1
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JUNE 30, 2001
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
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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 [ ]
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, as of August 17, 2001 was 49,638,452.
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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)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 24,678 $ 27,259
Cash limited as to use ............................................. 342 387
Accounts receivable, net of allowances of
$14,447 and $17,912 ............................................. 85,041 77,387
Inventories ........................................................ 11,972 12,796
Deferred income taxes, net ......................................... 514 428
Prepaid reorganization costs for administrative professionals ...... 206 --
Other current assets ............................................... 6,937 4,759
------------ ------------
Total current assets ....................................... 129,690 123,016
Property and equipment, net .......................................... 15,147 15,292
Deferred income taxes, net ........................................... 2,119 1,697
Other deferred costs and intangible assets, net of
accumulated amortization of $18,188 and $16,963 ................... 7,223 8,448
Goodwill, net of accumulated amortization of
$92,619 and $87,770 ................................................ 189,007 193,855
Other assets ......................................................... 5,834 3,068
------------ ------------
Total assets ............................................... $ 349,020 $ 345,376
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable ................................................... $ 23,691 $ 21,450
Accrued compensation and related liabilities ....................... 19,545 17,098
Current maturities of long-term debt ............................... 29 179
Insurance note payable ............................................. 1,651 --
Income taxes payable ............................................... 546 773
Deferred income taxes .............................................. 1,458 52
Accrued merger and restructuring costs ............................. 1,172 2,301
Accrued reorganization costs for administrative professionals ...... 5,425 4,831
Other accrued liabilities, including interest payable .............. 7,520 6,849
------------ ------------
Total current liabilities not subject to compromise ................ 61,037 53,533
Total current liabilities subject to compromise (See Note 2)........ 166,603 166,627
------------ ------------
Total current liabilities ............................................ 227,640 220,160
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities ............................ 19 24
Minority interests in consolidated joint ventures and
preferred stock issued by a subsidiary .......................... 6,004 5,978
Other liabilities .................................................. 15,049 13,630
Deferred income taxes .............................................. 1,175 2,073
Net liabilities of discontinued operations ........................... 26,506 26,533
------------ ------------
Total liabilities .......................................... 276,393 268,398
Commitments and contingencies ........................................ -- --
Stockholders' equity:
Preferred stock, par value $.001, authorized
10,000 shares, none issued ...................................... -- --
Common stock, par value $.001, 150,000 shares
authorized, 49,638 shares issued and outstanding ................ 50 50
Additional paid-in capital ......................................... 427,360 427,357
Accumulated deficit ................................................ (354,783) (350,429)
------------ ------------
Total stockholders' equity ................................. 72,627 76,978
------------ ------------
Total liabilities and stockholders' equity ................. $ 349,020 $ 345,376
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
2
3
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net revenue ............................................................... $ 98,938 $ 130,224 $ 193,684 $ 265,020
Cost of service ........................................................... 69,160 96,069 138,658 196,724
--------- --------- --------- ---------
Gross profit .............................................................. 29,778 34,155 55,026 68,296
Operating expenses:
Selling, general and administrative expenses ............................ 21,063 25,053 41,739 48,509
Provision for estimated uncollectible accounts .......................... 3,024 3,548 5,928 6,791
Amortization of goodwill ................................................ 2,425 2,530 4,849 5,108
Restructuring cost recovery ............................................. (21) -- (583) --
--------- --------- --------- ---------
Total operating expenses ........................................ 26,491 31,131 51,933 60,408
--------- --------- --------- ---------
Operating income from continuing operations ............................... 3,287 3,024 3,093 7,888
Other income (expense):
Interest income ......................................................... 499 136 957 295
Interest expense (excluding post-petition contractual interest of
$3.4 million and $6.9 million for the three and six months ended
June 30, 2001, respectively) ....................................... (1,627) (6,771) (2,212) (13,447)
--------- --------- --------- ---------
Equity in net income of unconsolidated joint ventures ................... 294 130 468 389
Other income, net ....................................................... 37 48 38 34
--------- --------- --------- ---------
Income (loss) from continuing operations before reorganization
expenses, income taxes and minority interests ........................... 2,490 (3,433) 2,344 (4,841)
Reorganization expenses, net .............................................. (3,444) -- (6,264) --
--------- --------- --------- ---------
Loss from continuing operations before income taxes and minority
interests ............................................................... (954) (3,433) (3,920) (4,841)
Income tax expense ........................................................ 50 75 100 175
Minority interests in net income of consolidated joint ventures ........... 135 356 334 337
--------- --------- --------- ---------
Loss from continuing operations ........................................... (1,139) (3,864) (4,354) (5,353)
Loss from disposal of discontinued operations ............................. -- (98) -- (3,481)
--------- --------- --------- ---------
Net loss .................................................................. $ (1,139) $ (3,962) $ (4,354) $ (8,834)
========= ========= ========= =========
Loss Per Share
Basic and Diluted:
Loss from continuing operations ....................................... $ (0.02) $ (0.08) $ (0.09) $ (0.11)
Loss from discontinued operations ..................................... -- -- -- (0.07)
--------- --------- --------- ---------
Net loss per common share ............................................. $ (0.02) $ (0.08) $ (0.09) $ (0.18)
========= ========= ========= =========
Weighted average common shares used in computation of
basic and diluted loss per share ........................................ 49,638 49,638 49,638 49,638
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated
financial statements.
3
4
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2001 2000
------------ ------------
Net cash provided by continuing operations before
reorganization expenses ............................ $ 8,857 $ 21,978
Net cash used by reorganization expenses .............. (5,708) --
------------ ------------
Net cash provided by continuing operations (net
of reorganization expenses) ........................ 3,149 21,978
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ................ (2,664) (2,194)
Proceeds from dispositions of property and
equipment ....................................... 65 57
------------ ------------
Net cash used in investing activities ................. (2,599) (2,137)
------------ ------------
Cash flows from financing activities:
Borrowings on line of credit ....................... -- 1,500
Repayments of debt obligations ..................... (155) (17,311)
Repayments of insurance note payable ............... (546) --
Deposits to collateralize letters of credit ........ (2,095) --
Cash distributions paid to minority interests ...... (308) (491)
------------ ------------
Net cash used in financing activities ................. (3,104) (16,302)
------------ ------------
Net increase (decrease) in cash from continuing
operations ......................................... $ (2,554) $ 3,539
============ ============
Net cash used in discontinued operations .............. $ (27) $ (3,350)
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
4
5
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2001
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Business Activity. As of June 30, 2001, 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,
including non-intravenous home health products such as durable medical equipment
and respiratory services. Other services offered by Coram include centralized
management, administration and clinical support for clinical research trials.
Coram delivers its alternate site infusion therapy services through 76 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. Since that date, the Debtors have been
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 business operated by its subsidiary, CTI Network, Inc. Accordingly,
Coram's primary business strategy is to focus its efforts on the delivery of its
core infusion therapies, including nutrition, anti-infective therapies and
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 5 for further details.
Most of the company's 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 for chronically ill patients through
its Coram Prescription Services ("CPS") business 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.
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 healthcare 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 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.
5
6
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
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, results of operations and cash flows 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 June 30, 2001 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, 2000.
The accompanying condensed 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 Debtors' 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 are subject to significant uncertainty. During the
pendency of the Debtors' Chapter 11 bankruptcy proceedings, the company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the Condensed Consolidated Financial Statements.
Further, a confirmed plan of reorganization in the Chapter 11 bankruptcy
proceedings could materially change the amounts reported in the Condensed
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 a confirmed plan of reorganization (see Note 2 for further
details). The company's ability to continue as a going concern is dependent
upon, among other things, confirmation of a plan of reorganization, future
profitable operations, the ability to comply with the terms of the company's
financing agreements, the ability to remain in compliance with the physician
ownership and referral provisions of the Omnibus Budget Reconciliation Act of
1993 (commonly known as "Stark II") and the ability to generate sufficient cash
from operations and/or financing arrangements to meet obligations.
Reclassifications. Certain amounts in the 2000 condensed consolidated
financial statements have been reclassified to conform to the 2001 presentation.
Provision for Estimated Uncollectible Accounts. Management regularly reviews
the collectibility of accounts receivable utilizing system-generated reports
which track collection and write-off activity. Estimated write-off percentages
are then applied to each aging category by payer classification to determine the
allowance for estimated uncollectible accounts. Additionally, the company
establishes appropriate additional reserves for accounts that are deemed
uncollectible due to occurrences such as bankruptcy filings by the payer. The
allowance for estimated uncollectible accounts is adjusted as needed to reflect
current collection, write-off and other trends, including changes in assessment
of realizable value. While management believes the resulting net carrying
amounts for accounts receivable are fairly stated at each quarter-end and that
the company has made adequate provision for uncollectible accounts based on all
information available, no assurances can be given as to the level of future
provisions for uncollectible accounts, or how they will compare to the levels
experienced in the past. The company's ability to successfully collect its
accounts receivable depends, in part, on its ability to adequately supervise and
train personnel in billing and collections, and minimize losses related to
branch consolidations and system changes.
Earnings per Share. For each of the periods presented in the accompanying
Condensed Consolidated Statements of Operations, the company experienced losses
from continuing operations and, in accordance with the provisions of Financial
Accounting Standards Board ("FASB") Statement No. 128, Earnings Per Share, the
denominator utilized to calculate earnings (loss) per share does not increase
when losses from continuing operations are in evidence because to do so would be
anti-dilutive.
Derivatives and Hedging Activities. In June 1998, the FASB issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"), which requires the recognition of all
derivative instruments as assets or liabilities, measured at fair value.
Statement 133 was effective for fiscal years beginning after June 15, 2000.
Accordingly, Coram adopted the new accounting pronouncement effective January 1,
2001; however, it had no effect on the company's financial position or operating
results.
6
7
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Business Combinations. In July 2001, the FASB issued Statement of Financial
Accounting Standards No. 141, Business Combinations ("Statement 141"), which
requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain. Statement 141 is effective for the company's financial statements for the
year ending December 31, 2002. The adoption of this accounting pronouncement is
not currently anticipated to have a material impact on the company's financial
position or results of operations.
Goodwill and Other Intangible Assets. In July 2001, the FASB issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("Statement 142"), which primarily addresses the accounting
for goodwill and intangible assets subsequent to their acquisition. Statement
142 requires that goodwill and indefinite long-lived intangible assets no longer
be amortized to earnings, but instead be reviewed periodically for impairment.
Statement 142 is effective for the company's financial statements for the year
ending December 31, 2002. Management is currently evaluating the impact that the
adoption of this accounting pronouncement will have on the company's financial
position and results of operations.
2. REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE
On August 8, 2000, CHC and CI filed voluntary petitions under Chapter 11 of
the Bankruptcy Code. Following the filing of the voluntary Chapter 11 petitions,
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 their 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 (see discussion of Stark II in Note 9) and the scheduled May
27, 2001 maturity of the Series A Senior Subordinated Unsecured Notes.
Accordingly, the Debtors sought advice and counsel from a variety of sources
and, in connection therewith, 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 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 financing arrangement (see Note
6 for details of the executed agreement); and (iv) use of all company bank
accounts for normal business operations. In September 2000, the Bankruptcy Court
approved the Debtors' motion to reject four unexpired, non-residential real
property leases and any associated subleases. The rejected leases include
underutilized locations in: (i) Allentown, Pennsylvania; (ii) Denver, Colorado;
(iii) Philadelphia, Pennsylvania; and (iv) Whippany, New Jersey. The successful
rejection of the Whippany, New Jersey lease caused the company to reverse
certain reserves that had previously been established related to closure of its
discontinued operations. Additionally, on May 24, 2001 the Bankruptcy Court
approved the Debtors' motion for an extension of the period of time in which the
Debtors can reject unexpired leases of non-residential real property up to and
including September 3, 2001. Certain other motions filed by the Debtors have
been granted and others are presently pending.
In September 2000 and October 2000, the Bankruptcy Court approved payments
of up to approximately $2.6 million for retention bonuses to certain key
employees. The bonuses were scheduled to be paid in two equal installments on
(i) the later of the date of emergence from bankruptcy or December 31, 2000 and
(ii) December 31, 2001. Due to events that have delayed the emergence from
bankruptcy, the Bankruptcy Court approved early payment of the first installment
to most individuals within the retention program and such payments, aggregating
approximately $0.7 million, were made on March 15, 2001. The remaining portion
of the first installments of approximately $0.5 million, which relates to the
company's Chief Executive Officer and Executive Vice President, is scheduled for
payment upon approval of a plan of reorganization by the Bankruptcy Court, and
the second installment remains scheduled to be paid on December 31, 2001. The
company is accruing monthly amounts as earned pursuant to the provisions of the
retention plan.
7
8
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
On or about May 9, 2001, the Bankruptcy Court approved the Debtors' motion
requesting authorization to enter into an insurance premium financing agreement
with AICCO, Inc. (the "Financing Agreement") to finance the payment of premiums
under certain of the Debtor's insurance policies. Under the terms of the
Financing Agreement, the Debtors made a down payment of approximately $1.1
million. The amount financed is approximately $2.1 million and is secured by the
unearned premiums and loss payments under the insurance policies covered by the
Financing Agreement. The amount financed is being paid in eight monthly
installments of approximately $0.3 million each, including interest at a per
annum rate of 7.85%. In addition, AICCO, Inc. has the right to terminate the
insurance policies and collect the unearned premiums (as administrative
expenses) if the Debtors do not make the monthly payments called for by the
Financing Agreement.
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 September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtors' 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 engaged in discovery related
to this substantive consolidation motion and, in connection therewith, the
parties reached a settlement agreement in November 2000, which was approved by
an order of the Bankruptcy Court. See Note 9 for further details.
On the same day that 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 were authorized for distribution by the Bankruptcy
Court. Among other things, the Restated Joint Plan provided for: (i) a
conversion of all of the CI obligations represented by the company's Series A
Senior Subordinated Unsecured Notes (the "Series A Notes") and the Series B
Senior Subordinated Unsecured Convertible Notes (the "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 Notes and the
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, under the Debtors'
Restated Joint Plan, as filed, the existing stockholders of CHC would have
received 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
Notes 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 Notes and Series B Notes and Senior Credit Facility prior to
the filing of such Joint Plan.
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 were 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, as the holders of such claims and
interested parties were deemed to reject the Restated Joint Plan. The tabulated
vote of the unsecured creditors was in favor of the company's Restated Joint
Plan. However, culminating at a confirmation hearing on December 21, 2000, the
Restated Joint Plan was not approved by the Bankruptcy Court. On April 25, 2001
and July 11, 2001, the Bankruptcy Court extended the period during which the
Debtors have the exclusive right to file a plan or plans before the Bankruptcy
Court to July 11, 2001 and August 1, 2001, respectively. Additionally, on August
2, 2001, the Bankruptcy Court extended the Debtors' exclusivity period to
solicit acceptances of any filed plan or plans to November 9, 2001.
In order for the company to remain compliant with the requirements of Stark
II, on December 29, 2000, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $97.7 million of the Series A Notes and approximately
$11.6 million of accrued but unpaid interest on the Series A Notes and the
Series B Notes for 905 shares of CI Series A Cumulative Preferred Stock (see
Notes 6 and 8 for further details). This transaction generated an extraordinary
gain on troubled debt restructuring of approximately $107.8 million, net of tax,
which was recorded in the fourth quarter of the year ended December 31, 2000. At
December 31, 2000, the company's stockholders' equity exceeded the minimum Stark
II requirement necessary to comply with the public company exemption. See Note 9
for further discussion regarding Stark II.
8
9
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
On or about February 6, 2001, the Official Committee of the Equity Security
Holders (the "Equity Committee") filed a motion with the Bankruptcy Court
seeking permission to bring a derivative lawsuit directly against the company's
Chief Executive Officer, a former member of the Board of Directors and Cerberus
Partners, L.P. (a party to the company's debtor-in-possession financing
agreement, Senior Credit Facility and Securities Exchange Agreement). On
February 26, 2001, the Bankruptcy Court ruled that the Equity Committee's motion
would not be productive at that time and, accordingly, the motion was denied
without prejudice. On the same day, the Bankruptcy Court approved the Debtors'
motion and appointed Goldin Associates, L.L.C. ("Goldin") as independent
restructuring advisors to the Independent Committee of the Board of Directors
(the "Independent Committee"). Among other things, the scope of Goldin's
services include (i) reporting its findings to the Independent Committee,
including its assessment of the appropriateness of the Restated Joint Plan, and
advising the Independent Committee respecting an appropriate course of action
calculated to bring the Debtors' bankruptcy proceedings to a fair and
satisfactory conclusion, (ii) preparing a written report as may be required by
the Independent Committee and/or the Bankruptcy Court and (iii) appearing before
the Bankruptcy Court to provide testimony, as needed. Goldin was also appointed
as a mediator among the Debtors, the Equity Committee and other parties in
interest.
Based upon Goldin's findings and recommendations, on July 31, 2001 the
Debtors filed with the Bankruptcy Court a Second Joint Disclosure Statement (the
"Second Disclosure Statement") with respect to their Second Joint Plan of
Reorganization (the "Second Joint Plan"). The Second Joint Plan, which was also
filed on July 31, 2001, provides for terms of reorganization similar to those
described in the Restated Joint Plan; however, utilizing Goldin's
recommendations, the following substantive modifications are included in the
Second Joint Plan:
o the payment of up to $3.0 million to the holders of allowed general
unsecured claims of CHC;
o the payment of up to $10.0 million to the holders of CHC equity
interests;
o cancellation of the issued and outstanding CI Series A Cumulative
Preferred Stock; and
o a $7.5 million reduction in certain performance bonuses payable to
Daniel D. Crowley, the company's Chief Executive Officer.
Under certain circumstances, as more fully discussed in the Second
Disclosure Statement, the general unsecured claim holders may be entitled to
receive a portion of the $10.0 million cash consideration allocated to the
holders of CHC equity interests.
In order to become effective, the Second Joint Plan is subject to a vote by
certain impaired creditors and equity holders and final approval of the
Bankruptcy Court. On September 6, 2001, a hearing before the Bankruptcy Court is
scheduled to consider the adequacy of the Second Disclosure Statement and
whether it may be disseminated to holders of certain claims and interests who
are entitled to vote on the Second Joint Plan. Although the Equity Committee's
motion to terminate the Debtors' exclusivity periods and file its own plan of
reorganization was denied by the Bankruptcy Court on August 1, 2001, management
of the company cannot predict what impact the Equity Committee or any other
interested party will have on the Second Joint Plan at the disclosure statement
hearing. The Bankruptcy Court may ultimately 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;
however, no assurances can be given regarding the confirmation of the Second
Joint Plan.
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 Condensed
Consolidated Balance Sheets as liabilities subject to compromise. Additional
Chapter 11 bankruptcy 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 also are stayed, although the holders of such claims have the
right to petition the Bankruptcy Court for relief from the automatic stay and
foreclose on the property securing their claims. Additionally, certain claimants
have sought relief from the Bankruptcy Court to remove the automatic stay and
continue pursuit of their claims against the Debtors or the Debtors' insurance
carriers.
9
10
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
The principal categories and balances of Chapter 11 bankruptcy claims
accrued in the Condensed Consolidated Balance Sheets and included in liabilities
subject to compromise are summarized as follows (in thousands) (December 31,
2000 liabilities subject to compromise have been adjusted from amounts
previously reported to reflect the proposed $7.5 million reduction in
performance bonuses payable to the company's Chief Executive Officer):
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
Series A and Series B Notes in default and other long-term debt obligations .......... $ 153,422 $ 153,422
Management incentive compensation liability .......................................... 7,500 7,500
Liabilities of discontinued operations subject to compromise ......................... 2,936 2,936
Earn-out obligation .................................................................. 1,268 1,268
Accrued merger and restructuring costs (primarily severance liabilities).............. 468 468
Accounts payable ..................................................................... 106 111
Legal and professional liabilities ................................................... 98 113
Other ................................................................................ 805 809
------------ ------------
Total liabilities subject to compromise ............................................ $ 166,603 $ 166,627
============ ============
In addition to the amounts disclosed in the table above, the holders of
Coram, Inc.'s Series A Cumulative Preferred Stock continue to maintain a claim
position within the Debtors' bankruptcy proceedings in the aggregate amount of
their cumulative liquidation preference. Notwithstanding the debt to equity
exchange, the aforementioned holders' priority in the Debtors' bankruptcy
proceedings will be no less than it was immediately prior to said exchange.
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 will be subject to the Second Joint
Plan, which will be subject to a vote by certain of the Debtors' impaired
creditors and equity holders 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 June 30, 2001 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, expenses related to key employee
retention plans, United States Trustee fees and other expenditures incurred
relating to the Chapter 11 proceedings, offset by interest earned on cash
accumulated related to the Debtors not paying their pre-petition liabilities and
other expenditures incurred relating to the Chapter 11 proceedings. The
principal components of reorganization expenses for the three and six months
ended June 30, 2001 are as follows (in thousands):
THREE MONTHS SIX MONTHS
------------ ------------
Legal, accounting and consulting fees ........................... $ 3,089 5,246
Key employee retention plan expenses ............................ 368 1,085
United States Trustee fees ...................................... 9 19
Interest income ................................................. (22) (86)
------------ ------------
Total reorganization expenses, net .............................. $ 3,444 $ 6,264
============ ============
3. DISCONTINUED OPERATIONS
In November 1999, following the filing of voluntary bankruptcy petitions for
the Resource Network Subsidiaries and the plan to liquidate the R-Net division,
Coram disclosed as Net Liabilities of Discontinued Operations in the Condensed
Consolidated Financial Statements the excess of R-Net's liabilities over its
assets. Coram also separately reflected R-Net's operating results in the
Condensed Consolidated Statements of Operations as Discontinued Operations.
10
11
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
For the three and six months ended June 30, 2001, no Losses from Operations
of Discontinued Operations of R-Net were reflected in the company's Condensed
Consolidated Statements of Operations. The $3.5 million Loss from Disposal of
Discontinued Operations for the six months ended June 30, 2000 includes
additional reserves for litigation and other wind-down costs resulting from
R-Net's Chapter 11 bankruptcy proceedings. The components of the net liabilities
of discontinued operations included in the Condensed Consolidated Balance Sheets
are summarized as follows (in thousands):
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
Cash ........................................................ $ 1,487 $ 1,162
Intercompany receivable (payable) ........................... -- 500
Accounts payable ............................................ (29,524) (28,619)
Accrued expenses ............................................ (1,405) (1,512)
Other long-term liabilities ................................. -- (1,000)
------------ ------------
(29,442) (29,469)
Net liabilities subject to compromise under Debtors' Chapter
11 case ................................................... 2,936 2,936
------------ ------------
Net liabilities of Discontinued Operations .................. $ (26,506) $ (26,533)
============ ============
As of June 30, 2001, approximately $27.5 million of the liabilities related
to the discontinued operations was subject to compromise under the R-Net Chapter
11 bankruptcy proceedings.
All of the R-Net locations have been closed in connection with the pending
liquidation of R-Net. Additionally, Coram employees who were members of the
Resource Network Subsidiaries' Board of Directors resigned during the year ended
December 31, 2000 and currently only the Chief Restructuring Officer appointed
by the Bankruptcy Court remains on the Board of Directors to manage and operate
the liquidation of the R-Net business.
4. RELATED PARTY TRANSACTIONS
The company's current Chairman, Chief Executive Officer and President,
Daniel D. Crowley, owns a consulting company (Dynamic Healthcare Solutions, LLC
("DHS")) from which the company purchased services. Effective with the Debtors'
Chapter 11 filings in the Bankruptcy Court, DHS employees who were serving as
consultants to Coram terminated their employment with DHS and became fulltime
Coram employees. Subsequent to December 31, 2000 and through August 17, 2001,
approximately $0.2 million was paid to Mr. Crowley's company for overhead costs
of the consulting company's Sacramento, California location that are directly
attributable to the duties that Mr. Crowley performed on behalf of Coram in
2001. For the three and six months ended June 30, 2000, the company paid
approximately $0.1 million and $0.2 million, respectively, to Mr. Crowley's
consulting company for consulting services and reimbursable expenses.
Effective August 2, 2000, the company's Board of Directors approved a
contingent bonus to Mr. Crowley. Under the agreement, subject to certain
material terms and conditions, Mr. Crowley is to be paid $1.8 million following
the successful refinancing of the company's debt. In connection therewith and
the debt to preferred stock exchange discussed in Notes 2 and 6, the company
recorded a $1.8 million reorganization expense for the success bonus in 2000.
Such success bonus will not be payable until such time as the Debtors' or
another interested party's plan of reorganization is fully approved by the
Bankruptcy Court.
As more fully discussed in Note 2, Mr. Crowley's incentive compensation may
be reduced by $7.5 million in connection with the Debtors' Second Joint Plan.
Such amount is recorded as current liabilities subject to compromise in the
accompanying Condensed Consolidated Balance Sheets.
Effective August 1, 1999, Mr. Crowley and Cerberus Capital Management, L.P.
(an affiliate of Cerberus Partners, L.P. ("Cerberus"), a party to the company's
debtor-in-possession financing agreement, Senior Credit Facility and Securities
Exchange Agreement), executed an employment agreement whereby Mr. Crowley is
paid by Cerberus approximately $1 million per annum plus the potential of
performance related bonus opportunities, equity options and fringe benefits. The
services rendered by Mr. Crowley to Cerberus include, but are not limited to,
providing business and strategic healthcare investment advice to executive
management at Cerberus and its affiliates. Moreover, Mr. Crowley is the Chairman
of the Board of Directors of Winterland Productions, Inc. ("Winterland"), a
privately held affinity merchandise company in which an interest is owned by an
affiliate of Cerberus. On January 2, 2001, Winterland voluntarily filed for
protection under Chapter 11 of the United States Bankruptcy Code in the Northern
District of California.
11
12
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
5. 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 June
30, 2001, the company may be required to pay approximately $1.3 million under
such contingent obligations. However, payment of such amounts has been stayed by
the Debtors' bankruptcy proceedings. Subject to certain elections by the company
or the sellers, $0.6 million of these contingent obligations may be paid in
cash. In the period these payments become probable, they are recorded as
additional goodwill. No payments were made during the six months ended June 30,
2001 but approximately $0.1 million was paid during the six months ended June
30, 2000. See Note 9 for further details concerning contingencies relative to
earn-out payments.
Merger and Restructuring. As a result of the formation of Coram and the May
1995 acquisition of substantially all of the assets of the alternate site
infusion business of Caremark, Inc., a subsidiary of Caremark International,
Inc., the company initiated a restructuring plan (the "Caremark Business
Consolidation Plan") and charged approximately $25.8 million to operations as a
restructuring cost.
During December 1999 the company initiated an organizational restructure and
strategic repositioning plan (the "Coram Restructure Plan") and charged
approximately $4.8 million to operations as a restructuring cost. The Coram
Restructure Plan resulted in the closing of additional facilities and reduction
of personnel. In connection therewith, the company reserved for (i) personnel
reduction costs relating to severance payments, fringe benefits and taxes for
employees that have been or may be terminated and (ii) facility closing costs
that consist of rent, common area maintenance and utility costs for fulfilling
lease commitments of approximately fifteen branch and corporate facilities that
have been or may be closed or downsized. Reserves for facility closing costs are
offset by amounts arising from sublease arrangements, but not until such
arrangements are in the form of signed and executed contracts. As part of the
Coram Restructure Plan, the company informed certain reimbursement sites of
their estimated closure dates. Such operations have been closed during the first
half of 2001, and in connection therewith, approximately 80 related employees
were terminated.
Under the Caremark Business Consolidation Plan and the Coram Restructure
Plan, the total charges through June 30, 2001, the estimate of total future cash
expenditures and the estimated total charges are as follows (in thousands):
CHARGES THROUGH JUNE 30, 2001 BALANCES AT JUNE 30, 2001
---------------------------------------- -------------------------
ESTIMATED
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES
------------ ----------- ----------- ------------ -----------
Caremark Business Consolidation Plan:
Personnel reduction costs .............................. $ 11,300 $ -- $ 11,300 $ -- $ 11,300
Facility reduction costs ............................... 10,168 3,900 14,068 625 14,693
----------- ----------- ----------- ----------- -----------
Subtotal ............................................ 21,468 3,900 25,368 625 25,993
Coram Restructure Plan:
Personnel reduction costs .............................. 2,181 -- 2,181 284 2,465
Facility reduction costs ............................... 899 -- 899 731 1,630
----------- ----------- ----------- ----------- -----------
Subtotal ............................................ 3,080 -- 3,080 1,015 4,095
----------- ----------- ----------- ----------- -----------
Totals ................................................... $ 24,548 $ 3,900 $ 28,448 1,640 $ 30,088
=========== =========== =========== ===========
Restructuring costs subject to compromise ...... (468)
-----------
Accrued Merger and Restructuring Costs Per
the Condensed Consolidated Balance Sheets ... $ 1,172
===========
12
13
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
During the six months ended June 30, 2001, significant items impacting the
restructuring reserves that were not subject to compromise are summarized as
follows (in thousands):
Balance at December 31, 2000 ......................................... $ 2,301
Activity during the six months ended June 30, 2001:
Payments under the plans
(546)
Reversals principally due to changes in estimates
attributable to leased facilities (lease assumption by a
third party) and severance obligations ......................... (583)
------------
Balance at June 30, 2001 ............................................. $ 1,172
============
The company estimates that the future cash expenditures related to the
restructuring plans stated above will be made in the following periods: 68%
through June 30, 2002, 16% through June 30, 2003, 9% through June 30, 2004 and
7% thereafter.
6. DEBT OBLIGATIONS
Debt obligations are as follows (in thousands):
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
Debtor-In-Possession Financing Agreement ....................................... $ -- $ --
Senior Credit Facility ......................................................... -- --
Series A Senior Subordinated Unsecured Notes in default ........................ 61,208 61,208
Series B Senior Subordinated Unsecured Convertible Notes in default ............ 92,084 92,084
Other obligations, including capital leases, at interest rates ranging from
7.5% to 13.1% .................................................................. 178 333
------------ ------------
153,470 153,625
Less: Debt obligations subject to compromise .................................. (153,422) (153,422)
Less: Current scheduled maturities ............................................ (29) (179)
------------ ------------
$ 19 $ 24
============ ============
As a result of the Debtors' Chapter 11 Bankruptcy Court filings,
substantially all short and long-term debt obligations at the August 8, 2000
filing date have been classified as liabilities subject to compromise in the
accompanying Condensed Consolidated Balance Sheets in accordance with SOP 90-7.
Under the United States Bankruptcy Code, actions against the Debtors to collect
pre-petition indebtedness are subject to an automatic stay. As of August 8,
2000, the company's principal credit and debt agreements included (i) a
Securities Exchange Agreement (the "Securities Exchange Agreement"), dated May
6, 1998, with Cerberus Partners, L.P., Goldman Sachs Credit Partners, L.P. and
Foothill Capital Corporation (collectively 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") and (ii)
a Senior Credit Facility with Foothill Income Trust L.P., Cerberus Partners,
L.P. and Goldman Sachs Credit Partners, L.P. (collectively the "Lenders") and
Foothill Capital Corporation as agent thereunder. Subsequent to the petition
date, the Debtors entered into a secured debtor-in-possession financing
agreement with an affiliate of Cerberus Partners, L.P. Pursuant to the terms and
conditions of the aforementioned credit and debt agreements, the company is
precluded from paying cash dividends or making other capital distributions.
Moreover, the Debtors' voluntary Chapter 11 filings caused events of default to
occur under the Securities Exchange Agreement and the Senior Credit Facility,
thereby terminating the Debtors' ability to make additional borrowings under the
Senior Credit Facility through its expiration on February 6, 2001.
The recognition of interest expense pursuant to SOP 90-7 is appropriate
during the Chapter 11 proceedings if it is probable that such interest will be
an allowed priority, secured or unsecured claim. The Debtors' Second Joint Plan
(see Note 2), if approved, will effectively eliminate all post-petition interest
on pre-petition borrowings. Accordingly, no interest expense is being recorded
on pre-petition unsecured indebtedness. The ultimate confirmed plan put forth by
the Debtors or any other party in interest may have a similar effect on
post-petition interest; however, appropriate approvals in accordance with the
Bankruptcy Code will be required.
13
14
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Debtor-In-Possession ("DIP") Financing Agreement. In connection with the
Chapter 11 Bankruptcy Court filings, effective August 30, 2000, the Debtors
entered into a secured debtor-in-possession financing agreement with Madeleine
L.L.C. ("Madeleine"), an affiliate of Cerberus Partners, L.P. Prior to entering
into the DIP financing agreement, management and the Board of Directors
solicited advice from the company's financial advisors. Such advisors indicated
that the terms and conditions of the DIP financing agreement were generally
favorable when compared to a company with Coram's financial history. The
agreement contemplates that the Debtors 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
the Debtors' plan of reorganization or August 31, 2001. Management is currently
in discussions with Madeleine for an extension to the DIP financing agreement;
however, no assurances can be given that Madeleine will consent to such an
extension on terms and conditions that are acceptable to the Debtors or that the
Bankruptcy Court will approve an extension. The DIP financing agreement provides
for maximum borrowings generally equal to the product of: (i) 65% of Net
Eligible Accounts Receivable, 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 effective interest rate was 8.75% on June 30, 2001. The DIP financing
agreement is secured by the capital stock of the Debtor'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 Debtors paid a fee of 1% or $0.4 million and are liable for commitment fees
on the unused facility at a rate of 0.5% per annum, payable monthly in arrears.
The terms of the DIP financing agreement contain customary representations,
warranties and covenants, including certain financial covenants related to
earnings before interest expense, income taxes, reorganization expenses,
restructuring costs, depreciation and amortization ("EBITDA"), lease obligations
and capital expenditures. A breach of such representations, warranties and
covenants could result in restrictions on the Debtors' ability to obtain
advances under the DIP financing agreement and possibly the exercise of remedies
by Madeleine.
Management believes that at June 30, 2001, the company was in compliance
with all the covenants of the DIP financing agreement; however, there can be no
assurances as to future compliance therewith and whether waivers, if necessary,
would be granted.
Through August 17, 2001, no borrowings had been made under the DIP financing
agreement. At July 31, 2001, the borrowing base was approximately $36.8 million
pursuant to the limitations of the DIP financing agreement.
Senior Credit Facility. On August 20, 1998, the company entered into the
Senior Credit Facility, which provided for the availability of up to $60.0
million for acquisitions, working capital, letters of credit and other corporate
purposes. The terms of the agreement also provided for the issuance of letters
of credit of up to $25.0 million provided that available credit would not fall
below zero. On September 21, 2000 and January 29, 2001, the company permanently
reduced the commitment to $2.7 million and $2.1 million, respectively, in order
to reduce the fees related to commitments on which the company was not able to
borrow against. Effective February 6, 2001, the Lenders and the company
terminated the Senior Credit Facility. In connection with the termination of the
Senior Credit Facility and pursuant to orders of the Bankruptcy Court, the
company established new letters of credit through Wells Fargo Bank Minnesota, NA
("Wells Fargo") and such new letters of credit are fully secured by interest
bearing cash deposits of the company held by Wells Fargo.
The Senior Credit Facility provided for interest on outstanding indebtedness
at the rate of prime plus 1.5%, payable in arrears. Additionally, the terms of
the agreement provided for a fee of 1.0% per annum on the outstanding letter of
credit obligations, also payable in arrears. The Senior Credit Facility further
provided 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. The Senior Credit Facility was 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. The Senior Credit
Facility contained other customary covenants and events of default.
14
15
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Among other fees, the company incurred approximately $0.8 million upon
consummation of the Senior Credit Facility and was thereafter liable for
commitment fees on the unused facility at 0.375% per annum, due quarterly in
arrears. Additionally, the terms of the agreement 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 anti-dilution adjustments (the "1998
Warrants"). The estimated fair value of the 1998 Warrants was determined on the
date of issuance and capitalized as deferred debt issuance costs. Such costs
were amortized ratably to interest expense over the life of the Senior Credit
Facility; however, contemporaneous with the permanent reduction of the borrowing
capacity on September 21, 2000, the company charged to interest expense
approximately $1.1 million of remaining deferred debt issuance costs related to
the Senior Credit Facility. The 1998 Warrants expired on February 6, 2001 when
the Senior Credit Facility was terminated.
Securities Exchange Agreement. On May 6, 1998, the company entered into the
Securities Exchange Agreement with the Holders of its subordinated rollover note
(the "Rollover Note"). While the Rollover Note was outstanding, the Holders had
the right to receive warrants to purchase up to 20% of the outstanding common
stock of the company (the "Rollover Note Warrants") on a fully diluted basis.
Effective April 13, 1998, the Securities Exchange Agreement provided for the
cancellation of the Rollover Note, including deferred interest and fees, and the
Rollover Note Warrants in an exchange for the payment of $4.3 million in cash
and the issuance by the company to the Holders of (i) $150.0 million in
principal amount of Series A Notes and (ii) $87.9 million in principal amount of
8.0% Series B Notes. Additionally, the Holders of the Series A Notes and the
Series B Notes were given the right to approve certain new debt and the right to
name one director to the company's Board of Directors. Such director was elected
to the Board of Directors in June 1998 and reelected in August 1999; however,
the designated board member resigned in July 2000 and has not been replaced.
On April 9, 1999, the company entered into Amendment No. 2 (the "Note
Amendment") to the Securities Exchange Agreement with the Holders. Pursuant to
the Note Amendment, the outstanding principal amount of Series B Notes is
convertible into shares of the company's common stock at a conversion price of
$2.00 per share (subject to customary anti-dilution adjustments). Prior to
entering into the Note Amendment, the Series B Notes were convertible into
common stock at a conversion price of $3.00 per share, which was subject to
downward (but not upward) adjustment based on prevailing market prices for the
company's common stock on April 13, 1999 and October 13, 1999. Based on reported
market closing prices for the company's common stock prior to April 13, 1999,
this conversion price would have been adjusted to below $2.00 on such date had
the company not entered into the Note Amendment. Pursuant to the Note Amendment,
the parties also increased the interest rate applicable to the Series A Notes
from 9.875% to 11.5% per annum.
On December 28, 2000, the Debtors announced the Bankruptcy Court's approval
of their request to exchange a sufficient amount of debt and related accrued
interest for equity in the form of Coram, Inc. Series A Cumulative Preferred
Stock in order to maintain compliance with the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly referred
to as "Stark II"). On December 29, 2000, the Securities Exchange Agreement was
amended ("Amendment No. 4") and an Exchange Agreement was simultaneously
executed among the Debtors and the Holders. Pursuant to such arrangements, the
Holders agreed to exchange approximately $97.7 million aggregate principal
amount of the Series A Notes and $11.6 million of aggregate unpaid accrued
contractual interest on the Series A Notes and the Series B Notes as of December
29, 2000 for 905 shares of Coram, Inc. Series A Cumulative Preferred Stock (see
Note 8 for further details regarding the preferred stock). Following the
exchange, the Holders retain approximately $61.2 million aggregate principal
amount of the Series A Notes and $92.1 million aggregate principal amount of the
Series B Notes. Pursuant to Amendment No. 4, the per annum interest rate on both
the Series A Notes and the Series B Notes has been adjusted to 9.0%. Moreover,
the Series A Notes' and Series B Notes' original scheduled maturity dates of May
2001 and April 2008, respectively, have both been modified to June 30, 2001. Due
to the Holders receipt of consideration with a fair value less than the face
value of the exchanged principal and accrued interest, the exchange transactions
qualified as a troubled debt restructuring pursuant to Statement of Financial
Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings ("SFAS No. 15"). In connection therewith, the company
recognized an extraordinary gain during the fourth quarter of the year ended
December 31, 2000 of approximately $107.8 million, net of tax.
Although the principal amounts under the Series A Notes and Series B Notes
were not paid on June 30, 2001 and the company is in technical default of the
Securities Exchange Agreement, the Holders are stayed from any remedies pursuant
to the provisions of the United States Bankruptcy Code.
15
16
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
The Securities Exchange Agreement, pursuant to which the Series A Notes and
the Series B Notes were issued, contains customary covenants and events of
default. Upon the Debtors' Chapter 11 bankruptcy filings, the company was in
violation of certain covenants and conditions thereunder; however, such
bankruptcy proceedings have stayed any remedial actions by either the Debtors or
the Holders. Additionally, the company was not in compliance with other
covenants relating to certain contractual relationships its wholly-owned
Resource Network Subsidiaries had with certain parties that were contracted to
provide services pursuant to the Aetna Master Agreement, effective May 1, 1998,
and to other covenants relating to the capitalization of subsidiaries. The
company received waivers from its lenders regarding such events of
noncompliance. The voluntary filing of Chapter 11 bankruptcy petitions by the
Resource Network Subsidiaries caused further defaults under the Securities
Exchange Agreement; however, such defaults were waived by the Holders. In
connection with these waivers and the waivers provided for certain matters of
noncompliance under 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 Notes and the 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 Notes and the Series B Notes resumed on such date.
However, due to the Debtors' Chapter 11 bankruptcy filings no interest is being
paid subsequent to August 8, 2000.
Other than the aforementioned default for non-payment of principal on June
30, 2001, management believes that at June 30, 2001 the company was in
compliance with all other covenants of the Securities Exchange Agreement. There
can be no assurance as to whether further covenant violations or defaults will
occur in future periods and whether any necessary waivers would be granted.
At the election of the company, the Series A Notes and the Series B Notes
are scheduled to pay interest quarterly in arrears in cash or through the
issuance of pari passu debt securities, except that Holders can require the
company to pay interest in cash if the company exceeds a predetermined interest
coverage ratio. Notwithstanding the contractual terms of the Securities Exchange
Agreement, no interest is being paid subsequent to August 8, 2000 due to the
Debtors' ongoing bankruptcy proceedings. Pursuant to the troubled debt
restructuring rules promulgated under SFAS No. 15, no interest expense was
recognized in the company's consolidated financial statements relative to the
Series A Notes and the Series B Notes from December 29, 2000 through June 30,
2001.
The Series A Notes and the Series B Notes are callable, in whole or in part,
at the option of the Holders 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 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.
7. INCOME TAXES
During the six months ended June 30, 2001 and 2000, the company recorded
income tax expense of approximately $0.1 million and $0.2 million, respectively.
The effective income tax rates for each of the six-month periods are higher than
the statutory rate because the company is not recognizing the deferred income
tax benefits potentially generated by current period losses. As of June 30,
2001, deferred tax assets were net of a $144.3 million valuation allowance.
Realization of deferred tax assets is dependent upon the ability of the company
to generate taxable income in the future. Deferred tax assets have been limited
to amounts expected to be recovered, net of deferred tax liabilities that would
otherwise become payable in the carryforward period. As management believes that
realization of the balance of deferred tax assets is sufficiently uncertain at
this time, the balances were fully offset by valuation allowances at both June
30, 2001 and December 31, 2000.
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 net operating loss carryforwards ("NOLs") that may be deductible
against future taxable income. As of June 30, 2001, the company had NOLs of
approximately $168.0 million that are available to offset future federal taxable
income and expire in varying amounts in the years 2002 through 2019. This NOL
balance includes approximately $36.4 million generated prior to the creation of
Coram through the merger by and among T2 Medical, Inc., Curaflex Health
Services, Inc., HealthInfusion, Inc. and Medisys, Inc. Such pre-merger NOL
amounts are subject to an annual usage limitation of approximately $4.5 million.
The ability to utilize the full amount of the $168.0 million of NOLs is
uncertain due to income tax rules related to changes in ownership.
16
17
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
As a result of the issuance of Coram, Inc. Series A Cumulative Preferred
Stock in December 2000 (see Note 8), the company effectuated a deconsolidation
of its group for federal income tax purposes. Accordingly, subsequent income tax
returns will be filed with Coram, Inc. as the parent company of the new
consolidated group and Coram Healthcare Corporation will file its own separate
income tax returns. The issuance of the preferred stock also caused an ownership
change at Coram, Inc. for federal income tax purposes. However, Coram, Inc.
currently operates as a debtor-in-possession under the jurisdiction of the
Bankruptcy Court and it meets certain other bankruptcy related conditions of the
Internal Revenue Code ("IRC"). The bankruptcy provisions of IRC Section 382
impose limitations on the utilization of NOLs and other tax attributes.
In January 1999, the Internal Revenue Service ("IRS") completed an
examination of the company's federal income tax return for the year ended
September 30, 1995 and proposed substantial adjustments to the prior tax
liabilities. The company has agreed to adjustments of $24.4 million that only
affect available NOLs. Management does not agree with the other proposed
adjustments regarding the deductibility 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 (obtained from federal
income tax refunds), 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 NOLs as specified liability losses and offset income in prior
years. In August 1999, the company filed a petition with the United States Tax
Court ("Tax Court") contesting the notice of deficiency. The IRS responded to
the petition and requested the petition be denied. The Tax Court proceeding is
currently stayed by reason of the Debtors' bankruptcy proceedings.
Pursuant to standard IRS procedures, the resolution of the disputed issues
contained in the Tax Court petition has been assigned to the administrative
appeals function of the IRS. The company is presently negotiating with the
appeals office of the IRS in an attempt to resolve these matters. Due to the
uncertainties related to the final resolution thereof, the accompanying
Condensed Consolidated Financial Statements include reserves for such potential
liabilities, including approximately $1.4 million of incremental interest
expense for the six months ended June 30, 2001. The federal income tax
adjustments would also give rise to additional state tax liabilities. No
assurances can be given that the company will prevail given the uncertainties
inherent in any proceedings with the IRS or related litigation. If the company
is not able to resolve its issues with the IRS through negotiations and does not
prevail in the Tax Court with respect to the significant proposed adjustments,
the financial position and liquidity of the company could be materially
adversely affected.
8. MINORITY INTERESTS
The following summarizes the minority interests in consolidated joint
ventures and preferred stock issued by a subsidiary (in thousands):
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
Series A Cumulative Preferred Stock of Coram, Inc. .... $ 5,522 $ 5,522
Majority-owned companies .............................. 482 456
------------ ------------
Total minority interests .............................. $ 6,004 $ 5,978
============ ============
On December 29, 2000, Coram, Inc. ("CI"), a wholly-owned subsidiary of Coram
Healthcare Corporation, executed the Exchange Agreement with the Holders of CI's
Securities Exchange Agreement (see Note 6 for further details) to exchange
approximately $97.7 million of the Series A Notes and approximately $11.6
million of accrued but unpaid interest on the Series A Notes and Series B Notes
in exchange for 905 shares of CI Series A Cumulative Preferred Stock, $0.001 par
value per share, having an aggregate liquidation preference of approximately
$109.3 million (hereinafter referred to as the "Preferred Stock"). The Preferred
Stock was issued to the Holders on a pro rata basis. Through an independent
valuation, it was determined that the Preferred Stock had a fair value of
approximately $6.1 million and such amount, offset by certain legal and other
closing costs, nets to approximately $5.5 million.
17
18
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
The authorized CI Preferred Stock consists of 10,000 shares, and the only
shares issued and outstanding at June 30, 2001 are those pursuant to the
Exchange Agreement. So long as any shares of the Preferred Stock are
outstanding, the Holders are entitled to receive preferential dividends at a
rate of 15% per annum on the liquidation preference amount. Dividends are
payable on a quarterly basis on the last business day of each calendar quarter.
Prior to the effective date of the Debtors' plan of reorganization, dividends
are to be paid in the form of additional shares of Preferred Stock having a
liquidation preference amount equal to such dividend amount. Subsequent to the
effective date of a plan of reorganization, at CI's election, dividends will be
payable in cash or shares of common stock of CI having a fair value equal to
such cash dividend payment, as determined by a consensus of investment banking
firms acceptable to the Holders. In the event of default, the dividend rate
shall increase to 16% per annum until such time that the event of default is
cured. All dividends are to include tax indemnities and gross-up provisions
(computed subsequent to the company's tax fiscal year end) as are appropriate
for transactions of this nature. In-kind dividends earned during the six months
ended June 30, 2001 aggregated approximately 70 shares and had a liquidation
preference of approximately $8.5 million.
The agreements and bylaws underlying the Preferred Stock include usual and
customary affirmative and negative covenants for a security of this nature,
including, but not limited to (i) providing timely access to certain financial
and business information; (ii) authorization to communicate with independent
certified public accountants with respect to the financial conditions and other
affairs of the company; (iii) maintaining tax compliance; (iv) maintaining
adequate insurance coverage; (v) adherence to limitations on transactions with
affiliates; (vi) adherence to limitations on acquisitions or investments; (vii)
adherence to limitations on the liquidation of assets or businesses; and (viii)
adherence to limitations on entering into additional indebtedness.
Subsequent to the effective date of a plan of reorganization, each share of
Preferred Stock will be entitled to one vote and shall vote together with the
shares of CI's common stock on all matters submitted to a vote of stockholders.
The Preferred Stock would have had 47.5% of CI's total voting power on December
31, 2000; however, such voting rights are temporarily suspended during the
Debtors' bankruptcy proceedings. Subsequent to the effective date of a plan of
reorganization, the Holders will have the right to appoint three directors out
of a total of seven directors to CI's Board of Directors, and a quorum in
meetings of the Board of Directors shall be constituted by the presence of a
majority of the members, at least two of whom must be directors appointed by the
Holders. During the pendency of CI's bankruptcy proceedings, the Holders have
the right to appoint two directors to CI's Board of Directors. Alternatively, if
no Board of Directors representation is elected by the Holders, they retain the
right to appoint one observer.
The Preferred Stock is redeemable at the option of CI, in whole or in part,
at any time, on not less than thirty days prior written notice, at the
liquidation preference amount plus any accrued but unpaid dividends. Redemption
may be made in the form of cash payments only. As of August 17, 2001, the
aggregate Preferred Stock liquidation preference was approximately $117.8
million.
The Debtors' Second Joint Plan (Note 2), if confirmed in its current form,
would effectively retire all of the currently outstanding Preferred Stock on or
before the Plan's effective date.
9. LITIGATION AND CONTINGENCIES
Bankruptcy Proceedings. On August 8, 2000, the Debtors filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code 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) (collectively the "Chapter 11 Cases"), respectively. 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 (MFW). None of the Debtors'
other subsidiaries are a debtor in the proceeding. See Note 2 for further
details.
Except as may otherwise be determined by the Bankruptcy Court overseeing the
Chapter 11 Cases, the protection generally afforded by Chapter 11 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.
18
19
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Official Committee of the Equity Security Holders' Matters. A committee of
persons claiming to own shares of the company's publicly-traded common stock
(the "Equity Committee") objected to the Restated Joint Plan of reorganization,
contending, among other things, that the company's valuation upon which the
Restated Joint Plan of reorganization was premised and the underlying
projections and assumptions were flawed. On December 21, 2000, the Bankruptcy
Court determined not to confirm the Restated Joint Plan. The company and the
Equity Committee are involved in a review of certain company information
regarding, among other things, the Equity Committee's contentions. Moreover, on
July 30, 2001, the Equity Committee filed a motion to terminate the Debtors'
exclusivity period and file its own plan or reorganization; however, the motion
was denied by the Bankruptcy Court.
Additionally, on or about February 6, 2001, the Equity Committee filed a
motion with the Bankruptcy Court seeking permission to bring a derivative
lawsuit directly against the company's Chief Executive Officer, a former member
of the Board of Directors and Cerberus Partners, L.P. (a party to the company's
debtor-in-possession financing agreement, Senior Credit Facility and Securities
Exchange Agreement). The Equity Committee's lawsuit alleged a collusive plan
whereby the named parties conspired to devalue the company for the benefit of
the company's creditors under the Securities Exchange Agreement. On February 26,
2001, the Bankruptcy Court ruled that the Equity Committee's motion would not be
productive at that time and, accordingly, the motion to proceed with the lawsuit
was denied without prejudice.
Management cannot predict whether any future objections of the Equity
Committee will be forthcoming or if they would prevent confirmation of the
Second Joint Plan set forth by management. Management also cannot predict if any
other actions of the Equity Committee will have adverse consequences to the
company.
Resource Network Subsidiaries' Bankruptcy. On November 12, 1999, the
Resource Network Subsidiaries filed voluntary petitions under Chapter 11 of the
United States Code in the United States Bankruptcy Court for the District of
Delaware, Case No. 99-2889 (MFW). On August 19, 1999, a small group of parties
with claims against the Resource Network Subsidiaries filed an involuntary
bankruptcy petition under Chapter 11 against Coram Resource Network, Inc. in the
United States Bankruptcy Court for the District of Delaware. The two proceedings
were consolidated by stipulation of the parties and the case is pending under
the style, In Re Coram Resource Network, Inc. and Coram Independent Practice
Association, Inc., Case No. 99-2889 (MFW). The Resource Network Subsidiaries are
now being liquidated pursuant to the proceedings. The Chief Restructuring
Officer of the Resource Network Subsidiaries had 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.
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.
If granted, the Chapter 11 proceedings involving the Resource Network
Subsidiaries and the Chapter 11 proceedings involving the Debtors would have
been combined such that the assets and liabilities of the Resource Network
Subsidiaries would be joined with the assets and liabilities of the Debtors, 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 have voted on any reorganization plan for the combined
entities. The Resource Network Subsidiaries and the Debtors engaged in discovery
related to this substantive consolidation motion and, in connection therewith,
the parties reached a settlement agreement in November 2000. The settlement
agreement was approved by the Bankruptcy Court in December 2000 and the Debtors
made a payment of $0.5 million to the Resource Network Subsidiaries in January
2001.
Notwithstanding the withdrawal of the substantive consolidation motion, the
Resource Network Subsidiaries still maintain proofs of claim in excess of $41
million against each of CHC's and CI's estates and the company maintains a
reciprocal claim of approximately the same amount against the Resource Network
Subsidiaries' estate. The ultimate outcome of these claims cannot be predicted
with any degree of certainty but management, in consultation with legal counsel,
does not believe that the final resolution of this matter or other matters
raised by the Resource Network Subsidiaries' Chief Restructuring Officer will
have a material adverse impact on the company's financial position or results of
operations.
19
20
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Aetna U.S. Healthcare, Inc. On June 30, 1999, the company filed a complaint
(the "Coram Complaint") against Aetna in the United States District Court for
the Eastern District of Pennsylvania setting forth claims against Aetna for
fraud, misrepresentation, breach of contract and rescission relating to the
Master Agreement between the parties for ancillary network management services
through the Resource Network Subsidiaries. On June 30, 1999, the company
received a copy of a complaint (the "Aetna Complaint") that had been filed by
Aetna on June 29, 1999 in the Court of Common Pleas of Montgomery County,
Pennsylvania. The Aetna Complaint sought specific performance, injunctive relief
and declaratory relief to compel the company to perform under the Master
Agreement, including the payment of compensation to the healthcare providers
that had rendered and continued to render services to Aetna's health plan
members. As stated in the Aetna Complaint, Aetna disputed the company's right to
terminate the Agreement. The company removed the Aetna Complaint to federal
court. On July 20, 1999, Aetna filed a counterclaim against the company in the
federal court lawsuit brought by the company. In its counterclaim, Aetna sued
the company for, among other things, breach of the Master Agreement and
fraudulent misrepresentation, contending the company never intended to perform
under the Master Agreement, defamation, interference with contractual relations
with providers and interference with prospective contractual relations with
other companies that allegedly bid for the Master Agreement.
On April 20, 2000, the company and Aetna reached an amicable resolution to
the then outstanding disputes and, in connection therewith, all claims and
counterclaims amongst the parties were dismissed from the courts of appropriate
jurisdiction. The final resolution of these matters did not have a material
effect on the company's consolidated financial position or results of
operations. The impact of this dispute resolution has been charged to
discontinued operations in the accompanying condensed consolidated financial
statements during the six months ended June 30, 2000.
Apria Healthcare, Inc. Apria Healthcare, Inc. and one of its affiliates,
Apria Healthcare of New York State, Inc., (collectively "Apria") filed suit
against CHC and the Resource Network Subsidiaries in the Superior Court of
Orange County, California. Apria's claims related to services that were rendered
as part of certain home health provider networks managed by the Resource Network
Subsidiaries. Apria's complaint alleged that, among other things, 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 included
requests for declaratory, compensatory and other relief in excess of $1.4
million. On February 21, 2001, the company and Apria agreed to a "dismissal
without prejudice" from the Superior Court of Orange County, California with
each party responsible for its own legal fees.
TBOB Enterprises, Inc. 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 the company breached its obligations under an agreement entered into
by the parties in 1996 relating to a prior earn-out obligation of the company
that originated from the acquisition of the claimant's prescription services
business in 1993 by a wholly-owned subsidiary of the company. The company
operated the business under the name Coram Prescription Services ("CPS") and the
assets of the CPS business were sold on July 31, 2000. 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 $0.9 million. TBOB contends that
this amount must be paid in addition to the final scheduled earn-out payment of
approximately $1.3 million that was due in March 2001. TBOB reiterated its
monetary demand through a proof of claim filed against CHC's estate for the
aggregate amount of approximately $2.2 million (the scheduled earn-out payment
plus the alleged damages). Any action relating to the final $1.3 million
earn-out payment that was scheduled for March 2001 and the alleged damages of
$0.9 million have been stayed by operation of the Bankruptcy Code. On July 5,
2001, the company received a letter from TBOB's legal counsel requesting that
the arbitration remain in abeyance pending resolution of the bankruptcy
proceedings. Management does not believe that final resolution of this matter
will have a material adverse impact on the company's financial position or
results of operations.
Internal Revenue Service Dispute. CHC is contesting a notice of deficiency
issued by the Internal Revenue Service through administrative proceedings and
litigation. See Note 7 for further details.
20
21
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Alan Furst et. al. v. Stephen Feinberg, et. al. A complaint was filed in the
United States District Court for the Third District of New Jersey on November 8,
2000 and an Amended Class Action Complaint was filed on November 15, 2000,
alleging that certain current and former officers and directors of the company
and the company's principal lenders, Cerberus Partners, L.P., Foothill Capital
Corporation and Goldman Sachs & Co., implemented a scheme to perpetrate a fraud
upon the stock market regarding the common stock of CHC. A second Amended Class
Action Complaint (the "Second Amended Complaint") was filed on March 21, 2001,
which removed all of the officers and directors of the company as defendants,
except the company's Chief Executive Officer and another current member of the
Board of Directors and continued to name Cerberus Partners, L.P., Foothill
Capital Corporation and Goldman Sachs & Co. as defendants. The plaintiffs
alleged that the defendants artificially depressed the trading price of the
company's publicly traded shares and created the false impression that
stockholders' equity was decreasing in value and was ultimately worthless. The
plaintiffs further alleged that members of the class sustained total investment
losses of $50 million or more. On June 14, 2001, a third Amended Class Action
Complaint (the "Third Amended Complaint") was filed naming the same defendants
as the Second Amended Complaint. The plaintiffs' allegations set forth in the
Third Amended Complaint, were substantially similar to the allegations in the
Second Amended Complaint; however, the Third Amended Complaint eliminated
references to the corporate assets of Coram. The company notified its insurance
carrier of the lawsuit and intends to avail itself of any appropriate insurance
coverage for its directors and officers, who are vigorously contesting the
allegations. The company cannot predict the outcome of this case nor can it
predict the scope and nature of any indemnification that the directors and
officers may have with the company's insurance carrier.
General. Management of the company and its subsidiaries intends to
vigorously defend the company in the matters described above. Nevertheless, due
to the uncertainties inherent in litigation, including possible indemnification
against other parties, the ultimate disposition of such matters cannot presently
be determined. Adverse outcomes in some or all of the proceedings could have a
material adverse effect on the financial position, results of operations and
liquidity of the company.
The company and its subsidiaries are also parties to various other legal
actions arising out of the normal course of their businesses, including employee
claims, reviews of cost reports submitted to Medicare and examinations by
regulators such as Medicare and Medicaid fiscal intermediaries and the Centers
for Medicare and Medicaid Services (formerly the Health Care Financing
Administration). 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.
PricewaterhouseCoopers LLP. On July 7, 1997, the company filed suit against
Price Waterhouse LLP (now known as PricewaterhouseCoopers LLP) in the Superior
Court of San Francisco, California, seeking damages in excess of $165.0 million.
As part of the settlement that resolved a case filed by the company against
Caremark International, Inc. and Caremark, Inc. (collectively "Caremark"),
Caremark assigned and transferred to the company all of Caremark's claims and
causes of action against Caremark's independent auditors, PricewaterhouseCoopers
LLP, related to the lawsuit filed by the company against Caremark. This
assignment of claims includes claims for damages sustained by Caremark in
defending and settling its lawsuit with the company. The case was dismissed from
the California court because of inconvenience to witnesses with a right to
re-file in Illinois. The company re-filed the lawsuit in state court in Illinois
and PricewaterhouseCoopers LLP filed a motion to dismiss the company's lawsuit
on several grounds, but its motion was denied on March 15, 1999.
PricewaterhouseCoopers LLP filed an additional motion to dismiss the lawsuit in
May 1999, and that motion was dismissed on January 28, 2000. On April 19, 2001,
PricewaterhouseCoopers LLP filed a motion for partial summary judgement with
regard to a portion of Caremark's claims. A hearing is scheduled for September
18, 2001 on the motion for partial summary judgement. The lawsuit is currently
in the discovery stage and a trial is scheduled to commence after June 22, 2002.
There can be no assurance of any recovery from PricewaterhouseCoopers LLP.
Government Regulation. Under the physician ownership and referral provisions
of the Omnibus Budget Reconciliation Act of 1993 (commonly referred to as "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 and/or the physician's family, as defined under
Stark II, 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. The company 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, based upon advice of legal counsel, using an arrangement management
believes to be consistent with the applicable exceptions set forth in Stark II.
21
22
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
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. Due principally to the
extraordinary gain on troubled debt restructuring (see Note 6) and the
disposition of the CPS business, at December 31, 2000 the company's
stockholders' equity was above the required level. However, in light of the
company's recurring operational losses during each of the years in the three
year period ended December 31, 2000 and the six months ended June 30, 2001,
management's ability to maintain an appropriate level of stockholders' equity
cannot be reasonably assured. The penalties for failure to comply with Stark II
include civil penalties that could be imposed upon the company or the referring
physician, regardless of whether either the physician or the company intended to
violate the law.
Management has been advised by counsel 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 the
company's common stock remains publicly traded and its stockholders' equity
falls below the required levels, the company would be forced to cease accepting
referrals of patients with government-sponsored benefit programs or run a
significant risk of noncompliance with Stark II. Because referrals of the
company's patients with government-sponsored benefit programs comprise
approximately 25% and 23% of the company's consolidated net revenue (excluding
CPS) for the six months ended June 30, 2001 and the year ended December 31,
2000, respectively, discontinuing the acceptance of patients with
government-sponsored benefit programs would have a material adverse effect on
the financial condition, results of operations and cash flows 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 previously requested a Stark II waiver from the Health
Care Financing Administration, but such waiver request was denied.
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 and related
services (including non-intravenous home health products such as durable medical
equipment and respiratory therapy services). CPS, which was divested by the
company on July 31, 2000, primarily provided specialty mail-order pharmacy and
pharmacy benefit management services. The other non-reportable segment
principally represents centralized management, administration and clinical
support for clinical research trials.
Management uses earnings before interest expense, income taxes, depreciation
and amortization ("EBITDA") for purposes of performance measurement. For the
three and six months ended June 30, 2001 and 2000, corporate costs were
allocated on a revenue basis. For the three and six months ended June 30, 2000,
EBITDA has been reclassified to conform to the 2001 presentation. EBITDA
excludes reorganization expenses and merger and restructuring charges. The
measurement basis for segment assets includes net accounts receivable,
inventories, net property and equipment and other current assets.
22
23
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Summary information by segment is as follows (in thousands):
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
INFUSION
Revenue from external customers .................. $ 98,790 $ 102,287 $ 193,368 $ 209,964
Intersegment revenue ............................. 51 699 103 1,176
Interest income .................................. 82 19 95 49
Equity in net income of unconsolidated joint
ventures ..................................... 294 130 468 389
Segment EBITDA profit ............................ 9,159 8,754 14,549 19,651
Segment assets ................................... 114,452 115,089 114,452 115,089
Segment asset expenditures ....................... 1,365 858 2,163 1,847
CPS
Revenue from external customers .................. $ -- $ 26,778 $ -- $ 53,023
Intersegment revenue ............................. -- -- -- 11
Interest income .................................. -- 2 -- 3
Equity in net income of unconsolidated joint
ventures ..................................... -- -- -- --
Segment EBITDA loss .............................. -- (1,126) -- (1,675)
Segment assets ................................... -- 22,945 -- 22,945
Segment asset expenditures ....................... -- 70 -- 224
ALL OTHER
Revenue from external customers .................. $ 148 $ 1,159 $ 316 $ 2,033
Intersegment revenue ............................. -- -- -- --
Interest income .................................. -- -- -- --
Equity in net income of unconsolidated joint
ventures ..................................... -- -- -- --
Segment EBITDA profit (loss) ..................... (235) 261 (405) 333
Segment assets ................................... 119 1,034 119 1,034
Segment asset expenditures ....................... -- -- -- --
A reconciliation of the company's segment revenue, segment EBITDA
profit (loss) and segment assets to the corresponding amounts in the Condensed
Consolidated Financial Statements are as follows (in thousands):
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
NET REVENUE
Total for reportable segments ......................... $ 98,841 $ 129,764 $ 193,471 $ 264,174
Other revenue ......................................... 148 1,159 316 2,033
Elimination of intersegment revenue ................... (51) (699) (103) (1,187)
--------- --------- --------- ---------
Total consolidated revenue ............................ $ 98,938 $ 130,224 $ 193,684 $ 265,020
========= ========= ========= =========
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND MINORITY INTERESTS
Total EBITDA profit for reportable segments ........... $ 9,159 $ 7,628 $ 14,549 $ 17,976
Other EBITDA profit (loss) ............................ (235) 261 (405) 333
Goodwill amortization expense ......................... (2,425) (2,530) (4,849) (5,108)
Depreciation and other amortization expense ........... (2,494) (2,374) (4,985) (4,932)
Interest expense ...................................... (1,627) (6,771) (2,212) (13,447)
Reorganization expenses, net .......................... (3,444) -- (6,264) --
All other income, net ................................. 112 353 246 337
--------- --------- --------- ---------
Loss from continuing operations before income taxes and
minority interests ............................... $ (954) (3,433) (3,920) (4,841)
========= ========= ========= =========
ASSETS
Total assets for reportable segments .................. $ 114,452 $ 138,034 $ 114,452 $ 138,034
Other assets .......................................... 234,568 242,495 234,568 242,495
--------- --------- --------- ---------
Consolidated total assets .......................... $ 349,020 $ 380,529 $ 349,020 $ 380,529
========= ========= ========= =========
For each of the periods 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 consolidated operations.
Sales to Aetna U.S. Healthcare ("Aetna") and its affiliated payers for the
company's Infusion and CPS segments represented approximately 2% of the
company's consolidated net revenue from continuing operations for both the three
months ended June 30, 2001 and 2000, and 2% and 4% for the six months ended
23
24
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
June 30, 2001 and 2000, respectively. 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 new local agreements for home infusion services. As
of June 30, 2001, four such agreements for home infusion services have been
entered into by Coram subsidiaries and local Aetna plans.
Net revenue from Medicare and Medicaid programs represented approximately
25% and 21% of the company's consolidated net revenue for the three months ended
June 30, 2001 and 2000, respectively, and 25% and 20%, respectively, for the six
months ended June 30, 2001 and 2000.
Accounts receivable from Health Net, Inc. represented approximately 5.4% of
the company's consolidated accounts receivable as of June 30, 2001. No other
payers exceeded 5% of consolidated accounts receivable at June 30, 2001 or
December 31, 2000.
11. DEBTOR/NON-DEBTOR FINANCIAL STATEMENTS
In accordance with SOP 90-7, the Debtors are presenting the following
Condensed Consolidating Financial Statements as of and for the six months ended
June 30, 2001 (in thousands):
CONDENSED CONSOLIDATING BALANCE SHEET
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 24,285 $ 393 $ -- $ 24,678
Cash limited as to use ......................................... 185 157 -- 342
Accounts receivable, net ....................................... -- 85,041 -- 85,041
Inventories .................................................... -- 11,972 -- 11,972
Deferred income taxes, net ..................................... -- 514 -- 514
Prepaid reorganization costs for administrative professionals .. 206 -- -- 206
Other current assets ........................................... 4,856 2,081 -- 6,937
------------ ------------ ------------ ------------
Total current assets .......................................... 29,532 100,158 -- 129,690
Property and equipment, net ..................................... 1,629 13,518 -- 15,147
Deferred income taxes, net ...................................... -- 2,119 -- 2,119
Other deferred costs and intangible assets, net ................. -- 7,223 -- 7,223
Goodwill, net ................................................... -- 189,007 -- 189,007
Investments in and advances to wholly-owned subsidiaries,
net ........................................................... 243,898 -- (243,898) --
Other assets .................................................... 4,585 1,249 -- 5,834
------------ ------------ ------------ ------------
Total assets .................................................. $ 279,644 $ 313,274 $ (243,898) $ 349,020
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable ............................................... $ 11,177 $ 12,514 $ -- 23,691
Accrued compensation and related liabilities ................... 12,270 7,275 -- 19,545
Current maturities of long-term debt ........................... -- 29 -- 29
Insurance note payable ......................................... 1,651 -- -- 1,651
Income taxes payable ........................................... 227 319 -- 546
Deferred income taxes .......................................... -- 1,458 -- 1,458
Accrued merger and restructuring costs ......................... 716 456 -- 1,172
Accrued reorganization costs for administrative
professionals ................................................ 5,425 -- -- 5,425
Other accrued liabilities, including interest payable .......... 3,426 4,094 -- 7,520
------------ ------------ ------------ ------------
Total current liabilities not subject to compromise ........... 34,892 26,145 -- 61,037
Total current liabilities subject to compromise ................. 166,603 -- -- 166,603
------------ ------------ ------------ ------------
Total current liabilities ....................................... 201,495 26,145 -- 227,640
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities ........................ -- 19 -- 19
Minority interests in consolidated joint ventures and
preferred stock issued by a subsidiary ....................... 5,522 482 -- 6,004
Other liabilities .............................................. -- 15,049 -- 15,049
Deferred income taxes .......................................... -- 1,175 -- 1,175
Net liabilities of discontinued operations ...................... -- 26,506 -- 26,506
------------ ------------ ------------ ------------
Total liabilities ............................................. 207,017 69,376 -- 276,393
Net assets, including amounts due to Debtors .................... -- 243,898 (243,898) --
Total stockholders' equity ...................................... 72,627 -- -- 72,627
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity .................... $ 279,644 $ 313,274 $ (243,898) $ 349,020
============ ============ ============ ============
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25
CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Net revenue ........................................................ $ -- $ 193,684 $ -- $ 193,684
Cost of service .................................................... -- 138,658 -- 138,658
------------ ------------ ------------ ------------
Gross profit ....................................................... -- 55,026 -- 55,026
Operating expenses:
Selling, general and administrative expenses ...................... 8,961 32,778 -- 41,739
Provision for estimated uncollectible accounts .................... -- 5,928 -- 5,928
Amortization of goodwill .......................................... -- 4,849 -- 4,849
Restructuring cost recovery ....................................... -- (583) -- (583)
------------ ------------ ------------ ------------
Total operating expenses ......................................... 8,961 42,972 -- 51,933
------------ ------------ ------------ ------------
Operating income (loss) from continuing operations ................. (8,961) 12,054 -- 3,093
Other income (expense):
Interest income ................................................... 863 94 -- 957
Interest expense .................................................. (700) (1,512) -- (2,212)
Equity in net income of wholly-owned subsidiaries ................. 10,707 -- (10,707) --
Equity in net income of unconsolidated joint ventures ............. -- 468 -- 468
Other income, net ................................................. 1 37 -- 38
------------ ------------ ------------ ------------
Income from continuing operations before reorganization expenses
income taxes and minority interests ............................... 1,910 11,141 (10,707) 2,344
Reorganization expenses, net ....................................... (6,264) -- -- (6,264)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income
taxes and minority interests ...................................... (4,354) 11,141 (10,707) (3,920)
Income tax expense ................................................ -- 100 -- 100
Minority interests in net income of consolidated joint ventures ... -- 334 -- 334
------------ ------------ ------------ ------------
Net income (loss) from continuing operations ....................... $ (4,354) $ 10,707 $ (10,707) $ (4,354)
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
DEBTORS NON-DEBTORS CONSOLIDATED
------------ ------------ ------------
Net cash provided by (used in) continuing operations before
reorganization expenses ...................................... $ (4,033) $ 12,890 $ 8,857
Net cash used by reorganization expenses ...................... (5,708) -- (5,708)
------------ ------------ ------------
Net cash provided by (used in) continuing operations (net
of reorganization expenses) .................................. (9,741) 12,890 3,149
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment .......................... (558) (2,106) (2,664)
Cash advances from wholly-owned subsidiaries ................. 10,707 (10,707) --
Proceeds from dispositions of property and equipment ......... 6 59 65
------------ ------------ ------------
Net cash provided by (used in) investing activities ........... 10,155 (12,754) (2,599)
------------ ------------ ------------
Cash flows from financing activities:
Repayments of debt obligations ............................... -- (155) (155)
Repayments of insurance note payable ......................... (546) -- (546)
Deposits to collateralize letters of credit .................. (2,095) -- (2,095)
Cash distributions paid to minority interests ................ -- (308) (308)
------------ ------------ ------------
Net cash used in financing activities ......................... (2,641) (463) (3,104)
------------ ------------ ------------
Net decrease in cash from continuing operations ............... $ (2,227) $ (327) $ (2,554)
============ ============ ============
Net cash used in discontinued operations ...................... $ -- $ (27) $ (27)
============ ============ ============
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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 Healthcare Corporation ("CHC")
and its subsidiaries ("Coram" or the "company") that is based on the beliefs of
the management of Coram, as well as, assumptions made by and information
currently available to the management of Coram. The company's actual results may
vary materially from the forward-looking statements made in this report due to
important factors such as the outcome of the bankruptcy proceedings of CHC and
its first tier wholly owned subsidiary, Coram, Inc. ("CI") (collectively the
"Debtors") and certain other factors, 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 management with respect to future events
based on currently available information and are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. Management does not undertake any obligation to publicly
release 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 Condensed 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 Debtors' 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 are subject to significant uncertainty. During the
pendency of the Debtors' Chapter 11 bankruptcy proceedings, the company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the Condensed Consolidated Financial Statements.
Further, the Debtors' Second Joint Plan of Reorganization (the "Second Joint
Plan") filed in the Chapter 11 proceedings could materially change the amounts
reported in the Condensed 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 a plan of reorganization (see Note 2 to
the company's Condensed Consolidated Financial Statements for further details).
The company's ability to continue as a going concern is dependent upon, among
other things, confirmation of a plan of reorganization, future profitable
operations, the ability to comply with the terms of the company's financing
agreements, the ability to remain in compliance with the physician ownership and
referral provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly
known as "Stark II") and the ability to generate sufficient cash from operations
and/or financing arrangements to meet obligations.
Background. During 2000, Coram and its subsidiaries were engaged primarily
in two principal lines of business: (i) alternate site (outside the hospital)
infusion therapy, including non-intravenous home health products such as durable
medical equipment and respiratory therapy services, and (ii) pharmacy benefit
management and specialty mail-order pharmacy services. Effective July 31, 2000,
the company sold its pharmacy benefit management and specialty mail-order
pharmacy services business to Curascript Pharmacy, Inc. and Curascript PBM
Services, Inc. (collectively the "Buyers"). The Buyers were a management-led
group that was financed by GTCR Golder Rauner, L.L.C. Other services offered by
Coram include centralized management, administration and clinical support for
clinical research trials.
Additionally, Coram's R-Net subsidiaries are being liquidated through
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. All of the R-Net locations have been closed in connection
with the pending liquidation of R-Net. Additionally, Coram employees who were
members of the Resource Network Subsidiaries' Board of Directors resigned during
the year ended December 31, 2000 and currently only the Chief Restructuring
Officer appointed by the Bankruptcy Court remains on the Board of Directors to
manage and operate the liquidation of the R-Net business. See Note 3 to the
company's Condensed Consolidated Financial Statements.
Reorganization. On August 8, 2000, CHC and CI filed voluntary petitions
under Chapter 11 of the Bankruptcy Code. Following the filing of the voluntary
Chapter 11 petitions, 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 their 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 (see discussion of Stark II in Note 9 to the company's
Condensed Consolidated Financial Statements) and the scheduled May 27, 2001
maturity of the Series A Senior Subordinated Unsecured Notes. Accordingly, the
Debtors sought advice and counsel from a variety of sources and, in connection
therewith, the Board of Directors unanimously concluded that the bankruptcy and
restructuring were the only viable alternatives.
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On August 9, 2000, the Bankruptcy Court approved the Debtors' motions for:
(i) payment of 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 financing arrangement (see Note
6 to the company's Condensed Consolidated Financial Statements for details of
the executed agreement); and (iv) use of all company bank accounts for normal
business operations. In September 2000, the Bankruptcy Court approved the
Debtors' motion to reject four unexpired, non-residential real property leases
and any associated subleases. The rejected leases include underutilized
locations in: (i) Allentown, Pennsylvania; (ii) Denver, Colorado; (iii)
Philadelphia, Pennsylvania; and (iv) Whippany, New Jersey. The successful
rejection of the Whippany, New Jersey lease caused the company to reverse
certain reserves that had previously been established related to closure of its
discontinued operations. Additionally, on May 24, 2001 the Bankruptcy Court
approved the Debtors' motion for an extension of the period of time in which the
Debtors can reject unexpired leases of non-residential real property up to and
including September 3, 2001. Certain other motions filed by the Debtors have
been granted and others are presently pending.
In September 2000 and October 2000, the Bankruptcy Court approved payments
of up to approximately $2.6 million for retention bonuses to certain key
employees. The bonuses were scheduled to be paid in two equal installments on
(i) the later of the date of emergence from bankruptcy or December 31, 2000 and
(ii) December 31, 2001. Due to events that have delayed the emergence from
bankruptcy, the Bankruptcy Court approved early payment of the first installment
to most individuals within the retention program and such payments, aggregating
approximately $0.7 million, were made on March 15, 2001. The remaining portion
of the first installments of approximately $0.5 million, which relates to the
company's Chief Executive Officer and Executive Vice President, is scheduled for
payment upon approval of a plan of reorganization by the Bankruptcy Court, and
the second installment remains scheduled to be paid on December 31, 2001. The
company is accruing monthly amounts as earned pursuant to the provisions of the
retention plan.
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 September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtors' 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 engaged in discovery related
to this substantive consolidation motion and, in connection therewith, the
parties reached a settlement agreement in November 2000, which was approved by
an order of the Bankruptcy Court. See Note 9 to the company's Condensed
Consolidated Financial Statements for further details.
On the same day that 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 were authorized for distribution by the Bankruptcy
Court. Among other things, the Restated Joint Plan provided for: (i) a
conversion of all of the CI obligations represented by the company's Series A
Senior Subordinated Unsecured Notes (the "Series A Notes") and the Series B
Senior Subordinated Unsecured Convertible Notes (the "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 Notes and the
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, under the Debtors'
Restated Joint Plan, as filed, the existing stockholders of CHC would have
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28
received 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
Notes 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 Notes and Series B Notes and Senior Credit Facility prior to
the filing of such Joint Plan.
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 were 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, as the holders of such claims and
interested parties were deemed to reject the Restated Joint Plan. The tabulated
vote of the unsecured creditors was in favor of the company's Restated Joint
Plan. However, culminating at a confirmation hearing on December 21, 2000, the
Restated Joint Plan was not approved by the Bankruptcy Court. On April 25, 2001
and July 11, 2001, the Bankruptcy Court extended the period during which the
Debtors have the exclusive right to file a plan or plans before the Bankruptcy
Court to July 11, 2001 and August 1, 2001, respectively. Additionally, on August
2, 2001, the Bankruptcy Court extended the Debtors' exclusivity period to
solicit acceptances of any filed plan or plans to November 9, 2001.
In order for the company to remain compliant with the requirements of Stark
II, on December 29, 2000, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $97.7 million of the Series A Notes and approximately
$11.6 million of accrued but unpaid interest on the Series A Notes and the
Series B Notes for 905 shares of CI Series A Cumulative Preferred Stock (see
Notes 6 and 8 to the company's Condensed Consolidated Financial Statements for
further details). This transaction generated an extraordinary gain on troubled
debt restructuring of approximately $107.8 million, net of tax, which was
recorded in the fourth quarter of the year ended December 31, 2000. At December
31, 2000, the company's stockholders' equity exceeded the minimum Stark II
requirement necessary to comply with the public company exemption. See Note 9 to
the company's Condensed Consolidated Financial Statements for further discussion
regarding Stark II.
On or about February 6, 2001, the Official Committee of the Equity Security
Holders (the "Equity Committee") filed a motion with the Bankruptcy Court
seeking permission to bring a derivative lawsuit directly against the company's
Chief Executive Officer, a former member of the Board of Directors and Cerberus
Partners, L.P. (a party to the company's debtor-in-possession financing
agreement, Senior Credit Facility and Securities Exchange Agreement). On
February 26, 2001, the Bankruptcy Court ruled that the Equity Committee's motion
would not be productive at that time and, accordingly, the motion was denied
without prejudice. On the same day, the Bankruptcy Court approved the Debtors'
motion and appointed Goldin Associates, L.L.C. ("Goldin") as independent
restructuring advisors to the Debtors. Among other things, the scope of Goldin's
services include (i) reporting its findings to the Independent Committee of the
Board of Directors (the "Independent Committee"), including its assessment of
the appropriateness of the Restated Joint Plan, and advising the Independent
Committee respecting an appropriate course of action calculated to bring the
Debtors' bankruptcy proceedings to a fair and satisfactory conclusion, (ii)
preparing a written report as may be required by the Independent Committee
and/or the Bankruptcy Court and (iii) appearing before the Bankruptcy Court to
provide testimony, as needed. Goldin was also appointed as a mediator among the
Debtors, the Equity Committee and other parties in interest.
Based upon Goldin's findings and recommendations, on July 31, 2001 the
Debtors filed with the Bankruptcy Court a Second Joint Disclosure Statement (the
"Second Disclosure Statement") with respect to their Second Joint Plan of
Reorganization (the "Second Joint Plan"). The Second Joint Plan, which was also
filed on July 31, 2001, provides for terms of reorganization similar to those
described in the Restated Joint Plan; however, utilizing Goldin's
recommendations, the following substantive modifications are included in the
Second Joint Plan:
o the payment of up to $3.0 million to holders of allowed general
unsecured claims of CHC;
o the payment of up to $10.0 million to the holders of CHC equity
interests;
o cancellation of the issued and outstanding CI Series A Cumulative
Preferred Stock; and
o a $7.5 million reduction in certain performance bonuses payable to
Daniel D. Crowley, the company's Chief Executive Officer.
Under certain circumstances, as more fully discussed in the Second
Disclosure Statement, the general unsecured claim holders may be entitled to
receive a portion of the $10.0 million cash consideration allocated to the
holders of CHC equity interests.
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In order to become effective, the Second Joint Plan is subject to a vote by
certain impaired creditors and equity holders and final approval of the
Bankruptcy Court. On September 6, 2001, a hearing before the Bankruptcy Court is
scheduled to consider the adequacy of the Second Disclosure Statement and
whether it may be disseminated to holders of certain claims and interests who
are entitled to vote on the Second Joint Plan. Although the Equity Committee's
motion to terminate the Debtors' exclusivity periods and file its own plan of
reorganization was denied by the Bankruptcy Court on August 1, 2001, management
of the company cannot predict what impact the Equity Committee or any other
interested party will have on the Second Joint Plan at the disclosure statement
hearing. The Bankruptcy Court may ultimately 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;
however, no assurances can be given regarding the confirmation of the Second
Joint Plan.
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 Condensed
Consolidated Balance Sheets as liabilities subject to compromise. Additional
Chapter 11 bankruptcy 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 also are stayed, although the holders of such claims have the
right to petition the Bankruptcy Court for relief from the automatic stay and
foreclose on the property securing their claims. Additionally, certain claimants
have sought relief from the Bankruptcy Court to remove the automatic stay and
continue pursuit of their claims against the Debtors or the Debtors' insurance
carriers.
The holders of Coram, Inc.'s Series A Cumulative Preferred Stock continue to
maintain a claim position within the Debtors' bankruptcy proceedings in the
aggregate amount of their cumulative liquidation preference. Notwithstanding the
debt to equity exchange, the aforementioned holders' priority in the Debtors'
bankruptcy proceedings will be no less than it was immediately prior to said
exchange.
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 will be subject to the Second Joint
Plan, which will be subject to a vote by certain of the Debtors' impaired
creditors and equity holders and confirmation by the Bankruptcy Court, as
described above.
RESULTS OF OPERATIONS
As discussed in Note 3 to the company's Condensed Consolidated Financial
Statements, the company considers R-Net's operating results as part of
discontinued operations; however, for the three and six months ended June 30,
2001 and 2000 the Resource Network Subsidiaries had no operations.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Net Revenue. Net revenue decreased $31.3 million or 24.0% to $98.9 million
in the three months ended June 30, 2001 from $130.2 million in the three months
ended June 30, 2000. The decrease is primarily due to the sale of CPS on July
31, 2000 (CPS had net revenue of $26.8 million during the three months ended
June 30, 2000) and a $1.0 million decline in net revenue attributable to the
company's subsidiary, CTI Network, Inc. ("CTI"). Additionally, a decrease in
infusion net revenue of $3.5 million is due to initiatives to focus on core
therapies.
Gross Profit. Gross profit decreased $4.4 million to $29.8 million or a
gross margin of 30.1% in the three months ended June 30, 2001 from $34.2 million
or a gross margin of 26.2% in the three months ended June 30, 2000. The gross
margin percentage increase is primarily due to the sale of CPS, which had a
lower gross margin percentage than that of the infusion business segment,
thereby causing a lower blended consolidated percentage during the three months
ended June 30, 2000. The components of gross profit are as follows (in
millions):
FOR THE THREE MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
------------ ------------
Infusion ................. $ 29,683 $ 30,017
CPS ...................... -- 3,612
CTI ...................... 95 526
------------ ------------
Total gross profit ....... $ 29,778 $ 34,155
============ ============
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Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
decreased $4.0 million or 15.9% to $21.1 million in the three months ended June
30, 2001 from $25.1 million in the three months ended June 30, 2000. The
decrease during the three months ended June 30, 2001 is primarily due to
approximately $2.1 million of SG&A expenses directly related to CPS personnel
and other CPS related activities that were eliminated upon the divestiture of
the CPS business segment. Additionally, the full impact of certain cost
reduction programs implemented in December 1999 and a decrease in expense
related to incentive compensation favorably impacted SG&A expenses for the three
months ended June 30, 2001 compared to the three months ended June 30, 2000.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts is $3.0 million or 3.1% of net revenue in the three
months ended June 30, 2001 compared to $3.5 million or 2.7% of net revenue in
the three months ended June 30, 2000. The percentage increase is primarily
attributable to the sale of CPS, which had a lower bad debt experience rate than
that of the infusion business segment, thereby causing a lower blended
consolidated effective rate during the three months ended June 30, 2000.
Additionally, the company experienced a bad debt recovery of $0.3 million during
the three months ended June 30, 2000.
Interest Expense. Interest expense decreased $5.2 million to $1.6 million in
the three months ended June 30, 2001 from $6.8 million in the three months ended
June 30, 2000. The decrease is primarily due to (i) reduced outstanding
borrowings on revolving credit arrangements and (ii) the non-recognition of
interest expense related to the Series A Senior Subordinated Unsecured Notes
(the "Series A Notes") and the Series B Senior Subordinated Unsecured
Convertible Notes (the "Series B Notes") in connection with the execution of the
Exchange Agreement on December 29, 2000, which qualified as a troubled debt
restructuring (See Notes 6 and 8 to the company's Condensed Consolidated
Financial Statements for further details). These decreases are partially offset
by the recognition of approximately $1.1 million of interest expense on the
estimated settlement value of a dispute with the Internal Revenue Service, which
is more fully described in Note 7 to the company's Condensed Consolidated
Financial Statements.
Reorganization Expenses, Net. In the three months ended June 30, 2001, the
company recognized $3.4 million in net reorganization expenses related to the
Debtors' Chapter 11 bankruptcy proceedings. These expenses include, but are not
limited to, professional fees, expenses related to employee retention plans,
United States Trustee fees and other expenditures during the Chapter 11
proceedings, offset by interest earned on accumulated cash due to the Debtors
not paying their pre-petition liabilities. See Note 2 to the company's Condensed
Consolidated Financial Statements for further details.
Income Tax Expense. See Note 7 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 on Disposal of Discontinued Operations. During the three months ended
June 30, 2000, Coram recorded charges in the aggregate amount of $0.1 million
for additional wind-down costs of the Resource Network Subsidiaries. See Note 3
to the company's Condensed Consolidated Financial Statements for further
details.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Net Revenue. Net revenue decreased $71.3 million or 26.9% to $193.7 million
in the six months ended June 30, 2001 from $265.0 million in the six months
ended June 30, 2000. The decrease is primarily due to the sale of CPS on July
31, 2000 (CPS had net revenue of $53.0 million during the six months ended June
30, 2000) and a $1.7 million decline in net revenue attributable to the
company's subsidiary, CTI. Additionally, a decrease in infusion net revenue of
$16.6 million is due, in part, to the termination of the Aetna National
Ancillary Services Agreement, effective April 12, 2000, and initiatives to focus
on core therapies.
Gross Profit. Gross profit decreased $13.3 million to $55.0 million or a
gross margin of 28.4% in the six months ended June 30, 2001 from $68.3 million
or a gross margin of 25.8% in the six months ended June 30, 2000. The gross
margin percentage increase is primarily due to the sale of CPS, which had a
lower gross margin percentage than that of the infusion business segment,
thereby causing a lower blended consolidated percentage during the six months
ended June 30, 2000. The components of gross profit are as follows (in
millions):
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
------------ ------------
Infusion ................ $ 54,794 $ 60,146
CPS ..................... -- 7,125
CTI ..................... 232 1,025
------------ ------------
Total gross profit ...... $ 55,026 $ 68,296
============ ============
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Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
decreased $6.8 million or 14.0% to $41.7 million in the six months ended June
30, 2001 from $48.5 million in the six months ended June 30, 2000. The decrease
during the six months ended June 30, 2001 is primarily due to approximately $4.3
million of SG&A expenses directly related to CPS personnel and other CPS related
activities that were eliminated upon the divestiture of the CPS business
segment. Additionally, the full impact of certain cost reduction programs
implemented in December 1999 and a decrease in expense related to incentive
compensation favorably impacted SG&A expenses for the six months ended June 30,
2001 compared to the six months ended June 30, 2000.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts is $5.9 million or 3.1% of net revenue in the six months
ended June 30, 2001 compared to $6.8 million or 2.6% of net revenue in the six
months ended June 30, 2000. The percentage increase is primarily attributable to
the sale of CPS, which had a lower bad debt experience rate than that of the
infusion business segment, thereby causing a lower blended consolidated
effective rate during the six months ended June 30, 2000. Additionally, the
company experienced a bad debt recovery of $0.3 million during the six months
ended June 30, 2000.
Restructuring Cost Recovery. During the six months ended June 30, 2001, the
company recognized restructuring cost recoveries of $0.6 million related to the
assumption of one of the company's real property leases by a third party and
certain changes in estimates attributable to severance liabilities. Such items
were previously reserved for as part of accrued merger and restructuring costs.
Interest Expense. Interest expense decreased $11.3 million to $2.2 million
in the six months ended June 30, 2001 from $13.5 million in the six months ended
June 30, 2000. The decrease is primarily due to (i) reduced outstanding
borrowings on revolving credit arrangements and (ii) the non-recognition of
interest expense related to the Series A Notes and the Series B Senior Notes in
connection with the execution of the Exchange Agreement on December 29, 2000,
which qualified as a troubled debt restructuring (See Notes 6 and 8 to the
company's Condensed Consolidated Financial Statements for further details).
These decreases are partially offset by the recognition of approximately $1.4
million of interest expense on the estimated settlement value of a dispute with
the Internal Revenue Service which is more fully described in Note 7 to the
company's Condensed Consolidated Financial Statements.
Reorganization Expenses, Net. In the six months ended June 30, 2001, the
company recognized $6.3 million in net reorganization expenses related to the
Debtors' Chapter 11 bankruptcy proceedings. These expenses include, but are not
limited to, professional fees, expenses related to employee retention plans,
United States Trustee fees and other expenditures during the Chapter 11
proceedings, offset by interest earned on accumulated cash due to the Debtors
not paying their pre-petition liabilities. See Note 2 to the company's Condensed
Consolidated Financial Statements for further details.
Income Tax Expense. See Note 7 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 on Disposal of Discontinued Operations. During the six months ended
June 30, 2000, Coram recorded charges in the aggregate amount of $3.5 million,
which includes additional reserves for litigation and other wind-down costs of
the Resource Network Subsidiaries. See Note 3 to the company's Condensed
Consolidated Financial Statements for further details.
LIQUIDITY AND CAPITAL RESOURCES
Bankruptcy Proceedings. The Debtors filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code on August 8, 2000. Since
that date, 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. Although the filing of the Chapter
11 cases constitutes defaults under the company's principal debt instruments,
Section 362 of the Bankruptcy Code imposes an automatic stay that will generally
preclude creditors and other interested parties under such arrangements from
taking remedial action in response to any such default without prior Bankruptcy
Court approval. 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. See Note 2 to the company's Condensed Consolidated Financial
Statements.
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 will be subject to the Debtors' Second
Joint Plan. Therefore, it is not possible to fully or completely estimate the
liquidation amount of the liabilities subject to compromise at June 30, 2001 due
to the Debtors' Chapter 11 cases and the uncertainty surrounding the ultimate
amount and settlement terms for such liabilities.
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Credit Facilities. On August 20, 1998, the company entered into the Senior
Credit Facility, which provided for the availability of up to $60.0 million for
acquisitions, working capital, letters of credit and other corporate purposes.
The terms of the agreement also provided for the issuance of letters of credit
of up to $25.0 million provided that available credit would not fall below zero.
On September 21, 2000 and January 29, 2001, the company permanently reduced the
commitment to $2.7 million and $2.1 million, respectively, in order to reduce
the fees related to commitments on which the company was not be able to borrow
against due to the Debtors' bankruptcy proceedings. Effective February 6, 2001,
the Senior Credit Facility lenders and the company terminated the agreement. In
connection with the termination of the Senior Credit Facility and pursuant to
orders of the Bankruptcy Court, the company established new letters of credit
aggregating $2.1 million through Wells Fargo Bank Minnesota, NA ("Wells Fargo")
and such new letters of credit are fully secured by interest bearing cash
deposits of the company held by Wells Fargo. Due to certain hemophilia and
intravenous immunoglobulin product shortages and the pendency of the Debtors'
bankruptcy proceedings, the company may be required to enhance exiting letters
of credit or establish new letters of credit in order to ensure the availability
of such products for its patients' medical needs.
The Debtors entered into a secured debtor-in-possession ("DIP") financing
agreement with Madeleine L.L.C., an affiliate of Cerberus Partners, L.P. (a
party to the Senior Credit Facility), as of August 30, 2000. Prior to entering
into the DIP financing agreement, management and the Board of Directors
solicited advice from the company's financial advisors. Such advisors indicated
that the terms and conditions of the DIP financing agreement were generally
favorable when compared to a company with Coram's financial history. 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 operations of their businesses and the businesses of their subsidiaries. On
September 12, 2000, the Bankruptcy Court approved the DIP agreement. See Note 6
to the company's Condensed Consolidated Financial Statements for further
details. Through August 17, 2001, no borrowings had been made under the DIP
financing agreement. At July 31, 2001, the borrowing base was approximately
$36.8 million pursuant to the limitations of the DIP financing agreement.
On December 29, 2000, the Securities Exchange Agreement was amended
("Amendment No. 4") and an Exchange Agreement was simultaneously executed among
the Debtors and Cerberus Partners, L.P., Goldman Sachs Credit Partners, L.P. and
Foothill Capital Corporation (collectively the "Holders"). Pursuant to such
arrangements, the Holders agreed to exchange approximately $97.7 million
aggregate principal amount of the Series A Notes and $11.6 million of aggregate
unpaid accrued contractual interest on the Series A Notes and the Series B Notes
as of December 29, 2000 for 905 shares of Coram, Inc. Series A Cumulative
Preferred Stock (see Note 8 to the company's Condensed Consolidated Financial
Statements for further details regarding the preferred stock). Following the
exchange, the Holders retain approximately $61.2 million aggregate principal
amount of the Series A Notes and $92.1 million aggregate principal amount of the
Series B Notes. Pursuant to Amendment No. 4, the per annum interest rate on both
the Series A Notes and the Series B Notes has been adjusted to 9.0%. Moreover,
the Series A Notes' and Series B Notes' original scheduled maturity dates of May
2001 and April 2008, respectively, have both been modified to June 30, 2001. See
Note 6 to the company's Condensed Consolidated Financial Statements for
discussion of certain continuing defaults under the Securities Exchange
Agreement. Due to the Holders' receipt of consideration with a fair value less
than the face value of the exchanged principal and accrued interest, the
exchange transactions qualified as a troubled debt restructuring pursuant to
Statement of Financial Accounting Standards No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings. In connection therewith, the company
recognized an extraordinary gain during the fourth quarter of the year ended
December 31, 2000 of approximately $107.8 million, net of tax. As of August 17,
2001, the aggregate Preferred Stock liquidation preference was approximately
$117.8 million.
General. The company's 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 Debtors' 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 Debtors' Chapter 11 bankruptcy proceedings, the company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the Condensed Consolidated Financial Statements.
Further, a confirmed plan of reorganization in the Chapter 11 proceedings could
materially change the amounts reported in the Condensed 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 a confirmed
plan of reorganization. The company's ability to continue as a going concern is
dependent upon, among other things, confirmation of a plan of reorganization,
future profitable operations, the ability to comply with the terms of the
company's financing agreements, the ability to remain in compliance with the
physician ownership and referral provisions of Stark II and the ability to
generate sufficient cash from operations and/or financing arrangements to meet
obligations.
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Coram used cash generated from operations to fund its reorganization
activities, working capital requirements and operations for the six months ended
June 30, 2001. Coram's working capital deficit as of June 30, 2001 was $98.0
million as compared to a working capital deficit of $97.1 million at December
31, 2000. The working capital deficits at June 30, 2001 and December 31, 2000
are primarily due to (i) liabilities subject to compromise classified as current
liabilities, including the full amount of the company's Series A Notes and the
Series B Notes aggregating $153.3 million, (ii) accruals for management
incentive compensation and (iii) accruals for administrative costs of the
Debtors' bankruptcy proceedings. Events impacting the net working capital
deficit during the six months ended June 30, 2001 were the requisite deposit of
$2.1 million needed to collateralize certain letters of credit and obligations
to purchase new financial and human resource software packages. As discussed
above under Credit Facilities, the company may be required to provide additional
cash collateral or new and/or enhanced letters of credit. Changes in current
assets related to (i) a decrease in cash and cash equivalents of $2.6 million,
(ii) a decrease in inventories of $0.8 million, (iii) an increase in accounts
receivable of $7.7 million and (iv) an increase in other current assets of $2.2
million. Total current liabilities changed primarily due to (i) an increase in
accrued compensation and related liabilities of $2.4 million, (ii) a decrease in
merger and restructuring costs of $1.1 million (including a non-cash reserve
reversal of $0.6 million), (iii) an increase in accrued reorganization costs for
administrative professionals of $0.6 million and (iv) an increase in other
accrued liabilities of $0.7 million.
Management believes that the net costs for the Debtors' reorganization and
bankruptcy proceedings will result in significant use of cash for the year
ending December 31, 2001. These items principally consist of professional fees
and expenses and expenditures related to key employee success and retention
plans. Management believes that such costs will primarily be funded through
available cash balances, cash provided by operations and, if necessary,
borrowings under the DIP financing agreement.
The company sponsors a Management Incentive Plan ("MIP"), which provides for
annual bonuses payable to certain key employees. The bonuses are predicated on
overall corporate performance (principally cash collections and earnings before
interest, taxes, reorganization expenses, restructuring costs, depreciation and
amortization), as well as, individual performance targets and objectives. On
March 20, 2001, the Compensation Committee of the company's Board of Directors
approved an overall award of approximately $13.6 million for the year ended
December 31, 2000 for those individuals participating in the MIP. The Second
Joint Plan, if approved, will reduce the MIP by $7.5 million related to
incentive compensation bonuses payable to Daniel D. Crowley, the company's Chief
Executive Officer. On August 17, 2001, the Debtors filed a motion with the
Bankruptcy Court requesting approval to pay approximately $2.8 million of MIP
amounts. The $2.8 million represents all of the year 2000 MIP award, except for
the amounts due to Mr. Crowley, which are subject to resolution pursuant to the
Second Joint Plan. Upon Bankruptcy Court approval, the company intends to fund
the MIP award with its available cash balances, cash provided by operations,
and, if necessary, borrowings under its DIP financing agreement. The $7.5
million incentive compensation bonus for Mr. Crowley that is subject to
potential downward adjustment is recorded in current liabilities subject to
compromise in the accompanying Condensed Consolidated Balance Sheets.
On or about May 9, 2001, the Bankruptcy Court approved the Debtors' motion
requesting authorization to enter into an insurance premium financing agreement
with AICCO, Inc. (the "Financing Agreement") to finance the payment of premiums
under certain of the Debtor's insurance policies. Under the terms of the
Financing Agreement, the Debtors made a down payment of approximately $1.1
million. The amount financed is approximately $2.1 million and is secured by the
unearned premiums and loss payments under the insurance policies covered by the
Financing Agreement. The amount financed is being paid in eight monthly
installments of approximately $0.3 million each, including interest at a per
annum rate of 7.85%, which commenced on May 15, 2001. In addition, AICCO, Inc.
has the right to terminate the insurance policies and collect the unearned
premiums (as administrative expenses) if the Debtors do not make the monthly
payments called for by the Financing Agreement.
The final liquidation of the Resource Network Subsidiaries through their
bankruptcy proceedings may result in certain additional cash expenditures by the
company beyond the cash accounts already deemed to be a part of R-Net's
bankruptcy estate. However, management does not expect that such amounts, if
any, will be material to the financial condition or cash flows of the company.
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Management throughout the company is continuing to concentrate on enhancing
timely 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. In December 2000, Coram announced that as part of its
continuing efforts to improve efficiency and overall performance, several
Patient Financial Service Centers (reimbursement sites) were being consolidated
and the related reimbursement positions were to be eliminated. By consolidating
to fewer sites, management expects to implement improved training, more easily
standardize "best demonstrated practices," enhance specialization related to
payers such as Medicare and achieve more consistent and timely cash collections.
Management does not expect this change to affect Coram's patients or payers, but
believes, instead, that in the long-term they will receive better, more
consistent service. The transition was accomplished in stages, commencing April
1, 2001 and ending July 2001. Management has taken certain actions to mitigate
the potential shortfall in cash collections during and after the transition
period, including, but not limited to, offering incentives for personnel to stay
with the company until the completion of their corresponding regional
consolidation. Notwithstanding management's efforts, the company has experienced
a deterioration in its days sales outstanding ("DSO") since the commencement of
the reimbursement consolidation plan. No assurances can be given that the
consolidation of the company's Patient Financial Service Centers will be
successful in enhancing timely reimbursement, that the company will not
experience a significant shortfall in cash collections after the transition
period or that the aforementioned deterioration in DSO will not continue.
The Board of Directors approved management's request to upgrade Coram's
company-wide information systems. In connection therewith, on May 17, 2001 the
company entered into an agreement whereby new financial and human resource
software packages and related licenses will be procured. The total purchase
price for such software and licenses will be approximately $1.2 million, of
which $0.5 million was paid on May 18, 2001 and the remaining balance is accrued
in the accompanying Condensed Consolidated Balance Sheets. Additional internal
and external costs will be incurred to implement this software; however, no
related commitments for this project or any other significant capital project
have been made as of August 17, 2001. The company intends to fund its current
and future capital commitments with its available cash balances, cash provided
by operations and, if necessary, borrowings under its DIP financing agreement.
Coram is in a dispute with the Internal Revenue Service regarding certain
tax refunds previously received by the company. Should it not prevail in the
majority of the issues in dispute, Coram would need to access funds to address
the alleged deficiency of approximately $12.7 million, plus interest and
penalties. Furthermore, management cannot predict whether any future objections
of the Official Committee of the Equity Security Holders or other interested
parties in the Debtors' bankruptcy proceedings will be forthcoming or if they
would prevent confirmation of the Debtors' Second Joint Plan. Outcomes
unfavorable to the company or unknown additional actions could require the
company and the Debtors to access significant additional funds. See Notes 7 and
9 to the company's Condensed Consolidated Financial Statements.
RISK FACTORS
There can be no assurance regarding Coram's ability to continue operations
in light of the Chapter 11 Proceedings.
The company's ability to continue operations is dependent upon, among other
things, the ability of the company to comply with the terms of the DIP financing
arrangement, confirmation of a plan of reorganization, success of future
operations after such confirmation and the ability to generate sufficient cash
from operations and financing sources to meet obligations. There can be no
assurances that the Debtors' Second Joint Plan or any other plan of
reorganization will be approved by the Bankruptcy Court or that such a plan will
allow the company to operate profitably. Any plan of reorganization and other
actions during the Chapter 11 proceedings could change materially the financial
condition and/or outlook of the company. Furthermore, the future availability or
terms of financing can not be determined in light of the Chapter 11 filings and
there can be no assurance that the amounts available through the DIP financing
will be sufficient to fund the operations of the company until a proposed plan
of reorganization is approved by the Bankruptcy Court. In addition, the company
may experience difficulty in attracting and maintaining patients and appropriate
personnel as a result of the Chapter 11 proceedings.
Coram's common stock is subject to a high degree of risk and market
volatility.
As a result of the Chapter 11 bankruptcy filings of the Debtors, the equity
interests of the common stockholders are subject to a high degree of risk.
Should a plan of reorganization similar to the Second Joint Plan of
reorganization be approved, the complete elimination of the equity interests of
CHC would occur in accordance with the terms of the Second Joint Plan. There can
be no assurances that the Second Joint Plan will be approved by interested
parties or the Bankruptcy Court. See Note 2 to the company's Condensed
Consolidated Financial Statements.
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There has historically been and may continue to be significant volatility in
the market price for Coram's common stock. Factors include, but not limited to,
the Debtors' Chapter 11 bankruptcy proceedings, actual or anticipated
fluctuations in Coram's operating results, new products or services introduced
or new contracts entered into by the company or its competitors, conditions and
trends in the healthcare industry including changes in government reimbursement
policies, changes in financial estimates by securities analysts, general market
conditions and other factors could cause the market price of Coram's common
stock to fluctuate substantially. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market price for the common stock of healthcare
companies. These broad market fluctuations may adversely affect the market price
of the common stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has been brought against that company. There can be no assurances that such
litigation will not occur in the future with respect to Coram. Such litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon Coram's business,
financial condition and results of operations.
Coram may find itself unable to procure the products necessary to serve its
patients.
Due to the nature of factor manufacturing processes, intermittent product
shortages may be experienced from time to time, which may make it difficult for
Coram to meet the needs of its patients and may have an adverse impact on
Coram's future results of operations. Furthermore, limited allocations of
products from manufacturers, including, but not limited to, recombinant factor
VIII (rVIII), greatly impact the company's ability to expand its customer base.
These shortages could be due to insufficient donor pools, failed production
lots, contamination, regulations and other factors beyond Coram's control. The
ability to acquire factor products under normal conditions is volatile, but
currently the international demand for certain factor products far exceeds the
supply. Availability of factor product from manufacturers is spotty, thereby
requiring the company to purchase through the blood broker market wherein
pricing may not be favorable to the company and product availability can change
significantly from day to day. During times of such shortages, prices can rise
significantly with limited ability on the part of the company to pass these
additional costs on to patients.
Average Wholesale Price changes may trend in a direction that is adverse to
net revenue and profitability.
For most of the drugs that Coram provides to its patients, it is reimbursed
by many of its governmental and third party payers according to rate schedules
that are based on the Average Wholesale Price ("AWP") of the drugs provided. AWP
is an industry term that is intended to represent the suggested prices at which
retail pharmacies, such as Coram, sell individual drugs to patients and
customers.
Since the company is reimbursed by many of its governmental and third party
payers for most of the drugs that it provides according to rate schedules that
are based on AWP, the company's reimbursement rates for these drugs should move
roughly along with the price at which it acquires the drugs. However, in many
cases, the AWPs for certain drugs have failed to keep pace with rapid unit cost
price increases for those drugs. In such instances, the margin between Coram's
reimbursement rate and the cost at which it acquired the drug, which margin
should cover the costs of the clinical services and overhead expenses associated
with the delivery and administration of the drug, has been substantially reduced
or eliminated.
There can be no assurances that the AWP for drugs utilized in the Company's
operations will keep pace with the unit costs of those drugs. Further
significant differences in the margin between the AWP and drug costs could have
a material impact on the company's profit margins.
In particular, effective July 1, 2001, the margin between Coram's
reimbursement rate and the cost of the acquired drug Vancomycin has decreased as
a result of the reduction in the AWP reimbursement rate. To possibly mitigate
the decrease of net revenue from the resulting decrease in AWP reimbursement,
the company has made modifications to its drug purchasing formulary. Vancomycin
net revenue for the three months and six months ended June 30, 2001 was $3.6
million and $6.3 million, respectively. For the three months and six months
ended June 30, 2000, Vancomycin net revenue was $3.0 million and $5.1 million,
respectively. While the company is implementing changes to reduce the adverse
effect on net revenue and the direct impact to profitability, no assurances can
be made that the company will be successful in implementing these changes.
For a discussion of other risks that have impacted or may impact the
company, readers are instructed to review the discussion under the heading "Risk
Factors" which appears in Item 7. of the company's Annual Report on Securities
and Exchange Commission Form 10-K for the year ended December 31, 2000.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 June 30, 2001, the company had outstanding long-term debt of $153.5
million of which $153.3 million matured on June 30, 2001 and bore interest at
9.0% per annum; however, the $153.3 million was not paid on such date and the
creditors' remedies are currently stayed pursuant to the Debtors' bankruptcy
proceedings. The company also has a debtor-in-possession ("DIP") financing
agreement providing for the availability of up to $40.0 million for use in
connection with the operation of its businesses and the businesses of its
subsidiaries. The facility matures on the earlier of either confirmation of the
Debtors' plan of reorganization or August 31, 2001 and bears interest at a rate
of prime plus 2.0% (the effective interest rate was 8.75% at June 30, 2001). As
of June 30, 2001 and August 17, 2001, no borrowings under the DIP financing
agreement had been made. Because substantially all of the interest on the
company's debt is fixed, a hypothetical 10.0% change in interest rates would not
have a material impact on the company. Increases in interest rates could,
however, increase interest expense associated with future borrowings by the
company, if any. The company does not hedge against interest rate changes. See
Note 6 to the company's Condensed Consolidated Financial Statements for
discussion of management's ongoing negotiations with the company's lender
regarding modifications to the underlying DIP financing agreement.
The debt to equity exchange transaction described in Note 6 to the company's
Condensed Consolidated Financial Statements qualified as a troubled debt
restructuring pursuant to Statement of Financial Accounting Standards No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings. In
accordance therewith, the Debtors did not recognize any interest expense on the
Series A Notes and the Series B Notes through their maturity on June 30, 2001.
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 9 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 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 is set forth in
Note 6 to the company's Condensed Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
None
(B) Reports on Form 8-K.
None
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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, Chief Financial Officer
and Treasurer
August 20, 2001
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