================================================================================
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A
AMENDMENT No. 1
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11343
----------------
CORAM HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 33-0615337
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1675 Broadway
Suite 900
Denver, CO 80202
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 292-4973
----------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 under the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] (On August 8, 2000, the registrant and one
of its wholly-owned subsidiaries filed voluntary petitions under Chapter 11 of
Title 11 of the United States Code in the Bankruptcy Court for the District of
Delaware. Through May 16, 2003, no plan or plans of reorganization have been
confirmed by such court.)
As of May 16, 2003, there were 49,638,452 outstanding shares of the
registrant's common stock, $0.001 par value, which is the only class of voting
stock of the registrant outstanding.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(RESTATED - SEE NOTE 1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 33,836 $ 30,591
Cash limited as to use ........................................... 259 217
Accounts receivable, net of allowances of $22,071 and $22,229 .... 104,291 103,498
Inventories ...................................................... 15,326 13,160
Deferred income taxes, net ....................................... 117 107
Other current assets ............................................. 5,521 5,658
--------- ------------
Total current assets ........................................... 159,350 153,231
Property and equipment, net ......................................... 9,515 10,439
Deferred income taxes, net .......................................... 493 449
Other deferred costs and intangible assets, net ..................... 5,142 5,270
Goodwill, net ....................................................... 57,186 57,186
Other assets ........................................................ 5,246 5,064
--------- ------------
Total assets ................................................... $ 236,932 $ 231,639
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable ................................................. $ 31,029 $ 27,986
Accrued compensation and related liabilities ..................... 24,611 23,882
Current maturities of long-term debt ............................. 72 61
Income taxes payable ............................................. 3,331 3,280
Deferred income taxes ............................................ 610 556
Accrued merger and restructuring costs ........................... 155 190
Accrued reorganization costs ..................................... 7,168 7,610
Other accrued liabilities ........................................ 11,600 8,479
--------- ------------
Total current liabilities not subject to compromise ................. 78,576 72,044
Total current liabilities subject to compromise (See Note 2) ........ 15,630 15,630
--------- ------------
Total current liabilities ........................................... 94,206 87,674
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities .......................... 77 73
Minority interests in consolidated joint ventures and
preferred stock issued by a subsidiary ......................... 6,181 6,215
Income taxes payable ............................................. 16,422 16,130
Other liabilities ................................................ 3,565 3,565
Net liabilities for liquidation of discontinued operations ....... 27,293 27,275
--------- ------------
Total liabilities .............................................. 147,744 140,932
--------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001, authorized
10,000 shares, none issued ..................................... -- --
Common stock, par value $0.001, 150,000 shares
authorized, 49,638 shares issued and outstanding ............... 50 50
Additional paid-in capital ....................................... 427,354 427,354
Accumulated deficit .............................................. (338,216) (336,697)
--------- ------------
Total stockholders' equity ..................................... 89,188 90,707
--------- ------------
Total liabilities and stockholders' equity ..................... $ 236,932 $ 231,639
========= ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
--------- -----------
Net revenue ...................................................................... $ 113,096 $ 101,982
Cost of service .................................................................. 86,034 74,301
--------- -----------
Gross profit ..................................................................... 27,062 27,681
Operating expenses:
Selling, general and administrative expenses .................................. 23,007 21,020
Provision for estimated uncollectible accounts ................................ 3,517 3,118
Restructuring cost recoveries ................................................. -- (13)
--------- -----------
Total operating expenses .................................................... 26,524 24,125
--------- -----------
Operating income from continuing operations ...................................... 538 3,556
Other income (expenses):
Interest income ............................................................... 79 85
Interest expense (excluding post-petition contractual interest of
approximately $260 and $3,034 for the three months ended March 31,
2003 and 2002, respectively) ................................................ (342) (365)
Equity in net income of unconsolidated joint ventures ......................... 234 387
Gain on sale of business ...................................................... -- 46
Other income (expense), net ................................................... (1) 12
--------- -----------
Income from continuing operations before reorganization expenses, income
taxes, minority interests and the cumulative effect of a change in
accounting principle .......................................................... 508 3,721
Reorganization expenses, net ..................................................... 1,762 2,010
--------- -----------
Income (loss) from continuing operations before income taxes, minority
interests and the cumulative effect of a change in accounting principle ....... (1,254) 1,711
Income tax expense ............................................................... 35 38
Minority interests in net income of consolidated joint ventures .................. 133 223
--------- -----------
Income (loss) from continuing operations before the cumulative effect of a
change in accounting principle ................................................ (1,422) 1,450
Loss from disposal of discontinued operations .................................... (97) --
--------- -----------
Income (loss) before the cumulative effect of a change in accounting
principle .................................................................... (1,519) 1,450
Cumulative effect of a change in accounting principle ............................ -- (71,902)
--------- -----------
Net loss ......................................................................... $ (1,519) $ (70,452)
========= ===========
Net Loss Per Common Share:
Basic and Diluted:
Income (loss) from continuing operations .................................... $ (0.03) $ 0.03
Loss from disposal of discontinued operations ............................... -- --
Cumulative effect of a change in accounting principle ....................... -- (1.45)
--------- -----------
Net loss per common share ................................................... $ (0.03) $ (1.42)
========= ===========
Weighted average common shares used in the computation of basic
net loss per common share ..................................................... 49,638 49,638
========= ===========
Weighted average common shares used in the computation of diluted
net loss per common share ..................................................... 49,638 49,674
========= ===========
See accompanying notes to unaudited condensed consolidated financial statements.
3
CORAM HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
Net cash provided by (used in) continuing operations before
reorganization items ........................................ $ 6,426 $ (1,208)
Net cash used by reorganization items .......................... (2,204) (2,380)
-------- --------
Net cash provided by (used in) continuing operations (net
of reorganization items) .................................... 4,222 (3,588)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ......................... (656) (1,125)
Deposit to purchase property and equipment .................. (337) --
-------- --------
Net cash used in investing activities .......................... (993) (1,125)
-------- --------
Cash flows from financing activities:
Principal payments of debt obligations ...................... (35) (19)
Refunds of deposits to collateralize letters of credit ...... 302 200
Cash distributions to minority interests .................... (172) (98)
-------- --------
Net cash provided by financing activities ...................... 95 83
-------- --------
Net increase (decrease) in cash from continuing operations ..... $ 3,324 $ (4,630)
======== ========
Net cash used in discontinued operations ....................... $ (79) $ --
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
4
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2003
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF BUSINESS
Business Activity. As of March 31, 2003, Coram Healthcare Corporation
("CHC") and its subsidiaries ("Coram" or the "company") were engaged primarily
in the business of furnishing alternate site (outside the hospital) infusion
therapy, which also includes non-intravenous home health products such as
respiratory therapy services and durable medical equipment. Other services
offered by Coram include centralized management, administration and clinical
support for clinical research trials, as well as, outsourced hospital
compounding services. Coram delivers its alternate site infusion therapy
services through 77 branch offices located in 40 states and Ontario, Canada. CHC
and its first tier wholly owned subsidiary, Coram, Inc. ("CI") (collectively the
"Debtors"), filed voluntary petitions under Chapter 11 of Title 11 of the United
States Code (the "Bankruptcy Code") on August 8, 2000 in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") In re
Coram Healthcare Corporation, Case No. 00-3299 and In re Coram, Inc., Case No.
00-3300 (collectively the "Bankruptcy Cases"). The Bankruptcy Cases have been
consolidated for administrative purposes only by the Bankruptcy Court and are
being jointly administered under the docket of In re Coram Healthcare
Corporation, Case No. 00-3299 (MFW). Commencing on August 8, 2000, the Debtors
operated as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court; however, a Chapter 11 trustee was appointed by the Bankruptcy Court on
March 7, 2002. With the appointment of a Chapter 11 trustee, the Debtors are no
longer debtors-in-possession under the Bankruptcy Code. None of the company's
other subsidiaries is a debtor in the Bankruptcy Cases and, other than Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc.
(collectively the "Resource Network Subsidiaries" or "R-Net"), none of the
company's other subsidiaries is a debtor in any bankruptcy case. See Notes 2 and
3 for further details.
Coram's focus is on its core alternate site infusion therapy business, the
clinical research business operated by its CTI Network, Inc. subsidiary and
outsourced hospital compounding services provided by its SoluNet LLC subsidiary.
Accordingly, management's primary business strategy is to focus Coram's efforts
on the delivery of its core infusion therapies, such as nutrition,
anti-infective therapies, intravenous immunoglobulin ("IVIG"), pain management
and coagulant and blood clotting therapies for persons with hemophilia.
Management also implemented programs focused on the reduction and control of
operating expenses and other costs of providing services, assessment of
under-performing branches and review of branch efficiencies. Pursuant to this
review, several branches and reimbursement sites have been closed or scaled back
to serve as satellites for other branches/reimbursement sites and personnel have
been eliminated. See Note 5 for further details.
For each of the periods presented, the company's primary operations and
assets were within the United States. The company maintains infusion operations
in Canada; however, assets, revenue and profitability related to the Canadian
businesses are not material to the company's consolidated financial position or
operations.
Concentrations of Revenue and Credit Risk. Substantially all of the
company's revenue is derived from third party payers, including insurance
companies, managed care plans, governmental payers and contracted institutions.
Revenue from the Medicare and Medicaid programs accounted for approximately 24%
and 25% of the company's consolidated net revenue for the three months ended
March 31, 2003 and 2002, respectively. Laws and regulations governing the
Medicare and Medicaid programs are complex and subject to interpretation and
revision. Management believes that the company is in substantial 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. Medicare accounts receivable represented
approximately 31% and 33% of the company's consolidated accounts receivable at
March 31, 2003 and December 31, 2002, respectively. No other individual payer
exceeded 5% of consolidated accounts receivable at those dates.
5
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
In certain cases, the company accepts fixed fee or capitated fee
arrangements. As of March 31, 2003, Coram was a party to only two capitated fee
arrangements. Certain information regarding the company's capitated fee
agreements is as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
------ ------
Capitated fee agreements as a percentage
of consolidated net revenue.......... 6.4% 8.4%
Approximately 5.5% and 7.1% of the company's consolidated net revenue for
the three months ended March 31, 2003 and 2002, respectively, related to a
capitated fee agreement that provides services to members in the California
marketplace. Additionally, Coram owns 50% of a partnership located in California
that derived approximately 34.6% and 39.8% of its net revenue during the three
months ended March 31, 2003 and 2002, respectively, from services provided under
such capitated fee agreement. The underlying two year agreement expired by its
terms on December 31, 2002 but it is subject to automatic annual renewals absent
a written termination notice from one of the contracting parties. The company
and its partnership continue to render services subject to the automatic renewal
provisions of the contract. On February 28, 2003, the contracted payer invited
Coram, as well as a limited group of other providers, to respond to a request
for proposal ("RFP") that covers the services provided exclusively by Coram.
Subsequent to Coram's written response to the RFP, the company was invited to
participate in oral presentations in May 2003. Management anticipates that the
payer will select a provider or providers no later than July 2003 and the new
contract or contracts will become effective January 1, 2004. Management can
provide no assurances that the company will successfully procure such contract
on economic and operational terms that are favorable to the company. The loss of
this capitated fee contract or significant modifications to the terms and
conditions of the existing contract could have a materially adverse impact on
the results of operations, cash flows and financial condition of the company and
its partnership.
From time to time, the company negotiates settlements with its third party
payers in order to resolve outstanding disputes, terminate business
relationships or facilitate the establishment of new or enhanced payer
contracts. In connection therewith, the company entered into a settlement
agreement with one of its payers and recorded a bad debt recovery of
approximately $0.5 million during the three months ended March 31, 2003. The
company did not record any material bad debt expense or recoveries relative to
settlement activity during the three months ended March 31, 2002. Furthermore,
management is aware of certain claims, disputes or unresolved matters with third
party payers arising in the normal course of business and, although there can be
no assurances, management believes that the resolution of such matters should
not have a material adverse effect on the company's financial position, results
of operations or cash flows.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been prepared
by the company pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission") and reflect all adjustments and
disclosures (consisting of normal recurring accruals and, effective August 8,
2000, all adjustments and disclosures pursuant to the adoption of Statement of
Position 90-7, Financial Reporting by Entities in Reorganization under the
Bankruptcy Code ("SOP 90-7")) that are, in the opinion of management, necessary
for a fair presentation of the company's financial position, results of
operations and cash flows as of and for the interim periods presented herein.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to the applicable
Commission regulations. The results of operations for the interim period ended
March 31, 2003 are not necessarily indicative of the results for the full
calendar year. The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
company's Annual Report on Form 10-K/A Amendment No. 2 for the year ended
December 31, 2002.
6
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
The condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Bankruptcy Cases and circumstances relating thereto,
including the company's leveraged financial structure and cumulative losses from
operations, such realization of assets and liquidation of liabilities are
subject to significant uncertainty. During the pendency of the Bankruptcy Cases,
the company may sell or otherwise dispose of assets and liquidate or settle
liabilities for amounts other than those reflected in the condensed consolidated
financial statements. Furthermore, a plan or plans of reorganization could
materially change the amounts reported in the condensed consolidated financial
statements, which do not give effect to any adjustments of the carrying value of
assets or liabilities that might be necessary as a consequence of a plan or
plans of reorganization (see Note 2 for further details). The company's ability
to continue as a going concern is dependent upon, among other things,
confirmation of a plan or plans of reorganization, future profitable operations,
the ability to comply with the terms of the company's financing agreements, the
ability to obtain necessary financing to fund a proposed settlement with the
Internal Revenue Service, the ability to remain in compliance with the physician
ownership and referral provisions of the Omnibus Budget Reconciliation Act of
1993 (commonly known as "Stark II") and the ability to generate sufficient cash
from operations and/or financing arrangements to meet its obligations and
capital asset expenditure requirements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
RESTATEMENT
Certain financial advisors to the Chapter 11 trustee previously furnished
to the company an enterprise valuation analysis, dated December 11, 2002, which
was utilized in the determination of the company's goodwill impairment charge
pursuant to the annual impairment test required by Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statement
142"), as reflected in the company's consolidated financial statements for the
year ended December 31, 2002. In certain ongoing bankruptcy-related proceedings,
the company's management, the Chapter 11 trustee and his financial advisors were
made aware of errors in the aforementioned enterprise valuation analysis. As a
result thereof, in June 2003 such advisors released an amended enterprise
valuation analysis, dated as of December 11, 2002, wherein the errors were
corrected.
Upon applying the concepts promulgated by Statement 142, management
determined that the company's previously reported goodwill and stockholders'
equity balances at both March 31, 2003 and December 31, 2002 were understated by
approximately $10.7 million. The company's condensed consolidated financial
statements have been modified to reflect the aforementioned restatement as
follows (in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
--------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
Goodwill, net ................................. $ 46,470 $ 57,186 $ 46,470 $ 57,186
======== ======== ======== ========
Total assets .................................. $226,216 $236,932 $220,923 $231,639
======== ======== ======== ========
Total stockholders' equity .................... $ 78,472 $ 89,188 $ 79,991 $ 90,707
======== ======== ======== ========
Total liabilities and stockholders' equity .... $226,216 $236,932 $220,923 $231,639
======== ======== ======== ========
The restatement had no impact on the company's condensed consolidated
statements of operations and cash flows for the quarter ended March 31, 2003.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The condensed consolidated financial statements
include the accounts of CHC, its subsidiaries, including CI (CHC's wholly-owned
direct subsidiary), and joint ventures that are considered to be under the
control of CHC. As discussed above, CI is a party to the Bankruptcy Cases that
are being jointly administered with those of CHC in the Bankruptcy Court. All
material intercompany account balances and transactions 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 of 50% or less.
Provision for Estimated Uncollectible Accounts. Management regularly
reviews the collectibility of accounts receivable utilizing reports that track
collection and write-off activity. Estimated write-off percentages are then
applied to each aging category by payer classification to determine the
provision for estimated uncollectible accounts. Additionally, the company
establishes supplemental specific reserves for accounts that are deemed
uncollectible due to occurrences such as payer financial distress and payer
bankruptcy filings. The provision for estimated uncollectible accounts is
periodically adjusted to reflect current collection, write-off and other trends.
While management believes the resulting net carrying amounts for accounts
receivable are fairly stated and that the company has adequate allowances for
uncollectible accounts based on all information available, no assurances can be
given as to the level of future provisions for uncollectible accounts or how
they will compare to the levels experienced in the past. The company's ability
to successfully collect its accounts receivable depends, in part, on its ability
to adequately supervise and train personnel in billing and collections, and
maximize integration efficiencies related to reimbursement site consolidations
and information system changes.
Management throughout the company is continuing to concentrate on enhancing
timely reimbursement by emphasizing improved billing and cash collection
methods, continued assessment of reimbursement systems support and concentration
of the company's expertise and managerial resources into certain reimbursement
locations. See Note 5 for further discussion of recent reimbursement site
consolidation activity. By consolidating to fewer sites, management expects to
implement improved training, more easily standardize "best demonstrated
practices," enhance specialization related to payers such as Medicare and
achieve more consistent and timely cash collections. Management believes that,
in the long-term, payers and patients will receive better, more consistent
service. However, no assurances can be given that the consolidation of the
company's Patient Financial Service Centers
7
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
(reimbursement sites) and other related activities initiated by management will
be successful in enhancing timely reimbursement or that the company will not
experience a significant shortfall in cash collections, deterioration in days
sales outstanding ("DSO") and/or unfavorable aging trends in its accounts
receivable.
Capitalized Software Development Costs. Costs related to software developed
and/or obtained for internal use are stated at cost in accordance with Statement
of Position 98-1, Accounting for Computer Software Developed for or Obtained for
Internal-Use ("SOP 98-1"). Amortization is computed using the straight-line
method over estimated useful lives ranging from one to five years. For the three
months ended March 31, 2003 and 2002, software development costs aggregating
approximately $0.1 million and $0.4 million, respectively, were capitalized in
accordance with SOP 98-1.
Stock-Based Compensation. The company elected to measure compensation
expense related to its employee stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and disclose the pro forma impact of accounting for
employee stock-based compensation plans pursuant to the fair value-based
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("Statement 123"). Because the exercise price of
the company's employee stock options equals the market price of the underlying
stock on the date of grant, no APB 25 stock-based compensation expense has been
recognized for the company's stock-based compensation plans in the condensed
consolidated financial statements. Had compensation expense for such plans been
recognized in accordance with the provisions of Statement 123, the company's pro
forma financial results would have been as follows (in thousands, except per
share amounts):
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
Net loss, as reported ........................................... $ (1,519) $ (70,452)
Less: Pro forma stock-based compensation expense (determined
using the fair value method for all awards) ................... (11) (62)
---------- ----------
Pro forma net loss .............................................. $ (1,530) $ (70,514)
========== ==========
Net loss per common share:
Basic and diluted, as reported ................................ $ (0.03) $ (1.42)
========== ==========
Basic and diluted, pro forma .................................. $ (0.03) $ (1.42)
========== ==========
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 (loss) disclosed above may not be
representative of pro forma compensation expense in future periods.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure ("Statement 148"). This accounting
pronouncement amends Statement 123 and provides alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation. Management evaluated the various methods
of transitioning to Statement 123 as outlined in Statement 148 but concluded
that the company will continue to use the intrinsic method provided in APB 25 as
the company's accounting policy for stock-based compensation plans. The company
will continue to provide the pro forma disclosures required pursuant to
Statement 123, as amended.
8
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Net Income (Loss) Per Common Share. Basic net income (loss) per common share
excludes any dilutive effects of stock options, warrants and convertible
securities. The company experienced a loss from continuing operations for the
three months ended March 31, 2003 and, in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share, the
denominator utilized to calculate net income (loss) per share does not increase
when losses from continuing operations are in evidence because to do so would be
anti-dilutive. However, the company experienced income from continuing
operations for the three months ended March 31, 2002.
The following table sets forth the computations of basic and diluted net
income (loss) per common share for the three months ended March 31, 2003 and
2002 (in thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
---------- ----------
Numerator for basic and diluted net loss per common share:
Income (loss) from continuing operations ...................... $ (1,422) $ 1,450
Loss from disposal of discontinued operations ................. (97) --
Cumulative effect of a change in accounting principle ......... -- (71,902)
---------- ----------
Net loss ........................................................ $ (1,519) $ (70,452)
========== ==========
Weighted average shares - denominator for basic net loss per
common share .................................................. 49,638 49,638
Effect of dilutive securities:
Stock options ................................................ -- 36
---------- ----------
Denominator for diluted net loss per common share - adjusted
weighted average shares ....................................... 49,638 49,674
========== ==========
Basic and diluted net loss per common share:
Income (loss) from continuing operations ..................... $ (0.03) $ 0.03
Loss from disposal of discontinued operations ................ -- --
Cumulative effect of a change in accounting principle ........ -- (1.45)
---------- ----------
Net loss ..................................................... $ (0.03) $ (1.42)
========== ==========
Accounting for Asset Retirement Obligations. In June 2001, the FASB issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations ("Statement 143"). Statement 143 requires entities to
record the fair value of legal obligations associated with the retirement of
long-lived tangible assets. The company adopted Statement 143 on January 1,
2003; however, the company's financial position and results of operations were
not impacted by the adoption of this accounting pronouncement.
Reporting Extinguishments of Debt. In April 2002, the FASB issued Statement
of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections
("Statement 145"). Statement 145 requires gains and losses on extinguishments of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items, as previously required under Statement of Financial
Accounting Standards No. 4, Reporting Gains and Losses From Extinguishments of
Debt. Extraordinary treatment will be required for certain extinguishments of
debt as provided in Accounting Principles Board Opinion No. 30, Reporting the
Result of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Statement 145 also amends Statement of Financial Accounting
Standards No 13, Accounting for Leases, to require that certain modifications to
capital leases be treated as sale-leaseback transactions and modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
(or guarantor). Effective January 1, 2003, the company has adopted the
provisions of Statement 145; however, the adoption of such accounting
pronouncement had no impact on the company's financial statement presentation,
financial position or results of operations.
9
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Accounting for Costs Associated with Exit or Disposal Activities. In October
2002, the FASB issued Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities ("Statement
146"). Statement 146 supersedes the Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring) ("EITF
Issue No. 94-3"). Statement 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
rather than at the date of the entity's commitment to an exit plan, as
prescribed in EITF Issue No. 94-3. Statement 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Effective
January 1, 2003, the company adopted Statement 146; however, the adoption of
this accounting pronouncement did not have an impact on the company's financial
position or results of operations.
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. In November 2002, the FASB issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN No.
45"). FIN No. 45 elaborates on the disclosure requirements for annual and
interim financial statements of a guarantor and requires that, in certain cases,
a guarantor recognize a liability at the inception of the guarantee for the fair
value of the obligation undertaken. The company adopted FIN No. 45 on January 1,
2003; however, the company's financial position and results of operations were
not impacted by the adoption of this accounting pronouncement.
2. REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Background and Certain Important Bankruptcy Court Activity
On August 8, 2000, CHC and CI commenced the Bankruptcy Cases by filing
voluntary petitions under Chapter 11 of the Bankruptcy Code. Following the
commencement of the Bankruptcy Cases, the Debtors operated as
debtors-in-possession subject to the jurisdiction of the Bankruptcy Court;
however, as discussed below, a Chapter 11 trustee was appointed by the
Bankruptcy Court on March 7, 2002. With the appointment of a Chapter 11 trustee,
the Debtors are no longer debtors-in-possession under Chapter 11 of the
Bankruptcy Code. None of the company's other subsidiaries is a debtor in the
Bankruptcy Cases and, other than the Resource Network Subsidiaries, none of the
company's other subsidiaries is a debtor in any bankruptcy case. The Debtors'
need to seek the relief afforded by the Bankruptcy Code was due, in part, to its
requirement to remain compliant with the physician ownership and referral
provisions of Stark II after December 31, 2000 (see discussion of Stark II in
Note 10) and the scheduled May 27, 2001 maturity of the Series A Senior
Subordinated Unsecured Notes. The Debtors sought advice and counsel from a
variety of sources and, in connection therewith, CHC's Independent Committee of
the Board of Directors unanimously concluded that the bankruptcy and
restructuring were the only viable alternatives.
On August 9, 2000, the Bankruptcy Court approved the Debtors' motions for:
(i) payment of all employee wages and salaries and certain benefits and other
employee obligations; (ii) payment of critical trade vendors, utilities and
insurance in the ordinary course of business for both pre and post-petition
expenses; (iii) access to a debtor-in-possession financing arrangement; and (iv)
use of all company bank accounts for normal business operations. In September
2000, the Bankruptcy Court approved the Debtors' motion to reject four
unexpired, non-residential real property leases and any associated subleases.
The rejected leases included underutilized locations in: (i) Allentown,
Pennsylvania; (ii) Denver, Colorado; (iii) Philadelphia, Pennsylvania; and (iv)
Whippany, New Jersey.
The Bankruptcy Court granted the Debtors five extensions of the period of
time that they must assume or reject unexpired leases of non-residential real
property (such extensions expired on January 4, 2001, May 4, 2001, September 3,
2001, January 1, 2002 and May 2, 2002). On May 1, 2002, the Chapter 11 trustee
moved the Bankruptcy Court to grant a sixth extension through and including
August 27, 2002. The Chapter 11 trustee filed a certificate of no objection on
May 21, 2002 and is awaiting issuance of the enabling order by the Bankruptcy
Court. However, on September 6, 2002 and December 26, 2002 the Bankruptcy Court
granted two separate motions of the Chapter 11 trustee to further extend the
period of time to assume or reject the aforementioned real property leases
through and including December 31, 2002 and June 30, 2003, respectively.
10
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
In September 2000 and October 2000, the Bankruptcy Court approved payments
of up to approximately $2.6 million for retention bonuses payable to certain key
employees. The bonuses were scheduled to be paid in two equal installments on
the later of the date of emergence from bankruptcy or: (i) December 31, 2000 and
(ii) December 31, 2001. Due to events that delayed emergence from bankruptcy,
the Bankruptcy Court approved early payment of the first installment to most
individuals within the retention program and such payments, aggregating
approximately $0.7 million, were made on March 15, 2001. In January 2002, when
events again delayed the Debtors' anticipated emergence from bankruptcy, the
Debtors requested permission from the Bankruptcy Court to pay: (i) the remaining
portion of the first installment of approximately $0.5 million to the company's
former Chief Executive Officer and Executive Vice President and (ii) the full
amount of the second installment. The Debtors also requested authorization to
initiate another retention plan to provide financial incentives not to exceed
$1.25 million to certain key employees during the year ending December 31, 2002.
Principally due to the then pending appointment of a Chapter 11 trustee, on
February 12, 2002 the Bankruptcy Court declined to rule on the Debtors' motions.
However, on March 15, 2002, after the appointment of a Chapter 11 trustee, the
Bankruptcy Court partially approved the Debtors' motions insofar as all the
remaining retention bonuses were authorized to be paid, exclusive of amounts
pertaining to the company's former Chief Executive Officer. The incremental
retention bonuses, aggregating approximately $0.8 million, were paid on March
25, 2002. The Bankruptcy Court postponed its rulings on the Debtors' motions
pertaining to the 2002 retention plan and payment of the former Chief Executive
Officer's retention amounts. However, as discussed below, the Chapter 11 trustee
subsequently filed, and the Bankruptcy Court approved, a motion to withdraw the
Debtors' motions regarding the 2002 retention plan and the request to pay the
remaining 2000 retention plan amount.
On September 7, 2001, the Bankruptcy Court authorized the Debtors to pay up
to $2.7 million for management incentive plan compensation bonuses pursuant to
the management incentive plan for the year ended December 31, 2000 (the "2000
MIP"). In September 2001, the Debtors paid all participants of the 2000 MIP,
except for approximately $10.8 million attributable to the company's former
Chief Executive Officer.
On March 21, 2001, CHC's Compensation Committee of the Board of Directors
approved a management incentive program for the year ended December 31, 2001
(the "2001 MIP"). Under the terms of the 2001 MIP, the participants thereunder
were authorized to receive an aggregate payment up to approximately $2.5
million. On August 16, 2002, the Chapter 11 trustee filed a motion with the
Bankruptcy Court to make 2001 MIP payments of approximately $1.1 million to the
2001 MIP participants, which excluded certain 2001 MIP amounts as indicated
below. The Bankruptcy Court approved such motion on September 6, 2002 and, in
connection therewith, on or about September 16, 2002 the approved amounts were
paid to the eligible 2001 MIP participants. The Chapter 11 trustee agreed
separately with each of the company's former Chief Executive Officer and its
Executive Vice President: (i) not to request any 2001 MIP payment to the former
Chief Executive Officer and (ii) to request the payment of a portion of the 2001
MIP amount to which the company's Executive Vice President is otherwise
entitled. The Bankruptcy Court's order approving the motion also (i) withdrew a
previous motion made by the Debtors to implement a 2002 key employee retention
plan, (ii) withdrew the Debtors' previous motion requesting permission to pay
the remaining amounts under the first key employee retention plan and (iii)
preserved the company's former Chief Executive Officer's and Executive Vice
President's rights to later seek Bankruptcy Court orders authorizing payment of
amounts due to them under the 2001 MIP. Moreover, the Chapter 11 trustee retains
the right, at his discretion, to request payout of all or any portion of the
remaining unpaid 2001 MIP amounts in any proposed plan or plans of
reorganization.
At March 31, 2003, the company has accrued approximately $13.0 million for
unpaid amounts attributable to the company's former Chief Executive Officer and
its Executive Vice President under the aforementioned retention bonus plans and
the 2001 and 2000 MIP programs.
On or about May 9, 2001, the Bankruptcy Court approved the Debtors' motion
requesting authorization to enter into an insurance premium financing agreement
with AICCO, Inc. (the "2001 Financing Agreement") to finance the payment of
premiums under certain of the Debtors' insurance policies. Under the terms of
the 2001 Financing Agreement, the Debtors made a down payment of approximately
$1.1 million. The amount financed was approximately $2.1 million and was paid in
eight monthly installments of approximately $0.3 million through December 2001,
including interest at a per annum rate of 7.85%. On May 9, 2002, pursuant to the
order authorizing
11
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
the Debtors to enter into the 2001 Financing Agreement, the Debtors entered into
a second insurance premium financing agreement with Imperial Premium Finance,
Inc., an affiliate of AICCO, Inc., (the "2002 Financing Agreement") to finance
the premiums under certain insurance policies. Under the terms of the 2002
Financing Agreement, the Debtors made down payments of approximately $1.5
million and financed approximately $2.7 million. Commencing on May 15, 2002, the
amount financed was paid in seven monthly installments of approximately $0.4
million, including interest at a per annum rate of 4.9%. Furthermore, as
provided by the Bankruptcy Court order authorizing the 2001 Financing Agreement,
in April 2003 the Debtors entered into a third premium financing agreement with
Imperial Premium Finance, Inc. (the "2003 Financing Agreement"). The terms of
the 2003 Financing Agreement required the Debtors to remit a down payment of
approximately $1.5 million in May 2003. The amount financed is approximately
$2.8 million and will be paid, commencing May 15, 2003, in seven monthly
installments of approximately $0.4 million, including interest at a rate of
3.75% per annum. Imperial Premium Finance, Inc. has the right to terminate the
insurance policies and collect the unearned premiums (as administrative
expenses) if the Debtors do not make the monthly payments called for by the 2003
Financing Agreement. Additionally, the 2003 Financing Agreement is secured by
the unearned premiums and any loss payments under the covered insurance
policies.
On October 29, 2001, the Debtors filed a motion with the Bankruptcy Court
requesting approval of an agreement providing a non-debtor subsidiary of the
company with the authority to sell a respiratory and durable medical equipment
business located in New Orleans, Louisiana to a third party. On November 13,
2001, the Bankruptcy Court authorized the Debtors to enter into this agreement.
The sale of such business was finalized in January 2002 at a sales price of
approximately $0.1 million.
The Debtors are currently paying the post-petition claims of their vendors
in the ordinary course of business and are, pursuant to an order of the
Bankruptcy Court, causing their subsidiaries to pay their own debts in the
ordinary course of business. Even though the commencement of the Bankruptcy
Cases constituted defaults under the company's principal debt instruments, the
Bankruptcy Code imposes an automatic stay that will generally preclude the
creditors and other interested parties under such arrangements from taking
remedial action in response to any such resulting default without prior
Bankruptcy Court authorization.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Bankruptcy Cases seeking, among other things, to have the Resource Network
Subsidiaries' bankruptcy proceedings substantively consolidated with the
Bankruptcy Cases. The Resource Network Subsidiaries and the Debtors engaged in
discovery related to this substantive consolidation motion and, in connection
therewith, the parties reached a settlement agreement in November 2000, which
was approved by an order of the Bankruptcy Court. Under the terms of the
settlement agreement, the Resource Network Subsidiaries withdrew the substantive
consolidation motion with prejudice. Additionally, the Official Committee of
Unsecured Creditors in the Coram Resource Network, Inc. and Coram Independent
Practice Association, Inc. bankruptcy proceedings filed motions for relief from
the automatic stay to pursue claims against the Debtors and certain of their
operating subsidiaries. The Bankruptcy Court granted such motion on June 6,
2002. See Note 10 for further details.
The Debtors' First Joint Plan of Reorganization and Related Activities
On the same day the Debtors commenced the Bankruptcy Cases, the Debtors
also filed their joint plan of reorganization (the "Joint Plan") and their joint
disclosure statement with the Bankruptcy Court. The Joint Plan was subsequently
amended and restated (the "Restated Joint Plan") and, on or about October 10,
2000, the Restated Joint Plan and the First Amended Disclosure Statement with
respect to the Restated Joint Plan were authorized for distribution by the
Bankruptcy Court. Among other things, the Restated Joint Plan provided for: (i)
a conversion of all of the CI obligations represented by the company's Series A
Senior Subordinated Unsecured Notes (the "Series A Notes") and the Series B
Senior Subordinated Unsecured Convertible Notes (the "Series B Notes") into (a)
a four year, interest only note in the principal amount of $180 million that
would bear interest at the rate of 9% per annum and (b) all of the equity in the
reorganized CI; (ii) the payment in full of all secured, priority and general
unsecured debts of CI; (iii) the payment in full of all secured and priority
claims against CHC; (iv) the impairment of certain general unsecured debts of
CHC, including, among others, CHC's obligations under the Series A Notes and the
Series B Notes; and (v) the complete elimination of CHC's equity interests.
Furthermore, pursuant to the Restated
12
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Joint Plan, CHC would be dissolved as soon as practicable after the effective
date of the Restated Joint Plan and the common stock of CHC would no longer be
publicly traded. Therefore, under the Restated Joint Plan, as filed, the
existing stockholders of CHC would have received no value for their shares and
all of the outstanding equity of CI, as the surviving entity, would be owned by
the holders of the Series A Notes and the Series B Notes. Representatives of the
company negotiated the principal aspects of the Restated Joint Plan with
representatives of the holders of the Series A Notes and the Series B Notes and
the parties to the Senior Credit Facility prior to the filing of such Restated
Joint Plan.
On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that were entitled to a distribution under the Restated Joint Plan. The
Debtors did not send ballots to the holders of unimpaired classes, who were
deemed to accept the Restated Joint Plan, and classes that were not receiving
any distribution, who were deemed to reject the Restated Joint Plan. Eligible
voters responded in favor of the Restated Joint Plan. At a confirmation hearing
on December 21, 2000, the Bankruptcy Court denied confirmation of the Restated
Joint Plan finding, inter alia, that the incomplete disclosure of the
relationship between the Debtors' former Chief Executive Officer and Cerberus
Capital Management, L.P., an affiliate of one of the Debtors' largest creditors,
precluded the Bankruptcy Court from finding that the Restated Joint Plan was
proposed in good faith, a statutory requirement for plan confirmation.
In order for the company to remain compliant with the requirements of Stark
II, on December 29, 2000, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $97.7 million of the Series A Notes and approximately
$11.6 million of contractual unpaid interest on the Series A Notes and the
Series B Notes for 905 shares of Coram, Inc. Series A Cumulative Preferred
Stock, $0.001 par value per share (see Notes 7 and 9 for further details).
Hereafter, the Coram, Inc. Series A Cumulative Preferred Stock is referred to as
the "CI Series A Preferred Stock." The exchange transaction generated an
extraordinary gain on troubled debt restructuring of approximately $107.8
million, net of tax, in 2000. At December 31, 2000, the company's stockholders'
equity exceeded the minimum requirement necessary to comply with the Stark II
public company exemption for the year ended December 31, 2001. See Note 10 for
further discussion regarding Stark II.
The Second Joint Plan of Reorganization and Related Activities
On or about February 6, 2001, the Official Committee of the Equity Security
Holders of Coram Healthcare Corporation (the "Equity Committee") filed a motion
with the Bankruptcy Court seeking permission to bring a derivative lawsuit
directly against the company's former Chief Executive Officer, a former member
of the CHC Board of Directors, Cerberus Partners, L.P., Cerberus Capital
Management, L.P., Cerberus Associates, L.L.C. and Craig Court, Inc. (all the
aforementioned corporate entities being parties to certain of the company's debt
agreements or affiliates of such entities). On February 26, 2001, the Bankruptcy
Court denied such motion without prejudice. On the same day, the Bankruptcy
Court approved the Debtors' motion to appoint Goldin Associates, L.L.C.
("Goldin") as independent restructuring advisor to the CHC Independent Committee
of the Board of Directors (the "Independent Committee"). Among other things, the
scope of Goldin's services included (i) assessing the appropriateness of the
Restated Joint Plan and reporting its findings to the Independent Committee and
advising the Independent Committee regarding an appropriate course of action
calculated to bring the Bankruptcy Cases to a fair and satisfactory conclusion,
(ii) preparing a written report as may be required by the Independent Committee
and/or the Bankruptcy Court and (iii) appearing before the Bankruptcy Court to
provide testimony as needed. Goldin was also appointed as a mediator among the
Debtors, the Equity Committee and other parties in interest.
On April 25, 2001 and July 11, 2001, the Bankruptcy Court extended the
period during which the Debtors had the exclusive right to file a plan of
reorganization to July 11, 2001 and August 1, 2001, respectively. On August 1,
2001, the Bankruptcy Court denied the Equity Committee's motion to terminate the
Debtors' exclusivity periods and file its own plan of reorganization. Moreover,
on August 2, 2001, the Bankruptcy Court extended the Debtors' exclusivity period
to solicit acceptances of any filed plan or plans to November 9, 2001 (the date
to solicit acceptances of the plan for CHC's equity holders was subsequently
extended to November 12, 2001). On or about November 7, 2001, the Debtors filed
a motion seeking to extend the periods to file a plan or plans of reorganization
and solicit acceptances thereof to December 31, 2001 and March 4, 2002,
respectively. The Bankruptcy Court extended exclusivity to January 2, 2002.
Thereafter, the Debtors' exclusivity period terminated.
13
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Based upon Goldin's findings and recommendations, as set forth in the
Report of Independent Restructuring Advisor, Goldin Associates, L.L.C. (the
"Goldin Report"), on July 31, 2001 the Debtors filed with the Bankruptcy Court a
Second Joint Disclosure Statement, as amended (the "Second Disclosure
Statement"), with respect to their Second Joint Plan of Reorganization, as
amended (the "Second Joint Plan"). The Second Joint Plan, which was also filed
on July 31, 2001, provided for terms of reorganization similar to those
described in the Restated Joint Plan; however, utilizing Goldin's
recommendations, as set forth in the Goldin Report, the following substantive
modifications were included in the Second Joint Plan:
o the payment of up to $3.0 million to the holders of allowed CHC general
unsecured claims;
o the payment of up to $10.0 million to the holders of CHC equity
interests (contingent upon such holders voting in favor of the Second
Joint Plan);
o cancellation of the issued and outstanding CI Series A Preferred Stock,
and
o a $7.5 million reduction in certain performance bonuses payable to the
company's former Chief Executive Officer.
Under certain circumstances, as more fully disclosed in the Second
Disclosure Statement, the general unsecured claim holders could have been
entitled to receive a portion of the $10.0 million cash consideration allocated
to the holders of CHC equity interests.
The Second Joint Plan was subject to a vote by certain impaired creditors
and equity holders and confirmation by the Bankruptcy Court. On September 6,
2001 and September 10, 2001, hearings before the Bankruptcy Court considered the
adequacy of the Second Disclosure Statement. In connection therewith, the Equity
Committee, as well as the Official Committee of Unsecured Creditors in the Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc.
bankruptcy cases, filed objections. Notwithstanding the aforementioned
objections, the Second Disclosure Statement was approved by the Bankruptcy Court
for distribution to holders of certain claims in interests entitled to vote on
the Second Joint Plan. On or about September 21, 2001, the Debtors mailed
ballots to those parties entitled to vote on the Second Joint Plan.
The CHC equity holders voted against confirmation of the Second Joint Plan
and all other classes of claimholders voted in favor of the Second Joint Plan.
If certain conditions of Chapter 11 of the Bankruptcy Code are satisfied, the
Bankruptcy Court can confirm a plan of reorganization notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity holders.
However, on December 21, 2001, after several weeks of confirmation hearings, the
Bankruptcy Court issued an order denying confirmation of the Second Joint Plan
for the reasons set forth in an accompanying opinion. The Debtors appealed the
Bankruptcy Court's order denying confirmation of the Second Joint Plan; however,
such appeal was subsequently dismissed.
In order for the company to remain compliant with the requirements of Stark
II, on December 31, 2001, pursuant to an order of the Bankruptcy Court, CI
exchanged $21.0 million of the Series A Notes and approximately $1.9 million of
contractual unpaid interest on the Series A Notes for approximately 189.6 shares
of CI Series A Preferred Stock (see Notes 7 and 9 for further details). This
transaction generated an extraordinary gain on troubled debt restructuring of
approximately $20.7 million in 2001. At December 31, 2001, the company's
stockholders' equity exceeded the minimum requirement necessary to comply with
the Stark II public company exemption for the year ended December 31, 2002. See
Note 10 for further discussion regarding Stark II.
Appointment of Chapter 11 Trustee and Bankruptcy Related Activities During the
Year Ended December 31, 2002
On February 12, 2002, among other things, the Bankruptcy Court granted
motions made by the Office of the United States Trustee and two of the Debtors'
noteholders requesting the appointment of a Chapter 11 trustee to oversee the
Debtors during their reorganization process. Additionally, on such date the
Bankruptcy Court denied, without prejudice, a renewed motion made by the Equity
Committee for leave to bring a derivative lawsuit against certain of the
company's current and former directors and officers, Cerberus Partners, L.P.,
Cerberus Capital Management, L.P., Cerberus Associates, L.L.C., Craig Court,
Inc., Goldman Sachs Credit Partners L.P., Foothill
14
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Capital Corporation and Harrison J. Goldin Associates, L.L.C. (sic) (all the
aforementioned corporate entities, except for Harrison J. Goldin Associates,
L.L.C., being parties to certain of the company's debt agreements or affiliates
of such entities). Moreover, on February 12, 2002 the Bankruptcy Court denied
motions filed by the Equity Committee (i) to require the company to call a
stockholders' meeting and (ii) to modify certain aspects of CI's corporate
governance structure.
On March 7, 2002, the Bankruptcy Court approved the appointment of Arlin M.
Adams, Esquire, as the Debtors' Chapter 11 trustee. The Bankruptcy Code and
applicable rules require a Chapter 11 trustee to perform specific duties
relating to the administration of a bankruptcy case. Generally, a Chapter 11
trustee shall investigate the acts, conduct, assets, liabilities, financial
condition and operations of a debtor, and any other matter relevant to the case
or to the formulation of a plan of reorganization. The Bankruptcy Code also
requires a Chapter 11 trustee to, as soon as practicable, file with the
Bankruptcy Court (i) a statement of any investigation so conducted, including
any facts ascertained pertaining to fraud, dishonesty, incompetence, misconduct,
mismanagement, or irregularities in the management of the affairs of the debtor,
or to a cause of action available to the estate, and (ii) a plan of
reorganization, or file a report as to why a plan of reorganization would not be
filed. With the appointment of a Chapter 11 trustee, while still under the
jurisdiction of the Bankruptcy Court, the Debtors are no longer
debtors-in-possession under the Bankruptcy Code.
Furthermore, the Bankruptcy Code permits a Chapter 11 trustee to operate
the debtor's business. As with a debtor-in-possession, a Chapter 11 trustee may
enter into transactions in the ordinary course of business without notice or a
hearing before the bankruptcy court; however, non-ordinary course actions still
require prior authorization from the bankruptcy court. A Chapter 11 trustee also
assumes responsibility for management functions, including decisions relative to
the hiring and firing of personnel. As is the case with the Debtors, when
existing management is necessary to run the day-to-day operations, a Chapter 11
trustee may retain and oversee such management group. After a Chapter 11 trustee
is appointed, a debtor's board of directors does not retain its ordinary
management powers. While Mr. Adams has assumed the board of directors'
management rights and responsibilities, he is doing so without any pervasive
changes to the company's existing management or organizational structure, other
than, as further discussed below, the acceptance of Daniel D. Crowley's
resignation effective March 31, 2003.
On or about July 24, 2002, the Bankruptcy Court granted a motion submitted
by the Chapter 11 trustee to (i) defer payment on account of certain approved
interim professional fee applications, (ii) defer the Bankruptcy Court's
decisions regarding the allowance or disallowance of compensation and expense
reimbursements requested in certain interim professional fee applications, (iii)
disallow certain professional fee applications requesting payment for
professional services rendered and expense reimbursements subsequent to March 6,
2002 and (iv) disallow certain other professional fee and expense reimbursement
applications. Certain legal counsel engaged during the period the Debtors
operated as debtors-in-possession have filed final fee applications seeking,
inter alia, a final order allowing payment of professional fees and
reimbursement of expenses incurred in connection with the Bankruptcy Cases. The
Chapter 11 trustee filed an omnibus objection to all final professional fee
applications and seeks to adjourn the adjudication of such final professional
fee applications until sometime after confirmation of a plan or plans of
reorganization. Through May 16, 2003, the Bankruptcy Court has adjudicated only
one final fee application. On or about July 24, 2002, the Bankruptcy Court also
approved several motions filed by the Chapter 11 trustee related to fiduciary
and administrative matters, including (i) the maintenance of the Debtors'
existing bank accounts, (ii) continued use of the company's business forms and
record retention policies and procedures and (iii) expenditure
authorization/check disbursement policies.
On October 14, 2002, the Chapter 11 trustee filed a motion with the
Bankruptcy Court requesting approval for the retention of investment bankers and
financial advisors to provide services focusing on the Debtors' restructuring
and reorganization. The services may include, subject to the Chapter 11
trustee's discretion, (i) providing a formal valuation of the Debtors, (ii)
assisting the Chapter 11 trustee in exploring the possible sale of the Debtors
or their assets, (iii) assisting the Chapter 11 trustee in negotiating with
stakeholders and the restructuring of the stakeholders' claims, and/or (iv) one
or more opinions on the fairness, from a financial perspective, of any proposed
sale of the Debtors or restructuring of the Debtors. Such motion was approved by
the Bankruptcy Court on December 2, 2002.
15
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
On December 19, 2002, the Equity Committee filed a proposed plan of
reorganization with respect to the Debtors (the "Proposed Equity Committee
Plan"). A complete description of the Proposed Equity Committee Plan is set
forth in the Disclosure Statement of the Official Committee of Equity Security
Holders of Coram Healthcare Corporation and Coram, Inc. and Exhibits A through I
thereto (collectively the "Proposed Equity Committee Disclosure Statement"). The
Proposed Equity Committee Disclosure Statement was filed contemporaneously with
the Proposed Equity Committee Plan in the Bankruptcy Court, under jointly
administered Case No. 00-3299, and both documents are available at docket
numbers 2019, 2020, 2021 and 2022 in such case.
In order for the company to remain compliant with the requirements of Stark
II, on December 31, 2002, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $40.2 million of the Series A Notes, $7.3 million of
accrued but unpaid interest on the Series A Notes, $83.1 million of the Series B
Notes and $16.6 million of accrued but unpaid interest on the Series B Notes for
approximately 1,218.3 shares of Coram, Inc. Series B Cumulative Preferred Stock,
$0.001 par value per share (see Notes 7 and 9 for further details). Hereafter
the Coram, Inc. Series B Cumulative Preferred Stock is referred to as the "CI
Series B Preferred Stock." This transaction generated an extraordinary gain on
troubled debt restructuring of approximately $123.5 million in 2002. At December
31, 2002, the company's stockholders' equity exceeded the minimum requirement
necessary to comply with the Stark II public company exemption for the year
ending December 31, 2003. See Note 10 for further discussion regarding Stark II.
Bankruptcy Related Activities Subsequent to December 31, 2002
Daniel D. Crowley, the company's former Chief Executive Officer and
President, had an employment contract which expired by its own terms on November
29, 2002. On January 24, 2003, the Chapter 11 trustee filed a motion with the
Bankruptcy Court seeking authorization to enter into a Termination and
Employment Extension Agreement (the "Transition Agreement"), effective January
1, 2003, with Mr. Crowley to have him serve as CHC's Chief Transition and
Restructuring Officer for a term not to exceed the earlier of (i) six months
from January 1, 2003, (ii) the date on which a plan or plans of reorganization
are confirmed by final order of the Bankruptcy Court or (iii) the substantial
consummation of a plan or plans of reorganization. Pursuant to the Transition
Agreement, Mr. Crowley would have continued to render essentially the same
services as previously provided to the company. On March 3, 2003, the Bankruptcy
Court denied the Chapter 11 trustee's motion for authorization to enter into the
Transition Agreement due to the Bankruptcy Court's belief that Mr. Crowley,
contrary to his representations, has continued to seek remuneration from one of
CI's noteholders in connection with efforts undertaken by Mr. Crowley in the
Bankruptcy Cases. Mr. Crowley subsequently resigned from the company effective
March 31, 2003.
On January 14, 2003, the Equity Committee filed a motion with the
Bankruptcy Court seeking an order to (i) immediately terminate Mr. Crowley's
employment with the Debtors and remove him from all involvement in the Debtors'
affairs, (ii) terminate all consulting arrangements between the Debtors and
Dynamic Healthcare Solutions, LLC ("DHS"), a privately held management
consulting and investment firm owned by Mr. Crowley (see Note 4 for further
details), (iii) substantially terminate all future payments to Mr. Crowley and
DHS and (iv) require Mr. Crowley and DHS to return all payments received to
date, except as otherwise authorized by the Bankruptcy Court as administrative
claims. On March 26, 2003, the Bankruptcy Court entered an order denying the
Equity Committee's motion to terminate Mr. Crowley's employment as moot and
reserved its decision on the other relief requested, including disgorgement,
until future litigation, if any, arises.
The employment contract with Allen J. Marabito, Executive Vice President,
acting General Counsel and acting Secretary, expired by its terms on November
29, 2002. The Chapter 11 trustee has agreed to continue Mr. Marabito's
employment in his prior capacity and Mr. Marabito has also assumed the duties
and responsibilities previously performed by Mr. Crowley. Mr. Marabito's
employment is at will with a base salary of $375,000 per annum, plus the same
employee benefits as prior to the expiration of his employment contract. On May
19, 2003, Mr. Marabito released the company from all contractual obligations
pertaining to his incentive compensation for the year ended December 31, 2002
(i.e., the 2002 MIP of approximately $1.05 million which remained subject to
Chapter 11 trustee and Bankruptcy Court approvals). In consideration thereof,
Mr. Marabito was granted a retention bonus of $380,000 under the company's 2003
Key Employee Retention Plan discussed below. The loss of Mr. Marabito's services
could have a material adverse effect on the company.
16
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
On April 7, 2003, the Bankruptcy Court approved a motion filed by the
Chapter 11 trustee to establish the 2003 Key Employee Retention Plan (the "2003
KERP"), which provides for (i) retention bonus payments of approximately $3.1
million to key employees of the company (the "2003 KERP Compensation") and (ii)
other payments of approximately $0.3 million to certain branch management
personnel (the "Branch Incentive Compensation"). Pursuant to the provisions of
the 2003 KERP, the 2003 KERP Compensation is payable in two equal installments
as follows: (i) upon approval of the 2003 KERP by the Bankruptcy Court and (ii)
the earlier of 60 days after confirmation of a plan or plans of reorganization
or December 31, 2003 (the "Second Payment Date"). Should a 2003 KERP
Compensation participant voluntarily leave the company or be terminated for
cause prior to the Second Payment Date, such participant must return any amounts
previously received under the 2003 KERP, less applicable taxes withheld.
Approximately $1.8 million, which represented the first installment under the
2003 KERP Compensation and the entire Branch Incentive Compensation amount, was
paid to the eligible participants in April 2003.
On May 2, 2003, the Chapter 11 trustee filed a proposed joint plan of
reorganization with respect to the Debtors (the "Chapter 11 Trustee's Proposed
Plan of Reorganization"). A complete description of the Chapter 11 Trustee's
Proposed Plan of Reorganization is set forth in the Disclosure Statement With
Respect to the Chapter 11 Trustee's Joint Plan of Reorganization (including
Exhibits A through D) (collectively the "Chapter 11 Trustee's Proposed
Disclosure Statement"). The Chapter 11 Trustee's Proposed Disclosure Statement
was filed contemporaneously with the Chapter 11 Trustee's Proposed Plan of
Reorganization in the Bankruptcy Court, under jointly administered Case No.
00-3299, and both documents are available at docket numbers 2597 and 2599 in
such case.
On May 15, 2003, the Equity Committee filed its First Amended Plan Of
Reorganization Of The Equity Security Holders Of Coram Healthcare Corporation
And Coram, Inc. (the "Amended Proposed Equity Committee Plan") and its
Disclosure Statement Of The Equity Committee Of Coram Healthcare Corporation And
Coram, Inc. In Connection With The First Amended Plan Of Reorganization Of Coram
Healthcare Corporation And Coram, Inc., including related exhibits thereto
(collectively the "Amended Proposed Equity Committee Disclosure Statement").
Both the Amended Proposed Equity Committee Plan and the Amended Proposed Equity
Committee Disclosure Statement can be found under jointly administered Case No.
00-3299 at docket numbers 2662 through 2667 inclusive.
Prior to the solicitation of a vote in favor of confirmation of a plan of
reorganization, the Bankruptcy Court must approve the related disclosure
statement as containing "adequate information," as that term is defined under
Chapter 11 of the Bankruptcy Code. Moreover, under Chapter 11 of the Bankruptcy
Code certain parties-in-interest may file objections to a proposed disclosure
statement and plan of reorganization and, in connection therewith, certain
parties have already filed objections to the Proposed Equity Committee
Disclosure Statement and the Proposed Equity Committee Plan. A Bankruptcy Court
hearing on both the Amended Proposed Equity Committee Disclosure Statement and
the Chapter 11 Trustee's Proposed Disclosure Statement is currently scheduled
for June 19, 2003.
Other Bankruptcy-Related Disclosures
Under Chapter 11 of the Bankruptcy Code, certain claims against the Debtors
in existence prior to the filing date are stayed while the Debtors' operations
continue under the purview of a Chapter 11 trustee or as debtors-in-possession.
These claims are reflected in the condensed consolidated balance sheets as
liabilities subject to compromise. Additional Chapter 11 claims have arisen and
may continue to arise subsequent to the filing date due to the rejection of
executory contracts and unexpired non-residential real property leases and from
determinations by the Bankruptcy Court of allowed claims for contingent,
unliquidated and other disputed amounts. Parties affected by the rejection of an
executory contract or unexpired non-residential real property lease may file
claims with the Bankruptcy Court in accordance with the provisions of Chapter 11
of the Bankruptcy Code and applicable rules. Claims secured by the Debtors'
assets also are stayed, although the holders of such claims have the right to
petition the Bankruptcy Court for relief from the automatic stay to permit such
creditors to foreclose on the property securing their claims. Additionally,
certain claimants have sought relief from the Bankruptcy Court to lift the
automatic stay and continue pursuit of their claims against the Debtors or the
Debtors' insurance carriers. See Note
17
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
10 for further details regarding activities of the Official Committee of
Unsecured Creditors of Coram Resource Network, Inc. and Coram Independent
Practice Association, Inc. in the Resource Network Subsidiaries' bankruptcy
proceedings.
The principal categories and balances of Chapter 11 bankruptcy claims accrued
in the condensed consolidated balance sheets at both March 31, 2003 and December
31, 2002 and included in liabilities subject to compromise are summarized as
follows (in thousands):
Series B Notes and other long-term debt obligations........................ $ 9,130
Liabilities of discontinued operations subject to compromise............... 2,936
Earn-out obligation........................................................ 1,268
Accounts payable........................................................... 1,390
Accrued merger and restructuring costs (primarily severance liabilities)... 468
Legal and professional liabilities......................................... 98
Other...................................................................... 340
--------
Total liabilities subject to compromise................................. $ 15,630
========
In addition to the amounts disclosed in the table above, the holders of the
CI Series A Preferred Stock and the CI Series B Preferred Stock (collectively
the "CI Preferred Stock Holders") continue to assert claims within the
Bankruptcy Cases in the aggregate amount of their cumulative liquidation
preferences. Furthermore, in connection with the note exchange effective on
December 31, 2002, the Bankruptcy Court entered an order granting the exchange,
subject to its comments of record, and further ordered that (i) if equitable or
other relief is sought by any party in interest against the CI Preferred Stock
Holders, all defenses, affirmative defenses, setoffs, recoupments and other such
rights of the Chapter 11 trustee, the CI Preferred Stock Holders and the Debtors
shall be preserved, and all such issues shall be determined, regardless of the
first, second and third note exchanges and (ii) the rights and equity interests
of the CI Preferred Stock Holders are, and in connection with any plan or plans
of reorganization or any other distribution of the Debtors' assets pursuant to
Chapter 11 the Bankruptcy Code shall remain, senior and superior to the rights
and equity interests of all holders of CI's common stock and all claims against
and equity interests in CHC.
On April 28, 2003, attorneys for the Equity Committee advised the Chapter
11 trustee and his legal counsel of their disagreement with certain statements
in the preceding paragraph. They assert that the cumulative liquidation
preferences include post-petition interest which, at a hearing on December 27,
2002, the Bankruptcy Court agreed would be reviewed in connection with the terms
and conditions of a plan or plans of reorganization. In addition, they assert
that because the Chapter 11 trustee's motion for authorization to issue CI
Series B Preferred Stock in exchange for debt was granted subject to the
Bankruptcy Court's comments on the record, that the rights and equity interests
of the CHC common equity holders, not the CI Preferred Stock Holders, are
preserved for determination by the Bankruptcy Court in connection with any plan
or plans of reorganization or any other distribution of the Debtors' assets
pursuant to Chapter 11 of the Bankruptcy Code. Whether or not the Equity
Committee's attorneys' interpretation of the Bankruptcy Court's order approving
the exchange is correct should be resolved as part of the Bankruptcy Court's
determination of the adversary proceeding discussed in the following paragraph.
Further, final resolution of the rights and equitable interests of the CI
Preferred Stock Holders will be determined by the Bankruptcy Court during
confirmation hearings on a plan or plans of reorganization.
On or about March 28, 2003, the Equity Committee commenced an adversary
proceeding seeking to subordinate the preferred stock interests of Cerberus
Partners, L.P., Goldman Sachs Credit Partners L.P. and Foothill Capital
Corporation in Coram, Inc. to the interests of Coram Healthcare Corporation as
the sole common shareholder of Coram, Inc. The complaint alleges, among other
things, that the aforementioned defendants have (i) engaged in inequitable
conduct, (ii) conferred an unfair advantage upon themselves and (iii) caused
damage to Coram Healthcare Corporation. The defendants have moved the Bankruptcy
Court to dismiss the adversary proceeding and the Equity Committee has replied
in opposition thereto. A hearing with regard to the adversary proceeding is
scheduled for June 5, 2003.
Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and
18
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
claims filed by creditors are being investigated and resolved. The ultimate
amount and the settlement terms for such liabilities will be subject to a plan
or plans of reorganization and review by the Chapter 11 trustee. Therefore, it
is not possible to fully or completely estimate the fair value of the
liabilities subject to compromise at March 31, 2003 and December 31, 2002 due to
the Bankruptcy Cases and the uncertainty surrounding the ultimate amount and
settlement terms for such liabilities.
Reorganization expenses are items of expense or income that are incurred or
realized by the Debtors as a result of the reorganization. These items include,
but are not limited to, professional fees, expenses related to key employee
retention plans, Office of the United States Trustee fees and other expenditures
relating to the Bankruptcy Cases, offset by interest earned on cash accumulated
as a result of the Debtors not paying their pre-petition liabilities during the
pendency of the Bankruptcy Cases. The principal components of reorganization
expenses for the three months ended March 31, 2003 and 2002 are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
---------- ----------
Legal, accounting and consulting fees ....... $ 1,854 $ 2,092
Office of the United States Trustee fees .... 10 10
Interest income ............................. (102) (92)
---------- ----------
Total reorganization expenses, net ....... $ 1,762 $ 2,010
========== ==========
3. DISCONTINUED OPERATIONS
Prior to January 1, 2000, the company provided ancillary network management
services through the Resource Network Subsidiaries, which managed networks of
home healthcare providers on behalf of HMOs, PPOs, at-risk physician groups and
other managed care organizations. In April 1998, the company entered into a five
year capitated agreement with Aetna U.S. Healthcare, Inc. ("Aetna") (the "Master
Agreement") for the management and provision of certain home health services,
including home infusion, home nursing, respiratory therapy, durable medical
equipment, hospice care and home nursing support for several of Aetna's disease
management programs.
On August 19, 1999, an involuntary bankruptcy petition was filed against
Coram Resource Network, Inc. and, on November 12, 1999, the Resource Network
Subsidiaries filed voluntary bankruptcy petitions under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court. On or about May 31, 2000, the Resource
Network Subsidiaries filed a liquidating Chapter 11 plan and disclosure
statement. Subsequently, on October 21, 2002 the Official Committee of Unsecured
Creditors of Coram Resource Network, Inc. and Coram Independent Practice
Association, Inc. (the "R-Net Creditors' Committee") filed a competing proposed
Liquidating Chapter 11 Plan. A complete description of such plan is set forth in
the disclosure statement filed contemporaneously therewith, which is available
on the docket of the Resource Network Subsidiaries' bankruptcy cases at docket
numbers 1003 and 1004. The Chapter 11 trustee has objected to the disclosure
statement and a hearing thereon is scheduled for May 30, 2003.
The agreements that R-Net had for the provision of ancillary network
management services, including the Aetna Master Agreement, have been terminated
and R-Net is no longer providing any ancillary network management services.
Additionally, all of the R-Net locations have been closed in connection with its
proposed liquidation. Coram employees who were members of the Resource Network
Subsidiaries' Board of Directors resigned and only the Chief Restructuring
Officer appointed by the Bankruptcy Court remains on the R-Net Board of
Directors to manage the liquidation of the R-Net business.
Following the November 1999 filing of voluntary bankruptcy petitions by the
Resource Network Subsidiaries, Coram accounted for such division as a
discontinued operation. In connection therewith, Coram separately reflected
R-Net's operating results in its consolidated statements of income as
discontinued operations; however, R-Net had no operating activity for the three
months ended March 31, 2003 and 2002. During the three months ended March 31,
2003, the company recorded a $0.1 million loss from disposal of discontinued
operations related to certain litigation between the R-Net Creditors' Committee
and the Debtors and several of their non-debtor subsidiaries, as
19
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
well as, legal costs associated with corresponding indemnifications provided to
the company's officers and directors in the Resource Network Subsidiaries'
bankruptcy proceedings/litigation.
As of March 31, 2003, the company has provided approximately $27.3 million
to fully and completely liquidate the Resource Network Subsidiaries, including
the R-Net Creditors' Committee litigation, legal costs related thereto (beyond
any insurance recoveries that the company may avail itself of), proofs of claims
asserted against the Debtors and other related matters (e.g., R-Net creditors
ultimately may successfully assert claims against the company). See Note 10 for
further details regarding the R-Net Creditors' Committee litigation, the
potential impact of the Chapter 11 Trustee's Proposed Plan of Reorganization (if
confirmed by the Bankruptcy Court) and related matters.
4. RELATED PARTY TRANSACTIONS
The company's former Chairman, Chief Executive Officer and President,
Daniel D. Crowley, owns Dynamic Healthcare Solutions, LLC ("DHS"), a privately
held management consulting and investment firm from which the company purchased
services. Mr. Crowley's employment with the company terminated effective March
31, 2003. Effective with the commencement of the Bankruptcy Cases, DHS employees
who were then serving as consultants to Coram terminated their employment with
DHS and became full time Coram employees. Through March 31, 2003, DHS continued
to bill the company the actual costs it attributed to DHS' Sacramento,
California location where Mr. Crowley and other persons were located and
performed services for or on behalf of the company. Effective April 1, 2003, DHS
and the Chapter 11 trustee entered into a month-to-month lease agreement for
office space at the aforementioned Sacramento, California location where certain
company employees and consultants are located. The rent, including parking and
certain utilities, is approximately $7,900 per month. Subsequent to December 31,
2002 and through May 16, 2003, approximately $0.1 million was paid to DHS in
connection with the aforementioned arrangements. Additionally, during the three
months ended March 31, 2002, the company paid approximately $0.1 million to DHS.
Effective August 2, 2000, the CHC Board of Directors approved a contingent
bonus to Mr. Crowley. Under the agreement, subject to certain material terms and
conditions, Mr. Crowley will have a claim for $1.8 million following the
successful refinancing of the company's debt. In connection therewith and the
December 2000 debt to preferred stock exchange transaction discussed in Notes 2
and 7, the company recorded a $1.8 million reorganization expense for the
success bonus during the year ended December 31, 2000. The success bonus will
not be payable unless and until such time as a plan or plans of reorganization,
which provide for payment of such bonus, are fully approved by the Bankruptcy
Court. Mr. Crowley also has claims for performance bonuses for the years ended
December 31, 2002, 2001 and 2000 aggregating approximately $13.8 million based
on overall company performance under the related Management Incentive Plans. Mr.
Crowley also participated in the company's key employee retention plans. In
connection with the Second Joint Plan, Mr. Crowley voluntarily offered to accept
a $7.5 million reduction in certain performance bonuses, contingent on the
confirmation and consummation of the Second Joint Plan. As discussed in Note 2,
confirmation of the Second Joint Plan was denied by the Bankruptcy Court on
December 21, 2001. The company cannot predict what, if any, reduction in Mr.
Crowley's incentive, retention or success bonuses, which are accrued in the
condensed consolidated financial statements, will be proposed or opposed in a
new plan or plans of reorganization. Mr. Crowley has indicated that he reserves
the right to claim the full outstanding amounts of his incentive, retention,
success bonus and other compensation. The Chapter 11 trustee reserves the right
to seek disallowance by the Bankruptcy Court of all such amounts and/or seek
disgorgement in any future litigation.
Effective August 1, 1999, Mr. Crowley and Cerberus Capital Management, L.P.
(an affiliate of Cerberus Partners, L.P. ("Cerberus"), a party to the company's
former debtor-in-possession financing agreement, Senior Credit Facility and
Securities Exchange Agreement), executed an employment agreement whereby Mr.
Crowley was paid approximately $1 million per annum plus potential
performance-related bonuses, equity options and fringe benefits. The services
rendered by Mr. Crowley to Cerberus included, but were not limited to, providing
business and strategic healthcare investment advice to executive management at
Cerberus and its affiliates. Mr. Crowley and Cerberus agreed to suspend their
contract and all related obligations immediately after the Bankruptcy Court's
denial of the Second Joint Plan on December 21, 2001. In September 2002, Mr.
Crowley formally terminated the Cerberus employment contract.
20
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
On January 14, 2003, the Equity Committee filed a motion with the
Bankruptcy Court seeking an order to (i) immediately terminate Mr. Crowley's
employment with the Debtors and remove him from all involvement in the Debtors'
affairs, (ii) terminate all consulting arrangements between the Debtors and DHS,
(iii) substantially terminate all future payments to Mr. Crowley and DHS and
(iv) require Mr. Crowley and DHS to return all payments received to date, except
as otherwise authorized by the Bankruptcy Court as administrative claims. On
March 26, 2003, the Bankruptcy Court entered an order denying the Equity
Committee's motion to terminate Mr. Crowley's employment as moot and reserved
its decision on the other relief requested, including disgorgement, until future
litigation, if any, arises.
As further discussed in Note 10, in November 2001 the Official Committee of
Unsecured Creditors of Coram Resource Network, Inc. and Coram Independent
Practice Association, Inc. brought an adversary proceeding in the Bankruptcy
Court against, among other defendants, the Debtors and certain of their
operating subsidiaries, as well as several related parties, including Foothill
Capital Corporation, Foothill Income Trust, L.P., Goldman Sachs Credit Partners
L.P., Cerberus, one of Cerberus' principals, current management, former
management and current and former members of the CHC's Board of Directors.
On March 7, 2002, the Bankruptcy Court approved the appointment of Arlin M.
Adams, Esquire, as the Debtors' Chapter 11 trustee. As more fully discussed in
Note 2, Mr. Adams has assumed the company's Board of Directors' management
rights and responsibilities. Subsequent to Bankruptcy Court appointment, the
Chapter 11 trustee engaged the law firm of Schnader, Harrison, Segal & Lewis LLP
("Schnader Harrison") to provide professional services in connection with the
Bankruptcy Cases. Mr. Adams is of counsel at such law firm. Schnader Harrison
was approved by the Bankruptcy Court as counsel to the Chapter 11 trustee and,
in connection therewith, reimbursement of professional fees and related expenses
are subject to Bankruptcy Court review and approval prior to interim and final
payments by the company. Additionally, Mr. Adams is entitled to compensation and
reimbursement of related expenses attributable to his services on behalf of the
Debtors. Mr. Adams is compensated on an hourly basis at a rate that has been
approved by the Bankruptcy Court. During the three months ended March 31, 2003
and 2002, the company recorded aggregate compensation and reimbursable expenses
for Mr. Adams of approximately $22,326 and $50,000, respectively. In addition,
the company recorded aggregate professional fees and reimbursable expenses
during the three months ended March 31, 2003 and 2002 for Schnader Harrison of
approximately $765,000 and $50,000, respectively. Through May 16, 2003, the
company has paid $66,974 to Mr. Adams for compensation and reimbursable expenses
incurred through November 30, 2002. Additionally, through May 16, 2003, the
company has also paid $1,006,651 to Schnader Harrison for professional services
rendered and reimbursable expenses incurred through November 25, 2002 (such
amount is net of certain holdbacks available to the company pursuant to Chapter
11 of the Bankruptcy Code).
5. MERGER AND RESTRUCTURING RESERVES
As a result of the formation of Coram and the acquisition of substantially
all of the assets of the alternate site infusion business of Caremark, Inc., a
subsidiary of Caremark International, Inc. (the "Caremark Business"), during May
1995 the company initiated a restructuring plan (the "Caremark Business
Consolidation Plan") and charged approximately $25.8 million to operations as a
restructuring cost.
During December 1999, the company initiated an organizational restructure
and strategic repositioning plan (the "Coram Restructure Plan") and charged
approximately $4.8 million to operations as a restructuring cost. The Coram
Restructure Plan resulted in the closing of additional facilities and reduction
of personnel. In connection therewith, the company reserved for (i) personnel
reduction costs relating to severance payments, fringe benefits and taxes for
employees that have been or may be terminated and (ii) facility closing costs
that consist of rent, common area maintenance and utility costs for fulfilling
lease commitments of approximately fifteen branch and corporate facilities that
have been or may be closed or downsized. Reserves for facility closing costs are
offset by amounts arising from sublease arrangements, but not until such
arrangements are in the form of signed and executed contracts. As part of the
Coram Restructure Plan, the company informed certain reimbursement sites of
their estimated closure dates and such operations were ultimately closed during
the first half of 2001, including the severance of approximately 80 employees.
Additionally, in May 2003 the company announced the transition of all active
patient accounts currently serviced by the Dallas, Texas reimbursement site to
other reimbursement sites during May and June 2003. The Dallas site will
maintain a small workforce to support the resolution of certain
21
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
inactive accounts from the company's other reimbursement centers. The company
has not recorded any merger and restructuring expenses or reserves in connection
with the Dallas reimbursement site consolidation plan as of March 31, 2003
because such activities do not meet the new criteria established by Statement
146 as of such date.
Under the Caremark Business Consolidation Plan and the Coram Restructure
Plan, the total charges through March 31, 2003, the estimate of total future
cash expenditures and the estimated total charges are as follows (in thousands):
CHARGES THROUGH MARCH 31, 2003 BALANCES AT MARCH 31, 2003
------------------------------------------- --------------------------
ESTIMATED
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTALS EXPENDITURES CHARGES
------------ -------- --------- ------------ ----------
Caremark Business Consolidation Plan:
Personnel reduction costs.............. $ 11,300 $ - $ 11,300 $ - $ 11,300
Facility reduction costs............... 10,437 3,900 14,337 260 14,597
----------- -------- --------- ------------ ---------
Subtotals............................ 21,737 3,900 25,637 260 25,897
Coram Restructure Plan:
Personnel reduction costs.............. 2,361 - 2,361 104 2,465
Facility reduction costs............... 1,258 - 1,258 259 1,517
----------- -------- --------- ------------ ---------
Subtotals............................ 3,619 - 3,619 363 3,982
----------- -------- --------- ------------ ---------
Totals.................................... $ 25,356 $ 3,900 $ 29,256 623 $ 29,879
=========== ======== ========= =========
Restructuring costs subject to compromise.......................................... (468)
------------
Accrued merger and restructuring costs per the condensed consolidated
balance sheet..................................................................... $ 155
============
During the three months ended March 31, 2003, significant items impacting
the restructuring reserves that were not subject to compromise are summarized as
follows (in thousands):
Balance at December 31, 2002............................................. $ 190
Activity during the three months ended March 31, 2003:
Payments under the plans.............................................. (35)
-----------
Balance at March 31, 2003................................................ $ 155
===========
The company estimates that the future cash expenditures related to the
aforementioned restructuring plans will be made in the following periods: 73%
through March 31, 2004, 21% through March 31, 2005 and 6% through March 31,
2006.
6. GOODWILL AND OTHER LONG-LIVED ASSETS
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("Statement 142"), which
eliminates the amortization of goodwill and intangible assets with indefinite
useful lives. Statement 142 also requires that goodwill and other intangible
assets with indefinite useful lives be reviewed for impairment at least
annually. The company adopted Statement 142 on January 1, 2002. Pursuant to the
provisions of Statement 142, intangible assets with finite lives continue to be
amortized over their estimated useful lives.
Goodwill. Statement 142 requires the company to test goodwill for
impairment using a two-step process. The first step is a screen for potential
impairment and the second step measures the amount of impairment, if any. As a
result of the initial adoption of Statement 142 in December 2002 (retroactive to
January 1, 2002), the company recognized a transitional goodwill impairment
charge of approximately $71.9 million which, in accordance with Statement 142,
was reflected in the condensed consolidated financial statements as the
cumulative effect of change in an accounting principle and resulted in a
restatement of the company's condensed consolidated income statement for the
three months ended March 31, 2002.
22
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Management selected December 1st as the company's annual goodwill
impairment test date. Separately, management concluded that no indicators of
impairment were in evidence at March 31, 2003 and through May 16, 2003; however,
there can be no assurances that the December 1, 2003 annual impairment test
(including the impact of an enterprise valuation, if necessary) will not result
in a potentially significant incremental impairment of the company's recorded
goodwill. If the company recognizes a material goodwill impairment charge during
2003, stockholders' equity may be less than $75 million as of December 31, 2003,
at which time the company may not qualify for the public company exemption of
Stark II for the year ending December 31, 2004. The potential material adverse
effects of noncompliance with Stark II on the company's financial condition and
business operations are described in more detail in Note 10.
Other Intangible Assets. The principal components of intangible assets
other than goodwill are as follows (in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
--------------------------------- --------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT (AT COST) AMORTIZATION AMOUNT (AT COST) AMORTIZATION
---------------- ------------ ---------------- ------------
Commercial payer contracts........... $ 13,683 $ (13,683) $ 13,683 $ (13,683)
Patient outcomes database............ 8,386 (3,400) 8,386 (3,296)
Employee noncompete agreements....... 3,343 (3,342) 3,343 (3,342)
---------------- ------------ ---------------- ------------
Total intangible assets.............. 25,412 (20,425) 25,412 (20,321)
Other deferred costs................. 302 (147) 302 (123)
---------------- ------------ ---------------- ------------
Total intangible assets and other
deferred costs.................... $ 25,714 $ (20,572) $ 25,714 $ (20,444)
================ ============ ================ ============
Amortization expense related to intangible assets, which is included in
selling, general and administrative expenses, was approximately $0.1 million and
$0.6 million during the three months ended March 31, 2003 and 2002,
respectively.
7. DEBT OBLIGATIONS
Debt obligations are as follows (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Series B Senior Subordinated Unsecured Convertible Notes ................. $ 9,000 $ 9,000
Accreditation note payable ............................................... 101 118
Other obligations, including capital leases, at interest rates ranging
from 6.8% to 13.1% ..................................................... 178 146
--------- ------------
9,279 9,264
Less: Debt obligations subject to compromise ............................. (9,130) (9,130)
Less: Current maturities ................................................. (72) (61)
--------- ------------
Long-term debt, less current maturities .................................. $ 77 $ 73
========= ============
As a result of the Bankruptcy Cases, substantially all short and long-term
debt obligations at the August 8, 2000 filing date have been classified as
liabilities subject to compromise in the condensed consolidated balance sheets
in accordance with SOP 90-7. Under Chapter 11 of the Bankruptcy Code, actions
against the Debtors to collect pre-petition indebtedness are subject to an
automatic stay provision. As of August 8, 2000, the company's principal credit
and debt agreements included (i) a Securities Exchange Agreement, dated May 6,
1998 (the "Securities Exchange Agreement"), with Cerberus Partners, L.P.,
Goldman Sachs Credit Partners L.P. and Foothill Capital Corporation
(collectively the "Holders") and the related Series A Senior Subordinated
Unsecured Notes (the "Series
23
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
A Notes") and the Series B Senior Subordinated Unsecured Convertible Notes (the
"Series B Notes") and (ii) a Senior Credit Facility with Foothill Income Trust
L.P., Cerberus Partners, L.P. and Goldman Sachs Credit Partners L.P.
(collectively the "Lenders") and Foothill Capital Corporation as agent
thereunder. Subsequent to the petition date, the Debtors entered into a secured
debtor-in-possession financing agreement with Madeleine L.L.C., an affiliate of
Cerberus Partners, L.P. (the "DIP Agreement); however, such credit facility
expired under its terms on August 31, 2001. Pursuant to the terms and conditions
of the aforementioned credit and debt agreements, the company is precluded from
paying cash dividends or making other capital distributions. Moreover, the
Debtors' voluntary Chapter 11 filings caused events of default to occur under
the Securities Exchange Agreement and the Senior Credit Facility, thereby
terminating the Debtors' ability to make additional borrowings under the Senior
Credit Facility through its expiration on February 6, 2001.
The recognition of interest expense pursuant to SOP 90-7 is appropriate
during the Bankruptcy Cases if it is probable that such interest will be an
allowed priority, secured or unsecured claim. The Second Joint Plan (see Note 2
for further details), which was denied by the Bankruptcy Court on December 21,
2001, would have effectively eliminated all post-petition interest on
pre-petition borrowings. The final confirmed plan or plans of reorganization may
have a similar effect on post-petition interest; however, appropriate approvals
thereof in accordance with Chapter 11 of the Bankruptcy Code would be required.
Accreditation Note Payable. In August 2001, CI entered into an agreement
(the "ACHC Agreement") with the Accreditation Commission for Health Care, Inc.
("ACHC") whereby ACHC is to, among other things, provide national accreditation
for Coram as deemed appropriate by ACHC. Under the terms of the ACHC Agreement,
which commenced on the date that it was executed and expires in November 2004,
Coram made an upfront payment and is obligated to make twelve equal non-interest
bearing quarterly payments of approximately $17,000. The total payments to be
made under the ACHC Agreement will aggregate approximately $0.3 million. In the
event of breach or default by either of the parties, CI and/or ACHC may
immediately terminate the ACHC Agreement if the breach or default is not cured
within fifteen days of receipt of written notice from the non-breaching party.
Securities Exchange Agreement. In April 1998, the Securities Exchange
Agreement cancelled a previously outstanding subordinated rollover note, related
deferred interest and fees and related warrants to purchase up to 20% of the
outstanding CHC common stock on a fully diluted basis in an exchange for the
payment of $4.3 million in cash and the issuance by the company to the Holders
of (i) $150.0 million in principal amount of Series A Notes and (ii) $87.9
million in principal amount of 8.0% Series B Notes. Additionally, the Holders of
the Series A Notes and the Series B Notes were given the right to approve
certain new debt and the right to name one member of the CHC Board of Directors.
Such director was elected in June 1998 and reelected in August 1999; however,
the designated board member resigned in July 2000 and has not been replaced.
On April 9, 1999, the company entered into Amendment No. 2 (the "Note
Amendment") to the Securities Exchange Agreement with the Holders. Pursuant to
the Note Amendment, the outstanding principal amount of the Series B Notes is
convertible into shares of the company's common stock at a conversion price of
$2.00 per share (subject to customary anti-dilution adjustments). Prior to
entering into the Note Amendment, the Series B Notes were convertible into
common stock at a conversion price of $3.00 per share, which was subject to
downward (but not upward) adjustment based on prevailing market prices for CHC's
common stock on April 13, 1999 and October 13, 1999. Based on reported market
closing prices for CHC's common stock prior to April 13, 1999, this conversion
price would have been adjusted to below $2.00 on such date had the company not
entered into the Note Amendment. Pursuant to the Note Amendment, the parties
also increased the interest rate applicable to the Series A Notes from 9.875% to
11.5% per annum.
On December 28, 2000, the Bankruptcy Court approved the Debtors' request to
exchange a sufficient amount of debt and related accrued interest for Coram,
Inc. Series A Cumulative Preferred Stock in order to maintain compliance with
the physician ownership and referral provisions of Stark II. Hereafter, the
Coram, Inc. Series A Cumulative Preferred Stock is referred to as the "CI Series
A Preferred Stock." On December 29, 2000, the Securities Exchange Agreement was
amended ("Amendment No. 4") and an Exchange Agreement was simultaneously
executed among the Debtors and the Holders. Pursuant to such arrangements, the
Holders agreed to exchange approximately $97.7 million aggregate principal
amount of the Series A Notes and $11.6 million of
24
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
aggregate contractual unpaid interest on the Series A Notes and the Series B
Notes as of December 29, 2000 for 905 shares of CI Series A Preferred Stock (see
Note 9 for further details regarding the preferred stock). Following the
exchange, the Holders retained approximately $61.2 million aggregate principal
amount of the Series A Notes and $92.1 million aggregate principal amount of the
Series B Notes. Pursuant to Amendment No. 4, the per annum interest rate on both
the Series A Notes and the Series B Notes was adjusted to 9.0%. Moreover, the
Series A Notes' and Series B Notes' original scheduled maturity dates of May
2001 and April 2008, respectively, were both modified to June 30, 2001. Due to
the Holders' receipt of consideration with a fair value less than the face value
of the exchanged principal and accrued interest, the exchange transaction
qualified as a troubled debt restructuring pursuant to Statement of Financial
Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings ("Statement No. 15"). In connection therewith, the company
recognized an extraordinary gain during the year ended December 31, 2000 of
approximately $107.8 million, net of tax.
On December 27, 2001, the Bankruptcy Court approved the Debtors' request to
exchange an additional amount of debt and related contractual unpaid interest
for CI Series A Preferred Stock in an amount sufficient to maintain compliance
with Stark II. In connection therewith, on December 31, 2001 the Securities
Exchange Agreement was amended ("Amendment No. 5") and an Exchange Agreement was
simultaneously executed among the Debtors and the Holders. Pursuant to such
arrangements, the Holders agreed to exchange $21.0 million aggregate principal
amount of the Series A Notes and approximately $1.9 million of aggregate
contractual unpaid interest on the Series A Notes as of December 31, 2001 for
approximately 189.6 shares of CI Series A Preferred Stock. Following this second
exchange, the Holders retained approximately $40.2 million aggregate principal
amount of the Series A Notes. Pursuant to Amendment No. 5, the Series A Notes'
and Series B Notes' scheduled maturity date of June 30, 2001 were both modified
to June 30, 2002. Due to the Holders receipt of consideration with a fair value
less than the face value of the exchanged principal and accrued interest, the
exchange transaction qualified as a troubled debt restructuring pursuant to
Statement No. 15. In connection therewith, the company recognized an
extraordinary gain during the year ended December 31, 2001 of approximately
$20.7 million.
On December 31, 2002, with approval from the Bankruptcy Court, the Holders
exchanged an additional amount of debt and related contractual unpaid interest
for Coram, Inc. Series B Cumulative Preferred Stock in an amount sufficient to
maintain compliance with Stark II. Hereafter, the Coram, Inc. Series B
Cumulative Preferred Stock is referred to as the "CI Series B Preferred Stock."
The Securities Exchange Agreement was amended ("Amendment No. 6") on December
31, 2002 and a third Exchange Agreement was simultaneously executed among the
Debtors and the Holders. Pursuant to such arrangements, the Holders agreed to
exchange approximately $40.2 million aggregate principal amount of the Series A
Notes, $7.3 million of aggregate contractual unpaid interest on the Series A
Notes, $83.1 million aggregate principal amount of the Series B Notes and $16.6
million of aggregate contractual unpaid interest on the Series B Notes for
approximately 1,218.3 shares of the CI Series B Preferred Stock. Following this
third exchange, the Holders retain $9.0 million aggregate principal amount of
the Series B Notes and no Series A Notes. Pursuant to Amendment No. 6, the
Series B Notes' scheduled maturity date of June 30, 2002 has been modified to
June 30, 2003. Due to the Holders receipt of consideration with a fair value
less than the face value of the exchanged principal and accrued interest, the
exchange transaction qualified as a troubled debt restructuring pursuant to
Statement No. 15. In connection therewith, the company recognized an
extraordinary gain during the year ended December 31, 2002 of approximately
$123.5 million.
Although the principal amounts under the Series A Notes and Series B Notes
were not paid on their scheduled maturity date of June 30, 2002 and the company
was in technical default of the Securities Exchange Agreement from that date
until the execution of Amendment No. 6, the Holders were stayed from any
remedies pursuant to the provisions of Chapter 11 of the Bankruptcy Code.
Moreover, the default was cured by Amendment No. 6.
The Securities Exchange Agreement, pursuant to which the Series A Notes and
the Series B Notes were issued, contains customary covenants and events of
default. Upon the Debtors' Chapter 11 bankruptcy filings, the company was in
violation of certain covenants and conditions thereunder; however, such
bankruptcy proceedings have stayed any remedial actions by either the Debtors or
the Holders.
Notwithstanding the aforementioned default for non-payment of principal on
the Series A Notes and the Series B Notes on June 30, 2002, subsequently cured
by Amendment No. 6, management believes that at March 31, 2003
25
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
the company was in compliance with all covenants of the Securities Exchange
Agreement. However, there can be no assurances as to whether further covenant
violations or events of default will occur in future periods and whether any
necessary waivers would be granted.
The Series B Notes are (and the Series A Notes were) scheduled to pay
interest quarterly in arrears in cash or, at the election of the company,
through the issuance of pari passu debt securities, except that the Holders can
require the company to pay interest in cash if the company exceeds a
predetermined interest coverage ratio. Notwithstanding the contractual terms of
the Securities Exchange Agreement, no cash-basis interest is being paid
subsequent to August 8, 2000 due to the ongoing Bankruptcy Cases. Pursuant to
the troubled debt restructuring rules promulgated under Statement No. 15 and
other accounting rules under SOP 90-7, no interest expense has been recognized
in the company's consolidated financial statements relative to the Series A
Notes and the Series B Notes since December 29, 2000.
The Series B Notes are redeemable, in whole or in part, at the option of
the Holders in connection with any change of control of the company (as defined
in the Securities Exchange Agreement), if the company ceases to hold and control
certain interests in its significant subsidiaries or upon the acquisition of the
company or certain of its subsidiaries by a third party. In such instances, the
Series B Notes are redeemable, subject to prior authorization by the Bankruptcy
Court, at 103% of the then outstanding principal amount, plus accrued interest.
8. INCOME TAXES
During the three months ended March 31, 2003 and 2002, the company recorded
income tax expense of approximately $35,000 and $38,000, respectively. The
effective income tax rates for the three months ended March 31, 2003 and 2002
are lower than the statutory rate because the company is able to utilize net
operating loss carryforwards ("NOLs") that are fully reserved in the valuation
allowance. At March 31, 2003, deferred tax assets were net of a valuation
allowance of approximately $161.2 million, as restated (see Note 1 for further
details). Realization of deferred tax assets is dependent upon the company's
ability to generate taxable income in the future. Deferred tax assets have been
limited to amounts expected to be recovered, net of deferred tax liabilities
that would otherwise become payable in the carryforward period. As management
believes that realization of the deferred tax assets is sufficiently uncertain,
they have been wholly offset by valuation allowances at both March 31, 2003 and
December 31, 2002.
Deferred tax assets relate primarily to temporary differences consisting, in
part, of accrued restructuring costs, charges for goodwill and other long-lived
assets, allowances for doubtful accounts, R-Net reserves and other accrued
liabilities that are not deductible for income tax purposes until paid or
realized and NOLs that may be deductible against future taxable income. At March
31, 2003, the company had NOLs for federal income tax purposes of approximately
$196.5 million, which may be available to offset future federal taxable income
and expire in varying amounts in the years 2003 through 2023. This NOL balance
includes approximately $34.4 million generated by certain predecessor companies
prior to the formation of the company and such amount is subject to an annual
usage limitation of approximately $4.5 million. In addition, the ability to
utilize the full amount of the $196.5 million of federal NOLs and certain of the
company's state NOLs is uncertain due to income tax rules related to the
exchanges of debt and related interest for Coram, Inc. Series A Cumulative
Preferred Stock (the "CI Series A Preferred Stock") in December 2001 and 2000
and Coram, Inc. Series B Cumulative Preferred Stock (the "CI Series B Preferred
Stock") in December 2002 (See Note 9 for further details). As of March 31, 2003,
the company had alternative minimum tax ("AMT") credit carryforwards of
approximately $2.8 million, which may be available to offset future regular
income taxes and have an indefinite carryforward period.
As a result of the issuance of CI Series A Preferred Stock in December 2000,
the company effectuated a deconsolidation of its group for federal income tax
purposes. Accordingly, subsequent to December 29, 2000 CI filed income tax
returns as the parent company of the new consolidated group and CHC filed its
own separate income tax returns. Pursuant to Internal Revenue Code ("IRC")
Section 382, the issuance of the CI Series A Preferred Stock in December 2000
also caused an ownership change at CI for federal income tax purposes. However,
CI currently operates under the jurisdiction of the Bankruptcy Court and meets
certain other bankruptcy related conditions of the IRC. The bankruptcy
provisions of IRC Section 382 impose limitations on the utilization of NOLs and
other tax attributes. The extraordinary gains on troubled debt restructurings
that resulted from the
26
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
issuance of CI Series A Preferred Stock in December 2001 and December 2000 and
the issuance of CI Series B Preferred Stock in December 2002 are generally not
subject to income tax pursuant to the cancellation of debt provisions included
in IRC Section 108; however, such extraordinary gains could affect the company's
NOLs and certain other tax attributes.
In connection with recently enacted legislation, during the year ended
December 31, 2002 the company filed refund claims with the Internal Revenue
Service ("IRS") requesting approximately $1.8 million of previously paid AMT
(the "AMT Refund"). The AMT Refund has been reflected in the condensed
consolidated financial statements and approximately $0.1 million thereof was
received by the company in February 2003.
In January 1999, the IRS completed an examination of the company's federal
income tax return for the year ended September 30, 1995 and proposed substantial
adjustments to prior tax liabilities. The adjustments involve the deductibility
of warrants, write-offs of goodwill and the ability of the company to categorize
certain NOLs as specified liability losses and offset income in prior years. In
May 1999, the company received a statutory notice of deficiency totaling
approximately $12.7 million (obtained from federal tax refunds), plus interest
and penalties to be determined, with respect to certain proposed adjustments
seeking to recover taxes previously refunded. In August 1999, the company filed
a petition with the United States Tax Court (the "Tax Court") contesting the
notice of deficiency. The IRS responded to the petition and requested that the
petition be denied. The Tax Court proceeding is currently stayed by reason of
the Bankruptcy Cases.
Pursuant to standard IRS procedures, the resolution of the issues contained
in the Tax Court petition were assigned to the administrative appeals function
of the IRS. The company reached a tentative settlement agreement with the IRS
Appeals office on the aforementioned issues and subsequently entered into
proposed Decision and Stipulation agreements with the IRS. Hereinafter, the
tentative settlement agreement, the Decision and Stipulation agreements and the
deferred payment plan (as further discussed below) are collectively referred to
as the "Proposed Settlement." Subject to obtaining necessary approvals from the
Joint Committee of Taxation, the Debtors' Chapter 11 trustee and the Bankruptcy
Court, the Decision and Stipulation agreements will be filed with the Tax Court.
In September 2002, the Joint Committee of Taxation approved the Decision and
Stipulation agreements and the Chapter 11 trustee is currently reviewing the
Proposed Settlement.
If ultimately approved by all parties, the Proposed Settlement would result
in (i) a federal tax liability of approximately $9.9 million, (ii) interest of
approximately $9.1 million at March 31, 2003 and (iii) penalties, if applicable,
to be determined by the IRS in accordance with certain statutory guidelines. In
connection therewith, the condensed consolidated financial statements include
short-term and long-term liability reserves for the Proposed Settlement
aggregating approximately $19.0 million, including $0.3 million of interest
expense recorded during each of the three months ended March 31, 2003 and 2002.
The federal income tax adjustments would also give rise to certain incremental
state tax liabilities.
In October 2002, the company submitted a deferred payment plan to the IRS,
which was tentatively accepted by the IRS in April 2003, subject to Chapter 11
trustee and Bankruptcy Court approvals. The deferred payment plan contemplates
an initial application of the remaining outstanding AMT Refund of approximately
$1.7 million. Thereafter, the company would make quarterly payments aggregating
approximately $0.7 million until such time as the Proposed Settlement amount,
post-settlement interest and penalties, if any, are fully liquidated. Under the
terms of the deferred payment plan, interest would accrue at a variable rate,
compounded daily, as determined by reference to rates published by the IRS (at
May 16, 2003, the corresponding effective interest rate would have been 7.0%).
The condensed consolidated balance sheets at March 31, 2003 and December 31,
2002 include approximately $3.2 million and $3.1 million, respectively, of
short-term liabilities which represent management's projections of the principal
amounts that will be due within one year of the respective balance sheet dates.
If the Chapter 11 trustee or the Bankruptcy Court do not approve the
Proposed Settlement amount or the proposed payment plan, the financial position
and liquidity of the company could be materially adversely affected.
27
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
9. MINORITY INTERESTS
The following summarizes the minority interests in consolidated joint
ventures and preferred stock issued by a subsidiary (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Preferred stock of Coram, Inc. ....... $ 5,538 $ 5,538
Majority-owned companies ............. 643 677
--------- ------------
Total minority interests ............. $ 6,181 $ 6,215
========= ============
On December 29, 2000, CI, a wholly-owned subsidiary of Coram Healthcare
Corporation, executed an Exchange Agreement with the parties to CI's Securities
Exchange Agreement (collectively the "Holders") (see Note 7 for further details)
to exchange approximately $97.7 million of the Series A Notes and approximately
$11.6 million of contractual but unpaid interest on the Series A Notes and the
Series B Notes in exchange for 905 shares of CI Series A Cumulative Preferred
Stock, $0.001 par value per share (this preferred stock class is hereinafter
referred to as the "CI Series A Preferred Stock"). Such shares of CI Series A
Preferred Stock were issued to the Holders on a pro rata basis. Through an
independent valuation, it was determined that the 905 shares of CI Series A
Preferred Stock had a fair value of approximately $6.1 million.
On December 31, 2001, CI executed a second Exchange Agreement with the
Holders (see Note 7 for further details) to exchange $21.0 million of the Series
A Notes and approximately $1.9 million of contractual but unpaid interest on the
Series A Notes for approximately 189.6 shares of CI Series A Preferred Stock.
Such shares of CI Series A Preferred Stock were issued to the Holders on a pro
rata basis. Utilizing an updated independent valuation, it was determined that
the aggregate issued and outstanding CI Series A Preferred Stock at December 31,
2001 had a fair value of approximately $1.9 million and approximately $0.3
million of such amount was allocated to the shares issued in conjunction with
the second Exchange Agreement.
On December 31, 2002, CI executed a third Exchange Agreement with the
Holders (see Note 7 for further details) to exchange approximately $40.2 million
of the Series A Notes, $7.3 million of contractual but unpaid interest on the
Series A Notes, $83.1 million of the Series B Notes and $16.6 million of
contractual but unpaid interest on the Series B Notes for approximately 1,218.3
shares of a new class of CI preferred stock that is subordinate to the CI Series
A Preferred Stock. Such new class of preferred stock, (i.e., the CI Series B
Cumulative Preferred Stock (the "CI Series B Preferred Stock"), $0.001 par value
per share ) was issued on a pro rata basis to the Holders. Through an
independent valuation, it was determined that the 1,218.3 shares of CI Series B
Preferred Stock had no value on the date of issuance (principally due to the
subordination to the CI Series A Preferred Stock).
28
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Hereinafter the CI Series A Preferred Stock and the CI Series B Preferred
Stock are collectively referred to as the CI Preferred Stock. A summary of the
CI Preferred Stock activity and related liquidation preference values through
March 31, 2003 is as follows (in thousands, except share amounts):
CI SERIES A PREFERRED STOCK CI SERIES B PREFERRED STOCK
--------------------------- ---------------------------
LIQUIDATION LIQUIDATION
SHARES PREFERENCES SHARES PREFERENCES
--------- ----------- --------- -----------
Balances at January 1, 2000 .................. -- $ -- -- $ --
Shares issued pursuant to the Exchange
Agreement dated December 29, 2000 ....... 905.0 109,326 -- --
--------- ----------- --------- -----------
Balances at December 31, 2000 ................ 905.0 109,326 -- --
Dividends In-Kind ......................... 146.5 17,700 -- --
Shares issued pursuant to the Exchange
Agreement dated December 31, 2001 ....... 189.6 22,901 -- --
--------- ----------- --------- -----------
Balances at December 31, 2001 ................ 1,241.1 149,927 -- --
Dividends In-Kind ......................... 210.5 25,428 -- --
Shares issued pursuant to the Exchange
Agreement dated December 31, 2002 ....... -- -- 1,218.3 147,171
--------- ----------- --------- -----------
Balances at December 31, 2002 ................ 1,451.6 175,355 1,218.3 147,171
Dividends In-Kind ......................... 54.4 6,576 45.7 5,519
--------- ----------- --------- -----------
Balances at March 31, 2003 ................... 1,506.0 $ 181,931 1,264.0 $ 152,690
========= =========== ========= ===========
The authorized CI Preferred Stock consists of 10,000 shares, of which 2,500
shares are designated as CI Series A Preferred Stock and 2,500 shares are
designated as CI Series B Preferred Stock. The only shares issued and
outstanding at March 31, 2003 are those issued to the Holders pursuant to the
three aforementioned Exchange Agreements and any corresponding in-kind
dividends. So long as any shares of the CI Preferred Stock are outstanding, the
Holders are entitled to receive preferential dividends at a rate of 15% per
annum on the liquidation preference amounts. Dividends are payable on a
quarterly basis on the last business day of each calendar quarter. Prior to the
effective date of a plan or plans of reorganization, dividends are to be paid in
the form of additional shares of CI Preferred Stock having a liquidation
preference amount equal to such dividend amount. Subsequent to the effective
date of a plan or plans of reorganization, dividends will be payable, at CI's
election, in cash or shares of common stock of CI having a fair value equal to
such cash dividend payment, as determined by a consensus of investment banking
firms acceptable to the Holders. In the event of default, the dividend rate on
the CI Preferred Stock shall increase to 16% per annum until such time that the
event of default is cured. During the year ended December 31, 2002, an event of
default occurred whereby CI was required to pay in-kind dividends at the
aforementioned default rate for the three quarters ended September 30, 2002. All
CI Preferred Stock dividends are to include tax indemnities and gross-up
provisions (computed subsequent to the company's tax fiscal year end in
connection with the preparation of the company's income tax returns) as are
customary for transactions of this nature.
The organizational documents and other agreements underlying the CI
Preferred Stock include usual and customary affirmative and negative covenants
for securities of this nature, including, but not limited to (i) providing
timely access to certain financial and business information; (ii) authorization
to communicate with the company's independent certified public accountants with
respect to the financial condition and other affairs of the company; (iii)
maintaining tax compliance; (iv) maintaining adequate insurance coverage; (v)
adherence to limitations on transactions with affiliates; (vi) adherence to
limitations on acquisitions or investments; (vii) adherence to limitations on
the liquidation of assets or businesses; and (viii) adherence to limitations on
entering into additional indebtedness.
The organizational documents and other agreements underlying the CI
Preferred Stock also include special provisions regarding voting rights. These
provisions include terms and conditions pertaining to certain triggering events
whereby the CI Preferred Stock voting rights would become effective. Generally,
such triggering events
29
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
include notice of a meeting, distribution of a written consent in lieu of a
meeting, or entry of an order of court compelling a meeting, of the stockholders
or the Board of Directors of CI or CHC: (i) to approve appointment, removal or
termination of any member of the Board of Directors of CI or CHC; or (ii) to
approve any change in the rights of any person to do so. Triggering events
related to a notice of a meeting or the distribution of a written consent of the
stockholders or CI Board of Directors cannot occur without a majority of the CHC
independent directors previously approving such meeting or written consent.
Substantial consummation of a plan or plans of reorganization will also
constitute a triggering event.
On April 12, 2002, the Holders executed a waiver, whereby they agreed to
permanently and irrevocably waive their rights to collectively exercise, upon
the occurrence of a triggering event, in excess of 49% of the voting rights of
the aggregate of all classes of common and preferred shares and any other voting
securities of CI (the "Waiver"), regardless of the number of CI Preferred Stock
shares issued and outstanding. Additionally, pursuant to this permanent and
irrevocable waiver of rights, the Holders waived their rights to collectively
elect or appoint a number of directors that constitutes half or more of the
total number of CI directors. Alternatively, if the holders of the CI Preferred
Stock elect no Board of Directors' representation, then, solely through the CI
Series A Preferred Stock, each of the three Holders shall have the right to
appoint an observer to CI's Board of Directors. The Waiver can only be modified
or amended with the written consent of the Debtors. In connection with the third
Exchange Agreement, the provisions of the Waiver were formally incorporated into
the Second Certificate of Amendment of Certificate of Designation, Preferences
and Relative, Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof of Coram, Inc.
Accordingly, subsequent to the occurrence of a triggering event, each share of
CI Preferred Stock will be entitled to one vote and shall entitle the holder
thereof to vote on all matters voted on by the holders of CI common stock,
voting together as a single class with other shares entitled to vote, at all
meetings of the stockholders of CI. As of March 31, 2003, the Holders had
contingent voting rights aggregating 49% of CI's total voting power. As of such
date, upon the occurrence of a triggering event, the Holders would also have had
the right to appoint three of the seven directors to CI's Board of Directors (a
quorum in meetings of the Board of Directors would have been constituted by the
presence of a majority of the directors, at least two of whom must have been
directors appointed by the Holders). Prior to the occurrence of a triggering
event, solely through the CI Series A Preferred Stock, the Holders have the
right to appoint two directors to CI's Board of Directors.
The CI Preferred Stock is redeemable at the option of CI, in whole or in
part, at any time, on not less than thirty days prior written notice, at the
liquidation preference amount plus any contractual but unpaid dividends.
Redemption may only be made in the form of cash payments.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Letters of Credit. In February 2001, pursuant to an order of the Bankruptcy
Court, the company established irrevocable letters of credit through Wells Fargo
Bank Minnesota, NA ("Wells Fargo"), an affiliate of Foothill Capital Corporation
(a party to the former Senior Credit Facility, the Securities Exchange Agreement
and a holder of both the CI Series A Preferred Stock and the CI Series B
Preferred Stock). Such letters of credit aggregated approximately $0.5 million
at March 31, 2003 and are fully secured by interest-bearing cash deposits held
by Wells Fargo. The outstanding letters of credit have maturity dates in
September 2003 ($187,000) and February 2004 ($278,000).
Purchase and Other Commitments. As a result of the management's evaluation
of several pole-mounted infusion pump alternatives, the company is replacing its
entire fleet of Sabratek Corporation 3030 pole-mounted pumps. In connection
therewith, Coram entered into two agreements with B. Braun Medical, Inc. ("B.
Braun") in 2003 whereby the company purchased 1,000 Vista Basic pole-mounted
pumps at an aggregate cost of approximately $1.3 million. Such amount was paid
in four equal installments of approximately $337,000 during March, April and May
2003. Additionally, on April 29, 2003 the Bankruptcy Court approved a motion
that authorized the company to enter into a three year lease agreement (the
"Lease Agreement") with B. Braun for an additional 1,000 Vista Basic pumps. The
aggregate three year commitment under the Lease Agreement, including related
interest, is
30
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
approximately $1.5 million. As a result, the company is required to pay to B.
Braun approximately $0.2 million, $0.4 million and $0.9 million during the
first, second and third years of the Lease Agreement. Upon the expiration of the
Lease Agreement, the company has the option to acquire the leased Vista Basic
pumps at a bargain purchase price of $1 per pump. The Lease Agreement contains
customary covenants and events of default, as well as, remedies available to B.
Braun if the company is in violation thereof, including, but not limited to, (i)
termination of the Lease Agreement, (ii) return of the leased Vista Basic pumps
to B. Braun and/or (iii) recovery from the company of any unpaid amounts as of
the date of default and all amounts remaining under the unexpired term of the
Lease Agreement. Management believes that the company will comply with the terms
and conditions of the Lease Agreement; however, there can be no assurances
thereof or what remedies, if any, would be invoked by B. Braun in the event of
default.
The Bankruptcy Court order approving the Lease Agreement further provided
that, among other things, the company could assume an agreement with B. Braun to
purchase drugs and supplies (the "Supply Agreement"). The Supply Agreement
expires in February 2005 and, pursuant to its terms, the company is required to
purchase at least 95% of its annual volume requirements related to twelve
product categories from B. Braun. However, the company has the right to remove
any product category from the purview of the Supply Agreement if such product
category is offered by another vendor at pricing that is 10% lower, in the
aggregate, for that entire product category, provided that B. Braun waives its
right to match such pricing. The company also has the right to terminate the
Supply Agreement after sixty days written notice if B. Braun provides products
or services of a quality or technical level that fail to meet customary
standards of the medical industry. However, if the company terminates the Supply
Agreement for any other reason, it must reimburse B. Braun (i) certain
incentives previously paid to the company, which are calculated at $150,550 per
unexpired quarter under the Supply Agreement and (ii) the greater of $4.0
million or 50% of the company's purchases for the twelve months immediately
preceding the early termination date. Additionally, if it is determined that the
company does not satisfy the 95% purchasing requirement for any of the twelve
product categories and such failure is not related to a lack of product
availability, then the company is required to pay B. Braun an amount equal to
10% of the previous quarter's purchases. Since the inception of the Supply
Agreement, no such quarterly shortfall has been in evidence and, while no
assurances can be given, management does not expect that such circumstances will
arise during the remaining term of the Supply Agreement. Moreover, due to the
company's business relationship with B. Braun and the advantageous drug and
supply pricing enjoyed by the company, management currently has no intentions of
terminating the Supply Agreement and, accordingly, management believes it is
unlikely that the early termination penalties will be invoked. However, if an
early contract termination did occur, the penalties, which would have aggregated
approximately $5.2 million at March 31, 2003, would have a material adverse
effect on the company's financial position, liquidity and results of operations.
Effective December 3, 2002, the Chapter 11 trustee and the company entered
into a three year telecommunication services agreement with AT&T Corporation
("AT&T") (the "Master Agreement") whereby the company will receive advantageous
pricing and other favorable terms. Under the terms of the Master Agreement, the
company committed to minimum annual telecommunication service purchases of
approximately $2.2 million (the "Minimum Annual Commitment") commencing on the
effective date of the Master Agreement. In the event that the company fails to
meet the Minimum Annual Commitment, AT&T will invoice the company for the
difference between the Minimum Annual Commitment and the actual services
purchased during such measurement period. Under certain circumstances, AT&T, at
its sole discretion, may reduce the Minimum Annual Commitment amount during any
given period. Moreover, if certain material conditions are satisfied, in the
third year of the agreement, the company may unilaterally terminate the contract
without penalty. In the event that the Master Agreement is terminated by the
company without cause or by AT&T for cause, the company will be required to pay
an amount equal to 35% of the remaining Minimum Annual Commitment for the period
in which the termination occurs and for all unexpired periods under the term of
the Master Agreement. Although no assurances can be given, management believes
that the company's telecommunication service requirements will be sufficient to
meet the Minimum Annual Commitment amounts through the term of the Master
Agreement. In the event that the Master Agreement is terminated and the 35%
surcharge is invoked or the Minimum Annual Commitment is not met in a given
period, the aforementioned AT&T supplemental charges could have a material
adverse effect on the company's liquidity and results of operations.
On April 27, 2003, the Chapter 11 trustee filed a motion in the Bankruptcy
Court requesting authorization to execute certain real property and construction
agreements that pertain to a relocation of the company's information
31
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
technology and CTI Network, Inc. operations from their current location in
Bannockburn, Illinois to the company's existing branch location in Mount
Prospect, Illinois. The company's existing lease at the Bannockburn facility
expires by its own terms on August 31, 2003 and, as a result of prior
consolidations, the Mount Prospect branch has excess capacity in its facility.
On May 13, 2003, the Bankruptcy Court approved the Chapter 11 trustee's motion
and, in connection therewith, management projects that approximately $1.0
million will be expended before the end of the third quarter to renovate the
Mount Prospect branch, build a new data center and move the company's personnel
and equipment to Mount Prospect.
Management was advised by its malpractice insurance carrier that the
carrier would no longer offer malpractice policies to its insureds. In
connection therewith, the company made a one-time premium payment of
approximately $3.4 million in May 2003 to purchase a tail insurance policy,
thereby providing the company with insurance protection for malpractice-related
claims that may have occurred during the term of the expired policy. Effective
April 16, 2003, the company obtained malpractice insurance from a new insurance
carrier and financed the related premiums through the 2003 Financing Agreement
that is further discussed in Note 2.
Guarantees. The primary obligor of the Series B Notes is CI; however, such
liabilities are guaranteed by CHC and substantially all of its subsidiaries (see
Note 7 for further details of the Series B Notes). The B. Braun Lease Agreement
was executed by a non-Debtor subsidiary but the capital lease obligation is
guaranteed by the Debtors. Additionally, CHC, CI and certain of their
subsidiaries are parties to various real property and personal property
operating lease agreements wherein guarantees have been provided to third party
lessors.
LITIGATION
Bankruptcy Cases. On August 8, 2000, the Debtors commenced the Bankruptcy
Cases. None of the company's other subsidiaries is a debtor in the Bankruptcy
Cases and, other than the Resource Network Subsidiaries, none of the company's
other subsidiaries is a debtor in any bankruptcy case. See Notes 2 and 3 for
further details.
Except as may otherwise be determined by the Bankruptcy Court, the
protection afforded by Chapter 11 of the Bankruptcy Code generally provides for
an automatic stay relative to any litigation proceedings pending against either
or both of the Debtors. All such claims will be addressed through the
proceedings applicable to the Bankruptcy Cases. The automatic stay would not,
however, apply to actions brought against the company's non-debtor subsidiaries.
The Official Committee of the Equity Security Holders of Coram Healthcare
Corporation. The Official Committee of the Equity Security Holders of Coram
Healthcare Corporation (the "Equity Committee") objected to the Restated Joint
Plan and the Second Joint Plan, contending, among other things, that the
valuations upon which the Restated Joint Plan and the Second Joint Plan were
premised and the underlying projections and assumptions were flawed. At various
times during 2001, the Debtors and the Equity Committee reviewed certain company
information regarding, among other things, the Equity Committee's contentions.
In connection therewith, on July 30, 2001, the Equity Committee filed a motion
to terminate the Debtors' exclusivity period and file its own plan of
reorganization; however, such motion was denied by the Bankruptcy Court.
Additionally, in February 2001, the Equity Committee filed a motion with
the Bankruptcy Court seeking permission to bring a derivative lawsuit directly
against the company's former Chief Executive Officer, a former member of the CHC
Board of Directors, Cerberus Partners, L.P., Cerberus Capital Management, L.P.,
Cerberus Associates, L.L.C. and Craig Court, Inc. (all the aforementioned
corporate entities being parties to certain of the company's debt agreements or
affiliates of such entities). The Equity Committee's proposed lawsuit alleged a
collusive plan whereby the named parties conspired to devalue the company for
the benefit of the company's creditors under the Securities Exchange Agreement.
On February 26, 2001, the Bankruptcy Court denied the Equity Committee's motion
without prejudice. In January 2002, the Equity Committee filed a substantially
similar motion with the Bankruptcy Court, which additionally named certain
current CHC directors, the company's other noteholders and Harrison J. Goldin
Associates, L.L.C. (sic) as possible defendants. On February 12, 2002, the
Bankruptcy Court again denied the renewed motion without prejudice.
32
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
After the Debtors' exclusivity period to file their own plan of
reorganization terminated, on December 19, 2002 the Equity Committee filed a
proposed plan of reorganization with respect to the Debtors (as amended on May
15, 2003, the "Amended Proposed Equity Committee Plan"). The Amended Proposed
Equity Committee Plan incorporates a variation of the aforementioned proposed
derivative lawsuit. See Note 2 for further discussion of the Amended Proposed
Equity Committee Plan and the related disclosure statement.
On May 2, 2003, the Chapter 11 trustee filed the Chapter 11 Trustee's
Proposed Plan of Reorganization and the Chapter 11 Trustee's Proposed Disclosure
Statement. The Chapter 11 Trustee's Proposed Plan of Reorganization includes the
settlement of certain claims against the company's noteholders and is subject
to, and contingent upon, (i) Bankruptcy Court approval and (ii) confirmation of
the Chapter 11 Trustee's Proposed Plan of Reorganization. Management cannot
predict whether or not the Chapter 11 Trustee's Proposed Plan of Reorganization
will be confirmed, the ultimate outcome of the Amended Proposed Equity Committee
Plan or the Chapter 11 Trustee's Proposed Plan of Reorganization, or whether
future objections of any party will be forthcoming relative to such proposed
plans.
Resource Network Subsidiaries' Bankruptcy. On August 19, 1999, a small
group of parties with claims against the Resource Network Subsidiaries filed an
involuntary petition pursuant to Section 303 of Chapter 11 of the Bankruptcy
Code against Coram Resource Network, Inc. in the Bankruptcy Court. On November
12, 1999, the Resource Network Subsidiaries filed voluntary petitions under
Chapter 11 of the Bankruptcy Code, Case No.s 99-2888 (MFW) and 99-2889 (MFW).
The two cases were consolidated for administrative purposes and are now pending
under the docket of In re Coram Resource Network Inc. and Coram Independent
Practice Association, Inc., Case No. 99-2889 (MFW). On October 21, 2002, the
Official Committee of Unsecured Creditors of Coram Resource Network, Inc. and
Coram Independent Practice Association, Inc. (the "R-Net Creditors' Committee")
filed a proposed Liquidating Chapter 11 Plan. A complete description of such
plan is set forth in the disclosure statement filed contemporaneously therewith,
which is available on the docket of the Resource Network Subsidiaries'
bankruptcy cases at docket numbers 1003 and 1004. The Chapter 11 trustee has
objected to the disclosure statement and a hearing thereon is currently
scheduled for May 30, 2003.
On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Bankruptcy Cases seeking, among other things, to have the Resource Network
Subsidiaries' bankruptcy proceedings substantively consolidated with the
Bankruptcy Cases. If this motion had been granted, the bankruptcy proceedings
involving the Resource Network Subsidiaries and the Debtors would have been
combined such that the assets and liabilities of the Resource Network
Subsidiaries would have been joined with the assets and liabilities of the
Debtors, the liabilities of the combined entity would have been satisfied from
the combined assets and all intercompany claims would have been eliminated.
Furthermore, the creditors of both proceedings would have voted on any
reorganization plan for the combined entities. The Resource Network Subsidiaries
and the Debtors engaged in discovery related to this substantive consolidation
motion and then reached a settlement agreement in November 2000. The settlement
agreement was approved by the Bankruptcy Court in December 2000 and, in
connection therewith, the Debtors made a payment of $0.5 million to the Resource
Network Subsidiaries' estate in January 2001 and the substantive consolidation
motion was withdrawn with prejudice.
Notwithstanding the withdrawal of the substantive consolidation motion, the
Resource Network Subsidiaries still maintain claims against each of the Debtors'
estates and the company maintains claims against the Resource Network
Subsidiaries' estate. Additionally, the R-Net Creditors' Committee filed
objections to confirmation of the Second Joint Plan, as well as, a motion to
lift the automatic stay in the Debtors' bankruptcy proceedings to pursue its
claims against the Debtors. On June 6, 2002, the Bankruptcy Court granted the
motion of the R-Net Creditors' Committee and lifted the automatic stay in the
Bankruptcy Cases, thereby allowing the R-Net Creditors' Committee to pursue its
claims against the Debtors.
In November 2001, the R-Net Creditors' Committee filed a complaint in the
Bankruptcy Court, subsequently amended twice, both on its own behalf and as
assignee for causes of action that may belong to the Resource Network
Subsidiaries, which named as defendants the Debtors, several non-debtor
subsidiaries, several current and former directors, current executive officers
of CHC and several other current and former employees of the company. This
complaint, as amended, also named as defendants Cerberus Partners, L.P., Goldman
Sachs Credit Partners L.P.,
33
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
Foothill Capital Corporation and Foothill Income Trust, L.P. (parties to certain
of the company's debt agreements or affiliates of such entities). The complaint
alleges that the defendants violated various state and federal laws in
connection with alleged wrongdoings related to the operation and corporate
structure of the Resource Network Subsidiaries, including, among other
allegations, breach of fiduciary duty, conversion of assets and preferential
payments to the detriment of the Resource Network Subsidiaries' estates,
misrepresentation and fraud, conspiracy, fraudulent concealment and a pattern of
racketeering activity. The complaint seeks damages in the amount of
approximately $56 million and additional monetary and non-monetary damages,
including the disallowance of the Debtors' claims against the Resource Network
Subsidiaries, punitive damages and attorneys' fees. The Debtors objected to the
complaint in the Bankruptcy Court because management believed that the complaint
constituted an attempt to circumvent the automatic stay protecting the Debtors'
estates; however, the Debtors' non-debtor subsidiaries have no such protection
and, accordingly, they are vigorously contesting the allegations.
On June 17, 2002, the Chapter 11 trustee agreed to withdraw the Debtors'
objections to the motion of the R-Net Creditors' Committee for leave of court to
file their second amended complaint. On July 25, 2002, by stipulation between
the Chapter 11 trustee and the R-Net Creditors' Committee, the Bankruptcy Court
authorized the R-Net Creditors' Committee to file its second amended complaint.
The parties to (i) the second amended complaint, (ii) the Debtors' motion for an
order expunging the proofs of claims filed by the Resource Network Subsidiaries
and (iii) the Resource Network Subsidiaries' objections to the Debtors' proofs
of claims are proceeding with discovery under a case management order. On
January 10, 2003, the United States District Court for the District of Delaware
(the "District Court") granted motions by some, but not all, of the defendants
for that court to withdraw the adversary proceedings from the jurisdiction of
the Bankruptcy Court. Now pending before the District Court are motions by
various defendants to dismiss some or all counts of the complaint. The company
notified its insurance carrier of the second amended complaint and intends to
avail itself of any appropriate insurance coverage for its directors and
officers, who are also vigorously contesting the allegations.
On May 2, 2003, the Chapter 11 trustee filed the Chapter 11 Trustee's
Proposed Plan of Reorganization and the Chapter 11 Trustee's Proposed Disclosure
Statement. The Chapter 11 Trustee's Proposed Plan of Reorganization provides for
a settlement of the aforementioned Resource Network Subsidiaries' matters
whereby the company will pay to the Resource Network Subsidiaries approximately
$7.95 million and the company will maintain a $1,000 claim in the Resource
Network Subsidiaries' bankruptcy proceedings. This settlement is subject to, and
contingent upon, (i) Bankruptcy Court approval and (ii) confirmation of the
Chapter 11 Trustee's Proposed Plan of Reorganization. Management cannot predict
the outcome of the confirmation of the Chapter 11 Trustee's Proposed Plan of
Reorganization nor can management predict the amount of recoveries, if any, that
the company may ultimately receive from its insurance carrier.
TBOB Enterprises, Inc. On July 17, 2000, TBOB Enterprises, Inc. ("TBOB")
filed an arbitration demand against CHC (TBOB Enterprises, Inc. f/k/a Medical
Management Services of Omaha, Inc. against Coram Healthcare Corporation, in the
American Arbitration Association office in Dallas, Texas). In its demand, TBOB
claims that the company breached its obligations under an agreement entered into
by the parties in 1996 relating to a prior earn-out obligation of the company
that originated from the acquisition of the claimant's prescription services
business in 1993 by a wholly-owned subsidiary of the company. The company
operated the business under the name Coram Prescription Services ("CPS") and the
assets of the CPS business were sold on July 31, 2000. TBOB alleges, among other
things, that the company impaired the earn-out payments due TBOB by improperly
charging certain expenses to the CPS business and failing to fulfill the
company's commitments to enhance the value of CPS by marketing its services. The
TBOB demand alleges damages of more than $0.9 million, in addition to the final
scheduled earn-out payment of approximately $1.3 million that was due in March
2001 (the latter amount is recorded in the condensed consolidated financial
statements). Furthermore, pursuant to the underlying agreement with TBOB,
additional liabilities may result from post-petition interest on the final
scheduled earn-out payment. In accordance with SOP 90-7, such interest estimated
to aggregate approximately $0.5 million at March 31, 2003 using the contractual
interest rate of 18%, has not been recorded in the company's condensed
consolidated financial statements because TBOB's claim for interest may
ultimately not be sustainable. TBOB reiterated its monetary demand through a
proof of claim filed against CHC's estate for the aggregate amount of
approximately $2.2 million (the scheduled earn-out payment plus the alleged
damages). Any action relating to the final $1.3 million earn-out payment
scheduled for March 2001, the alleged damages of $0.9 million and any interest
accrued thereon have been
34
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
stayed by operation of Chapter 11 of the Bankruptcy Code. On July 5, 2001, the
company received a letter from TBOB's legal counsel requesting that the
aforementioned arbitration remain in abeyance pending resolution of the
Bankruptcy Cases. Management does not believe that final resolution of this
matter will have a material adverse impact on the company's financial position
or results of operations.
Internal Revenue Service ("IRS") Proposed Settlement. The company has
reached a proposed settlement with the IRS regarding a notice of deficiency
previously issued by such taxing authority. Moreover, management and the IRS
have agreed in principle to a deferred payment plan. If ultimately approved by
the Chapter 11 trustee and the Bankruptcy Court, the proposed settlement and the
deferred payment plan would collectively result in (i) a federal tax liability
of approximately $9.9 million, (ii) interest of approximately $9.1 million at
March 31, 2003 and (iii) penalties, if applicable, to be determined by the IRS
in accordance with certain statutory guidelines. The condensed consolidated
financial statements at March 31, 2003 include approximately $19.0 million in
reserves for the proposed settlement with the IRS. See Note 8 for further
details.
Regulatory Audits and Reviews. State Medicaid agencies and their fiscal
intermediaries periodically conduct payment reviews or audits of claims for
services provided to Medicaid beneficiaries. One such audit by the Kansas
Medicaid agency (the "Kansas Agency") identified that certain of the company's
claims were subject to recoupment; however, the Kansas Agency will allow the
company to resubmit certain claims identified during the audit. As a result of
the audit findings, the company established an internal review, refund and
rebilling initiative for certain claims related to one of its billing centers
and, in connection therewith, further possible errors in its Medicaid billing
practices were identified. Management believes the Kansas Agency audit and the
other identified erroneous billing matters are not pervasive throughout the
company's billing centers.
In April 2003, the company was served with a subpoena from a Statewide
Grand Jury pertaining to claims paid to the company for two Rhode Island
Medicaid beneficiaries. The precise nature and extent of the investigation by
Rhode Island governmental authorities and the specific matters before the
Statewide Grand Jury are currently unknown.
Although management believes that the company's billing practices are
fundamentally sound and the company is in substantial compliance with state
Medicaid billing requirements, the adverse financial impact of Medicaid-related
regulatory matters, if any, is currently unknown. In the event that the two
aforementioned Medicaid matters or similar reviews/audits by other agencies
result in findings, the company could face civil, criminal and/or administrative
claims for refunds, sanctions and/or penalties in amounts that, in the
aggregate, could be material to the financial condition, results of operations
and liquidity of the company.
General. Management intends to vigorously defend the company and its
subsidiaries in the matters described above. Nevertheless, due to the
uncertainties inherent in litigation, including possible indemnification of
other parties, the ultimate disposition of such matters cannot presently be
determined. Adverse outcomes in some or all of the proceedings could have a
material adverse effect on the financial position, results of operations and
liquidity of the company.
The company and its subsidiaries are also parties to various other actions
arising out of the normal course of their businesses, including employee claims,
reviews of cost reports and billings submitted to Medicare and Medicaid, as well
as, examinations by regulators such as Medicare and Medicaid fiscal
intermediaries and the Centers for Medicare & Medicaid Services ("CMS").
Management believes that the ultimate resolution of such actions will not have a
material adverse effect on the financial position, results of operations or
liquidity of the company.
PricewaterhouseCoopers LLP. On July 7, 1997, the company filed suit against
Price Waterhouse LLP (now known as PricewaterhouseCoopers LLP) in the Superior
Court of San Francisco, California, seeking damages in excess of $165.0 million.
As part of the settlement that resolved a case filed by the company against
Caremark International, Inc. and Caremark, Inc. (collectively "Caremark"),
Caremark assigned and transferred to the company all of Caremark's claims and
causes of action against Caremark's independent auditors, PricewaterhouseCoopers
LLP, related to the lawsuit filed by the company against Caremark. This
assignment of claims includes claims for damages sustained by Caremark in
defending and settling its lawsuit with the company. The case was dismissed from
the California court because of inconvenience to witnesses with a right to
re-file in Illinois. The company re-filed the lawsuit in state court in Illinois
and PricewaterhouseCoopers LLP filed a motion to dismiss the company's lawsuit
on several grounds, but its motion was denied on March 15, 1999.
PricewaterhouseCoopers LLP filed an additional motion to dismiss the lawsuit in
May 1999 and that motion was dismissed on January 28, 2000. On April 19, 2001,
PricewaterhouseCoopers LLP filed a motion for partial summary judgment with
regard to a portion of Caremark's claims; however, this motion was subsequently
denied. The lawsuit is currently in the discovery stage and a trial date is
being scheduled. Management cannot predict the outcome of this litigation or
whether there will be any recovery from PricewaterhouseCoopers LLP or its
insurance carriers.
Government Regulation. Under the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly referred
to as "Stark II"), it is unlawful for a physician to refer patients for certain
designated health services reimbursable under the Medicare or Medicaid programs
to an entity with which the physician and/or the physician's family, as defined
under Stark II, has a financial relationship, unless the financial relationship
fits within an exception enumerated in Stark II or regulations promulgated
thereunder. A "financial relationship" under Stark II is broadly defined as an
ownership or investment interest in, or any type of compensation arrangement in
which remuneration flows between the physician and the provider. The company has
financial relationships with physicians and physician owned entities in the form
of medical director agreements and service agreements pursuant to which the
company provides pharmacy products. In each case, the relationship has been
structured, based upon advice of legal counsel, using an arrangement management
believes to be consistent with the applicable exceptions set forth in Stark II.
In addition, the company is aware of certain referring physicians
35
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
(or their immediate family members) that have had financial interests in the
company through ownership of shares of CHC's common stock. The Stark II law
includes an exception for the ownership of publicly traded stock in companies
with equity above certain levels. This exception of Stark II requires the
issuing company to have stockholders' equity of at least $75 million either as
of the end of its most recent fiscal year or on average over the last three
fiscal years. Due principally to the extraordinary gains on troubled debt
restructurings (see Note 7 for further details), at December 31, 2002 the
company's stockholders' equity was above the required level. As a result, the
company is compliant with the Stark II public company exemption through the year
ending December 31, 2003.
Management has been advised by legal counsel that a company whose stock is
publicly traded has, as a practical matter, no reliable way to implement and
maintain an effective compliance plan for addressing the requirements of Stark
II other than complying with the public company exception. Accordingly, if the
company's common stock remains publicly traded and its stockholders' equity
falls below the required levels, the company would be forced to cease accepting
referrals of patients covered by Medicare or Medicaid programs or run a
significant risk of Stark II noncompliance. Because referrals of the company's
patients with such government-sponsored benefit programs comprised approximately
24% of the company's consolidated net revenue for the three months ended March
31, 2003 and 25% of the company's consolidated net revenue for the year ended
December 31, 2002, discontinuing the acceptance of such patients would have a
material adverse effect on the financial condition, results of operations and
cash flows of the company. Additionally, ceasing to accept such referrals could
materially adversely affect the company's business reputation in the market as
it may cause the company to be a less attractive provider to which a physician
could refer his or her patients.
36
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
11. DEBTOR/NON-DEBTOR CONDENSED FINANCIAL STATEMENTS
The following Condensed Consolidating Balance Sheets as of March 31, 2003
and December 31, 2002 and the related Condensed Consolidating Statements of
Operations and Cash Flows for the three months ended March 31, 2003 and 2002 are
presented in accordance with SOP 90-7.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2003
(RESTATED - SEE NOTE 1)
(UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 32,968 $ 868 $ -- $ 33,836
Cash limited as to use ........................................ 175 84 -- 259
Accounts receivable, net ...................................... -- 104,291 -- 104,291
Inventories ................................................... -- 15,326 -- 15,326
Deferred income taxes, net .................................... -- 117 -- 117
Other current assets .......................................... 5,219 302 -- 5,521
--------- ----------- ------------ ------------
Total current assets ........................................ 38,362 120,988 -- 159,350
Property and equipment, net ...................................... 2,715 6,800 -- 9,515
Deferred income taxes, net ....................................... -- 493 -- 493
Other deferred costs and intangible assets, net .................. 155 4,987 -- 5,142
Goodwill, net .................................................... -- 57,186 -- 57,186
Investments in and advances to wholly-owned subsidiaries, net .... 118,461 -- (118,461) --
Other assets ..................................................... 3,451 1,795 -- 5,246
--------- ----------- ------------ ------------
Total assets ................................................ $ 163,144 $ 192,249 $ (118,461) $ 236,932
========= =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable .............................................. $ 16,010 $ 15,019 $ -- $ 31,029
Accrued compensation and related liabilities .................. 20,370 4,241 -- 24,611
Current maturities of long-term debt .......................... 51 21 -- 72
Income taxes payable .......................................... 31 3,300 -- 3,331
Deferred income taxes ......................................... -- 610 -- 610
Accrued merger and restructuring costs ........................ 136 19 -- 155
Accrued reorganization costs .................................. 7,168 -- -- 7,168
Other accrued liabilities ..................................... 7,308 5,052 (760) 11,600
--------- ----------- ------------ ------------
Total current liabilities not subject to compromise .............. 51,074 28,262 (760) 78,576
Total current liabilities subject to compromise .................. 15,630 -- -- 15,630
--------- ----------- ------------ ------------
Total current liabilities ........................................ 66,704 28,262 (760) 94,206
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities ....................... 50 27 -- 77
Minority interests in consolidated joint ventures and
preferred stock issued by a subsidiary ...................... 5,538 643 -- 6,181
Income taxes payable .......................................... -- 16,422 -- 16,422
Other liabilities ............................................. 1,664 1,901 -- 3,565
Net liabilities for liquidation of discontinued operations .... -- 26,533 760 27,293
--------- ----------- ------------ ------------
Total liabilities ........................................... 73,956 73,788 -- 147,744
Net assets, including amounts due to Debtors ..................... -- 118,461 (118,461) --
Total stockholders' equity ....................................... 89,188 -- -- 89,188
--------- ----------- ------------ ------------
Total liabilities and stockholders' equity .................... $ 163,144 $ 192,249 $ (118,461) $ 236,932
========= =========== ============ ============
37
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
(RESTATED - SEE NOTE 1)
(IN THOUSANDS)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 29,675 $ 916 $ -- $ 30,591
Cash limited as to use ........................................ 133 84 -- 217
Accounts receivable, net ...................................... -- 103,498 -- 103,498
Inventories ................................................... -- 13,160 -- 13,160
Deferred income taxes, net .................................... -- 107 -- 107
Other current assets .......................................... 5,004 654 -- 5,658
--------- ----------- ------------ ------------
Total current assets ........................................ 34,812 118,419 -- 153,231
Property and equipment, net ...................................... 3,402 7,037 -- 10,439
Deferred income taxes, net ....................................... -- 449 -- 449
Other deferred costs and intangible assets, net .................. 178 5,092 -- 5,270
Goodwill, net .................................................... -- 57,186 -- 57,186
Investments in and advances to wholly-owned subsidiaries, net .... 118,924 -- (118,924) --
Other assets ..................................................... 3,274 1,790 -- 5,064
--------- ----------- ------------ ------------
Total assets ................................................ $ 160,590 $ 189,973 $ (118,924) $ 231,639
========= =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable .............................................. $ 15,031 $ 12,955 $ -- $ 27,986
Accrued compensation and related liabilities .................. 19,861 4,021 -- 23,882
Current maturities of long-term debt .......................... 51 10 -- 61
Income taxes payable .......................................... 30 3,250 -- 3,280
Deferred income taxes ......................................... -- 556 -- 556
Accrued merger and restructuring costs ........................ 171 19 -- 190
Accrued reorganization costs .................................. 7,610 -- -- 7,610
Other accrued liabilities ..................................... 4,230 4,991 (742) 8,479
--------- ----------- ------------ ------------
Total current liabilities not subject to compromise .............. 46,984 25,802 (742) 72,044
Total current liabilities subject to compromise .................. 15,630 -- -- 15,630
--------- ----------- ------------ ------------
Total current liabilities ........................................ 62,614 25,802 (742) 87,674
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities ....................... 67 6 -- 73
Minority interests in consolidated joint ventures and
preferred stock issued by a subsidiary ...................... 5,538 677 -- 6,215
Income taxes payable .......................................... -- 16,130 -- 16,130
Other liabilities ............................................. 1,664 1,901 -- 3,565
Net liabilities for liquidation of discontinued operations .... -- 26,533 742 27,275
--------- ----------- ------------ ------------
Total liabilities ........................................... 69,883 71,049 -- 140,932
Net assets, including amounts due to Debtors ..................... -- 118,924 (118,924) --
Total stockholders' equity ....................................... 90,707 -- -- 90,707
--------- ----------- ------------ ------------
Total liabilities and stockholders' equity .................... $ 160,590 $ 189,973 $ (118,924) $ 231,639
========= =========== ============ ============
38
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
Net revenue ...................................................... $ -- $ 113,096 $ -- $ 113,096
Cost of service .................................................. -- 86,034 -- 86,034
--------- ----------- ------------ ------------
Gross profit ..................................................... -- 27,062 -- 27,062
Operating expenses:
Selling, general and administrative expenses .................. 5,018 17,989 -- 23,007
Provision for estimated uncollectible accounts ................ -- 3,517 -- 3,517
--------- ----------- ------------ ------------
Total operating expenses .................................... 5,018 21,506 -- 26,524
--------- ----------- ------------ ------------
Operating income (loss) from continuing operations ............... (5,018) 5,556 -- 538
Other income (expenses):
Interest income ............................................... 32 47 -- 79
Interest expense .............................................. (2) (340) -- (342)
Equity in net income of wholly-owned subsidiaries ............. 5,320 -- (5,320) --
Equity in net income of unconsolidated joint ventures ......... -- 234 -- 234
Other expense, net ............................................ -- (1) -- (1)
--------- ----------- ------------ ------------
Income from continuing operations before reorganization
expenses, income taxes and minority interests ................. 332 5,496 (5,320) 508
Reorganization expenses, net ..................................... 1,762 -- -- 1,762
--------- ----------- ------------ ------------
Income (loss) from continuing operations before income taxes
and minority interests ........................................ (1,430) 5,496 (5,320) (1,254)
Income tax expense ............................................... -- 35 -- 35
Minority interests in net income of consolidated joint ventures .. -- 133 -- 133
--------- ----------- ------------ ------------
Income (loss) from continuing operations ......................... (1,430) 5,328 (5,320) (1,422)
Loss from disposal of discontinued operations .................... (89) (8) -- (97)
--------- ----------- ------------ ------------
Net income (loss) ................................................ $ (1,519) $ 5,320 $ (5,320) $ (1,519)
========= =========== ============ ============
39
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
(RESTATED (1) AND UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ------------ ------------
Net revenue ...................................................... $ -- $ 101,982 $ -- $ 101,982
Cost of service .................................................. -- 74,301 -- 74,301
--------- ----------- ------------ ------------
Gross profit ..................................................... -- 27,681 -- 27,681
Operating expenses:
Selling, general and administrative expenses .................. 4,238 16,782 -- 21,020
Provision for estimated uncollectible accounts ................ -- 3,118 -- 3,118
Restructuring cost recoveries ................................. -- (13) -- (13)
--------- ----------- ------------ ------------
Total operating expenses .................................... 4,238 19,887 -- 24,125
--------- ----------- ------------ ------------
Operating income (loss) from continuing operations ............... (4,238) 7,794 -- 3,556
Other income (expenses):
Interest income ............................................... 62 23 -- 85
Interest expense .............................................. (8) (357) -- (365)
Gain on sale of business ...................................... -- 46 -- 46
Equity in net income (loss) of wholly-owned subsidiaries ...... (64,258) -- 64,258 --
Equity in net income of unconsolidated joint ventures ......... -- 387 -- 387
Other income, net ............................................. -- 12 -- 12
--------- ----------- ------------ ------------
Income (loss) from continuing operations before reorganization
expenses, income taxes, minority interests and the
cumulative effect of a change in accounting principle ......... (68,442) 7,905 64,258 3,721
Reorganization expenses, net ..................................... 2,010 -- -- 2,010
--------- ----------- ------------ ------------
Income (loss) from continuing operations before income taxes,
minority interests and the cumulative effect of a change in
accounting principle .......................................... (70,452) 7,905 64,258 1,711
Income tax expense ............................................... -- 38 -- 38
Minority interests in net income of consolidated joint ventures .. -- 223 -- 223
--------- ----------- ------------ ------------
Income (loss) from continuing operations before the cumulative
effect of a change in accounting principle .................... (70,452) 7,644 64,258 1,450
Loss from disposal of discontinued operations .................... -- -- -- --
--------- ----------- ------------ ------------
Income (loss) before the cumulative effect of a change in
accounting principle .......................................... (70,452) 7,644 64,258 1,450
Cumulative effect of a change in accounting principle ............ -- (71,902) -- (71,902)
--------- ----------- ------------ ------------
Net loss ......................................................... $ (70,452) $ (64,258) $ 64,258 $ (70,452)
========= =========== ============ ============
(1) The company recognized a transitional goodwill impairment charge of
approximately $71.9 million in accordance with the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("Statement 142"), in December 2002; however, such charge was retroactive to
January 1, 2002. In accordance with the provisions of Statement 142, the
transitional goodwill impairment charge was recorded as the cumulative effect of
a change in accounting principle. See Note 6 for further details.
40
CORAM HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS CONSOLIDATED
--------- ----------- ------------
Net cash provided by continuing operations
before reorganization items ................................ $ (3,161) $ 9,587 $ 6,426
Net cash used by reorganization items ......................... (2,204) -- (2,204)
--------- ----------- ------------
Net cash provided by (used in) continuing operations
(net of reorganization items) .............................. (5,365) 9,587 4,222
--------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment ........................ (54) (602) (656)
Deposit to purchase property and equipment ................. (337) -- (337)
Cash advances from wholly-owned subsidiaries ............... 8,812 (8,812) --
--------- ----------- ------------
Net cash provided by (used in) investing activities ........... 8,421 (9,414) (993)
--------- ----------- ------------
Cash flows from financing activities:
Principal payments of debt obligations ..................... (17) (18) (35)
Refunds of deposits to collateralize letters of credit ..... 302 -- 302
Cash distributions to minority interests ................... -- (172) (172)
--------- ----------- ------------
Net cash provided by (used in) financing activities ........... 285 (190) 95
--------- ----------- ------------
Net increase (decrease) in cash from continuing operations .... $ 3,341 $ (17) $ 3,324
========= =========== ============
Net cash used in discontinued operations ...................... $ (48) $ (31) $ (79)
========= =========== ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS)
DEBTORS NON-DEBTORS CONSOLIDATED
--------- ----------- ------------
Net cash provided by (used in) continuing operations
before reorganization items ................................ $ (5,047) $ 3,839 $ (1,208)
Net cash used by reorganization items ......................... (2,380) -- (2,380)
--------- ----------- ------------
Net cash provided by (used in) continuing operations
(net of reorganization items) .............................. (7,427) 3,839 (3,588)
--------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment ........................ (749) (376) (1,125)
Cash advances from wholly-owned subsidiaries ............... 3,199 (3,199) --
--------- ----------- ------------
Net cash provided by (used in) investing activities ........... 2,450 (3,575) (1,125)
--------- ----------- ------------
Cash flows from financing activities:
Principal payments of debt obligations ..................... (17) (2) (19)
Refunds of deposits to collateralize letters of credit ..... 200 -- 200
Cash distributions to minority interests ................... -- (98) (98)
--------- ----------- ------------
Net cash provided by (used in) financing activities ........... 183 (100) 83
--------- ----------- ------------
Net increase (decrease) in cash from continuing operations .... $ (4,794) $ 164 $ (4,630)
--------- ----------- ------------
Net cash used in discontinued operations ...................... $ -- $ -- $ --
========= =========== ============
41
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form l0-Q/A Amendment No. 1 contains certain
"forward-looking" statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995) and information relating to Coram Healthcare
Corporation ("CHC") and its subsidiaries (collectively "Coram" or the "company")
that is based on the beliefs of Coram management, as well as, assumptions made
by, and information currently available to, management. The company's actual
results may vary materially from the forward-looking statements made in this
report due to important factors such as the outcome of the bankruptcy cases of
CHC and its first tier wholly-owned subsidiary, Coram, Inc. ("CI") (CHC and CI
are hereinafter collectively referred to as the "Debtors") and certain other
factors, which are described in greater detail in Coram's Annual Report on Form
10-K/A Amendment No. 2 (the "Form 10-K/A") for the year ended December 31, 2002
under Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Risk Factors." When used in this
report, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements reflect the current views of management with respect
to future events based on currently available information and are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Management does not undertake any obligation
to publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The company's condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Debtors' bankruptcy filings and
circumstances relating thereto, including the company's leveraged financial
structure and cumulative losses from operations, such realization of assets and
liquidation of liabilities are subject to significant uncertainty. During the
pendency of the Debtors' Chapter 11 bankruptcy cases, the company may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the condensed consolidated financial statements.
Furthermore, a plan or plans of reorganization filed in the Chapter 11
bankruptcy cases could materially change the amounts reported in the condensed
consolidated financial statements, which do not give effect to any adjustments
of the carrying value of assets or liabilities that might be necessary as a
consequence of a plan or plans of reorganization (see Note 2 to the company's
condensed consolidated financial statements for further details). The company's
ability to continue as a going concern is dependent upon, among other things,
confirmation of a plan or plans of reorganization, future profitable operations,
the ability to comply with the terms of the company's financing agreements, the
ability to obtain necessary financing to fund a proposed settlement with the
Internal Revenue Service, the ability to remain in compliance with the physician
ownership and referral provisions of the Omnibus Budget Reconciliation Act of
1993 (commonly known as "Stark II") and the ability to generate sufficient cash
from operations and/or financing arrangements to meet its obligations and
capital asset expenditure requirements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
BACKGROUND AND CERTAIN IMPORTANT BANKRUPTCY COURT ACTIVITIES
During 2003 and 2002, Coram was engaged primarily in the business of
furnishing alternate site (outside the hospital) infusion therapy and related
services, including non-intravenous home health products such as respiratory
therapy services and durable medical equipment. Other services offered by Coram
include centralized management, administration and clinical support for clinical
research trials, as well as, outsourced hospital compounding services. Coram
delivers its alternate site infusion therapy services through 77 branch offices
located in 40 states and Ontario, Canada.
42
(I) BACKGROUND AND CERTAIN IMPORTANT BANKRUPTCY COURT ACTIVITY
The Debtors filed voluntary petitions under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") on August 8, 2000 in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") In
re Coram Healthcare Corporation, Case No. 00-3299 and In re Coram, Inc., Case
No. 00-3300 (collectively the "Bankruptcy Cases"). The Bankruptcy Cases have
been consolidated for administrative purposes only by the Bankruptcy Court and
are being jointly administered under the docket of In re Coram Healthcare
Corporation, Case No. 00-3299 (MFW). Commencing on August 8, 2000, the Debtors
operated as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court; however, a Chapter 11 trustee was appointed by the Bankruptcy Court on
March 7, 2002. With the appointment of a Chapter 11 trustee, the Debtors are no
longer debtors-in-possession under Chapter 11 of the Bankruptcy Code. None of
the company's other subsidiaries is a debtor in the Bankruptcy Cases, and, other
than Coram Resource Network, Inc. and Coram Independent Practice Association,
Inc. (collectively the "Resource Network Subsidiaries" or "R-Net"), none of the
company's other subsidiaries is a debtor in any bankruptcy case. See Notes 2 and
3 to the company's condensed consolidated financial statements for further
details.
On August 19, 1999, an involuntary bankruptcy petition was filed against
Coram Resource Network, Inc. and, on November 12, 1999, the Resource Network
Subsidiaries filed voluntary bankruptcy petitions under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court. On or about May 31, 2000, the Resource
Network Subsidiaries filed a liquidating Chapter 11 plan and disclosure
statement. Subsequently, on October 21, 2002 the Official Committee of Unsecured
Creditors of Coram Resource Network, Inc. and Coram Independent Practice
Association, Inc. filed a competing proposed Liquidating Chapter 11 Plan. A
complete description of such plan is set forth in the disclosure statement filed
contemporaneously therewith, which is available on the docket of the Resource
Network Subsidiaries' bankruptcy cases at docket numbers 1003 and 1004. The
Chapter 11 trustee has objected to the disclosure statement and a hearing
thereon is scheduled for May 30, 2003. The agreements that R-Net had for the
provision of ancillary network management services have been terminated and
R-Net is no longer providing any ancillary network management services.
Additionally, all of the R-Net locations have been closed in connection with its
proposed liquidation. Coram employees who were members of the Resource Network
Subsidiaries' Board of Directors resigned and only the Chief Restructuring
Officer appointed by the Bankruptcy Court remains on the R-Net Board of
Directors to manage the liquidation of the R-Net business.
(II) THE DEBTORS' FIRST JOINT PLAN OF REORGANIZATION AND RELATED ACTIVITIES
On the same day the Debtors commenced the Bankruptcy Cases, the Debtors also
filed their joint plan of reorganization (the "Joint Plan") and their joint
disclosure statement with the Bankruptcy Court. The Joint Plan was subsequently
amended and restated (the "Restated Joint Plan") and, on or about October 10,
2000, the Restated Joint Plan and the First Amended Disclosure Statement with
respect to the Restated Joint Plan were authorized for distribution by the
Bankruptcy Court. Among other things, the Restated Joint Plan provided for: (i)
a conversion of all of the CI obligations represented by the company's Series A
Senior Subordinated Unsecured Notes (the "Series A Notes") and the Series B
Senior Subordinated Unsecured Convertible Notes (the "Series B Notes") into (a)
a four year, interest only note in the principal amount of $180 million that
would bear interest at the rate of 9% per annum and (b) all of the equity in the
reorganized CI; (ii) the payment in full of all secured, priority and general
unsecured debts of CI; (iii) the payment in full of all secured and priority
claims against CHC; (iv) the impairment of certain general unsecured debts of
CHC, including, among others, CHC's obligations under the Series A Notes and the
Series B Notes; and (v) the complete elimination of CHC's equity interests.
Furthermore, pursuant to the Restated Joint Plan, CHC would be dissolved as soon
as practicable after the effective date of the Restated Joint Plan and the
common stock of CHC would no longer be publicly traded. Therefore, under the
Restated Joint Plan, as filed, the existing stockholders of CHC would have
received no value for their shares and all of the outstanding equity of CI, as
the surviving entity, would be owned by the holders of the Series A Notes and
the Series B Notes. Representatives of the company negotiated the principal
aspects of the Restated Joint Plan with representatives of the holders of the
Series A Notes and the Series B Notes and the parties to the Senior Credit
Facility prior to the filing of such Restated Joint Plan.
On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that were entitled to a distribution under the Restated
43
Joint Plan. The Debtors did not send ballots to the holders of unimpaired
classes, who were deemed to accept the Restated Joint Plan, and classes that
were not receiving any distribution, who were deemed to reject the Restated
Joint Plan. Eligible voters responded in favor of the Restated Joint Plan. At a
confirmation hearing on December 21, 2000, the Bankruptcy Court denied
confirmation of the Restated Joint Plan finding, inter alia, that the incomplete
disclosure of the relationship between the Debtors' former Chief Executive
Officer and Cerberus Capital Management, L.P., an affiliate of one of the
Debtors' largest creditors, precluded the Bankruptcy Court from finding that the
Restated Joint Plan was proposed in good faith, a statutory requirement for plan
confirmation.
In order for the company to remain compliant with the requirements of Stark
II, on December 29, 2000, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $97.7 million of the Series A Notes and approximately
$11.6 million of contractual unpaid interest on the Series A Notes and the
Series B Notes for 905 shares of Coram, Inc. Series A Cumulative Preferred
Stock, $0.001 par value per share (see Notes 7 and 9 to the company's condensed
consolidated financial statements for further details). Hereafter, the Coram,
Inc. Series A Cumulative Preferred Stock is referred to as the "CI Series A
Preferred Stock." The exchange transaction generated an extraordinary gain on
troubled debt restructuring of approximately $107.8 million, net of tax, in
2000. At December 31, 2000, the company's stockholders' equity exceeded the
minimum requirement necessary to comply with the Stark II public company
exemption for the year ended December 31, 2001. See Note 10 to the company's
condensed consolidated financial statements for further discussion regarding
Stark II.
(III) THE SECOND JOINT PLAN OF REORGANIZATION AND RELATED ACTIVITIES
On or about February 6, 2001, the Official Committee of the Equity Security
Holders of Coram Healthcare Corporation (the "Equity Committee") filed a motion
with the Bankruptcy Court seeking permission to bring a derivative lawsuit
directly against the company's former Chief Executive Officer, a former member
of the CHC Board of Directors, Cerberus Partners, L.P., Cerberus Capital
Management, L.P., Cerberus Associates, L.L.C. and Craig Court, Inc. (all the
aforementioned corporate entities being parties to certain of the company's debt
agreements or affiliates of such entities). On February 26, 2001, the Bankruptcy
Court denied such motion without prejudice. On the same day, the Bankruptcy
Court approved the Debtors' motion to appoint Goldin Associates, L.L.C.
("Goldin") as independent restructuring advisor to the CHC Independent Committee
of the Board of Directors (the "Independent Committee"). Among other things, the
scope of Goldin's services included (i) assessing the appropriateness of the
Restated Joint Plan and reporting its findings to the Independent Committee and
advising the Independent Committee regarding an appropriate course of action
calculated to bring the Bankruptcy Cases to a fair and satisfactory conclusion,
(ii) preparing a written report as may be required by the Independent Committee
and/or the Bankruptcy Court and (iii) appearing before the Bankruptcy Court to
provide testimony as needed. Goldin was also appointed as a mediator among the
Debtors, the Equity Committee and other parties in interest.
On April 25, 2001 and July 11, 2001, the Bankruptcy Court extended the
period during which the Debtors had the exclusive right to file a plan of
reorganization to July 11, 2001 and August 1, 2001, respectively. On August 1,
2001, the Bankruptcy Court denied the Equity Committee's motion to terminate the
Debtors' exclusivity periods and file its own plan of reorganization. Moreover,
on August 2, 2001, the Bankruptcy Court extended the Debtors' exclusivity period
to solicit acceptances of any filed plan or plans to November 9, 2001 (the date
to solicit acceptances of the plan for CHC's equity holders was subsequently
extended to November 12, 2001). On or about November 7, 2001, the Debtors filed
a motion seeking to extend the periods to file a plan or plans of reorganization
and solicit acceptances thereof to December 31, 2001 and March 4, 2002,
respectively. The Bankruptcy Court extended exclusivity to January 2, 2002.
Thereafter, the Debtors' exclusivity period terminated.
44
Based upon Goldin's findings and recommendations, as set forth in the Report
of Independent Restructuring Advisor, Goldin Associates, L.L.C. (the "Goldin
Report"), on July 31, 2001 the Debtors filed with the Bankruptcy Court a Second
Joint Disclosure Statement, as amended (the "Second Disclosure Statement"), with
respect to their Second Joint Plan of Reorganization, as amended (the "Second
Joint Plan"). The Second Joint Plan, which was also filed on July 31, 2001,
provided for terms of reorganization similar to those described in the Restated
Joint Plan; however, utilizing Goldin's recommendations, as set forth in the
Goldin Report, the following substantive modifications were included in the
Second Joint Plan:
o the payment of up to $3.0 million to the holders of allowed CHC general
unsecured claims;
o the payment of up to $10.0 million to the holders of CHC equity
interests (contingent upon such holders voting in favor of the Second
Joint Plan);
o cancellation of the issued and outstanding CI Series A Preferred Stock,
and
o a $7.5 million reduction in certain performance bonuses payable to the
company's former Chief Executive Officer.
Under certain circumstances, as more fully disclosed in the Second
Disclosure Statement, the general unsecured claim holders could have been
entitled to receive a portion of the $10.0 million cash consideration allocated
to the holders of CHC equity interests.
The Second Joint Plan was subject to a vote by certain impaired creditors
and equity holders and confirmation by the Bankruptcy Court. On September 6,
2001 and September 10, 2001, hearings before the Bankruptcy Court considered the
adequacy of the Second Disclosure Statement. In connection therewith, the Equity
Committee, as well as the Official Committee of Unsecured Creditors in the Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc.
bankruptcy cases, filed objections. Notwithstanding the aforementioned
objections, the Second Disclosure Statement was approved by the Bankruptcy Court
for distribution to holders of certain claims in interests entitled to vote on
the Second Joint Plan. On or about September 21, 2001, the Debtors mailed
ballots to those parties entitled to vote on the Second Joint Plan.
The CHC equity holders voted against confirmation of the Second Joint Plan
and all other classes of claimholders voted in favor of the Second Joint Plan.
If certain conditions of Chapter 11 of the Bankruptcy Code are satisfied, the
Bankruptcy Court can confirm a plan of reorganization notwithstanding the
non-acceptance of the plan by an impaired class of creditors or equity holders.
However, on December 21, 2001, after several weeks of confirmation hearings, the
Bankruptcy Court issued an order denying confirmation of the Second Joint Plan
for the reasons set forth in an accompanying opinion. The Debtors appealed the
Bankruptcy Court's order denying confirmation of the Second Joint Plan; however,
such appeal was subsequently dismissed.
In order for the company to remain compliant with the requirements of Stark
II, on December 31, 2001, pursuant to an order of the Bankruptcy Court, CI
exchanged $21.0 million of the Series A Notes and approximately $1.9 million of
contractual unpaid interest on the Series A Notes for approximately 189.6 shares
of CI Series A Preferred Stock (see Notes 7 and 9 to the company's condensed
consolidated financial statements for further details). This transaction
generated an extraordinary gain on troubled debt restructuring of approximately
$20.7 million in 2001. At December 31, 2001, the company's stockholders' equity
exceeded the minimum requirement necessary to comply with the Stark II public
company exemption for the year ended December 31, 2002. See Note 10 to the
company's condensed consolidated financial statements for further discussion
regarding Stark II.
(IV) APPOINTMENT OF CHAPTER 11 TRUSTEE AND BANKRUPTCY RELATED ACTIVITIES
DURING THE YEAR ENDED DECEMBER 31, 2002
On February 12, 2002, among other things, the Bankruptcy Court granted
motions made by the Office of the United States Trustee and two of the Debtors'
noteholders requesting the appointment of a Chapter 11 trustee to oversee the
Debtors during their reorganization process. Additionally, on such date the
Bankruptcy Court denied, without prejudice, a renewed motion made by the Equity
Committee for leave to bring a derivative lawsuit against certain of the
company's current and former directors and officers, Cerberus Partners, L.P.,
Cerberus Capital Management, L.P., Cerberus Associates, L.L.C., Craig Court,
Inc., Goldman Sachs Credit Partners L.P., Foothill
45
Capital Corporation and Harrison J. Goldin Associates, L.L.C. (sic) (all the
aforementioned corporate entities, except for Harrison J. Goldin Associates,
L.L.C., being parties to certain of the company's debt agreements or affiliates
of such entities). Moreover, on February 12, 2002 the Bankruptcy Court denied
motions filed by the Equity Committee (i) to require the company to call a
stockholders' meeting and (ii) to modify certain aspects of CI's corporate
governance structure.
On March 7, 2002, the Bankruptcy Court approved the appointment of Arlin M.
Adams, Esquire, as the Debtors' Chapter 11 trustee. The Bankruptcy Code and
applicable rules require a Chapter 11 trustee to perform specific duties
relating to the administration of a bankruptcy case. Generally, a Chapter 11
trustee shall investigate the acts, conduct, assets, liabilities, financial
condition and operations of a debtor, and any other matter relevant to the case
or to the formulation of a plan of reorganization. The Bankruptcy Code also
requires a Chapter 11 trustee to, as soon as practicable, file with the
Bankruptcy Court (i) a statement of any investigation so conducted, including
any facts ascertained pertaining to fraud, dishonesty, incompetence, misconduct,
mismanagement, or irregularities in the management of the affairs of the debtor,
or to a cause of action available to the estate, and (ii) a plan of
reorganization, or file a report as to why a plan of reorganization would not be
filed. With the appointment of a Chapter 11 trustee, while still under the
jurisdiction of the Bankruptcy Court, the Debtors are no longer
debtors-in-possession under the Bankruptcy Code.
Furthermore, the Bankruptcy Code permits a Chapter 11 trustee to operate the
debtor's business. As with a debtor-in-possession, a Chapter 11 trustee may
enter into transactions in the ordinary course of business without notice or a
hearing before the bankruptcy court; however, non-ordinary course actions still
require prior authorization from the bankruptcy court. A Chapter 11 trustee also
assumes responsibility for management functions, including decisions relative to
the hiring and firing of personnel. As is the case with the Debtors, when
existing management is necessary to run the day-to-day operations, a Chapter 11
trustee may retain and oversee such management group. After a Chapter 11 trustee
is appointed, a debtor's board of directors does not retain its ordinary
management powers. While Mr. Adams has assumed the board of directors'
management rights and responsibilities, he is doing so without any pervasive
changes to the company's existing management or organizational structure, other
than, as further discussed below, the acceptance of Daniel D. Crowley's
resignation effective March 31, 2003.
On or about July 24, 2002, the Bankruptcy Court granted a motion submitted
by the Chapter 11 trustee to (i) defer payment on account of certain approved
interim professional fee applications, (ii) defer the Bankruptcy Court's
decisions regarding the allowance or disallowance of compensation and expense
reimbursements requested in certain interim professional fee applications, (iii)
disallow certain professional fee applications requesting payment for
professional services rendered and expense reimbursements subsequent to March 6,
2002 and (iv) disallow certain other professional fee and expense reimbursement
applications. Certain legal counsel engaged during the period the Debtors
operated as debtors-in-possession have filed final fee applications seeking,
inter alia, a final order allowing payment of professional fees and
reimbursement of expenses incurred in connection with the Bankruptcy Cases. The
Chapter 11 trustee filed an omnibus objection to all final professional fee
applications and seeks to adjourn the adjudication of such final professional
fee applications until sometime after confirmation of a plan or plans of
reorganization. Through May 16, 2003, the Bankruptcy Court has adjudicated only
one final fee application. On or about July 24, 2002, the Bankruptcy Court also
approved several motions filed by the Chapter 11 trustee related to fiduciary
and administrative matters, including (i) the maintenance of the Debtors'
existing bank accounts, (ii) continued use of the company's business forms and
record retention policies and procedures and (iii) expenditure
authorization/check disbursement policies.
On October 14, 2002, the Chapter 11 trustee filed a motion with the
Bankruptcy Court requesting approval for the retention of investment bankers and
financial advisors to provide services focusing on the Debtors' restructuring
and reorganization. The services may include, subject to the Chapter 11
trustee's discretion, (i) providing a formal valuation of the Debtors, (ii)
assisting the Chapter 11 trustee in exploring the possible sale of the Debtors
or their assets, (iii) assisting the Chapter 11 trustee in negotiating with
stakeholders and the restructuring of the stakeholders' claims, and/or (iv) one
or more opinions on the fairness, from a financial perspective, of any proposed
sale of the Debtors or restructuring of the Debtors. Such motion was approved by
the Bankruptcy Court on December 2, 2002.
On December 19, 2002, the Equity Committee filed a proposed plan of
reorganization with respect to the Debtors (the "Proposed Equity Committee
Plan"). A complete description of the Proposed Equity Committee Plan is set
forth in the Disclosure Statement of the Official Committee of Equity Security
Holders of Coram Healthcare
46
Corporation and Coram, Inc. and Exhibits A through I thereto (collectively the
"Proposed Equity Committee Disclosure Statement"). The Proposed Equity Committee
Disclosure Statement was filed contemporaneously with the Proposed Equity
Committee Plan in the Bankruptcy Court, under jointly administered Case No.
00-3299, and both documents are available at docket numbers 2019, 2020, 2021 and
2022 in such case.
In order for the company to remain compliant with the requirements of Stark
II, on December 31, 2002, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $40.2 million of the Series A Notes, $7.3 million of
accrued but unpaid interest on the Series A Notes, $83.1 million of the Series B
Notes and $16.6 million of accrued but unpaid interest on the Series B Notes for
approximately 1,218.3 shares of Coram, Inc. Series B Cumulative Preferred Stock,
$0.001 par value per share (see Notes 7 and 9 to the company's condensed
consolidated financial statements for further details). Hereafter the Coram,
Inc. Series B Cumulative Preferred Stock is referred to as the "CI Series B
Preferred Stock." This transaction generated an extraordinary gain on troubled
debt restructuring of approximately $123.5 million in 2002. At December 31,
2002, the company's stockholders' equity exceeded the minimum requirement
necessary to comply with the Stark II public company exemption for the year
ending December 31, 2003. See Note 10 to the company's condensed consolidated
financial statements for further discussion regarding Stark II.
(V) BANKRUPTCY RELATED ACTIVITIES SUBSEQUENT TO DECEMBER 31, 2002
Daniel D. Crowley, the company's former Chief Executive Officer and
President, had an employment contract which expired by its own terms on November
29, 2002. On January 24, 2003, the Chapter 11 trustee filed a motion with the
Bankruptcy Court seeking authorization to enter into a Termination and
Employment Extension Agreement (the "Transition Agreement"), effective January
1, 2003, with Mr. Crowley to have him serve as CHC's Chief Transition and
Restructuring Officer for a term not to exceed the earlier of (i) six months
from January 1, 2003, (ii) the date on which a plan or plans of reorganization
are confirmed by final order of the Bankruptcy Court or (iii) the substantial
consummation of a plan or plans of reorganization. Pursuant to the Transition
Agreement, Mr. Crowley would have continued to render essentially the same
services as previously provided to the company. On March 3, 2003, the Bankruptcy
Court denied the Chapter 11 trustee's motion for authorization to enter into the
Transition Agreement due to the Bankruptcy Court's belief that Mr. Crowley,
contrary to his representations, has continued to seek remuneration from one of
CI's noteholders in connection with efforts undertaken by Mr. Crowley in the
Bankruptcy Cases. Mr. Crowley subsequently resigned from the company effective
March 31, 2003.
On January 14, 2003, the Equity Committee filed a motion with the Bankruptcy
Court seeking an order to (i) immediately terminate Mr. Crowley's employment
with the Debtors and remove him from all involvement in the Debtors' affairs,
(ii) terminate all consulting arrangements between the Debtors and Dynamic
Healthcare Solutions, LLC ("DHS"), a privately held management consulting and
investment firm owned by Mr. Crowley (see Note 4 to the company's condensed
consolidated financial statements for further details), (iii) substantially
terminate all future payments to Mr. Crowley and DHS and (iv) require Mr.
Crowley and DHS to return all payments received to date, except as otherwise
authorized by the Bankruptcy Court as administrative claims. On March 26, 2003,
the Bankruptcy Court entered an order denying the Equity Committee's motion to
terminate Mr. Crowley's employment as moot and reserved its decision on the
other relief requested, including disgorgement, until future litigation, if any,
arises.
The employment contract with Allen J. Marabito, Executive Vice President,
acting General Counsel and acting Secretary, expired by its terms on November
29, 2002. The Chapter 11 trustee has agreed to continue Mr. Marabito's
employment in his prior capacity and Mr. Marabito has also assumed the duties
and responsibilities previously performed by Mr. Crowley. Mr. Marabito's
employment is at will with a base salary of $375,000 per annum, plus the same
employee benefits as prior to the expiration of his employment contract. On May
19, 2003, Mr. Marabito released the company from all contractual obligations
pertaining to his incentive compensation for the year ended December 31, 2002
(i.e., the 2002 MIP of approximately $1.05 million which remained subject to
Chapter 11 trustee and Bankruptcy Court approvals). In consideration thereof,
Mr. Marabito was granted a retention bonus of $380,000 under the company's 2003
Key Employee Retention Plan discussed below. The loss of Mr. Marabito's services
could have a material adverse effect on the company.
On April 7, 2003, the Bankruptcy Court approved a motion filed by the
Chapter 11 trustee to establish the 2003 Key Employee Retention Plan (the "2003
KERP"), which provides for (i) retention bonus payments of
47
approximately $3.1 million to key employees of the company (the "2003 KERP
Compensation") and (ii) other payments of approximately $0.3 million to certain
branch management personnel (the "Branch Incentive Compensation"). Pursuant to
the provisions of the 2003 KERP, the 2003 KERP Compensation is payable in two
equal installments as follows: (i) upon approval of the 2003 KERP by the
Bankruptcy Court and (ii) the earlier of 60 days after confirmation of a plan or
plans of reorganization or December 31, 2003 (the "Second Payment Date"). Should
a 2003 KERP Compensation participant voluntarily leave the company or be
terminated for cause prior to the Second Payment Date, such participant must
return any amounts previously received under the 2003 KERP, less applicable
taxes withheld. Approximately $1.8 million, which represented the first
installment under the 2003 KERP Compensation and the entire Branch Incentive
Compensation amount, was paid to the eligible participants in April 2003.
On May 2, 2003, the Chapter 11 trustee filed a proposed joint plan of
reorganization with respect to the Debtors (the "Chapter 11 Trustee's Proposed
Plan of Reorganization"). A complete description of the Chapter 11 Trustee's
Proposed Plan of Reorganization is set forth in the Disclosure Statement With
Respect to the Chapter 11 Trustee's Joint Plan of Reorganization (including
Exhibits A through D) (collectively the "Chapter 11 Trustee's Proposed
Disclosure Statement"). The Chapter 11 Trustee's Proposed Disclosure Statement
was filed contemporaneously with the Chapter 11 Trustee's Proposed Plan of
Reorganization in the Bankruptcy Court, under jointly administered Case No.
00-3299, and both documents are available at docket numbers 2597 and 2599 in
such case.
On May 15, 2003, the Equity Committee filed its First Amended Plan Of
Reorganization Of The Equity Security Holders Of Coram Healthcare Corporation
And Coram, Inc. (the "Amended Proposed Equity Committee Plan") and its
Disclosure Statement Of The Equity Committee Of Coram Healthcare Corporation And
Coram, Inc. In Connection With The First Amended Plan Of Reorganization Of Coram
Healthcare Corporation And Coram, Inc., including related exhibits thereto
(collectively the "Amended Proposed Equity Committee Disclosure Statement").
Both the Amended Proposed Equity Committee Plan and the Amended Proposed Equity
Committee Disclosure Statement can be found under jointly administered Case No.
00-3299 at docket numbers 2662 through 2667 inclusive.
Prior to the solicitation of a vote in favor of confirmation of a plan of
reorganization, the Bankruptcy Court must approve the related disclosure
statement as containing "adequate information," as the term is defined under
Chapter 11 of the Bankruptcy Code. Moreover, under Chapter 11 of the Bankruptcy
Code certain parties-in-interest may file objections to a proposed disclosure
statement and plan of reorganization and, in connection therewith, certain
parties have already filed objections to the Proposed Equity Committee
Disclosure Statement and the Proposed Equity Committee Plan. A Bankruptcy Court
hearing on both the Amended Proposed Equity Committee Disclosure Statement and
the Chapter 11 Trustee's Proposed Disclosure Statement is currently scheduled
for June 19, 2003.
(VI) OTHER BANKRUPTCY-RELATED DISCLOSURES
Under Chapter 11 of the Bankruptcy Code, certain claims against the Debtors
in existence prior to the filing date are stayed while the Debtors' operations
continue under the purview of a Chapter 11 trustee or as debtors-in-possession.
These claims are reflected in the condensed consolidated balance sheets as
liabilities subject to compromise. Additional Chapter 11 claims have arisen and
may continue to arise subsequent to the filing date due to the rejection of
executory contracts and unexpired non-residential real property leases and from
determinations by the Bankruptcy Court of allowed claims for contingent,
unliquidated and other disputed amounts. Parties affected by the rejection of an
executory contract or unexpired non-residential real property lease may file
claims with the Bankruptcy Court in accordance with the provisions of Chapter 11
of the Bankruptcy Code and applicable rules. Claims secured by the Debtors'
assets also are stayed, although the holders of such claims have the right to
petition the Bankruptcy Court for relief from the automatic stay to permit such
creditors to foreclose on the property securing their claims. Additionally,
certain claimants have sought relief from the Bankruptcy Court to lift the
automatic stay and continue pursuit of their claims against the Debtors or the
Debtors' insurance carriers. See Note 10 to the company's condensed consolidated
financial statements for further details regarding activities of the Official
Committee of Unsecured Creditors of Coram Resource Network, Inc. and Coram
Independent Practice Association, Inc. in the Resource Network Subsidiaries'
bankruptcy proceedings.
48
The holders of the CI Series A Preferred Stock and the CI Series B
Preferred Stock (collectively the "CI Preferred Stock Holders") continue to
assert claims within the Bankruptcy Cases in the aggregate amount of their
cumulative liquidation preferences. Furthermore, in connection with the note
exchange effective on December 31, 2002, the Bankruptcy Court entered an order
granting the exchange, subject to its comments of record, and further ordered
that (i) if equitable or other relief is sought by any party in interest against
the CI Preferred Stock Holders, all defenses, affirmative defenses, setoffs,
recoupments and other such rights of the Chapter 11 trustee, the CI Preferred
Stock Holders and the Debtors shall be preserved, and all such issues shall be
determined, regardless of the first, second and third note exchanges and (ii)
the rights and equity interests of the CI Preferred Stock Holders are, and in
connection with any plan or plans of reorganization or any other distribution of
the Debtors' assets pursuant to Chapter 11 the Bankruptcy Code shall remain,
senior and superior to the rights and equity interests of all holders of CI's
common stock and all claims against and equity interests in CHC.
On April 28, 2003, attorneys for the Equity Committee advised the Chapter
11 trustee and his legal counsel of their disagreement with certain statements
in the preceding paragraph. They assert that the cumulative liquidation
preferences include post-petition interest which, at a hearing on December 27,
2002, the Bankruptcy Court agreed would be reviewed in connection with the terms
and conditions of a plan or plans of reorganization. In addition, they assert
that because the Chapter 11 trustee's motion for authorization to issue CI
Series B Preferred Stock in exchange for debt was granted subject to the
Bankruptcy Court's comments on the record, that the rights and equity interests
of the CHC common equity holders, not the CI Preferred Stock Holders, are
preserved for determination by the Bankruptcy Court in connection with any plan
or plans of reorganization or any other distribution of the Debtors' assets
pursuant to Chapter 11 of the Bankruptcy Code. Whether or not the Equity
Committee's attorneys' interpretation of the Bankruptcy Court's order approving
the exchange is correct should be resolved as part of the Bankruptcy Court's
determination of the adversary proceeding discussed in the following paragraph.
Further, final resolution of the rights and equitable interests of the CI
Preferred Stock Holders will be determined by the Bankruptcy Court during
confirmation hearings on a plan or plans of reorganization. See Exhibits 10.93
and 10.94 filed with the company's Form 10-K/A for the year ended December 31,
2002 for the Bankruptcy Court order approving the note exchange and a transcript
abstract from the hearing held on December 27, 2002, respectively.
On or about March 28, 2003, the Equity Committee commenced an adversary
proceeding seeking to subordinate the preferred stock interests of Cerberus
Partners, L.P., Goldman Sachs Credit Partners L.P. and Foothill Capital
Corporation in Coram, Inc. to the interests of Coram Healthcare Corporation as
the sole of common shareholder of Coram, Inc. The complaint alleges, among other
things, that the aforementioned defendants have (i) engaged in inequitable
conduct, (ii) conferred an unfair advantage upon themselves and (iii) caused
damage to Coram Healthcare Corporation. The defendants have moved the Bankruptcy
Court to dismiss the adversary proceeding and the Equity Committee has replied
in opposition thereto. A hearing with regard to the adversary proceeding is
scheduled for June 5, 2003.
Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to a plan or plans of
reorganization and review by the Chapter 11 trustee. Therefore, it is not
possible to fully or completely estimate the fair value of the liabilities
subject to compromise at March 31, 2003 due to the Bankruptcy Cases and the
uncertainty surrounding the ultimate amount and settlement terms for such
liabilities.
CRITICAL ACCOUNTING POLICIES
The condensed consolidated financial statements include the accounts of CHC,
its subsidiaries, including CI (CHC's wholly-owned direct subsidiary), and joint
ventures that are considered to be under the control of CHC. As discussed above,
CI is a party to the Bankruptcy Cases that are being jointly administered with
those of CHC in the Bankruptcy Court. All material intercompany account balances
and transactions have been eliminated in consolidation. The company uses the
equity method of accounting for investments in entities in which it exhibits
significant influence, but not control, and has an ownership interest of 50% or
less.
Effective August 8, 2000, the company began presenting its consolidated
financial statements in accordance with the provisions of AICPA Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code."
49
Management considers the accounting policies that govern revenue recognition
and the determination of the net realizable value of accounts receivable to be
the most critical accounting policies in relation to the company's consolidated
financial statements, as well as, those that most require important and
substantive management judgment. Accounting policies that govern the
capitalization of software development costs are also considered critical while
the company is in the process of improving and enhancing its enterprise-wide
information systems. For a description of these critical accounting policies,
refer to Note 2 to the company's audited consolidated financial statements and
"Critical Accounting Policies" under Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Coram's Annual
Report on Form 10-K/A for the year ended December 31, 2002.
Other accounting policies requiring significant judgment are those related
to the measurement and recognition of impairments of goodwill and other
long-lived assets. For a description of these critical accounting policies,
refer to Note 8 to the company's audited consolidated financial statements in
Coram's Annual Report on Form 10-K/A for the year ended December 31, 2002.
Moreover, because the Debtors are operating under Chapter 11 of the Bankruptcy
Code, the fair value of the company's liabilities will be impacted by their
settlement value pursuant to a plan or plans of reorganization set forth by the
Debtors' Chapter 11 trustee or another interested party in the Bankruptcy Cases
and, ultimately, on decisions of the Bankruptcy Court. As a result, the implied
value of the company's goodwill is premised on several highly judgmental
assumptions, including, among other things, the company's enterprise value and
the final disposition of the company's pre-petition liabilities. Accordingly,
the company's goodwill impairment analysis is subject to the volatility inherent
in the underlying enterprise value determination. If the company recognizes a
material goodwill impairment charge during 2003, stockholders' equity may be
less than $75 million as of December 31, 2003, at which time the company may not
qualify for the public company exemption of Stark II for the year ending
December 31, 2004. The potential material adverse effects of noncompliance with
Stark II on the company's financial condition and business operations are
described in more detail in Note 10 to the company's condensed consolidated
financial statements.
RESULTS OF OPERATIONS
As discussed in Note 3 to the company's condensed consolidated financial
statements, R-Net's operating results are included in discontinued operations;
however, for the three months ended March 31, 2003 and 2002 the Resource Network
Subsidiaries had no operations.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Net Revenue. Net revenue increased $11.1 million or 10.9% to $113.1 million
during the three months ended March 31, 2003 from $102.0 million during the
three months ended March 31, 2002. As a result of management's continued focus
on the delivery of the company's core infusion therapies, which include
coagulant and blood clotting ("Factor"), intravenous immunoglobulin ("IVIG"),
anti-infective, pain management and total parenteral nutrition therapies, net
revenue from such therapies increased $5.6 million or 7.9% during the three
months ended March 31, 2003 from the three months ended March 31, 2002. Also
contributing to the consolidated net revenue increase is a $5.1 million
improvement (approximately 18.1%) in the company's non-core infusion therapies,
such as therapies corresponding to the Food and Drug Administration approved
drugs Synagis and Remicaid. However, no individual non-core therapy represented
more than 5% of the company's net revenue during the three months ended March
31, 2003 or 2002. The company's core and non-core infusion therapies aggregated
approximately 97% of net revenue during both the three months ended March 31,
2003 and 2002.
During the three months ended March 31, 2003 and 2002, approximately $6.2
million and $7.2 million, respectively, of the company's consolidated net
revenue related to a capitated fee agreement that provides services to members
in the California marketplace. Additionally, Coram owns 50% of a partnership
located in California that derived approximately 34.6% and 39.8% of its net
revenue during the three months ended March 31, 2003 and 2002, respectively,
from services provided under such capitated fee agreement. The underlying two
year agreement expired by its terms on December 31, 2002 but it is subject to
automatic annual renewals absent a written termination notice from one of the
contracting parties. The company and its partnership continue to render services
subject to the automatic renewal provisions of the contract. On February 28,
2003, the contracted payer invited Coram, as well as a limited group of other
providers, to respond to a request for proposal ("RFP") that covers the services
provided exclusively by Coram. Subsequent to Coram's written response to the
RFP, the company was
50
invited to participate in oral presentations in May 2003. Management anticipates
that the payer will select a provider or providers no later than July 2003 and
the new contract or contracts will become effective January 1, 2004. See Note 1
to the company's condensed consolidated financial statements for further
details.
Gross Profit. Gross profit decreased $0.6 million to $27.1 million or a
gross margin of 24.0% during the three months ended March 31, 2003 from $27.7
million or a gross margin of 27.2% during the three months ended March 31, 2002.
During the three months ended March 31, 2003, the company's gross margin
percentage was favorably impacted by declining acquisition costs for Factor and
IVIG products (principally due to an overall increase in related product
availability in the marketplace during such period). However, the company's
overall 2003 gross margin percentage declined primarily due to a $3.4 million
charge for the purchase of a malpractice insurance tail policy (see Note 10 to
the company's condensed consolidated financial statements for further details).
Additionally, the 2003 gross margin was adversely impacted by higher workers'
compensation insurance costs and an increased proportion of contract labor
expenses associated with providing clinical services. Further offsetting the
2003 gross margin was a larger proportion of non-core therapies in the company's
revenue mix (such therapies generally have a higher product cost as a percentage
of net revenue than the company's core therapies).
Selling, General and Administrative ("SG&A"). Expenses, SG&A expenses
increased $2.0 million or 9.5% to $23.0 million during the three months ended
March 31, 2003 from $21.0 million during the three months ended March 31, 2002.
The company incurred incremental costs of (i) $0.9 million to enhance its sales
and marketing force and (ii) $0.8 million in reimbursement personnel and
consulting costs during the three months ended March 31, 2003. In addition, the
increase in SG&A expenses includes a $0.3 million increase in legal fees
relating to certain ongoing litigation (see Note 10 to the company's condensed
consolidated financial statements for further details of the company's
litigation matters). In connection with the implementation and enhancement of
its company-wide information systems, Coram also recognized increased
depreciation and amortization costs of approximately $0.2 million during the
three months ended March 31, 2003.
Partially offsetting the above SG&A expense increases was a $0.5 million
decrease in amortization expense related to the company's commercial payer
contracts intangible asset, which became fully amortized during the three months
ended March 31, 2002.
In addition to the aforementioned changes, the company experienced an
overall increase in SG&A expenses attributable to revenue growth and inflation.
Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $3.5 million and $3.1 million during the three months
ended March 31, 2003, and 2002, respectively. During both such periods, the
provision for uncollectible accounts was 3.1% of net revenue. For the year ended
December 31, 2002, the provision for estimated uncollectible accounts was 3.7%
of net revenue. The decrease therein during the three months ended March 31,
2003 is primarily the result of a continuation of the company's favorable cash
collection trends, including settlement negotiations related to certain of the
company's aged commercial accounts receivable (see Note 1 to the company's
condensed consolidated financial statements for further details). The 2003
provision for estimated uncollectible accounts reflects management's best
estimate of bad debt expense for the year ending December 31, 2003; however,
there can be no assurances that such provisions will be adequate or that factors
adversely affecting the company's bad debt expense will not worsen in the
future.
Interest Expense. Interest expense was $0.3 million and $0.4 million during
the three months ended March 31, 2003 and 2002, respectively. Both periods
primarily reflect the recognition of interest expense on the proposed settlement
with the Internal Revenue Service, which is more fully described in Note 8 to
the company's condensed consolidated financial statements. Both periods also
reflect the non-recognition of interest expense related to certain notes issued
in connection with the Securities Exchange Agreement subsequent to the execution
of debt-for-equity exchange agreements on December 29, 2000, December 31, 2001
and December 31, 2002, which qualified as troubled debt restructurings (see
Notes 7 and 9 to the company's condensed consolidated financial statements for
further details).
51
Equity in Net Income of Unconsolidated Joint Ventures. Equity in net income
of unconsolidated joint ventures was $0.2 million and $0.4 million during the
three months ended March 31, 2003 and 2002, respectively. The decrease in 2003
was principally due to the pending liquidation of one of the company's
unconsolidated joint ventures in the Chicago, Illinois marketplace. Management
expects that such unconsolidated joint venture will cease operations in June
2003.
Gain on Sales of Business. During January 2002, the company finalized the
sale of a respiratory and durable medical equipment business located in New
Orleans, Louisiana to a third party, which resulted in a nominal gain. See Note
2 to the company's condensed consolidated financial statements for further
details.
Reorganization Expenses, Net. During the three months ended March 31, 2003
and 2002, the company recognized $1.8 million and $2.0 million, respectively, in
net reorganization expenses related to the Bankruptcy Cases. These expenses
include, but are not limited to, professional fees, Office of the United States
Trustee fees and other expenditures during the Chapter 11 bankruptcy
proceedings, offset by interest earned on accumulated cash due to the Debtors
not paying their liabilities subject to compromise. During the three months
ended March 31, 2003 and 2002, the company recorded $1.9 million and $2.1
million of bankruptcy-related professional fees, respectively. The Chapter 11
trustee evaluated the needs for services of the professionals previously engaged
by the Debtors while debtors-in-possession and re-engaged only certain of these
professionals. Furthermore, the Chapter 11 trustee engaged certain new
professionals for the benefit of the Debtors' estates. See Note 2 to the
company's condensed consolidated financial statements for further details,
including motions submitted by the Chapter 11 trustee related to administrative
professionals that have been approved by the Bankruptcy Court.
Income Tax Expense. See Note 8 to the company's condensed consolidated
financial statements for discussion of the variance between the statutory income
tax rate and the company's effective income tax rates.
Loss from Disposal of Discontinued Operations. During the three months ended
March 31, 2003, the company recorded a $0.1 million loss from disposal of
discontinued operations. Such amount represents legal costs for certain pending
litigation between the Official Committee of Unsecured Creditors of Coram
Resource Network, Inc. and Coram Independent Practice Association, Inc. and the
Debtors and several of their non-debtor subsidiaries, as well as, legal costs
associated with corresponding indemnifications provided to the company's
officers and directors in the Resource Network Subsidiaries' bankruptcy
proceedings/litigation. See Notes 3 and 10 to the company's condensed
consolidated financial statement for further details.
Cumulative Effect of a Change in Accounting Principle. Effective January 1,
2002, the company recognized a transitional goodwill impairment charge of
approximately $71.9 million related to the adoption of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statement
142"). In accordance with the underlying provisions of Statement 142, such
charge was retroactively recorded in the company's condensed consolidated
financial statements as a cumulative effect of a change in accounting principle
during the three months ended March 31, 2002. See Note 6 to the company's
condensed consolidated financial statements for further details.
LIQUIDITY AND CAPITAL RESOURCES
Bankruptcy Proceedings. The Debtors commenced the Bankruptcy Cases by filing
voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on August
8, 2000. Following the commencement of the Bankruptcy Cases, the Debtors
operated as debtors-in-possession subject to the jurisdiction of the Bankruptcy
Court; however, a Chapter 11 trustee was appointed by the Bankruptcy Court on
March 7, 2002. With the appointment of a Chapter 11 trustee, while still under
the jurisdiction of the Bankruptcy Court, the Debtors are no longer
debtors-in-possession. None of the company's other subsidiaries is a debtor in
the Bankruptcy Cases and, other than the Resource Network Subsidiaries, none of
the company's other subsidiaries is a debtor in any bankruptcy case. Although
the filing of the Bankruptcy Cases constitutes an event of default under the
company's principal debt instruments, Section 362 of Chapter 11 of the
Bankruptcy Code imposes an automatic stay that will generally preclude creditors
and other interested parties under such arrangements from taking remedial action
in response to any such default without prior Bankruptcy Court approval. In
addition, the Debtors may reject executory contracts and unexpired leases of
non-residential real property. Parties effected by such rejections may file
claims with the Bankruptcy Court in
52
accordance with the provisions of Chapter 11 of the Bankruptcy Code and
applicable rules. See Note 2 to the company's condensed consolidated financial
statements for further details.
Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to a plan or plans of
reorganization and review by the Chapter 11 trustee. Therefore, it is not
possible to fully or completely estimate the fair value of the liabilities
subject to compromise at March 31, 2003 due to the Bankruptcy Cases and the
uncertainty surrounding the ultimate amount and settlement terms for such
liabilities.
Credit Facilities, Letters of Credit and other Debt Obligations. During the
three months ended March 31, 2003 and through May 16, 2003, the company was not
a party to any revolving credit, line of credit or similar borrowing facility.
Due to the pendency of the Bankruptcy Cases, the company's ability to borrow or
otherwise enter into new post-petition credit facilities is limited. Moreover,
any new credit facility would require the approval of the Chapter 11 trustee and
the Bankruptcy Court.
As a result of the management's evaluation of several pole-mounted infusion
pump alternatives, the company is replacing its entire fleet of Sabratek
Corporation 3030 pole-mounted pumps. In connection therewith, Coram entered into
two agreements with B. Braun Medical, Inc. ("B. Braun") in 2003 whereby the
company purchased 1,000 Vista Basic pole-mounted pumps at an aggregate cost of
approximately $1.3 million. Such amount was paid in four equal installments of
approximately $337,000 during March, April and May 2003. Additionally, on April
29, 2003 the Bankruptcy Court approved a motion that authorized the company to
enter into a three year lease agreement (the "Lease Agreement") with B. Braun
for an additional 1,000 Vista Basic pumps. The aggregate three year commitment
under the Lease Agreement, including related interest, is approximately $1.5
million. As a result, the company is required to pay to B. Braun approximately
$0.2 million, $0.4 million and $0.9 million during the first, second and third
years of the Lease Agreement. Upon the expiration of the Lease Agreement, the
company has the option to acquire the leased Vista Basic pumps at a bargain
purchase price of $1 per pump. The Lease Agreement contains customary covenants
and events of default, as well as, remedies available to B. Braun if the company
is in violation thereof, including, but not limited to, (i) termination of the
Lease Agreement, (ii) return of the leased Vista Basic pumps to B. Braun and/or
(iii) recovery from the company of any unpaid amounts as of the date of default
and all amounts remaining under the unexpired term of the Lease Agreement.
Management believes that the company will comply with the terms and conditions
of the Lease Agreement; however, there can be no assurances thereof or what
remedies, if any, would be invoked by B. Braun in the event of default.
Through March 31, 2004, approximately $9.3 million of principal on the
company's debt obligations will become due and payable, including $0.2 under the
Lease Agreement and $9.0 million of the Series B Notes that matures on June 30,
2003. The Series B Note repayments, if any, will require approval of both the
Chapter 11 trustee and the Bankruptcy Court because such amount represents a
pre-petition liability. The company intends to finance any approved mandatory
debt repayments with available cash balances and cash provided by operations.
In February 2001, pursuant to an order of the Bankruptcy Court, the company
established irrevocable letters of credit through Wells Fargo Bank Minnesota, NA
("Wells Fargo"), an affiliate of Foothill Capital Corporation (a party to the
former Senior Credit Facility, the Securities Exchange Agreement and a holder of
certain preferred stock issued by Coram, Inc.). Such letters of credit
aggregated approximately $0.5 million at May 16, 2003 and are fully secured by
interest-bearing cash deposits held by Wells Fargo. The outstanding letters of
credit have maturity dates in September 2003 ($187,000) and February 2004
($278,000). Due to the pendency of the Bankruptcy Cases and the possibility of
drug and supply shortages in the future, the company may be required to enhance
existing letters of credit or establish new letters of credit in order to ensure
the availability of products for its patients' medical needs.
General. The company's condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Bankruptcy Cases and circumstances
relating thereto, including the company's leveraged financial structure and
cumulative losses from operations, such realization of assets and liquidation of
liabilities are subject to significant uncertainty. During the pendency of the
Bankruptcy Cases, the company may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those
53
reflected in the condensed consolidated financial statements. Furthermore, a
plan or plans of reorganization could materially change the amounts reported in
the condensed consolidated financial statements, which do not give effect to any
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan or plans of reorganization (see Note 2 to
the company's condensed consolidated financial statements for further details).
The company's ability to continue as a going concern is dependent upon, among
other things, confirmation of a plan or plans of reorganization, future
profitable operations, the ability to comply with the terms of the company's
financing agreements, the ability to obtain necessary financing to fund a
proposed settlement with the Internal Revenue Service, the ability to remain in
compliance with the physician ownership and referral provisions of the Omnibus
Budget Reconciliation Act of 1993 (commonly known as "Stark II") and the ability
to generate sufficient cash from operations and/or financing arrangements to
meet its obligations and capital asset expenditure requirements.
Coram used cash on hand and cash generated from operations to fund its
reorganization activities and working capital requirements for the three months
ended March 31, 2003. Working capital decreased $0.4 million to $65.2 million at
March 31, 2003 from $65.6 million at December 31, 2002. This change in working
capital is primarily due to: (i) a $3.2 million increase in cash and cash
equivalents, (ii) an increase in net accounts receivable of $0.8 million, (iii)
an increase of $2.2 million in inventories (primarily due to strategic purchases
of inventories during the three months ended March 31, 2003), (iv) a $0.1
million decrease in other current assets, (v) a $3.0 million increase in
accounts payable (primarily due to the aforementioned strategic inventory
purchases), (vi) a $0.7 million increase in accrued compensation and related
liabilities, (vii) a $0.1 million increase in the current portion of income
taxes payable, (viii) a $3.1 million increase in other accrued liabilities
(primarily due to an accrual for the purchase of a malpractice insurance tail
policy) and (ix) a $0.4 million decrease in accrued reorganization costs.
Cash used in investing activities for the three months ended March 31, 2003
was approximately $1.0 million. Of that amount, $0.7 million related to
purchases of property and equipment in the normal course of business and $0.3
million was a deposit to purchase the Vista Basic pole-mounted pumps.
Net cash provided by financing activities for the three months ended March
31, 2003 was approximately $0.1 million. Of that amount, approximately $0.3
million related to refunds of deposits to collateralize the company's letters of
credit, offset by cash distributions paid to minority interests of approximately
$0.2 million and principal debt repayments of $35,000.
Management believes that the net costs for the Bankruptcy Cases will result
in a significant use of cash for the year ending December 31, 2003 and
thereafter. These costs principally consist of professional fees and expenses
and employee retention payments. On or about July 24, 2002, the Bankruptcy Court
granted a motion submitted by the Chapter 11 trustee to (i) defer payment on
account of certain approved interim professional fee applications, (ii) defer
the Bankruptcy Court's decisions regarding the allowance or disallowance of
compensation and expense reimbursements requested in certain interim
professional fee applications, (iii) disallow certain professional fee
applications requesting payment for professional services rendered and expense
reimbursements subsequent to March 6, 2002 and (iv) disallow certain other
professional fee and expense reimbursement applications. Certain legal counsel
engaged during the period the Debtors operated as debtors-in-possession have
filed final fee applications seeking, inter alia, a final order allowing payment
of professional fees and reimbursement of expenses incurred in connection with
the Bankruptcy Cases. The Chapter 11 trustee filed an omnibus objection to all
final professional fee applications and seeks to adjourn the adjudication of
such final professional fee applications until some time after confirmation of a
plan or plans of reorganization. Through May 16, 2003, the Bankruptcy Court has
adjudicated only one final fee application. On or about July 24, 2002, the
Bankruptcy Court also approved several motions filed by the Chapter 11 trustee
related to fiduciary and administrative matters, including (i) the maintenance
of the Debtors' existing bank accounts, (ii) continued use of the company's
business forms and record retention policies and procedures and (iii)
expenditure authorization/check disbursement policies.
Management cannot predict whether any future objections of the Official
Committee of the Equity Security Holders of Coram Healthcare Corporation or any
other interested parties in the Bankruptcy Cases will be forthcoming. Outcomes
unfavorable to the company or unknown additional actions could require the
company to access significant additional funds. See Notes 2 and 10 to the
company's condensed consolidated financial statements for further details.
54
The former principal supplier of Coram's infusion pumps, Sabratek
Corporation ("Sabratek"), filed for protection under Chapter 11 of the
Bankruptcy Code on December 17, 1999. In January 2000, Baxter Healthcare
Corporation ("Baxter") purchased certain Sabratek assets, including Sabratek's
pump manufacturing division, and continued to produce the related tubing and
infusion sets needed to operate the Sabratek 6060 Homerun Pumps (the "6060
Pumps") pumps that are used by Coram. Management expects that Baxter will extend
the period during which it will produce the tubing and infusion sets necessary
for operation of the 6060 Pumps; however, no assurances can be given that Baxter
will provide such an extension. Moreover, the company's fleet of 6060 Pumps
requires certain costly software and hardware upgrades and such pumps are
currently experiencing significant and recurring repairs that are not covered
under warranty. The upgrades and extensive ongoing repairs will require a
substantial cash outlay by the company and, in the case of upgrades, would
temporarily remove numerous company-owned pumps from revenue-producing
activities (thereby requiring the company to lease incremental pumps on a
month-to-month basis). Given the issues surrounding the 6060 pumps, management
is currently evaluating several alternatives, including replacement of the
entire fleet of approximately 4,800 units. No assurances can be given that the
company will develop an alternative that will be economically viable, including
identification of a source of long-term financing, or meet with the approval of
the Chapter 11 trustee and the Bankruptcy Court.
On April 7, 2003, the Bankruptcy Court approved a motion filed by the
Chapter 11 trustee to establish the 2003 Key Employee Retention Plan (the "2003
KERP"), which provides for (i) retention bonus payments of approximately $3.1
million to key employees of the company (the "2003 KERP Compensation") and (ii)
other payments of approximately $0.3 million to certain branch management
personnel (the "Branch Incentive Compensation"). Pursuant to the provisions of
the 2003 KERP, the 2003 KERP Compensation is payable in two equal installments
as follows: (i) upon approval of the 2003 KERP by the Bankruptcy Court and (ii)
the earlier of 60 days after confirmation of a plan or plans of reorganization
or December 31, 2003 (the "Second Payment Date"). Should a 2003 KERP
Compensation participant voluntarily leave the company or be terminated for
cause prior to the Second Payment Date, such participant must return any amounts
previously received under the 2003 KERP, less applicable taxes withheld.
Approximately $1.8 million, which represented the first installment under the
2003 KERP Compensation and the entire Branch Incentive Compensation amount, was
paid to the eligible participants in April 2003 from available cash balances.
The company intends to fund the remaining amounts under the 2003 KERP with
available cash balances and cash provided by operations.
The company sponsors a Management Incentive Plan ("MIP"), which provides
for annual bonuses payable to certain key employees. The bonuses are predicated
on overall corporate performance (principally sales of the company's core
infusion therapies, cash collections and earnings before interest expense,
taxes, reorganization expenses, restructuring costs, depreciation and
amortization and certain other non-recurring items), as well as, individual
performance targets and objectives. Pursuant to the terms of their employment
contracts, Daniel D. Crowley, the company's former Chairman of the Board of
Directors, Chief Executive Officer and President, and Allen J. Marabito, the
company's Executive Vice President, maintain contractual claims to receive
unpaid MIP amounts aggregating approximately $13.8 million and $0.4 million,
respectively, for certain periods through December 31, 2002. Payments of (i) the
aforementioned MIP amounts for Messrs. Crowley and Marabito, (ii) $0.8 million
claimed by Mr. Crowley from the first key employee retention plan and (iii) a
$1.8 million refinancing success bonus claimed by Mr. Crowley remain subject to
approval by the Bankruptcy Court and the Chapter 11 trustee. If these claims are
granted, the company intends to fund such amounts with available cash balances
and cash provided by operations.
In connection with the Second Joint Plan, Mr. Crowley voluntarily offered
to accept a $7.5 million reduction in certain performance bonuses, contingent on
the confirmation and consummation of the Second Joint Plan. As discussed in Note
2 to the company's condensed consolidated financial statements, confirmation of
the Second Joint Plan was denied by the Bankruptcy Court on December 21, 2001.
The company cannot predict what, if any, reduction in Mr. Crowley's incentive,
retention or success bonuses, which are accrued in the company's condensed
consolidated financial statements, will be proposed or opposed in a new plan or
plans of reorganization. Mr. Crowley has indicated that he reserves the right to
claim the full outstanding amounts of such bonuses and incentive compensation,
as well as, all other compensation. The Chapter 11 trustee reserves the right to
seek disallowance by the Bankruptcy Court of all such amounts and/or seek
disgorgement in any future litigation.
On January 14, 2003, the Equity Committee filed a motion with the Bankruptcy
Court seeking an order to (i) immediately terminate Mr. Crowley's employment
with the Debtors and remove him from all involvement in the Debtors' affairs,
(ii) terminate all consulting arrangements between the Debtors and Dynamic
Healthcare Solutions,
55
LLC ("DHS"), a privately held management consulting and investment firm owned by
Mr. Crowley (see Note 4 to the company's condensed consolidated financial
statements for further details), (iii) substantially terminate all future
payments to Mr. Crowley and DHS and (iv) require Mr. Crowley and DHS to return
all payments received to date, except as otherwise authorized by the Bankruptcy
Court as administrative claims. On March 26, 2003, the Bankruptcy Court entered
an order denying the Equity Committee's motion to terminate Mr. Crowley's
employment as moot and reserved its decision on the other relief requested,
including disgorgement, until future litigation, if any, arises.
With the approval of the Chapter 11 trustee, in November 2002 the company
modified its paid time off ("PTO") policy for the year ended December 31, 2002
on a basis similar to the two preceeding calendar years. The transitional PTO
policy authorized cash payouts to employees with aggregate vested PTO time
meeting certain criteria and/or exceeding certain predetermined thresholds. In
connection therewith, payments aggregating approximately $0.3 million each were
made in December 2002 and April 2003.
In recent years, the company experienced significant increases in insurance
premiums for its Directors and Officers ("D&O"), General and Professional
Liability ("GLPL") and certain other risk management insurance policies. In
connection therewith, in 2001 the Bankruptcy Court approved a motion filed by
the Debtors to enter into an insurance premium financing agreement with AICCO,
Inc. to finance certain GLPL premiums for the 2001 policy year. In April 2003,
pursuant to the order previously entered by the Bankruptcy Court, the Debtors
entered into another premium financing agreement with Imperial Premium Finance,
Inc., an affiliate of AICCO, Inc., (the "2003 Financing Agreement") to finance
the premiums under certain insurance policies. Under the terms of the 2003
Financing Agreement, the Debtors made a down payment of approximately $1.5
million in May 2003 and financed approximately $2.8 million. Commencing on May
15, 2003, the amount financed is being paid in seven monthly installments of
approximately $0.4 million, including interest at a rate of 3.75% per annum. The
2003 Financing Agreement is secured by the unearned premiums and any loss
payments under the covered insurance policies. In addition, Imperial Premium
Finance, Inc. has the right to terminate the insurance policies and collect the
unearned premiums (as administrative expenses) if the Debtors do not make the
monthly payments called for by the 2003 Financing Agreement. No assurances can
be given that the company will be able to obtain and/or maintain adequate D&O,
GLPL and malpractice insurance coverage beyond the expiration of the current
policies, which is generally in early 2004. In the event that the company is
unable to obtain and/or maintain such insurance at a price that will be
economically viable, there could be a material adverse effect on the company's
operations and liquidity. The company generally funds its insurance premiums
and/or related financing agreements with available cash balances and cash
provided by operations.
Management was advised by its malpractice insurance carrier that the carrier
would no longer offer malpractice policies to its insureds. In connection
therewith, the company made a one-time premium payment of approximately $3.4
million in May 2003 to purchase a tail insurance policy, thereby providing the
company with insurance protection for malpractice-related claims that may have
occurred during the term of the expired policy. Effective April 16, 2003, the
company obtained malpractice insurance from a new insurance carrier and financed
the related premiums through the 2003 Financing Agreement.
In November 2001, the R-Net Creditors' Committee filed a complaint in the
Bankruptcy Court, subsequently amended twice, both on its own behalf and as
assignee for causes of action that may belong to the Resource Network
Subsidiaries, which named as defendants the Debtors, several non-debtor
subsidiaries, several current and former directors, current executive officers
of CHC and several other current and former employees of the company. This
complaint, as amended, also named as defendants Cerberus Partners, L.P., Goldman
Sachs Credit Partners L.P., Foothill Capital Corporation and Foothill Income
Trust, L.P. (parties to certain of the company's debt agreements or affiliates
of such entities). The complaint alleges that the defendants violated various
state and federal laws in connection with alleged wrongdoings related to the
operation and corporate structure of the Resource Network Subsidiaries,
including, among other allegations, breach of fiduciary duty, conversion of
assets and preferential payments to the detriment of the Resource Network
Subsidiaries' estates, misrepresentation and fraud, conspiracy, fraudulent
concealment and a pattern of racketeering activity. The complaint seeks damages
in the amount of approximately $56 million and additional monetary and
non-monetary damages, including the disallowance of the Debtors' claims against
the Resource Network Subsidiaries, punitive damages and attorneys' fees. The
Debtors objected to the complaint in the Bankruptcy Court because management
believed that the complaint constituted an
56
attempt to circumvent the automatic stay protecting the Debtors' estates;
however, the Debtors' non-debtor subsidiaries have no such protection and,
accordingly, they are vigorously contesting the allegations.
On June 17, 2002, the Chapter 11 trustee agreed to withdraw the Debtors'
objections to the motion of the R-Net Creditors' Committee for leave of court to
file their second amended complaint. On July 25, 2002, by stipulation between
the Chapter 11 trustee and the R-Net Creditors' Committee, the Bankruptcy Court
authorized the R-Net Creditors' Committee to file its second amended complaint.
The parties to (i) the second amended complaint, (ii) the Debtors' motion for an
order expunging the proofs of claims filed by the Resource Network Subsidiaries
and (iii) the Resource Network Subsidiaries' objections to the Debtors' proofs
of claims are proceeding with discovery under a case management order. On
January 10, 2003, the United States District Court for the District of Delaware
(the "District Court") granted motions by some, but not all, of the defendants
for that court to withdraw the adversary proceedings from the jurisdiction of
the Bankruptcy Court. Now pending before the District Court are motions by
various defendants to dismiss some or all counts of the complaint.
Through March 31, 2003, the company incurred approximately $1.0 million in
legal fees, including legal fees associated with indemnifications of the
company's directors and officers related to the second amended complaint filed
by the R-Net Creditors' Committee. The company notified its insurance carrier of
the second amended complaint and intends to avail itself of any appropriate
insurance coverage for its directors and officers, who are also vigorously
contesting the allegations. On May 2, 2003, the Chapter 11 trustee filed the
Chapter 11 Trustee's Proposed Plan of Reorganization and the Chapter 11
Trustee's Proposed Disclosure Statement. The Chapter 11 Trustee's Proposed Plan
of Reorganization provides for a settlement of the aforementioned Resource
Network Subsidiaries' matters whereby the company will pay to the Resource
Network Subsidiaries approximately $7.95 million. This settlement is subject to,
and contingent upon, (i) Bankruptcy Court approval and (ii) confirmation of the
Chapter 11 Trustee's Proposed Plan of Reorganization. Management cannot predict
the outcome of the confirmation of the Chapter 11 Trustee's Proposed Plan of
Reorganization nor can management predict the amount of recoveries, if any, that
the company may ultimately receive from its insurance carrier. Accordingly,
management cannot reasonably estimate the ultimate cash requirements to settle
the aforementioned Resource Network Subsidiaries' matters or any additional cash
expenditures that may be required of the company relative to the liquidation of
the Resource Network Subsidiaries through their bankruptcy proceedings.
Prior to the appointment of the Chapter 11 trustee, the CHC Board of
Directors approved management's request to upgrade Coram's company-wide
information systems. In connection therewith, the company entered into an
agreement whereby a new financial, materials management, procurement, human
resource and payroll (collectively the "Back Office") software package and
related licenses were procured. The total purchase price for the Back Office
software package was approximately $1.3 million. All of the Back Office modules
were operational before June 30, 2002, except for the human resource and payroll
software modules, which are scheduled to become operational in 2003.
Additionally, management is negotiating with a third party vendor for the
acquisition of a software system and appropriate upgrades thereto in order to
replace its billing, accounts receivable, clinical and pharmacy systems
(collectively the "Front Office"). Management expects to begin substantive
implementation of the Front Office modules during 2003. In addition to the cost
of the aforementioned Back Office software package, substantial internal and
external costs have been and will continue to be incurred to implement the
remaining Back Office (human resource and payroll modules) and Front Office
software solutions, as well as, resolve certain residual functional issues in
the Back Office modules (financial, materials management and procurement).
Internal personnel time and expenses and external vendor consultation costs of
approximately $6.0 million were incurred through March 31, 2003 on these
projects. Through March 31, 2003, the company also purchased certain hardware
necessary to run the new information systems aggregating approximately $2.9
million; however, supplemental hardware and peripheral equipment will be
required in order to support the new Front Office software suites. Although
management cannot readily determine the aggregate costs to implement the Back
Office and Front Office solutions and resolve the remaining functional issues in
the current operating environment, the company plans to manage the timing of
such efforts in order to fund its current and future information system
requirements, including potentially substantial supplemental consulting
services, with its available cash balances and cash provided by operations. Any
disruptions to transaction processing may adversely affect management's ability
to report, analyze and utilize data for purposes of making proactive business
decisions and complying with various financial reporting requirements.
57
On April 27, 2003, the Chapter 11 trustee filed a motion in the Bankruptcy
Court requesting authorization to execute certain real property and construction
agreements that pertain to a relocation of the company's information technology
and CTI Network, Inc. operations from their current location in Bannockburn,
Illinois to the company's existing branch location in Mount Prospect, Illinois.
The company's existing lease at the Bannockburn facility expires by its own
terms on August 31, 2003 and, as a result of prior consolidations, the Mount
Prospect branch has excess capacity in its facility. On May 13, 2003, the
Bankruptcy Court approved the Chapter 11 trustee's motion and, in connection
therewith, management projects that approximately $1.0 million will be expended
before the end of the third quarter to renovate the Mount Prospect branch, build
a new data center and move the company's personnel and equipment to Mount
Prospect.
The Bankruptcy Court order approving the B. Braun Lease Agreement further
provided that, among other things, the company could assume an agreement with B.
Braun to purchase drugs and supplies (the "Supply Agreement"). The Supply
Agreement expires in February 2005 and, pursuant to its terms, the company is
required to purchase at least 95% of its annual volume requirements related to
twelve product categories from B. Braun. However, the company has the right to
remove any product category from the purview of the Supply Agreement if such
product category is offered by another vendor at pricing that is 10% lower, in
the aggregate, for that entire product category, provided that B. Braun waives
its right to match such pricing. The company also has the right to terminate the
Supply Agreement after sixty days written notice if B. Braun provides products
or services of a quality or technical level that fail to meet customary
standards of the medical industry. However, if the company terminates the Supply
Agreement for any other reason, it must reimburse B. Braun (i) certain
incentives previously paid to the company, which are calculated at $150,550 per
unexpired quarter under the Supply Agreement and (ii) the greater of $4.0
million or 50% of the company's purchases for the twelve months immediately
preceding the early termination date. Additionally, if it is determined that the
company does not satisfy the 95% purchasing requirement for any of the twelve
product categories and such failure is not related to a lack of product
availability, then the company is required to pay B. Braun an amount equal to
10% of the previous quarter's purchases. Since the inception of the Supply
Agreement, no such quarterly shortfall has been in evidence and, while no
assurances can be given, management does not expect that such circumstances will
arise during the remaining term of the Supply Agreement. Moreover, due to the
company's business relationship with B. Braun and the advantageous drug and
supply pricing enjoyed by the company, management currently has no intentions of
terminating the Supply Agreement and, accordingly, management believes it is
unlikely that the early termination penalties will be invoked. However, if an
early contract termination did occur, the penalties, which would have aggregated
approximately $5.2 million at March 31, 2003, would have a material adverse
effect on the company's financial position, liquidity and results of operations.
Effective December 3, 2002, the Chapter 11 trustee and the company entered
into a three year telecommunication services agreement with AT&T Corporation
("AT&T") (the "Master Agreement") whereby the company will receive advantageous
pricing and other favorable terms. Under the terms of the Master Agreement, the
company committed to minimum annual telecommunication service purchases of
approximately $2.2 million (the "Minimum Annual Commitment") commencing on the
effective date of the Master Agreement. In the event that the company fails to
meet the Minimum Annual Commitment, AT&T will invoice the company for the
difference between the Minimum Annual Commitment and the actual services
purchased during such measurement period. Under certain circumstances, AT&T, at
its sole discretion, may reduce the Minimum Annual Commitment amount during any
given period. Moreover, if certain material conditions are satisfied, in the
third year of the agreement, the company may unilaterally terminate the contract
without penalty. In the event that the Master Agreement is terminated by the
company without cause or by AT&T for cause, the company will be required to pay
an amount equal to 35% of the remaining Minimum Annual Commitment for the period
in which the termination occurs and for all unexpired periods under the term of
the Master Agreement. Although no assurances can be given, management believes
that the company's telecommunication service requirements will be sufficient to
meet the Minimum Annual Commitment amounts through the term of the Master
Agreement. In the event that the Master Agreement is terminated and the 35%
surcharge is invoked or the Minimum Annual Commitment is not met in a given
period, the aforementioned AT&T supplemental charges could have a material
adverse effect on the company's liquidity and results of operations.
The company has reached a proposed settlement with the Internal Revenue
Service (the "IRS") regarding a notice of deficiency previously issued by such
taxing authority. Moreover, management and the IRS have agreed in principle to a
deferred payment plan. The proposed settlement agreement has been approved by
the Joint Committee on Taxation. If approved by the Chapter 11 trustee and the
Bankruptcy Court, the proposed settlement and the deferred payment plan would
collectively result in (i) a federal tax liability of approximately $9.9
million,
58
(ii) interest of approximately $9.3 million at May 16, 2003 and (iii) penalties,
if applicable, to be determined by the IRS in accordance with certain statutory
guidelines. The federal income tax adjustments would also give rise to certain
incremental state tax liabilities. If the Bankruptcy Court or the Chapter 11
trustee do not approve the proposed settlement or the deferred payment plan, the
financial position and liquidity of the company could be materially adversely
affected. Additionally, in connection with recently enacted legislation, during
the year ended December 31, 2002 the company filed refund claims with the IRS
requesting approximately $1.8 million of previously paid alternative minimum
taxes, of which, approximately $0.1 million was received by the company in
February 2003. See Note 8 to the company's condensed consolidated financial
statements for further details regarding the proposed settlement and the
deferred payment plan.
State Medicaid agencies and their fiscal intermediaries periodically conduct
payment reviews or audits of claims for services provided to Medicaid
beneficiaries. In connection therewith, certain of the company's claims are
currently being reviewed by, among others, Kansas Medicaid and Rhode Island
Medicaid (see Note 10 to the company's condensed consolidated financial
statements for further details). Although management believes that the company's
billing practices are fundamentally sound and the company is in substantial
compliance with state Medicaid billing requirements, the adverse financial
impact of Medicaid-related regulatory matters, if any, is currently unknown. In
the event that the two aforementioned Medicaid matters or similar reviews/audits
by other agencies result in findings, the company could face civil, criminal
and/or administrative claims for refunds, sanctions and/or penalties in amounts
that, in the aggregate, could be material to its financial condition, results of
operations and liquidity.
The Balanced Budget Act of 1997 (the "BBA"), as amended by the Medicare,
Medicaid and SCHIP Balanced Budget Refinement Act of 1999 (the "BBRA"), required
certified home health agencies participating in Part A of the Medicare program
to post surety bonds in an amount equal to the lesser of 10% of the amount that
Medicare paid to the provider in the prior year or $50,000. The deadline for
securing such bonds has been extended indefinitely while the Centers for
Medicare & Medicaid Services ("CMS") reviews the bonding requirements. CMS has
indicated that the new compliance date will be sixty days after the publication
of the final rule. Management believes that, based upon currently available
information derived from discussions with surety bond brokers and organizations
that issue surety bonds, the necessary bonds will not be generally available to
home health providers until CMS 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 May 16, 2003, the company had only one Medicare Part A certified
home health provider location, which has not obtained a surety bond.
Additionally, as required by the BBA, CMS also intends to issue separate surety
bond regulations applicable to Medicare Part B suppliers. Virtually all of
Coram's branches participate as suppliers in the Medicare Part B program.
Similar bonding requirements are being reviewed by state Medicaid programs and
at least one state requires Medicaid suppliers to maintain a surety bond.
Currently there is no federal surety bond requirement in effect for Medicare
Part B suppliers. If such a requirement becomes effective and if Coram is not
able to obtain all of the necessary surety bonds, it may have to cease its
participation in the Medicare and Medicaid programs for some or all of its
branch locations. In addition, depending upon the final regulations, the company
may be able to establish letters of credit for the bonding requirement in whole
or in part, however, such letters of credit may require the use of cash in order
to be fully collateralized. Management also believes that another potential
source for meeting bonding requirements may be to obtain bonds through a
qualified insurance carrier. However, no assurances can be given that cash
generated by operations, letter of credit availability or bond availability from
an insurance carrier at a reasonable cost will satisfy these surety bond
requirements when they are finalized.
Certain administrative simplification provisions of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") require specified
healthcare entities, including the company, to only use standard medical billing
code sets and make standard electronic transactions available for all billing
transactions. These new provisions are currently scheduled to take effect no
later than October 16, 2003. These changes are having a critical impact on the
company and its market segment because no standard billing mechanisms were
available to the home infusion industry until January 2002. In order to comply
with these new provisions, it will be necessary for the company to renegotiate
or amend a significant number of its commercial payer contracts by October 16,
2003. The standard billing code sets available under the HIPAA provisions may
require that the company separate certain elements of its services, thereby
resulting in possible reductions of the overall revenue that the company may
earn under its payer contracts. Additionally, several large commercial payers
are seeking to attain HIPAA compliance by renewing their contracts with their
providers on terms and conditions that may not be favorable to the provider,
bidding out their provider services through an open proposal process,
terminating existing provider contracts, requiring providers to contract with a
third party administrator at less favorable rates and unilaterally imposing new
billing codes and fee structures on existing providers. Moreover, the company's
payers may experience difficulties and/or distractions as they strive to become
HIPAA compliant, thereby disrupting the company's cash collections and
reimbursement activities. As a result of the aforementioned HIPAA compliance
activities and payer contracting initiatives, the company may not be successful
in negotiating new contracts and/or renewing existing contracts in order to
provide timely and adequate levels of reimbursement and profitability.
The company recently executed a settlement agreement with one of its
national managed care payers whereby the company will receive settlement
proceeds of approximately $0.6 million. Management expects to receive the
proceeds of such settlement agreement during the three months ending June 30,
2003. Additionally, management is
59
currently negotiating other agreements related to aged accounts receivable with
certain regional plans affiliated with the aforementioned national payer.
However, no assurances can be given that additional agreements will be reached
or that future financial resolutions with this payer, if any, will be on terms
that are favorable to the company.
Coram maintains systems and processes to collect its accounts receivable as
quickly as possible after the underlying service is rendered. Nevertheless,
there is generally a time lag between when the company pays for the salaries,
supplies and overhead expenses related to the generation of revenue and when the
company collects payments for the services rendered and products delivered.
Consequently, as the company grows its revenue related to its core and non-core
therapies, the need for working capital increases due to the timing difference
between cash received from growth in sales and the cash disbursements required
to pay the expenses associated with such sales. As a result, the amount of cash
generated from the company's accounts receivable may not be sufficient to cover
the expenses associated with its business growth.
Management throughout the company is continuing to concentrate on enhancing
timely reimbursement by emphasizing improved billing and cash collection
methods, continued assessment of reimbursement systems support and concentration
of the company's expertise and managerial resources into certain reimbursement
locations. In December 2000, Coram announced that as part of its continuing
efforts to improve efficiency and overall performance, several Patient Financial
Service Centers (reimbursement sites) were being consolidated and the related
reimbursement positions were being eliminated. Additionally, in May 2003 the
company announced the transition of all active patient accounts currently
serviced by the Dallas, Texas reimbursement site to other reimbursement sites
during May and June 2003. The Dallas Patient Financial Service Center will
maintain a small workforce to support the resolution of certain inactive
accounts from the company's other reimbursement centers. By consolidating to
fewer sites, management expects to implement improved training, more easily
standardize "best demonstrated practices," enhance specialization related to
payers such as Medicare and achieve more consistent and timely cash collections.
Management believes that, in the long-term, payers and patients will receive
better, more consistent service. However, no assurances can be given that the
consolidation of the company's Patient Financial Service Centers and other
related activities initiated by management will be successful in enhancing
timely reimbursement or that the company will not experience a significant
shortfall in cash collections, deterioration in days sales outstanding ("DSO")
and/or unfavorable aging trends in its accounts receivable.
RELATED PARTY TRANSACTIONS
Refer to Note 4 of the company's condensed consolidated financial
statements, incorporated herein by reference, as well as, Part III and Note 11
to the audited consolidated financial statements included in Coram's Annual
Report on Form 10-K/A for the year ended December 31, 2002, incorporated herein
by reference, for further discussion of related party transactions.
RISK FACTORS
Refer to the caption "Risk Factors" under Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Coram's Annual
Report on Form 10-K/A for the year ended December 31, 2002, incorporated herein
by reference, for further discussion of certain risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the company's exposure to market risk related to
changes in interest rates. This discussion contains forward-looking statements
that are subject to risks and uncertainties. Actual results could vary
materially as a result of a number of factors, including, but not limited to,
changes in interest rates.
As of March 31, 2003, the company had outstanding long-term debt of
approximately $9.3 million of which $9.0 million matures on June 30, 2003 and
bears interest at 9.0% per annum. Additionally, on May 12, 2003 the company
executed a capital lease agreement with aggregate payments of approximately $1.5
million, including related interest, through May 2006. Because substantially all
of the interest on the company's debt is fixed, a hypothetical 10.0% change in
interest rates would not have a material impact on the company. Increases in
interest rates could, however, increase interest expense associated with future
borrowings by the company, if any. The
60
company does not hedge against interest rate changes. See Notes 7 and 10 to the
company's condensed consolidated financial statements for further details
regarding its debt obligations.
The debt to equity exchange transactions described in Note 7 to the
company's condensed consolidated financial statements qualified as troubled debt
restructurings pursuant to Statement of Financial Accounting Standards No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings. In
accordance therewith and certain provisions of SOP 90-7, Financial Reporting by
Entities in Reorganization under the Bankruptcy Code, the company will not
recognize any interest expense on the remaining Series B Notes until after
confirmation of a plan or plans of reorganization by the Bankruptcy Court.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The company performed an evaluation under the supervision and with the
participation of its management, including the company's Executive Vice
President, who is fulfilling the duties and responsibilities of the Chief
Executive Officer and President of the company, and the Chief Financial Officer,
of the effectiveness of the company's disclosure controls and procedures, as
such term is defined under Rule 13a-14(c) and Rule 15d-14(c) promulgated under
the Securities Exchange Act of 1934, as amended, within 90 days prior to the
filing of this report. Based upon their evaluation, the company's Executive Vice
President and the Chief Financial Officer concluded that the company's
disclosure controls and procedures effectively ensure that the company records,
processes, summarizes and reports in its public disclosures, including
Securities and Exchange Commission reports, all information: (a) required to be
disclosed, (b) within the time periods specified and (c) pursuant to processes
that enable the company's management, including its principal executive and
financial officers, as appropriate, to make timely decisions regarding
disclosure.
(b) Changes in Internal Controls.
There were no significant changes in the company's internal controls or in
other factors that could significantly affect the company's internal controls
subsequent to the date of their most recent evaluation.
61
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Descriptions of the material legal proceedings to which the company is a
party are set forth in Note 10 to the company's condensed consolidated financial
statements contained in this report and are incorporated herein by reference.
The company is also a party to various other legal actions arising out of
the normal course of its business. Management believes that the ultimate
resolution of such other actions will not have a material adverse effect on the
financial position, results of operations or liquidity of the company.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of these actions cannot presently be determined.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.1 --- 2003 Coram Key Employee Retention Incentive Agreement
and Rider to 2003 Coram Key Employee Retention
Incentive Program Agreement by and between Coram, Inc.
and Allen Marabito.
10.2 --- 2003 Coram Key Employee Retention Incentive Agreement
by and between Coram, Inc. and Scott Danitz.
10.3 --- 2003 Coram Key Employee Retention Incentive Agreement
by and between Coram, Inc. and Deborah Meyer.
10.4 --- 2003 Coram Key Employee Retention Incentive Agreement
by and between Coram, Inc. and Michael Saracco.
10.5 --- Agreement dated May 12, 2003 between Curaflex Health
Services, Inc. and B. Braun Medical, Inc. for the lease
of 1,000 Vista Basic pumps.
10.6 --- Agreement dated November 17, 1995 by and between McGaw,
Inc. and Coram Healthcare Corporation for the purchase
and sale of products, including various amendments
thereto. Certain portions of the agreement and related
amendments have been omitted pursuant to a request for
confidential treatment. The entire agreement and
related amendments have been filed confidentially with
the Securities and Exchange Commission.
10.7 --- Amendment to agreement for purchase and sale of certain
disposables and IV products, dated May 12, 2003, by and
between B. Braun Medical, Inc. and Coram Healthcare
Corporation. Certain portions of the amendment have
been omitted pursuant to a request for confidential
treatment. The entire amendment has been filed
confidentially with the Securities and Exchange
Commission.
99.1 --- Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
99.2 --- Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
62
(B) Reports on Form 8-K
On May 9, 2003, Coram Healthcare Corporation filed a report on Form 8-K
regarding a proposed disclosure statement and a proposed plan of
reorganization filed by Arlin M. Adams, Esquire, the Chapter 11 trustee
for the bankruptcy estates of Coram Healthcare Corporation and Coram,
Inc. (collectively the "Debtors"), in respect of the Debtors.
SIGNATURES
Pursuant to the requirements 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.
CORAM HEALTHCARE CORPORATION
By: /s/ SCOTT R. DANITZ
--------------------------------------
Scott R. Danitz
Senior Vice President,
June 17, 2003 Chief Financial Officer and Treasurer
63
CERTIFICATION
I, Allen J. Marabito, certify that:
1. I have reviewed this quarterly report on Form l0-Q/A Amendment No. 1 of
Coram Healthcare Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
-particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 17, 2003
/s/ ALLEN J. MARABITO
--------------------------------------------------------------------
Allen J. Marabito
Executive Vice President and principal executive officer fulfilling
the duties and responsibilities of president and
chief executive officer of the company
64
CERTIFICATION
I, Scott R Danitz, certify that:
1. I have reviewed this quarterly report on Form l0-Q/A Amendment No. 1 of
Coram Healthcare Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 17, 2003
/s/ SCOTT R. DANITZ
--------------------------------------------
Scott R. Danitz
Senior Vice President,
Chief Financial Officer and Treasurer
65
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 --- 2003 Coram Key Employee Retention Incentive Agreement
and Rider to 2003 Coram Key Employee Retention
Incentive Program Agreement by and between Coram, Inc.
and Allen Marabito.
10.2 --- 2003 Coram Key Employee Retention Incentive Agreement
by and between Coram, Inc. and Scott Danitz.
10.3 --- 2003 Coram Key Employee Retention Incentive Agreement
by and between Coram, Inc. and Deborah Meyer.
10.4 --- 2003 Coram Key Employee Retention Incentive Agreement
by and between Coram, Inc. and Michael Saracco.
10.5 --- Agreement dated May 12, 2003 between Curaflex Health
Services, Inc. and B. Braun Medical, Inc. for the lease
of 1,000 Vista Basic pumps.
10.6 --- Agreement dated November 17, 1995 by and between McGaw,
Inc. and Coram Healthcare Corporation for the purchase
and sale of products, including various amendments
thereto. Certain portions of the agreement and related
amendments have been omitted pursuant to a request for
confidential treatment. The entire agreement and
related amendments have been filed confidentially with
the Securities and Exchange Commission.
10.7 --- Amendment to agreement for purchase and sale of certain
disposables and IV products, dated May 12, 2003, by and
between B. Braun Medical, Inc. and Coram Healthcare
Corporation. Certain portions of the amendment have
been omitted pursuant to a request for confidential
treatment. The entire amendment has been filed
confidentially with the Securities and Exchange
Commission.
99.1 --- Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
99.2 --- Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002.