Free Appendix - District Court of Delaware - Delaware

Case 1:04-cv-01565-SLR

Document 125-8

Filed 04/17/2007

Page 1 of 30

The Equity Committee

took

exiensive

discovery in anticipation

of the

confirmation

hearing

In

November2000

toward the concJusion

of

that

discovery

the

Equity

Committee

filed

objections

to confirmation

of the

Plan

It

objected

to conliimation

on four

grounds

that

the

Debtors were not insolvent

ii that

the

Plan was not proposed

in

good

faith

because

Corani had

failed

to disclose

that

its

Chief Executive Officer

CEO
the

and

Chairman

Daniel

Crowley had
whose

lucrative

employment

contract

with Cerberus Partners

L.P

Cerberus
board of

Noteholder

principal

Stephen

Feinberg

had

been

member of

Comm

directors

and

Chairman

of its Compensation

COmmittee

until

July

2O00

iii that

conduct

of Cerberus and

certain

of Corams

directors

and

management was improper and nequitableand
either to derivative

caused significant

damage
need

to

the

Company

giving

rise

claim on behalf of

the estates

or the

to

recharacterize

Cerberus

claim as equity and

iv

that the

Plan

improperly released

the

shareholders

claims

against

Crowley

and

others

Objections

to

Confirmation

at

2-3

On December 21 2000
Court denied cOnfirmation of the Plan

at

the conclusion

of

six

day confirmation

hearing

the

The Court found

that

under

all

the various

and

competing

valuations

Corarn

was

in fact

insolvent

December

21

2000

Tr
to

at

88 The
actual

Court

concluded

however

that

Crwleys

relationship

with

Cerberus gave

rise

an

conflict

of

interest which

tainted the debtors

restructuring

of

its

debt

the

debtors

negotiations

towards

plan even

the

debtors restructuring

of

its

operations

Id
be
in

at

87-89 same

As

result

of the taint the

Court found

it

impossible

to

kiiow

whether

we

would

the

boat

today or whether

different

plan

would

have

been proposed

by the debtor

had

the existence

and

terms of

Crowleys

contract

whh Cerberus been

disclosed

timely

Id

at

65

Accordingly

the

COUrt was

to

find on the record before

it

thai

the

Plan had

been

proposed

in

good

faith

Id

at

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Scope

of theExamination

On
Code

February 12001

the

Debtors moved

for entry

of an order pursuant

to

Bankruptcy

105

appointing

Goldin independent

restructuring

advisor

to the

Debtoi

The motion proposed

that

Joldin exaixdne analyze

and

report

on the following

issues

whether
business

the

Debtors

business

plan with

and the projections
business

that

underlie

their

plan

are consistent

reasonable

judgment
Partners of

whether
valuation

Goldin found
analysis

any evidence
not

that

Chanin

Capital

was by

independently preparod
the

or free

any undue

or

improper influence

member of

board

or the

Debtors

management
whether
the

Plan was

consistent

with the best

interests

of the

Debtors

whether
Plan

Gol4in found
not

any material.facts
in

that in

support

conclusion with

that

the

was
or

proposed

good

faith fair

and
to
all

compliance
in

applicable

law

was

not

fimdamentally

parties

interest

and

whether
interests

the Plan

Or

some

modjflcaiion

thereto

would

best serve

the

of the Debtors

The motion proposed

that

3odin

report

on these

issues

both

to

the

Court and

to

special

committee the Special

Committee
stated that
in

cf the

independent

members

of

Comm

Healthcares

board

of directors

The motion

the

Debtors

view Goldins

services

would

enable

the

Court to make

definitive

deerrnination

as

to

whether

it

can properly

confirm

planlsimilar

to

the

Plan

and/or

provide

guidance

to the

Court

the

Debtors

and

other

parties

in

interest

with

respect

to the negotiation

and

formulation

of

any viable

alternative

Plan

as

may

be

appropriate

Motion

to

Appoint

Goldin

at

17 26-29

Objections

to the

Debtors

motion

to

retain

Goldin

were

filed

by

Office

of the

U.S..Trustee

and the Equity Committee In addition

on February 62001

the Equity

Comrriittee

-4K.2IO73.7

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moved

for leave

to

file

complaint the

Complaint
against

on behalf of Coram Heah1iare asserting

breach.of

fiduciairy

duty and related

claims

Crowley Feinberg and Cerberus

At

hearing

on February

26

2001

the

Bankruptcy

CoirtappEoved

the

Debtors

motion to appoint

3oldin as

their

independent

restructuring

advisor

subject

to certain

modifications.3

To

resolve

the

U.S

Trustees objection

that

the

motion impinged on her

exclusive

power

to appoint

examiners

the

Debtors agreed

that

Godin would

be retained

by

the

Debtors pursuant

to

Code

327ª
Committee

ii Goldins
and other

report

would

not

be flied with the Court but

would

be

given

to the Special

partis in interest

and iii Goldins

function

wouid

nat

be to report

to the

Court as an examiner

but

rather

to

advise

the Special

Committee

respecting

the allegations

and claims

in the

proposed

Complaint

including whether

the

Debtors ought to pursue any of the proposed

claims

and

potentialameudments

to the

Plan

It

was

also

agreed

that

Goldin would

attempt

to

mediate

consensual

resolution

among

the

.1

Debtors

the

Equity Copuninee

and other parties in interest

Fr of Feb

26

2001

hearing

at

7-

914-1826

On March 292001
Levin Naftajs Frankel

Goldin

filed

an

application

to

approve

the retention

of Kramer

LLPas

counsel

to

the

Debtors to

assist

Goldin

in

connection with

its-

investigation

and

report

By

order

dated

May 14

2001

the

Court approved

that

retention

The

Court also denied
prejudice to

the Equity

Committees motion
at later

for leave
It

to

file

the

Complaint
at

without

renewal of the motion
that

date

was

also agreed full

the

February 26 hearing
diligence

the

Debtors would
financial

give theEquity and
the other

Committee

due

access

to

Corams
at

records

pertinent

documents

Fr of

Feb 26 200 hearing
retention application Deloitte

35-36 Subsequently

Court approved
to

supplemental
its

filed

by the Equity Committee pursuant

advisor review

Touche

LLP

DT

which

financial

was

authorized

to

undertake

due

diligence

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C.-

Methodologyof

the

Examination

During March 2001

Goldin met with representatives

of many

of the key

participants

in these

bankruptcy cases

including

the

Debtors

the

Equity Committee the

--

Creditors Committee

and the Noteholders

At

these

meetings Goldin reviewed

with each

constituency

the process

it

intended.to

follow

in

conducting

its

examination

Goldin also

solicited

the

views

of these

parties

on various

factual

and legal issues and

invited-

them to provide

further

input

Finally Gbldin circulated

draft report

to the various

constituencies

for their

cormnent

and review

After reviewing

and considering

those

comments and suggestions Goldin-

-_

prepared

Reprt

that

it

issued

on July

112001

This Updated

Report

is

dated

S.eptember4

2001

Documents

Goldin and Kramer Levin

reviewed

the following

documents

among

others

the discovery

taken

in

connection.with

the confirmation

hearing including

the

depositions

taken

by the Equity Committee

and the exhibits

marked

at

those

depositions

the

transcript of

the-confirmation

hearing

and

the hearing

exhibits

the papers-filed

in

support

of and

in

opposition

to

theEquitys

Committees

motion for leave

to

file

the

Complaint

documents

filed

with the Securities

Exchange

Commission

or

in

the

bankruptcy

case

and- publicly

available

analysts

reports

and

news

articles

concerning

Coram

In

addition Goldin reviewed-extensively

the

Debtors

financial records

and

other

pertinent

company

reports

and

documents

as well

as the

three financial

advisors

valuation

reports

and

numerous

healthcare

company and

industry

reports

Interviews

Over seven weeks

Goldin

and

its

counsel

interviewed

the

following

15

people with

knowledge

relevant

to the investigation

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Person

Relationship

to

Corarn

Donald

Amaral

CEO
1999

of Coraxn and

from Oetober
to

1995

to

April

October

November 1999
October 1995
to

director present

of Corain from

William

Casey

Outside direLtor of Comm

since

1997

bniel Crowley

CEO

President

and Chairman 1999

of theBoard
to

of Coramn

from November

present

Stephen

Feinberg

Managing member of Cerberus Associates

L.L.C

the general

partner

of Cerberus of Coraru

Partners

LLP
1998

outside to July

director

from June

2000 from -1994

Richard Fink

Outside director of Coramn February 2000

to

David

Friedman

Partner

at

Kanowitz

Benson

Tories to

Friedman

LLP

bankruptcy counsel

Comm
Daniel

Lynn

Deloitte Services

Touche

Financial

Advisory

Christina

Morrison

Principal financial

at

Deutsche
to

Banc Alex Brown Coram
Sachs

advisors

Edward Mule

Former partner

at

Goldman

Co
through

Wendy

Simpson

CFO of

Coram from March 1998

March 2000
Peter

Smith

Outside director of Coram since

1994

Richard Smith

CEO
prior

of

Coram from
then

April

1999

to

October

1999 CFO and
to

President

of Coram

April

1999

Sandra

Smoley

Outside director of

Comm

since

February

2000 Edward Steams
Senior Vice President Corporation Eugene Tiliman
Partnei
at

of Foothill

Capital

Reed Smith Shaw
counsel to

McClay

LLP

regulatory

Coram

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V.VVV

These

interviews

took place

in person

or

by telephone

in

New

York Denver Baltimore and

California

Go din
would
facilitate

opted

for

relatively

informal

style

of interviewing which

it

beliee4

the free

flow of information

and

help limit

costs

The

interviews

were not-

transcribed

and other parties

in

interest

were not permitted

to

attend

the interviews

All the

interviewees

were given

the opp9rtunity

to

appear

with counsel

some chose

to

do so while

qthers

did

not

Goldin and/or

Kramer

Levin took notes

at

each

interview

and prepared

interview

summaries

or use

in

drafting

th

Report

In adduiion

Goldin personnel

sjent

ten

days

at

Comms

offices in

Dnver

Colorado on four

separate

occasions meeting with members of the Debtors

current

management
Goldins

Gbldin spoke with

the following

people

who proiided

information

pertinent

to

financial

analysis

Comm
Scott

Danitz

Kate Douglass John Ellis Frank Geiger

Richard Iriye
Allen

Marabito Meyers

Debbie

Ron
Vito

Mills

Ponzi
Reynolds Saracco

SVP and CFO SVP Clinical Servies SVP Operations Eastern Region SVP Materials Management SVP Operations Western Region EVP SVP Field Sales VP Management Information Systems SVP Human Resources
Controller

Gerald

Michael

Steven Schmahi David

SVP Specialty VP Contracting VP VP
Finance

Products and
Pricing

Schwab

General Counsel

Joseph Sivori Rodney Wright

Reimbursements

EmstYoung
Arlyn

Dozeman Simmons

Partner

Shawn

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JolinR Sato

cianin
Eric

Capital Scroggins

Partners

Managing

Director

Robert

Stobo

VP Healthcare

Group

UBSWarburg Robert DishnerPhilip M.Pucciarelli

AssOciate Director Global Healthcare

GlbalHighYield

Research

Firancia1

iutlis

Driving on

its

extensive

revie bf

finialrºords
conducted

and

other

curæents

as

vcU

as the

discovery

and benrhg

record

the interviews

it

and

other

due

diligence

Goldin performed

detailed

financial

analysis

to

determine the value of

Corsin

at

four

times

the Petition

Date ii the tine of

the confinnation

hearing

on the Plan

and

iii June

152001

and

iv

August

31 2001
critiqued

In

addition

to

performing

its

own independent

valuation Goldin reviewed

analyzed and

the valuations

performed by Chanin

Capital

Partners

on

behalf

of the Debtors

UBS Warburg on

behalf

of the Cred hors

Committee and

DT

on

behalf of the Equity Committee

Mediation Efforts

In

an effort

to

explore

possible

consensual

resolution

of the

outstanding

dispute Goldin had

number of meetings and
the

discussions

with

representatives

of

the

Equity Committee the Noteholders

arid

Debtors

Goldin has considered

alternative

settlement

proposals-and

has discussed

them

with the parties

In

addition as noted

in

an attempt

to further the

settlement

dialogue

Goldin simultaneously

furnished

this

Report

in

draft

form

to

the parties

in

interest

including

the Special

Committee The

parties

comments on thedraft

report

were considered

and when appropriate

the

Report issued on July

II

was modified

accordingly

The

settlement

dialogue

is

ongoing

and should

the

Court and/or

parties

in

interest

-9Ku2%nsn3

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wish

Goiclin

willbe.available

to continue

its

mediation efforts.following

dissemination

of

this

Report in final form

II As
the

CONCLUIOS
Bankruptcy Court found

EECOAflONS
Crowleys employment
agreement
with

Cerleru
tainted

created

an actual

conflict

of interest

on

his

part the non-disclosure

of that agreement

the

debtors

restructuring

of

its-

debt the debtors negotiations

towards the plan

even

the

debtprs restructuring

of

its

operations

Fr of

Dec 21

2000

hearing.at

88-89

Crowleys and

Feinbergs

failure to disclose

the

full

extent

of the

Crowley/Cerberus relationship

and

the

potential

for

abuse

it

posed
the

to

other

directors

and officers was

breach

of their respective

fiduciary

duties

While

evidence

as

to

Crowleys and Feinbergs
to

intentions

in

this

regard

is

not

conclusive

Feinbergs nondisclosure

appears

have

been

inadvertent

Crowley by

contrast

had

an incentive

to conceal

the existence

of his Cerberus contract

so

as

not to risk

reduction

of his Coram compensation

and

his failure to

make

appropriate

disclosure

may not

have

been

inadvertent.

It

does

not

appear

however

that

either

Crowley or Feinberg acted

with

culpable

intent

of the

sort

alleged

in the

Equity Committees Complaint

The evidence

does notestablish

that either

man

intended

or expected

that

Crowley would

seek to advance

Cerberus

interests

to

the detriment

of Corain

ad

its

shareholders

There

is

no indication

that

Cerberus or the other

Noteholders

ever

instructed

Crowley

to

act

contrary

to

the

companys
accord

best

interests

or

--

with

one

possible

exception

that

Crowley

ever

did

so

of his own

The one

possible

exception

is

Crowleys

decision

to

make

$6.3

million cash

interest

payment

to

the

Noteholders

on July

14 2000

at

time when the companys

cash was

low and

banki-uptcy

filing

vas

under

K1i2108n3.7

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active

consideration

Yfljat

decision

is

troublesome

whatever

the niceties

of the sit ation

companies

preparing

for

bankruptcy

are invariably

advised

well

to

husband

cash

Other than

the $6.3

million intere.t.paypeit

whichs
that
hard

it

turned

out

did

not

cause the cOmpany

any hann

thr is
Coranfs

no videncL suggeting

he had

io conflict

Crowley would

bave.mam
let

peratins

or finances

mbrØ

effectively

or

that-

he wOuld

have

identified

msnnimated any mergersale The evidende

or

finat

ntiapsaction

That

might

have -enabk-

-.m toavoid

bankruptcy

indcafethatCrOwleywotked

diligently

and

effectively

to stabilize

Comms

operations

and-improve

its

financiaiprfrmance

goal shared

by the Noteholders and the stockholders

Moreover
the

at

all

relevant

times

the

amount

of

Comams

debt

materially

exceeded

companys

enterpiise

value

At no time during

therelevant

period was the integdty

of

Corams accounting
impaired

financial

reporting

recordkeeping or system of controls

compromised

or

materially

In

sum

the

only damages

Coram

has suffered

by

virtue

of Crowleys undisclosed

conflict

of

interest

are those

related

to

the

Debtors

inability to obtain

confirmation

of

their

Plan

of Reorganization

in

December2000
fees

that

is the

approximately

$5

million

to

$6 million of

additional

professional

and

expenses

incurred

by

Coram

and

the

approximately

$7 million

to

$9 million

in

business

losses

attributable

to

the

prolonging

of the bankruptcy

Under

Delaware

law the remedies available

for

Crowleys breach of

fiduciary

duty

are limited

to

recovery

of these

damages

and

ii disgorgement or more
agreement

precisely reduction

of amounts

owed Crowley under

his

employment

Recovery

if

any on account
nOted

of

Feinbergs

breach

of fiduciary

duty

would

be limited to the damages

to

Coram

just

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Apotentially

prOtracted

lawsuit

against

Crowley and Feinbergto
would

rcovLr

the

sums

potentially

awardable

could

entail

morecost

to

Coram

than

the

suit

be worili.ln

addition

to the direct

expense of prosecuting

the suit

it

would likely

divert the attenUon

of

Comms
Corams

management from

the urgent

business

tasks

ahead

It

also

would

provide no benefit

to

existing

equity

holders

From

the standpoint

of Comarn

its

creditors

and

its

shareholders

consensual

and swift resolution

of the claims

if

achievable

on

appropriate

tenns

would

be far preferable

Accordingly

3oldin recommends that the Special

Comniitte

attempt

to resolve

the

litigation

through

among

other

things amendments

toCorams Plun of

Reorganization

necessary

first

step

toward

consensual

resOlution

is

to

reduce substantially

the

$13.4 million owed Crowley under his employment

agreemnt which Crowley Corams

is

not entitled to

receive

anyway

unless

and

until

the

Bankruptcy

Court approves

assumption of that

agreement amount

Goldin recommends

that the Special

Committee

require

$7.5

million

reduction

Jfl

that

This woujdVleave

Crowley with

total

of $5.9 million in bonus.compensation

fl

top

of his $650000

annual

salary

Second Goldin recommends
of Reorganization

that

the Special

Committee

cause

Corani to

amend
general

its

Plan

so as

to

offer

$13

million distribution

to

Corarn Healthcares

unsecured

creditors

and shareholders

Specifically

Goldin recommends

that

the Plan

be

amended

as

follows

The

cash

distribution

to

Coram Healthcares

general

unsecured

creditors

should

be increased

from $2 million

to

$3 million contingent

on

vote

by

that

creditorclass

approving the amended

Plan

This

would

increase

this

class recovery from the

26%

each

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creditor

would

have

received

under

the

Plan which

theyvote4.nnimously.1o.aprove

to

alinost4Q9

t...
In addition

..-..

......

$10

million distribution

shuld

be offered

to

Coram

I-lealthcares

shareholders contingent

oii

shareholder

class

vote approving

tle

anended Plan by

the requisite

majorities

The Plan should provide

that

if

the shareholder

class rejects

th

Plan

and

the

proposed

payment
the

shareholders

will receive

no distribution

with the lankniptcy

Curt

asked

to

approve

Plan pursuant

to the

cramdown
shareholders

provisions

of Code

1129b

Goldin

recommends
be done

that the distribution

to

take

thp

form of an equity

securify

if

that

an

consistent

with the requirements

of Stark

should Stark

11

preclude

distribbtion

iii

that

form

the distribution

should

be

in cash.2

The recommended $13
and unsecured

million distribution

by Coram

Healthcare

to

its

-shareholders

creditors

is

tantamount to

voluntary

contribution

designed

to
of

achieve

consensual

reorganization

by those

who

would

otherwise

be the beneficiaries

this

distribution

i.e the Noteholders

Its

sole

purpose

is to

concude

the

bankruptcy

and propsed

litigation

Significantly

in

that

regard the proposed

$13

million

payment

approximates the

losses

suffered

by

Comm

as

result of the

breach

of fiduciary

duty by Crowley

and

Feinberg

Goldinhas

not attempted
in

to

probe whether
that

distributin Stark
11

of equity

securities in-any

form

can be accomplished

way

meets

requirements

-13KL2aoagl3a

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JR
Background

FACTUAL II1NDINGS

Comm

Healthcare

was formed

in

July

1994

as.a result

of the merger OfT2

Medical Inc Curaflex Health Services Inc Medisys was

Inc..and

Heahhlnftisioninc

each

of

which

pnllcly

held

ntional

or regional

provider

ofbomeinfusion

thrapy

and related

services

Each of

these

compames became and
direct or

is

now

an indirect

wholly-owned

subsidiary

of

Comm
madp was

Healthcare

and

mdirect subsidiary

of

Coram

Inc

Comm
most

Heal thcare has

numbr

of acquisitions

since

it

commenced

operLiqns

the

significant

of which.

the acquisition

of certain

assets of the

home

infusion

business

of Caremark

Inc

wholly-

owned

subsidiary

of Caremark

International

Inc Inc
in

effective

in April

1995

In

addition

Coraii

Healtbcare

acquired

the stock

of H.M.S.S

leading

regionalprovider of home infusion

therapies

based

in

Houston

Texas

effective

September1994

As

result

of these

acquisitions

Coraxn Healthcare became

leading

provider

of

alternative

site

infusion

therapy

services

in the

Jnited

States

based on geographic service

area

and

total

revenue

Presently

Comm

Healthare

and

Corarn

Inc

through

their

wholly-owned

non-debtor subsidiaries

deliver infusion

therapy

services

through approximately

80 branch

offices located

in

40

states

and

Ontario

Canada

Infusion

therapy-involves

the intravenous

administration

of nutrition

anti-infective

therapy

HIV

blood factor

therapies

pain

management

chemotherapy

and other therapies.3

The upon

initiatioii

and duration

of these

infusion plan

therapies

is

determined by therapy

physician

based

patients

diagnosis -treatment

and response used
or
in

to

Certain

therapies

such as anti-infective
conditions or while

therapy are generally such as nutrition
infusion therapies

the treatment

of temporary infection
required
at

others

coagulants

may be

on

long-term

permanent

basis

The

that

are administered

patients

home

are

-14K12iIOR73.7

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In

addition

to the

mfision services

winch

are the core

of

its

business

Coram

pwned

businesses

that

provided other home health

services including

womefls health

business

which

provided alteriale

site

obstetucal

and

gynecological

support

services
orderphaimacy

litholifpsy

business for the oufptieæt treatinenf of kidne

stones

aix
the

claim administration

busines

Coram

also

had

veb of companies ollectivelyknown

as

Resource

NetworkRNet

that

provid1 network
the provision

managementservices

to-ttssist

managed

care

organizations

in coordinating

of h6me heªlthcare

In

addition starting in

1995 COram 1egan
infusion

to provide

support

serviLes

orC1iiiicairØsearch

studies involving

alternate

site

theiapy

Coram makes

its

warehouse

Of

clinical

data

from the pzovision

of home

infnsioii

thLrapis availableto

pharmaceutical

companies

and

others for use

in

designing

cliiiical

trials

and

other

aspects

of product

development

To

finance

its

acquisition

of Caremark

in early

1995

Coram borrowed

approximately

$355

million consisting

of

$205

million senior

credit

facility

and

$150

million

subordinated

bridge

loan

from an

affiliate

of Donaldson

Luf kin Jenrette

DLI

In

the

words

o1 Corm

director Peter

Smith Coram from
of 1995

that

time

on was always living under

cloud of

debt By
cliff

the

Summer
had

Corain

according

to another

former directo

was going

off

financially

It

amassed

over $400niillion

in

long-term

debt
its

suffered

aloss of more

than

$65

million

in

the

second quarter

of

1995 and

the price

of

stock

had

fallen

by almost

50%

administered In

by the patient

designated

care

partner patients

or

an employee

such patient

groups as immune suppressed
therapies

ASW
therapy

or agent

of

Coram

cancer
care

nd

transplant provided patients

patients bloodcoagulant
periodically life generally

or anti-infective

may be

over the duration
as episodic

of the primary disease

or for the

remainder of the

care

-15Kt22JflSIcfl.7

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..

MtbeurofitslendersUand
the

Cb

.in

Octob

-1995

Comm

hiredDon

..

Amaralto

replace

companys founder

James

Sweeney

as

CEO.andPresidenL

Sweeney-

remained

Chairman

of the Board

Before joining

Cora

Amaral

had

held executive

and/dr

board positions

at..

sevral healthcare

companies.incltiding

OrNda.Healthcorp

Summit Health Ltd and CareMatiix
an exprienced turnaround executive..

Corporation

He was known

throughout the industry

as

He

says

Corarn was the biggest

mess

ever saw

my

life

when

took over as

CEO

Upon
that

takingover

in

October

1995

he commenced

$1.5

billio-Iawsuit

against

Caremark

alleging

Caremark had

misrepresented

the value

of

its

home

infusion

business

Amaral

says

that

Coram-s

ciains

against

Caremark

were

its

prime asset

at

thetime

and that

th

litigation

was

must

win

for

the-company

In

Amarals vinw Corarewas

fighting on three fronts

at

the

time he took over

as

CEO

the Carernark

litigation

improving

operations

and

refinancing

its

debt

and/or

obtaining

breathing

room from

its

lenders

The Caremark
of

suit was

settled

in July

1997

netting

Coram $165

million through

combination

cash

payment

anti

loan

forgiveness

Arnaral

proceeded

to

try

and tackle

the other

two fronts

Throughout

1996

and

1997

Amaral devoted

significant

energies

to trying to

sell

or

merge

the

company

Hebelieved

Coram

could

never survive

as

stand-alone

company industrj
His sale

because

it

offered

only

one of the three basic segments

within

the

home heakhcare

infusion

services

but not

oxygen

therapy

or durable

medical equipment

DME
by

efforts

continued

although

with

less intensity

into

1998

Incentivized

$4 million
--

-16KL22IOU717

A764

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prospective

bonus Maral

reported

woiking

with Bear

Stearns

to

explorepossib1eiransactions

with approximately

ten

conpani

Although

Amaral

seems

to

have

come

close

on at least two

Occiasions

he never

succeeded

in finding

purchaser

Tn

October

1996

Tntegrted

Health Services

agreed

to

acqhe

Coram
stock

But in Apr11 1997

after

its initial

due diligence

Integrated

abandonedits

bid Corarns

promptly

lost

half

its

value

Corarn alsoheld

serious

discussions

with Apria respecting

merger

at

the

time -Apria

was COrains main competitorand
merger Coram would

theleadhig

provider of

booxygen
both

therhpy

and DM13.

In

such

haveprovided

the thIrd

eiemeit

that

Amaral and

Comms
fell

founder

Sweeney Summer

believed

was

Critical

to

teing an industry

leader

The

proposed

deal

through

in the

of 1998

Amaral offers several

explanations

for

Comms
and

inability

to

merge

First the

industry

was

going through

difficultxinies

during

1997

1998

and

stock

prices

were depressed

in the

wake of

the

Columbia

Healthcare

imbroglio

Second because of Cormns

growing debt

it

became

clear

that

Coram would

have

to

be the consolidator

rather

than

the

acquiree

which

limited

the available

options

Finally

Amaral

--

who was

significant

shareholder

owning

.124296

shares

and 2500000

options

and

consistent

advOcate

for the shareholders

says

that

number

of the

proposed

deals

failed

because he held out perhaps

too

tenaciously

for the

highest

price

possible

In retrospect

he believes

he shoald have

done

whatever

it

took

to

consummate

deal even

if

that

meant accepting

lower offer

In

1998

and

1999

Amarals

focus

shifted

from actively

soliciting

mergers to

trying to

grow

the

company

internally

The main growth

area

was

division

called

Coram

Prescription

Services

CPS CPS

provided mail-order

prescription

services

to

HMOs

-I7
X1.2IUW3.7

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employer benefit

plans

and other uanaged

care

custOmers

as

well as.pharmcybeæeflt

plan

management

It

services

included

on-line claims

administration

and

drugutilization

review.

through

nationwide network

of.ovez5l00Q

retail..pharmacies

Comm

wanted

to

expand

CP.Si

into

an Internet

retailer.by

developing an on-line drug store alongthe

llnesofDrugstore.com

--

Coram

invested

in

expanding

and developing

CPS
the

acccpting.that

it

wotM.not

generate

any.

profits for

it

least

few years

Under

Amara

company
to

also invested

money

to

expand

the

..

RNet
cliniLal

subsidiaries

and devoted

additional

resources

developing

and

marl.ceting

oranfs

services

division

The Noteholders
In April

1997

Cerberus PartnersL.P

together.with.itsaffihiates

Cerberus Foothill
Cerbemus

Goldman Sachs
the

Credit

Partners

L.P

Goldman
the

and Foothill

Capital

Corporation

collectively

Noteholders

purchased

$150

million

bridge loan

from DLJ.4

Goldman and

Foothill

acquired

approximately

36% 45%
that

and

19%

of the loan respectively

Goldmans 45%
to

share

included

10%

piece

Cerberus held in record

name and

participated

Goldman
accrued

At the time of

their

purchase

the outstanding

value of the loan including

principal

and

interest

was $190

million The.Noteholders

paid

more

than

90 cents

on the dollar

At the time the Noteholders

believed

the debt

had

significant

risk

but

that

the

risk

was

cOuntered

by the high coupon

rate

and the accompanying

warrants

They
another

also

expected

that

Coram would

pay down the debt

in

full through

assets sales

andlor

refinancing

relatively

soon

Prior

to the April

1997

purchase

of the bridge
in

note

each

of the Nteholders

had

separately

made

smaller

investments

Comms

bank

debt

-18KL2IWlfl3.7

A766

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Corams

ever-increasing

debt

Iinited

the

conpan.ysoptions

As

the

debt grew

Comm
difficult

became

less attractive sale or

merger candidate

Thehigh

level

debIalso

made

it

for

Corarn to flee up money to grow the compthy

internally.

During the remainder

tV

of

his

term as

CEO Amaral
some
relief.

engaged

in constant

discussions

and negotiations

with the Noteholders

to try

and

gain

He suceeded
thneCoram

in renegotiating

the debt

on

three -separate

bccasions

in.Ari 1998 hround

the

entered

into

theAetna.contract

ii in

April 1999

shortly before

Amaral resigned

as

CEO

and

iii in November

1999

while

serving

as interim

CEO

following

Richard Smiths resignation

as

CEO

By
find viable

the

Spring of 1998

it

had

become

clear

to Ainaral

that

Coram was unlike1
from Coranfs

to

sale or

merger opportuaity

He

felt

he needed

to obtain

relief

high

interest

burden

so

hc could

grow

the

company and devote
loan

resources

to

R-Net

and

CPS

Ever-

since

the

Noteholders acquired

the bridge

from

DLJ

the relationship

betWeen

Aniaral

and

the

Noteholders had

been

adversadal

OriginaIl

DLJ

told Anraral

that

it

would

sell

the

note

back

to

Coram

at

a-substantial

discount

from

its

par value

Instead

DL sold
that

the

debt

to

the

Noteholders for more than

90%

of face

value

Amarai

says

that

from

time

forward

he

harbored resentment toward the Noteholders

which

carried

over into his negotiations

with them

He
the

bargained

as hard

as possible

to extract

concessions

from the Noteholders for the benefit

of

company and
on
the

its

shareholders

and instructed

Corains

management

to put as

much

pressure

as possible

Noteholders

At one

point

in

1998

he

tried

unsuccessfully

to

persuade

senior

management

to

threaten

to

resign

en masse

if

the

Noteholders

would

not

accede

to his

demands

In

April

1998

through

restructuring

of the debt

held

by

the

Noteholders

Comm

obtained

financial

breathing

room thrugh May 2001
interest

The Noteholders

cancelled

their

existing

bridge

note

including deferred

and

fees and

the

accompanying

warrants

in

-19KL22lUt73.7

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exchange

for

the payment

of $43 million in cash

the issuance

pf$l5OnilIionin

unsecured

Series

Notes payable

in

May 2001

and the issuance

cif

$87

in

unsecuredSeries

B.

Notes

convertible

at

$3.00 per share

subject

to

crtain downward reet provisioflandpayate

in April

2008

Because

of the conversion

feature

plus

holdings

of warrants

to

purchase

million

common
own

shares

at

$01 per share Cerberus Goldman and

Foothill

the aggregate

had

the right

approximately

39%

of the equity

of

Comm

Shortly

thereafter

but as part of the same negotiations

the

Noteholders

providecI

$60

million senior

secured

revolving

credit

facility

to

Coram

At

year-end

1998

following

the

Spring refinancing

Coram had $242.2

million in long-term

debt

and $92.9 million in stockholder

equity

At the timeof the April

1998

restructuring

Amral

suggested

thatthe

Noteholders exercise

their

iight

which

they

possessed under

the original

loan documents

governing the bridge note

and continued

to possess

following

the

1998

restructuring

to

designate

representative

to

Corams board

In

June 1998

the

Noteholders exercised

that

rlght

for the

first

time designating

Feinberg as their representative

on the board

Neither

Goldman

nor Foothill.had

any desire

to

serve

on the board

themselves

Feinberg

served

on Corams

board

from June 1998

until

July

2000

For the most

part his role as

board

member was no

different

from

that

of any other

outside

director

with

onesignhficant

excepion

1e

recused

himself from

all

board discussions

concerning the

refinancing

renegotiation

or restructuring

of Corams

debt

According

to his fellow

board

members

Feinberg

was

in

all

other

respects

an active

and helpful

participant

he was extremely

-2022IO38737

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attentive

to detail

and

asked probing and incisive

questions

lie

didnot

attempt

tobntro1

the

decision-making

process

or.to

dpninate

the

board in any

way.

.-

Under Amarals employment
bonus event be was
able

contract

with

Corambe was
debt

entitled

to

$1

iriillion

in the

to

refinance

the

companys
board

completion

of the Spring 1998restructuring

the

awarded

Amaral

$1 million bonus

The

board

also

asked him

to

stay

on as President

and

CEO

The Aetna Contract

By
actively

the time

of the April

1998

restnictiiring

Amarals

focus

had shifted from

seeking out mergers to promoting internal growth

Among

other prOjects

he devoted

substantial

resources

to

developing and expanding

the

R-Net

subsidiaries

Ji April

1998

the

board

approved

five year coitract

with Aetna

under

which

Corarn

through

its

R-Net

division

would

manage The

and-provide

home

healthcare

services

for

over two million Aetna

enrollees

in

eight

states

contract

went

into effect

in July

1998

While

Comms

services

were.still

limited

to

infusion Arnaral

says

the

Aetna

contract

was intended

to fulfil the

one-stop

shopping model

both

he and Sweeney

had

en-visioned

for

Coram from

the

outset

Under

the

agreement

the

R-Net

subsidiaries

would

provide the

full

panoply of

network

assistance

service$

including

intake

of referrals

utilization

management

claims

processing

and

payments

and arranging

for the provision

of

home

health

services

Coram would

be paid

so-called

capitated

monthly-rate

per-enrollee

That rate

was

fixed

at

the outset

based

on Aetnas representations

respecting

home

healthcare

utilization levels

Despite

the inclusion

of an integration

clause

in

the contract

Coram

relied

on

Aetnas

oral representatioh

thatshould

utilization

levels

exceed expectations

Aetna

would

increase

Corams

compensation

accordingly

-21-

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The

contract

itself

however

did

not allow

Comm

to adjust

the capitation

rate

should actual

utilization

exceed

the parties

expectations

Within nicnths

of signing

the contract

Coram

realized

that

utilization

levels

i.e.

the

number of Aetna

enrollees

accessing

home

healthcare

benefits

were much

higher

than

Aetna

had

represented

Hence

the capitation

rate in the contract

which

was based on expected

levels

of -utilization

was

too

low

As

result

Comm

was

spending

money

to provide

services

for

which

-it

ivas

not being paid

Instead

of generating

profit

the contract

resulted

in

an ongoing

net

loss

Comm
success

management met
to renegotiate

repeatedly

with Aetnato

discuss

the probcrn.aiid

tried-

without

the fee structure

In

September

1998

the

Coram board began
of Folger

to consider

seeking

termination

of

the

agreement

Itengaged the.law

firm

Levin and

Kahn ILP

to prepare

draft

complaint

in the eventlcgaI

action

became-necessary

But Amamal

chosenot

to

go that route

During

the

remainder of Amnarals

tenure

as

CEO Comm

continued

to

perform under the terms of-

the original

agreement

while

trying

unsuccessfiuly

to renegotiate

the capitation

rate

with

Aetna

In

June 1999 shortly

after

Richard Smith had

succeeded

Amaral as

CEO

Coraim

terminated

the contract

and on June

30

1999

filed

suit

against

Aetna

in the

United States District

Court for the Eastern

District of

Pennsylvania

Corani asserted

claims

for fraudulent

inducement

misrepresentation

breach

of contract

and rescission

and requested

in

excess

of $50

million in

compensatory

and

punitive

damages

On

July

20

1999

Aetna

filed

counterclaims

against

Coram

asserting

claims

for breach

of contract

fraudulent

misrepresentation

defamation

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and

interferenLe

with contractualrelations

arni

seeking aticast $133

milliOn

.hf.thpflstory

and

punitive

damages.5

Richard Smith was President

when Coram

enteredinto

the contract

with Aetna

At

the

times An

aral

was devoting

more

time

Æidattention

to family matters

in particular

fo.a

family rn-ember

who-was

suffering

from

serious

illness

role

perhaps

the central.role

in negotiating

theAetna

contract

Several

of The dirtors

blaih Smith

for the defects

in the

Aetna

contract

Asdescribed.belowThe

disastrous

copsof

that

contract

contributed

to

the

bords

growingdisillusionment with

Smith

TheSmitbEra
October 1998 Amaral informed the board that for family reasons he needed
to

In

step

down

as

CEO

The board persuaded

him

to

continue

for another

six

months

in the

hope

that

he could help during

that

period

to bring

about

sale

or merger

Aniaral

agreed to continue

as

CEO

through April 1999

In the perception

of some of Amarals co-directors

for the

remaining

six

months

of his tenure

i.e from October

1998

through April 1999

he was

less

focused

on

the

company

Smith Aniarals

intended

successor assumed

more prominent

role

On

April

23

1999

Amaral resigned

as

CEO

lie

agreed

to

remain Chairman

of

the

board

and consult

with

Corarn on

part-time

basis

through

May 2000

for

which

he would

The

suit

was

settled

in

April

2000

Coram agreed

to

pay Aetna

total

of $3

million

in

three annual

installments

-23Kt.22tO8837

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receive

compensation

of $100000

year

On

Aniarals recommendation

the

board

agreed

unanimously

to appoint

Smith his successor elevating

Smith from President

to

CEO.6

In

1998

Coranfs

operating

performance

had begun

to

weaken

That years

EB1TDA was $20070000
and

versus

$26228000

in

1997 Beginning

in the

first

quarter

bf

1999
Thc

continuing

throughout the rest of the year Corams

performance

declined

dramatically

problems associated

with the Aetna

contract

deriving

from the unexpectedly

igh

utilization

lev.els

and the insufficient

capitation

rates

were the primay culprits

Those

problems

which

had begun

to surface

in

1998

within

months

of.the

execuon

of the contract

continued

into

1999

Despite

ongoing

efforts

by Coranis management Aetna

refused

to renegotiate

payment

terms

Meanwhile

Corain continued to perform under the agreed-upon

terms

providing

services

forwbich

it

wasnotbeing paid

In

late

June 1999 two

months

after

he became

CEO

Smith terminated

the

Aetna

contract

and

authorized

Folger

Levin

Kahn

to

file

suit

against

Aetna The

termination

of the

Aetna

contract

presaged

a.drastic decline

in the

performance

of Corams

R-Net

subsidiaries

which

managed and
the

serviced

the underlying

contracts

In

August

1999 two months

after

Coram

terminated

Aetna

agreement

R-Net

was

placed

intoinvoluntary

bankruptcy proceedings

In

addition

to

these

Aetna-related

problems

Coram was

also

struggling

with

adverse

trends

arid

deteriorating

economic

climate

in

the infusion

business

Among

other

In April

1999
debt $2.00

just before

resigning
rate thu

as

CEO

Amaral again-renegotiated Notes

the terms

of

Comms
share
to

The conversion
share to

on the Series

was lowered from $3.00
rate

without below

amendment

the

conversion on

would

automatically

have

been

adjusted

$2.00 and
per

the interest rate

the Series

notes

was

increased

from 9.875% to 11.5%

annum

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problems

CoramTaced ongoing

pricing

pressure

resulting

from ahltnifavorable

shi11izrpayor

mix from pthateindemnity
and

iniircrs

to

managed

care

organizations inreased

competition

from

hospitals

physicians

other

provniers

of aternIte-sit1nfus1on

Therapy

increased

costs

associated

with providmg

infusion

therapy

services

including

the costs

of chnica1

staffing

decreasing

supply and

corresponding price increase

of blood and blood deiivativproducts

and

declining

government

reimbursement rates

Although

the decision

to alevate

Smith to

CEO

had

been

unanimous

in retrospect

all

agree

that

ha lacked

the experience

to

run

companyas
conditions

troubled

as

Coram

Confronted wIth

growing internal problems and adverse

economic

in the infusion

business

at

large

Smith failed to take

decisive

action

ta

address

Corams him

increasing

costs

and declining

profitability

The

entire

board has criticized

for

focusing

an growth

at

the

expense

of cutting

costs

and

questioned

whether

be had

the requisite

skills

and

experience to run the company

The boards

dissatisfaction

with

Smith began

to

emerge

shortly

after

he became

CEO
claims

Amaral says Smith repealed

rosy projections

which

never

panned

out

Peter

Smith

he undertook too many

growth

initiatives

at

one

time

Casey

says

Smith had

the

unrealistic idea that he could grow

and spend

the

company

out-

of

its

problems

Fink says

Smith was keen

on growing

the top line hut

did

not

contribute

to the

bottom line

Amaral said

similarly

that

Smith was trying

to

grow

the top line for

its

own sake

Unable

to

fund growth

from the companys

own

earnings

Smith began

drawing

down

large

sums

from the senior

revolver thereby

further increasing

Corams debt

Smith admits that he allowed the Aetna

liligation

to

consume

his

time and

did not

delegate

the

problem

to anyone-

other

than

himself

.Focusing primarily

on the Aetna

suit

Smith

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did

not devote

hi

energies

to solving

any of the internal causes

of

Comms

financial

decline.

Two

issues

in particular

siand

ut

First

he continued

to

allow Coram to operate

undex.a

decentrathed

system in which

each branch

office

made

its

own

purchasing decisions

UndeL.
and3

that

system

Comm

could

not take

advantage

of

volume

discounts

could

not control

costs

thus

could not control

the

bottom line

Sectmd

Comm

faced

mounting

accounts

receivables

problem among

other

things

the average

number of days

that

elapsed

bstween

Comms
to

provision

of services

and

its

receipt

of payment

increased

considerably

Smith seems

have

done

nothing to correct

the

problem

Th Equity
level that characterization

Committee

has characterized

Sniithas

an architect

of gtowth

On

one

is

apt

Smith had in fact

been

un advocate

of building

both R-Net

and

CPS

According to Wendy

Simpson Corarns CFO under Smith CPS.was Corarns crown much
have
in the

jewel.7

But in 1999

CPS

was.still

very

development

stage To transform

it

into

full-fedged

internet

retailec

Coram would

bad

to continue

to invest

huge

amounts

of cash

without the prospect

of an immediate return

Given

Coranis

mounting

liquidity

problem those
retained

expenditures

could

not

be justified

At

meeting on September

17 1999

the

board

Deutsche

Banc Alex Brown

bAB
stock or

to assess

strategic

alternatives

for

.CPS

--

specifically

an

initial

public

offering of

CPS

sale

of the division

to

third

party

DBAB

concluded

that

there

was

no market for an

PO

and confined

its

efforts

to trying

to

sell

the

company

Both

Smiths

other
to

growth.lnitiatives
tli

were limited
services sold
it

His main

project

apart

from R-Net
data

and

CPS
for

was

expand

clinical

business which

took the

clinical

from customers

Corains use
in

infusion
clialcal

business
trials

and

to

and other aspecth

pharmaceutical companies of product deelopment
is

and other

though
that

th project

appears

to

have
it

had the support
in

of the board there
or profitable

no

evidence

Smith

implemented

meaningful

way

-26K2IO8873.7

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Smith and Simpson acknowledge.that the board

had

no.choice.but

to

trynd seILCPS given

Corams

liquidity

crisis

--

.-

.--

The

decision

top CPS
rapidly

j..13 .J Fftt.% on the market appears.to

have

been

sound

one The

business

was growingvery
12-month

revenues

increased

from $30.4

million in

1997

to

$96.7

million for the

period

ended

March 31 1999 and bad begun
for

to

show

profit

But this

rapid

growth engendered

heavy need

cash

which

was

anticipated

to

continue beyond200l

indeed

prciections

showed

that

CPS would

be

net

of user cash through

at

least

2004

When
the

the

board

decided

to

try

and

sell

CPS

Coram was

at

or

ijear

the limit

of availabiluiy-uider

borrowing

base formula of

its

revolving

credit line

and

was on credit hold with many of
net

its

vendors

When

the sale closel

in

July

2O0OCoram

received

cash of approximately

$38

million of which

about $28.5miliion was used to pay off

its

working

capital

-line

of credit

Given

the prospect

that

Coram could have

difficulty

meeting the minimum

$75

million stockholders

equityrequirement

under

the Stark

Ii

publiccompany

exclusion

provision selling CPS

at

gain

would

increase

Corams

net

worth and thereby.help

meet the

Stark

II

hurdle

It

was

initially

expected

that

the sale price

of

CPS

would

be significantly

higher

than

was achieved

perhaps

because the on-line part

of

CPS

business

might command

an

Internet-type

premium The

sale did

generate

gain

of $18.3

million increasing

Comms

net

worth by that amount

Coram

suffered

losses

in

each

of the

first

two quarters

of 1999

By July1999
stmits

three

months

into

Smiths

tenure

as

CEO Comm
decided

was

again

in

difficult

financial

At some

point

in

the

Summer of

999

the

board

to bring

ina more experienced consultarto

assist

Smith Feinbergrecommended.Daniel

Crowley

The

rest

of the board

supported

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Feinbergs

recommendation

unanimously

The board

does not appear to liav sought

outr

considered anyother

candidates

.Crowleys

Arrival

The

Relationship

Between Crowley
in the

and Ceflirus
healthcar ie1d and asicnown

Crowley had

stion reputation

to

have

particular expertise

turnmg around troubled

companies

Among

number of

other

healthcare

jobs he had

been

President

and

CEO

of Foundation Healthcare

and

had run Blue Cross of

Oluo
its

IiU 997

he founded

consulting

and investing

firm called

Dynamic Healthcare Solutions Dynamic made
do

focus

wa.jinding

distressed

opportumities

In

or

aiound 1998

pitch

to

thrnarouid work

at

Oxford

Dynamic

did not get the

job

But in the procss

Crowileymet

Feinberg and became

associated

with Cerberus.

Cerberus maintains

bench

of

CEO
In

..

consultants

available

to

work

with

troubled

companies

on

project-by-project

basis

1998

or

early

1999

Crowley joined

Cerberus

bench

of

CEO

consultants

Until

July

1999

Crowley worked

with Cerbei-us

on

project-by-project

basis

earning

$10000

day plus

expenses

Iii

July

1999CrowIey From

struck

handshake deal with

Feinberg

altering the

$10000

day arrangement

July

forward Cerberus would

pay

Cbwley

base salary of $80000

month

plus expenses

to serve

as

consultant

to distressed

companies-in

which

Cerbei-us

had

or

contemplated an investment

--

referred

to

in

the

agreement

as

Portfolio Companies

Although

Feinberg

and

Crowley

began

to operate

under

this

Cerberus has

roster

of consultants companies
in

whom
which

it

hires out

as

coaches

or

mentors
these

to the

CEOs
-have

of the troubled

Cerberus invests

Typically
If

consultants

incentive-based the

compensation
thereby

arrangements with Cerberus
increasing their the value

they

succeed in

turning

company around
the profits
in

of Cerberus

investmentthy

can share

in

addition

to

base compensation

from Cerberus

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arrangemeiit

in July

1999

the contract

itselfwashotغitºd.iillNovethber

f1999
their

Crowley

claims that from August

on he repeatedly

aske

FLinberg to themializ

arrangement

but that.Feiriberg

sfoitpaadØlP
shall be automatically

The wittencontractwas

to last

for

an mitial three year term1

which

extended

to successive

one year

periodsunless

either party

provided written notice

oferrninTatioii

in

ch
is

In the

Cerberus contract

aPoitfolib

Companyis
debtor

defined

asany

corporation.

or

any of

its

Affiliates has

madc.a

equity

investment

rridfor

which

rendering

services

as

all

employee

thereofconsultant

thereto

on 1ehaif of

Covered

Portfolio

Company

is

defined

to

include

anyPortfolio

Company

as

to

which

at the request

of

serves

as

Chief Executive Officer

during the

term of

this

Agreement

Corani fitboth

descriptions

Section

2.3

sets

forth

in

broad terms

the nature

and scope of Crowleys duties

under

the contract

It states

that

Crowley will have

such

duties

as are assigned

or delegated..

by

Feinberg

that

he will devote his entire business

time

attention

skill

and

energy

exclusively

to the business

of

or

any Portfolio

Company

or

Companies

as

to

which

is

assigned

by
business

and that he will use his best efforts to promote

the

success

of

or

the business

of such

Portfolio

Company
is

Under

section

6.3

of the contract

Cerberus

could terminate

Crowley

for cause which
of

defined

to include

Crowleys
Board

failure

to

follow

the reasonable

instwctions

Feinberg

or the

of Directors

of any Portfolio

Company

According to Crowley and

Feinberg

the idea

was fo Crowley

to

scailed

CEO

of

CEOs

or

CEO coach

assisting the

CEOs

of four

or five

portfolio companies

at

-29KIi2lO8R73.7

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time

.Jn

addition

to

his

guaranteed

annual salary

of nearly

$1 thlllkn

year

theagreement

also

gave.Crowley

the opportunity

to earn

up

tO

20%

ofth.eprofits.from

Cerberus

boldingsin.

each

Ccivered

Portfoio.Company

other

than

Coram

provided the profits exceeded

a.certaiji

threshold

level

Section.3.2

During the relevant

timpiiod

company

called

Winterlandin

which

Cerberus had

significant

stake was the only company that arguably qual

Wed

as

Covered

Portfolio

Company

based on

Crowleys

position

there.as.Chainnan

Whiterland

never

generated

sufficient

profits to trigger

Crowleys

right to

upside compensation

under

the

contract

is

now

in

bankruptcy

In

August

1999

shortly after agreeing

to

thisarrangementwith

Cerberus

Crowley became

consultant

to the

CEO

of

Comm

and began

earning

$40000

month from

Coram
the

Earlier

that

month Feinberg had

become

member

Cf the

compensation

cOrnniitteeof-

Corarn board

Under

Section

3.1

of the Cerberus contract

Crowleys $80000-per

month

salary

from Cerberus would as

general

rule be offset by any compensation

he received

from

the portfolio

companies

for

which

he worked

Corani was exempted

from

this

arrangement

The
for

Salary

shall

be reduced fees

and

offset

on

dollar

for dollar

basis
or

any

directors

salary

consulting that

payments may

bonuses
receive

other

cash

incentive

payments
other

from

any Portfolio Company

than Coram Healthcaie

Section

3.1 emphasis added

Thus from

JUlY

to

November crowley $1440000
on

earned

combined

base

salary

from both companies

of

$120000 per month

or

full

year basis

Richard

Smith claims

this

consulting

arrangement

was

never formally put

to

the

board

of

directors of

Coram

According

to the

minutes

the

board

did

not discuss

Crowley

until

its

meeting on September

1999

The

relevant

entry

011

that

date

states

discussion

enÆed

regarding

the consultant

Dan Crowley

that

Mr

Feinberg had

proposed

to

assist

theCompany

in

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operating

its

business

Messrs Ka1n.and

Sullivan

veereq

stedtoprepredocuments

th.

would

establish

privileged

telatibnshibaiweenthCompahy.and
involved

Mr

Crwley

Amiirul

boweier

says

all

six

board methbers.werL actively

in

thedecislontobiL

Crowley

iiri
Several

board

members

Amaral included

either

knew

or knew

of him from
and

their past

experiences

in

the

balthcare

field

They

believed

he was an excellent

apprc4riate

choice for

Pui
the task
at

hand

and

that

under

the-circumstances

CoriimwÆsfortunatto

have

him

Crowley

and

Feinberg told the board

that

they had

met-each

other

in

connection

with Oxford

They

also told the

board that Crowley

was

currently

-serving

tis

chai

inaflof

the

board

of

t-shirt

company Winterland

in

whichCerberus

heliFa

substantial

stake

Jn

addition

they

told the bcsard

that

Crowley had in lhepas6

done

some

consulting

work

for

Cerberus

They

did

not explain

that

Crowleys

consulting

work

for

Cerberus wasongoing

Nor

did

theyexplain

that

Crowley

had an.existing

contract

with Cerberus under

which

he was earning

at

least

$80000

month with
did

the potential to earn

much more

Indeed

Crowley

and

Feinb erg both admit that

they

not disclose

either the

existence or the terms.of the Cerberus contract

to the directors

or

shareholders

of Corani

either orally or in

writing prior to discovery in the bankruptcy case

The other two Noteholders

had limited

knowledge

of the relationship

between

Crowley

and Cerberus

Ed

Stearns

the Foothill

principal

responsible

for the

Coram investment

and Ed Mule his counterpart

at

Goldman

did

not learn

about the Crowley/Cerberus

contract

until

after

Coram had

filed

for banki-uptcy

Stearns

knew

that

Crowley

had

worked

for

Feinberg

at

Winterland

but

assumed

that

the

Winterland

assignment was either over or nearing

completion

He

did

not

know

that

Crowley was

still

being paid

by Cerberus

for potential

projects

other

than

Winterland

Nor

did

he know

that

there

was an ongoing

employment

relatioiiship

between

them

Mule knew Cerberus was paying Crowley lmost $1

million

year

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he believed

this

was compensation

for his services

as

halthcare

consltant andiis work

at

Winterlaæd

He

did

not

know

whether

Feinberg ever

disclosed

the

amount

of Crowleys

compensation

or other

aspects

of the Crowley/Cerberus relationship

to the

Comm

brd he

assumed

Feinberg would

make whatever

disclosures

were.appropriate

Crowleys Role as Consultant
Crowley v.s
to consult for only three to

Originally

supposed

our inths iith
lived

thelimited

objective

of getting

Smith up to speed and back

on track

Crowley who

in
insists

Sacramento

and

had recently

gotten

engaged

did

not

want tostay

at

Coram long-trm he

that

he had

no desire

to

become

CEO

Smith however
and

vie-wed

Crowleys

arrival-as

ruse

to

get

rid

of

him They

did

not get along

from the

start

Smith admits that he did not cooperate

with

Crowley

Smith says

that

at their

initial

meeting Crowleyblarned

Smith for screwing

up

the

Aetna

contract

Smith admits That for the

first

month

or so after that

he did not cormnunicate

with

Crowley

In

his

defense

he claims

thftt

an attorney

from Folger Levin

which

was

representing

Coramin

the

Aetna

litigation

advised him not

to

bring

in

an outside

consultant

for

fear

that

might prejudice

Coram in

the

pending

case

Amaral put pressure

on Smith to cooperate

with Crowley

at

Amarals

insistence

Smith met with

Crowley

again

in

September

1999

Smith

says

that

he eventually

embraced
did not return

Crowley

and gave

him

all

necessary

information

Yet he

concedes

that

he often

Crowleys phone

ºalls

because

he was busy trying to run-a

business

and that accommodating

Crowleys

information

requests

was

not.rny

top priority

at

the

time

-32KL22IDW.7

A780