<PAGE> 1
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)
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)
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 [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of November 20, 2000, was 49,638,452.
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 16,425 $ 6,539
Cash limited as to use ................................... 792 707
Accounts receivable, net of allowances of
$24,613 and $30,448 ................................... 72,397 107,406
Inventories .............................................. 12,643 22,966
Deferred income taxes, net ............................... 476 364
Other current assets ..................................... 4,910 5,614
------------ ------------
Total current assets ............................. 107,643 143,596
Property and equipment, net ................................ 16,850 22,198
Deferred income taxes, net ................................. 2,021 1,481
Other deferred costs ....................................... 66 2,434
Goodwill, net of accumulated amortization of
$85,214 and $78,027 ...................................... 204,735 216,062
Other assets ............................................... 13,024 17,451
------------ ------------
Total assets ..................................... $ 344,339 $ 403,222
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities not subject to compromise:
Accounts payable ......................................... $ 21,359 $ 36,090
Accrued compensation ..................................... 17,100 11,273
Interest payable (see Note 2) ............................ -- 5,100
Current maturities of long-term debt ..................... 267 390
Income taxes payable ..................................... 559 240
Deferred income taxes .................................... 288 419
Accrued merger and restructuring costs ................... 3,027 7,392
Other accrued liabilities ................................ 8,925 9,666
------------ ------------
Total current liabilities not subject to compromise ...... 51,525 70,570
Total current liabilities subject to
compromise (See Note 2) ................................ 267,833 --
------------ ------------
Total current liabilities .................................. 319,358 70,570
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities .................. 26 302,662
Minority interests in consolidated joint ventures ........ 911 1,652
Other liabilities ........................................ 12,529 14,092
Deferred income taxes .................................... 2,209 1,427
Net liabilities of discontinued operations ................. 30,304 34,518
Commitments and contingencies .............................. -- --
------------ ------------
Total liabilities ................................ 365,337 424,921
Stockholders' deficit:
Preferred stock, par value $.001, authorized
10,000 shares, none issued ............................ -- --
Common stock, par value $.001, authorized
150,000 shares, issued and outstanding 49,638 ......... 50 50
Additional paid-in capital ............................... 427,410 427,399
Accumulated deficit ...................................... (448,458) (449,148)
------------ ------------
Total stockholders' deficit ...................... (20,998) (21,699)
------------ ------------
Total liabilities and stockholders' deficit ...... $ 344,339 $ 403,222
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE> 3
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue ....................................................... $ 102,866 $ 132,939 $ 367,886 $ 386,858
Cost of service ................................................... 75,667 102,370 272,391 300,240
---------- ---------- ---------- ----------
Gross profit ...................................................... 27,199 30,569 95,495 86,618
Operating expenses:
Selling, general and administrative expenses .................... 22,109 23,538 70,618 66,091
Provision for estimated uncollectible accounts .................. 3,357 3,690 10,148 11,879
Amortization of goodwill ........................................ 2,562 2,711 7,670 8,159
Restructuring costs ............................................. -- -- -- 950
---------- ---------- ---------- ----------
Total operating expenses ................................ 28,028 29,939 88,436 87,079
---------- ---------- ---------- ----------
Operating income (loss) from continuing operations ................ (829) 630 7,059 (461)
Other income (expenses):
Interest expense (see Note 2) ................................... (6,866) (8,110) (20,313) (22,193)
Gains on sales of businesses .................................... 18,456 -- 18,456 --
Other income, net ............................................... 448 571 1,166 948
---------- ---------- ---------- ----------
Income (loss) from continuing operations before reorganization
expenses, income taxes and minority interests ................... 11,209 (6,909) 6,368 (21,706)
Reorganization expenses, net....................................... (1,805) -- (1,805) --
---------- ---------- ---------- ----------
Income (loss) before income taxes and minority interests .......... 9,404 (6,909) 4,563 (21,706)
Income tax expense ................................................ 75 125 250 375
Minority interests in net income of consolidated joint ventures ... 129 176 466 1,183
---------- ---------- ---------- ----------
Income (loss) from continuing operations after income taxes
and minority interests ...................................... 9,200 (7,210) 3,847 (23,264)
Discontinued Operations:
Loss from operations ............................................ -- (7,957) -- (30,281)
Income (loss) from disposal ..................................... 324 -- (3,157) --
---------- ---------- ---------- ----------
Net income (loss) ................................................. $ 9,524 $ (15,167) $ 690 $ (53,545)
========== ========== ========== ==========
Basic Income (Loss) Per Share:
Income (loss) from continuing operations ........................ $ 0.18 $ (0.15) $ 0.08 $ (0.47)
Income (loss) from discontinued operations ...................... 0.01 (0.16) (0.06) (0.61)
---------- ---------- ---------- ----------
Net income (loss) ............................................... $ 0.19 $ (0.31) $ 0.02 $ (1.08)
========== ========== ========== ==========
Diluted Income (Loss) Per Share:
Income (loss) from continuing operations ........................ $ 0.17 $ (0.15) $ 0.07 $ (0.47)
Income (loss) from discontinued operations ...................... 0.01 (0.16) (0.06) (0.61)
---------- ---------- ---------- ----------
Net income (loss) ............................................... $ 0.18 $ (0.31) $ 0.01 $ (1.08)
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net cash provided by (used in) continuing operations before
reorganization expenses ...................................... $ 30,441 $ (648)
Net cash used by reorganization expenses ........................ (1,001) --
---------- ----------
Net cash provided by (used in) continuing operations (net
of reorganization expenses) .................................. 29,440 (648)
Cash flows from investing activities:
Purchases of property and equipment .......................... (2,778) (5,639)
Proceeds from sales of businesses ............................ 41,585 --
Other ........................................................ 60 (481)
---------- ----------
Net cash provided by (used in) investing activities ............. 38,867 (6,120)
Cash flows from financing activities:
Borrowings on line of credit ................................. 1,500 43,000
Repayment of debt ............................................ (55,376) (6,065)
Payments of debtor-in-possession financing costs
(post-petition) .............................................. (503) --
Cash distributions paid to minority interests ................ (850) (825)
---------- ----------
Net cash provided by (used in) financing activities ............. (55,229) 36,110
---------- ----------
Net increase in cash from continuing operations ................. $ 13,078 $ 29,342
========== ==========
Net cash used in discontinued operations ........................ $ (3,192) $ (20,928)
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BUSINESS ACTIVITY AND BASIS OF PRESENTATION
Business Activity. As of September 30, 2000, Coram Healthcare Corporation
("CHC") and its subsidiaries ("Coram" or the "company"), were engaged primarily
in the business of furnishing alternate site (outside the hospital) infusion
therapy and related services. Other services offered by Coram include
centralized management, administrative and clinical support for clinical
research trials, medical informatics and non-intravenous home health products
such as durable medical equipment and respiratory therapy services. Coram
delivers its alternate site infusion therapy services through approximately 77
branch offices located in 40 states and Ontario, Canada. CHC and its first tier
wholly owned subsidiary, Coram, Inc. ("CI") (collectively the "Debtors"), filed
voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") on August 8, 2000. As of such date the Debtors are operating
as debtors-in-possession subject to the jurisdiction of the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). None of
the company's other subsidiaries is a debtor in the proceeding. See Note 2 for
further details.
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 costs 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 6. Most of the company's alternate site infusion therapy
net revenue is derived from third-party payers such as private indemnity
insurers, managed care organizations and governmental payers.
Prior to August 1, 2000, the company delivered pharmacy benefit management
and specialty mail-order pharmacy services through its Coram Prescription
Services ("CPS") business, which provided 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 provided 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 were delivered through its six facilities, which
provided distribution, compliance monitoring, patient education and clinical
support to a wide variety of patients. On July 31, 2000, Coram completed the
sale of its CPS business to a management-led group financed by GTCR Golder
Rauner, L.L.C. for a one-time payment of $41.3 million. See Note 4.
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. (collectively 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; however, the
litigation was amicably resolved and the case was dismissed on April 20, 2000.
The Resource Network Subsidiaries filed voluntary bankruptcy petitions on
November 12, 1999 with the Bankruptcy Court under Chapter 11 of the United
States Bankruptcy Code, and the Resource Network Subsidiaries are being
liquidated pursuant to such proceedings. See Notes 5 and 8.
5
<PAGE> 6
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared by the company pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission") and
reflect all adjustments and disclosures (consisting of normal recurring accruals
and, effective August 8, 2000, all adjustments pursuant to the adoption of SOP
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7")) that are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations as of and for
the interim periods presented herein. 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 the applicable Commission regulations. The results of operations for
the interim periods ended September 30, 2000 are not necessarily indicative of
the results for 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.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the bankruptcy filings and circumstances relating
thereto, including the company's leveraged financial structure and cumulative
losses from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. During the pendency of the
Chapter 11 bankruptcy proceedings involving the Debtors, the company may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the consolidated financial statements. Further,
the proposed plan of reorganization filed in the Chapter 11 proceedings could
materially change the amounts reported in the consolidated financial statements,
which do not give effect to any adjustments of the carrying value of assets or
liabilities that might be necessary as a consequence of the proposed plan of
reorganization. The company's ability to continue as a going concern is
dependent upon, among other things, confirmation of the proposed plan of
reorganization, future profitable operations, the ability to comply with the
terms of the company's filed financing agreements, the ability to remain in
compliance with the physician ownership and referral provisions of the Omnibus
Budget Reconciliation Act of 1993 known as "Stark II" and the ability to
generate sufficient cash from operations and/or financing arrangements to meet
obligations.
Reclassifications. Certain amounts in Coram's 1999 consolidated financial
statements have been reclassified to exclude the discontinued operations of
R-Net and to conform to the year 2000 presentation.
Provision for Estimated Uncollectible Accounts. Notwithstanding the ongoing
Chapter 11 bankruptcy proceedings, 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. 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.
Income (Loss) per Share. Basic income (loss) per share excludes any dilutive
effects of options, warrants and convertible securities. The following table
sets forth the computations of basic and diluted income (loss) per share for the
three and nine months ended September 30, 2000 and 1999 (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted income (loss) per share
Income (loss) from continuing operations ................. $ 9,200 $ (7,210) $ 3,847 $ (23,264)
Income (loss) from discontinued operations ............... 324 (7,957) (3,157) (30,281)
---------- ---------- ---------- ----------
Net income (loss) .......................................... $ 9,524 $ (15,167) $ 690 $ (53,545)
========== ========== ========== ==========
Weighted average shares - denominator for basic
Income (loss) per share .................................. 49,638 49,550 49,638 49,483
Effect of other dilutive securities:
Stock options ............................................ -- -- 1 --
Warrants ................................................. 3,136 -- 3,187 --
Series B Senior Subordinated Convertible Notes ........... -- -- -- --
---------- ---------- ---------- ----------
Denominator for diluted income (loss) per share - adjusted
weighted average shares and assumed conversion ........... 52,774 49,550 52,826 49,483
========== ========== ========== ==========
Basic income (loss) per share:
Income (loss) from continuing operations ................. $ 0.18 $ (0.15) $ 0.08 $ (0.47)
Income (loss) from discontinued operations ............... 0.01 (0.16) (0.06) (0.61)
---------- ---------- ---------- ----------
Net income (loss) ........................................ $ 0.19 $ (0.31) $ 0.02 $ (1.08)
========== ========== ========== ==========
Diluted income (loss) per share:
Income (loss) from continuing operations ................. $ 0.17 $ (0.15) $ 0.07 $ (0.47)
Income (loss) from discontinued operations ............... 0.01 (0.16) (0.06) (0.61)
---------- ---------- ---------- ----------
Net income (loss) ........................................ $ 0.18 $ (0.31) $ 0.01 $ (1.08)
========== ========== ========== ==========
</TABLE>
6
<PAGE> 7
Diluted loss per share computations for periods ended September 30, 1999 did
not give effect to stock options, warrants or the Series B Senior Subordinated
Convertible Notes because their effect would have been anti-dilutive.
The company's equity structure is subject to significant modifications if
the Debtors' joint plan of reorganization is approved in the form presented to
the Bankruptcy Court. See Note 2.
Derivatives and Hedging Activities. In June 1998, the Financial Accounting
Standards Board ("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. The FASB issued, in June 1999, Statement of
Financial Accounting Standards Statement 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
defers adoption of Statement 133 to fiscal years beginning after June 15, 2000
and any interim periods during the year of adoption. At September 30, 2000, the
company had not entered into any derivative or hedging transactions, and as
such, the company does not believe that adoption of the new pronouncement will
have an effect on the company's future financial position or operating results.
2. REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE
Following the filing of the voluntary Chapter 11 petitions on August 8,
2000, the Debtors have been operating as debtors-in-possession subject to the
jurisdiction of the Bankruptcy Court. None of the company's other subsidiaries
is a debtor in the proceeding. The Debtors' need to seek the relief afforded by
the Bankruptcy Code was due, in part, to its requirement to remain in compliance
with the physician ownership and referral provisions of the Omnibus Budget
Reconciliation Act of 1993, commonly referred to as Stark II, after December 31,
2000 and the pending maturity of the Series A Notes that was scheduled for May
27, 2001. The Debtors sought advice and counsel from a variety of sources, and
the Independent Committee of the Board of Directors unanimously concluded that
the bankruptcy and restructuring were the only viable alternatives.
On August 9, 2000, the Bankruptcy Court approved the Debtors' motions for:
(i) payment of all employee wages and salaries and certain benefits and other
employee obligations; (ii) payment of critical trade vendors, utilities and
insurance in the ordinary course of business for both pre and post-petition
expenses; (iii) access to a debtor-in-possession ("DIP") financing arrangement
(see Note 3 for details of the executed agreement); and (iv) use of all company
bank accounts for normal business operations. In September 2000 and October
2000, the Bankruptcy Court approved payment of approximately $2.6 million for
retention bonuses for certain key employees. The bonuses will be paid in two
equal installments; (i) the later of the date of emergence from bankruptcy or
December 31, 2000 and (ii) December 31, 2001. The company is ratably accruing
monthly amounts pursuant to the provisions of the retention plan. Certain other
motions filed by the Debtors have been granted and others are presently pending.
The Debtors are currently paying the post-petition claims of their vendors
in the ordinary course of business and are, pursuant to an order of the
Bankruptcy Court, causing their subsidiaries to pay their own debts in the
ordinary course of business. Even though the filing of the Chapter 11 cases
constituted defaults under the company's principal debt instruments, the
Bankruptcy Code imposes an automatic stay that will generally preclude the
creditors and other interested parties under such arrangements from taking
remedial action in response to any such resulting default without prior
Bankruptcy Court approval.
On the same day as the Chapter 11 cases were filed, the Debtors filed their
joint plan of reorganization (the "Joint Plan") and their joint disclosure
statement with the Bankruptcy Court. The Joint Plan was subsequently amended and
restated (the "Restated Joint Plan") and, on or about October 10, 2000, the
Restated Joint Plan and the First Amended Disclosure Statement with respect to
the Restated Joint Plan was approved for distribution by the Bankruptcy Court.
Among other things, the Restated Joint Plan provides for: (i) a conversion of
all of the CI obligations represented by the company's Series A and Series B
Notes into (a) a four-year, interest only note in the principal amount of $180
million, that would bear interest at the rate of 9% per annum and (b) all of the
equity in the reorganized CI; (ii) the payment in full of all secured, priority
and general unsecured debts of CI; (iii) the payment in full of all secured and
priority claims against CHC; (iv) the impairment of certain general unsecured
debts of CHC, including, among others, CHC's obligations under the Series A and
Series B Notes; and (v) the complete elimination of the equity interests of CHC.
Furthermore, pursuant to the Restated Joint Plan, CHC would be dissolved as soon
as practicable after the effective date of the Restated Joint Plan and the stock
of CHC would no longer be publicly traded. Therefore, if the Debtors' Restated
Joint Plan were approved as filed, the existing stockholders of CHC would
receive no value for their shares and all of the outstanding equity of CI as the
surviving entity would be owned by the holders of the company's Series A and
Series B Notes.
Representatives of the company negotiated the principal aspects of the Joint
Plan with representatives of the holders of the company's Series A and Series B
Notes and Senior Credit Facility prior to the filing of such Joint Plan. The
Restated Joint Plan of
7
<PAGE> 8
reorganization must be voted upon by the impaired creditors of the Debtors and
approved by the Bankruptcy Court after certain findings required by the
Bankruptcy Code are made. The Bankruptcy Court may confirm a plan of
reorganization notwithstanding the non-acceptance of the plan by an impaired
class of creditors or equity holders if certain conditions of the Bankruptcy
Code are satisfied.
On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that are entitled to a distribution under the Restated Joint Plan. The
Debtors did not send ballots to the holders of other types of claims and
interested parties, including equity holders, but the holders of such claims and
interested parties are deemed to reject the plan in any event. Ballots are due
to be returned on November 21, 2000, and a confirmation hearing regarding the
Restated Joint Plan is scheduled to be heard by the Bankruptcy Court on December
1, 2000. The company has learned that certain parties intend to object to the
Restated Joint Plan. There can be no assurance that the Restated Joint Plan will
be approved by the requisite number of claim holders, confirmed by the
Bankruptcy Court or that it will be consummated. See Note 8.
Under the Bankruptcy Code, certain claims against the Debtors in existence
prior to the filing date are stayed while the Debtors continue their operations
as debtors-in-possession. These claims are reflected in the September 30, 2000
Condensed Consolidated Balance Sheet as liabilities subject to compromise.
Additional Chapter 11 claims have arisen and may continue to arise subsequent to
the filing date resulting from the rejection of executory contracts, including
certain leases, and from the determination by the Bankruptcy Court of allowed
claims for contingencies and other disputed amounts. Parties affected by the
rejections may file claims with the Bankruptcy Court in accordance with the
provisions of the Bankruptcy Code and applicable rules. Claims secured by the
Debtors' assets ("secured claims") also are stayed, although the holders of such
claims have the right to petition the Bankruptcy Court for relief from the
automatic stay to permit such creditors to foreclose on the property securing
their claim. The Restated Joint Plan submitted by the Debtors addresses the
amounts that would be paid to various classes of creditors, as described above.
The principal categories and balances of Chapter 11 claims accrued in the
Condensed Consolidated Balance Sheets and included in liabilities subject to
compromise at September 30, 2000 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Series A and Series B Notes and other long-term debt obligations ..... $ 251,138
Accrued interest ..................................................... 11,488
Liabilities of discontinued operations subject to compromise ......... 4,178
Accrued merger and restructuring costs (primarily severance
liabilities) ....................................................... 554
Accounts payable ..................................................... 227
Legal and professional liabilities ................................... 130
Other ................................................................ 118
------------
Total liabilities subject to compromise ............................ $ 267,833
============
</TABLE>
Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities are subject to the Restated Joint
Plan. The Restated Joint Plan is subject to a vote by the Debtors' impaired
creditors and confirmation by the Bankruptcy Court as described above.
Therefore, it is not possible to fully or completely estimate the fair value of
the liabilities subject to compromise at September 30, 2000 due to the Debtors'
Chapter 11 cases and the uncertainty surrounding the ultimate amount and
settlement terms for such liabilities.
Reorganization expenses are items of expense or income that are incurred or
realized by the company as a result of the reorganization. These items include,
but are not limited to, professional fees, United States Trustee fees and
interest earned on cash accumulated related to the Debtors not paying their
pre-petition liabilities and other expenditures incurred relating to the Chapter
11 proceeding. The principal components of reorganization expenses for the three
and nine months ended September 30, 2000 are as follows (in thousands):
<TABLE>
<S> <C>
Legal, accounting and consulting fees ....... $ 1,554
United States Trustee fees .................. 10
Interest income ............................. (69)
Other related expenses ...................... 310
----------
Total reorganization expenses, net ........ $ 1,805
==========
</TABLE>
3. DEBTOR-IN-POSSESSION ("DIP") FINANCING AGREEMENT
In connection with the Chapter 11 cases, effective August 30, 2000, CHC and
CI entered into a secured debtor-in-possession financing agreement with
Madeleine L.L.C., an affiliate of Cerberus Partners, L.P. The agreement
contemplates that the Debtors
8
<PAGE> 9
could access, as necessary, a line of credit of up to $40 million for use in
connection with the operation of their businesses and the businesses of their
subsidiaries. On September 12, 2000, the Bankruptcy Court issued an order
approving the DIP Financing agreement.
The DIP Financing agreement matures on the earlier of either confirmation of
a plan of reorganization of the Debtors or August 15, 2001. The DIP Financing
agreement provides for maximum borrowings equal to the product of: (i) 65% of
Net Eligible Receivables, as defined in the underlying agreement, and (ii) 95%.
Outstanding borrowings under the DIP Financing agreement bear interest at a rate
of prime plus 2.0%, payable in arrears on the first business day of each month.
The interest rate was 11.5% on October 31, 2000. The DIP Financing agreement is
secured by the capital stock of the company's subsidiaries, as well as the
accounts receivable and certain other assets held by the Debtors and their
subsidiaries. Under the DIP Financing agreement, among other nominal fees, the
company paid an upfront fee of 1% or $0.4 million in August 2000 and will be
liable for commitment fees on the unused facility at a rate of 0.5% per annum,
due monthly in arrears. The terms of the DIP Financing agreement contain certain
customary representations, warranties and covenants, including certain financial
covenants relating to earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA") and capital expenditures, among others.
The breach of such representations, warranties and covenants of the Debtors
could result in the Debtors being unable to obtain advances under the DIP
Financing agreement and possibly the exercise of certain remedies by the lender.
As of November 20, 2000, no borrowings had been made under the DIP Financing
agreement.
4. SALE OF CPS AND OTHER BUSINESS
On July 31, 2000, the company completed the sale of substantially all of the
assets and assignment of certain related liabilities of the CPS business to
Curascript Pharmacy, Inc. and Curascript PBM Services, Inc. (collectively the
"Buyers") for a one-time cash payment of approximately $41.3 million. The
company's gain on the sale of the CPS business was approximately $18.1 million.
The sale generated net cash proceeds of approximately $38.0 million after
related expenses. These cash proceeds were applied to the remaining principal
balance under CI's revolving line of credit of $28.5 million, and an additional
$9.5 million was applied to the principal balance of the Series A Senior
Subordinated Notes. See Note 7.
Pursuant to a contingent consideration arrangement related to one of the
company's operating subsidiaries, approximately $365,000 was recognized as
incremental proceeds during the three months ended September 30, 2000. The
contingency related to the operating activities of the subsidiary through June
30, 2000. Upon payment of the contingent consideration, substantially all
conditions of the initial sale and purchase agreement have been satisfied.
5. LOSS ON DISCONTINUED OPERATIONS
In November 1999, following the filing of voluntary bankruptcy petitions by
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 Statements of Operations
as Discontinued Operations.
The Loss from Operations of Discontinued Operations of R-Net reflected in
the company's Condensed Consolidated Statements of Operations includes the
following (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net Revenue ................................. $ -- $ 70,125
========== ==========
Gross Deficit ............................... $ -- $ (9,593)
========== ==========
Loss from Operations of Discontinued
Operations ................................ $ -- $ (30,281)
========== ==========
</TABLE>
The Loss from Disposal of Discontinued Operations of approximately $3.2
million for the nine months ended September 30, 2000 included additional
reserves for litigation and other wind-down costs, net of certain insurance
recoveries.
9
<PAGE> 10
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash ................................................................. $ 1,335 $ 2,022
Accounts receivable, net ............................................. -- --
Other current assets ................................................. -- --
Property & equipment, net ............................................ -- --
Intercompany payable ................................................. (4) (437)
Accounts payable ..................................................... (31,845) (31,490)
Accrued expenses ..................................................... (3,968) (4,613)
------------ ------------
Net liabilities of Discontinued Operations not subject to
compromise under Debtors' Chapter 11 case .......................... (34,482) (34,518)
Net liabilities subject to compromise under Debtors'
Chapter 11 case .................................................... 4,178 --
------------ ------------
Net liabilities of Discontinued Operations ........................... $ (30,304) $ (34,518)
============ ============
</TABLE>
As of September 30, 2000, approximately $31 million of accounts payable
related to the discontinued operations was subject to compromise under the R-Net
Chapter 11 proceedings.
6. ACQUISITIONS AND RESTRUCTURING
Acquisitions. Certain agreements, related to previously acquired businesses
or interests therein, provide for additional contingent consideration to be paid
by the company. The amount of additional consideration, if any, is generally
based on the financial performance levels of the acquired companies. As of
September 30, 2000, the company may be required to pay, under such contingent
obligations, approximately $1.3 million, which is subject to increase based on
certain revenue or income targets. Subject to certain elections by the company
or the sellers, approximately $0.7 million of these contingent obligations may
be paid in cash. In the period these payments become probable, they are recorded
as additional goodwill. Payments made during the nine months ended September 30,
2000 and 1999 were $0.1 million and $0.3 million, respectively. See Note 8 for
further details concerning contingencies relative to contingent earn-out
payments.
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
restructure reversal benefits of $0.7 million and $0.2 million, respectively.
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 may
result in the closing of additional 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 of
approximately fifteen branch and corporate facilities that have been or may be
closed or downsized as part of the restructuring. During the three months ended
September 30, 2000, the company recorded a restructure reversal adjustment of
approximately $1.0 million relating to the sale of CPS (See Note 4) and a
restructure adjustment for severance of approximately $0.4 million.
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 Notes 1 and
5, 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 are reflected in the net liability of discontinued
operations.
Under the Caremark Business Consolidation Plan and the Coram Restructure
Plan, the company has made total payments, disposals and reversals as follows
(in thousands):
10
<PAGE> 11
<TABLE>
<CAPTION>
BALANCES AT
THROUGH SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------------------------------------------ ---------------------------
CASH NON-CASH RESTRUCTURE RESTRUCTURE FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL ADJUSTMENTS REVERSALS EXPENDITURE CHARGES
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Caremark Business Consolidation
Plan:
Personnel Reduction Costs ...... $ 11,300 $ -- $ 11,300 $ -- $ -- $ -- $ 11,300
Facility Reduction Costs ....... 9,919 3,900 13,819 -- 943 1,938 16,700
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Restructuring Costs ... $ 21,219 $ 3,900 $ 25,119 $ -- $ 943 $ 1,938 $ 28,000
============ ============ ============ ============ ============ ============ ============
Coram Restructure Plan:
Personnel Reduction Costs ...... $ 2,072 $ -- $ 2,072 $ (387) $ -- $ 877 $ 2,562
Facility Reduction Costs ....... 500 -- 500 1,033 -- 761 2,294
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Restructuring Costs ... $ 2,572 $ -- $ 2,572 $ 646 $ -- $ 1,638 $ 4,856
============ ============ ============ ============ ============ ============ ============
</TABLE>
The balance in the accrued merger and restructuring liability at September
30, 2000 consists of future cash expenditures related to the Caremark Business
Consolidation Plan of $1.9 million and the Coram Restructure Plan of $1.6
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: 56%
through September 30, 2001, 18% through September 30, 2002, 10% through
September 30, 2003, and 16% thereafter.
As a result of the Chapter 11 filings under the United States Bankruptcy
Code, approximately $0.6 million of the restructuring reserves, primarily
personnel reduction costs, are classified as liabilities subject to compromise
in the company's Condensed Consolidated Balance Sheets in accordance with SOP
90-7 (See Note 2).
7. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
DIP Financing Agreement (see Note 3) ............... $ -- $ --
Series A Senior Subordinated Unsecured Notes ....... 158,923 166,825
Series B Senior Subordinated Convertible Notes ... 92,084 91,474
Senior Credit Facility ............................. -- 44,000
Other obligations, including capital leases,
at interest rates ranging from 11% to 13%,
collateralized by certain property and
equipment ........................................ 424 753
------------ ------------
251,431 303,052
Less: long-term debt subject to compromise ........ (251,138) --
Less: current scheduled maturities ................ (267) (390)
------------ ------------
$ 26 $ 302,662
============ ============
</TABLE>
As a result of the Chapter 11 filings, substantially all short and long-term
debt at the filing date of August 8, 2000 was classified as liabilities subject
to compromise in the company's Condensed Consolidated Balance Sheets in
accordance with SOP 90-7. Under the Bankruptcy Code, actions against the company
to collect prepetition indebtedness are subject to an automatic stay provision.
As of the Chapter 11 petition date, the company's principal credit and debt
agreements included (i) a Securities Exchange Agreement (the "Securities
Exchange Agreement") dated May 6, 1998 with Cerberus Partners, L.P., Goldman
Sachs Credit Partners, L.P. and Foothill Capital Corporation (collectively known
as the "Holders") and the related Series A Senior Subordinated Unsecured Notes
(the "Series A Notes") and the Series B Senior Subordinated Unsecured
Convertible Notes (the "Series B Notes") contemplated thereby and (ii) a 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 credit and debt agreements, the
company is precluded from paying cash dividends during the term of indebtedness.
The voluntary Chapter 11 filings made by the Debtors have caused events of
default to occur under these debt instruments. The company is no longer able to
borrow under the Senior Credit Facility; however; effective August 30, 2000, the
Debtors entered into the DIP Financing agreement. See Note 3.
Securities Exchange Agreement. The Securities Exchange Agreement, pursuant
to which the Series A Notes and the Series B Notes were issued, contains certain
customary covenants and events of default. At July 31, 2000, the company was in
compliance with all of these covenants, other than covenants relating to certain
contractual relationships its Coram Resource Network,
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<PAGE> 12
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 subsidiaries. The company has 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 Securities
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 Senior Credit Facility,
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 on such date.
However, pursuant to the terms of the Securities Exchange Agreement, the company
was, upon filing of the Chapter 11 cases, in default under the Securities
Exchange Agreement.
Series A Notes. The Series A Notes are scheduled to mature in May 2001 and
bear interest at 11.5% 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
exceeds a certain interest coverage ratio. However, due to the filing of the
Chapter 11 cases, no interest is being paid.
Series B Notes. The Series B Notes are scheduled to 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. 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. Due to the
filing of the Chapter 11 cases, no interest is being paid.
The Series A and Series B Notes are callable, 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 callable 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 redeemable at 103% of the then outstanding
principal amount plus accrued interest at the option of the company.
In connection with the sale of CPS, effective July 31, 2000, the company
applied $9.5 million of the net cash proceeds derived from the sale of the CPS
business to prepay a portion the principal amount outstanding under the Series A
Notes. The Holders of the Series A Notes waived the 103% prepayment premium
thereby permitting the company to reduce the principal amount outstanding under
the Series A Notes to approximately $158.9 million as of September 30, 2000.
Senior Credit Facility. On August 20, 1998, the company entered into a
definitive agreement for the Senior Credit Facility providing for availability
of up to $60.0 million facility for acquisitions, working capital, letters of
credit and other corporate purposes. On September 21, 2000, the company
permanently reduced the commitment to $2.7 million in order to reduce the fees
related to a commitment on which the company would not be able to borrow
against. The availability is subject to certain borrowing base calculations as
defined in the underlying agreement. The Senior Credit Facility matures February
26, 2001 and bears interest at the rate of prime plus 1.5%, payable in arrears
on the first business day of each month. The interest rate was 11.0% at
September 30, 2000. The 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 Senior Credit
Facility, among other nominal fees, the company was required to pay an upfront
fee of 1.0% or $0.6 million and was liable for commitment fees on the unused
facility of 3/8 of 1.0% per annum, due quarterly in arrears. In addition, the
terms of the Senior Credit Facility provided for the issuance of warrants to
purchase up to 1.9 million shares of the company's common stock at $0.01 per
share, subject to customary adjustments (the "1998 Warrants"). The 1998 Warrants
were valued at their fair value at the date of issuance, and were accounted for
as deferred costs amortized over the life of the Senior Credit Facility;
however, contemporaneous with the permanent reduction of the commitment on
September 21, 2000, the company wrote-off approximately $1.1 million of deferred
debt issuance costs related to the Senior Credit Facility. The terms of the
Senior Credit Facility also provided for the issuance of letters of credit of up
to $25.0 million provided that available credit would not fall below zero. As of
September 30, 2000, the Lenders had issued irrevocable letters of credit
totaling $2.7 million. The terms of the Senior Credit Facility further provides
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
Senior Credit Facility also provides 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 September 30,
2000, such fees were 0.825% per annum
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<PAGE> 13
on the amount of outstanding letter of credit obligations. The Senior Credit
Facility contains certain other customary covenants and events of default. As
discussed above, the company is no longer able to borrow under the Senior Credit
Facility.
In connection with the sale of CPS, effective July 31, 2000, the company
reduced its outstanding borrowings on the Senior Credit Facility by $28.5
million, leaving only irrevocable letter of credit obligations totaling $2.7
million outstanding. In connection with the DIP Financing arrangement, the
company has begun taking measures to terminate the Senior Credit Facility.
Post-petition interest expense on pre-petition debt of approximately $3.4
million is considered an allowable Bankruptcy Court claim and was accrued at
September 30, 2000. The recognition of interest expense pursuant to SOP 90-7 is
appropriate during the Chapter 11 proceeding if it is probable that it will be
an allowed priority, secured or unsecured claim. However, the Debtors' Restated
Joint Plan (Note 2), if approved, would effectively eliminate the post-petition
interest on pre-petition borrowings.
8. LITIGATION AND CONTINGENCIES
Litigation. The Debtors filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code on August 8, 2000 with the United States
Bankruptcy Court for the District of Delaware, In Re: Coram Healthcare
Corporation and Coram, Inc., Case Nos. 00-3299 (MFW) and 00-3300 (MFW) (the
"Chapter 11 Cases"). The proceedings have been consolidated for administrative
purposes only by the United States Bankruptcy Court in Delaware and are being
administered under the docket of In Re: Coram Healthcare Corporation, Case No.
00-3299 (MSW). None of the company's other subsidiaries is a debtor in the
proceeding. See Note 2.
Except as may otherwise be determined by the Bankruptcy Court overseeing the
Chapter 11 Cases, the automatic stay protection afforded by Chapter 11 generally
automatically stays any litigation proceedings pending against either or both of
the Debtors. All such claims will be addressed through the proceedings
applicable to the Chapter 11 Cases. The automatic stay would not, however, apply
to actions brought against the company's non-debtor subsidiaries.
Beginning in June 1999, Coram Healthcare Corporation ("CHC") had been in
litigation with Aetna U.S. Healthcare, Inc. over the Master Agreement that had
been entered into by CHC 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.
On November 12, 1999, two subsidiaries of Coram, Inc., Coram Resource
Network, Inc. and Coram Independent Practice Association, Inc. (collectively,
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, Case No. 99-2889 (MFW). The Resource Network Subsidiaries are now
being liquidated pursuant to the proceeding. The Chief Restructuring Officer of
the Resource Network Subsidiaries has threatened suit on behalf of the estates
against CHC. The draft complaint included claims for damages against CHC and
certain of its former and current officers and directors in excess of $41
million. The draft complaint included a threat to pierce the corporate veil of
the Resource Network Subsidiaries to reach CHC and included claims of breaches
by the officers and directors of their fiduciary duties to the Resource Network
Subsidiaries and CHC. The company has received no notice that any such complaint
has been filed or that any litigation will be pursued.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtor's Chapter 11 proceedings seeking, among other things, to have the two
separate bankruptcy proceedings substantively consolidated into one proceeding.
The Resource Network Subsidiaries and the Debtors have been engaged in discovery
related to this motion which is scheduled for hearing in part on November 28,
2000 and in part on December 1, 2000. If granted, the Chapter 11 proceedings
involving the Resource Network Subsidiaries and the Chapter 11 proceedings
involving the Debtors would be combined such that the assets and liabilities of
the Resource Network Subsidiaries would be joined with the assets and
liabilities of CHC and CI, the liabilities of the combined entity would be
satisfied from their combined funds and all intercompany claims would be
eliminated. Furthermore, the creditors of both proceedings would vote on any
reorganization plan for the combined entities. The outcome of this motion can
not be predicted due to the uncertainties inherent in litigation, and the
company can not predict with certainty what impact the granting of the
substantive consolidation motion would have on the company or the timing or
adoption of the Restated Joint Plan. The holders of the company's Series A and
Series B Notes and Senior Credit Facilty have informed the company that they
would withdraw their support for the Restated Joint Plan if the substantive
consolidation motion is granted.
On November 17, 2000, however, the Debtors reached a preliminary agreement
to settle all claims with the Resource Network Subsidiaries and to have the
substantive consolidation motion withdrawn. Subject to the approval of the
Bankruptcy Courts, in the proceedings involving both the Debtors and the
Resource Network Subsidiaries, there can be no assurance that the agreement
between the Debtors and the Resource Network Subsidiaries will be approved. The
Resource Network Subsidiaries have filed a proof of claim in the Debtors' case
in excess of $41.0 million.
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<PAGE> 14
A committee of persons claiming to own shares of the company's common stock
(the "Equity Committee") have informed the company that they intend to object to
the Restated Joint Plan contending that the company valuation upon which the
Restated Joint Plan is premised is flawed. The company and the Equity Committee
are involved in discovery regarding, among other things, the Equity Committee's
contentions. Any objections to the Restated Joint Plan must be filed by November
21, 2000, and would be heard at the confirmation hearing in the Bankruptcy Court
that is presently scheduled for December 1, 2000.
The company cannot predict whether the objection of the Equity Committee
will prevent confirmation of the Restated Joint Plan. Failure by the Bankruptcy
Court to approve the Restated Joint Plan could have a material adverse effect om
the company.
Apria Healthcare, Inc. and one of its affiliates (collectively "Apria")
filed suit against CHC 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). Apria's
claims relate to services that were rendered as part of certain home health
provider networks managed by the Resource Network Subsidiaries. Apria's
complaint alleges, among other things, that the Resource Network Subsidiaries
operated as the alter ego of CHC and, as a result, CHC 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 Superior Court notifying it of the bankruptcy proceedings involving the
Resource Network Subsidiaries and contending that the case has, by operation of
certain provisions of the United States Bankruptcy Code, been stayed.
On July 17, 2000, TBOB Enterprises, Inc. ("TBOB") filed an arbitration
demand against CHC (TBOB Enterprises, Inc. f/k/a Medical Management Services of
Omaha, Inc. against Coram Healthcare Corporation, in the American Arbitration
Association office in Dallas, Texas). In its demand, TBOB claims that Coram
breached its obligations under an agreement entered into by the parties in 1996
relating to a prior earn-out obligation of the company's subsidiary, Curaflex
Health Services, Inc. ("Curaflex"), that originated from Curaflex's acquisition
of the claimant's prescription services business in 1993. Coram and Curaflex
operated the business under the name "Coram Prescription Services" ("CPS") and
the assets of the CPS business were sold on July 31, 2000. See Note 4 for
further details. TBOB alleges, among other things, that the company has impaired
the earn-out payments due TBOB by improperly charging certain expenses to the
CPS business and failing to fulfill the company's commitments to enhance the
value of CPS by marketing its services. The TBOB demand alleges damages of more
than $898,000. TBOB contends that this amount must be paid in addition to the
final scheduled earn-out payment of approximately $1.3 million that will be due
from Coram and Curaflex in March 2001. CHC has received a copy of a letter from
TBOB to the American Arbitration Association in which it is attempting to obtain
the return of the filing fees that it has paid in connection with the filing of
this action. The arbitration proceeding has been stayed by the Bankruptcy Code.
On behalf of its subsidiary, T2 Medical, Inc., CHC is also contesting a
notice of deficiency issued by the Internal Revenue Service through
administrative proceedings and litigation. See Note 9 for further details.
On November 8, 2000 a complaint was filed in the United States District
Court for the Third District of New Jersey, Furst, et al. v. Feinberg, et al.,
Case No. 2:00cv05509. The complaint seeks class action status on behalf of those
who sold CHC stock between August 8, 2000, the date of Coram's Bankruptcy
filing, and November 8, 2000. Although Coram Healthcare Corporation and its
subsidiaries are not named as defendants, the complaint names as defendants a
number of current and former members of Coram's Management and Board of
Directors as well as Coram's note holders. The complaint alleges, among others,
claims based on Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10(b)-5 and the common law for misrepresenting the value of Coram
common stock. The complaint seeks unspecified compensatory and punitive damages,
attorney fees and various equitable relief.
CHC and its subsidiaries intend to defend themselves vigorously in the
matters described above. Nevertheless, due to the uncertainties inherent in
litigation, the ultimate disposition of such matters cannot presently be
determined. An adverse outcome in any such litigation or proceedings could have
a material adverse effect on the financial position, results of operations and
liquidity of the company.
CHC and its subsidiaries are also parties 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.
Government Regulation. Under the physician ownership and referral provisions
of the Omnibus Budget Reconciliation Act of 1993 ("Stark II"), it is unlawful
for a physician to refer patients for certain designated health services
reimbursable under the Medicare or Medicaid programs 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 service 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 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
on average over 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. As
of September 30, 2000, the total stockholders' deficit was approximately $21.0
million,
14
<PAGE> 15
therefore, CHC would no longer qualify for such exception without a significant
increase in stockholders' equity prior to December 31, 2000. The penalties for
failure to comply with Stark II include civil penalties that could be imposed
upon Coram or the referring physician regardless of whether either the physician
or Coram intended to violate the law.
Coram has been advised that a company whose stock is publicly traded has, as
a practical matter, no reliable way to implement and maintain an effective
compliance plan for addressing the requirements of Stark II other than complying
with the public company exception. Accordingly, if Coram were to remain a
company whose stock is publicly traded after December 31, 2000, Coram would be
forced to cease accepting referrals of patients with government sponsored
benefit programs or run a significant risk of non-compliance with Stark II.
Because referrals of patients with government sponsored benefit programs
comprise approximately 22% of the company's revenue (excluding CPS) for the nine
months ended September 30, 2000, discontinuing the acceptance of patients with
government sponsored benefit programs would have a material adverse effect on
the financial condition and results of operations of the company. Additionally,
ceasing to accept such referrals could materially adversely affect the company's
business reputation in the market as it may cause the company to be a less
attractive provider to which a physician could refer his or her patients. The
company has written to the Health Care Financing Administration ("HCFA") seeking
a waiver from the provisions of Stark II through the date its Restated Joint
Plan becomes effective. There can be no assurance that any such waiver would be
provided or that HCFA has the authority to grant such a waiver.
9. INCOME TAXES
During the nine months ended September 30, 2000 and 1999, the company
recorded income tax expense of approximately $0.3 million and $0.4 million,
respectively. The effective income tax rates for the three and nine month
periods ended September 30, 2000 and 1999 differ substantially from the expected
combined federal and state statutory income tax rates as a result of the company
providing a full valuation reserve against its deferred tax assets.
As of September 30, 2000, deferred tax assets were net of a $169.7 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 an
examination of the federal income tax return of the company for the year ended
September 30, 1995, and proposed substantial adjustments to the prior tax
liabilities of the company. The company has agreed to adjustments of $24.4
million that only affect the available net operating loss carryforwards. 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 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 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.
10. INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS
Management regularly evaluates the operating performance of the company by
reviewing results on a product or service 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, which
was divested by the company on July 31, 2000, primarily provides specialty
mail-order pharmacy and pharmacy benefit management services. The other
non-reportable segment principally represents clinical trials and informatics
services. R-Net, a discontinued operation, is no longer identified as a
reportable segment. See Note 5.
15
<PAGE> 16
Management uses earnings before interest expense, income taxes, depreciation
and amortization ("EBITDA") for purposes of performance measurement. For the
three months and nine months ended September 30, 2000, corporate costs were
allocated on a budgeted revenue basis. For the three months and the nine months
ended September 30, 1999, EBITDA has been reclassified to conform to the 2000
presentation. For the three and nine months ended September 30, 2000, EBITDA
excludes reorganization expenses. The measurement basis for segment assets
includes net accounts receivable, inventories, net property and equipment and
other current assets. The segment assets as of September 30, 1999 have been
reclassified to conform to the 2000 measurement basis.
Summary information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INFUSION
Revenue from external customers ....................................... $ 94,106 $ 109,434 $ 304,070 $ 323,469
Intersegment revenue .................................................. (53) 4,260 1,123 19,665
Interest income ....................................................... 18 15 67 60
Equity in net income of unconsolidated joint ventures ............. 322 193 711 194
Segment EBITDA profit ................................................. 5,246 5,996 23,646 17,203
Segment assets ........................................................ 104,791 143,256 104,791 143,256
Segment asset expenditures ............................................ 578 1,013 2,425 4,438
CPS
Revenue from external customers ....................................... $ 8,354 $ 22,644 $ 61,377 $ 62,310
Intersegment revenue .................................................. -- 966 11 1,581
Interest income ....................................................... 10 -- 13 --
Equity in net income of unconsolidated joint ventures ............. -- -- -- --
Segment EBITDA profit (loss) .......................................... 17,839 (1,529) 16,454 (1,671)
Segment assets ........................................................ -- 23,052 -- 23,052
Segment asset expenditures ............................................ 6 628 230 1,697
ALL OTHER
Revenue from external customers ....................................... $ 406 $ 861 $ 2,439 $ 1,079
Intersegment revenue .................................................. -- -- -- --
Interest income ....................................................... 4 -- 4 --
Equity in net income of unconsolidated joint ventures ................. -- -- -- --
Segment EBITDA profit (loss) .......................................... 142 179 385 (33)
Segment assets ........................................................ 285 293 285 293
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 AS OF AND FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET REVENUE
Total for reportable segments ........................................ $ 102,407 $ 137,304 $ 366,581 $ 407,025
Other revenue ........................................................ 406 861 2,439 1,079
Elimination of intersegment revenue .................................. 53 (5,226) (1,134) (21,246)
---------- ---------- ---------- ----------
Total consolidated revenue ................................. $ 102,866 $ 132,939 $ 367,886 $ 386,858
========== ========== ========== ==========
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
REORGANIZATION EXPENSES, INCOME TAXES AND MINORITY INTERESTS
Total EBITDA profit for reportable segments .......................... $ 23,085 $ 4,467 $ 40,100 $ 15,532
Other EBITDA profit (loss) ........................................... 142 179 385 (33)
Goodwill amortization expense ........................................ (2,562) (2,711) (7,670) (8,159)
Depreciation and other amortization expense .......................... (2,278) (2,582) (7,210) (8,037)
Interest expense ..................................................... (6,866) (8,110) (20,313) (22,193)
All other income (expense), net ...................................... (312) 1,848 1,076 1,184
---------- ---------- ---------- ----------
Income (loss) from continuing operations before reorganization
expenses, income taxes and minority interests ...................... $ 11,209 $ (6,909) $ 6,368 $ (21,706)
========== ========== ========== ==========
ASSETS
Total assets for reportable segments ................................. $ 104,791 $ 166,308 $ 104,791 $ 166,308
Other assets ......................................................... 239,548 261,860 239,548 261,860
---------- ---------- ---------- ----------
Consolidated total assets .......................................... $ 344,339 $ 428,168 $ 344,339 $ 428,168
========== ========== ========== ==========
</TABLE>
16
<PAGE> 17
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 ("Aetna") and its affiliated payers for the
company's Infusion and CPS segments represented approximately 2% and 8% of the
company's total net revenue from continuing operations for the three months
ended September 30, 2000 and 1999, respectively, and 4% and 7%, respectively,
for the nine months ended September 30, 2000 and 1999. The National Ancillary
Services Agreement with 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. One such local agreement for home infusion services has been entered
into by a Coram subsidiary and a local Aetna plan.
The company's Infusion and CPS net revenue from Medicare and Medicaid
programs represented approximately 21% and 20% of the company's total
consolidated net revenue for the three months ended September 30, 2000 and 1999,
and 20% for the nine months ended September 30, 2000 and 1999.
11. DEBTOR/NONDEBTOR FINANCIAL STATEMENTS
In accordance with SOP 90-7, the Debtors are presenting a Condensed
Consolidating Balance Sheet.
<TABLE>
<CAPTION>
DEBTORS NON-DEBTORS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 15,952 $ 473 $ 16,425
Cash limited as to use ........................................... 185 607 792
Accounts receivable, net of allowances ........................ -- 72,397 72,397
Inventories ...................................................... -- 12,643 12,643
Deferred income taxes, net ....................................... -- 476 476
Other current assets ............................................. 2,935 1,975 4,910
---------- ---------- ----------
Total current assets ..................................... 19,072 88,571 107,643
Property and equipment, net ........................................ 501 16,349 16,850
Deferred income taxes, net ......................................... -- 2,021 2,021
Other deferred costs ............................................... 66 -- 66
Goodwill, net of accumulated amortization .......................... -- 204,735 204,735
Other assets ....................................................... 4,441 8,583 13,024
---------- ---------- ----------
Total assets ............................................. $ 24,080 $ 320,259 $ 344,339
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities not subject to
compromise:
Accounts payable ................................................. $ 10,372 $ 10,987 $ 21,359
Accrued compensation ............................................. 12,096 5,004 17,100
Interest payable (see Note 2) .................................... -- -- --
Current maturities of long-term debt ............................. -- 267 267
Income taxes payable ............................................. 23 536 559
Deferred income taxes ............................................ -- 288 288
Accrued merger and restructuring costs ........................... 1,454 1,573 3,027
Other accrued liabilities ........................................ 6,645 2,280 8,925
---------- ---------- ----------
Total current liabilities not subject to compromise ............. 30,590 20,935 51,525
Liabilities subject to compromise (See Note 2) ..................... 267,833 -- 267,833
---------- ---------- ----------
Total current liabilities .......................................... 298,423 20,935 319,358
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities .......................... -- 26 26
Minority interests in consolidated joint ventures ................ -- 911 911
Other liabilities ................................................ -- 12,529 12,529
Deferred income taxes ............................................ -- 2,209 2,209
Net liabilities of discontinued operations ......................... -- 30,304 30,304
Commitments and contingencies ...................................... -- -- --
---------- ---------- ----------
Total liabilities ........................................ 298,423 66,914 365,337
Total stockholders' equity (deficit), including intercompany
balances ......................................................... (274,343) 253,345 (20,998)
---------- ---------- ----------
Total liabilities and stockholders' equity (deficit) ..... $ 24,080 $ 320,259 $ 344,339
========== ========== ==========
</TABLE>
Since the date of the Chapter 11 filing on August 8, 2000, the Debtors have
a combined net loss of approximately $10.8 million.
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
17
<PAGE> 18
vary materially from the forward-looking statements made in this report due to
important factors such as: the outcome of bankruptcy proceedings of the Debtors
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.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the bankruptcy filings and circumstances relating
thereto, including the company's leveraged financial structure and cumulative
losses from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. During the pendency of the
Chapter 11 bankruptcy proceedings involving the Debtors, the company may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the consolidated financial statements. Further the
proposed plan of reorganization filed in the Chapter 11 proceedings could
materially change the amounts reported in the consolidated financial statements,
which do not give effect to any adjustments of the carrying value of assets or
liabilities that might be necessary as a consequence of the proposed plan of
reorganization. The company's ability to continue as a going concern is
dependent upon, among other things, confirmation of the proposed plan of
reorganization, future profitable operations, the ability to comply with the
terms of the company's filed financing agreements, the ability to remain in
compliance with the physician ownership and referral provisions of the Omnibus
Budget Reconciliation Act of 1993 known as "Stark II" and the ability to
generate sufficient cash from operations and/or financing arrangements to meet
obligations.
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 has been sold. 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. On
July 31, 2000, the company sold its CPS business to CuraScript Pharmacy, Inc.
and CuraScript PBM Services, Inc. for a one-time cash payment of approximately
$41.3 million. See Note 4 to the company's Condensed Consolidated Financial
Statements.
Reorganization. On August 8, 2000, CHC and its first tier wholly owned
subsidiary, Coram, Inc. (collectively, the "Debtors"), filed voluntary petitions
under Chapter 11 (the "Chapter 11 Cases") of the United States Bankruptcy Code.
Accordingly, as of such date the Debtors are operating as debtors-in-possession
subject to the jurisdiction of the United States Bankruptcy Court in Delaware
(the "Bankruptcy Court"). On August 9, 2000, the Bankruptcy Court approved the
Debtors' motions for: (i) payment of all employee wages and salaries and certain
benefits and other employee obligations; (ii) payment of critical trade vendors,
utilities and insurance in
18
<PAGE> 19
the ordinary course of business for both pre and post-petition expenses; (iii)
access to a debtor-in-possession ("DIP") Financing arrangement; and (iv) use of
all company bank accounts for normal business operations. Certain other motions
filed by the Debtors are presently pending. The Debtors are currently paying the
post-petition claims of their vendors in the ordinary course of business and
are, pursuant to an order of the Bankruptcy Court, causing its subsidiaries to
pay their own debt in the ordinary course of business. None of the company's
other subsidiaries is a debtor in the proceeding. Even though the filing of the
Chapter 11 Cases constituted defaults under the company's principal debt
instruments, the Bankruptcy Code imposes an automatic stay that will generally
preclude the creditors and other interested parties under such arrangements from
taking remedial action in response to any such resulting default without prior
Bankruptcy Court approval. The Debtors have sought advice and counsel from a
variety of sources and concluded that the bankruptcy and restructuring is the
only viable alternative. The Debtors' need to seek the relief afforded by the
Bankruptcy Code was due, in part, to its need to remain in compliance with the
physician ownership and referral provisions of the Omnibus Budget Reconciliation
Act of 1993, commonly known as Stark II, after December 31, 2000 and the pending
maturity of the Series A Notes that was scheduled for May 27, 2001. See Notes 3,
7 and 8 to the company's Condensed Consolidated Financial Statements.
On the same day as the Chapter 11 cases were filed, the Debtors filed their
joint plan of reorganization (the "Joint Plan") and their joint disclosure
statement with the Bankruptcy Court. The Joint Plan was subsequently amended and
restated (the "Restated Joint Plan") and, on or about October 10, 2000, the
Restated Joint Plan and the First Amended Disclosure Statement with respect to
the Restated Joint Plan was approved for distribution by the Bankruptcy Court.
Among other things, the Restated Joint Plan provides for: (i) a conversion of
all of the CI obligations represented by the company's Series A and Series B
Notes into (a) a four-year, interest only note in the principal amount of $180
million, that would bear interest at the rate of 9% per annum and (b) all of the
equity in the reorganized CI; (ii) the payment in full of all secured, priority
and general unsecured debts of CI; (iii) the payment in full of all secured and
priority claims against CHC; (iv) the impairment of certain general unsecured
debts of CHC, including, among others, CHC's obligations under the Series A and
Series B Notes; and (v) the complete elimination of the equity interests of CHC.
Furthermore, pursuant to the Restated Joint Plan, CHC would be dissolved as soon
as practicable after the effective date of the Restated Joint Plan and the stock
of CHC would no longer be publicly traded. Therefore, if the Debtors' Restated
Joint Plan were approved as filed, the existing stockholders of CHC would
receive no value for their shares and all of the outstanding equity of CI as the
surviving entity would be owned by the holders of the company's Series A and
Series B Notes.
Representatives of the company negotiated the principal aspects of the plan
with representatives of the holders of the company's Series A and Series B Notes
and Senior Credit Facility prior to the filing of such plan. The Restated Joint
Plan must be voted upon by the impaired creditors of the Debtors and approved by
the Bankruptcy Court after certain findings required by the Bankruptcy Code are
made. The Bankruptcy Court may confirm a plan of reorganization notwithstanding
the non-acceptance of the plan by an impaired class of creditors or equity
holders if certain conditions of the Bankruptcy Code are satisfied.
On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that are entitled to a distribution under the Restated Joint Plan. The
Debtors did not send ballots to the holders of other types of claims and
interested parties, including equity holders, but the holders of such claims and
interested parties are deemed to reject the plan in any event. Ballots are due
to be returned on November 21, 2000, and a confirmation hearing regarding the
Restated Joint Plan is scheduled to be heard by the Bankruptcy Court on December
1, 2000. There can be no assurance that the Restated Joint Plan will be approved
by the requisite number of claim holders, confirmed by the Bankruptcy Court or
that it will be consummated. See Notes 2 and 8 to the company's Condensed
Consolidated Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999 (IN MILLIONS, EXCEPT PER SHARE DATA):
Discontinued Operations. As discussed in Note 5 to the company's Condensed
Consolidated Financial Statements, the company reclassified prior year results
for the discontinuance of R-Net operations in 1999. Had R-Net's operations been
included in the continuing operations, the following would have been contributed
to Coram's operations (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net revenue .................. $ -- $ 10.3
Gross profit ................. $ -- $ 2.4
Operating loss ............... $ -- $ (8.0)
</TABLE>
19
<PAGE> 20
The following discussion of Coram's financial condition and results of
operations during 2000 and 1999 excludes the discontinued operations for R-Net.
Net Revenue. Net revenue decreased $30.0 million or 22.6%, to $102.9 million
in the three months ended September 30, 2000 from $132.9 million in the three
months ended September 30, 1999. The net decrease is primarily due to (i) a
decrease in CPS net revenue as a result of the sale of the CPS business on July
31, 2000, (ii) a decrease in the infusion net revenue due, in part, to the
termination of the National Ancillary Services Agreement with Aetna and (iii)
corporate initiatives to focus on core therapies.
Gross Profit. Gross profit decreased $3.4 million to $27.2 million or a
gross margin of 26.4% in the three months ended September 30, 2000 from $30.6
million or a gross margin of 23.0% in the three months ended September 30, 1999.
The gross margin percentage increased primarily from favorable product/therapy
mix and certain cost reduction programs implemented in December 1999. The
components of gross profit are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Infusion ..................... $ 25,877 $ 26,987
CPS .......................... 935 3,102
CTI .......................... 387 480
---------- ----------
Total gross profit ........... $ 27,199 $ 30,569
========== ==========
</TABLE>
Selling, General and Administrative ("SG&A") Expenses. SG&A decreased $1.4
million or 6.0% to $22.1 million in the three months ended September 30, 2000
from $23.5 million in the three months ended September 30, 1999. Expenses
decreased primarily due to the sale of CPS effective July 31, 2000.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $3.4 million or 3.3% of net revenue for the three
months ended September 30, 2000 compared to $3.7 million or 2.8% of net revenue
for the three months ended September 30, 1999. As the company's cash collection
efforts have increased in 2000, bad debt write-offs are more readily identified
and charged against earnings.
Operating Income. The company had an operating loss of $0.8 million during
the three months ended September 30, 2000 compared to an operating income of
$0.6 million during the three months ended September 30, 1999. The decrease in
operating income is due primarily to the decrease in gross profit, offset in
part by the net decrease in SG&A expenses.
Interest Expense. Interest expense decreased $1.2 million to $6.9 million in
the three months ended September 30, 2000 from $8.1 million in the three months
ended September 30, 1999. The decrease is primarily due to (i) the forbearance
of interest on the Series A and Series B Notes which resulted in a lower
effective interest rate for book purposes in 2000 and (ii) the reduced
outstanding borrowings on the Senior Credit Facility and the Series A Notes as a
result of the application of the proceeds from the sale of the CPS business on
July 31, 2000. See Notes 2 and 7 to the company's Condensed Consolidated
Financial Statements for further details.
Gains on Sales of Businesses. During the three months ended September 30,
2000, the company recorded gains on sales of businesses of $18.5 million
consisting primarily of the gain on sale of the CPS business and an earnout
payment relating to one of the company's operating subsidiaries. See Note 4 to
the company's Condensed Consolidated Financial Statements for further details.
Reorganization Expenses, Net. During the three months ended September 30,
2000, the company recorded reorganization expenses of $1.8 million consisting of
costs related to the bankruptcy filing and financial reorganization. See Note 2
to the company's Condensed Consolidated Financial Statements for further
details.
Income Tax Expense. See Note 9 to the company's Condensed Consolidated
Financial Statements for discussion of the variance between the statutory income
tax rate and the company's effective income tax rate.
Loss from Discontinued Operations. During December 1999, as a result of the
bankruptcy proceeding involving the Resource Network Subsidiaries, Coram
classified the operating losses of this business for all periods presented to
discontinued operations. The loss for the three months ended September 30, 1999
for the R-Net business was primarily related to the Aetna Master Agreement that
20
<PAGE> 21
was terminated in 1999. The $0.3 million income from Disposal of Discontinued
Operations of the segment for the three months ended September 30, 2000
principally relates to the proceeds from certain insurance recoveries. See Note
5 to the company's Condensed Consolidated Financial Statements for further
details.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999 (IN MILLIONS, EXCEPT PER SHARE DATA):
Discontinued Operations. As discussed in Note 5 to the company's Condensed
Consolidated Financial Statements, the company reclassified prior year results
for the discontinuance of R-Net operations in 1999. Had R-Net's operations been
included in the continuing operations, the following would have been contributed
to Coram's operations (in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net revenue ....................... $ -- $ 70.1
Gross deficit ..................... $ -- $ (9.6)
Operating loss .................... $ -- $ (30.3)
</TABLE>
The following discussion of Coram's financial condition and results of
operations during 2000 and 1999 excludes the discontinued operations for R-Net.
Net Revenue. Net revenue decreased $19.0 million or 4.9% to $367.9 million
in the nine months ended September 30, 2000 from $386.9 million in the nine
months ended September 30, 1999. The decrease is primarily due to (i) a decrease
in infusion net revenue due to the termination of its national Ancillary
Services Agreement with Aetna, (ii) a decrease in net revenue from the CPS
business as a result of the sale of the CPS business on July 31, 2000 and (iii)
corporate initiatives to focus on core therapies.
Gross Profit. Gross profit increased $8.9 million to $95.5 million or a
gross margin of 26.0% in the nine months ended September 30, 2000 from $86.6
million or a gross margin of 22.4% in the nine months ended September 30, 1999.
The gross margin percentage increased primarily from favorable product/therapy
mix, increased high margin CTI business and certain cost reduction programs
implemented in December 1999. The components of gross profit are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Infusion .......................... $ 86,023 $ 77,418
CPS ............................... 8,060 8,551
CTI ............................... 1,412 649
---------- ----------
Total gross profit ................ $ 95,495 $ 86,618
========== ==========
</TABLE>
Selling, General and Administrative ("SG&A") Expenses. SG&A increased $4.5
million or 6.8% to $70.6 million in the nine months ended September 30, 2000
from $66.1 million in the nine months ended September 30, 1999. Expenses
increased primarily due to an increase in the incentive compensation plan for
2000, offset, in part, by certain cost reduction programs implemented in
December 1999 and the divestiture of CPS on July 31, 2000. Additionally, 1999
was favorably impacted by a recovery of a note receivable of approximately $1.8
million and other legal recoveries.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $10.1 million or 2.8% of net revenue in the nine
months ended September 30, 2000 compared to $11.9 million or 3.1% of net revenue
in the nine months ended September 30, 1999. The percentage decrease is due
primarily to the company's increased collection efforts and certain recoveries
of amounts previously deemed to be uncollectible.
Restructuring Costs, Net. During the first quarter of 1999, the company
recorded approximately $1.0 million of charges relating to reorganization of the
company's management structure. See Note 6 to the company's Condensed
Consolidated Financial Statements for further details.
Operating Income. The company had operating income of $7.0 million during
the nine months ended September 30, 2000 compared to a loss of $0.5 million
during the nine months ended September 30, 1999. The increase in operating
income is due primarily to the increase in gross profit and a reduction in
goodwill amortization, offset in part by the net increase in SG&A expenses.
21
<PAGE> 22
Interest Expense. Interest expense decreased $1.9 million to $20.3 million
in the nine months ended September 30, 2000 from $22.2 million in the nine
months ended September 30, 1999. The decrease is primarily due to (i) the
forbearance of interest on the Series A and Series B Notes which resulted in a
lower effective interest rate for book purposes in 2000 and (ii) the reduced
outstanding borrowings on the Senior Credit Facility and the Series A Notes as a
result of the application of the proceeds from the sale of the CPS business on
July 31, 2000. See Notes 2 and 7 to the company's Condensed Consolidated
Financial Statements for further details.
Gains on Sales of Businesses. During the nine months ended September 30,
2000, the company recorded gains on sales of businesses of $18.5 million
consisting primarily of the gain on sale of the CPS business and an earnout
payment relating to one of the company's operating subsidiaries. See Note 4 to
the company's Condensed Consolidated Financial Statements for further details.
Reorganization Expenses, Net. During the nine months ended September 30,
2000, the company recorded reorganization expenses of $1.8 million consisting of
costs related to the bankruptcy filing and financial reorganization. See Note 2
to the company's Condensed Consolidated Financial Statements for further
details.
Income Tax Expense. See Note 9 to the company's Condensed Consolidated
Financial Statements for discussion of the variance between the statutory income
tax rate and the company's effective income tax rate.
Minority Interests in Net Income of Consolidated Joint Ventures. Minority
interests in net income of consolidated joint ventures decreased $0.7 million to
$0.5 million in the nine months ended September 30, 2000 from $1.2 million in
the nine months ended September 30, 1999. The reduction was primarily due to
reduced profitability of joint venture entities, the closure of certain joint
ventures and the start-up losses incurred with the commencement of operations at
new joint ventures.
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 loss for the nine months ended September 30, 1999
for the R-Net business was primarily related to the Aetna Master Agreement that
was terminated in 1999. The $3.2 million Loss from Disposal of Discontinued
Operations of the segment for the nine months ended September 30, 2000 includes
additional reserves for litigation and miscellaneous wind-down costs, net of
certain insurance recoveries. See Note 5 to the company's Condensed Consolidated
Financial Statements for further details.
LIQUIDITY AND CAPITAL RESOURCES
The Debtors filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code on August 8, 2000. As of such date, the Debtors
are operating as debtors-in-possession subject to the jurisdiction of the
Bankruptcy Court. None of the company's other subsidiaries is a debtor in the
proceeding. The filings have caused events of default to occur under the Senior
Credit Facility and the Securities Exchange Agreement under which the Series A
and Series B Notes have been issued. Although the filing of the Chapter 11 cases
constituted defaults under the company's principal debt instruments, Section 362
of the Bankruptcy Code imposes an automatic stay that will generally preclude
the creditors and other interested parties under such arrangements from taking
remedial action in response to any such default without prior Bankruptcy Court
approval.
On September 21, 2000, the company permanently reduced the Senior Credit
Facility commitment to $2.7 million in order to reduce its banking fees but
continue to provide for $2.7 million of irrevocable letters of credit. At
November 14, 2000, the company had no other amounts outstanding under the Senior
Credit Facility and the aforementioned events of default prohibit the company
from making additional borrowings thereunder. The Series A and Series B Notes,
including any related accrued interest thereunder, are subject to the Debtors
joint plan of reorganization. During the pendency of the Chapter 11 Bankruptcy
proceedings, the Debtors are not permitted to pay post-petition interest on
pre-petition indebtedness. See Notes 2 and 7 to the company's Condensed
Consolidated Financial statements for further details. The Debtors entered into
a secured debtor-in-possession financing agreement with Madeleine L.L.C., an
affiliate of Cerberus Partners, L.P., as of August 30, 2000. The agreement
provides that the Debtors could access, as necessary, up to $40 million
depending upon borrowing base availability, for use in connection with the
operation of their businesses and the business of their subsidiaries. On
September 12, 2000, the Bankruptcy Court approved the DIP Agreement. See Note 3
to the company's Condensed Consolidated Financial Statements for further
details. As of November 14, 2000, no amounts were outstanding under the DIP
Financing Agreement; however, pursuant to the terms and conditions of the DIP
agreement, approximately $33.1 million of financing would be available to the
Debtors on such date.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness are
stayed and other contractual obligations may not be enforced against the
Debtors. In addition, the Debtors may reject executory contracts and unexpired
leases. Parties affected by the rejections may file claims with the Bankruptcy
Court in accordance with the provisions of the Bankruptcy Code and applicable
rules. The Debtors filed a joint plan of reorganization with the Bankruptcy
Court on August 8, 2000. Subsequently, the Debtors filed an Amended and Restated
Joint Plan of Reorganization and First Amended Disclosure Statement with respect
to the plan (the "Disclosure Statement"). The Disclosure Statement was approved
by the Bankruptcy Court on October 10, 2000. The Restated Joint Plan described
in the Disclosure Statement addresses the amounts that would be paid to various
classes of creditors. See "Background -- Reorganization."
Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities are subject to the Restated Joint
Plan. The Restated Joint Plan is subject to a vote by the Debtors' impaired
creditors and confirmation by the Bankruptcy Court and, accordingly, is not
presently determinable. Therefore, it is not possible to fully or completely
estimate the fair value of the liabilities subject to compromise at September
30, 2000 due to the Debtors' Chapter 11 cases and the uncertainty surrounding
the ultimate amount and settlement terms for such liabilities.
22
<PAGE> 23
Coram uses cash generated from operations and cash available under its DIP
financing arrangement to fund its working capital requirements and operations.
Coram's working capital deficit as of September 30, 2000 was $211.7 million as
compared with net working capital of $73.0 million at December 31, 1999. Changes
in current assets related to (i) an increase in cash and cash equivalents of
$9.9 million, (ii) a decrease in inventories of $10.3 million, (iii) a decrease
in accounts receivable of $35.0 million and (iv) a decrease in other current
assets of 0.7 million. Total current liabilities increased primarily due to (i)
the reclassification of Series A and Series B Senior Subordinated Notes of
$158.9 million and $92.1 million, respectively, to current liabilities subject
to compromise and (ii) an increase in interest payable of $6.4 million.
As of September 30, 2000, the company did not have any material commitments
for capital expenditures.
Coram and its subsidiary, T2 Medical, Inc. are in a dispute with the
Internal Revenue Service regarding certain tax refunds previously received.
Should it not prevail in the majority of the issues in dispute, Coram would need
to access funds to address the alleged deficiency of approximately $12.7 million
plus interest and penalties as determined. Furthermore, Coram cannot predict the
outcome of the R-Net bankruptcy proceeding, the substantive consolidation motion
filed by the Resource Network Subsidiaries in the Debtors' Chapter 11
proceedings or the challenge to the Restated Joint Plan by certain company
stockholders in the Debtors' Chapter 11 proceedings. An outcome unfavorable to
the company or unknown additional actions could require the company and the
Debtors to access significant additional funds. See Notes 8 and 9 to the
company's Condensed Consolidated Financial Statements.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the bankruptcy filings and circumstances relating
thereto, including the company's leveraged financial structure and cumulative
losses from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. During the pendency of the
Chapter 11 bankruptcy proceedings involving the Debtors, the company may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the consolidated financial statements. Further,
the proposed plan of reorganization filed in the Chapter 11 proceedings could
materially change the amounts reported in the consolidated financial statements,
which do not give effect to any adjustments of the carrying value of assets or
liabilities that might be necessary as a consequence of the proposed plan of
reorganization. The company's ability to continue as a going concern is
dependent upon, among other things, confirmation of the proposed plan of
reorganization, future profitable operations, the ability to comply with the
terms of the company's filed financing agreements, the ability to remain in
compliance with the physician ownership and referral provisions of the Omnibus
Budget Reconciliation Act of 1993 known as "Stark II" and the ability to
generate sufficient cash from operations and/or financing arrangements to meet
obligations.
RISK FACTORS
Confirmation and consummation of the Debtors' Restated Joint Plan would
result in complete elimination of CHC's equity interests.
On the same day as the Chapter 11 cases were filed, the Debtors filed their
joint plan of reorganization (the "Joint Plan") and their joint disclosure
statement with the Bankruptcy Court. The Joint Plan was subsequently amended and
restated (the "Restated Joint Plan") and, on or about October 10, 2000, the
Restated Joint Plan and the First Amended Disclosure Statement with respect to
the Restated Joint Plan was approved for distribution by the Bankruptcy Court.
Among other things, the Restated Joint Plan provides for: (i) a conversion of
all of the CI obligations represented by the company's Series A and Series B
Notes into (a) a four-year, interest only note in the principal amount of $180
million, that would bear interest at the rate of 9% per annum and (b) all of the
equity in the reorganized CI; (ii) the payment in full of all secured, priority
and general unsecured debts of CI; (iii) the payment in full of all secured and
priority claims against CHC; (iv) the impairment of certain general unsecured
debts of CHC, including, among others, CHC's obligations under the Series A and
Series B Notes and (v) the complete elimination of the equity interests of CHC.
Furthermore, pursuant to the Restated Joint Plan, CHC would be dissolved as soon
as practicable after the effective date of the Restated Joint Plan, and the
stock of CHC would no longer be publicly traded. Therefore, if the Debtors'
Restated Joint Plan were approved as filed, the existing stockholders of CHC
would receive no value for their shares and all of the outstanding equity of CI
as the surviving entity would be owned by the holders of the company's Series A
and Series B Notes.
Representatives of the company negotiated the principal aspects of the plan
with representatives of the holders of the company's Series A and Series B Notes
and Senior Credit Facility prior to the filing of such plan. The Restated Joint
Plan must be voted upon by the impaired creditors of the Debtors and approved by
the Bankruptcy Court after certain findings required by the Bankruptcy Code are
made. The Bankruptcy Court may confirm a plan of reorganization notwithstanding
the non-acceptance of the plan by an impaired class of creditors or equity
holders if certain conditions of the Bankruptcy Code are satisfied.
23
<PAGE> 24
On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that are entitled to a distribution under the Restated Joint Plan. The
Debtors did not send ballots to the holders of other types of claims and
interested parties, including equity holders, but the holders of such claims and
interested parties are deemed to reject the plan in any event. Ballots are due
to be returned on November 21, 2000, and a confirmation hearing regarding the
Restated Joint Plan is scheduled to be heard by the Bankruptcy Court on December
1, 2000. The R-Net Subsidiaries have filed a motion for substantive
consolidation in the Debtors' Chapter 11 proceedings that would, if granted,
cause the proceedings involving the Debtors and the proceedings involving the
R-Net Subsidiaries to be combined. This motion is scheduled for hearing before
the Bankruptcy Court in part on November 28, 2000 and in part on December 1,
2000. A committee claiming to own shares of the company's common stock (the
"Equity Committee") has also informed the company of its intent to object to the
Restated Joint Plan and it is also opposing confirmation of the Restated Joint
Plan claiming, in part, that the Restated Joint Plan is premised upon a
valuation of the company that is flawed.
On November 17, 2000, the Debtors reached a preliminary agreement to settle
all claims with the Resource Network Subsidiaries and to have the substantive
consolidation motion withdrawn. Subject to the approval of the Bankruptcy
Courts, in the proceedings involving both the Debtors and the Resource Network
Subsidiaries. There can be no assurance that the agreement between the Debtors
and the Resource Network Subsidiaries will be approved. There can be no
assurance that the Restated Joint Plan will be approved by the requisite holders
of claims, confirmed by the Bankruptcy Court or that it will be consummated. See
Note 8 to the company's Condensed Consolidated Financial Statements.
Coram's reimbursement rates may be adversely impacted by recent regulatory
action.
Approximately thirty state Medicaid programs have adopted regulations or
other policies whereby they will begin applying a new average wholesale price
list to certain drugs furnished to Medicaid beneficiaries for services rendered
on or after May 1, 2000. Other states are expected to adopt similar regulations
or policies. The new average wholesale price lists would drastically reduce the
amounts that the Medicaid programs would reimburse pharmacy providers such as
the company for their services. The drugs and services scheduled for the rate
reduction include many drug therapies commonly received by patients of Coram.
During the nine months ended September 30, 2000, the amount of revenue the
company derived from services rendered to Medicaid beneficiaries was
approximately $24.8 million or 7% of the company's overall net revenue. The
company cannot predict what impact such rate reductions will have on the
company's results of operations or financial condition.
The Medicare program and most private payer organizations with which the
company does business also reimburse the company for its services using a
formula that incorporates the average wholesale price of the drug delivered. If
the Medicare program and/or private payer organizations adopt the Medicaid
average wholesale price lists, the company cannot provide any assurance that its
results of operations and financial condition will not be materially adversely
impacted.
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 2 of the company's Quarterly Report on Securities and Exchange
Commission ("Commission") Form 10-Q for the periods ended March 31, 2000 and
June 30, 2000 and Item 7 of the company's Annual Report on 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 vary
materially as a result of a number of factors, including but not limited to,
changes in interest rates.
As of September 30, 2000, the company had outstanding long-term debt of
$251.4 million of which $158.9 of this outstanding debt was scheduled to mature
in May 2001 and bears interest at 11.5% per annum and $92.1 of the outstanding
debt was scheduled to mature in April 2008 and bears interest at the rate of 8%
per annum. Both of the aforementioned debt obligations are in default due to the
Debtors' bankruptcy proceedings and, in connection therewith, the balances
thereunder are deemed to be current and subject to compromise. The company also
has a Senior Credit Facility which provides for the availability of up to $2.7
million; however, such amount is not generally available to the company for any
purpose other than certain currently outstanding irrevocable letters of credit.
See Note 7 to the company's Condensed Consolidated Financial Statements for
discussion of fees and interest charges related to outstanding and unused letter
of credit obligations under the Senior Credit Facility. Effective August 30,
2000, the Debtors executed a secured debtor-in-possession financing agreement
that bears interest at a rate of prime plus 2.0%; however, through November 14,
2000, no amounts have been borrowed thereunder. 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 expense associated with any
future borrowings by the company. The company does not hedge against interest
rate changes.
24
<PAGE> 25
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 8 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 defaults and certain matters of non-compliance with certain
covenants contained in the company's principal debt agreements are set forth in
Note 7 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
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
(B) Reports on Form 8-K.
On October 11, 2000, Coram Healthcare Corporation filed a report on Form 8-K
announcing the approval by the United States Bankruptcy Court of the
Debtor-in-Possession financing agreement with Madeleine L.L.C.
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
November 20, 2000
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
