. At March 31,
2000, the company received waivers of non-compliance with such covenants through
December 31, 2000. There can be no assurance as to whether further covenant
violations will occur in periods ending after December 31, 2000 and whether
necessary waivers will be forthcoming at that time.
At May 8, 2000, the New Senior Credit Facility had a borrowing base of
$60.0 million, of which $34.5 million had been drawn. In addition, after
deducting from the borrowing base the other letters of credit obligations
totaling $2.7 million, the total available under the facility was $22.8 million
as of May 8, 2000.
5. LITIGATION AND CONTINGENCIES
Litigation. Beginning in June 1999, the company had been in litigation
with Aetna U.S. Healthcare, Inc. over the Master Agreement that had been entered
into by Coram and Aetna in 1998. The case was pending in the United States
District Court for the Eastern District of Pennsylvania (Civil Action Nos.
99-CV-3330 and 99-CV-3378), but was dismissed on April 20, 2000 following an
amicable resolution of the dispute by the parties. The parties have agreed to
make good faith efforts to negotiate a new contract for home infusion services.
On November 12, 1999, the Resource Network Subsidiaries filed voluntary
petitions under Chapter 11 of the United States Code in the United States
Bankruptcy Court for the District of Delaware. On August 19, 1999, a small group
of parties with claims against the R-Net filed an involuntary bankruptcy
petition under Chapter 11 against Coram Resource Network, Inc. ("CRN") in the
United States Bankruptcy Court for the District of Delaware. The two proceedings
were consolidated by stipulation of the parties and the case is pending under
the caption, In Re Coram Resource Network, Inc. and Coram Independent Practice
Association, Inc., Case No. 99-2889 (MFW).
Apria Healthcare, Inc. and one of its affiliates (collectively "Apria")
have also filed suit against the company and the Resource Network Subsidiaries
in the Superior Court of Orange County, California (Apria Healthcare, Inc. and
Apria Healthcare of New York State, Inc. v. Coram Healthcare Corporation, Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc, Case No.
813264) regarding Apria's specific provider claims. The claims relate to
services that were rendered as part of a network in connection with the Master
Agreement with Aetna. Apria's complaint alleges, among other things, that the
Resource Network Subsidiaries operated as the alter ego of Coram and, as a
result, Coram should be declared responsible for the alleged breaches of the
contracts that the Resource Network Subsidiaries had with Apria. The complaint
includes requests for declaratory, compensatory and other relief in excess of
$1.4 million. A notice has been filed with the Court notifying it of the
bankruptcy proceedings and contending that the case has, by operation of certain
provisions of the United States Bankruptcy Code, been stayed. If the case is
prosecuted against Coram despite the stay of the proceedings, Coram will pursue
all available grounds for dismissal and defend itself vigorously in the matter.
Due to the uncertainties inherent in litigation, the ultimate
12
<PAGE> 13
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
disposition of this matter cannot presently be determined and no provision has
been recorded in the company's Condensed Consolidated Financial Statements for
any loss that may result upon resolution of the litigation with Apria. See Note
2.
In January 1999, the Internal Revenue Service ("IRS") completed the
examination of Coram's 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. Coram has agreed to adjustments of $24.4 million
that only affect the net operating loss carryforwards available. Coram 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
affects the prior year's tax liability. On May 14, 1999, Coram received a
statutory notice of deficiency, totaling approximately $12.7 million plus
interest and penalties to be determined. The most significant proposed
adjustment relates to the ability of Coram to categorize certain net operating
losses as specified liability losses and offset income in prior years, for which
the company has previously received refunds in the amount of approximately $12.7
million. On August 11, 1999, Coram filed a petition in the United States Tax
Court contesting the deficiency and the IRS filed a response arguing that
Coram's petition should be denied. Coram and the IRS have agreed to pursue a
trial date in the early part of 2001 with discovery proceeding during 2000.
Coram is contesting the notice of deficiency through administrative proceedings
with the IRS and through the litigation in the Tax Court described above. Coram
will vigorously defend its current position. Due to the uncertainty of final
resolution, Coram's financial statements include a reserve for these issues.
Coram would, however, be required to pay from its cash resources any deficiency
resulting from resolution of the proposed adjustments, plus interest and
penalties, if applicable. 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 Coram will prevail. If Coram does not prevail with
respect to the proposed material adjustments, the financial position and
long-term liquidity of Coram could be materially adversely affected. See Note 6.
Coram intends vigorously to defend itself in the matters described above.
Nevertheless, due to the uncertainties inherent in litigation and IRS
proceedings, the ultimate disposition of the matters described in the preceding
paragraphs cannot presently be determined. Accordingly, charges recorded for
various litigation settlements that are not individually material to Coram and
the reserve established for the tax case as discussed above, no provision for
any loss that may result upon resolution of any suits or proceedings has been
made in the company's Condensed Consolidated Financial Statements. An adverse
outcome in any such litigation or proceedings could have a material adverse
effect to the financial position, results of operations and liquidity of the
company.
On July 7, 1997, Coram 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, PricewaterhouseCoopers LLP, related to the
lawsuit filed by Coram against Caremark. This assignment of claims includes
claims for damages sustained by Caremark in defending and settling its lawsuit
with Coram. The case was dismissed from the court in California because of
inconvenience to witnesses with a right to re-file in Illinois. Coram re-filed
the lawsuit in state court in Illinois. PricewaterhouseCoopers LLP filed a
motion to dismiss Coram's lawsuit in the state court in Illinois on several
grounds, but their motion was denied on March 15, 1999. PricewaterhouseCoopers
LLP filed an additional motion to dismiss Coram's lawsuit in May 1999, and that
motion was dismissed on January 28, 2000. The lawsuit has progressed into the
discovery stage. There can be no assurance of any recovery from
PricewaterhouseCoopers LLP.
13
<PAGE> 14
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Coram 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.
Government Regulation. Under the Omnibus Budget Reconciliation Act of 1933
("Stark II"), it is unlawful for a physician to refer patients for certain
designated health services reimbursable under the Medicare or Medicaid program
to an entity with which the physician has a financial relationship, unless the
financial relationship fits within an exception enumerated in Stark II or
regulations promulgated thereunder. A "financial relationship" under Stark II is
defined broadly as an ownership or investment interest in, or any type of
compensation arrangement in which remuneration flows between the physician and
the provider. Coram has financial relationships with physicians and physician
owned entities in the form of medical director agreements and services
agreements pursuant to which the company provides pharmacy products. In each
case the relationship has been structured using an arrangement the company
believes to be consistent with applicable exceptions set forth in Stark II.
In addition, the company is aware of certain referring physicians that have
had financial interests in the company through ownership of shares of the
company's common stock. The Stark II law includes an exception for the ownership
of publicly traded stock in certain companies with equity above certain levels.
This exception of Stark II requires the issuing company to have stockholders'
equity of at least $75 million either as of the end of its most recent fiscal
year or during the last three fiscal years. As of December 31, 1999, the
company's stockholders equity was below the required level, but average
stockholders' equity over the prior three years was above the required level.
Without an increase in Coram's stockholders' equity level prior to the end of
the fiscal year ending December 31, 2000, Coram would no longer qualify for such
exception and would be forced to cease accepting referrals of patients with
government sponsored benefit programs from physicians who own shares of Coram's
common stock.
6. INCOME TAXES
During the three months ended March 31, 2000 and 1999, the company recorded
an income tax expense of $0.1 million each period. The effective income tax
rates for the three month periods ended March 31, 2000 and 1999 differ
substantially from the expected combined federal and state income tax rates
calculated using applicable statutory rates as a result of the company providing
a full valuation reserve against its deferred tax assets.
As of March 31, 2000, deferred tax assets are net of a $175.3 million
valuation allowance. Realization of deferred tax assets is dependent upon the
ability of the company to generate taxable income in the future. Deferred taxes
relate primarily to temporary differences consisting, in part, of accrued
restructuring costs, the charge for goodwill and other long-lived assets,
allowances for doubtful accounts, R-Net reserves and other accrued liabilities
that are not deductible for income tax purposes until paid or realized and to
net operating loss carryforwards that are deductible against future taxable
income.
In January 1999, the Internal Revenue Service ("IRS") completed the
examination of the federal income tax return of the company for the year ended
September 30, 1995, and proposed substantial adjustments to the prior tax
liabilities of the company. See Note 5. The company has agreed to adjustments of
$24.4 million that affect only the net operating loss carryforwards available.
The company does not agree with the other proposed adjustments regarding the
deduction of warrants, write-off of goodwill and the specified liability portion
of the 1995 loss which would, if the IRS prevails, affect the prior years' tax
liabilities. In May 1999, the company received a statutory notice of deficiency
with respect to the proposed adjustments. The alleged deficiency totaled
approximately $12.7 million plus interest and penalties to be determined. The
company is contesting the notice of deficiency through administrative
proceedings and litigation, and will
14
<PAGE> 15
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
vigorously defend its position. The most significant adjustment proposed by the
IRS relates to the ability of the company to categorize certain net operating
losses as specified liability losses and offset income in prior years, for which
the company has previously received refunds in the amount of approximately $12.7
million. In August 1999, the company filed a petition with the United States Tax
Court contesting the notice of deficiency. The IRS responded to the petition and
requested the petition be denied. The IRS Appeals office currently has
jurisdiction over the case. Due to the uncertainty of final resolution, the
company's financial statements include a reserve for these potential
liabilities. No assurance can be given that the company will prevail given the
early phase of this matter and the uncertainties inherent in any proceeding with
the IRS or in litigation. If the company does not prevail with respect to the
proposed material adjustments, the financial position and liquidity of the
company could be materially adversely affected.
7. 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 and CPS. Infusion is the company's base
business, which derives its revenue primarily from alternate site infusion
therapy. CPS primarily provides specialty mail-order pharmacy and pharmacy
benefit management services. The other non-reportable segment represents
clinical trials and informatics services. R-Net, a discontinued operation, is no
longer identified as a reportable segment. See Note 2.
Coram uses earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") for purposes of performance measurement. For the quarter
ended March 31, 2000, corporate costs were allocated on a revenue basis. For the
quarter ended March 31, 1999, the EBITDA has been restated to conform to the
2000 presentation. 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
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
INFUSION
Revenue from external customers............................. $107,677 $105,605
Intersegment revenue........................................ 477 7,203
Interest income............................................. 30 22
Equity in net income of unconsolidated joint ventures....... 259 --
Segment EBITDA profit....................................... 9,037 7,539
Segment assets.............................................. 127,454 155,181
Segment asset expenditures.................................. 989 2,242
CPS
Revenue from external customers............................. $ 26,245 $ 18,655
Intersegment revenue........................................ 11 82
Interest income............................................. 1 --
Equity in net income of unconsolidated joint ventures....... -- --
Segment EBITDA profit (loss)................................ (815) 316
Segment assets.............................................. 24,364 16,402
Segment asset expenditures.................................. 154 470
</TABLE>
15
<PAGE> 16
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
ALL OTHER
Revenue from external customers............................. $ 874 $ 88
Intersegment revenue........................................ -- --
Interest income............................................. -- --
Equity in net income of unconsolidated joint Ventures....... -- --
Segment EBITDA loss......................................... (37) (56)
Segment assets.............................................. 917 104
Segment asset expenditures.................................. -- --
</TABLE>
A reconciliation of the company's segment revenue, segment EBITDA profit
(loss), segment assets and other significant items to the corresponding amounts
in the Condensed Consolidated Financial Statements are as follows (in
thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
NET REVENUES
Total for reportable segments............................... $134,410 $131,545
Other revenue............................................... 874 88
Elimination of intersegment revenue......................... (488) (7,285)
-------- --------
Total consolidated revenue........................ $134,796 $124,348
======== ========
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTERESTS
Total EBITDA profit for reportable segments................. $ 8,222 $ 7,855
Other EBITDA loss........................................... (37) (56)
Goodwill amortization expense............................... (2,578) (2,732)
Depreciation and other amortization expense................. (2,558) (2,662)
Interest expense............................................ (6,676) (6,559)
All other income (expense), net............................. 2,219 (1,245)
-------- --------
Loss from continuing operations before income taxes and
minority interests..................................... $ (1,408) $ (5,399)
======== ========
ASSETS
Total assets for reportable segments........................ $151,818 $171,583
Other assets................................................ 238,057 268,259
-------- --------
Consolidated total assets................................. $389,875 $439,842
======== ========
</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 Aetna U.S. Healthcare and its affiliated payers for the company's
Infusion and CPS segments represented approximately 5% and 7% of the company's
total net revenue from continuing operations for the three months ended March
31, 2000 and 1999, respectively. The National Ancillary Services Agreement with
16
<PAGE> 17
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Aetna applicable to the company's home infusion business was terminated
effective April 12, 2000. The company and Aetna have agreed to use their good
faith efforts to negotiate a new agreement for home infusion services. Net
revenue from the Medicare and Medicaid programs for the company's Infusion and
CPS segments represented approximately 19% and 20% of the company's total
consolidated net revenue for the three months ended March 31, 2000 and 1999,
respectively.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) and information relating to Coram that is based on the beliefs of
the management of Coram as well as assumptions made by and information currently
available to the management of Coram. The company's actual results may vary
materially from the forward-looking statements made in this report due to
important factors such as: the company's lack of profitability; uncertainties
associated with the outcomes of certain pending legal proceedings; the company's
significant level of outstanding indebtedness; the company's need to obtain
additional financing or equity; uncertainties associated with the dilution that
would occur if the company's existing debt holders exercise their equity
conversion rights; the company's limited liquidity; and certain other factors,
all of which are described in greater detail later in this Item 2 under the
caption "Risk Factors." 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. For a discussion of such risks, see "Risk Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. Coram does not undertake any
obligation to release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
BACKGROUND
Business Strategy. Prior to January 1, 2000, Coram and its subsidiaries had
been 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.
In December 1999, Coram announced that it was repositioning its business to
focus on its core alternate site infusion therapy business and the clinical
research and medical informatics business operated by its subsidiary, CTI.
Accordingly, Coram's primary business strategy is to focus its efforts on the
delivery of its core infusion therapies, such as nutrition, anti-infective
therapies, IVIG and coagulant and blood clotting therapies for persons with
hemophilia. To that end, Coram has established product managers with dedicated
sales, marketing and clinical resources aimed at expanding Coram's growth in
these areas. Coram has also implemented programs focused on the reduction and
control of cost of services and operating expenses, assessment of poorly
performing branches and review of branch efficiencies. Coram management is also
reviewing the way the company provides nursing care and is implementing changes
to its practices to maintain Coram's high level of patient satisfaction and
effective clinical results while reducing the actual number of nursing visits.
Furthermore, management throughout the company is continuing to concentrate on
reimbursement by emphasizing improved billing and cash collection methods,
continued assessment of systems support for reimbursement and concentration of
the company's expertise and managerial resources into certain reimbursement
locations.
Meanwhile, Coram's R-Net subsidiaries are being liquidated and its CPS
business is being reviewed for divestiture. The liquidation of R-Net is taking
place in the proceedings that are currently pending in the United States
Bankruptcy Court for the District of Delaware. These proceedings originated in
August 1999 following the filing of an involuntary bankruptcy petition against
Coram Resource Network, Inc. in such court. In August 1999, Coram announced that
it had hired an investment advisor to assist it in pursuing strategic
alternatives for CPS. An auction of the CPS business is currently in progress.
If Coram is not able to reach an agreement to sell CPS on terms and conditions
that are acceptable to Coram, Coram will retain CPS and explore its options.
18
<PAGE> 19
Events that may impact Coram in the future include, but are not limited to,
the Chapter 11 bankruptcy proceedings filed by the Resource Network Subsidiaries
and their anticipated liquidation, the termination of the company's National
Ancillary Services Agreement with Aetna for infusion services that became
effective April 12, 2000 and the reorganization of the company's operating
structure and the related restructuring charge that was recorded during the
fourth quarter of 1999. Strategic alternatives and initiatives currently being
implemented or explored by Coram include, among others: (i) renewed focus on the
growth in sales of the core therapies provided by the infusion business, (ii)
the potential divestiture of the CPS business, (iii) restructuring of the
company's debt instruments through a possible conversion of some or all such
instruments to equity, (iv) the continued investment into and development of
services provided by CTI, (v) cost reduction initiatives and (vi) improved cash
collections. Combined, management believes that success in the foregoing will
improve Coram's long term financial prospects. While management believes the
implementation of its overall business strategy has begun improving operating
performance throughout the company, no assurances can be given as to its
ultimate success.
Factors Affecting Recent Operating Results. The most significant factors
affecting Coram's operating performance and financial condition are as follows:
(i) the termination of the Master Agreement with Aetna effective
June 30, 1999 and the related litigation between Aetna and the
company;
(ii) the Chapter 11 bankruptcy filings involving the Resource Network
Subsidiaries and their anticipated liquidation through such
proceedings;
(iii) expansion and improved sales efforts in the CPS business;
(iv) ongoing pricing pressure in the company's infusion business as a
result of an unfavorable shift in payer mix from private
indemnity insurers to managed care organizations and other
contracted payers, and intense competition among infusion
providers. The following table sets forth the approximate
percentages of the company's infusion therapy net revenue from
certain categories of payers for the three months ended March 31,
2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Private Indemnity Insurance and Other
Non-Contracted Payers........................... 18% 23%
Managed Care Organizations and Other Contracted
Payers.......................................... 58% 54%
Medicare and Medicaid Program..................... 24% 23%
--- ---
Total................................... 100% 100%
=== ===
</TABLE>
(v) increased competition from hospitals and physicians that have
sought to increase the scope of services they offer through their
facilities and offices, including services similar to those
offered by the company, or that have entered into risk-bearing
relationships with third-party payers pursuant to which they have
been delegated control over the provision of a wide variety of
health care services, including the services offered by the
company;
(vi) the average number of days that elapse between the date that the
company, either through its infusion therapy business or through
CPS, provides services to a patient and the date that the company
actually receives reimbursement for that service; and
(vii) increased costs associated with providing certain infusion
therapy services offered by Coram, including increased costs for
clinical staffing, product delivery, on-call personnel and other
volume related costs associated with such therapies combined with
increased costs for certain blood and blood derivative products
that are in limited supply and an increase in the number of
patients receiving such therapies.
19
<PAGE> 20
RESULTS OF OPERATIONS
Certain Quarterly Comparisons
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Net revenue................................................. $134,796 $124,348
Cost of service............................................. 100,655 96,720
-------- --------
Gross profit................................................ 34,141 27,628
Operating expenses:
Selling, general and administrative expenses.............. 23,456 18,941
Provision for estimated uncollectible accounts............ 3,243 4,048
Amortization of goodwill.................................. 2,578 2,732
Restructuring costs....................................... -- 950
-------- --------
Total operating expenses.......................... 29,277 26,671
-------- --------
Operating income from continuing operations................. 4,864 957
Other income (expenses):
Interest expense.......................................... (6,676) (6,559)
Other income, net......................................... 404 203
-------- --------
Loss from continuing operations before income taxes and
minority interests........................................ (1,408) (5,399)
Income tax expense........................................ 100 75
Minority interest in net income of consolidated joint
ventures............................................... (19) 428
-------- --------
Loss from continuing operations after income taxes and
minority interests........................................ (1,489) (5,902)
Discontinued Operations:
Income from operations.................................... -- 5,517
Loss from Disposal........................................ (3,383) --
-------- --------
Net loss.................................................... $ (4,872) $ (385)
======== ========
Basic and Diluted Earnings (Loss) Per Share:
Loss from continuing operations........................... $ (0.03) $ (0.12)
Income (loss) from discontinued operations................ (0.07) 0.11
-------- --------
Net loss.................................................... $ (0.10) $ (0.01)
======== ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED)
Discontinued Operations. As discussed in Note 2 to the company's Condensed
Consolidated Financial Statements, the company restated prior year results for
the discontinuance of R-Net operations in 1999. Had R-Net been included in the
continuing operations, the following would have been contributed to Coram's
operations (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------ ------
<S> <C> <C>
Net revenue................................................ $ -- $36.6
Gross profit............................................... $ -- $10.5
Operating income (loss).................................... $(3.4) $ 5.5
</TABLE>
The following discussion of Coram's financial condition and results of
operations during 2000 and 1999 is restated to exclude the discontinued
operations for R-Net for conformity of the periods presented.
20
<PAGE> 21
Consolidated Net Revenue from Continuing Operations. Net revenue increased
$10.5 million or 8.5%, to $134.8 million in the three months ended March 31,
2000 from $124.3 million in the three months ended March 31, 1999. The increase
is primarily due to a (i) $2.1 million increase in net revenue from the infusion
business primarily due to an increase in net revenue per patient partially
offset by the loss of Aetna infusion business; and (ii) $7.6 million increase in
net revenue from the CPS business resulting from expansion of services and
improved sales efforts, net of revenue losses from the termination of its
National Ancillary Services Agreement with Aetna.
Consolidated Gross Profit from Continuing Operations. Gross profit
increased $6.5 million to $34.1 million or a gross margin of 25.3% in the three
months ended March 31, 2000 from $27.6 million or a gross margin of 22.2% in the
three months ended March 31, 1999. The gross margin percentage increase resulted
primarily from the increase in net revenue, discussed above, in the Infusion and
CPS businesses and certain cost reduction programs implemented at the end of
December 1999.
Consolidated Selling, General and Administrative ("SG&A") Expenses. SG&A
increased $4.6 million or 24.3%, to $23.5 million in the three months ended
March 31, 2000 from $18.9 million in the three months ended March 31, 1999.
Expenses increased primarily due to recovery of a note receivable and legal
recoveries of $3.0 million in the three months ended March 31, 1999 and accrual
of incentive plan compensation in the three months ended March 31, 2000 of $1.7
million. In addition, expenses increased due to growth in the CPS business.
These increases were offset in part by certain cost reduction programs
implemented at the end of December 1999.
Provision for Estimated Uncollectible Accounts from Continuing
Operations. The provision for estimated uncollectible accounts was $4.0 million
or 3.3% of net revenue in the quarter ended March 31, 1999 compared to $3.2
million or 2.4% of net revenue in the quarter ended March 31, 2000. The decrease
is due primarily to the company's recognition of uncollectible accounts in
December 1999.
Restructuring Costs, Net. The company recorded approximately $1.0 million
of charges in March 1999 relating to reorganization of the company's management
structure completed during the first quarter of 1999. No such charges were
recorded in the quarter ended March 31, 2000. See Note 3 to the company's
Condensed Consolidated Financial Statements.
Consolidated Operating Income from Continuing Operations. The company had
operating income of $4.9 million during the three months ended March 31, 2000
compared to $1.0 million during the three months ended March 31, 1999. The
increase in operating income is due primarily to the increase in gross profit,
offset in part by the net increase in operating expenses for the quarter ended
March 31, 2000 as explained above.
Consolidated Net Loss from Continuing Operations. During the three months
ended March 31, 2000, the company recognized a net loss of $1.5 million compared
to $5.9 million during the three months ended March 31, 1999. As discussed
above, the reduction of net loss can be attributed to the increase in operating
income and a $0.4 million decrease in expense for minority interests of
unconsolidated joint venture partnerships.
Income (Loss) from Discontinued Operations. During December 1999, as a
result of the bankruptcy proceeding pending against the Resource Network
Subsidiaries, Coram classified the operating losses of this business for all
periods presented to discontinued operations. The income for the three months
ended March 31, 1999 for the R-Net business was primarily related to the Aetna
Master Agreement that was terminated in 1999. The $3.4 million Loss from
Disposal of Discontinued Operations of the segment includes for the three months
ended March 31, 2000, additional reserves for litigation and other wind-down
costs. See Note 2 to the company's Condensed Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Coram uses cash generated from operations and cash available under its new
senior credit facility to fund its working capital requirements and operations.
Coram's working capital as of March 31, 2000 was $34.7 million compared to $38.5
million at December 31, 1999, a decrease of $3.8 million. During the three
months ended March 31, 2000, the primary change in current assets related to (i)
a decrease in cash and cash equivalents of $6.1 million and (ii) a decrease in
inventory of $3.9 million. The decrease in cash and cash
21
<PAGE> 22
equivalents was primarily due to repayments, net of borrowings, on the new
senior credit facility. In the three months ended March 31, 2000, total current
liabilities decreased due primarily to a decrease in accounts payable of $6.4
million resulting from the faster payment by the company of its accounts
payable, partially offset by an increase in interest payable of $2.8 million
related to additional interest expense resulting from increased levels of
indebtedness outstanding prior to and during the period ended March 31, 2000.
As of March 31, 2000, the company did not have any material commitments for
capital expenditures.
Under the terms of the company's new senior credit facility, the maximum
credit available to Coram is the lesser of (a) the company's borrowing base as
calculated pursuant to the agreement or (b) the total revolving credit
commitment of $60.0 million. As of March 31, 2000, the amount available to Coram
was $60.0 million. As of such date, the company had used $2.7 million for
letters of credit and $38.5 million for revolver borrowings. As a result, the
total available credit under the new senior credit facility was $18.8 million as
of March 31, 2000. As of May 8, 2000, the total available credit was $22.8
million due to additional repayments of $4.0 million that occurred after March
31, 2000.
As of March 31, 2000, Coram's lenders have waived non-compliance with
certain covenants under the new senior credit facility through the period ending
December 31, 2000. There can be no assurance as to whether other covenant
violations or defaults will occur in future periods and whether any necessary
waivers will be forthcoming at that time. The company also entered into an
amendment of the Securities Exchange Agreement, dated as of November 15, 1999,
whereby no interest would be due on the Series A and Series B Notes for the
period from November 15, 1999 through the earlier of (i) final resolution of the
litigation with Aetna or (ii) May 15, 2000. The litigation with Aetna was
resolved on April 20, 2000, and, as a result, the obligation to pay interest on
the Series A and Series B Notes resumed as of such date.
Coram is in a dispute with the Internal Revenue Service ("IRS") regarding
certain tax refunds previously received by the company. Should it not prevail in
the majority of the issues in dispute, Coram would need to access funds that
could be in excess of $12.7 million. Furthermore, Coram cannot predict the
outcome of the R-Net bankruptcy proceedings. An outcome unfavorable to the
company or unknown additional actions against Coram could require Coram to need
access to significant additional funds. See Note 5 to the company's Condensed
Consolidated Financial Statements.
Coram has experienced pressure on liquidity due to its current levels of
debt and the pace of its cash collections compared with its obligations to pay
its vendors, suppliers, creditors and employees. Coram has reviewed its business
plan for operations in light of the termination of the Aetna Master Agreement,
the liquidation of R-Net and the potential sale of the CPS business. Coram's
business plan does not provide for financial results that would guarantee
sufficient liquidity to discharge debt obligations coming due in Fiscal 2001 or
guarantee payment of cash interest on debt during Fiscal 2000. Coram is
currently in discussions with the holders of the Series A and Series B Notes
regarding additional debt restructuring. Such restructuring would likely include
a conversion of a material portion of this debt to some form and amount of
equity. The amount, form and timing of any conversion cannot be predicted at
this time. The company cannot guarantee that any restructuring agreement or
other agreement providing for additional funds to the company will be reached.
RISK FACTORS
Coram has not been profitable and may not become profitable, in which event
its business and stock price could be adversely affected.
During the quarter ended March 31, 2000, Coram generated a net loss from
continuing operations of $1.5 million. Numerous factors have affected Coram's
performance and financial condition to date, including, among others (i) ongoing
pricing pressure in Coram's infusion therapy business as a result of a
continuing shift in payer mix from private indemnity insurance to managed care
and governmental payers and intense competition among infusion providers; (ii)
increased competition from hospitals and physicians who have sought to increase
the scope of services they offer through their facilities and offices, including
services similar to those offered by Coram; and (iii) increased competition from
hospitals and physicians which have entered
22
<PAGE> 23
into risk bearing relationships with third-party payers pursuant to which they
have been delegated control over the provision of a wide variety of health care
services, including the services offered by Coram. There can be no assurance
that the foregoing factors will not continue to have an adverse effect on the
company's financial condition and results of operations in the future.
The outcome of pending legal proceedings could adversely effect Coram's
business.
Coram is involved in several legal disputes, including one material legal
dispute which centers around the company's federal income tax return filed for
its tax year ended September 30, 1995. In a case presently pending in Tax Court,
the IRS has claimed that Coram must pay more than $12.7 million in back tax
adjustments plus interest and penalties. Coram disagrees with the position taken
by the IRS. Even though Coram intends to pursue its claims and defend itself
vigorously in this matter, the company can not predict the outcome of this
matter due to the uncertainties inherent in litigation. If Coram does not
prevail in this matter, the financial condition, results of operations and
liquidity of the company may be materially adversely affected.
Furthermore, Coram cannot predict the outcome of the R-Net bankruptcy
proceedings. An outcome unfavorable to Coram or unknown additional actions
against Coram could materially, adversely affect Coram's financial condition,
results of operations and liquidity.
Operations may be adversely affected by the significant outstanding
indebtedness.
At May 8, 2000, Coram had $92.1 million principal outstanding in the form
of Series B Notes at 8.0% interest, and $168.4 million principal outstanding in
the form of Series A Notes at 11.5% interest. The company also had $34.5 million
outstanding under its senior credit facility at an interest rate of 10.5% as of
May 8, 2000. This indebtedness may make the company more vulnerable to economic
downturns, competitive and payer pricing pressures, adverse changes in
government regulation or other adverse events or circumstances. In addition, the
lenders, pursuant to the new senior credit facility and the Series B Notes are
entitled to the benefits of various restrictive covenants, and their consent is
required to be obtained for the company to engage in various activities and
transactions. This consent could be withheld which could adversely effect the
operations of the company. See Item 2. "Liquidity and Capital Resources."
Coram will require additional financing and it may not be able to obtain
additional financing.
Coram's Fiscal 2000 business plan does not provide for financial results
that would guarantee sufficient liquidity to discharge debt obligations coming
due in Fiscal 2001. Without sufficient revisions to Coram's existing debt
agreements, there can be no assurance that it will have sufficient liquidity to
continue to fund operations. At this time, Coram is not in discussions with any
financing sources other than the holders of its existing long term debt
instruments to replace or supply any future funding and the company can offer no
guarantees that these or any other parties would agree to a restructuring that
would provide future liquidity. A restructuring of Coram's debt instruments may
involve a conversion of some or all of Coram's debt instruments into equity and
such conversion will result in dilution to current shareholders.
Coram will require additional equity in order to be able to avoid disruption
in accepting referrals of certain patients from physicians who may own shares
of Coram common stock.
Coram has learned that certain physicians have, from time to time, owned
shares of its common stock. Under federal law, including certain provisions
contained in the Omnibus Budget Reconciliation Act of 1993 commonly know as the
Stark II law, the ownership of shares in a health care services provider is a
financial relationship subject to federal regulation. For example, the Stark II
law prohibits a physician from making Medicare or Medicaid referrals for certain
"designated health services," including durable medical equipment, parenteral
and enteral nutrition therapy and outpatient prescription drugs, to entities
with which the physician or an immediate family member has a financial
relationship, unless an exception to the law is available. Referrals to Coram
for designated health services after January 1, 2001 by physicians who own Coram
stock will be protected by an exception under Stark II for publicly traded
corporations if Coram's stockholder equity at December 31, 2000 is $75.0
million, or if Coram has had average stockholder equity of $75.0 million during
23
<PAGE> 24
the preceding three (3) years. Absent such protection, Coram would, before
accepting a referral, be required to determine whether the physician (or an
immediate family member) owns Coram stock and could not accept referrals where
such ownership was present. Therefore, absent a significant increase in
stockholder equity, Coram may fail to meet the Stark II exception for the
publicly-traded corporations. Failure to meet this exception and operating
without the protection of the statutory exception under Stark II that Coram has
enjoyed in the past could be extremely onerous and could have a material adverse
impact on Coram's business or financial condition because of the costs and
uncertainties of compliance and Coram's inability to accept certain referrals
after January 1, 2001.
Holders of Coram common stock may have their ownership interest diluted by the
equity conversion rights held by existing debt holders.
Cerberus Partners, L.P., Goldman Sachs Credit Partners, L.P. and Foothill
Capital Corporation (collectively, the "Series B Holders") are holders of the
Series B Notes, with an outstanding principal balance of $92.1 million as of
April 30, 2000. The Series B Notes mature April 2008, subject to the obligation
of Coram to offer to prepay all Series B Notes on the date of maturity of the
Series A Notes. The Series B Notes are currently convertible into shares of
common stock of Coram at a price of $2.00 per share. In addition, the Series B
Holders are holders of warrants to purchase more than 1.9 million shares of
common stock of the company at an exercise price of $.01 per share. Based upon
the number of shares of common stock currently outstanding, the Series B Holders
at a $2.00 conversion price beneficially own in the aggregate approximately
49.3% of the shares of Coram common stock. The Series B Holders would be in a
position to generally control the affairs of Coram as well as the outcome of
stockholder votes, including votes concerning the election of directors, the
adoption of amendments to Coram's Certificate of Incorporation or By-Laws and
the approval of significant corporate transactions, including a sale of
substantially all of Coram's assets or merger of the company. Such control could
also have the effect of delaying or preventing a change in control of Coram.
Coram may not be able to meet its increased cash requirements.
Coram has experienced pressures from some vendors to tighten payment terms
for needed drugs and supplies. Noncompliance with terms could result in the
company not having access to the necessary drugs and supplies to maintain or
grow its present business. At the same time, Coram has experienced increases in
the time it takes to receive payment for its services. There can be no assurance
that payers will not continue to extend the time they pay Coram for its
services, which would cause additional liquidity pressures on the company.
The success of Coram's business is dependent on relationships with third
parties.
The profitability of Coram's business depends in part on its ability to
establish and maintain close working relationships with managed care
organizations, private and governmental third-party payers, hospitals,
physicians, physician groups, home health agencies, long-term care facilities
and other institutional health providers and insurance companies and large
self-insured employers. A central feature of the company's business strategy is
to improve its relationships with such third parties in general, and with
physicians and physician groups in particular. There can be no assurance that
the company will be successful in improving and maintaining such relationships
or that the company's existing relationships will be successfully maintained or
that additional relationships will be successfully developed and maintained in
existing or future markets. The loss of such existing relationships such as the
loss of its relationship with Aetna and its affiliated company. Prudential, or
the failure to continue to develop and maintain ongoing relationships in the
future could have a material adverse effect on the company's business, financial
condition and results of operations.
For a discussion of other risks that have or may impact the company,
readers are instructed to review the discussion under the heading "Risk Factors"
which appears in Item 7 of the company's Annual Report on Securities and
Exchange Commission Form 10-K for the year ended December 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses the company's exposure to market risk related to
changes in interest rates. This discussion contains forward-looking statements
that are subject to risks and uncertainties. Actual results could
24
<PAGE> 25
vary materially as a result of a number of factors, including but not limited
to, changes in interest rates, and those set forth under Item 2. "Management's
Discussion and Analysis of Results of Operations and Financial Condition:
Background -- Factors Affecting Recent Operating Results."
As of March 31, 2000, the company had outstanding long-term debt of $299.1
million of which $168.4 of this outstanding debt that matures in May 2001 bears
interest at 11.5% per annum and $92.1 of the outstanding debt matures in April
2008 and bears interest at the rate of 8% per annum. The company also has a New
Senior Credit Facility providing for the availability of up to $60.0 million for
acquisitions, working capital, letters of credit and other corporate purposes.
The facility matures in February 2001 and bears an interest rate of prime plus
1.5%, which was 10.5% as of March 31, 2000. As of March 31, 2000, the company
had drawn $38.5 million under the facility. Because substantially all of the
interest on the company's debt is fixed, a hypothetical 10.0% decrease in
interest rates would not have a material impact on the company. Increases in
interest rates could, however, increase interest expenses associated with future
borrowings by the company, if any. The company does not hedge against interest
rate changes.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Descriptions of the material legal proceedings to which the company is a
party are set forth in Note 5 to the company's Condensed Consolidated Financial
Statements.
The company is also a party to various other legal actions arising out of
the normal course of its business. Management believes that the ultimate
resolution of such other actions will not have a material adverse effect on the
financial position, results of operations or liquidity of the company.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of these actions cannot presently be determined.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
A discussion of certain matters of non-compliance with certain covenants
contained in the company's principal debt agreements and the waivers received
relating to such matters is set forth in Note 4 to the company's Condensed
Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.1 Second Amendment to Employment Agreement, dated as of April
6, 2000 between the company and Daniel D. Crowley.
27 Financial Data Schedule
</TABLE>
(B) Reports on Form 8-K.
None
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORAM HEALTHCARE CORPORATION
By: /s/ SCOTT R. DANITZ
--------------------------------------
Scott R. Danitz
Senior Vice President, Finance and
Chief Accounting Officer
May 15, 2000
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.1 Second Amendment to Employment Agreement, dated as of April
6, 2000 between the company and Daniel D. Crowley.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made
as of April 6, 2000, by and between Coram Healthcare Corporation, a Delaware
corporation (the "Company"), and Daniel D. Crowley ("Executive").
RECITALS
A. The parties previously made and executed that certain Employment
Agreement, effective November 30, 1999, that was subsequently amended effective
as of November 30, 1999 (collectively, the "Employment Agreement").
B. Each of the parties desires to amend the Employment Agreement as set
forth herein.
NOW THEREFORE, in consideration of the premises set forth above and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Executive hereby agree as follows:
1. Amendment. The Employment Agreement is hereby amended as follows:
(a) Section 3(b) of the Employment Agreement is hereby amended by
deleting such paragraph in its entirety and replacing it with the following:
In addition to the Base Salary, Executive shall be entitled to a
performance bonus (the "Incentive Bonus") payable within 90 days of the
end of each fiscal year based upon the Company's operating results
measured against a target level of earnings established by the
Executive and the Compensation Committee of Coram's Board of Directors
before the beginning of each of the Company's fiscal years during the
Employment Term. With respect to the Company's fiscal year ending
December 31, 2000, the Incentive Bonus shall be, as follows: if
earnings before interest, taxes, depreciation and amortization (EBITDA)
of the Company for such year, as measured by the audited financial
statements of the Company for its fiscal year ending December 31, 2000,
equals or exceeds $14,000,000 (the "2000 Incentive Target"), the
Incentive Bonus to which the Executive shall be entitled shall be an
amount equal to 25% of the Company's EBITDA that exceeds the 2000
Incentive Target. The Incentive Bonus shall be paid in cash from
Coram's available Free Cash (as defined below) or from the Revolving
Credit Facility (as that term is defined below).
In addition to the Incentive Bonus, in the event that the EBITDA of the
Company as measured by the audited financial statements of the Company
equals or exceeds $35,000,000, for its fiscal year ending December 31,
2000, the Company shall pay an additional bonus (the "EBITDA Bonus") of
$5,000,000 to the Executive or others as designated by Executive, if
any.
Any Incentive Bonus, EBITDA Bonus, Success Bonus (as defined below) or
other bonus earned by the Executive under any provision of this
Employment Agreement
<PAGE> 2
shall be payable by the Company in cash out of funds derived from the
Company's excess available cash flow ("Free Cash") or from amounts
drawn on the Company's Credit Facility, dated August 20, 1998, among
the Company, Coram, Inc. and the Guarantors named therein, the Lenders
named therein and Foothill Capital Corporation, as Agent, or any
subsequent credit facility that replaces such facility (the "Revolving
Credit Facility"); provided, however, that in the event that the amount
drawn on the Revolving Credit Facility at the time any of such bonuses
are due is an amount that is greater than 65% (the percentage drawn as
of April 6, 2000) of the maximum funds available to the Company under
such credit facility (for example, the maximum amount available under
the Revolving Credit Facility is $60,000,000 and as of April 6, 2000
the amount drawn was $38.5 Million), the Company shall pay such to the
Executive (or the designated individual recipient) as follows: 50% in
cash on the due date and 50% in monthly installments over the next
eleven (11) months. In the event that the Executive or the designated
recipient is terminated for any reason whatsoever other than for Cause,
any unpaid amount of such bonus shall be paid immediately in a lump
sum.
(b) Section 3 of the Employment Agreement is hereby amended by adding
the following provision to such Section as a new Section 3(j):
In addition to the Base Salary and any other bonuses payable under this
Amendment or the Agreement, Executive shall also be entitled to
receive, upon consummation of a "Refinancing" (as that term is defined
below) of the Company's "Principal Debt Instruments" (as that term is
defined below), a success bonus (the "Success Bonus") equal to the
greater of (i) 1.5% of the principal amount of the Principal Debt
Instruments that are converted into common or preferred stock issued by
the Company; or (ii) 1.0% of the total principal amount of the
Principal Debt Instruments outstanding after consummation of the
Refinancing. Such Success Bonus shall be paid immediately upon the
Effective Date of the Refinancing from Free Cash or the Revolving
Credit Facility.
The term "Principal Debt Instruments" shall mean (a) the Revolving
Credit Facility; and (b) that certain Securities Exchange Agreement,
dated as of May 6, 1998, as amended, by and between the Company; Coram,
Inc.; Cerberus Partners, L.P.; Goldman Sachs Credit Partners, L.P.; and
Foothill Capital Corporation and the Series A and Series B Notes issued
pursuant thereto.
The term "Refinancing" shall mean a transaction or series of related
transactions approved by the Company's Board of Directors that provides
for either: (a) the conversion of some or all of the Principal Debt
Instruments into a combination of new Company debt instruments and
shares of common or preferred stock issued by the Company; or (b) the
conversion of the Principal Debt Instruments into new debt instruments
issued by the Company.
(c) Section 5(a) of the Employment Agreement is hereby amended by
deleting such Section in its entirety and replacing it with the following:
The Company agrees to employ and Executive accepts such employment for
the period beginning as of the Effective Date and ending on the third
anniversary of the
2
<PAGE> 3
Effective Date, provided that: (i) the Employment Period shall
terminate prior to such date upon Executive's resignation, death or
permanent disability (defined as the expiration of a continuous period
of 180 days during which Executive is unable to perform the essential
functions of his assigned duties due to physical or mental incapacity);
(ii) the Employment Period may be terminated by Executive at any time
prior to such date if the Company fails to comply with any material
provision of this Agreement, which failure has not been cured within 10
business days after written notice of such noncompliance has been given
by Executive to the Company; and (iii) the Employment Period may be
terminated by the Company at any time prior to such date for Cause. In
the absence of the occurrence of any of the events in subsections (i)
through (iv) of this Section, the Employment Period shall automatically
be renewed for up to two (2) additional one (1) year terms commencing
on the third anniversary of the Effective Date.
(d) Section 5(d) of the Employment Agreement is hereby amended by
deleting such Section in its entirety and replacing it with the following:
If the Employment Period is terminated by the Company other than for
Cause or by Executive pursuant to paragraph 5(a)(ii) above, or if
Executive's duties, responsibilities, and/or job title is substantially
altered from that of Chairman of the Board, Chief Executive Officer and
President other than as contemplated by Section 2 of this Agreement,
then Executive shall be entitled to receive his Base Salary and
Automobile Allowance through the third anniversary of the date such
termination of employment becomes effective (the "Severance Period"),
payable in accordance with the Company's general payroll practices, and
all bonuses payable hereunder, however denominated, as described herein
throughout the Severance Period. The Company shall also continue
coverage for Executive under the Company's life insurance, medical,
health, disability and similar welfare benefit plans described in
Section 3(d) (or under other plans, including the whole life insurance
policy, obtained by the Company for the benefit of the Executive and
fully funded by the Company. The Executive shall receive a full tax
gross-up for any tax liability of the Executive for such benefits and
the Automobile Allowance) throughout the Severance Period.
(e) Section 3 of the Employment Agreement is hereby amended by adding
the following provision to such Section as a new Section 3(k):
If the Executive and the Board of Directors concur on the appointment
of a Chief Executive Officer and/or a President for the Company as
contemplated by Section 2 of the Agreement, this Agreement will remain
in full force and effect without modification to any of the terms and
conditions set forth herein (other than the Executive's duties to the
extent they may be assigned to the new chief executive officer),
including but not limited to the Executive's Base Salary, bonus
opportunities and full benefits; provided, however, that the new Chief
Executive Officer and/or President shall be entitled to receive a
portion of the EBITDA Bonus in an amount reasonably negotiated between
the Board of Directors, the Executive and such person. The split of the
money between Daniel D. Crowley and the new Chief Executive Officer or
President needs to be approved by the Board of Directors whose approval
will not be unreasonably withheld.
3
<PAGE> 4
2. Counterparts. This Amendment may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same instrument.
3. Miscellaneous. Except as expressly amended by this Amendment, the
Employment Agreement shall continue in full force and effect in accordance with
the provisions thereof. As used in the Employment Agreement, the terms
"hereinafter," "hereto," hereof, and other words of similar import shall, unless
the context otherwise requires, mean the Employment Agreement as amended by this
Amendment. In the event of any conflict or inconsistency between the terms and
conditions of the Employment Agreement and the terms and conditions of this
Amendment, the terms and conditions of this Amendment shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
CORAM HEALTHCARE CORPORATION EXECUTIVE
By: /s/ Stephen A. Feinberg /s/ Daniel D. Crowley
----------------------------------- ------------------------------------
Stephen A. Feinberg Daniel D. Crowley
Chairman of Compensation Committee
By: /s/ L. Peter Smith
-----------------------------------
L. Peter Smith
Director, Compensation Committee
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CORAM HEALTHCARE CORPORATION FOR
THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,008
<SECURITIES> 0
<RECEIVABLES> 139,176
<ALLOWANCES> (31,163)
<INVENTORY> 19,059
<CURRENT-ASSETS> 135,311
<PP&E> 53,791
<DEPRECIATION> (32,448)
<TOTAL-ASSETS> 389,875
<CURRENT-LIABILITIES> 100,651
<BONDS> 299,149
0
0
<COMMON> 50
<OTHER-SE> (26,582)
<TOTAL-LIABILITY-AND-EQUITY> 389,875
<SALES> 134,796
<TOTAL-REVENUES> 134,796
<CGS> 100,655
<TOTAL-COSTS> 100,655
<OTHER-EXPENSES> 26,015
<LOSS-PROVISION> 3,243
<INTEREST-EXPENSE> 6,676
<INCOME-PRETAX> (1,408)
<INCOME-TAX> 100
<INCOME-CONTINUING> (1,489)
<DISCONTINUED> (3,383)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,872)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
