-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LN2uRu+jCQSsDWiClb+/PMiQSk2bfcHHfbpfvF0WvXPkdLqYyZqbPAb+DMQu3LLt lEv1OwKpWfUsi3IdWFH+3Q== 0000950134-98-002816.txt : 19980401 0000950134-98-002816.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950134-98-002816 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORAM HEALTHCARE CORP CENTRAL INDEX KEY: 0000924174 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 330615337 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11343 FILM NUMBER: 98583678 BUSINESS ADDRESS: STREET 1: 1125 SEVENTEENTH ST. STE. 1500 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032924973 MAIL ADDRESS: STREET 1: ONE LAKESHORE CENTRE STREET 2: 3281 GUASTI ROAD SUITE 700 CITY: ONTARIO STATE: CA ZIP: 91761 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-11343 CORAM HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE 33-0615337 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1125 SEVENTEENTH STREET, SUITE 2100 80202 DENVER, COLORADO (ZIP CODE) (Address of principal executive offices)
Registrant's telephone number, including area code: (303) 292-4973 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock ($.001 par value per share) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the securities exchange act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 23, 1998, there were outstanding 48,745,957 shares of the registrant's common stock, which is the only class of voting stock of the registrant outstanding. As of such date, the aggregate market value of the shares of common stock held by nonaffiliates of the registrant based on the closing price for the common stock on the New York Stock Exchange on March 23, 1998, was approximately $103.0 million. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ================================================================================ 2 PART I ITEM 1. BUSINESS. GENERAL OVERVIEW Coram Healthcare Corporation, a Delaware corporation ("Coram" or the "Company"), is a leading provider of alternate site (outside the hospital) infusion therapy and related services in the United States, operating approximately 100 branches located in 40 states. In addition, the Company provides services through one branch located in the province of Ontario, Canada. Infusion therapy involves the intravenous administration of anti-infective therapy, chemotherapy, pain management, nutrition and other therapies. Other services offered by the Company include mail-order pharmacy, pharmacy benefit management, ancillary network management services and other non-intravenous products and services. The Company was formed on July 8, 1994 as a result of a merger (the "Four-Way Merger") by and among T2 Medical, Inc. ("T2 Medical"), Curaflex Health Services, Inc. ("Curaflex"), Medisys, Inc. ("Medisys") and HealthInfusion, Inc. ("HealthInfusion"), each of which was a publicly-held national or regional provider of home infusion therapy and related services. Each of these other companies became and is now a wholly-owned subsidiary of the Company. This transaction was accounted for as a pooling of interests. The Company has made a number of acquisitions since operations commenced, the most significant of which was the acquisition of certain assets of the home infusion business of Caremark, Inc., a wholly-owned subsidiary of Caremark International, Inc. (the "Caremark Business"), effective April 1, 1995. In addition, the Company acquired H.M.S.S., Inc. ("HMSS"), a leading regional provider of home infusion therapies based in Houston, Texas, effective September 12, 1994. As a result of these acquisitions, the Company became a leading provider of alternate site infusion therapy services in the United States based on geographic service area and total revenue. During the nine months ended September 30, 1997, the Company provided lithotripsy services through a controlling interest in 11 lithotripsy partnerships as well as two wholly-owned lithotripsy entities. On August 20, 1997, the Company signed an agreement with Integrated Health Services, Inc. ("IHS") for the sale of the Company's interest in its thirteen lithotripsy partnerships, the stock of its equipment service company and certain related assets (the "Lithotripsy Business"). Effective September 30, 1997, the Company completed the transaction as to all of its Lithotripsy Business other than its interests in three lithotripsy partnerships. Pursuant to a side agreement amending the August 20, 1997 purchase agreement, the Company's interests in the three remaining partnerships were placed in escrow pending the satisfaction of certain conditions. Following satisfaction of these conditions, two of the partnerships were conveyed to IHS effective October 3, 1997. Due to the Company's and IHS's inability to obtain the consent of the other partner to the transfer of Coram's interest therein, the Company retained its interest in the remaining partnership. See Note 5 to the Company's Consolidated Financial Statements. STATEMENT ON FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains certain forward looking statements (as such term is defined in the private Securities Litigation Reform Act of 1995) and information relating to Coram that are based on the beliefs of the management of Coram as well as assumptions made by and information currently available to the management of Coram. When used in this Report, the words "estimate," "project," "believe," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views of Coram with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. For a discussion of such risks, see Item 7. RISK FACTORS. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Coram does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 1 3 DELIVERY OF ALTERNATE SITE HEALTHCARE SERVICES General. Infusion patients are primarily referred to the Company following diagnosis of a specific disease or upon discharge from a hospital. The treating physician will generally determine whether the patient is a candidate for home infusion treatment. Either the patient, discharge planner, patient's physician or a managed care payor will determine the infusion company to which a patient is referred. Because drugs administered intravenously tend to be more potent and complex than oral drugs, the delivery of intravenous drugs generally requires patient training, specialized equipment and periodic monitoring by skilled nurses and pharmacists. Most therapies require either a gravity-based flow control device or an electro-mechanical pump to monitor the drugs. Some therapies are administered continuously; most however, are given for prescribed periods of time. Coram's nurses and pharmacists work with the patient's doctor to track the patient's condition and update the therapy as necessary. The duration of the patient's treatment may last from as little as a few days to the lifetime of the patient. Branch Facilities. The delivery of infusion services is coordinated through local or regional infusion centers or "branches," that provide the following functions: (i) patient intake and monitoring, (ii) drug mixing and preparation by pharmacists and pharmacy technicians, (iii) clinical pharmacy services, (iv) nursing services, (v) materials management, including drug and supply inventory and delivery, (vi) billing, collections and benefit verification, (vii) sales to local referral sources, including doctors, hospitals and payors and (viii) general management. The Company's branch facilities typically are leased and generally consist of 1,500 to 32,000 square feet of office space in suburban office parks, often in close proximity to major medical facilities. A typical branch has a fully equipped pharmacy, offices for administrative personnel and a storage warehouse. A typical branch includes a branch manager, licensed pharmacists, pharmacy technicians, registered nurses, selling and administrative personnel. Each branch serves the market area in which it is located, generally within a two-hour driving radius of the patients served, as well as outlying locations where it can arrange appropriate nursing services. Satellite branches are also used. These smaller branches contain limited supplies and pharmacy operations and are used as support centers to respond to patient needs in specific geographical areas. In-Home Patient Care. Before accepting a patient for home infusion treatment, the staff at the local branch works closely with the patient's physician or clinicians and hospital personnel in order to assess the patient's suitability for home care. This assessment process includes but is not limited to an analysis of the patient's physical and emotional condition and of social factors such as the safety and cleanliness of the home environment and the availability of family members or others who can assist in the administration of the patient's therapy, if necessary. Patient assessment also includes a verification of a patient's eligibility and benefits package through the patient's insurance carrier, managed care provider or governmental payor. When a patient's suitability for home care has been confirmed, the patient and the patient's designated care-giver receive training and education concerning the therapy to be administered, including proper infusion technique and care and use of intravenous devices and other equipment used in connection with the therapy. The environmental assessment and training are generally performed by the Company's nurses. Prior to the patient receiving treatment services from the Company, the treating physician develops the patient's plan of care and communicates it to the local branch's clinical support team, including its nurses and pharmacists. This team will work with the treating physician and the managed care coordinator, if there is one, to administer the plan of care and monitor the patient's progress. Throughout the patient's therapy, the local branch's clinical support team will regularly provide the treating physician and the managed care coordinator with reports on the patient's condition, maintaining an information flow that allows the treating physician to actively manage the patient's treatment. The treating physician always remains responsible for the patient's care, including changing the patient's plan of care to meet the patient's needs. Upon the patient's arrival home, a nurse from the local branch typically oversees the administration of the patient's first home infusion treatment. Thereafter, the frequency of nursing visits depends upon the particular therapy the patient is receiving. During these subsequent visits, the nurse may check and adjust the patient's infusion site, intravenous lines and related equipment, obtain blood samples, change the pump settings and/or drug administration and assess the patient's condition and compliance with the plan of care. The patient's 2 4 supplies and drugs are typically delivered on a weekly basis depending on the therapy and the particular drugs being used. The treating physician and the managed care coordinator remain actively involved in the patient's treatment by monitoring the administration of the plan of care and revising the plan as necessary. PRODUCTS AND SERVICES OF THE COMPANY Infusion Therapy. Coram provides a variety of infusion therapies, principally anti-infective therapy, intravenous immuno-globulin ("IVIG"), parenteral nutrition, chemotherapy and pain management therapy. The initiation and duration of these therapies is determined by a physician based upon a patient's diagnosis, treatment plan and response to therapy. Certain therapies, such as anti-infective therapy, are generally used in the treatment of temporary conditions such as infections, while others, such as parenteral nutrition, may be required on a long-term or permanent basis. The infusion therapies are administered at the patient's home by the patient, the designated care-giver or an employee or agent of the Company. In patient groups such as immune suppressed patients (e.g., AIDS/HIV, cancer and transplant patients), antiinfective therapy may be provided periodically over the duration of the primary disease or for the remainder of the patient's life. Anti-Infective Therapy. Anti-infective therapy is the infusion of antibacterial, anti-viral or anti-fungal medications into the patient's bloodstream for the treatment of a variety of infectious diseases, such as osteomyelitis (bone infections), bacterial endocarditis (infection of the heart valves), wound infections, infections associated with AIDS and cancer and infections of the kidneys and urinary tract. Generally, intravenous anti-infective drugs are delivered through a peripheral catheter inserted in a vein in the patient's arm. Anti-infective drugs are generally more effective when infused directly into the bloodstream than when taken orally. Nutrition Therapy. Total parenteral nutrition therapy or "TPN" involves the intravenous feeding of life-sustaining nutrients to patients with impaired or altered digestive tracts due to a gastrointestinal illness or conditions such as an intestinal obstruction or inflammatory bowel disease. The therapy is administered through a central catheter surgically implanted into a major blood vessel to introduce the nutrient solution into the bloodstream. The nutrient solution may contain amino acids, dextrose, fatty acids, electrolytes, trace minerals or vitamins. In many cases, the underlying illness or condition from which parenteral nutrition patients suffer is recurrent in nature requiring periodic re-hospitalization for treatment followed by resumption of parenteral nutrition at home. Some patients must remain on parenteral nutritional therapy for life. Enteral nutrition therapy is administered through a feeding tube into the gastrointestinal tract to patients who cannot eat as a result of an obstruction to the upper gastrointestinal tract or other medical conditions. Enteral nutrition therapy is often administered over a long period, generally for more than six months. Biotherapy. The Company provides patients with biological response modifiers, colony stimulating factors, erythropoietin and interferons. In addition, the Company provides growth hormone therapies. IVIG. IVIG therapy involves the administration of a blood derivative product (gammaglobulins) which is administered to patients with immune deficiencies conditions. IVIG therapy is most commonly administered to patients with primary immune deficiencies or autoimmune disorders. Patients receiving IVIG therapy for primary immune deficiencies usually receive the therapy for life. Patients receiving IVIG therapy for autoimmune disorders receive the therapy intermittently over a period of months depending on their condition. During 1997, and continuing in 1998, the Company experienced and is experiencing difficulties in obtaining IVIG due to a national shortage of this product. The ongoing shortage of IVIG may adversely affect the Company's results of operations. Other Therapies. The Company provides other technologically advanced therapies such as chemotherapy, pain management, intravenous entropic therapy for patients with congestive heart failure or for those who are awaiting cardiac transplants, intravenous anti-coagulant therapy for prevention of blood clots and anti-nausea therapy for chemotherapyinduced emesis. Hydration therapy is often administered in conjunction with intravenous chemotherapy. In addition, the Company provides other therapies for diseases such as hemophilia and alpha-1-antititrypsin deficiency. Currently, each such therapy amounted to less than 5% of the Company's infusion therapy net revenue for each of the fiscal years ended December 31, 1997 and 1996. The Company 3 5 continually evaluates new infusion therapies and intends to add therapies which enable it to continue to provide full service to its patients and payors. For example, the Company has developed a program and is treating pre- and post-transplant patients. This treatment program includes proprietary patient assessment and monitoring protocols and the delivery of a wide range of intravenous and oral medications. Lithotripsy. Lithotripsy is a non-invasive technique that uses shock waves to disintegrate kidney stones. Depending on the particular lithotripter used, the patient is sedated using either general anesthesia or a mild sedative while seated in a bath or lying on a treatment table. The operator of the lithotripter machine locates the stone using fluoroscopy and directs the shock waves toward the stone. The shock waves then fragment the stone thereby enabling the patient to pass the fragments through the urinary tract. Because lithotripsy is non- invasive and is provided on an outpatient basis, lithotripsy is an attractive alternative to other more invasive techniques otherwise used in treating urinary tract stones. As of December 31, 1996, Coram owned a controlling interest in 11 lithotripsy partnerships as well as two wholly-owned lithotripsy entities, a wholly-owned lithotripter maintenance company and a lithotripsy management company. On August 20, 1997, the Company signed an agreement with IHS, for the sale of its Lithotripsy Business. Effective September 30, 1997, the Company completed the transaction as to all of its Lithotripsy Business other than its interests in three lithotripsy partnerships. Pursuant to a side agreement amending the August 20, 1997 purchase agreement, the Company's interest in the three remaining partnerships was placed in escrow pending the satisfaction of certain conditions. Following satisfaction of these conditions, two of the partnerships were conveyed to IHS effective October 3, 1997. Due to the Company's and IHS's inability to obtain the consent of the other partner to the transfer of Coram's interest therein, the Company retained its interest in the remaining partnership. R-Net. The Resource Network or "R-Net" is a home health services provider network and supporting management system developed by the Company in 1993. Through R-Net the Company offers provider network development and management to large managed care organizations such as Health Maintenance Organizations and at risk payors seeking to arrange for a variety of alternate site services for their enrollees under both capitated and fee-for-service arrangements. Under its R-NET arrangements, the Company (i) coordinates the provision of alternate site services among its network of providers; (ii) coordinates cases and utilization; and (iii) monitors and reports outcome to its customers who are concerned with combining cost efficiency with good clinical outcomes. As of December 31, 1997, R-Net had approximately 17 such arrangements covering approximately three million lives. Prescription Services. Coram Prescription Services ("CPS") includes a mail order pharmacy and a pharmacy benefit management service ("PBM"). The mail order pharmacy provides centralized distribution, compliance monitoring, patient education, and clinical support to patients with diabetes, organ transplants, HIV/AIDS, growth deficiencies, and other chronic conditions. The PBM provides on-line claims administration, formulary management, and drug utilization review services through a nationwide network of over 40,000 retail pharmacies. In addition to Coram's field sales force, CPS' services are marketed through a dedicated sales force to physicians, managed care organizations and other third-party payors. Women's Health. The Women's Health business provides pregnancy management services. The Women's Health services include: risk assessment and in-home monitoring of uterine contractions; monitoring of blood pressure, heart rate, weight, urine, protein and glucose levels; intravenous and oral drug therapy; dietician services; integrated nursing support; diabetes management; pregnancy-induced hypertension management; fertility management; and post-partum follow-up. Asthma Care and Chronic Obstructive Pulmonary Disease ("COPD"). The Company introduced an asthma and COPD management program. The programs, which are marketed to managed care organizations, are designed to prevent hospitalization and emergency room visits of patients with asthma or COPD by helping patients and families better manage the disease. 4 6 ORGANIZATION AND OPERATIONS General. The Company's alternate site infusion therapy business operations are conducted through approximately 100 branches managed through two divisional offices. The divisional offices provide each of its branches with key management direction and support services. The Company's organizational structure is designed to create operating efficiencies associated with certain centralized services and purchasing while also promoting local decision making. The Company believes that its decentralized approach to management facilitates high quality local decision making, which allows it to attract and retain experienced local managers and be responsive to local market needs. Operating Systems and Controls. An important factor in Coram's ability to monitor its operating locations is its management information systems. Besides routine revenue and cost reporting, the Company has developed a performance model for monitoring its field operations. Actual operating results derived from its management information systems are compared to the performance model, enabling management to identify opportunities for increased efficiency and productivity. The Company believes that the use of standardized, specific performance matrices and the identification of best demonstrated practices facilitates operating improvement. The Company endeavors to ensure that its local managers have the appropriate authority and ability to perform effectively by providing them with training, comprehensive policies and procedures and standardized systems. The Company has designed management incentive plans that reward performance based on revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA") contribution, accounts receivable collection and inventory control. REIMBURSEMENT OF SERVICES Virtually all of Coram's revenue is derived from third-party payors, including private insurers, managed care organizations such as Health Maintenance Organizations ("HMOs") and Preferred Provider Organizations ("PPOs"), and governmental payors such as Medicare and Medicaid. Similar to other medical service providers, the Company experiences lengthy reimbursement periods in certain circumstances as a result of third-party payment procedures. Consequently, management of accounts receivable through effective patient registration, billing, collection and reimbursement procedures is critical to financial success and continues to be a high priority for management. The Company has developed substantial expertise in processing claims and carefully screening new cases to determine whether adequate reimbursement will be available. Regional locations are generally responsible for billing and collections, within strict guidelines. The Company believes that accounts receivable management is best accomplished at the regional level because of direct relationships with payors and the ability of regional personnel to identify and react promptly to billing discrepancies. Private indemnity payors typically reimburse at a higher amount for a given service and provide a broader range of benefits than governmental and managed care payors, although net revenue and gross profits from private and other third-party non governmental payors have been affected by the continuing efforts to contain or reduce the costs of healthcare. An increasing percentage of Coram's revenue has been derived in recent years from agreements with HMOs, PPOs and other managed care providers. Although these agreements often provide for negotiated reimbursement at reduced rates, they generally result in lower bad debts, provide for faster payment terms and provide opportunities to generate greater volume than traditional indemnity referrals. Reimbursement coverage is provided through private sources, such as insurance companies, self-insured employers and patients, and through the Medicare and Medicaid programs. The Healthcare Financing Administration ("HCFA") has developed, for use in the Medicare Part B program, a national fee schedule for respiratory therapy, home medical equipment and infusion therapy which provides reimbursement at 80% of the amount of any fee on the schedule. A substantial amount of the revenue the Company receives from the Medicare program originates from the Part B program. The remaining 20% co-insurance portion is not paid by Medicare. The Company pursues secondary insurance and patients for the 20% co-insurance. 5 7 QUALITY ASSURANCE Coram has established quality improvement programs that implement service standards and enable the Company to monitor whether the objectives of those standards are met. As of March 23, 1998, the corporate office and 83 branches, including related satellite locations, had been re-surveyed by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). Of these, 75 branches received accreditation, 30 of which were accredited with commendation, the highest award possible. The remaining branches are either awaiting the results of their survey or are in the process of being re-surveyed. As of December 31, 1997, all branches were accredited. An integral part of Coram's quality efforts is the branch team that meets regularly to perform, among others, the following functions: 1. Evaluate branch programs, policies and procedures. 2. Provide ongoing direction to the quality improvement efforts. 3. Evaluate patient satisfaction activities and results. 4. Assist in development of new programs or procedures to meet recognized needs within the branch or community which it serves. 5. Evaluate the branch staff efforts related to professional and clinical issues. 6. Identify and monitor key performance areas of operations. In addition, Coram's Clinical Services Department performs ongoing quality audits of the branches to assess level of service being provided. COMPETITION The alternate site healthcare market is highly competitive and is experiencing both horizontal and vertical consolidation. Some of Coram's current and potential competitors include (i) integrated providers of alternate site healthcare services; (ii) hospitals; (iii) local providers of multiple products and services for the alternate site healthcare market; and (iv) physicians, including physicians with whom it previously had business arrangements. The Company has experienced increased competition from hospitals and physicians who have sought to increase the scope of services offered through their offices, including services similar to those offered by the Company. The Company competes on a number of factors, including quality of care and service, reputation within the medical community, geographical scope and price. Competition within the alternate site healthcare delivery system has been affected by the decision of third-party payors and their case managers to become more active in monitoring and directing the care delivered to their beneficiaries. Accordingly, relationships with such payors and their case managers and inclusion within preferred provider and other networks of approved or accredited providers may become a prerequisite to Coram's ability to continue to serve many of its patients. Similarly, the ability of the Company and its competitors to align themselves with other healthcare service providers may increase in importance as managed care providers and provider networks seek out providers who offer a broad range of services that may exceed the range of services currently offered directly by the Company. Moreover, there are relatively few barriers to entry in the local markets which Coram serves. Local or regional companies are currently competing in many of the home healthcare markets served by the Company and others may do so in the future. Coram also expects competitors to develop new strategic relationships with providers, referral sources and payors, which could result in a rapid and dramatic increase in competition. The introduction and enhancement of new services and the development of strategic relationships by Coram's competitors could cause a significant decline in sales, loss of market acceptance of the Company's services and intense price competition. The Company expects to continue to encounter increased competition in the future that could limit its ability to maintain or increase its market share. Such increased competition could have a 6 8 material effect on the business, financial condition and results of operations of the Company. See Item 7. RISK FACTORS -- "Intensely Competitive Industry." SALES AND MARKETING The Company's products and services are marketed through its field sales force, branch sales personnel and various media formats. Substantially all of Coram's new patients are referred by physicians, medical groups, hospital discharge planners, case managers employed by HMOs, PPOs or other managed care organizations, insurance companies and home care agencies. The Company's sales force is responsible for establishing and maintaining referral sources. All sales employees receive a base salary plus incentive compensation based on profitable revenue growth. The Company's network of field representatives enables it to market its services to numerous sources of patient referrals, including physicians, hospital discharge planners, hospital personnel, HMOs, PPOs and insurance companies. Marketing is focused on presenting the Company's clinical expertise tailored to the different customer interests with a specific emphasis on key therapies. Products and services that are outside of base infusion therapy are supported by specialty marketing and sales support personnel. As a result of escalating pressures to contain healthcare costs, third-party payors are participating to a greater extent in decisions regarding healthcare alternatives using their significant bargaining power to secure discounts and to direct referrals of their enrollees to providers. In response, Coram has modified its sales and development focus to aggressively pursue agreements with third-party payors, managed care organizations and provider networks that provide high quality, cost effective care. The Company has recruited a dedicated sales force to enhance its efforts to market and sell its services to managed care payors. Managed care sales representatives are deployed in each market and at the corporate level with additional resources focused on large national payors. The Company is currently focusing its efforts on increasing referrals through selected managed care agreements with the goal of being the exclusive infusion provider as well as selling specialty programs such as nutrition, chronic care and transplant services to these key customers. Through its R-Net product, the Company has established relationships with managed care companies serving as an ancillary service manager for all home health services. Under these arrangements, the Company provides some services directly and subcontracts the services it does not provide on its own through its network of providers. CUSTOMERS AND SUPPLIERS The Company provides alternate site home healthcare services and products to a large number of patients, and with the exception of Medicare and Medicaid (which collectively represent 28% of net revenue for the year ended December 31, 1997), no single payor accounted for more than 5% of Coram's net revenue for the year ended December 31, 1997. The Company purchases products from a large number of suppliers and considers its relationships with its vendors to be good. The Company believes that substantially all of its products are available from alternative sources with terms consistent in all material respects to its present agreements. In 1997, the Company incurred a one time purchase of approximately $11.5 million in multi-therapy infusion pumps and $4.3 million in related equipment and supplies. GOVERNMENT REGULATION General. Coram's alternate site infusion operations are subject to extensive federal and state laws regulating, among other things, the provision of pharmacy, home care, nursing services, health planning, health and safety, environmental compliance and toxic waste disposal. The Company is also subject to fraud and abuse and self referral laws, which affect its business relationships with physicians and other healthcare providers and referral sources and its reimbursement from government payors. Generally, all states require infusion companies to be licensed as pharmacies and to have appropriate state and federal registrations for dispensing controlled substances. Some states require infusion companies to be licensed as nursing or home health agencies and to obtain medical waste permits. In addition, certain employees of the Company are subject to state laws and regulations governing the ethics and professional practice of pharmacy and nursing. 7 9 The Company may also be required to obtain certification to participate in governmental payment programs, such as Medicare and Medicaid. Some states have established Certificate of Need ("CON") programs regulating the establishment or expansion of healthcare operations, including certain of Coram's operations. The failure to obtain, renew or maintain any of the required regulatory approvals or licenses could adversely affect the Company's business and could prevent the location involved from offering products and services to patients. Coram's operating results could be adversely affected, directly or indirectly, as a result of any such sanctions. The Company believes it complies in all material respects with these and all other applicable laws and regulations. The healthcare services industry will continue to be subject to pervasive regulation at the federal and state levels, the scope and effect of which cannot be predicted. No assurance can be given that the activities of the Company will not be reviewed and challenged or that government sponsored healthcare reform, if enacted, will not result in a material adverse change to the Company. Fraud and Abuse. The Company's operations are subject to the illegal remuneration provisions of the Social Security Act (sometimes referred to as the "anti-kickback" statute) and similar state laws that impose criminal and civil sanctions on persons who knowingly and willfully solicit, offer, receive or pay any remuneration, whether directly or indirectly, in return for, or to induce, the referral of a patient for treatment, or, among other things, the ordering, purchasing or leasing, of items or services that are paid for in whole or in part by federal healthcare programs. Violations of the federal anti-kickback statute are punishable by criminal penalties, including imprisonment, fines and exclusion of the provider from future participation in the federal healthcare programs. Federal health care programs have been defined to include any plan or program that provides health benefits which is funded by the United States Government and commonly include Medicare, Medicaid and CHAMPUS, among others. Civil suspension for anti-kickback violations can also be imposed through an administrative process, without the imposition of civil monetary penalties. In addition, violations of the anti-kickback statute may be prosecuted as false claims under Medicare law, the penalties for which include return of payments received, fines and exclusion from participation. Federal enforcement officials may also attempt to use other general federal statutes to punish behavior considered fraudulent or abusive, including the Federal False Claims Act, which provides for penalties of up to $10,000 per claim plus treble damages, and permits private persons to sue on behalf of the government. While the federal anti-kickback statute expressly prohibits transactions that have traditionally had criminal implications, such as kickbacks, rebates or bribes for patient referrals, its language has been construed broadly and has not been limited to such obviously wrongful transactions. Some court decisions state that, under certain circumstances, the statute is also violated when one purpose (as opposed to the "primary" or a "material" purpose) of a payment is to induce referrals. Congress has frequently considered federal legislation that would expand the federal anti-kickback statute to include the same broad prohibitions regardless of payor source. In addition to the payment or receipt of illegal remuneration for the referral or generation of Medicare or Medicaid business, the fraud and abuse law covers other billing practices that are considered fraudulent (such as presentation of duplicate claims, claims for services not actually rendered or for procedures that are more costly than those actually rendered) or abusive (such as claims presented for services not medically necessary based upon a misrepresentation of fact), subject to the same remedies described above. Similarly, a large number of states have varying laws prohibiting certain direct or indirect remuneration between healthcare providers for the referral of patients to a particular provider, including pharmacies and home health agencies. Possible sanctions for violation of these laws include loss of licensure and civil and criminal penalties. Prohibition on Physician Referrals. Under the Omnibus Budget Reconciliation Act of 1993 ("Stark II"), it is unlawful for a physician to refer patients for certain designated health services reimbursable under the Medicare or Medicaid program to an entity with which the physician has a financial relationship. While infusion therapy is not itself listed as a "designated health service," specific components are as follows: outpatient prescription drugs, parenteral and enteral nutrition, equipment and supplies, durable medical equipment and home health services. 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 entity is prohibited from claiming payment under the Medicare or Medicaid programs for services rendered pursuant to a prohibited referral and is liable for the refund of 8 10 amounts received pursuant to prohibited claims. The entity can also receive civil penalties of up to $15,000 per improper claim and can be excluded from participation in the Medicare and Medicaid programs. Comparable provisions applicable to clinical laboratory services became effective in 1992. Stark II provisions which may be relevant to the Company became effective on January 1, 1995. Because of its broad language, Stark II may be interpreted by the Office of Inspector General ("OIG") of the Department of Health and Human Services ("HHS") to apply to Coram's operations. Stark II is broadly written and at this point, only proposed regulations have been issued to clarify its meaning and application. Regulations for a predecessor law, Stark I, were published in August 1995 and remain in effect, but provide little guidance on the application of Stark II to the infusion therapy business. While the proposed Stark II regulations do not have the force and effect of law, they provide some guidance as to what may be included in the final version. Issued on January 9, 1998, the proposed regulations purport to define previously undefined key terms, clarify prior definitions and create new exceptions for certain "fair market value" transactions, de minimis compensation arrangements and discounts, among others. It is unclear when these regulations will be finalized and until such time, they cannot be relied upon in structuring transactions. However, a failure to comply with the provisions of Stark II (or the Stark I regulations) could have a material adverse effect on the Company. A large number of the states in which Coram operates have enacted some form of physician self-referral law that regulates ownership interests in or compensation arrangements between physicians and the healthcare service providers to which they refer patients. These laws vary from measures that require physicians to disclose their financial interests to outright prohibitions similar to Stark II. In most cases, state physician self-referral laws apply to all payors, government and private. The Company believes that most state laws are inapplicable to the businesses it operates or contain exemptions that appear to be applicable to its operations. Where state law does apply, the Company has restructured its business arrangements or implemented other methods for complying and maintaining compliance with such laws. Medicare and Healthcare Reform. As part of the Balanced Budget Act of 1997, Congress made numerous changes that affect the participation of Part A certified home health agency providers and Part B suppliers like the Company in the Medicare program. As of January 1, 1998, providers of home health services and suppliers of durable medical equipment would be required, as a condition of their participation in Part A and Part B of the Medicare program, to post surety bonds in the minimum amount of $50,000. The bonds would be used to secure such entities' performance and compliance with Medicare program rules and requirements. The regulations applicable to Medicare certified home health providers, as originally published, would require each Medicare certified home health provider to obtain a surety bond in an amount equal to the greater of 15% of the annual amount Medicare paid to the provider in the prior year (up to a maximum of $3,000,000) or $50,000. Under the regulations, each such home health provider was required to obtain and deliver the necessary surety bond by February 27, 1998. The deadline, however, was extended because HCFA learned that some home health agencies were not able to obtain the necessary surety bonds in time to meet the February deadline. The Company understands that HCFA is reviewing the bonding requirements and has stated that it will not take any action to terminate or withhold federal financial participation with respect to any home health agency that has not yet furnished a surety bond until its bonding rules become final. HCFA has further indicated that the new compliance date will be sixty days after the publication of the final rule and has requested that all home health agencies that have been unable to secure the necessary bond must notify their fiscal intermediary of this fact by March 31, 1998 so HCFA can make an accurate assessment of the number of home health agencies without bonds. The Company believes, based upon currently available information derived from its discussions with surety bond brokers and organizations that issue surety bonds, that the necessary bonds will not be generally available to home health providers until HCFA revises its bonding requirements in a way that clarifies and/or limits the types of liabilities that will be covered by the bonds. As of March 23, 1998, the Company had not obtained the necessary bonds for its eleven Medicare certified home health providers and has notified the appropriate fiscal intermediaries of this fact. The Company understands that HCFA will be issuing separate surety bond regulations applicable to Part B durable medical equipment suppliers. If the regulations applicable to Part B suppliers are similar to those published for Part A providers, the Company would be required to post bonds for each of its branches 9 11 that participate in the Part B program in the same amounts as those described above for Part A home health service providers. Virtually all of the Company's branch offices participate as suppliers in the Part B Medicare program. Similar bonding requirements are being required by state Medicaid programs. If the Company is required to post surety bonds under the Medicare and Medicaid programs for each of its Part A home health agency providers and Part B durable medical equipment supplier locations, the Company would be forced to obtain bonds in the minimum face amount of approximately $12.0 million. If the Company is not able to obtain all of the necessary bonds, it would have to cease its participation in the Medicare and Medicaid programs. Congress has also reduced reimbursement for oxygen and oxygen related therapies by 25% effective January 1, 1998, with an additional 5% reduction to occur effective January 1, 1999. In addition, Congress has initiated a freeze on both consumer price index updates for payments for durable medical equipment and "reasonable charge" payments for parenteral and enteral nutrients, supplies and equipment for the next five years. Congress has also initiated the implementation of a prospective payment system for home health services for cost reporting periods beginning on or after October 1, 1999 and certain demonstration projects for competitive bidding of, at a minimum, oxygen and oxygen equipment, through December 31, 2002. While the details of the prospective payment and competitive bidding systems are unclear, there can be no assurance that adoption of these systems, and the reductions and freezes described above, will not result in a material decrease in the amount of reimbursement the Company receives from the Medicare program for the services it currently provides and any other home health or related oxygen, durable medical equipment or home infusion services the Company may acquire in the future. Further, statutes or regulations may be adopted which would impose additional requirements in order for Coram to be eligible to participate in the federal and state payment programs. Such new legislation or regulations may adversely affect its business operations. There is significant national concern today about the availability and rising cost of healthcare in the United States. It is anticipated that new federal and/or state legislation will be passed and regulations adopted to attempt to provide broader and better healthcare and to manage and contain its cost. The Company is unable to predict the content of any legislation or what, if any, changes may occur in the method and rates of its Medicare and Medicaid reimbursement or in other government regulations that may affect its businesses, or whether such changes, if made, will have a material adverse effect on its business, financial position and results of operations. State Laws Regarding Fee Splitting, Provision of Medicine and Insurance. The laws of many states prohibit physicians from splitting fees with non-physicians and prohibit non-physician entities from practicing medicine. These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. Although Coram believes its operations as currently conducted are in material compliance with existing applicable laws, certain aspects of the Company's business operations have not been subject to state or federal regulatory interpretation. There can be no assurance that review of the Company's business by courts or regulatory authorities will not result in determinations that could adversely affect the operations of the Company or that the healthcare regulatory environment will not change so as to restrict its existing operations or its expansion. Most states have laws regulating insurance companies and HMOs. The Company is not qualified in any state to engage in the insurance or HMO business but has registered one of its subsidiaries as a risk taking preferred provider organization in one state due to proposed activities under an R-NET relationship with a licensed insurance organization. As managed care penetration increases, state regulators are beginning to scrutinize the practices of and relationships among third-party payors, medical service providers and entities providing management and administrative services to medical service providers, especially with respect to risk sharing arrangements by and among such providers, and whether risk bearing entities are subject to insurance or HMO regulation. The Company believes that its practices are consistent with those of other healthcare companies and do not constitute licensable HMO or insurance activities. To the extent such licenses may be required, the Company will make the necessary filings and registrations to achieve compliance with applicable law. However, given the limited regulatory history with respect to such practices, there can be no assurance that states requiring licensure will not attempt to assert jurisdiction. If the states pursue actions against the Company and/or its customers, the Company may be compelled to restructure or refrain from engaging in certain business practices. 10 12 Pharmacies and Home Health Agencies. All of Coram's pharmacies are licensed in the states in which they are located. All of these pharmacies also have Controlled Substances Registration Certificates issued by the Drug Enforcement Administration of the United States Department of Justice. Many states in which the Company operates also require home infusion companies to be licensed as home health agencies. The failure of a branch facility to obtain, renew or maintain any required regulatory approvals or licenses could adversely affect the existing operations of that branch facility. Other Regulations. Coram's operations are subject to various state hazardous waste disposal laws. The laws currently in effect do not classify most of the waste produced during the provision of the Company's services to be hazardous, although disposal of non-hazardous medical waste is also subject to regulation. OSHA regulations require employers of workers who are occupationally exposed to blood or other potentially infectious materials to provide those workers with certain prescribed protections against bloodborne pathogens. The regulatory requirements apply to all healthcare facilities, including the Company's branches, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide hepatitis-B vaccinations, personal protective equipment, infection control training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, and engineering and work practice controls. Employers are also required to comply with certain record-keeping requirements. The Company believes it is in material compliance with the foregoing laws and regulations. In September 1994 T2 Medical, one of the Company's subsidiaries, entered into a settlement agreement with the United States (the "T2 OIG Settlement Agreement") settling claims arising out of an investigation by the OIG into certain operations of T2 Medical, which occurred prior to the Four-Way Merger. T2 Medical, in expressly denying liability, agreed to a civil order which enjoins it from violating federal anti-kickback and false claims laws related to Medicare/Medicaid reimbursement. The T2 OIG Settlement Agreement imposes certain restrictions upon the types of relationships that T2 Medical may have with referring physicians and imposes a five year reporting obligation upon T2 Medical. During 1994 and the first quarter of 1995, the Company restructured or terminated a large number of relationships with physicians in order to meet the requirements of the T2 OIG Settlement Agreement, Stark II and Coram's own compliance standards. The Company has implemented measures to ensure compliance with the T2 OIG Settlement Agreement and has engaged Richard P. Kusserow, the former Inspector General of the Department of Health and Human Services, as a consultant to assist the Company in its continued development and administration of its compliance program. The Company's internal regulatory compliance review program is intended to deal with compliance issues under the T2 OIG Settlement Agreement and with other legal, regulatory and ethical compliance issues. However, no assurance can be made that in the future Coram's business arrangements, present or past (or those of its predecessors or divested subsidiaries, affiliates or partnerships), will not be the subject of an investigation or prosecution by a federal or state governmental authority. Such investigation could result in any, or any combination, of the penalties discussed above depending upon the agency involved in such investigation and prosecution. The Company regularly monitors legislative developments and would seek to restructure a business arrangement if it was determined that any of its business relationships placed it in material noncompliance with any statute. The healthcare service industry will continue to be subject to substantial regulation at the federal and state levels, the scope and effect of which cannot be predicted by the Company. Any loss by the Company of its various federal certifications, its authorization to participate in the Medicare and Medicaid programs or its licenses under the laws of any state or other governmental authority from which a substantial portion of its revenues are derived would have a material adverse effect on its business. See Item 7. RISK FACTORS -- "Governmental Regulation." EMPLOYEES As of December 31, 1997, Coram had approximately 2,800 full-time equivalent employees. None of the Company's employees is currently represented by a labor union or other labor organization. Approximately 40% of the employees are nurses and pharmacists, with the remainder consisting primarily of sales and 11 13 marketing, reimbursement, financial and systems professionals. The Company believes that its employee relations are good. ITEM 2. PROPERTIES. The Company's headquarters are located in Denver, Colorado and consist of approximately 20,000 square feet of office space leased through August, 1999. As of March 23, 1998, the Company had approximately 100 branch facilities throughout the United States and Canada, totaling approximately 1.0 million square feet of facility space currently in use with monthly rental of this space aggregating approximately $0.9 million, net of approximately 0.05 million square feet and $0.08 million for subleased space, respectively. The loss of the lease on any one facility will not materially effect the Company. ITEM 3. LEGAL PROCEEDINGS. On November 21, 1995, a suit captioned William Hall and Barbara Lisser v. Coram Healthcare Corporation, James W. Sweeney, Patrick Fortune, and Sam Leno, No 1:95-CV-2994(WHB) was filed in the United States District Court for the Northern District of Georgia on behalf of a purported class of plaintiffs who were entitled to receive warrants pursuant to the settlement of In re T2 Medical, Inc. Shareholder Litigation. Plaintiffs filed an Amended Class Action Complaint on February 28, 1996, in which they allege that the Defendants made false and misleading statements that caused a fraud on the market and artificially inflated the price of the Company's stock during the period from August 1994 through August 1995. Such Complaint alleges violations of Section 10(b) of the Securities Act of 1934, and Rule 10b-5 promulgated thereunder, against all of the Defendants. The Complaint also alleges controlling person liability against the individual defendants under Section 20(a) of the Securities and Exchange Act, and further alleges fraud by all of the Defendants under Georgia law. Finally, Plaintiffs allege a breach of the covenant of good faith and fair dealing by all Defendants. Plaintiffs seek compensatory damages reflecting the difference in value between the warrants as issued pursuant to the settlement of In re T2 Medical, Inc. Shareholder Litigation with the trading price of the Company's common stock at its actual price and the same number of warrants at the same exercise price with the Company's stock trading at its alleged true value. The Defendants filed a Motion to dismiss the Amended Class Action Complaint on March 13, 1996. The Court granted the Company's Motion to Dismiss the Complaint on February 12, 1997. The Plaintiffs have appealed the dismissal to the Eleventh Circuit Court of Appeals. The Company opposed the appeal. The Eleventh Circuit held oral argument on November 18, 1997, but the Court has not yet ruled on the appeal. The Company intends vigorously to defend itself in the matter described above. Nevertheless, due to the uncertainties inherent in litigation, the ultimate disposition of the matter described in the preceding paragraph cannot presently be determined. Accordingly, except for the settlement of the Shareholder Litigation described in Note 12 to the Company's Consolidated Financial Statements and charges recorded for various litigation settlements that are not individually material to the Company, no provision for any loss that may result upon resolution of any suits or proceedings has been made in the Company's Consolidated Financial Statements. An adverse outcome could be material to the financial position, results of operations and liquidity of the Company. In September 1995, as amended on October 6, 1995, the Company filed suit against Caremark (the "Caremark Litigation") in the San Francisco Superior Court. The Caremark Litigation and other related issues arose out of the acquisition of certain assets of Caremark's home infusion business in 1995. On June 30, 1997, the Company entered into a settlement with Caremark. Under the terms of the settlement, Junior Subordinated Pay-In-Kind Notes issued by the Company in such acquisition totaling approximately $100.0 million principal and $20.0 million accrued interest were canceled with all payments due thereunder forgiven. Additionally, Caremark agreed to pay $45.0 million in cash which was received on September 2, 1997. Of the $45.0 million cash received, $3.6 million was placed in escrow pending reconciliation of certain lockbox issues. As a result the Company recorded income from litigation settlement of $156.8 million during the second quarter of 1997. See Note 3 to the Company's Consolidated Financial Statements. 12 14 On July 7, 1997, the Company filed suit against Price Waterhouse LLP in the Superior Court of San Francisco, California, seeking damages in excess of $165.0 million. As part of the settlement of the Caremark Litigation, Caremark assigned and transferred to the Company all of Caremark's claims and causes of action against Caremark's auditors, Price Waterhouse LLP, related to the lawsuit. This assignment of claims includes claims for damages sustained by Caremark in defending and settling its lawsuit with the Company. Price Waterhouse has moved to dismiss the Company's lawsuit on several grounds. The Company has responded. However, there can be no assurance that the Company will succeed in its opposition to the motion to dismiss and there can be no assurance of any recovery from Price Waterhouse LLP. See Note 3 to the Company's 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 Company's financial position, results of operations and liquidity of the Company. Nevertheless, due to the uncertainties inherent in litigation, the ultimate disposition of these actions cannot presently be determined. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. The Company's Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "CRH". The following table sets forth the high and low sale prices of the Common Stock as reported on the New York Stock Exchange Composite Tape for the periods indicated:
HIGH LOW ---- --- CALENDAR YEAR 1996 First Quarter............................................... 6 3/8 4 1/8 Second Quarter.............................................. 5 5/8 3 7/8 Third Quarter............................................... 4 1/2 2 3/4 Fourth Quarter.............................................. 5 3/8 3 3/4 CALENDAR YEAR 1997 First Quarter............................................... 5 7/8 3 3/4 Second Quarter.............................................. 4 1 1/4 Third Quarter............................................... 5 3/16 3 1/8 Fourth Quarter.............................................. 5 2 3/4 CALENDAR YEAR 1998 First Quarter through March 23, 1998........................ 3 3/8 2 1/8
As of March 23, 1998, there were 5,957 record holders of the Company's Common Stock. On March 23, 1998, the last reported sale price of the Common Stock on the New York Stock Exchange was $2.3125 per share. The Company has not paid or declared any cash dividends on its capital stock since its inception and is currently precluded from doing so under its borrowing agreements. The Company currently intends to retain all future earnings for use in the operation of its business. Accordingly, the Company does not anticipate paying cash dividends on its common stock in the foreseeable future. The payment of any future dividends will depend upon, among other things, the terms of its borrowing agreements, future earnings, operations, capital requirements, the general financial condition of the Company, contractual restrictions and general business conditions. The Company did not sell any of its equity securities in the three months ended December 31, 1997 that were not registered under the Securities Act of 1933, as amended. 13 15 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Historical financial data for the Company prior to the July 1994 Four-Way Merger is based on the combined financial data of the predecessor entities, and may not be comparable on a year-to-year basis. Amounts are in thousands except per share data.
FISCAL YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- --------- --------- -------- INCOME STATEMENT DATA: Net revenue.............................................. $464,385 $521,969 $ 602,585 $ 450,496 $462,304 Cost of service.......................................... 328,781 361,688 459,710 313,182 285,023 -------- -------- --------- --------- -------- Gross profit........................................... 135,604 160,281 142,875 137,314 177,281 Operating expenses: Selling, general and administrative expenses........... 93,167 104,261 133,037 81,907 75,706 Provision for estimated uncollectible accounts......... 16,209 29,045 68,912 36,817 29,751 Amortization of goodwill............................... 13,586 15,259 15,307 8,971 7,824 Charge for long-lived assets and acquired receivables: Goodwill and other long-lived assets (1)............. -- -- 166,373 -- -- Valuation of acquired receivables (2)................ -- -- 37,000 -- -- Merger expenses (3).................................... -- -- -- 28,500 2,868 Provision for (income from) litigation settlements(4)....................................... (156,792) 27,875 -- 23,220 -- Restructuring costs, net (5)........................... -- -- 6,158 95,500 1,600 -------- -------- --------- --------- -------- Total operating expense.......................... (33,830) 176,440 426,787 274,915 117,749 -------- -------- --------- --------- -------- Operating income (loss).................................. 169,434 (16,159) (283,912) (137,601) 59,532 Interest income........................................ 2,242 1,497 1,531 2,469 3,746 Interest expense (6)................................... (75,026) (78,767) (49,741) (7,414) (3,916) Gain on sale of business (7)........................... 26,744 -- -- -- -- Termination fee (8).................................... 15,182 -- -- -- -- Other income (expense), net............................ 1,517 2,115 (2,117) 865 7,862 -------- -------- --------- --------- -------- Income (loss) before income taxes and minority interests.............................................. 140,093 (91,314) (334,239) (141,681) 67,224 Income tax expense (benefit)........................... 7,550 (13,998) (11,154) (26,231) 28,848 Minority interest in net income of consolidated joint ventures............................................. 7,283 7,698 10,964 12,622 9,715 -------- -------- --------- --------- -------- Net income (loss)........................................ $125,260 $(85,014) $(334,049) $(128,072) $ 28,661 ======== ======== ========= ========= ======== Earnings (loss) per common share......................... $ 2.64 $ (2.05) $ (8.39) $ (3.32) $ 0.76 ======== ======== ========= ========= ======== Earnings (loss) per common share--assuming dilution...... $ 2.30 $ (2.05) $ (8.39) $ (3.32) $ 0.76 ======== ======== ========= ========= ======== Cash dividends per common share (9)...................... -- -- -- -- -- BALANCE SHEET DATA: Cash and cash equivalents................................ $108,950 $ 15,375 $ 26,735 $ 30,134 $ 50,980 Working capital (deficit)................................ (11,620) (132,529) 37,422 83,811 124,992 Total assets............................................. 516,820 545,309 687,849 576,439 555,877 Long-term debt, net of current portion (10).............. 150,428 266,641 439,309 119,726 40,156 Stockholders' equity (deficit)........................... 125,026 (21,482) 18,040 322,261 438,872
- --------------- The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128"). For further discussion of earnings per share and the impact of Statement 128, see the notes to the Company's Consolidated Financial Statements. (1) In 1995, Coram recorded an impairment loss of $166.4 million related to its home infusion business, of which $158.1 million related to goodwill and $8.3 million related to other long-lived assets. (2) In 1995, Coram reduced the valuation of the acquired receivables related to the Caremark Business by an aggregate of $37.0 million, as certain receivables for services rendered prior to the acquisition date of April 1, 1995 were determined to be uncollectible. (3) Coram recorded merger costs of $28.5 million in 1994 related to the Four-Way Merger. This included executive severance payments directly related to the merger based on the respective employment agreements, investment banking fees, consulting, legal and accounting fees and other costs incurred as a direct result of the Four-Way Merger. 14 16 (4) In 1994, the $23.2 million provision for litigation settlements represents the cash and non-cash costs of settling certain litigation matters which arose prior to the Four-Way Merger. The $27.9 million provision for litigation settlements in 1996 includes a non-cash provision of $25.6 million and a cash provision of $0.3 million related to an agreement to settle certain stockholder class actions and certain derivative litigation. The $156.8 million income from litigation settlement recorded in 1997 relates to the settlement of a lawsuit against Caremark resulting from the purchase of the Caremark Business in 1995. (5) As a result of the Four-Way Merger, Coram initiated a merger and restructuring plan (the "Coram Consolidation Plan") during 1994 to reduce operating costs, improve productivity and gain efficiencies through consolidation of redundant infusion centers and corporate offices, reduction of personnel and elimination or discontinuance of investments in certain joint ventures and other non-infusion facilities. The estimated cost to complete the Coram Consolidation Plan of $95.5 million was recorded in the third quarter of 1994. (6) Interest expense increased significantly in 1995 due to increased borrowings to finance the acquisition of the Caremark Business and other acquisitions, merger costs and other working capital requirements, as well as the related amortization of deferred financing costs and warrants. (7) In 1997, the Company sold its Lithotripsy Business to IHS. Accordingly the Company recorded a gain on sale of its Lithotripsy Business of $26.7 million. (8) In 1997, the Company received $21.0 million from the termination of a merger agreement with IHS. As a result, the Company recorded other income of $15.2 million, representing the $21.0 million termination fee less related costs. (9) Excludes dividends paid by predecessor entities prior to the July 1994 Four-Way Merger. (10) On October 13, 1995, two major lenders of the Company, who issued credit in connection with the acquisition of the Caremark Business, agreed to restructure major terms of their debt agreements. As a result of the restructuring, the maturity date was shortened. In March 1996, Coram reclassified a portion of the long term balance to current. The current portion of long term debt was $150.2 million, $198.0 million, $67.1 million, $5.9 million and $28.8 million at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Annual Report on Form 10-K contains certain forward looking statements (as such term is defined in the private Securities Litigation Reform Act of 1995) and information relating to Coram that are based on the beliefs of the management of Coram as well as assumptions made by and information currently available to the management of Coram. When used in this Report, the words "estimate," "project," "believe," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views of Coram with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. For a discussion of such risks, see "Risk Factors." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Coram does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. BACKGROUND Business Strategy. The Company's business strategy is focused on the basic factors that could lead to profitability: revenue generation programs, cost reduction, quality improvement and cash collections. The Company continues to focus on business relationships where it can assure high quality of care and operate profitably. The Company is continuing to emphasize marketing efforts aimed at improving its therapy mix and physician relationships and also has continued the development of its specialty programs such as provider 15 17 network development and management for managed care payors, disease-state carve-outs (i.e., vertical integration along disease-specific categories), transplant programs, mail order prescription and pharmacy benefit management services and women's health programs. Cost reduction efforts have focused on field consolidation, reduction of corporate expenses, assessment of poorly performing branches and a review of branch efficiencies. Delivery of quality service is being closely monitored through an internal task force, more rigorous reporting and independent patient satisfaction surveys gathered throughout the year. Further, management continues to concentrate on reimbursement through an emphasis on improving billing and cash collections and continued assessment of systems support for reimbursement. While management believes the implementation of its business strategy has improved operating performance, no assurances can be given as to its ultimate success. The settlement of the Caremark Litigation, completion of the sale of the Lithotripsy Business and the termination of the proposed merger with IHS, have now permitted management of the Company to focus on operations and strategic alternatives for the Company to enable the Company to realize its potential in the changing market for alternate site infusion therapy services. In addition, other events that impacted the Company in 1997 or which may impact the Company in the future include: (i) repayment and termination of the Senior Credit Facility in January 1998 thereby reducing interest expense; and (ii) a six-month extension to September 30, 1998 for the payment of deferred interest and fees related to the Rollover Note, provided that the Company and the Holders of the Rollover Note reach an agreement in principle for its restructuring by April 13, 1998 (See Exhibit 10.40). Future strategic alternatives currently being considered by the Company include, among others, (i) the pursuit of opportunities in its core alternate site infusion therapy business, including consolidation with or acquisition of other companies in its core business or in businesses complimentary to the Company's core business and (ii) completion of the refinancing of its debt instruments to reduce interest expense. From time to time, the Company evaluates potential acquisitions in markets that permit the Company to grow its local or regional business either through its core infusion therapy business or through complimentary home health services such as respiratory therapy and durable medical equipment. Combined, management believes these factors have improved and will continue to improve the Company's financial prospects, improve and stabilize relationships with payors and referral sources, and improve its position within the home healthcare industry. There can be no assurance that any restructuring of the Company's debt obligations will be consummated or that other strategic alternatives, pursued by the Company, will be available on commercially acceptable terms to the Company. Factors Affecting Recent Operating Results. The most significant factors affecting the Company's operating performance and financial condition are as follows: (i) settlement of the Caremark Litigation for $165.0 million in 1997. See Notes 3 and 12 to the Company's Consolidated Financial Statements. Through 1995 and 1996, the Company suffered a loss of revenues from under-performance of the Caremark Business compared to original expectations, a negative impact on revenue referral sources and employee morale throughout the Company. In addition, the Company incurred substantial indebtedness to acquire the Caremark Business, which it expected to service primarily through the operating income and cash flow of the Caremark Business. With the settlement of the litigation, the Company is now focused on its operations to realize its potential in the changing market for alternate site infusion therapy services; (ii) sale of the Lithotripsy Business in the third quarter of 1997 allowing the Company to substantially reduce its debt obligations and its contingent liabilities associated with the Company's former commitments to its partners in the Lithotripsy Business thereby further improving its financial position. See Note 5 to the Company's Consolidated Financial Statements; (iii) distractions in its revenue generation programs in the first half of 1997 during the pendency of the IHS Merger which was terminated April 4, 1997. See Note 4 to the Company's Consolidated Financial Statements; (iv) ongoing pricing pressure in the Company's core infusion business as a result of a continuing shift in payor mix from private indemnity insurance to managed care and governmental payors and intense competition among infusion providers; 16 18 The following table sets forth the approximate percentages of the Company's net revenue attributable to private indemnity insurance and other payors, managed care organizations and Medicare and Medicaid programs ("governmental payors"), respectively, for the years ended December 31, 1997, 1996 and 1995:
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ----- ----- ----- Private Indemnity Insurance and Other Payors........ 27% 33% 40% Managed Care Organizations.......................... 45% 40% 36% Medicare and Medicaid Programs...................... 28% 27% 24% ---- ---- ---- Total..................................... 100% 100% 100% ==== ==== ====
(v) technological advances in the development of new medical treatments for complex diseases that reduce the need for certain infusion therapy services provided by the Company. For example, oral drugs such as protease inhibitors have assisted persons living with HIV and AIDS to remain healthier longer. Since the second quarter of 1996, the Company estimates that it has lost approximately $40.0 million of annualized revenue from the transition of HIV multiple therapy patients from intravenous therapy to oral medications; and (vi) increased competition from hospitals and physicians who have sought to increase the scope of services they offer through their facilities and offices, including services similar to those offered by the Company or who have entered into risk bearing relationships with third-party payors pursuant to which they have been delegated control over the provision of a wide variety of healthcare services, including the services offered by the Company. Management believes that the Company's financial position and its standing within the home healthcare industry improved in the year ended December 31, 1997 primarily through the stabilization of relationships with payors and referral sources. Additionally, management believes that its focus on its operations and strategic alternatives for the Company will facilitate a recovery in future periods. However, there can be no assurance that the improvement will continue or that factors noted above would not have an adverse effect on the financial position, results of operations and liquidity of the Company. 17 19 Results of Operations The following table shows certain items as a percentage of the Company's net revenue for the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ----- ----- ----- Net revenue................................................. 100.0% 100.0% 100.0% Cost of service............................................. 70.8 69.3 76.3 ----- ----- ----- Gross profit................................................ 29.2 30.7 23.7 Operating expenses: Selling, general and administrative expenses.............. 20.1 20.0 22.1 Provision for estimated uncollectible accounts............ 3.5 5.6 11.4 Amortization of goodwill.................................. 2.9 2.9 2.5 Charges for long-lived assets and acquired receivables: Goodwill and other long-lived assets................... -- -- 27.6 Valuation of acquired receivables...................... -- -- 6.2 Provision for (income from) litigation settlement......... (33.8) 5.3 -- Restructuring costs, net.................................. -- -- 1.0 ----- ----- ----- Total operating expenses.......................... (7.3) 33.8 70.8 ----- ----- ----- Operating income (loss)..................................... 36.5 (3.1) (47.1) Other income (expenses): Interest expense.......................................... (16.2) (15.1) (8.2) Termination fee........................................... 3.3 -- -- Gain on sale of business.................................. 5.8 -- -- Other income (expense), net............................... 0.8 0.7 (0.1) ----- ----- ----- Income (loss) before income taxes and minority interests.... 30.2 (17.5) (55.4) Income tax expense (benefit).............................. 1.6 (2.7) (1.9) Minority interests in net income of consolidated joint ventures............................................... 1.6 1.5 1.8 ----- ----- ----- Net income (loss)........................................... 27.0% (16.3)% (55.5)% ===== ===== =====
1997 Compared to 1996 As previously discussed in "Factors Affecting Recent Operating Results," the Company sold its Lithotripsy Business in 1997. During the years ended December 31, 1997 and 1996, the Lithotripsy Business provided the following to the Company's operations (in millions):
YEAR ENDED DECEMBER 31, -------------- 1997 1996 ----- ----- Net revenue................................................. $37.3 $49.7 Gross profit................................................ 23.5 27.4 Operating income............................................ 17.6 21.8
Net Revenue. Net revenue decreased $57.6 million or 11.0%, from $522.0 million in 1996 to $464.4 million 1997. The decrease is due primarily to a 9.1% decrease in patient census as well as a continued shift in payor mix from private insurance to managed care. See "Factors Affecting Recent Operating Results." Gross Profit. Gross profit decreased $24.7 million from $160.3 million or a gross margin of 30.7% in 1996 to $135.6 million or a gross margin of 29.2% in 1997. The decrease is due primarily to the decrease of $57.6 million in net revenue described above offset by a decline in cost of service of $32.9 million. See "Factors Affecting Recent Operating Results." Selling, General and Administrative Expenses. SG&A decreased $11.1 million or 10.6%, from $104.3 million in 1996 to $93.2 million in 1997. Excluding the effects of nonrecurring gains on the disposal of 18 20 non-core businesses and on the conversion of certain debentures totaling $3.0 million in 1996, SG&A expense decreased $14.1 million or 13.1%. The improvement is due primarily to the Company's continuing strategy to reduce unnecessary corporate and field administrative costs. Provision for Estimated Uncollectible Accounts. The provision for estimated uncollectible accounts was $16.2 million or 3.5% of net revenue in 1997 compared to $29.1 million or 5.6% of net revenue in 1996. The decrease is due primarily to the Company's concentrated collection efforts over the past year. Amortization of Goodwill. Amortization of goodwill decreased $1.7 million or 11.0%, from $15.3 million in 1996 to $13.6 million in 1997. The decrease in amortization is due to the sale of the Company's Lithotripsy Business in 1997. See "Factors Affecting Recent Operating Results" and Note 5 to the Company's Consolidated Financial Statements. Provision for (Income From) Litigation Settlement. During the year ended December 31, 1997, the Company recorded income from litigation settlement, net of related costs, of $156.8 million in connection with the settlement of the Caremark Lawsuit. During the year ended December 31, 1996, the Company recorded a non-cash provision of $25.6 million and a cash provision of $0.3 million in connection with an agreement to settle certain shareholder class action and certain derivative litigation ("the Shareholder Litigation"). Under the agreement, the Company was required to issue 5.0 million freely tradable shares of common stock of which 1.5 million shares were issued March 11, 1997 and 3.5 million shares were issued November 28, 1997. Additionally, a $2.0 million charge was recorded in 1996 related to various other litigation settlements. See Notes 3 and 12 to the Company's Consolidated Financial Statements. Operating Income (Loss). The Company recorded operating income of $169.4 million for the year ended December 31, 1997 compared to an operating loss of $16.2 million for the year ended December 31, 1996. The increase is due primarily to non-recurring income of $156.8 million from litigation settlement recorded in 1997 and the non-recurring provision for shareholder litigation of $27.9 million recorded in 1996. Interest Expense. Interest expense decreased by $3.8 million or 4.7%, from $78.8 million for the year ended December 31, 1996 to $75.0 million for the year ended December 31, 1997. The decline is due primarily to a decrease in interest related to the Junior Subordinated Pay-In-Kind notes issued in connection with the acquisition of the Caremark Business. In June 1997, pursuant to the settlement of the Caremark Litigation, the Junior Subordinated Pay-In-Kind Notes totaling approximately $100.0 million in principal and $20.0 million accrued interest were canceled. Additionally in January 1998, the Company repaid in full all principal, interest and related fees totaling approximately $80.1 million due under the Senior Credit Facility. Interest on the Senior Credit Facility for the years ended December 31, 1997 and 1996 was $11.3 million and $16.4 million, respectively. See "Factors Affecting Recent Operating Results" and Notes 3 and 8 to the Company's Consolidated Financial Statements. Gain On Sale of Business. In the year ended December 31, 1997, the Company recorded a gain on the sale of business, net of related costs, of $26.7 million in connection with the sale of its Lithotripsy Business. See "Factors Affecting Recent Operating Results" and Note 5 to the Company's Consolidated Financial Statements. Termination Fee. The Company recorded termination fee income, net of related costs, of $15.2 million in the year ended December 31, 1997 in connection with the termination of the proposed merger with IHS. See "Factors Affecting Recent Operating Results" and Note 4 to the Company's Consolidated Financial Statements. Income Tax Expense (Benefit). During 1997, the Company recorded income tax expense of $7.6 million compared to an income tax benefit of $14.0 million in 1996. The 1997 income tax expense is related to the gain on the sale of the Lithotripsy Business and income from settlement of the Caremark Litigation. The 1996 benefit was based on an estimate of 1996 carryback benefits available. Net Income (Loss). Net income for the year ended December 31, 1997 was $125.3 million compared to a net loss of $85.0 million for the year ended December 31, 1996. As discussed above, the change in net 19 21 income is due to non-recurring items totaling $198.7 million in 1997 and $27.9 million in 1996 as well as the change resulting from normal operations. 1996 COMPARED TO 1995 Net Revenue. Net revenue for the year ended December 31, 1996, decreased by $80.6 million or 13.4%, from $602.6 million in 1995 to $522.0 million in 1996. The decrease in revenue is due primarily to losses suffered from the under-performance of the Caremark Business and ongoing pricing pressures. See "Factors Affecting Recent Operating Results." Also contributing to the decrease in net revenue was the sale or discontinuance of non-strategic or unprofitable businesses which contributed $42.5 million in net revenue in 1995 compared with $2.7 million in 1996. In addition, management fees have also decreased from approximately $7.6 million in 1995 to approximately $1.6 million in 1996 as a result of the Company's termination of physician arrangements and certain businesses since 1994 while maintaining only those relationships that met both the Company's own compliance criteria and applicable legal requirements. Gross Profit. Gross profit for the year ended December 31, 1996 increased by $17.4 million, from $142.9 million or a gross margin of 23.7% in 1995 to $160.3 million or a gross margin of 30.7% in 1996. Approximately $13.0 million of the improvement is due to the decrease in total drugs and supplies expense from 36.1% of net revenue in 1995 to 33.9% of net revenue in 1996. The remaining improvement is due to a reduction in clinical service expense. Selling, General and Administrative Expenses. SG&A expenses decreased $28.7 million from $133.0 million for the year ended December 31, 1995 to $104.3 million for the year ended December 31, 1996. The decrease is due primarily to the Company's continuing strategy to reduce unnecessary corporate and field administrative costs, offset by excess legal expenses and collection agency fees recorded during 1996 of $6.9 million and $4.7 million, respectively. In addition, the Company recorded $10.2 million of non-recurring charges in 1995, consisting of a $1.4 million loss on disposal of branch, $2.0 million loss on the sale of a non-core business, $3.4 million transaction expenses related to the termination of a proposed merger with Lincare Holdings Inc. and $3.4 million loss on payment of a prior credit facility. Provision For Estimated Uncollectible Accounts. The provision for estimated uncollectible accounts was $29.0 million, or 5.6% of net revenue for the year ended December 31, 1996 compared with $68.9 million, or 11.4% of net revenue for the year ended December 31, 1995. The decrease is due primarily to a special charge recorded in the third quarter of 1995 of $20.0 million. The remaining decrease in the provision is due to the Company's concentrated collection efforts during 1996. In the third and fourth quarters of 1996, management implemented a program whereby collection teams comprised of external collection agencies were engaged to concentrate on collecting accounts greater than 90 days old. The increased cash collection effort resulted in increased cash collection calls, commitments for payment and charges to the Company's established reserves. The Company's allowance for uncollectible accounts was $40.3 million, or 27.4% of gross accounts receivable at December 31, 1996 compared to $63.8 million or 29.3% of gross accounts receivable at December 31, 1995. See Note 2 to the Company's Consolidated Financial Statements. Charge for Long-Lived Assets and Acquired Receivables. During 1995, the Company recorded an impairment loss of $166.4 million related to its home infusion business ($158.1 million related to goodwill and $8.3 million related to long-lived assets). In addition during 1995, the Company reduced the valuation of the acquired receivables related to the Caremark acquisition by an aggregate of $37.0 million. See Notes 2 and 3 to the Company's Consolidated Financial Statements. Provision for (Income From) Litigation Settlements. During 1996, the Company recorded a non-cash provision of $25.6 million and a cash provision of $0.3 million in connection with the Shareholder Litigation settlement. Additionally, a $2.0 million charge was recorded in 1996 related to various other litigation settlements. See Note 12 to the Company's Consolidated Financial Statements. Restructuring Costs. During 1995, the Company recorded a pre-tax charge of $25.8 million for estimated costs related to the Caremark Business Consolidation Plan. The charge was offset by the $18.2 million benefit recorded to restructuring costs related to the Coram and Caremark Consolidation Plans in the fourth quarter 20 22 of 1995 and a $1.4 million benefit recorded in the first quarter related to the sale of the Company's interest in Pediatric Partners, Inc., doing business as Kids Medical Club ("Kids Medical") as part of the Coram Consolidation Plan. The Company did not record any restructuring costs or benefits in 1996. Operating Loss. The Company recorded an operating loss of $16.2 million for the year ended December 31, 1996, compared with a $283.9 million operating loss for the year ended December 31, 1995. Eliminating the effects of the $27.9 million provision for litigation settlements recorded in 1996 and the $20.0 million charge to provision for estimated uncollectible accounts, the $203.4 million charge for long-lived assets and acquired receivables and the restructuring costs of $6.2 million recorded in 1995, the Company had operating income of $11.1 million in 1996 compared to an operating loss of $54.3 million in 1995. This improvement is due primarily to the increase in gross profit of $17.4 million, the decrease in SG&A of $28.7 million and the decrease in the provision for estimated uncollectible accounts (net of the $20.0 million mentioned above) of $19.9 million. Interest Expense. Interest expense increased $29.1 million, from $49.7 million in 1995 to $78.8 million in 1996. The increase is due primarily to a full year of interest incurred on the Caremark acquisition debt, the interest compounding effects of the Junior Subordinated Pay-In-Kind Notes (the "Junior Subordinated PIK Notes") and a Rollover Note issued in place of the Bridge Note when the Bridge Note was not repaid on its due date (the "Rollover Note"), amortization of warrants, as well as the reduction in the amortization period of deferred debt costs, offset by the reduction of the principal amount of the Senior Credit Facility. Of the $78.8 million interest expense recorded during 1996, $61.1 million was non-cash in nature. Income Tax Benefit. During the year ended December 31, 1996, the Company recorded an income tax benefit of $14.0 million, as compared with an $11.2 million benefit in 1995. The 1996 and 1995 benefits were based on carryback benefits available in relation to estimated pre-tax results for the year, exclusive of any significant unusual items. Minority Interest in Net Income of Consolidated Joint Ventures. Minority interest expense decreased $3.3 million, from $11.0 million in 1995 to $7.7 million in 1996. The decrease is due to the sale of one lithotripsy joint venture, the purchase of the minority interest in another lithotripsy joint venture and the sale of the Company's interest in Kids Medical in 1995. Additionally, the Company completed the purchase of certain minority interests in two lithotripsy joint ventures during 1996. Net Loss. Net loss for the year ended December 31, 1996 was $85.0 million as compared with a $334.0 million loss for the year ended December 31, 1995. As discussed above, the change in net loss is due to non-recurring items totaling $27.9 million in 1996 and $209.6 million in 1995 as well as the change resulting from normal operations. 21 23 QUARTERLY RESULTS (UNAUDITED) The following summarizes selected quarterly financial information with respect to the Company's operations for the last eight fiscal quarters. Amounts are in thousands, except per share data.
1997 QUARTER ENDED 1996 QUARTER ENDED ------------------------------------------ ----------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 -------- -------- --------- -------- -------- -------- -------- -------- Net revenue.................. $105,039 $119,516 $ 118,115 $121,715 $126,029 $131,206 $133,109 $131,625 Cost of service.............. 81,090 82,926 83,040 81,725 85,788 86,591 91,150 98,159 -------- -------- --------- -------- -------- -------- -------- -------- Gross profit................. 23,949 36,590 35,075 39,990 40,241 44,615 41,959 33,466 Operating expenses: Selling, general and administrative expenses................. 22,960 23,729 22,826 23,652 25,878 26,530 26,576 25,277 Provision for estimated uncollectible accounts... 3,682 4,135 4,104 4,288 6,696 6,766 6,831 8,752 Amortization of goodwill... 2,766 3,611 3,597 3,612 3,580 3,619 3,759 4,301 Provision for (income from) litigation settlements... -- -- (156,792) -- 15,125 250 12,500 -- -------- -------- --------- -------- -------- -------- -------- -------- Total operating expense............ 29,408 31,475 (126,265) 31,552 51,279 37,165 49,666 38,330 -------- -------- --------- -------- -------- -------- -------- -------- Operating income (loss)...... (5,459) 5,115 161,340 8,438 (11,038) 7,450 (7,707) (4,864) Other income (expenses): Interest expense........... (19,503) (15,797) (18,230) (21,496) (20,010) (19,175) (20,553) (19,029) Termination fee............ -- -- 15,182 -- -- -- -- -- Gain on sale of business... 8,772 17,972 -- -- -- -- -- -- Other income, net.......... 1,365 690 1,057 647 1,403 645 914 650 -------- -------- --------- -------- -------- -------- -------- -------- Income (loss) before income taxes and minority interests.................. (14,825) 7,980 159,349 (12,411) (29,645) (11,080) (27,346) (23,243) Income tax expense (benefit)................ 4,175 3,125 201 49 2 (1,347) (5,237) (7,416) Minority interest in net income of consolidated joint ventures................. 226 2,552 2,377 2,128 1,928 2,279 1,417 2,074 -------- -------- --------- -------- -------- -------- -------- -------- Net income (loss)............ $(19,226) $ 2,303 $ 156,771 $(14,588) $(31,575) $(12,012) $(23,526) $(17,901) ======== ======== ========= ======== ======== ======== ======== ======== Earnings (loss) per common share...................... $ (0.39) $ $0.05 $ 3.29 $ (0.31) $ (0.75) $ (0.28) $ (0.58) $ (0.44) ======== ======== ========= ======== ======== ======== ======== ======== Earnings (loss) per common share -- assuming dilution................... $ (0.39) $ 0.04 $ 2.99 $ (0.31) $ (0.75) $ (0.28) $ (0.58) $ (0.44) ======== ======== ========= ======== ======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents increased $93.6 million, from $15.4 million at December 31, 1996 to $109.0 million at December 31, 1997. The increase in cash and cash equivalents is due primarily to cash provided by operating activities of $66.0 million and cash provided by investing activities of $105.7 million offset by cash used in financing activities of $78.1 million. Cash provided by operating activities of $66.0 million was composed primarily of (i) a $21.0 million payment received as a result of the termination of the proposed merger with IHS; (ii) $41.4 million received from Caremark as a result of the settlement of the Caremark Litigation and (iii) improved cash collections of accounts receivable and decreased disbursement levels. Cash provided by investing activities is due primarily to net proceeds from the sale of the Lithotripsy Business of $124.8 million offset by the purchase of fixed assets totaling $19.1 million. Cash used in financing activities consists primarily of debt repayments of $89.4 million offset by additional borrowings of $10.0 million. On June 2, 1997, the Company refinanced $150.0 million owed its lenders under the Senior Credit Facility through a refinancing transaction with Goldman Sachs Credit Partners L.P. ("GSCP"). GSCP acquired the debt through an assignment from Chase Manhattan Bank. In January 1998, the Company repaid 22 24 in full all principal, interest and related fees totaling approximately $80.1 million due under the Senior Credit Facility. See Note 8 to the Company's Consolidated Financial Statements. On May 1, 1997 a group of investors consisting of Cerberus Partners, L.P., GSCP and Foothill Capital (collectively the "Holders") purchased the Rollover Note and all the rights to the warrants thereunder. The Company has received a six-month extension to September 30, 1998 for the payment of deferred interest and fees related to the Rollover Note, provided that the Company and the Holders of the Rollover Note reach an agreement in principle for its restructuring by April 13, 1998. Any restructuring will be subject to the parties entering into definitive agreements and the satisfaction of any conditions to consummation set forth herein. See Note 8 to the Company's Consolidated Financial Statements. There can be no assurance that future cash flow from operations will be sufficient to cover current or future debt obligations or that any restructuring thereof will be consummated. In June 1997, the Company entered into a settlement agreement with Caremark. Under the terms of the settlement, the Junior Subordinated PIK Notes totaling approximately $100.0 million principal and $20.0 million accrued interest were canceled with all payments thereunder forgiven and Caremark agreed to pay $45.0 million in cash which was received on September 2, 1997. Of the $45.0 million cash received, $3.6 million was placed in escrow pending reconciliation of certain lockbox issues. Accordingly in 1997, the Company recorded settlement income of $156.8 million. See Note 3 to the Company's Consolidated Financial Statements. Upon receipt of the cash proceeds due to the Company in the settlement of the Caremark Litigation, the Company applied substantially all net cash proceeds to reduce outstanding debt. On August 20, 1997 the Company signed an agreement with IHS for the sale of its Lithotripsy Business. Effective September 30, 1997, the Company completed the transaction as to all of its Lithotripsy Business other than its interests in three lithotripsy partnerships. Pursuant to a side agreement amending the August 20, 1997 purchase agreement, the Company's interests in the three remaining partnerships were placed in escrow pending the satisfaction of certain conditions. Following satisfaction of these conditions, two of the partnerships were conveyed to IHS effective October 3, 1997. Due to the Company's and IHS's inability to obtain the consent of the other partner to the transfer of Coram's interest therein, its interest in the remaining partnership was returned to the Company on October 21, 1997. Proceeds on the sale of the Lithotripsy Business totaled $126.6 million which further allowed the Company to substantially reduce its debt obligations and eliminate contingent liabilities associated with the Company's former commitments to its partners in the Lithotripsy Business. During the years ended December 31, 1997, 1996 and 1995 the Lithotripsy Business provided net revenue of approximately $37.3 million, $49.7 million and $53.5 million, respectively, to the Company. See Note 5 to the Company's Consolidated Financial Statements. The Company from time to time evaluates strategic alternatives in meeting scheduled maturities of principal and interest. The strategic alternatives which the Company considers include, but are not limited to, the pursuit of opportunities in its core alternate site infusion therapy business, including consolidation with or acquisition of other companies in its core business or in businesses complimentary to the Company's core business. These future acquisitions, if any, may require a change in capital structure or equity and debt financing. There can be no assurance that any such consolidations or acquisitions will occur. Additionally, if they occur there can be no assurance that the financing sources will be available to the Company or, if available, will be available on commercially acceptable terms to the Company. As of December 31, 1997, the Company did not have any material commitments for capital expenditures. RISK FACTORS Recent Operating Losses; Future Operating Results Uncertain During the year ended December 31, 1997, the Company recorded operating income of $169.4 million and net income of $125.3 million. Net income in 1997 included non-recurring income of $156.8 million income from settlement of the Caremark Litigation, $26.8 million gain on sale of Lithotripsy Business and $15.2 million termination fee income. Excluding these non-recurring charges, the Company incurred an operating income of $12.6 million and a net loss of $73.5 million. During the years ended December 31, 1996 23 25 and 1995 the Company recorded operating losses of $16.2 million and $283.9 million, respectively, and net losses of $85.0 million and $334.0 million, respectively. Numerous factors have affected the Company's performance and financial condition to date, including, among others (i) under-performance of the Caremark Business resulting in loss of revenues compared to original expectations, a negative impact on revenue referral sources and employee morale throughout the Company and the incurrence of substantial indebtedness to acquire the Caremark Business, which it expected to fund primarily through the operating income and cash flow of the Caremark Business; (ii) distractions in its revenue generation programs in the first half of 1997 during the pendency of the IHS Merger which was terminated April 4, 1997; (iii) the implementation of a policy to terminate physician arrangements and certain businesses during fiscal 1995 which the Company inherited from its predecessors that were potentially in conflict with new federal and state law, resulting in the loss of a number of historic referral sources; (iv) ongoing pricing pressure in the Company's core infusion business as a result of a continuing shift in payor mix from private indemnity insurance to managed care and governmental payors and intense competition among infusion providers; and (vi) increased competition from hospitals and physicians who have sought to increase the scope of services they offer through their facilities and offices, including services similar to those offered by the Company. With the settlement of the Caremark Litigation, termination of the proposed IHS Merger and completion of sale of the Lithotripsy Business, management of the Company is now focused on strategic alternatives for the Company and its operations to enable the Company to realize its potential in the changing market for alternate site infusion therapy services. In addition, proceeds from the sale of Lithotripsy Business and settlement of Caremark Litigation allowed the Company to substantially reduce its obligations under its credit arrangements. Notwithstanding these events and the Company's actions to address the factors discussed above, there can be no assurance that these factors will not continue to have an adverse effect on the Company's financial condition and results of operations in the future. Substantial Leverage The Company incurred a significant amount of long-term debt in connection with the acquisition of the Caremark Business. As of December 31, 1997, the Company's consolidated indebtedness was $193.1 million, net of $107.6 million cash held in overnight funds, and its consolidated stockholders' equity was $125.0 million. The degree to which the Company is leveraged could impair the Company's ability to finance, through its own cash flow or from additional financing, its future operations or pursue its business strategy and make the Company more vulnerable to economic downturns, competitive and payor pricing pressures and adverse changes in government regulation. See "Liquidity and Capital Resources." At December 31, 1997, $299.2 million of the Company's borrowings were under arrangements with variable interest rates. As of December 31, 1997, there was $80.0 million principal due under the Senior Credit Facility, all of which was repaid in full in January 1998. Payment of deferred interest and fees of $69.2 million as of December 31, 1997 on a $150.0 million Rollover Note is due September 30, 1998 provided that the Company and Holders of the Rollover Note reach an agreement in principle for its restructuring by April 13, 1998. Any significant increase in the interest rates on those borrowings would have a material adverse effect on the Company's business, financial condition and results of operations. Liquidity; Need For Additional Financing The Rollover Note matures on October 6, 2000 while deferred interest and accrued fees on the Rollover Note are due September 30, 1998 provided that the Company and Holders of the Rollover Note reach an agreement in principle for its restructuring by April 13, 1998. The agreement pursuant to which the Bridge Note and Rollover Note were issued contains customary covenants and events of default. At December 31, 1997, the Company was in compliance with all of these covenants. There can be no assurance that the Company's cash flow from operations will be sufficient to meet its short or long-term needs or that the restructuring will be consummated. Therefore, additional sources of funds may be required in future periods. In order to satisfy such obligations, the Company may engage in a public or private offering of debt or equity securities or a sale or merger of the Company. Any such transaction could result in a substantial dilution in the ownership interest of the existing stockholders and may have an adverse impact on the market price of the 24 26 Company's Common Stock. There can be no assurance that the Company will undertake any such transaction, what the timing thereof would be or that the Company will be able to obtain any additional funds or complete such a transaction on terms acceptable to the Company. See "Liquidity and Capital Resources." Dependence On Key Personnel; Changes In Management The Company is substantially dependent upon the services of its key executive officers, which include Donald J. Amaral, Chairman and Chief Executive Officer, Richard M. Smith, President, Wendy L. Simpson, Executive Vice President and Chief Financial Officer, and Paul J. Quiner, Senior Vice President and General Counsel. The loss of services of any of these executives could have a material adverse affect on the Company. The Company's future growth and success depends, in large part, upon its ability to obtain, retain and expand its staff of professional personnel. There can be no assurance that the Company will be successful in its efforts to attract and retain such personnel. Certain Litigation The Company, directly or indirectly, is a party to certain lawsuits that could, if their outcomes were unfavorable, have a material adverse effect, directly or indirectly, on its business, financial condition and results of operations. The Company intends vigorously to defend itself in these matters. Nevertheless, due to the uncertainties inherent in litigation, the ultimate disposition of the litigations cannot be presently determined. See Item 3. LEGAL PROCEEDINGS. Dependence On Relationships With Third Parties The profitability of the Company's business depends in part on its ability to establish and maintain close working relationships with managed care organizations, private and governmental third-party payors, hospitals, physicians, physician groups, home health agencies, long-term care facilities and other institutional health providers and insurance companies and large self-insured employers. A central feature of the Company's business strategy is to improve its relationships with such third parties in general, and with physicians and physician groups in particular. There can be no assurance that the Company will be successful in improving and maintaining such relationships or that the Company's existing relationships will be successfully maintained or that additional relationships will be successfully developed and maintained in existing or future markets. The loss of such existing relationships or the failure to continue to develop such relationships in the future could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business Strategy." Governmental Regulation The Company is subject to extensive federal and state laws regulating, among other things, the provision of pharmacy, home care nursing services, health planning, health and safety, environmental compliance and toxic waste disposal. The Company is also subject to fraud and abuse and self referral laws and "anti-kickback" statutes which affect the Company's business relationships with physicians and other health care providers and referral sources and its reimbursement from government payors. The Company may be required to obtain certification to participate in governmental payment programs, such as Medicare and Medicaid. Some states have established certificate of need programs regulating the establishment or expansion of health care facilities, including certain of the Company's facilities. Violations of the federal anti-kickback statute are punishable by criminal or civil penalties, including imprisonment, fines and exclusion of the provider from future participation in federal healthcare programs. Civil suspension for antikickback violations can also be imposed through an administrative process, without the imposition of civil monetary penalties. The failure to obtain, renew or maintain any of the required regulatory approvals or licenses could adversely affect the Company's business and could prevent the location involved from offering products and services to patients. The Company's business, financial condition and results of operations could be materially adversely affected as a result of any such change or sanctions. The health care services industry will continue to be subject to intense regulation at the federal and state levels, the 25 27 scope and effect of which cannot be predicted. No assurance can be given that the activities of the Company will not be reviewed and challenged or that government sponsored health care reform, if enacted, will not have a material adverse effect on the Company. See Item 1. GOVERNMENT REGULATION. As part of the Balanced Budget Act of 1997, Congress made various changes that affect the participation of companies like Coram in the Medicare program. Specifically, the Company will be required to obtain and post surety bonds for each of its Part A home health agency providers and Part B durable medical equipment suppliers when HCFA's rules implementing the bonding requirements become final. The Company currently operates eleven Part A home health agencies and virtually all of the Company's branch offices participate in Part B of the Medicare program. Under the regulations currently proposed for Part A home health agency providers, each provider would be required to post a surety bond in an amount equal to the greater of 15% of the amount paid to the agency or branch by Medicare in the previous year (up to a maximum of $3,000,000) or $50,000 whichever is greater. Discontinuing the Company's participation in the Medicare program would have a material adverse effect on the Company's business, financial condition and results of operations. If the Company is required to post surety bonds for each of its Part A home health agency providers and Part B durable medical equipment supplier locations as a condition to its participation in the Medicare program and is forced to obtain similar bonds for its participation in the state Medicaid programs it currently participates in, the Company would be forced to obtain surety bonds in the minimum face amount of approximately $12.0 million. If the Company is not able to obtain the necessary bonds, it would have to cease its participation in the Medicare and Medicaid programs. There can be no assurance that the Company will be able to obtain the required surety bonds and the Company may be forced to raise additional capital to facilitate its acquisition of the necessary bonds. See Item 1. GOVERNMENT REGULATION -- "Medicare and Healthcare Reform." Dependence On Payors And Reimbursement-Related Risks The profitability of the Company depends in large part on reimbursement provided by third-party payors. Because alternate site care is generally less costly to third-party payors than hospital-based care, alternate site providers have historically benefited from cost containment initiatives aimed at reducing the costs of hospitalization. However, competition for patients, efforts by traditional third-party payors to contain or reduce health care costs and the increasing influence of managed care payors such as health maintenance organizations in recent years have resulted in reduced rates of reimbursement for services provided by alternate site providers such as the Company. Since 1993, the alternate site infusion industry, including the Company, experienced severe reductions in the pricing of its products and services as a result of these trends. See "Factors Affecting Recent Operating Results." Additionally, managed care payors and even traditional indemnity insurers increasingly are demanding fee structures and other arrangements providing for the assumption by health care providers of all or a portion of the financial risk of providing care (e.g., capitation). Capitation arrangements currently do not comprise a material component of the Company's revenues. While the Company believes that short-term pricing pressures are stabilizing, no assurance can be given that pricing pressures will not continue or that the Company's business, financial condition and results of operations will not be adversely affected by such trends. A rapid increase in the percentage of revenue derived from managed care payors without a corresponding decrease in the Company's operating costs could have an adverse impact on the Company's profit margins. Concentration Of Large Payors Managed care organizations have grown substantially in terms of the percentage of the population that is covered by such organizations and in terms of their control over an increasing portion of the healthcare economy. Managed care plans have continued to consolidate to enhance their ability to influence the delivery of healthcare services. The Company has a number of contractual arrangements with managed care organizations and other parties. Other than Medicare and Medicaid, none of these arrangements individually accounted for more than 5% of the Company's net revenues in the year ended December 31, 1997; however, 10 managed care customers accounted in the aggregate for approximately 10% of the Company's infusion 26 28 therapy revenue and the loss of such customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Factors Affecting Recent Operating Results." Intensely Competitive Industry The Company competes in the alternate site health care market which is highly competitive and is experiencing both horizontal and vertical consolidation. Some of the Company's current and potential competitors include (i) integrated providers of alternate site health care services, (ii) large national hospital chains; (iii) local providers of multiple products and services offered for the alternate site health care market; and (iv) physicians, including physicians with whom the Company previously had business arrangements. The Company has experienced increased competition from hospitals and physicians who have sought to increase the scope of services offered through their offices, including services similar to those offered by the Company or who have entered into risk relationships with managed care organizations pursuant to which they have taken control of certain medical services, including the services offered by the Company. Integrated alternate site health care companies and certain of the Company's other national competitors may have superior financial, marketing and managerial resources, size, purchasing power and numerous strategic relationships with providers, referral sources such as physicians and traditional indemnity and managed care payors. Moreover, there are relatively few barriers to entry in the local markets which the Company serves. Local or regional companies are currently competing in many of the home health care markets served by the Company and others may do so in the future. The Company expects its competitors to continue to improve their service offerings and price competitiveness. The Company also expects its competitors to develop new strategic relationships with providers, referral sources and payors, which could result in a rapid and dramatic increase in competition. The introduction of new and enhanced services, acquisitions and continued industry consolidation and the development of strategic relationships by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's services or intense price competition, or make the Company's services noncompetitive. The Company expects to continue to encounter increased competition in the future that could limit its ability to maintain or increase its market share. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on the Company's business, financial condition and results of operations. See Item 1. COMPETITION. See also "Business Strategy" and "Factors Affecting Recent Operating Results." Health Care Reform Legislation In recent years, an increasing number of legislative initiatives have been introduced or proposed in Congress and in state legislatures that would effect major changes in the health care system, either nationally or at the state level. Among the proposals under consideration are various insurance market reforms, forms of price control, expanded fraud and abuse and anti-referral legislation and further reductions in Medicare and Medicaid reimbursement. The Company cannot predict whether any of the above proposals or any other proposals will be adopted, and if adopted, no assurance can be given that the implementation of such reforms will not have a material adverse effect on the business of the Company. In addition, no assurance can be give that recent reforms will not have a material adverse effect on the business of the Company. See Item 1. GOVERNMENT REGULATION. Potential Professional Liability And Insurance The services of the Company involve an inherent risk of professional liability. While the Company has not had any material claims for professional liability asserted against it, no assurance can be given that such claims will not be asserted in the future. While the Company maintains insurance consistent with industry practice, there can be no assurance that the amount of insurance currently maintained will satisfy all claims made against the Company or that the Company will be able to obtain insurance in the future at satisfactory rates or in adequate amounts. The Company cannot predict the effect that any such claims, regardless of their ultimate outcome, might have on its business or reputation or on its ability to attract and retain patients. 27 29 Changes In Technology The alternate site infusion business of the Company is dependent on physicians continuing to prescribe the administration of drugs and nutrients through intravenous and other infusion methods. Intravenous administration is often the most appropriate method for treating critically ill patients and is often the only way to administer proteins and biotechnology drugs. Nonetheless, technological advances in drug delivery systems, the development of therapies that can be administered orally, such as protease inhibitors for the treatment of persons with HIV or AIDS, and the development of new medical treatments that cure certain complex diseases or reduce the need for infusion therapy could adversely impact the business of the Company. Year 2000 Issues The Company has determined that it will need to modify, upgrade or replace portions of its software so that its computer systems will function properly with respect to dates in the Year 2000 and beyond. The Company also has initiated discussions with its significant suppliers, large customers and financial institutions to determine those parties have appropriate plans to remediate Year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to properly remediate their computer systems, and as of the date hereof is not able to quantify the impact on the Company, if any, of failures of those organizations to remediate Year 2000 issues properly. Potential Volatility Of Stock Price There may be significant volatility in the market price for Coram common stock. Factors such as actual or anticipated fluctuations in the Company's operating results, new products introduced or new contracts entered into by the Company or its competitors, conditions and trends in the healthcare industry, adoption of new accounting standards affecting the healthcare industry, changes in financial estimates by securities analysts, proposed or anticipated business combinations including the Company, general market conditions and other factors could cause the market price of Coram 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 prices for the common stocks 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 the Company. There can be no assurance that such litigation will not occur in the future with respect to the Company; such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect upon the Company's business, financial condition and results of operations. ITEM 8. FINANCIAL STATEMENTS. The Company's Consolidated Financial Statements and financial statement schedule at December 31, 1997, and 1996 and for the years ended December 31, 1997, 1996 and 1995 and the independent auditors' reports thereon are included in this report on pages F-1 through F-26 and page S-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 28 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information with respect to directors and executive officers of the Company is incorporated herein by reference to the information under the caption "Management -- Directors and Executive Officers" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS. Information with respect to executive compensation is incorporated herein by reference to the information under the caption "Management Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT. Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the tabulation under the caption "Voting Securities and Principal Stockholders" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information with respect to certain relationships and related transactions is incorporated herein by reference to this information under the caption "Certain Transactions" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements. The following consolidated financial statements of the Registrant and Independent Auditors Report thereon are presented on pages F-1 through F-26: Report of Independent Auditors Consolidated Balance Sheets -- December 31, 1997 and 1996 Consolidated Statements of Operations--Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity (Deficit) -- Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 2. Financial Statement Schedules. The following consolidated financial statement schedule of the Registrant for the years ended December 31, 1997, 1996 and 1995 is presented following the Notes to the Consolidated Financial Statements. Schedule II -- Valuation and Qualifying Account Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. (b) Reports on Form 8-K. On October 15, 1997, the Company filed a report on Form 8-K announcing the completion of the sale of its Lithotripsy Business to Integrated Health Services, Inc. as discussed in Note 5 to the Company's Consolidated Financial Statements. 29 31 (c) Exhibits Included as exhibits are the items listed on the Exhibit Index. The Registrant will furnish a copy of any of the exhibits listed below upon payment of $5.00 per exhibit to cover the costs to the Registrant of furnishing such exhibit. EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT -------------- ------- 2.1 -- Agreement and Plan of Merger dated as of February 6, 1994, by and among the Registrant, T2, Curaflex, HealthInfusion, Medisys, T2 Acquisition Company, CHS Acquisition Company, HII Acquisition Company and MI Acquisition Company (Incorporated by reference to Exhibit 2.1 of Registration No. 33-53957 on Form S-4). 2.2 -- First Amendment to Agreement and Plan of Merger dated as of May 25, 1994, by and among the Registrant, T2 Curaflex, HealthInfusion, Medisys, T2 Acquisition Company, CHS Acquisition Company, HII Acquisition Company and MI Acquisition Company (Incorporated by reference to Exhibit 2.2 of Registration No. 33-53957 on Form S-4). 2.3 -- Second Amendment to Agreement and Plan of Merger dated as of July 8, 1994 by and among the Registrant, T2, Curaflex, HealthInfusion, Medisys, T2 Acquisition Company, CHS Acquisition Company, HII Acquisition Company and MI Acquisition Company (Incorporated by reference to Exhibit 2.3 of the Registrant's Current Report on Form 8-K dated as of July 15, 1994). 2.4 -- Asset Sale and Note Purchase Agreement, (the "Asset Purchase Agreement") among the Registrant, Caremark International Inc. and Caremark Inc. dated as of January 29, 1995 (Incorporated by reference to Exhibit C of the Registrant's Current Report on Form 8-K dated April 6, 1995). The exhibits and schedules to the Asset Purchase Agreement are omitted from this Exhibit. The Company agrees to furnish supplementally any omitted exhibits or schedule with the Securities and Exchange Commission. 2.5 -- Agreement and Plan of Merger among the Registrant, CHC Acquisition Corp. and Lincare Holdings Inc., (the "Lincare Merger Agreement") dated as of April 17, 1995 (Incorporated by reference to Exhibit B of the Registrant's Current Report on Form 8-K dated May 2, 1995). The exhibits and schedules to the Lincare Merger Agreement are omitted from this Exhibit. The Company agrees to furnish supplementally any omitted exhibit or schedule with the Securities and Exchange Commission. 2.6 -- Agreement and Plan of Merger entered into as of October 19, 1996, among Coram Healthcare Corporation, Integrated Health Services, Inc. and IHS Acquisition XIX, Inc. (Incorporated by reference to Exhibit 2.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 2.7 -- Purchase Agreement by and between Integrated Health Services, Inc., T2 Medical, Inc., Coram Healthcare Corporation of Greater New York and Coram Healthcare Corporation. (Incorporated by reference Exhibit 2 of the Registrant's Current Report on Form 8-K dated as of August 20, 1997). 2.8 -- Side Agreement dated as of September 30, 1997 among Coram Healthcare Corporation, T2 Medical, Inc., Coram Healthcare Corporation of Greater New York and Integrated Health Services, Inc. (Incorporated by reference Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated as of September 30, 1997).
30 32
EXHIBIT NUMBER EXHIBIT -------------- ------- 3.1 -- Certificate of Incorporation of Registrant, as amended through May 11, 1994 (Incorporated by reference to Exhibit 3.1 of Registration No. 33-53957 on Form S-4). 3.2 -- Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 of Registration No. 33- 53957 on Form S-4). 3.3 -- Certificate of Amendment of the Registrant's Certificate of Incorporation.* 4.1 -- Form of Common Stock Certificate for the Registrant's common stock, $.001 par value per share. (Incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 4.2 -- Form of Common Stock Certificate for the Registrant's common stock, par value $0.001, including legend thereon in respect of the Stockholder Rights Agreement which exhibit is hereby incorporated by reference thereto.* 4.3 -- Form of Certificate of Designation, Preferences and Rights of the Registrant's Series X Participating Preferred Stock (filed as Exhibit A to the Stockholder Rights Agreement, which was filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated as of June 25, 1997, and which exhibit is hereby incorporated by reference thereto). 10.1 -- Amended and Restated Credit Agreement dated as of February 10, 1995, by and among Curaflex, T2, HealthInfusion, Medisys, and HMSS as Co-Borrowers, Toronto Dominion (Texas), Inc., as Agent (the "Amended Credit Agreement") (Incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). The exhibits and schedules to the Amended Credit Agreement are omitted from this Exhibit. The Company agrees to furnish supplementally any omitted exhibit or schedule to the Securities and Exchange Commission upon request. 10.2 -- Form of Employment Agreement between the Registrant and Charles A. Laverty (Incorporated by reference to Exhibit 10.1 of Registration No. 33-53957 on Form S-4). 10.3 -- Form of Severance/Non-Compete Agreement between the Registrant and Miles E. Gilman (Incorporated by reference to Exhibit 10.2 of Registration No. 33-53957 on Form S-4). 10.4 -- Form of Severance/Non-Compete Agreement between the Registrant and William J. Brummond (Incorporated by reference to Exhibit 10.3 of Registration No. 33-53957 on Form S-4). 10.5 -- Form of Severance/Non-Compete Agreement between the Registrant and Tommy H. Carter (Incorporated by reference to Exhibit 10.4 of Registration No. 33-53957 on Form S-4). 10.6 -- Form of Indemnification Agreement between the Registrant and each of the Registrant's directors and certain executive officers. (Incorporated by reference to Exhibit 10.6 of the Registrant's Form 10-K for the year ended December 31, 1994). 10.7 -- Registrant's 1994 Stock Option/Stock Issuance Plan and related forms of agreements (Incorporated by reference to Exhibit 10.15 of Registration No. 33-53957 on Form S-4). 10.8 -- Registrant's Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.16 of Registration No. 33-53957 on Form S-4). 10.9 -- 401(k) Plan of T2 dated December 8, 1989 (Incorporated herein by reference to Exhibit 10(s) of T2 Annual Report on Form 10-K for the fiscal year ended September 30, 1989, filed with the Commission on or about December 29, 1988.
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EXHIBIT NUMBER EXHIBIT -------------- ------- 10.10 -- 1988 Stock Option Plan of T2, as amended and restated as of July 31, 1990 and as further amended as of (i) August 20, 1991; (ii) November 12, 1991; and (iii) July 6, 1992 (Incorporated by reference to Exhibit 10.18 of Registration No. 33-53957 on Form S-4). 10.11 -- Curaflex 1989 Stock Option Plan (Incorporated by reference to Exhibit 10.53 of Registration No. 33-53957 on Form S-4). 10.12 -- Curaflex Amended 1990 Stock Option Plan (Incorporated by reference to Exhibit 10.54 of Registration No. 33-53957 on Form S-4). 10.13 -- Curaflex Directors' Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 10.59 of Registration No. 33-53957 on Form S-4). 10.14 -- Clinical Homecare Ltd. 1990 Incentive Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.61 of Registration No. 33-53957 on Form S-4). 10.15 -- Clinical Homecare Ltd. 1990 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.62 of Registration No. 33-53957 on Form S-4). 10.16 -- 1989 Stock Option Plan of Medisys (Incorporated by reference to Exhibit 10.85 of Registration No. 33-53957 on Form S-4). 10.17 -- Form of Non-Plan Option Agreement of Medisys (Incorporated by reference to Exhibit 10.86 of Registration No. 33-53957 on Form S-4). 10.18 -- Credit Agreement among Coram Healthcare Corporation, Coram, Inc., the Lenders named therein and Chemical Bank, as Administrative Agent, Collateral Agent and Fronting Bank (the "Senior Credit Facility") dated as of April 6, 1995. (Incorporated by reference to Exhibit D of the Registrant's Current Report on Form 8-K dated April 6, 1995). The exhibits and schedules to the Senior Credit Facility are omitted from this Exhibit. The Company agrees to furnish supplementally any omitted exhibit or schedule to the Securities and Exchange Commission. 10.19 -- First Amendment and Waiver to the Credit Agreement, dated as of August 9, 1995, together with exhibits hereto, among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as defined therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 10.19 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.20 -- Second Amendment to the Credit Agreement dated as of September 7, 1995, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as defined therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 10.20 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission.
32 34
EXHIBIT NUMBER EXHIBIT -------------- ------- 10.21 -- Third Amendment and Limited Waiver to the Credit Agreement, dated as of September 29, 1995, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as defined therein), and Chemical Bank as Agent (Incorporated by reference to Exhibit 10.21 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.22 -- Fourth Amendment and Limited Waiver to the Credit Agreement and First Amendment to Security Documents dated as of October 13, 1995, together with selected exhibits thereto, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions Party thereto (as defined therein) and Chemical Bank as Agent (Incorporated by reference to the Company's Current Report on Form 8-K as filed October 24, 1995). 10.23 -- Warrant Agreement dated as of October 13, 1995, among the Registrant, Coram Inc., and the other parties specified therein (Incorporated by reference to the Company's Current Report on Form 8-K as filed October 24, 1995). 10.24 -- Amendment and Limited Waiver to Bridge Securities Purchase Agreement, dated as of October 13, 1995, by and among the Registrant, Coram Inc., and Donaldson, Lufkin & Jenrette. (Incorporated by reference to Exhibit 10.24 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.25 -- Form of Employment Agreement between the Registrant and Donald J. Amaral. (Incorporated by reference to Exhibit 10.25 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.26 -- Securities Purchase Agreement ("Securities Purchase Agreement") and Form of Subordinated Bridge Note, dated as of April 6, 1995, among Coram Inc., Coram Funding, Inc. and the Registrant (Incorporated by reference to Exhibit E of the Registrant's Current report on Form 8-K dated April 6, 1995). The exhibits and schedules to the Securities Purchase Agreement are omitted from this Exhibit. The Registrant agrees to furnish supplementally any omitted exhibit or schedule to the Securities and Exchange Commission. 10.27 -- Exclusive Distribution Agreement -- Healthcare Products and Biomedical Equipment and Services Agreement between Medical Specialties Distributors, Inc. ("MSD") and Coram, dated as of June 1, 1996. (Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996). 10.28 -- Medical Specialties Master Service Agreement between MSD and Coram, dated as of June 1, 1996. (Incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996). 10.29 -- Medical Specialties Master Rental Agreement between MSD and Coram, dated as of June 1, 1996. (Incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996).
33 35
EXHIBIT NUMBER EXHIBIT -------------- ------- 10.30 -- Coram Healthcare Litigation Memorandum of Understanding between all parties to In re Coram Healthcare Corp. Securities Litigation, Master File No. 95-N-2074 and Shevde v. Sweeney et al., Civil Action No. 96-N-722, dated as of August 5, 1996. (Incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996). 10.31 -- Fifth Amendment to the Credit Agreement Dated as of February 6, 1996, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 99.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.32 -- Sixth Amendment to Credit Agreement Dated as of April 19, 1996, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 99.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.33 -- Seventh Amendment to Credit Agreement Dated as of July 3, 1996, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 99.1 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.34 -- Eighth Amendment to Credit Agreement dated as of December 3, 1996, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chase Manhattan Bank as Agent. Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.35 -- Ninth Amendment and Limited Waiver to the Credit Agreement dated as of March 14, 1997, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chase Manhattan Bank as Agent. Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.36 -- Amended Agreement, dated as of March 28, 1997 by and among the Registrant, Coram Inc., and Donaldson, Lufkin & Jenrette. Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.37 -- Sabratek Corporation and Coram Healthcare Exclusive Supply Agreement for IV Infusion Pumps, IV Disposable Sets and Related Items, dated as of February 26, 1997.
34 36
EXHIBIT NUMBER EXHIBIT -------------- ------- 10.38 -- Amendment to 9% Subordinated Convertible Debenture and Notice of Conversion dated as of June 30, 1996, by and among the Registrant, Coram Inc., and the other parties specified therein (Incorporated by reference to the Company's report on Form 8-K as filed on July 12, 1996. 10.39 -- Tenth Amendment to Credit Agreement dated June 2, 1997, by and among the Registrant, Goldman Sachs Credit Partners L.P., Coram, Inc., each Subsidiary Guarantor (as defined therein) and The Chase Manhattan Bank, as administrative agent and collateral agent for the Lenders named therein, to that certain Credit Agreement dated as of April 6, 1995, by and among the Registrant, Coram, Inc, each Subsidiary Guarantor (ad defined therein), the Financial Institutions named therein and The Chase Manhattan Bank, as collateral agent for the Lenders named therein. Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. (Incorporated by reference Exhibit 99 of the Registrant's Current Report on Form 8-K dated as of June 2, 1997). 10.40 -- Letter Agreement of March 29, 1998 by and among Cerberus Partners, L.P., Goldman Sachs Credit Partners, L.P. and Foothill Capital Corporation on the one hand, and Coram Healthcare Corporation, on the other, deferring the payment of interest and fees pursuant to (i) the Securities Purchase Agreement dated as of April 6, 1995 and (ii) the Letter Agreement dated March 28, 1997 between Coram Funding, Inc. and Coram Healthcare Corporation.* 20.1 -- Stockholder Rights Agreement (the "Stockholder Rights Agreement"), dated as of June 25, 1997, between Coram Healthcare Corporation and BankBoston, N.A., which includes the form of Certificate of Designation, Preferences and Rights setting forth the terms of the Series X Participating Preferred Stock, par value $0.001 per share, as Exhibit A, the Summary of Stockholder Rights Agreement as Exhibit B and the form of Right Certificate as Exhibit C. Pursuant to the Stockholder Rights Agreement, printed Right Certificates will not be mailed until as soon as practicable after the earlier of the tenth business day after public announcement that a person or group has become an Acquiring Person or the tenth business day after a person commences, or announces its intention to commence, a tender offer or exchange offer the consummation of which would result in such person becoming an Acquiring Person. (Incorporated by reference Exhibit 1 of the Registrant's Current Report on Form 8-K dated as of June 25, 1997). 21.1 -- Subsidiaries of the Registrant.* 23.1 -- Consent of Ernst & Young LLP.* 27.1 -- Financial Data Schedule.* 27.2 -- Restated Financial Data Schedules.*
- --------------- * Filed herewith. 35 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 1998. CORAM HEALTHCARE CORPORATION By: /s/ DONALD J. AMARAL ---------------------------------- Donald J. Amaral Chairman and Chief Executive Officer By: /s/ WENDY L. SIMPSON ---------------------------------- Wendy L. Simpson Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on be half of the registrant and in the capacities on the dates indicated. /s/ DONALD J. AMARAL Chairman and Chief Executive Officer March 31, 1998 - ----------------------------------------------------- (Principal Executive Officer) Donald J. Amaral /s/ RICHARD M SMITH President and Secretary March 31, 1998 - ----------------------------------------------------- Richard M. Smith /s/ WENDY L. SIMPSON Executive Vice President and Chief March 31, 1998 - ----------------------------------------------------- Financial Officer (Principal Wendy L. Simpson Financial Officer) /s/ SCOTT R. DANITZ Vice President and Controller March 31, 1998 - ----------------------------------------------------- (Principal Accounting Officer) Scott R. Danitz /s/ WILLIAM J. CASEY Director March , 1998 - ----------------------------------------------------- William J. Casey /s/ RICHARD A. FINK Director March 31, 1998 - ----------------------------------------------------- Richard A. Fink /s/ STEPHEN G. PAGLIUCA Director March 31, 1998 - ----------------------------------------------------- Stephen G. Pagliuca /s/ L. PETER SMITH Director March 31, 1998 - ----------------------------------------------------- L. Peter Smith
36 38 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE ---- Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets -- As of December 31, 1997 and 1996...................................................... F-3 Consolidated Statements of Operations -- Years Ended December 31, 1997, 1996 and 1995.......................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) -- Years Ended December 31, 1997, 1996 and 1995...................................................... F-5 Consolidated Statements of Cash Flows -- Years Ended December 31, 1997, 1996 and 1995.......................... F-6 Notes to Consolidated Financial Statements.................. F-7 Schedule II -- Valuation and Qualifying Accounts............ S-1
F-1 39 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Coram Healthcare Corporation We have audited the accompanying consolidated balance sheets of Coram Healthcare Corporation as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Coram Healthcare Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Denver, Colorado March 27, 1998 F-2 40 CORAM HEALTHCARE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, -------------------- 1997 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $108,950 $ 15,375 Cash limited as to use.................................... 1,029 3,917 Accounts receivable, net of allowance of $24,047 and $40,256................................................ 86,142 106,763 Inventories............................................... 14,277 14,268 Deferred income taxes, net................................ 3,077 4,063 Other current assets...................................... 9,510 11,884 -------- -------- Total current assets.............................. 222,985 156,270 Property and equipment, net................................. 20,050 16,998 Joint ventures and other assets............................. 19,917 24,654 Deferred income taxes, non-current.......................... 2,336 1,914 Other deferred costs........................................ 7,668 11,114 Goodwill, net of accumulated amortization of $57,937 and $50,500................................................... 243,864 334,359 -------- -------- Total assets...................................... $516,820 $545,309 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 39,084 $ 40,350 Current maturities of long-term debt...................... 150,225 198,033 Income taxes payable...................................... 10,287 1,663 Deferred income taxes..................................... 1,256 1,325 Reserve for litigation.................................... 2,785 3,273 Accrued merger and restructuring.......................... 8,771 13,533 Other accrued liabilities................................. 22,197 30,622 -------- -------- Total current liabilities......................... 234,605 288,799 Long-term debt, including revolving lines of credit......... 150,428 266,641 Minority interest in consolidated joint ventures............ 1,016 4,544 Other liabilities........................................... 1,588 2,155 Deferred income taxes, non-current.......................... 4,157 4,652 Commitments and contingencies............................... -- -- Stockholders' equity (deficit): Preferred stock, par value $.001, authorized 10,000 shares, none issued.................................... -- -- Common stock, par value $.001, authorized 100,000 shares at December 31, 1997 and 75,000 shares at December 31, 1996, issued and outstanding 48,069 at December 31, 1997 and 42,404 at December 31, 1996................... 48 42 Additional paid-in capital................................ 437,608 390,741 Common stock to be issued................................. -- 25,625 Accumulated deficit....................................... (312,630) (437,890) -------- -------- Total stockholders' equity (deficit).............. 125,026 (21,482) -------- -------- Total liabilities and stockholders' equity (deficit)....................................... $516,820 $545,309 ======== ========
See accompanying notes to consolidated financial statements. F-3 41 CORAM HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 --------- -------- --------- Net revenue................................................. $ 464,385 $521,969 $ 602,585 Cost of service............................................. 328,781 361,688 459,710 --------- -------- --------- Gross profit................................................ 135,604 160,281 142,875 Operating expenses: Selling, general and administrative expenses.............. 93,167 104,261 133,037 Provision for estimated uncollectible accounts............ 16,209 29,045 68,912 Amortization of goodwill.................................. 13,586 15,259 15,307 Charges for long-lived assets and acquired receivables: Goodwill and other long-lived assets................... -- -- 166,373 Valuation of acquired receivables...................... -- -- 37,000 Provision for (income from) litigation settlements........ (156,792) 27,875 -- Restructuring costs, net.................................. -- -- 6,158 --------- -------- --------- Total operating expenses.......................... (33,830) 176,440 426,787 --------- -------- --------- Operating income (loss)..................................... 169,434 (16,159) (283,912) Other income (expenses): Interest income........................................... 2,242 1,497 1,531 Interest expense.......................................... (75,026) (78,767) (49,741) Termination fee........................................... 15,182 -- -- Equity in net income of unconsolidated joint ventures..... 1,245 991 1,592 Gain on sale of business.................................. 26,744 -- -- Gain (loss) on sales of property and equipment............ (61) 668 (50) Other income (expense), net............................... 333 456 (3,659) --------- -------- --------- Income (loss) before income taxes and minority interests.... 140,093 (91,314) (334,239) Income tax expense (benefit).............................. 7,550 (13,998) (11,154) Minority interests in net income of consolidated joint ventures............................................... 7,283 7,698 10,964 --------- -------- --------- Net income (loss)........................................... $ 125,260 $(85,014) $(334,049) ========= ======== ========= Earnings (loss) per common share............................ $ 2.64 $ (2.05) $ (8.39) ========= ======== ========= Earnings (loss) per common share -- assuming dilution....... $ 2.30 $ (2.05) $ (8.39) ========= ======== =========
See accompanying notes to consolidated financial statements. F-4 42 CORAM HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
UNREALIZED COMMON LOSS ON COMMON STOCK ADDITIONAL STOCK AVAILABLE- --------------- PAID-IN TO BE FOR-SALE ACCUMULATED SHARES AMOUNT CAPITAL ISSUED SECURITIES DEFICIT TOTAL ------ ------ ---------- -------- ---------- ----------- --------- Balance, January 1, 1995............. 38,964 $39 $341,328 $ -- $(279) $ (18,827) $ 322,261 Issuance of common stock and warrants, net................... 1,405 1 29,548 -- -- -- 29,549 Elimination of unrealized loss..... -- -- -- -- 279 -- 279 Net loss........................... -- -- -- -- -- (334,049) (334,049) ------ --- -------- -------- ----- --------- --------- Balance, December 31, 1995........... 40,369 40 370,876 -- -- (352,876) 18,040 Issuance of common stock and warrants, net................... 2,035 2 19,865 -- -- -- 19,867 Shares reserved for litigation..... -- -- -- 25,625 -- -- 25,625 Net loss........................... -- -- -- -- -- (85,014) (85,014) ------ --- -------- -------- ----- --------- --------- Balance, December 31, 1996........... 42,404 42 390,741 25,625 -- (437,890) (21,482) Issuance of common stock and warrants, net................... 665 1 21,247 -- -- -- 21,248 Issuance of shares reserved for litigation...................... 5,000 5 25,620 (25,625) -- -- -- Net income......................... -- -- -- -- -- 125,260 125,260 ------ --- -------- -------- ----- --------- --------- Balance, December 31, 1997........... 48,069 $48 $437,608 $ -- $ -- $(312,630) $ 125,026 ====== === ======== ======== ===== ========= =========
See accompanying notes to consolidated financial statements. F-5 43 CORAM HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 --------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $ 125,260 $(85,014) $(334,049) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Provision for estimated uncollectible accounts............ 16,209 29,045 68,912 Depreciation and amortization............................. 56,068 64,487 47,322 Gain on conversion of debt................................ -- (1,350) -- Charge for long-lived assets and acquired receivables: Goodwill and long-lived assets.......................... -- -- 166,373 Valuation of acquired receivables....................... -- -- 37,000 Merger/restructuring benefit, net....................... -- -- (13,032) Litigation settlements not requiring cash................. (120,079) 25,625 1,372 Deferred income taxes, net................................ -- -- 25,140 Minority interest in net income of consolidated joint ventures, net........................................... (784) (2,946) 2,455 (Gain) loss on sales of assets............................ (2) (2,400) 50 Gain on sale of business.................................. (26,744) -- -- Loss on sales of investments, net......................... -- -- 3,483 Equity in net income of unconsolidated joint ventures, net..................................................... (498) (611) (1,186) Other, net................................................ 179 -- 919 Changes in assets and liabilities, net of acquisitions and dispositions: Accounts receivable..................................... (2,026) 14,029 (41,930) Prepaid expenses, inventories and other assets.......... (9,198) 20,702 (13,282) Current and other liabilities........................... 32,849 636 62,798 Accrued merger and restructuring........................ (4,762) (2,817) (10,996) Reserve for litigation.................................. (488) 833 (18,132) --------- -------- --------- Net cash provided (used) by operating activities............ 65,984 60,219 (16,783) --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of securities, net.................................... -- -- 16,592 Proceeds from sales of long-term assets..................... 680 3,875 16,839 Purchases of property and equipment......................... (19,149) (6,850) (7,329) Cash receipts on sale (payments for acquisitions) of businesses, net........................................... 124,196 4,821 (241,420) Proceeds from long-term receivables......................... -- 902 1,229 Capital contributions to unconsolidated joint ventures...... -- -- (1,333) --------- -------- --------- Net cash provided (used) by investing activities............ 105,727 2,748 (215,422) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Sales of common stock, net of repurchases and issuance costs..................................................... 1,234 553 10,387 Borrowings on lines of credit............................... -- -- 15,300 Repayments of lines of credit............................... -- -- (123,420) Securities sold under agreements to repurchase.............. -- -- (7,430) Debt borrowings............................................. 10,000 -- 588,980 Repayments of debt.......................................... (89,370) (74,630) (218,851) Cash paid for debt financing................................ -- (250) (19,614) --------- -------- --------- Net cash provided (used) by financing activities............ (78,136) (74,327) 245,352 --------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 93,575 (11,360) 13,147 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 15,375 26,735 13,588 --------- -------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 108,950 $ 15,375 $ 26,735 ========= ======== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest.................................................. $ 12,399 $ 17,719 $ 17,357 Income taxes.............................................. $ (1,074) $(24,682) $ (30,221) SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of stock in connection with acquisitions......... $ 870 $ 819 $ 6,897 Deferred interest......................................... $ 4,802 $ 4,968 $ 13,892 Issuance of notes in connection with acquisition of Caremark Business....................................... $ -- $ -- $ 100,000 Conversion of long-term debt to common stock.............. $ -- $ 5,267 $ 382 Note payable incurred for commitment fee on Senior Credit Facility................................................ $ -- $ -- $ 2,350 Warrants issued in connection with debt financing......... $ 18,965 $ 10,786 $ 9,793 Common stock issued for consulting services............... $ -- $ -- $ 1,479 Warrants issued to settle litigation...................... $ -- $ 365 $ 2,520 Common stock issued in settlement of litigation........... $ 25,625 $ 1,783 $ -- Common stock issued in connection with employment agreements.............................................. $ -- $ 294 $ -- Capital lease obligation incurred on equipment lease...... $ 41 $ 670 $ --
See accompanying notes to consolidated financial statements. F-6 44 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Business Activity. Coram Healthcare Corporation and its subsidiaries ("Coram" or the "Company") are primarily engaged in providing alternate site (outside the hospital) infusion therapy and related services throughout the United States and Canada. Other services offered by the Company include the provision of lithotripsy (see Note 5), mail-order pharmacy, pharmacy benefit management, ancillary network management service and other non-intravenous infusion products and services. The operations of the Company commenced on July 8, 1994, as a result of a merger of T2 Medical, Inc. ("T2"), Curaflex Health Services, Inc. ("Curaflex"), HealthInfusion, Inc. ("HealthInfusion") and Medisys, Inc. ("Medisys") (collectively, the "Merged Entities") (the "Four-Way Merger"). Each of these companies is a wholly-owned subsidiary of the Company. The transaction was accounted for as a pooling of interests. The Company has made a number of acquisitions since commencing operations, the most significant of which was the acquisition of substantially all of the assets and the assumption of certain specified liabilities of the alternate site infusion business and certain related businesses (the "Caremark Business") from Caremark Inc., a subsidiary of Caremark International, Inc. (collectively "Caremark") effective April 1, 1995. In addition, Coram acquired H.M.S.S., Inc. ("HMSS"), a leading regional provider of home infusion therapies based in Houston, Texas, effective September 12, 1994. See Note 6. Recent Operations and Financial Condition. Most of the Company's revenue is derived from alternate site infusion therapy and is reimbursed by third-party payors such as private insurers, managed care organizations and governmental payors. In 1997 and 1996, the increasingly and highly competitive market combined with the efforts by third-party payors to contain or reduce healthcare costs contributed to reduced reimbursement rates for services. These factors are likely to continue, at least in the near term, and may have an adverse effect on the Company's operations. The Company has suffered loss of revenue from under-performance of the Caremark Business compared to original expectations, along with a negative impact on revenue referral sources and employee morale throughout the Company. In addition, the Company incurred substantial indebtedness to acquire the Caremark Business, which it expected to service primarily through the operating income and cash flow of the Caremark Business. In 1997, the Company settled its litigation with Caremark for $165.0 million. See Notes 3 and 12. With the settlement of the Caremark litigation, the Company is now focused on strategic alternatives for the Company and its operations to realize its potential in the changing market for alternate site infusion therapy services. Additionally, in 1997 the Company sold its interest in its thirteen lithotripsy partnerships, the stock of its equipment service company and certain related assets (the "Lithotripsy Business"). The sale allowed the Company to substantially reduce its debt obligations and its contingent liabilities associated with the Company's former commitments to its partners in the Lithotripsy Business, thereby further improving its financial position. See Note 5. On October 19, 1996, Coram, Integrated Health Services, Inc. ("IHS") and IHS Acquisition XIX, Inc., a wholly-owned subsidiary of IHS ("Merger Sub"), entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") providing for the merger (the "IHS Merger") of Merger Sub with and into the Company. On April 4, 1997, the merger with IHS was terminated. See Note 4. Concentration of Credit Risks. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. As of December 31, 1997, approximately 98% of cash was deposited with Chase Manhattan Bank, the former lead bank under the Company's Senior Credit Facility. See Note 8. No other single institution represented greater than 5% of total cash equivalents. Amounts are generally in excess of the FDIC insurance limits but credit risk is mitigated as deposits are kept only with high credit quality institutions and invested in overnight funds. Accounts receivable are primarily from third-party payors, including private insurers, managed care organizations and state and federal governmental payors such as Medicare and Medicaid, and are unsecured. Credit risk is mitigated by F-7 45 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the large number of entities that comprise the third-party payor base and credit evaluations of patients and third-party payors. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation. The consolidated financial statements include the accounts of Coram, its subsidiaries and joint ventures and partnerships in which ownership is 50% or greater and considered to be under the control of the Company. All material intercompany accounts and transaction balances have been eliminated in consolidation. The Company uses the equity method of accounting to account for investments in entities in which it exhibits significant influence, but not control, and has an ownership interest less than 50%. Reclassifications. Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform to the 1997 presentation. Revenue Recognition. Revenue is recognized as services are rendered or products are delivered. Substantially all of the Company's revenue is billed to third-party payors, including insurance companies, managed care plans, governmental payors and contracted institutions. Revenue is recorded net of contractual adjustments and related discounts. Contractual adjustments represent estimated differences between service revenue at established rates and amounts expected to be realized from third-party payors under contractual agreements. Management fees, which are collected from entities managed by the Company, are based principally on a percentage of the entities' revenue. Management fees were approximately $2.0 million, $1.6 million and $7.6 million in 1997, 1996 and 1995, respectively. Revenue from the Medicare and Medicaid programs accounted for approximately 28%, 27% and 24%, respectively, of the Company's net revenue for the years ended December 31, 1997, 1996 and 1995, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Management of the Company believes that it is in compliance with all applicable laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Cash and Cash Equivalents. Cash equivalents include all highly liquid investments with an original maturity of three months or less. As of December 31, 1997, the Company had approximately $107.6 million cash held in overnight funds. A portion of the Company's cash balance was limited as to its use including cash of partnerships that may only be used for partnership operations. The restricted balances approximated $1.0 million at December 31, 1997 and $3.9 million at December 31, 1996. Inventories. Inventories, consisting primarily of pharmaceuticals and medical supplies, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment. Property and equipment are stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of one to 10 years for machinery and equipment, furniture, fixtures and vehicles, and 30 to 31.5 years for buildings. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the related assets. Goodwill and other Long-Lived Assets. Goodwill represents the excess of the purchase price over the fair value of net assets acquired through business combinations accounted for as purchases and is amortized on a straight-line basis over the expected periods to be benefited. In 1995, the Company implemented Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("Statement 121"). Accordingly, the carrying value of goodwill and other long-lived assets is reviewed quarterly to determine if any impairment indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not be recoverable, F-8 46 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) based on undiscounted estimated cash flows over their remaining depreciation and amortization period, their carrying value is reduced to estimated fair market value. Impairment indicators include, among other conditions, cash flow deficits; an historic or anticipated decline in revenue or operating profit; adverse legal, regulatory or reimbursement developments; accumulation of costs significantly in excess of amounts originally expected to acquire the asset; or a material decrease in the fair value of some or all of the assets. Within the home infusion business, the review is done separately for each of the markets in which the Company operates. Markets are currently the lowest level for which there are cash flows that are largely independent of the cash flows of other parts of the business. The Company performed the allocation of goodwill and other identifiable intangible assets at September 30, 1995. The Company was not able to allocate goodwill and other identifiable intangible assets to its branches or markets at the time such assets were acquired due to the numerous acquisitions and branch consolidations. Because the Company believes its goodwill is closely tied to the revenue generating capacity of each market, it allocated the goodwill to each market area at September 30, 1995 in proportion to the revenue of the market. The Company believed this was the most reasonable and objective basis available at that date. The allocation of goodwill was made using forecasted 1996 revenue. Other identifiable intangible assets were allocated in the same manner. The Company believes that its goodwill is defined by its relationships -- many of which are noncontractual -- with physicians, medical groups, hospitals, case managers and managed care organizations and other referral sources to the Company in the marketplace. The evaluation of the recoverability of goodwill is significantly affected by estimates of future cash flows from each of the Company's market areas. If estimates of future cash flows from operations decrease, the Company may be required to write down its goodwill and other long-lived assets in the future. Any such write-down could have a material adverse effect on the Company's financial position and results of operations. As of October 1, 1995, the Company reduced the remaining useful lives for goodwill to 25 years because of uncertainties in the Company's business environment and adverse operating results. Prior to that date, goodwill was amortized over useful lives ranging from 30 to 40 years. The change in estimated useful lives increased amortization expense by approximately $5.1 million, $5.8 million and $1.3 million during the years ended December 31, 1997, 1996 and 1995, respectively. 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 payor classification to determine the allowance for estimated uncollectible accounts. The allowance for estimated uncollectible accounts is adjusted as needed to reflect current collection, write-off and other trends, including changes in assessment of realizable value. While management believes the resulting net carrying amounts for accounts receivable are fairly stated at each quarter-end and that the Company has made adequate provision for uncollectible accounts based on all information available, no assurance can be given as to the level of future provisions for uncollectible accounts, or how they will compare to the levels experienced in the past. The Company's ability to successfully collect its accounts receivable depends, in part, on its ability to adequately supervise and train personnel in billing and collections, and minimize losses related to branch consolidations and system changes. In 1995, the Company recorded as part of its quarterly provision for estimated uncollectible accounts a charge of $20.0 million which management believes resulted principally from events that transpired as part of the consolidation of the various constituent companies' billing systems ultimately into one billing system for use at substantially all locations and to move its billing and collections functions from a centralized to a decentralized structure. Earnings per Share. In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("Statement 128"). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings F-9 47 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to fully diluted earnings per share under the previous earnings per share methodology. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 -------- -------- --------- Numerator for basic and diluted earnings per share........................................... $125,260 $(85,014) $(334,049) ======== ======== ========= Denominator: Weighted average shares......................... 44,321 41,546 39,802 Contingently issuable shares.................... 3,142 -- -- -------- -------- --------- Denominator for basic earnings per share........ 47,463 41,546 39,802 Effect of other dilutive securities: Stock options................................... 1,292 -- -- Warrants........................................ 5,726 -- -- -------- -------- --------- Denominator for diluted earnings per share -- adjusted weighted average shares and assumed conversion........................... 54,481 41,546 39,802 ======== ======== ========= Earnings (loss) per common share.................. $ 2.64 $ (2.05) $ (8.39) ======== ======== ========= Earnings (loss) per common share -- assuming dilution........................................ $ 2.30 $ (2.05) $ (8.39) ======== ======== =========
In 1997, basic earnings per share data was computed by dividing net income by the weighted average number of common shares and contingently issuable shares outstanding during the period. Diluted earnings per share was adjusted for the assumed conversion of all potentially dilutive securities including stock options and warrants to purchase common stock. In 1996 and 1995, the computations do not give effect to options or warrants as their effect would have been anti-dilutive. Segment Reporting. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"), which is effective for years beginning after December 15, 1997. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company will adopt the new requirements in 1998. Management has not completed its review of Statement 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's financial statement disclosures. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. 3. CAREMARK ACQUISITION AND LITIGATION SETTLEMENT Effective April 1, 1995, the Company acquired the Caremark Business for $209.0 million in cash and $100.0 million aggregate principal amount of Junior Subordinated Pay-In-Kind Notes ("Junior Subordinated PIK Notes"). The Company assumed only certain specified liabilities of the Caremark Business, which F-10 48 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expressly excluded any liabilities associated with the government investigation of Caremark, which was settled by Caremark in June 1995. The transaction was accounted for as a purchase. The following unaudited pro forma information is provided for comparative purposes only. It presents a combination of the Company's reported results and information furnished by Caremark for the Caremark Business prior to its acquisition by the Company as if the acquisition of the Caremark Business had occurred January 1, 1995. The data used for the Caremark Business in such pro forma financial information for the period prior to acquisition by the Company was furnished by Caremark (in thousands except per share data).
YEAR ENDED DECEMBER 31, 1995 ------------ Net revenue................................................. $698,685 Net loss.................................................... (344,207) Net loss per common share................................... (8.65)
Following the purchase of the Caremark Business in 1995, the Company expected the combined business to grow and expected to realize substantial cost savings, principally through elimination of geographically duplicative branches and consolidation of corporate functions. However, since the acquisition of the Caremark Business, the anticipated cost savings were offset by a decline in revenue resulting in substantial losses to the Company. During 1995, the Company reduced the valuation of the acquired receivables by an aggregate of $37.0 million and charged that amount to operations when it concluded that certain receivables for services rendered prior to April 1, 1995 were uncollectible and its sole source of recovery was its lawsuit against Caremark. The Company filed its initial complaint against Caremark on September 11, 1995. On June 30, 1997, the Company entered into a settlement agreement with Caremark for $165.0 million. Under the terms of the settlement, the Junior Subordinated PIK Notes totaling approximately $100.0 million principal and $20.0 million accrued interest (payable semiannually in PIK Notes of the same type) were cancelled with all payments thereunder forgiven. Additionally, Caremark agreed to pay $45.0 million in cash to the Company which was received September 2, 1997. Of the $45.0 million cash received, $3.6 million was placed in escrow pending reconciliation of certain lockbox issues. Additionally, as part of the settlement, Caremark assigned and transferred to Coram all of Caremark's claims and causes of action against Caremark's auditors, Price Waterhouse LLP, related to the lawsuit. This assignment of claims includes claims for damages sustained by Caremark in defending and settling the lawsuit. See Note 12. In June 1997, the Company recorded settlement income of $156.8 million which represents the $165.0 million settlement less related costs of $8.2 million. 4. TERMINATED MERGER WITH IHS On October 19, 1996, the Company, IHS and Merger Sub entered into the Merger Agreement providing for the merger of Merger Sub with and into the Company. If the IHS Merger had been consummated, the Company would have become a wholly-owned subsidiary of IHS. On March 30, 1997, Coram, IHS and Merger Sub executed an amendment to the Merger Agreement (the "Amendment"), which was to become effective April 4, 1997. On April 4, 1997, the Company received from IHS a written notice of termination of the Amendment and the Merger Agreement. Pursuant to the terms of the Merger Agreement and as a result of such termination, IHS paid the Company $21.0 million on May 6, 1997. Accordingly, in the second quarter of 1997 the Company recorded other income of $15.2 million, representing the $21.0 million termination fee less legal, professional and other costs related to the terminated merger of $5.8 million. F-11 49 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. SALE OF LITHOTRIPSY BUSINESS On August 20, 1997, the Company signed an agreement with IHS for the sale of the Company's interest in its thirteen lithotripsy partnerships, the stock of its equipment service company and certain related assets (the "Lithotripsy Business"). Effective September 30, 1997, the Company completed the transaction as to all of its Lithotripsy Business other than its interests in three lithotripsy partnerships. Pursuant to a side agreement amending the August 20, 1997 purchase agreement, the Company's interests in the three remaining partnerships were placed in escrow pending the satisfaction of certain conditions. Following satisfaction of these conditions, two of the partnerships were conveyed to IHS effective October 3, 1997. Due to the Company's and IHS's inability to obtain the consent of the other partner to the transfer of Coram's interest therein, the Company's interest in the remaining partnership was returned to the Company. During the years ended December 31, 1997, 1996 and 1995 the Lithotripsy Business provided the following to the Company's operations (in thousands):
1997 1996 1995 ------- ------- ------- Net revenue........................................... $37,282 $49,689 $53,491 Gross profit.......................................... 23,494 27,352 30,175 Operating income...................................... 17,584 21,824 27,200
Proceeds on the sale of the Lithotripsy Business totaled $126.6 million of which $105.6 million relates to the lithotripsy partnerships conveyed to IHS on September 30, 1997 and $21.0 million relates to the partnerships conveyed October 3, 1997. In 1997, the Company recognized a gain of $26.7 million on the sale of business. 6. ACQUISITIONS AND RESTRUCTURING Acquisitions. The acquisition activity during the year ended December 31, 1996 was limited to the completion of the purchase of certain minority interests in two lithotripsy joint ventures for approximately $4.7 million in cash. During 1995, the Company made several acquisitions, consisting primarily of certain physician owned entities totaling $25.0 million. These acquisitions were accounted for as purchases. Individually and in the aggregate, the results of operations of these businesses for periods prior to their acquisition were not material to the Company's consolidated results of operations. Certain agreements related to previously acquired businesses or interests therein provide for additional contingent consideration to be paid by the Company. The amount of additional consideration, if any, is generally based on the financial performance levels of the acquired companies. As of December 31, 1997, the Company may be required to pay under such contingent obligations approximately $2.5 million subject to increase based, in certain cases, on the Company or its subsidiaries exceeding certain revenue or income targets and changes in the market value of the Company's stock. Subject to certain elections by the Company or the sellers, a maximum of approximately $1.5 million of these contingent obligations, subject to increase, may be paid in cash. If these contingent payments are made, they will be recorded as additional goodwill in the period in which the payment becomes probable. Payments made during the years ended December 31, 1997, 1996 and 1995 were $0.6 million, $3.7 million and $0.7 million, respectively. Merger and Restructuring. During September 1994, the Company initiated a merger and restructuring plan (the "Coram Consolidation Plan") to reduce operating costs, improve productivity and gain efficiencies through consolidation of redundant infusion centers and corporate offices, reduction of personnel, and elimination or discontinuance of investments in certain joint ventures and other non-infusion facilities. As a result of the Coram Consolidation Plan, the Company recorded charges of $28.5 million in estimated merger costs and $95.5 million in estimated restructure costs. During May 1995, the Company initiated a second restructuring plan (the "Caremark Business Consolidation Plan") and charged $25.8 million to operations as F-12 50 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) a restructuring cost. Certain additional restructuring costs totaling approximately $11.4 million were accounted for as adjustments to the purchase price of the Caremark Business. For both the Coram and the Caremark Business Consolidation Plans, personnel reduction costs include severance payments, fringe benefits and taxes related to employees to be terminated, costs of terminating executives and buying out employment and consulting contracts, and incremental professional fees to develop and implement the plans. Facility reduction costs consist of the cost of fulfilling or buying out existing lease commitments on branch facilities and corporate offices that will be closed as part of the restructuring, reduced by any sublease income. They also include related costs for equipment leases and facility closure expenses. Facility reduction costs resulting in non-cash charges consist principally of the write-down, net of any proceeds on disposition, of operating assets that have become redundant because of the consolidation. They also include inventory that has no future value because of the restructuring. For the Coram Consolidation Plan, merger costs consist of executive severance payments directly related to the Four-Way Merger based on the relevant employment agreements, investment banking fees, consulting, legal and accounting fees and other costs incurred as a direct result of the merger. Discontinuance costs are principally non-cash and consist of the estimated loss on the disposal of non-core businesses. In 1997, net revenue of the Company does not include revenue from non-core businesses that were discontinued or disposed of as part of the Coram Consolidation Plan. However, in the years ended December 31, 1996 and 1995, net revenue included approximately $4.9 million and $52.1 million, respectively, from non-core businesses. Operating results from businesses that were discontinued or disposed were not material. During 1995, the Company had substantially completed the consolidation process contemplated by both the Coram and Caremark Business Consolidation Plans, including the closure of approximately 220 branch facilities, the downsizing of 40 branch facilities, the consolidation of corporate functions previously conducted in five corporate offices, and the reduction of 1,670 full-time equivalent field service and corporate personnel. As a result of evaluating the estimated cost to complete in relation to the accruals, the Company recognized the following benefits in 1995 (in thousands):
CORAM CAREMARK BUSINESS CONSOLIDATION PLAN CONSOLIDATION PLAN TOTAL ------------------ ------------------ -------- Personnel Reduction Costs......... $(5,600) $(6,700) $(12,300) Facility Reduction Costs.......... 1,100 (2,500) (1,400) Discontinuance Costs.............. (4,500) -- (4,500) ------- ------- -------- Total Restructuring Costs......... $(9,000) $(9,200) $(18,200) ======= ======= ========
The Company recognized net charges of $6.2 million (including the above benefit and a $1.4 million gain on the disposition of a non-core business) in the year ended December 31, 1995. No amounts were recorded during the years ended December 31, 1997 and 1996, however, the Company may continue to adjust amounts recorded as contingencies related to lease buyouts, contractual obligations and other facility reduction costs as they are resolved. F-13 51 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the two plans, the Company has made total asset payments and total asset disposals through December 31, 1997 as follows (in thousands):
BALANCE AT CHARGES THROUGH DECEMBER 31, 1997 DECEMBER 31, 1997 --------------------------------- ---------------------- CASH NON-CASH FUTURE CASH TOTAL EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES ------------ -------- ------- ------------ ------- Coram Consolidation Plan: Merger Costs.................. $27,300 $ 600 $27,900 $ 600 $28,500 ======= ======= ======= ====== ======= Personnel Reduction Costs..... $20,300 $ 600 $20,900 $ 300 $21,200 Facility Reduction Costs...... 11,600 21,500 33,100 500 33,600 Discontinuance Costs.......... 1,900 29,400 31,300 400 31,700 ------- ------- ------- ------ ------- Total Restructuring Costs..... $33,800 $51,500 $85,300 $1,200 $86,500 ======= ======= ======= ====== ======= Caremark Business Consolidation Plan: Personnel Reduction Costs..... $11,300 $ -- $11,300 $ -- $11,300 Facility Reduction Costs...... 8,850 3,900 12,750 3,950 16,700 ------- ------- ------- ------ ------- Total Restructuring Costs..... $20,150 $ 3,900 $24,050 $3,950 $28,000 ======= ======= ======= ====== =======
The balance in the "Accrued Merger and Restructuring" liability at December 31, 1997 consists of future cash expenditures of $5.8 million referenced above and $3.0 million of other accruals. The Company estimates that the future cash expenditures related to both the Coram and Caremark Business Consolidation Plans will be made in the following periods: 40% through December 31, 1998, 4% through December 31, 1999, 7% through December 31, 2000, and 49% through December 31, 2001, and thereafter. Although subject to future adjustment and the Company's ability to successfully implement its business strategy, the Company believes it has adequate reserves and liquidity as of December 31, 1997 to meet future expenditures related to the Coram Consolidation Plan and the Caremark Business Consolidation Plan. However, there is no assurance that the reserves will be adequate or that the Company will generate sufficient working capital to meet future expenditures. 7. PROPERTY AND EQUIPMENT Property and equipment are summarized as follows (in thousands):
DECEMBER 31, -------------------- 1997 1996 -------- -------- Land and buildings.......................................... $ -- $ 791 Leasehold improvements...................................... 4,567 3,782 Equipment and other......................................... 42,059 59,263 Furniture and fixtures...................................... 6,140 7,758 -------- -------- 52,766 71,594 Less accumulated depreciation and amortization.............. (32,716) (54,596) -------- -------- $ 20,050 $ 16,998 ======== ========
The above includes immaterial amounts of equipment under capital leases. F-14 52 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. LONG-TERM DEBT Long-term debt is as follows (in thousands):
DECEMBER 31, ---------------------- 1997 1996 --------- --------- Senior Credit Facility...................................... $ 80,000 $ 157,700 Bridge Note and Rollover Note, including accrued interest... 219,241 189,013 Junior Subordinated Pay-In-Kind (PIK) notes: Junior convertible subordinated PIK note.................. -- 84,609 Junior non-convertible subordinated PIK note.............. -- 30,669 Other obligations, including capital leases, at interest rates ranging from 6% to 16%, collateralized by certain property and equipment.................................... 1,412 2,683 --------- --------- 300,653 464,674 Less current scheduled maturities........................... (150,225) (198,033) --------- --------- $ 150,428 $ 266,641 ========= =========
The Company's principal credit and debt agreements were entered into on April 6, 1995 at the time of the acquisition of the Caremark Business. The cash paid by the Company in connection with the acquisition of the Caremark Business and the repayment of amounts outstanding under a prior credit facility, together with related fees and expenses, were financed through: (i) borrowings of approximately $205 million under a Credit Agreement with Chase Manhattan Bank (formerly Chemical Bank) as Agent (the "Senior Credit Facility") and (ii) $150 million from the issuance of a subordinated bridge note (the "Bridge Note"). On October 13, 1995, the Company and its lenders under its Senior Credit Facility and its Bridge Note agreed to a restructuring of the major terms of both agreements, as outlined below, provided a new $25.0 million credit line, which expired with no borrowings outstanding on December 31, 1996, terminated the unused portion of the existing revolving debt commitments of approximately $64.2 million and redefined certain financial covenants. In return, the lenders under the Senior Credit Facility received warrants to purchase 2.5 million shares of common stock of the Company or, at the option of the lenders, 6% of the shares of Coram Inc., a wholly-owned subsidiary of the Company and the immediate parent of the Company's operating subsidiaries, exercisable at a nominal price over five years. The Company is currently precluded from declaring or paying dividends on its capital stock. On March 14, 1997, the Company entered into a Ninth Amendment to the Senior Credit Facility which extended the maturity date. On June 2, 1997, the Company refinanced $150.0 million owed its lenders under the Senior Credit Facility through a refinancing transaction with Goldman Sachs Credit Partners L.P. ("GSCP"). GSCP acquired the debt through an assignment from Chase Manhattan Bank. As a result, the Company and GSCP entered into a Tenth Amendment to the Senior Credit Facility. The Tenth Amendment further extended the maturity date of the Senior Credit Facility, reinstated the Company's ability to borrow and repay loans under the revolving portion of the Senior Credit Facility, allowed the Company to make certain business acquisitions not previously permitted, modified interest rates and revised certain financial and other covenants. Interest is based on margins over certain domestic and foreign indices and was 9.25% as of December 31, 1997. In January 1998, the Company canceled and repaid in full all principal, interest and related fees totaling approximately $80.1 million due under the Senior Credit Facility. The warrants issued to the Company's lenders under the Senior Credit Facility were valued at $8.0 million, their fair value at date of issuance, and were accounted for as interest expense through March 31, 1997. The Company charged $1.6 million, $5.2 million and $1.2 million to expense during the years ended December 31, 1997, 1996 and 1995, respectively, related to these warrants. F-15 53 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Bridge Note was issued on April 6, 1995, as an unsecured obligation of the Company in the principal amount of $150.0 million. The Bridge Note was not repaid in full on its April 6, 1996 due date, and a Rollover Note (the "Rollover Note") which matures on October 6, 2000 was issued for the outstanding principal on the Bridge Note. The interest rate on the Rollover Note is based on various indices plus a margin which increases by 0.25% quarterly, but not to exceed 21.0% per annum. The rate as of December 31, 1997 was approximately 16.25%. During the year ended December 31, 1997, an additional $30.2 million was accrued on the Rollover Note for a total unsecured obligation in the amount of $219.2 million (including a funding fee of approximately $5.0 million due upon issuance of the Rollover Note which has also been deferred). Interest and accrued fees on the Rollover Note are due September 30, 1998 provided that the Company and the holders of the Rollover Note reach an agreement in principle for their restructuring by April 13, 1998. The agreement pursuant to which the Bridge Note and Rollover Note were issued contains customary covenants and events of default. At December 31, 1997, the Company was in compliance with all of these covenants. On May 1, 1997 a group of investors consisting of Cerberus Partners, L.P., GSCP and Foothill Capital (collectively the "Holders") purchased the Rollover Note and all the rights to the warrants thereunder. As long as the Rollover Note is outstanding, the Holders have the right to receive warrants to purchase up to 20% of the outstanding shares of common stock of the Company on a fully diluted basis as of April 6, 1995, in accordance with the following table. 0-89 days (Issued December 30, 1995)........................ 0.50% 90-179 days (Issued March 29, 1996)......................... 1.00% 180-269 days (Issued June 27, 1996)......................... 1.00% 270-359 days (Issued September 25, 1996).................... 1.50% 360-449 days (Issued December 24, 1996)..................... 2.00% 450-539 days (Issued March 24, 1997)........................ 2.50% 540-629 days (Issued June 22, 1997)......................... 2.50% 630-719 days (Issued September 20, 1997).................... 3.00% 720-809 days (Issued December 19, 1997)..................... 3.00% 810 days and thereafter (Issued March 19, 1998)............. 3.00% ----- 20.00% =====
Warrants issued to the Holders are accounted for as interest expense and additional paid-in capital. Through March 19, 1998, warrants for approximately 8.4 million shares of the Company's common stock have been reserved in escrow with a value of approximately $32.8 million. The value was determined as of the date the warrants were issued. The Company recorded interest expense of $18.2 million and $7.3 million related to these warrants during the years ended December 31, 1997 and 1996, respectively. The Junior Subordinated PIK Notes were issued to Caremark in connection with the acquisition of the Caremark Business. Through June 30, 1997 interest was based on rates ranging from 7% to 12%. On June 30, 1997, the Company entered into a settlement agreement with Caremark pursuant to which Caremark has canceled the Junior Subordinated PIK Notes totaling approximately $100.0 million principal and $20.0 million accrued interest as of such date with all payments thereunder forgiven. See Note 3. F-16 54 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1997, the Company was obligated to make principal payments on long-term debt outstanding as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 1998...................................................... $150,225 1999...................................................... 338 2000...................................................... 150,060 2001...................................................... 30 -------- $300,653 ========
9. INCOME TAXES The components of the consolidated income tax expense (benefit) were as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 ------ -------- -------- Current: Federal............................................ $5,000 $(14,000) $(36,293) State.............................................. 2,550 2 -- ------ -------- -------- Total Current.............................. 7,550 (13,998) (36,293) ------ -------- -------- Deferred: Federal............................................ -- -- 16,745 State.............................................. -- -- 8,394 ------ -------- -------- Total Deferred............................. -- -- 25,139 ------ -------- -------- Income tax expense (benefit)....................... $7,550 $(13,998) $(11,154) ====== ======== ========
The following table reconciles the federal statutory rate to the effective income tax expense (benefit) rate:
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------ ------ ------ Federal statutory rate...................................... 35.0% (35.0)% (35.0)% Valuation allowance......................................... (34.4) 17.9 31.9 State income taxes, net of federal income tax benefit....... .8 -- -- Goodwill.................................................... 1.2 2.7 .5 Other....................................................... 3.1 .3 (.6) ----- ----- ----- Effective income tax expense (benefit) rate................. 5.7% (14.1)% (3.2)% ===== ===== =====
The 1997 effective income tax rate is substantially lower than the statutory rate because of the Company's ability to utilize net operating loss carryforwards which are fully reserved in the valuation allowance. The income tax benefits recognized in 1996 and 1995 have been limited to the estimated amounts recoverable through carryback of losses to the separate returns of the Company's predecessor entities that were participants in the Four-Way Merger. Accordingly, the effective income tax rates from those years differ substantially from the expected combined federal and state income tax rates calculated using applicable statutory rates. F-17 55 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The temporary differences, tax effected, which give rise to the Company's net deferred tax asset (liability) were as follows (in thousands):
DECEMBER 31, ---------------------- 1997 1996 --------- --------- Deferred tax assets: Goodwill, net of amortization............................. $ 45,505 $ 52,175 Restructuring costs....................................... 4,554 7,344 Net operating loss carryforwards.......................... 43,255 74,933 AMT credit carryforwards.................................. 4,000 -- Accrued litigation........................................ 1,143 1,343 Litigation settlement costs............................... -- 10,518 Allowance for doubtful accounts........................... 9,870 10,822 Intangible assets......................................... 2,921 -- Property and equipment writedown.......................... 1,272 -- Accrued vacation.......................................... 636 967 Other accruals............................................ 4,364 3,358 Other..................................................... 553 2,032 --------- --------- Total gross deferred tax asset............................ 118,073 163,492 Less valuation allowance.................................. (112,660) (157,515) --------- --------- Total deferred tax asset.................................. 5,413 5,977 Deferred tax liabilities: Property and equipment depreciation....................... (3,988) (3,988) Amortization of intangibles............................... (169) (664) Partnerships.............................................. (144) (213) Other..................................................... (1,112) (1,112) --------- --------- Total deferred tax liabilities............................ (5,413) (5,977) --------- --------- Net deferred tax asset (liability)................ $ -- $ -- ========= =========
Deferred tax assets have been limited to amounts expected to be recovered through (a) carryback of taxable losses and resulting recovery of income taxes previously paid by predecessor entities for 1996 and (b) offset against deferred tax liabilities that would otherwise become payable in the carryforward period for 1996 and 1997. The Company believes that realization of the balance of deferred tax assets is sufficiently uncertain at this time that they should be offset by a valuation allowance. As of December 31, 1997, the Company had net operating loss carryforwards ("NOLs") for federal income taxes of approximately $109.5 million which are available to offset future federal taxable income, expiring in varying amounts in the years 2002 through 2011. This includes approximately $43.4 million generated prior to the Four-Way Merger and subject to separate return limitations of a predecessor company as well as an annual usage limitation of approximately $4.5 million. During the year ended December 31, 1996, the Company received a $24.7 million refund related to the carryback of tax losses for its tax years ended September 30, 1996 and 1995. The Internal Revenue Service ("IRS") is in the process of examining the tax return for the year ended September 30, 1995 and has proposed an adjustment for deduction of warrants to purchase the Company's stock that were issued to individuals in the settlement of the T2 Medical, Inc. Securities Class Action Litigation. The Company is in the process of responding to the IRS' proposal and will vigorously oppose the IRS in the event the IRS maintains its current position. Nevertheless, due to the early phase of this matter F-18 56 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and the uncertainties inherent in any proceeding with the IRS (in the event the IRS maintains its current position), no assurance can be made that the Company will prevail. 10. RELATED PARTY TRANSACTIONS Prior to the Four-Way Merger, the Merged Entities entered into agreements with individuals and/or companies considered to be related parties. The majority of these individuals and/or companies are no longer related parties as these individuals are no longer Company employees, officers and/or directors. The following summarizes the significant related party transactions: At December 31, 1996, the Company had an outstanding loan to a certain member of management approximating $0.7 million. The loan was collateralized by the individual's primary residence and had an interest rate of 8%. In 1997, the debt was satisfied. In 1997, the Company's Board of Directors approved a contingent bonus to Donald J. Amaral, Chairman and Chief Executive Officer for his success in the financial turnaround of Coram. Under the agreement, subject to certain material terms and conditions, Mr. Amaral is to be paid $1.0 million following a refinancing of the Company's debt and $4.0 million following a sale of the Company. Certain executive officers and consultants to the Merged Entities had employment, severance or consulting agreements that entitled such executive officers or consultants to certain termination, severance and consulting payments upon consummation of the Four-Way Merger or upon termination of employment following the Four-Way Merger. In conjunction with the Coram Consolidation Plan (see Note 6), the Company accrued $18.8 million for the termination of the existing employment, consulting and/or severance agreements with these individuals. This accrual is included as a component of the Coram Consolidation Plan. A director of the Company is associated with a law firm that rendered various legal services to the Company. The legal fees to the firm approximated $0.2 million, $1.7 million, and $2.4 million during the years ended December 31, 1997, 1996 and 1995, respectively. A director of the Company also serves on the Board of Directors of Sabratek Corporation. In 1997, the Company purchased from Sabratek Corporation approximately $11.5 million in multi-therapy infusion pumps and $4.3 million in related equipment and supplies. 11. STOCKHOLDERS' EQUITY At December 31, 1997, the Company was authorized to issue 10 million shares of preferred stock, $.001 par value, which may be issued at the discretion of the Company's Board of Directors without further stockholder approval. The Board of Directors can also determine the preferences, rights, privileges and restrictions of any series of preferred stock. At December 31, 1997, there were no shares of preferred stock issued and outstanding. In 1997, the Company adopted a Stockholder Rights Agreement which provides for the distribution of one "Right" to purchase a unit equal to one-hundredth of a share of newly created series of participating preferred stock ("Series X Preferred Stock") for each outstanding share of the Company's common stock of record on July 9, 1997. The Rights have an exercise price of $10 per Right, subject to subsequent adjustment under certain circumstances, and entitle the stockholder to purchase units of Series X Preferred Stock at an effective discount of 50% of the market price of the common stock under certain circumstances. Each unit of Series X Preferred Stock will be entitled to one vote on all matters on which shares of common stock may vote. This agreement expires by its terms on June 25, 1998, unless extended in one year increments by action of the Company's Board of Directors. F-19 57 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock Option Plans. The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related Interpretations in accounting for its employee stock options as permitted under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"). In connection with the Four-Way Merger, the Company assumed the outstanding obligations under the various stock option and stock purchase plans of the Merged Entities. No further options will be granted under these plans, unless so determined by the Company's Board of Directors. In addition, the Company implemented the 1994 Coram Healthcare Corporation Stock Option/Stock Issuance Plan (the "1994 Plan") and the Coram Employee Stock Purchase Plan (the "Purchase Plan"). During the fourth quarter of 1996, the Company's Board of Directors approved the suspension of the Purchase Plan. During 1997, the Purchase Plan was amended to increase the number of common shares issuable from 0.3 million to 1.0 million. Effective January 1998, the Employee Stock Purchase Plan was reinstated. The 1994 Plan contains three separate incentive programs which provide for the granting of stock options to certain officers, key employees, consultants and non-employee members of the Company's Board of Directors. Coram's 1994 Plan has authorized the grant of options for up to 7.6 million shares of the Company's common stock. Options granted under the 1994 Plan may constitute either incentive stock options, non-statutory options or stock appreciation rights based on the type of incentive program utilized. For each of the incentive programs, options may be granted at exercise prices ranging from 85% to 100% of the fair market value of the Company's stock at the date of grant. All options granted expire ten years from the date of grant and become exercisable at varying dates depending upon the incentive program utilized. The 1994 Plan is administered by a committee of the Board of Directors which has the authority to determine the employees to whom awards will be made and the incentive program to be utilized. The Company had an option agreement outside the 1994 Plan, with a firm performing consulting services to the Company for the purchase of 0.6 million shares of the Company's common stock granted as of November 2, 1994 at an exercise price of $15.63 and expiring in November 1999. This option was to vest over a 3 year period, commencing in November 1994. These options were accounted for under APB 25 using the fair value method of measurement at the date of grant. In September 1995, those options were canceled and 0.2 million shares of the Company's common stock were issued to that firm. The cancellation of the options and the issuance of the Company's stock were accounted for as consulting expenses in the amount of approximately $1.5 million in the year ended December 31, 1995. On May 16, 1997, the Company's Board of Directors recognized that the exercise price of certain stock options issued under the 1994 Plan were significantly out of the money as a result of a substantial decline in Coram's stock price. To better incentivize and retain employees of the Company, options held by all non-director employees (except the Chief Executive Officer) to purchase in the aggregate 2.8 million shares of the Company's common stock were reissued to reflect an exercise price of $2.625 per share, representing the fair market value of the Company's common stock on the date of such reissuance. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes multiple option pricing model with the following assumptions for 1997, 1996 and 1995, respectively: riskfree interest rates ranging from 5.73% to 6.57%, 5.26% to 6.54% and 5.5% to 7.39%; a dividend yield of 0% for each year; volatility factors of the expected market price of the Company's common stock of .62 for each year; and an expected life of the option of one year past vesting. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models F-20 58 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Because compensation expense associated with an award is recognized over the vesting period, the impact on pro forma net income disclosed below may not be representative of compensation expense in future pro forma years. The Company's pro forma information is as follows (in thousands except for earnings per share information):
1997 1996 1995 -------- -------- --------- Pro forma income (loss).............................. $120,638 $(90,180) $(337,035) Pro forma earnings (loss) per common share........... $ 2.54 $ (2.17) $ (8.47) Pro forma earnings (loss) per share -- assuming dilution........................................... $ 2.23 $ (2.17) $ (8.47)
A summary of the Company's stock option activity, and related information for the years ended December 31 is as follows:
1997 1996 1995 ------------------- ------------------- ------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE (000) PRICE (000) PRICE (000) PRICE ------- --------- ------- --------- ------- --------- Outstanding-Beginning Of Year......... 6,611 $5.41 7,145 $ 8.48 7,119 $16.62 Granted: Price equal to fair value........ 5,153 $2.77 1,348 $ 4.93 3,962 $ 9.02 Price greater than fair value.... -- $ -- -- $ -- 3,681 $ 4.27 Price less than fair value....... -- $ -- -- $ -- 300 $ 2.98 Exercised........................ (327) $3.21 (12) $ 4.53 (791) $11.58 Forfeited........................ (3,876) $5.98 (1,870) $16.81 (7,126) $14.39 ------- ------ ------ Outstanding-end of year............... 7,561 $3.39 6,611 $ 5.41 7,145 $ 8.48 ======= ====== ====== Exercisable at end of year............ 3,375 2,264 1,570 ======= ====== ====== Weighted-average fair Value of options granted During the year: Price equal to fair value........... $ 1.19 $ 2.39 $ 4.43 Price greater than fair value....... $ -- $ -- $ 1.17 Price less than fair value.......... $ -- $ -- $ 1.16
F-21 59 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Exercise prices for options outstanding and the weighted-average remaining contractual life of those options at December 31, 1997 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------ ------------------------------ NUMBER WEIGHTED-AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE EXERCISE PRICES (000) CONTRACTUAL LIFE EXERCISE PRICE (000) EXERCISE PRICE - --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 1.44 - $ 1.44 1 2.92 $ 1.44 1 $ 1.44 $ 2.50 - $ 2.50 1,347 9.42 $ 2.50 -- $ -- $ 2.63 - $ 2.63 2,774 7.97 $ 2.63 1,379 $ 2.63 $ 2.84 - $ 3.13 300 9.20 $ 3.08 100 $ 2.98 $ 3.45 - $ 3.45 2,200 7.78 $ 3.45 1,466 $ 3.45 $ 3.50 - $ 5.13 771 8.70 $ 4.91 261 $ 4.77 $ 5.50 - $39.04 145 5.00 $12.05 145 $12.05 $41.27 - $41.27 9 0.58 $41.27 9 $41.27 $42.46 - $42.46 13 0.72 $42.46 13 $42.46 $45.24 - $45.24 1 0.71 $45.24 1 $45.24 ----- ----- $ 1.44 - $45.24 7,561 8.22 $ 3.39 3,375 $ 3.83 ===== =====
On December 28, 1995, the Company's former Chairman and the outside members of the Board of Directors returned stock options held by them for 3.9 million shares. Common shares reserved for future issuance include approximately 0.8 million shares related to options outside of the 1994 Plan, 0.7 million shares related to the Purchase Plan and 12.4 million shares related to stock purchase warrants. In addition, Donald J. Amaral, Chairman and Chief Executive Officer, will receive his 1998 net base salary in shares of common stock. The shares will be valued at the time the compensation is paid based upon the lesser of the closing price of the stock or the average closing price for the prior 30 days. Warrants to Purchase Common Stock. The following warrants are outstanding or issuable at December 31, 1997:
EXERCISE PRICE EXPIRATION SHARES PER SHARE DATE ------ --------- ---------- Issued to lenders under Senior Credit Facility (Note 8)..................... 2,462,286 nominal October 13, 2000 Issued to the Rollover Note Holders (Note 8).............................. 7,116,260 nominal June 15, 2005 Issued in settlement of T2 litigation (Note 12)............................. 2,519,862 $22.125 July 10, 1999 Issued in settlement of dispute with former principals of Company acquired by T2 (Note 12)....................... 281,250 $4.625 September 30, 1999 Issued by Merged Entities prior to Four-Way Merger....................... 34,718 $12.58 - $18.79 March 6, 2001 to none
12. COMMITMENTS AND CONTINGENCIES Leases. The Company leases office, other operating space and equipment under various operating and capital leases. The leases provide for monthly rental payments including real estate taxes and other operating costs. Total rental expense for the years ended December 31, 1997, 1996 and 1995 was approximately $12.2 million, $13.0 million and $17.5 million, respectively, exclusive of amounts charged to restructuring F-22 60 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reserves. At December 31, 1997 the aggregate future minimum lease commitments were as follows (in thousands):
YEARS ENDING CAPITAL OPERATING DECEMBER 31, LEASES LEASES - ------------ ------- --------- 1998........................................................ $ 937 $11,963 1999........................................................ 221 7,975 2000........................................................ -- 4,775 2001........................................................ -- 968 2002........................................................ -- 1,301 Thereafter.................................................. -- 187 ------ ------- Total minimum lease payments...................... 1,158 27,169 Less amounts representing interest.......................... (85) -- ------ ------- Net minimum lease payments.................................. $1,073 $27,169 ====== =======
Capital lease obligations are included in other obligations. Operating lease obligations include $3.8 million, less $2.4 million of subleases, accrued for as part of the restructuring costs under the Coram and Caremark Business Consolidation Plans. See Notes 6 and 8. Employee Benefit Plans. The Merged Entities provided various defined contribution plans that were available to their employees. Management of the Company merged these benefit plans during 1995. Eligible employees include all individuals over the age of 21 who have worked at least 1,000 hours for the Company in a one year period. The Company offers a matching program of $.50 for every $1 contributed up to the first 6% of the employees' pay. Employee contributions vest immediately upon contribution, and the Company's contributions vest as follows: 1 year 0%, 2 years 25%, 3 years 50%, 4 years 75% and 5 years 100%. During the years ended December 31, 1997, 1996 and 1995, the Company's total contributions to these plans were approximately $1.7 million, $2.1 million and $1.9 million, respectively. Litigation. On November 21, 1995 , a suit captioned William Hall and Barbara Lisser v. Coram Healthcare Corporation, James W. Sweeney, Patrick Fortune, and Sam Leno, No 1:95-CV-2994(WHB) was filed in the United States District Court for the Northern District of Georgia on behalf of a purported class of plaintiffs who were entitled to receive warrants pursuant to the settlement of In re T2 Medical, Inc. Shareholder Litigation. Plaintiffs filed an Amended Class Action Complaint on February 28, 1996, in which they allege that the Defendants made false and misleading statements that caused a fraud on the market and artificially inflated the price of the Company's stock during the period from August 1994 through August 1995. Such Complaint alleges violations of Section 10(b) of the Securities Act of 1934, and Rule 10b-5 promulgated thereunder, against all of the Defendants. The Complaint also alleges controlling person liability against the individual defendants under Section 20(a) of the Securities and Exchange Act, and further alleges fraud by all of the Defendants under Georgia law. Finally, Plaintiffs allege a breach of the covenant of good faith and fair dealing by all Defendants. Plaintiffs seek compensatory damages reflecting the difference in value between the warrants as issued pursuant to the settlement of In re T2 Medical, Inc. Shareholder Litigation with the trading price of the Company's common stock at its actual price and the same number of warrants at the same exercise price with the Company's stock trading at its alleged true value. The Defendants filed a Motion to dismiss the Amended Class Action Complaint on March 13, 1996. The Court granted the Company's Motion to Dismiss the Complaint on February 12, 1997. The Plaintiffs have appealed the dismissal to the Eleventh Circuit Court of Appeals. The Company opposed the appeal. The Eleventh Circuit held oral argument on November 18, 1997, but the Court has not yet ruled on the appeal. The Company intends vigorously to defend itself in the matter described above. Nevertheless, due to the uncertainties inherent in litigation, the ultimate disposition of the matter described in the preceding paragraph F-23 61 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cannot presently be determined. Accordingly, except for the settlement of the Shareholder Litigation described below and charges recorded for various litigation settlements that are not individually material to the Company, no provision for any loss that may result upon resolution of any suits or proceedings has been made in the Consolidated Financial Statements. An adverse outcome could be material to the financial position, results of operations and liquidity of the Company. On August 8, 1996, the Company announced an agreement in principle to settle certain shareholder class action and certain derivative litigation ("the Shareholder Litigation"). The agreement in principle was approved by the Colorado District Court on January 24, 1997. As consideration for the settlement, the Company paid approximately $0.3 million and the Company's director's and officer's insurance policies paid approximately $22.3 million. Additionally, the Company was required to adopt certain disclosure policies with regard to certain public statements. Under the agreement the Company was required to issue 5.0 million freely tradable shares of common stock of which 1.5 million shares were issued March 11, 1997 and 3.5 million shares were issued November 28, 1997. The Company recorded non-cash charges of $25.6 million and a cash charge of $0.3 million during the year ended December 31, 1996. The $25.6 million, which was recorded in operations as a provision for shareholder litigation settlement and in stockholders' equity as common stock to be issued, represents the 5.0 million shares at the stock price of $5.125 per share on the date the settlement was approved. In September 1995, as amended on October 6, 1995, the Company filed suit against Caremark (the "Caremark Litigation") in the San Francisco Superior Court. The Caremark Litigation and other related issues arose out of the acquisition of certain assets of Caremark's home infusion business in 1995. On June 30, 1997, the Company entered into a settlement with Caremark. Under the terms of the settlement, Junior Subordinated Pay-In-Kind Notes totaling approximately $100.0 million principal and $20.0 million accrued interest were canceled with all payments due thereunder forgiven. Additionally, Caremark agreed to pay $45.0 million in cash which was received on September 2, 1997. Of the $45.0 million cash received, $3.6 million was placed in escrow pending reconciliation of certain lockbox issues. As a result the Company recorded income from litigation settlement of $156.8 million in June of 1997. See Note 3. On July 7, 1997, the Company filed suit against Price Waterhouse LLP in the Superior Court of San Francisco, California seeking damages in excess of $165.0 million. As part of the settlement of the Caremark Litigation, Caremark assigned and transferred to the Company all of Caremark's claims and causes of action against Caremark's auditors, Price Waterhouse LLP, related to the lawsuit. This assignment of claims includes claims for damages sustained by Caremark in defending and settling its lawsuit with the Company. Price Waterhouse has moved to dismiss the Company's lawsuit on several grounds. The Company has responded. However, there can be no assurance that the Company will succeed in its opposition to the motion to dismiss and there can be no assurance of any recovery from Price Waterhouse LLP. See Note 3. The Company is also a party to various other legal actions arising out of the normal course of its business. Management believes that the ultimate resolution of such other actions will not have a material adverse effect on the Company's financial position, results of operations and liquidity of the Company. Nevertheless, due to the uncertainties inherent in litigation, the ultimate disposition of these actions cannot presently be determined. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments included in the Company's assets and current liabilities (excluding long-term debt) are reflected in the financial statements at amounts approximating their fair value because of the short-term maturity of those instruments. At December 31, 1997 and 1996, the Company's ability to borrow was limited. At December 31, 1997 and 1996, the Company had total debt carried at $300.7 million and $464.7 million, respectively. At F-24 62 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1997 and 1996, the Senior Credit Facility was carried at $80.0 million and $157.7 million, respectively, and the Company estimates that its fair value approximates its face value based on the interest rate, security, covenants and remaining term to maturity. It is not practicable to determine the fair value as of December 31, 1997 of the Rollover Note, carried at $219.2 million. The obligation is unsecured and subordinate to the Company's Senior Credit Facility, and cash payments of principal or interest cannot be made under terms of the Senior Credit Facility. The timing and amounts of payments that may be made in the future are not determinable at this time. Further, the Company is not able to determine at what interest rate subordinated loans may be available to the Company, or whether loans on a subordinated unsecured basis would even be available. The Company believes the fair value of the Rollover Note at December 31, 1997 may be substantially less than its carrying amount because of its subordination provisions and remaining term to maturity and the Company's adverse operating results and liquidity. Considerable judgment is required in developing estimates of fair value, and the information furnished above is not meant to be indicative of what such debt could be settled for. See Note 8. The Company has investments in unconsolidated entities totaling approximately $1.2 million and $1.9 million at December 31, 1997 and 1996, respectively. Since these entities are all closely held companies and there are no quoted market prices, it is not practicable to estimate the fair value of such investments. 14. QUARTERLY RESULTS (IN THOUSANDS, EXCEPT PER COMMON SHARE DATA) (UNAUDITED)
FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Year Ended December 31, 1997 Net revenue...................................... $105,039 $119,516 $118,115 $121,715 ======== ======== ======== ======== Gross profit..................................... $ 23,949 $ 36,590 $ 35,075 $ 39,990 ======== ======== ======== ======== Net income (loss)................................ $(19,226) $ 2,303 $156,771 $(14,588) ======== ======== ======== ======== Earnings (loss) per common share................. $ (0.39) $ 0.05 $ 3.29 $ (0.31) ======== ======== ======== ======== Earnings (loss) per common share -- assuming dilution...................................... $ (0.39) $ 0.04 $ 2.99 $ (0.31) ======== ======== ======== ========
FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Year Ended December 31, 1996 Net revenue...................................... $126,029 $131,206 $133,109 $131,625 ======== ======== ======== ======== Gross profit..................................... $ 40,241 $ 44,615 $ 41,959 $ 33,466 ======== ======== ======== ======== Net loss......................................... $(31,575) $(12,012) $(23,526) $(17,901) ======== ======== ======== ======== Loss per common share............................ $ (0.75) $ (0.28) $ (0.58) $ (0.44) ======== ======== ======== ======== Loss per common share -- assuming dilution....... $ (0.75) $ (0.28) $ (0.58) $ (0.44) ======== ======== ======== ========
In 1997, unusual or infrequently occurring charges included second quarter income from litigation settlement of $156.8 million and termination fee income of $15.2 million. In addition, in the third and fourth quarters of 1997, the Company recorded a gain on sale of Lithotripsy Business of $18.0 million and $8.7 million, respectively. F-25 63 CORAM HEALTHCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1996, unusual or infrequently occurring charges included provisions for litigation of $12.5 million, $0.3 million and $15.1 million in the second, third and fourth quarters, respectively. The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with Statement 128. F-26 64 CORAM HEALTHCARE CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BEGINNING COSTS AND CHARGED TO BALANCE AT DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD ----------- ---------- ---------- -------------- ---------- ------------- Year ended December 31, 1997 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts................... $40,256 $16,209 $ -- $(32,418)(3)(1) $24,047 Year Ended December 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts................... $63,839 $29,045 $ -- $(52,628)(1) $40,256 Year Ended December 31, 1995 Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts................... $17,990 $68,912 $41,124(2) $(64,187)(1) $63,839
- --------------- (1) Accounts written off, net of recoveries. (2) Balance related to the Acquisition of Caremark Business, including $37.0 million charged to operations in the quarter ended September 30, 1995. (3) Includes a reduction in the reserve of $0.5 million resulting from the sale of the Lithotripsy Business. S-1 65 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT ------- ------- 2.1 -- Agreement and Plan of Merger dated as of February 6, 1994, by and among the Registrant, T2, Curaflex, HealthInfusion, Medisys, T2 Acquisition Company, CHS Acquisition Company, HII Acquisition Company and MI Acquisition Company (Incorporated by reference to Exhibit 2.1 of Registration No. 33-53957 on Form S-4). 2.2 -- First Amendment to Agreement and Plan of Merger dated as of May 25, 1994, by and among the Registrant, T2 Curaflex, HealthInfusion, Medisys, T2 Acquisition Company, CHS Acquisition Company, HII Acquisition Company and MI Acquisition Company (Incorporated by reference to Exhibit 2.2 of Registration No. 33-53957 on Form S-4). 2.3 -- Second Amendment to Agreement and Plan of Merger dated as of July 8, 1994 by and among the Registrant, T2, Curaflex, HealthInfusion, Medisys, T2 Acquisition Company, CHS Acquisition Company, HII Acquisition Company and MI Acquisition Company (Incorporated by reference to Exhibit 2.3 of the Registrant's Current Report on Form 8-K dated as of July 15, 1994). 2.4 -- Asset Sale and Note Purchase Agreement, (the "Asset Purchase Agreement") among the Registrant, Caremark International Inc. and Caremark Inc. dated as of January 29, 1995 (Incorporated by reference to Exhibit C of the Registrant's Current Report on Form 8-K dated April 6, 1995). The exhibits and schedules to the Asset Purchase Agreement are omitted from this Exhibit. The Company agrees to furnish supplementally any omitted exhibits or schedule with the Securities and Exchange Commission. 2.5 -- Agreement and Plan of Merger among the Registrant, CHC Acquisition Corp. and Lincare Holdings Inc., (the "Lincare Merger Agreement") dated as of April 17, 1995 (Incorporated by reference to Exhibit B of the Registrant's Current Report on Form 8-K dated May 2, 1995). The exhibits and schedules to the Lincare Merger Agreement are omitted from this Exhibit. The Company agrees to furnish supplementally any omitted exhibit or schedule with the Securities and Exchange Commission. 2.6 -- Agreement and Plan of Merger entered into as of October 19, 1996, among Coram Healthcare Corporation, Integrated Health Services, Inc. and IHS Acquisition XIX, Inc. (Incorporated by reference to Exhibit 2.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 2.7 -- Purchase Agreement by and between Integrated Health Services, Inc., T2 Medical, Inc., Coram Healthcare Corporation of Greater New York and Coram Healthcare Corporation. (Incorporated by reference Exhibit 2 of the Registrant's Current Report on Form 8-K dated as of August 20, 1997). 2.8 -- Side Agreement dated as of September 30, 1997 among Coram Healthcare Corporation, T2 Medical, Inc., Coram Healthcare Corporation of Greater New York and Integrated Health Services, Inc. (Incorporated by reference Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated as of September 30, 1997). 3.1 -- Certificate of Incorporation of Registrant, as amended through May 11, 1994 (Incorporated by reference to Exhibit 3.1 of Registration No. 33-53957 on Form S-4). 3.2 -- Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 of Registration No. 33-53957 on Form S-4).
66
EXHIBIT NUMBER EXHIBIT ------- ------- 3.3 -- Certificate of Amendment of the Registrant's Certificate of Incorporation.* 4.1 -- Form of Common Stock Certificate for the Registrant's common stock, $.001 par value per share. (Incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 4.2 -- Form of Common Stock Certificate for the Registrant's common stock, par value $.001, including legend thereon in respect of the Stockholder Rights Agreement which exhibit is hereby incorporated by reference thereto.* 4.3 -- Form of Certificate of Designation, Preferences and Rights of the Registrant's Series X Participating Preferred Stock (filed as Exhibit A to the Stockholder Rights Agreement, which was filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated as of June 25, 1997, and which exhibit is hereby incorporated by reference thereto). 10.1 -- Amended and Restated Credit Agreement dated as of February 10, 1995, by and among Curaflex, T2, HealthInfusion, Medisys, and HMSS as Co-Borrowers, Toronto Dominion (Texas), Inc., as Agent (the "Amended Credit Agreement") (Incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). The exhibits and schedules to the Amended Credit Agreement are omitted from this Exhibit. The Company agrees to furnish supplementally any omitted exhibit or schedule to the Securities and Exchange Commission upon request. 10.2 -- Form of Employment Agreement between the Registrant and Charles A. Laverty (Incorporated by reference to Exhibit 10.1 of Registration No. 33-53957 on Form S-4). 10.3 -- Form of Severance/Non-Compete Agreement between the Registrant and Miles E. Gilman (Incorporated by reference to Exhibit 10.2 of Registration No. 33-53957 on Form S-4). 10.4 -- Form of Severance/Non-Compete Agreement between the Registrant and William J. Brummond (Incorporated by reference to Exhibit 10.3 of Registration No. 33-53957 on Form S-4). 10.5 -- Form of Severance/Non-Compete Agreement between the Registrant and Tommy H. Carter (Incorporated by reference to Exhibit 10.4 of Registration No. 33-53957 on Form S-4). 10.6 -- Form of Indemnification Agreement between the Registrant and each of the Registrant's directors and certain executive officers. (Incorporated by reference to Exhibit 10.6 of the Registrant's Form 10-K for the year ended December 31, 1994). 10.7 -- Registrant's 1994 Stock Option/Stock Issuance Plan and related forms of agreements (Incorporated by reference to Exhibit 10.15 of Registration No. 33-53957 on Form S-4). 10.8 -- Registrant's Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.16 of Registration No. 33-53957 on Form S-4). 10.9 -- 401(k) Plan of T2 dated December 8, 1989 (Incorporated herein by reference to Exhibit 10(s) of T2 Annual Report on Form 10-K for the fiscal year ended September 30, 1989, filed with the Commission on or about December 29, 1988. 10.10 -- 1988 Stock Option Plan of T2, as amended and restated as of July 31, 1990 and as further amended as of (i) August 20, 1991; (ii) November 12, 1991; and (iii) July 6, 1992 (Incorporated by reference to Exhibit 10.18 of Registration No. 33-53957 on Form S-4).
67
EXHIBIT NUMBER EXHIBIT ------- ------- 10.11 -- Curaflex 1989 Stock Option Plan (Incorporated by reference to Exhibit 10.53 of Registration No. 33-53957 on Form S-4). 10.12 -- Curaflex Amended 1990 Stock Option Plan (Incorporated by reference to Exhibit 10.54 of Registration No. 33-53957 on Form S-4). 10.13 -- Curaflex Directors' Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 10.59 of Registration No. 33-53957 on Form S-4). 10.14 -- Clinical Homecare Ltd. 1990 Incentive Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.61 of Registration No. 33-53957 on Form S-4). 10.15 -- Clinical Homecare Ltd. 1990 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.62 of Registration No. 33-53957 on Form S-4). 10.16 -- 1989 Stock Option Plan of Medisys (Incorporated by reference to Exhibit 10.85 of Registration No. 33-53957 on Form S-4). 10.17 -- Form of Non-Plan Option Agreement of Medisys (Incorporated by reference to Exhibit 10.86 of Registration No. 33-53957 on Form S-4). 10.18 -- Credit Agreement among Coram Healthcare Corporation, Coram, Inc., the Lenders named therein and Chemical Bank, as Administrative Agent, Collateral Agent and Fronting Bank (the "Senior Credit Facility") dated as of April 6, 1995. (Incorporated by reference to Exhibit D of the Registrant's Current Report on Form 8-K dated April 6, 1995). The exhibits and schedules to the Senior Credit Facility are omitted from this Exhibit. The Company agrees to furnish supplementally any omitted exhibit or schedule to the Securities and Exchange Commission. 10.19 -- First Amendment and Waiver to the Credit Agreement, dated as of August 9, 1995, together with exhibits hereto, among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as defined therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 10.19 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.20 -- Second Amendment to the Credit Agreement dated as of September 7, 1995, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as defined therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 10.20 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.21 -- Third Amendment and Limited Waiver to the Credit Agreement, dated as of September 29, 1995, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as defined therein), and Chemical Bank as Agent (Incorporated by reference to Exhibit 10.21 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission.
68
EXHIBIT NUMBER EXHIBIT ------- ------- 10.22 -- Fourth Amendment and Limited Waiver to the Credit Agreement and First Amendment to Security Documents dated as of October 13, 1995, together with selected exhibits thereto, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions Party thereto (as defined therein) and Chemical Bank as Agent (Incorporated by reference to the Company's Current Report on Form 8-K as filed October 24, 1995). 10.23 -- Warrant Agreement dated as of October 13, 1995, among the Registrant, Coram Inc., and the other parties specified therein (Incorporated by reference to the Company's Current Report on Form 8-K as filed October 24, 1995). 10.24 -- Amendment and Limited Waiver to Bridge Securities Purchase Agreement, dated as of October 13, 1995, by and among the Registrant, Coram Inc., and Donaldson, Lufkin & Jenrette. (Incorporated by reference to Exhibit 10.24 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.25 -- Form of Employment Agreement between the Registrant and Donald J. Amaral. (Incorporated by reference to Exhibit 10.25 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.26 -- Securities Purchase Agreement ("Securities Purchase Agreement") and Form of Subordinated Bridge Note, dated as of April 6, 1995, among Coram Inc., Coram Funding, Inc. and the Registrant (Incorporated by reference to Exhibit E of the Registrant's Current report on Form 8-K dated April 6, 1995). The exhibits and schedules to the Securities Purchase Agreement are omitted from this Exhibit. The Registrant agrees to furnish supplementally any omitted exhibit or schedule to the Securities and Exchange Commission. 10.27 -- Exclusive Distribution Agreement -- Healthcare Products and Biomedical Equipment and Services Agreement between Medical Specialties Distributors, Inc. ("MSD") and Coram, dated as of June 1, 1996. (Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996). 10.28 -- Medical Specialties Master Service Agreement between MSD and Coram, dated as of June 1, 1996. (Incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996). 10.29 -- Medical Specialties Master Rental Agreement between MSD and Coram, dated as of June 1, 1996. (Incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996). 10.30 -- Coram Healthcare Litigation Memorandum of Understanding between all parties to In re Coram Healthcare Corp. Securities Litigation, Master File No. 95-N-2074 and Shevde v. Sweeney et al., Civil Action No. 96-N-722, dated as of August 5, 1996. (Incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996).
69
EXHIBIT NUMBER EXHIBIT ------- ------- 10.31 -- Fifth Amendment to the Credit Agreement Dated as of February 6, 1996, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 99.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.32 -- Sixth Amendment to Credit Agreement Dated as of April 19, 1996, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 99.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.33 -- Seventh Amendment to Credit Agreement Dated as of July 3, 1996, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chemical Bank as Agent. (Incorporated by reference to Exhibit 99.1 of the Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 1996). Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.34 -- Eighth Amendment to Credit Agreement dated as of December 3, 1996, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chase Manhattan Bank as Agent. Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.35 -- Ninth Amendment and Limited Waiver to the Credit Agreement dated as of March 14, 1997, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as defined therein), the Financial Institutions party thereto (as described therein), and Chase Manhattan Bank as Agent. Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.36 -- Amended Agreement, dated as of March 28, 1997 by and among the Registrant, Coram Inc., and Donaldson, Lufkin & Jenrette. Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. 10.37 -- Sabratek Corporation and Coram Healthcare Exclusive Supply Agreement for IV Infusion Pumps, IV Disposable Sets and Related Items, dated as of February 26, 1997. 10.38 -- Amendment to 9% Subordinated Convertible Debenture and Notice of Conversion dated as of June 30, 1996, by and among the Registrant, Coram Inc., and the other parties specified therein (Incorporated by reference to the Company's report on Form 8-K as filed on July 12, 1996.
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EXHIBIT NUMBER EXHIBIT ------- ------- 10.39 -- Tenth Amendment to Credit Agreement dated June 2, 1997, by and among the Registrant, Goldman Sachs Credit Partners L.P., Coram, Inc., each Subsidiary Guarantor (as defined therein) and The Chase Manhattan Bank, as administrative agent and collateral agent for the Lenders named therein, to that certain Credit Agreement dated as of April 6, 1995, by and among the Registrant, Coram, Inc, each Subsidiary Guarantor (ad defined therein), the Financial Institutions named therein and The Chase Manhattan Bank, as collateral agent for the Lenders named therein. Certain exhibits and schedules of this Exhibit have been omitted. The Registrant agrees to furnish supplementally any omitted schedule or exhibit to the Securities and Exchange Commission. (Incorporated by reference Exhibit 99 of the Registrant's Current Report on Form 8-K dated as of June 2, 1997). 10.40 -- Letter Agreement of March 29, 1998 by and among Cerberus Partners, L.P., Goldman Sachs Credit Partners, L.P. and Foothill Capital Corporation on the one hand, and Coram Healthcare Corporation, on the other, deferring the payment of interest and fees pursuant to (i) the Securities Purchase Agreement dated as of April 6, 1995 and (ii) the Letter Agreement dated March 28, 1997 between Coram Funding, Inc. and Coram Healthcare Corporation.* 20.1 -- Stockholder Rights Agreement (the "Stockholder Rights Agreement"), dated as of June 25, 1997, between Coram Healthcare Corporation and BankBoston, N.A., which includes the form of Certificate of Designation, Preferences and Rights setting forth the terms of the Series X Participating Preferred Stock, par value $0.001 per share, as Exhibit A, the Summary of Stockholder Rights Agreement as Exhibit B and the form of Right Certificate as Exhibit C. Pursuant to the Stockholder Rights Agreement, printed Right Certificates will not be mailed until as soon as practicable after the earlier of the tenth business day after public announcement that a person or group has become an Acquiring Person or the tenth business day after a person commences, or announces its intention to commence, a tender offer or exchange offer the consummation of which would result in such person becoming an Acquiring Person. (Incorporated by reference Exhibit 1 of the Registrant's Current Report on Form 8-K dated as of June 25, 1997). 21.1 -- Subsidiaries of the Registrant.* 23.1 -- Consent of Ernst & Young LLP.* 27.1 -- Financial Data Schedule.* 27.2 -- Restated Financial Data Schedules.*
- --------------- * Filed herewith. EX-3.3 2 CERTIFICATE OF AMENDMENT 1 Exhibit 3.3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CORAM HEALTHCARE CORPORATION Coram Healthcare Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows: 1. The Board of Directors of the Corporation, by unanimous written consent dated July 10, 1997, adopted resolutions setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable, and such amendment has been presented to the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of the Corporation be amended by deleting Article FOURTH, Section A, in its entirety and inserting in its place the following new Article FOURTH, Section A which shall read in full as follows: "FOURTH. A. AUTHORIZED CAPITAL STOCK. The total number of shares that the corporation shall have authority to issue shall be 110,000,000 shares, of which 100,000,000 shares shall be common stock, $.001 par value, and 10,000,000 shares shall be preferred stock, $.001 par value." 2. The foregoing amendment of the Certificate of Incorporation was duly adopted by the stockholders of the Corporation at the Annual Meeting of Stockholders held on September 16, 1997. 3. Said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Richard M. Smith, its Chief Financial Officer and Secretary on November 21, 1997. CORAM HEALTHCARE CORPORATION By: /s/ Richard M. Smith -------------------- Richard M. Smith Chief Financial Officer and Secretary EX-4.2 3 FORM OF COMMON STOCK CERTIFICATE 1 FBU NUMBER CORAM HEALTHCARE CORPORATION SHARES COMMON STOCK COMMON STOCK $.001 PAR VALUE $.001 PAR VALUE INCORPORATED UNDER THE LAWS THIS CERTIFICATE IS TRANSFERABLE IN THE CITIES OF BOSTON OR NEW YORK SEE REVERSE FOR OF THE STATE OF DELAWARE CERTAIN DEFINITIONS CUSIP 218103 10 9 THIS CERTIFIES THAT IS THE OWNER OF FULLY-PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF CERTIFICATE OF STOCK Coram Healthcare Corporation transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/ /s/ COUNTERSIGNED AND REGISTERED: SECRETARY PRESIDENT AND BANKBOSTON, N.A. CHIEF EXECUTIVE OFFICER Transfer Agent and Registrar BY Authorized Signature
2 The Corporation will furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation. Until the earlier of the Separation Time or the Expiration Time (as such terms are defined in the Stockholder Rights Agreement referred to below), this certificate also evidences and entities the holder hereof to certain Rights as set forth in a Stockholder Rights Agreement, dated as of June 25, 1997 as amended, supplemented or otherwise modified from time to time, (the "Stockholder Rights Agreement"), between CORAM HEALTHCARE CORPORATION (the "Company") and BANKBOSTON, N.A. as Rights Agent, the terms of which are hereby Incorporated herein by reference and a copy of which is on file at the principal executive offices of the Company. Under certain circumstances, as set forth in the Stockholder Rights Agreement, such Rights may expire, may become void (if they are "Beneficially Owned" by an "Acquiring Person" or an "Affiliate" or "Associate" thereof, as such terms are defined in the Stockholder Rights Agreement, or a transferee of any of the foregoing) or may be evidenced by separate certificates and may no longer be evidenced by this certificate. The Company will mail or arrange for the mailing of a copy of this Stockholder Rights Agreement to the holder of this certificate without charge within five days after the receipt of a written request therefor. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________ Custodian ___________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act _______________________________ in common (State) UNIF TRF MIN ACT -- _______ Custodian (until age _____) (Cust) ___________ under Uniform Transfers (Minor) to Minors Act _____________________ (State)
Additional abbreviations may also be used though not in the above list. For value received, __________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [ ] _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ ________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ____________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated: _______________________________ X _______________________________________ X _______________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: By ____________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.40 4 LETTER AGREEMENT 1 EXHIBIT 10.40 CERBERUS PARTNERS, L.P. GOLDMAN SACHS CREDIT PARTNERS, L.P. FOOTHILL CAPITAL CORPORATION March 29, 1998 Coram Healthcare Corporation 1125 Seventeenth Street, Suite 2100 Denver, Colorado 80202 Attention: Mr. Donald J. Amaral Chairman and Chief Executive Officer Gentlemen: We refer to the Securities Purchase Agreement dated as of April 6, 1995 among Coram, Inc. (the "Issuer"), ourselves as Assignees and Coram Healthcare Corporation (as amended, the "Agreement"). Terms defined in the Agreement are used herein with the same meanings. We also refer to the Letter Agreement dated March 28, 1997 among Coram Funding, Inc. and yourselves (the "1997 Deferral Letter"), pursuant to which, inter alia, Coram Funding, Inc. agreed to defer the interest and fees referred to below until March 31, 1998, and you agreed to pay an additional fee at a rate of 1% per annum on the daily amount of all unpaid principal of and interest on the Securities, and all such deferred amounts, each upon the terms set forth in the 1997 Deferral Letter. Subject to the proviso below, we agree to defer payment of each installment of interest due on the Securities prior to September 30, 1998, each installment of the duration fee payable pursuant to Section 2.2(d) of the Agreement due prior to September 30, 1998, and the fee payable pursuant to Section 7.1(c) of the Agreement to September 30, 1998, together in each case with interest accrued thereon. Such deferred amounts (the "Deferred Amounts") shall bear interest from the respective dates on which they would otherwise be due, until paid in full, at the rate of interest specified in the Securities, which interest shall be due and payable together with such Deferred Amounts on the earlier of (i) September 30, 1998 and (ii) the date of maturity or payment of all outstanding Securities, by acceleration or otherwise (such earlier dates, the "Payment Date"); provided, however, that if you have not entered into an indicative term sheet with us for the restructuring of the Rollover Notes by Monday, April 13, 1998 (extendable solely at our option), which term sheet shall be on terms satisfactory to us, the deferral of interest and fees set forth above will cease, and all Deferred Amounts (including interest thereon) will become immediately due and payable. 2 In addition, as provided in the 1997 Deferral Letter, you confirm that, in addition to the interest provided for in the preceding paragraph, you will pay to us a fee at the rate of 1% per annum on the daily amount of all unpaid principal of and interest on the Securities, such fee to accrue from and including March 31, 1997 through but excluding the date upon which all principal of and interest on the Securities, and all Deferred Amounts, are paid in full. Such fee shall be payable on the Payment Date and on each date thereafter on which interest on the Securities is payable. Except as specified herein, the terms of the Bridge Documents shall remain in full force and effect and are hereby confirmed. This letter agreement may not be amended or any provision hereof waived or modified except by an instrument in writing signed by the parties hereto. This letter agreement may be executed in any number of counterparts, each of which shall constitute one agreement. Delivery of an executed counterpart of a signature page of this letter agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart of this letter agreement. This letter agreement is intended to be solely for the benefit of the parties hereto and is not intended to confer any benefits upon, or create any rights in favor of, any person other than the parties hereto. The terms of this letter shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the conflict of law principles thereof. If the foregoing is acceptable to you, please so signify by signing below not later than March __, 1998, whereupon this agreement shall become binding and effective. Very truly yours, CERBERUS PARTNERS, L.P. By: ________________________________ Name: Title: GOLDMAN SACHS CREDIT PARTNERS, L.P. By: ________________________________ Name: Title: FOOTHILL CAPITAL CORPORATION By: ________________________________ Name: Title: 2 3 Accepted and agreed as of the date first above written: CORAM, INC. By:_____________________________________ Name: Title: CORAM HEALTHCARE CORPORATION, By:______________________________________ Name: Title: 3 EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 CORAM HEALTHCARE CORPORATION CORPORATE STRUCTURE Coram Healthcare Corporation Subsidiaries: Coram International Holdings Ltd. Subsidiaries: Coram Healthcare Limited Coram Pharmacy Limited (49% owned) Coram, Inc. Subsidiaries: Coram Independent Practice Association, Inc. Coram Physician Services, Inc. Subsidiaries: Fairfax Hematology Oncology Associates, Inc. Coram Resource Network, Inc. (R-NET) HealthInfusion, Inc. Subsidiaries: Hospicenter of Texas, Inc. (73% owned by parent) H.M.S.S., Inc. Subsidiaries: Coram Homecare of Texas, Inc. Infusion Affiliates of Dallas, Inc. Medisys, Inc. Subsidiaries: Coram Homecare of Illinois, Inc. T(2) Medical, Inc. Subsidiaries: Columbia Home Therapeutics, Inc. Coram Healthcare Corporation of Alabama Coram Healthcare Corporation of Colorado Coram Healthcare Corporation of Connecticut Coram Healthcare Corporation of Delaware Coram Healthcare Corporation of Florida Coram Healthcare Corporation of Greater D.C. Coram Healthcare Corporation of Greater New York Coram Healthcare Corporation of Illinois Coram Healthcare Corporation of Indiana Coram Healthcare Corporation of Iowa Coram Healthcare Corporation of Kansas Coram Healthcare Corporation of Kentucky Coram Healthcare Corporation of Louisiana Coram Healthcare Corporation of Michigan Coram Healthcare Corporation of Minnesota Coram Healthcare Corporation of Mississippi Coram Healthcare Corporation of Missouri Coram Healthcare Corporation of Nebraska Coram Healthcare Corporation of Nevada 2 T(2) Medical, Inc. subsidiaries (continued): Coram Healthcare Corporation of New Hampshire Coram Healthcare Corporation of New Jersey Coram Healthcare Corporation of New Mexico Coram Healthcare Corporation of North Carolina Coram Healthcare Corporation of Northern California Coram Healthcare Corporation of Ohio Coram Healthcare Corporation of Oklahoma Coram Healthcare Corporation of Oregon Coram Healthcare Corporation of Pennsylvania Coram Healthcare Corporation of Rhode Island Coram Healthcare Corporation of South Carolina Coram Healthcare Corporation of Southern California Coram Healthcare Corporation of Southern Florida Coram Healthcare Corporation of Tennessee Coram Healthcare Corporation of Texas Coram Healthcare Corporation of Virginia Coram Healthcare Corporation of Washington Coram Healthcare Corporation of West Virginia Coram Healthcare Corporation of Wisconsin Coram Homecare of Arizona, Inc. Coram Homecare of Kansas, Inc. Coram Homecare of Michigan, Inc. Coram Homecare of Minnesota, Inc. Coram Homecare of Nebraska, Inc. Coram Homecare of Northern California, Inc. Coram Homecare of Ohio, Inc. Coram Homecare of South Carolina, Inc. Coram Homecare of Virginia, Inc. Coram Homecare of Wisconsin, Inc. Coram Management of Hawaii, Inc. Coram Service Corporation Curaflex Health Services, Inc. Subsidiaries: Caremark Pharmacy Services, Inc. Comprehensive Pharmacy Home IV Services, Inc. Coram Alternate Site Services, Inc. Coram Healthcare Corporation of Massachusetts Subsidiaries: Clinical Homecare Corporation Coram Healthcare Corporation of New York Coram Healthcare Corporation of North Texas Coram Healthcare Corporation of Utah Homeline, Inc. (50% owned) Stratogen of Florida, Inc. Stratogen of Rhode Island, Inc. Dallas Home Therapeutics, Inc. Extendacare Health Systems, Inc. Intracare Holdings Corporation 2 3 PARTNERSHIPS ------------ ABC Infusion Therapy Carolina Home Therapeutics Associates Continuing Care Network, LLC (Pending signing) Covenant Home Infusion Healthcare at Home Healthcare/Meredia Infusion Services HealthOptions, LLC Hinsdale Infusion Care Home Care Hawaii L.L.P. Infusion Services of Maui (Dissolving) Kern Home Health Resources, LLC QSC Health Services (Pending signing) Trinity Home Infusion Total Home Care Infusion (Dissolving) Wisconsin IV Affiliates EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-55547, 33-55657 and 333-42019) of Coram Healthcare Corporation of our report dated March 27, 1998 with respect to the consolidated financial statements and schedule of Coram Healthcare Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1997. We also consent to the incorporation by referenced in Amendment No. 3 to the Registration Statements (Form S-3 No. 33-59661 and 33-60959) and Amendment No. 1 to the Registration Statement (Form S-3 No. 333-12955) and related Prospectuses of Coram Healthcare Corporation for the registration of 3,526,325, 2,686,656 and 184,444 shares, respectively, of its common stock, of our report dated March 27, 1998, with respect to the consolidated financial statements and schedule of Coram Healthcare Corporation included in the above-referenced Form 10-K. ERNST & YOUNG LLP Denver, Colorado March 27, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 109,979 0 110,189 24,047 14,277 222,985 52,766 32,716 516,820 234,605 150,428 0 0 48 124,978 516,820 464,385 464,385 328,781 328,781 (42,756) 16,209 75,026 140,093 7,550 125,260 0 0 0 125,260 2.64 2.30
EX-27.2 8 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information, restated under Financial Accounting Standards No. 128, EARNINGS PER SHARE, which was extracted from the Company's Consolidated Financial Statements for the years ended December 31, 1996 and 1995. 1,000 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 19,292 52,084 0 0 147,019 217,664 40,256 63,839 14,268 17,798 156,270 256,045 71,584 71,363 54,596 42,087 545,309 687,849 288,799 218,623 266,641 439,309 0 0 0 0 42 40 (21,524) 18,000 545,309 687,849 521,969 602,585 521,969 602,585 361,688 459,710 361,688 459,710 155,093 368,839 29,045 68,912 78,767 49,741 (91,314) (334,239) (13,998) (11,154) (85,014) (334,049) 0 0 0 0 0 0 (85,014) (334,049) (2.05) (8.39) (2.05) (8.39)
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