Coram Note Holders Win Right to Convert Debt to Equity; Reorganization Plan Denied

Denver Under a decision by a U.S. Bankruptcy Court judge in Delaware, Coram Healthcare note holders can convert debt of about $122 million to equity in the form of preferred stock. The move allows Coram, which in August filed for Chapter 11 bankruptcy protection, to remain in compliance with the public company exception under the Stark II rule.

Judge Mary Walrath also extended until March the company's right to resubmit a reorganization plan to the court. Walrath denied Coram's initial plan, which would have given all the company's equity to debt holders, leaving nothing for its 4,850 shareholders. The company had hoped to emerge in December as a private business.

"What the issue came down to is that [Daniel Crowley, Coram chairman, president and chief executive officer] has a relationship with one of the lenders," said Kurt Davis, acting vice president of corporate communications/investor relations. Crowley has long served as a consultant on investment matters to Cerberus Partners. Walrath said that created a potential conflict of interest and told the company it needed to clarify the issue. "So we're looking at the best way to do that," Davis said. "We need to make sure that the court is comfortable that the relationship with the lender didn't influence the plan so it is unfair to the shareholders."

Davis said he expected the new plan would in many ways mirror the first one, including taking the company private. "We think we'll have a different capital structure with lower debt, something that the company can handle. Whether that's as a private company - I suspect that it will be, but I can't say that definitely."

Despite the reorganization denial, company officials were largely relieved by Walrath's decisions. "This will allow us to work on the debt restructuring in an orderly fashion," said Crowley.

Coram sought bankruptcy protection because of its inability to repay $251 million in debt by May of this year and because of its need as a public company to remain in compliance with the physician ownership and referral provisions of Stark II, the Omnibus Budget Reconciliation Act of 1993. While it has shown improved cash flow and results from operations, company officials said they feared that stockholder equity in the first quarter of 2001 would fall below the level Stark II requires to except ownership of stock in publicly traded companies by referring physicians or their families.

Under the note exchange agreement, Series A and B note holders can exchange their holdings for preferred stock. Preferred stockholders will have 47.5 percent of the voting rights and can select no fewer than three of seven directors on Coram's board. They have, however, agreed to suspend their governance rights for the duration of the Chapter 11 process.