CORAM HEALTHCARE CORP, 10-Q/A, 1996-04-08

CORAM HEALTHCARE CORP
10-Q/A, 1996-04-08
HOME HEALTH CARE SERVICES

Previous: CORAM HEALTHCARE CORP, 8-K/A, 1996-04-08

Next: CORAM HEALTHCARE CORP, 10-K/A, 1996-04-08

<PAGE> 1
================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------------

FORM 10-Q/A
AMENDMENT NO. 1

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1125 SEVENTEENTH STREET
SUITE 1500
DENVER, CO 80202
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: (303) 292-4973

--------------------

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---

The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, as of November 09, 1995 was 40,369,015.

================================================================================
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORAM HEALTHCARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, INCLUDING SHARES)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1995 1994
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalent . . . . . . . . . . . . . . . . . . . . . . . $ 40,481 $ 13,588
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,469 6,458
Investment in available-for-sale securities . . . . . . . . . . . . . -- 16,546
Accounts receivable, net of allowance of $81,208 and $17,990 . . . . . 173,063 109,087
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,086 11,864
Prepaid taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,228 11,510
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . 15,124 31,893
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 11,119 7,251
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 303,570 208,197
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . 40,010 25,902
Joint ventures and other assets . . . . . . . . . . . . . . . . . . . . 48,152 6,262
Deferred income taxes non-current . . . . . . . . . . . . . . . . . . . 556 556
Other deferred costs and intangible assets . . . . . . . . . . . . . . . 14,033 2,284
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346,292 333,238
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 752,613 $ 576,439
========== ==========

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,732 $ 27,098
Current maturities of long-term debt . . . . . . . . . . . . . . . . . 48,645 5,911
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 5,818 5,788
Liabilities for securities sold under agreement to repurchase . . . . -- 7,430
Reserve for litigation . . . . . . . . . . . . . . . . . . . . . . . . 3,698 22,720
Accrued merger and restructuring . . . . . . . . . . . . . . . . . . . 51,233 43,594
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 64,858 11,845
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 266,984 124,386
Long-term debt, including revolving lines of credit . . . . . . . . . . 450,391 119,726
Minority interest in consolidated joint ventures . . . . . . . . . . . . 4,296 6,599
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,333 1,945
Deferred income taxes non-current . . . . . . . . . . . . . . . . . . . . 1,521 1,522
Stockholders' equity:
Common stock par value $.001, authorized 75,000 shares,
issued 40,346 in 1995 and 38,964 in 1994 . . . . . . . . . . . . . 40 39
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 361,293 341,328
Unrealized loss on available-for-sale securities . . . . . . . . . . . -- (279)
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (335,245) (18,827)
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 26,088 322,261
---------- ----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . $ 752,613 $ 576,439
========== ==========
</TABLE>

See accompanying notes to the condensed consolidated financial statements.

1
<PAGE> 3
CORAM HEALTHCARE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1995 1994
------------ -------------
<S> <C> <C>
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 164,741 $ 110,206
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,674 78,773
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,067 31,433
Operating expenses:
Selling, general and administrative expenses . . . . . . . . . . . . 40,844 20,927

Provision for estimated uncollectible accounts . . . . . . . . . . . 36,518 21,461
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . 2,947 2,158
Charge for long-lived assets and acquired receivables:
Goodwill and other long-lived assets . . . . . . . . . . . . . . . 166,373 --
Valuation of acquired receivable . . . . . . . . . . . . . . . . 37,000 --
Provision for T2 litigation settlements . . . . . . . . . . . . . . -- 6,020
Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . -- 28,500
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . -- 95,500
---------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . 283,682 174,566
---------- ----------
Other income (expense): . . . . . . . . . . . . . . . . . . . . . . . (248,615) (143,133)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . (14,236) (2,068)

Other income (expense), net . . . . . . . . . . . . . . . . . . . . (1,445) 655
---------- ----------
Loss before income taxes and minority interest . . . . . . . . . . . . (264.296) (144,546)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . (10,204) ( 26,847)
Minority interest in net income of consolidated joint ventures . . . (570) (3,477)
---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (254,662) $ (121,176)
========== ==========
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6.38) $ (3.14)
========== ==========
Weighted average common shares outstanding . . . . . . . . . . . . . . 39,915 38,636
========== ==========
</TABLE>

See accompanying notes to the condensed consolidated financial statements.

2
<PAGE> 4
CORAM HEALTHCARE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1994
---------- ---------
<S> <C> <C>
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 448,870 $ 336,918
Cost of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343,122 233,079
--------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,748 103,839
Operating expenses:
Selling, general and administrative expenses . . . . . . . . . . . . . 100,041 59,504

Provision for estimated uncollectible accounts . . . . . . . . . . . . 56,579 32,170
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . 10,504 6,435
Charge for long-lived assets and acquired receivables:
Goodwill and other long-lived assets . . . . . . . . . . . . . . . . 166,373 --
Valuation of acquired receivables . . . . . . . . . . . . . . . . . 37,000 --
Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 28,500
Provision for T2 litigation settlements . . . . . . . . . . . . . . . . -- 23,220
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . 21,370 95,500
--------- ---------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . 391,867 245,329
--------- ---------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (286,119) (141,490)

Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,625) (4,710)
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . 186 2,804
--------- ---------
Loss before income taxes, minority interest and extraordinary items . . . (317,558) (143,396)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . (11,309) (25,436)
Minority interest in net income of consolidated joint ventures . . . . (6,773) (9,005)
--------- ---------
Loss before extraordinary item . . . . . . . . . . . . . . . . . . . . . (313,022) (126,965)
Extraordinary loss-early extinquishment of debt (no income tax benefit) . (3,396) --
--------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(316,418) $(126,965)
========= =========
Net loss per share:
Loss before extraordinary item . . . . . . . . . . . . . . . . . . . . $ (7.86) $ (3.30)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . (0.08) --
--------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7.94) $ (3.30)
========= =========
Weighted average common shares outstanding . . . . . . . . . . . . . . . 40,180 38,462
========= =========
</TABLE>

See accompanying notes to the condensed consolidated financial statements.

3
<PAGE> 5
CORAM HEALTHCARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1994
---------- ---------
<S> <C> <C>
Net cash used by operating activities . . . . . . . . . . . . . . . . . . $ (19,859) $ (10,176)
Cash flows from investing activities:
Proceeds from sale and maturities of available-for-sale securities . . 10,817 10,429
Purchases of property and equipment . . . . . . . . . . . . . . . . . (3,489) (7,187)
Payments for acquisition of businesses, net of cash acquired . . . . . (240,633) (58,090)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 (9,879)
---------- ----------
Net cash used by investing activities . . . . . . . . . . . . . . . (233,188) (64,727)
---------- ----------
Cash flows from financing activities:
Sales of common stock, net of repurchases and issuance costs . . . . . 8,693 6,174
Borrowings (repayments) of lines of credit, net . . . . . . . . . . . (103,120) 73,169
Debt borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . 557,000 --
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . (180,785) (7,324)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,848)
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . 279,940 69,960
---------- ----------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . 26,893 (4,943)

Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . 13,588 22,971
---------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,481 $ 18,028
========== ==========
</TABLE>

See accompanying notes to the condensed consolidated financial statements.

SUPPLEMENTAL INFORMATION:

Depreciation and amortization was $25,915 in 1995 and $13,808 in 1994.

4
<PAGE> 6
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

1. BASIS OF PRESENTATION

Basis of Presentation. The accompanying unaudited condensed
consolidated financial statements have been prepared by Coram Healthcare
Corporation (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. The condensed consolidated financial statements
reflect all adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation. All such adjustments, other than
those relating to the acquisition of the Caremark Business (as defined below),
write-off of goodwill, consolidation, restructuring, termination of the
proposed merger with Lincare Holdings Inc. ("Lincare") and litigation
settlements are of a normal recurring nature. The results of operations for the
interim periods are not necessarily indicative of the results of the full
fiscal year. Certain 1994 Financial Statement amounts have been reclassified to
conform with the September 30, 1995 presentation.

Goodwill and Other Long-Lived Assets. Effective April 1, 1995 the
Company implemented Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." Accordingly, the carrying value of goodwill and other
long-lived assets is reviewed at least quarterly. If such review indicates that
they will not be recoverable, based on undiscounted estimated cash flows over
their remaining depreciation and amortization period, their carrying value
would be reduced to the estimated fair market value. An ability to recover such
assets may be suggested by, among other conditions, cash flow deficits; an
historic or anticipated decline in revenues or operating profits; adverse
legal, regulatory or reimbursement developments; accumulation of costs
significantly in excess of amounts originally expected to acquire the asset;
or, a material decrease in the fair value of some or all of the assets.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Background -- Goodwill and Other Long Lived Assets"
for information on the third quarter of 1995 $203.4 million charge to write-off
of goodwill and certain other long-lived assets and to record an adjustment to
the valuation of acquired receivables.

The Company continues to closely monitor its remaining goodwill and
other long-lived assets. The evaluation of the recoverability of goodwill is
significantly affected by estimates of future cash flows from each of the
Company's market areas. If estimates of future cash flows from operations
decrease, the Company may be required to further write down its goodwill and
other long-lived assets in the future. Any such write down could have a
material adverse effect on the company's financial position and results of
operations. Further, any such decrease could have an adverse effect on the
Company's liquidity and its ability to continue its operations.

Provision for Estimated Uncollectible Accounts. Management regularly
reviews the collectibility of accounts receivable and makes adjustments to the
provision for estimated uncollectible accounts as needed to reflect current
collection and other trends and changes in assessment of realizable value.
Management believes the resulting net carrying amounts for accounts receivable
are fairly stated at each quarter-end based on all information then available.
The Company has continued to become more sophisticated in its approach to the
estimation process as it gains experience with estimates for the consolidated
entities. While management believes the Company has made adequate provision for
uncollectible accounts based on all information available, no assurance can be
given as to the level of future provisions for uncollectible accounts, or how
they will compare to the levels experienced by the constituent entities before
1995.

5
<PAGE> 7
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

recorded as part of its quarterly provision for estimated uncollectible
accounts charges of $17.3 million and $20.0 million, respectively, which
management believes resulted principally from events that transpired as part of
the consolidation of the various constituent companies' billing systems
ultimately into one billing system for use at substantially all locations and
to move its billing and collections functions from a centralized to a
decentralized structure. Any further disruptions in those procedures could
adversely affect the ability of the Company to collect its receivables.

The Coram Consolidation Plan included a broad restructuring of the
Company's reimbursement organization and systems, including the
decentralization of centralized collection activities located in four locations
and the relocation of such activities to 100 branch locations. In connection
with the Coram Consolidation Plan (as defined below) and as a result of the
Company's decision to implement standardized policies for recognition of
allowances, deemphasize certain businesses and provide for the potential
disruptions expected during the merger and post-merger transition process, the
Company recorded a special charge of $17.3 million was recorded as part of the
provision for estimated uncollectible accounts in the quarter ended September
1994, the first quarter-end following the Four-Way Merger that occurred in July
1994. In this quarter, the Company noted a significant increase in aging of
receivables at various branches, which management concluded had resulted from
distractions related to the merger and consolidation process, the transfer of
billing information and patient files between branch offices, the termination
of certain employees experienced in billing and collection, and the inability
to efficiently complete, obtain or process certain claim documentation
necessary to secure payment because of the termination of certain physician
relationships and the elimination of some experienced branch personnel as part
of the consolidation of branches then occurring. The amount of the charge was
determined based on those factors, and also included a provision of $3.4
million for specific accounts rendered uncollectible because of relationships
terminated as part of the merger. Management believes a minor portion of the
overall provision may also be attributable to the accounting impact of
implementing standardized policies for recognition of contractual and other
allowances; however, the Company is unable to distinguish the impact of this
factor in the Company's overall provision for estimated uncollectible accounts
of $21.5 million for this quarter.

Following the Company's acquisition of the Caremark Business in April
1995 and as part of the Caremark Business Consolidation Plan (as defined below)
the Company undertook the conversion of its billing and accounts receivable
system to the acquired Caremark Business system while at the same time it
reorganized the acquired Caremark Business reimbursement function from a
centralized to a decentralized organization. These changes started in the
second quarter, but most of the changes occurred in July through September.
Their effects, which became most pronounced in the third quarter, were far more
disruptive than anticipated, resulting in significant delays in billing and
collection difficulties in receiving timely reimbursements. Those delays were
in part caused by the inability to efficiently complete, obtain or process
certain claim documentation and in part by lack of familiarity with the newly
acquired system. The passage of time makes missing documentation required for
payment difficult or impossible to obtain or replace, and can delay claim
submission past deadlines imposed by certain payors. Because of this, the
Company experienced larger write-offs than in prior quarters and, therefore,
for estimated uncollectible accounts of $20.0 million resulting in a total
provision of $36.5 million in the quarter ended September 30, 1995. This $20.0
million provision was for deterioration in accounts receivable that occurred
after the acquisition of the Caremark Business, and is separate from the $37.0
million reduction in the carrying value of accounts receivable acquired from
Caremark that related to an overstatement of those accounts as of April 1, 1995
when they were purchased by the Company as part of the Caremark Business
Acquisition. See Note 2 to the Financial Statements, Caremark Business
Acquisition.

2. ACQUISITIONS AND RESTRUCTURINGS

6
<PAGE> 8
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

Caremark Business Acquisition. Effective April 1, 1995, the Company
acquired substantially all of the assets used in the alternate site infusion
and certain related businesses (collectively the "Caremark Business") of
Caremark Inc. ("Caremark"), a California corporation and wholly-owned
subsidiary of Caremark International, Inc. ("Caremark International"), for $209
million in cash and $100 million aggregate principal amount of Junior
Subordinated Pay-In-Kind Notes (the "Junior Subordinated PIK Notes"), plus
assumption of specified liabilities of the Caremark Business. The Company also
incurred approximately $7.5 million of acquisition costs. The Company assumed
only certain specified liabilities of the Caremark Business, which expressly
exclude any liabilities associated with the recent government investigation of
Caremark. In connection with the acquisition of the Caremark Business, the
Company repaid all of its indebtedness under its then existing credit facility.
The cash paid by the Company in connection with the acquisition of the Caremark
Business and the repayment of indebtedness, together with related fees and
expenses, were financed through: (i) borrowings of approximately $205 million
under a Senior Credit Facility with Chemical Bank as Agent (the "Senior Credit
Facility") and (ii) $150 million from the issuance of a subordinated bridge
note (the "Bridge Note") to an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"). The acquisition was accounted for by the
purchase method of accounting and the results of the Caremark Business have
been included in the accompanying condensed consolidated financial statements
since the date of acquisition. In connection with the purchase, the Company has
determined that the fair values of acquired identifiable intangible and
tangible assets approximate $172.7 million, consisting principally of accounts
receivable of $101.0 million (net of a $37.0 million reduction in carrying
value of certain acquired accounts receivables including $7.0 million recorded
in September 1995), intangibles of $28.1 million, ($14.0 million clinical
outcomes database and $14.1 million payor contracts, being amortized over 20
years and 5 years, respectively) and property and equipment of $31.4 million.
In addition, liabilities of approximately $61.1 million were assumed, including
$11.4 million of costs of exiting certain Caremark Business activities. The
valuation of substantially all the identifiable tangible and intangible assets
except accounts receivable was based on independent appraisal. Accounts
receivable were valued by the Company in consultation with independent
accounting consultants. The cost in excess of identifiable net assets acquired
of $166.4 million was allocated to goodwill. In the third quarter of 1995, it
was determined that the incremental goodwill added in the acquisition of the
Caremark Business had no value and a substantial portion of that goodwill was
written off as part of the impairment loss on the Company's long-lived assets.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Valuation of Receivables Acquired from Carmark" for
information on the $37.0 million reduction in their valuation.

On September 11, 1995, as amended October 6, 1995, the Company filed
suit against Caremark and Caremark International, alleging fraudulent
misrepresentations of the value of accounts receivable and amounts of revenues,
concealment of important information concerning a criminal investigation of
Caremark's business practices, and other material misrepresentations and
breaches of contract terms. The suit seeks relief in the form of damages,
including damages to the Company's business resulting from the
misrepresentations and breaches, aggregating $5.2 billion. On October 12, 1995,
Caremark and Caremark International filed suit against the Company alleging
fraudulent misrepresentation in its purchase of the Caremark Business and
seeking damages of at least $100 million. The Company believes it has
meritorious defenses in this action, but due to the uncertainties inherent in
the early stages of litigation, no assurance can be given as to the ultimate
outcome of either of these suits at this time. Accordingly, no provision for
any loss or recovery that may result upon resolution of the suits has been made
in the consolidated financial statements. An adverse outcome could be material
to the financial position, results of operations and liquidity of the Company.

The following unaudited pro forma information is provided for
comparative purposes only. It presents a combination of the Company's reported
results and information furnished by Caremark for the Caremark Business prior
to its acquisition by the company as if the acquisition of the Caremark
Business including Caremark's purchase of the assets and assumption of certain
liabilities of Critical Care of America ("CCA") effective March 1, 1994, had
occurred January 1, 1994. The data used for the Caremark Business in

7
<PAGE> 9
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

such pro forma financial information for periods prior to its acquisition by
the Company was furnished by Caremark. The Company has filed a lawsuit against
Caremark alleging, among other things, that certain financial and other data
provided to the company by Caremark contains material misstatements and
omissions. Accordingly, pending the resolution of such litigation, the Company
believes the pro-forma information, to the extent it contains data furnished by
Caremark, should not be relied upon in evaluating the Company's financial
position and results of operations, and no assurance can be given as to its
completeness or accuracy. For this reason and because the Company had not
acquired the Caremark Business on January 1, 1994, the information is not
necessarily indicative of the results that would have been obtained had the
acquisitions of the Caremark Business and CCA occurred on the date indicated or
that may be achieved in the future.

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 545,128 $ 695,300
========== ==========
Loss before extraordinary item . . . . . . . . . . . . . . . . . . $ (324,145) $ (158,239)
========== ==========
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (327,541) $ (158,239)
========== ==========
Net loss per share before extraordinary item . . . . . . . . . . . $ (8.06) $ (4.11)
========== ==========
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . $ (8.14) $ (4.11)
========== ==========
Common shares used in computation . . . . . . . . . . . . . . . . . 39,685 38,462
========== ==========
</TABLE>

The above amounts reflect adjustments for interest charges on the debt
incurred as part of the acquisition, amortization of goodwill and depreciation
expense related to fixed assets. These amounts have not been reduced by any
potential cost savings.

Other Acquisitions. The Company has continued to make acquisitions,
primarily of certain physician owned entities. During the nine months ended
September 30, 1995, the Company completed nine such acquisitions totaling $24.5
million, which were accounted for as purchases. Individually and in the
aggregate, the results of operations of these businesses for periods prior to
their acquisition were not material to the Company's consolidated results of
operations.

Certain of the Company's historical purchase agreements provided for
additional contingent consideration. The amount of additional consideration, if
any, is based on the financial performance levels of the acquired companies.
The Company may be required to pay under such contingent obligations
approximately $5.5 million subject to increase based, in certain cases, on the
Company or its subsidiaries exceeding certain revenue or income targets and
changes in the market value of the Company's stock. Subject to certain
elections by the Company or the sellers, a maximum of approximately $3.1
million of contingent obligations may be paid in cash. If these contingent
payments are made, they will be recorded as additional goodwill in the period
in which the payment becomes probable.

Lincare Agreement. On April 17, 1995, the Company entered into an
agreement to merge with Lincare, a provider of oxygen and other respiratory
therapy services to patients in the home. On July 21, 1995, the Company and
Lincare announced that they had terminated the plans to merge and had signed a
letter of intent to cooperatively offer their integrated services in targeted
metropolitan areas. The Company and Lincare executed a letter of agreement
dated July 21, 1995, under which the parties agreed to allocate fees and
expenses incurred in connection with the transaction and to forever release and
discharge the other from actions, liabilities and obligations arising out of or
related to the transaction. Costs incurred of approximately $3.4 million,
representing the Company's expenses related to the transaction, were expensed
in the second quarter of 1995.

Merger and Restructuring. The operations of the Company commenced July
8, 1994 as a result of the merger of four predecessor entities (the "Four-Way
Merger"). During September 1994, the Company

8
<PAGE> 10
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

initiated a merger and restructuring plan (the "Coram Consolidation Plan") to
reduce operating costs, improve productivity and gain efficiencies through
consolidation of redundant infusion centers and corporate offices, reduction of
personnel, and elimination or discontinuance of investments in certain joint
ventures and other non-infusion facilities. The Coram Consolidation Plan
provided for the elimination of approximately 100 of the Company's home
infusion branch facilities and the consolidation of corporate administrative
operations into one location. It also provided for a corresponding reduction of
approximately 470 full-time equivalent field employees and 160 full-time
equivalent corporate employees. In connection with the Coram Consolidation
Plan, the Company recorded charges of $28.5 million in estimated merger costs
and $92.3 million in estimated restructuring costs. The Company extended the
Coram Consolidation Plan to include the consolidation of the operations of
H.M.S.S., Inc. upon its acquisition in September 1994, and accordingly recorded
additional estimated restructuring costs of $3.2 million. The estimated cost
associated with each component of the Coram Consolidation Plan, recorded in the
third quarter of 1994, including the write-down of existing assets to their
estimated net realizable value, were as follows (in thousands):

<TABLE>
<CAPTION>
CASH NON-CASH
EXPENDITURES CHARGES TOTAL
------------ -------- --------
<S> <C> <C> <C>
Merger Costs . . . . . . . . . . . . . . . . . . . . . . $27,900 $ 600 $28,500
======= ======= =======
Personnel Reduction Costs . . . . . . . . . . . . . . . . $26,200 $ 600 $26,800
Facility Reduction Costs . . . . . . . . . . . . . . . . 15,600 16,300 31,900
Discontinuance Costs . . . . . . . . . . . . . . . . . . 4,200 32,600 36,800
------- ------- -------
Total Restructuring Costs . . . . . . . . . . . . . . . . $46,000 $49,500 $95,500
======= ======= =======
</TABLE>

The Company believes these costs to be non-recurring; however, actual
costs may vary from the recorded charges as the Coram Consolidation Plan
continues. Net revenue of the Company includes revenues from non-core
businesses provided for in the Coram Consolidation Plan that will be
discontinued or disposed of approximating $5 million and $11 million in the
quarters ended September 30, 1995 and 1994, respectively, and approximating $24
million and $32 million in the nine months ended September 30, 1995 and 1994 ,
respectively. Operating results were not material.

The Company has continued to evaluate the remaining accruals and the
estimated costs to complete the Coram Consolidation Plan. As a result of this
evaluation, the Company recorded a benefit to restructuring as a change in
estimate in the first quarter of 1995. The change in estimate was the result of
the sale of its 51% ownership interest in Pediatric Partners, Inc., doing
business as Kids Medical Club ("Kids Medical"). The Company had estimated that
the sale of Kids Medical would result in a $2.7 million loss because Kids
Medical had historically sustained losses and made an insignificant
contribution to the Company's revenue. The unanticipated gain resulted from (i)
positive margins experienced by Kids Medical in the period from the date of the
estimate through the date of the sale and (ii) the purchase of Kids Medical by
a synergistic buyer, Pediatric Services of America, Inc. The sale of Kids
Medical resulted in a $1.4 million gain; therefore, $4.1 million was recorded
as a restructuring benefit in the first quarter of 1995. In the second quarter
of 1995, the Company recorded a $.3 million benefit to restructuring for the
sale of a non-strategic asset.

Through September 30, 1995, the Company had substantially completed
the consolidation process contemplated by the Coram Consolidation Plan,
including the closure of 136 branch facilities, the downsizing of 20 branch
facilities, the consolidation of the corporate functions previously conducted
in five corporate facilities, and a reduction of approximately 700 full-time
equivalent employees. However, the disposition of certain non-core businesses
has not yet been completed. A substantial portion of the remaining cash
expenditures relate to severance and lease costs that will be paid in future
periods. The Company has made total payments and total asset disposals through
September 30, 1995, as follows (in thousands):

<TABLE>
<CAPTION>
CASH NON-CASH CHANGE IN
EXPENDITURES CHARGES ESTIMATE TOTAL
------------ ------- -------- ---------
<S> <C> <C> <C> <C>
</TABLE>

9
<PAGE> 11
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

<TABLE>
<S> <C> <C> <C> <C>
Merger Costs . . . . . . . . . . . . . . . . . $ 26,300 $ 600 $ -- $ 26,900
======== ======= ======== ========
Personnel Reduction Costs . . . . . . . . . . . $ 18,500 $ 600 $ -- $ 19,100
Facility Reduction Costs . . . . . . . . . . . 7,900 16,300 -- 24,200
Discontinuance Costs . . . . . . . . . . . . . -- 32,600 (3,000) 29,600
-------- ------- -------- --------
Total Restructuring Costs . . . . . . . . . . . $ 26,400 $49,500 $ (3,000) $ 72,900
======== ======= ======== ========
</TABLE>

During May 1995, the Company initiated a second restructuring plan
(the "Caremark Business Consolidation Plan") which was contemplated by the
Company prior to the acquisition of the Caremark Business. The estimated costs
associated with each component of the Caremark Business Consolidation Plan,
recorded in the second quarter of 1995, including the write down of existing
assets to their net realizable value, were as follows (in thousands):

<TABLE>
<CAPTION>
CASH NON-CASH
EXPENDITURES CHARGES TOTAL
------------ --------- ---------
<S> <C> <C> <C>
Personnel Reduction Costs . . . . . . . . . . . . . . . $12,400 $ -- $12,400
Facility Reduction Costs . . . . . . . . . . . . . . . 6,800 6,600 13,400
------- ------ -------
Total Restructuring Costs . . . . . . . . . . . . . . . $19,200 $6,600 $25,800
======= ====== =======
</TABLE>

Personnel reduction costs include severance payments, fringe benefits
and taxes related to employees to be terminated as part of the restructuring,
costs of terminating executives, buying out employment contracts as part of the
restructuring, and approximately $3.5 million of direct incremental consulting,
legal and accounting fees related to development and implementation of the
restructuring plan.

Facility reduction costs resulting in cash expenditures consist of the
cost of fulfilling or buying out existing lease commitments on branch
facilities that will be closed as part of the restructuring, reduced by any
sublease income. These branches are located throughout the United States. It
includes related costs for equipment leases and closure expenses. Facility
reduction costs resulting in non-cash charges consist principally of the
write-down, net of any proceeds on disposition, of operating assets that have
become redundant because of the consolidation. Those assets include pharmacy
equipment, office and warehouse furniture and fixtures, computer hardware and
software, and leasehold improvements. It also includes inventory that has no
future value because of the restructuring.

The restructuring costs exclude the personnel reduction costs of
former Caremark employees in the amount of $4.8 million, the facility lease
buyout and closure expenses of former Caremark facilities in the amount of $2.7
million and vendor contract cancellation charges of former Caremark vendors in
the amount of $3.9 million. These costs, totaling approximately $11.4 million,
including the $3.7 million recorded in September 1995 (see below), were
accounted for as an adjustment to the purchase price of the Caremark Business.

The Caremark Business Consolidation Plan provided for the elimination
of approximately 55 and the downsizing of approximately ten of the Company's
home infusion facilities and the consolidation of corporate functions. It also
provided for a corresponding reduction of approximately 330 full-time
equivalent field employees and 100 full-time equivalent corporate employees. An
additional purchase price adjustment was made in September 1995 of $3.7
million, consisting of $2.1 million for personnel reduction costs and $1.6
million for Caremark facility lease buyouts and closure expenses. This
adjustment was based on a re-evaluation of the Caremark Business Consolidation
Plan and development of a formal business plan that provided for an additional
reduction of approximately 400 full-time equivalent field employee positions
and 140 full-time equivalent corporate employees. It also provided for further
consolidation of corporate functions and treatment centers with geographic
overlap.

10
<PAGE> 12
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

While the Company had completed a significant portion of the branch
downsizing and consolidation process contemplated by the Caremark Business
Consolidation Plan as of September 30, 1995, the corporate consolidation is
still in process. Through September 30, 1995, 73 branches have been closed, and
24 have been downsized, and there has been a reduction of approximately
two-thirds of the total planned reduction in full-time equivalent employees. A
substantial portion of the remaining cash expenditures relate to severance and
lease costs that will be paid in future periods.

The Company has made total payments and total asset disposals through
September 30, 1995, as follows (in thousands):

<TABLE>
<CAPTION>
CASH NON-CASH
EXPENDITURES CHARGES TOTAL
------------ -------- --------
<S> <C> <C> <C>
Personnel Reduction Costs . . . . . . . . . . . . . . . . . . $ 2,700 $ $ 2,700
Facility Reduction Costs . . . . . . . . . . . . . . . . . . 100 6,600 6,700
------- -------- -------
Total Restructuring Costs . . . . . . . . . . . . . . . . . . $ 2,800 $ 6,600 $ 9,400
======= ======== =======
</TABLE>

Although subject to future adjustment, the Company believes it had
adequate reserves and liquidity as of September 30, 1995 to complete the Coram
Consolidation Plan and Caremark Business Consolidation Plan.

The balance in the "Accrued merger and restructuring" liability at
September 30, 1995 consists of future cash expenditures related to:

<TABLE>
<S> <C>
Four-Way Merger $ 1,600
Coram Consolidation Plan 19,600
Caremark Business Consolidation Plan 26,200
Other 3,800
--------
Total $ 51,200
========
</TABLE>

Amounts for the Caremark Business Consolidation include $9.8 million related to
items recorded as an adjustment to the purchase price of the Caremark Business.

3. LINES OF CREDIT AND LONG-TERM DEBT

Lines of credit and long-term debt were as follows (in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
Senior Credit Facility . . . . . . . . . . . . . . . . . . . $235,000 $108,099
Bridge Note . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Junior convertible subordinated PIK note, due October 1,
2005, plus interest payable semi-annually at 7%, convertible
into common stock at the conversion rate of $27 . . . . . . 75,000

Junior non-convertible subordinated PIK note, due
September 30, 2005, plus interest payable semi-annually
at 12% . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Subordinated convertible debentures, due June 30, 1996,
</TABLE>

11
<PAGE> 13
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

<TABLE>
<S> <C> <C>
plus interest payable semi-annually at 9%, convertible
into common stock at the conversion rate of $16.36 . . . . . 6,818 7,000
Other obligations, including capital leases, at interest
ranging from 6% to 16%, collateralized by certain property
and equipment . . . . . . . . . . . . . . . . . . . . . . . 7,218 10,538
-------- --------
$499,036 $125,637
Less current scheduled maturities . . . . . . . . . . . . . . 48,645 5,911
-------- --------
$450,391 $119,726
======== ========

</TABLE>

The Company's principal credit and debt agreements were entered into
on April 6, 1995 at the time of the acquisition of the Caremark Business. As of
June 30 and September 30, 1995, the Company had violated certain minimum
financial ratios of the Senior Credit Facility and received short-term waivers
of such violations and payment extensions, and at June 30, 1995, the Company
had classified all its long-term debt as a current liability. On October 13,
1995, the Company and its lenders under its Senior Credit Facility and its
Bridge Note agreed to a restructuring of the major terms of both agreements,
which postponed the first principal payment due under the Senior Credit
Facility from September 30, 1995 until March 31, 1996, provided a new $25
million credit line (the "Overline") and re-defined certain financial
covenants. The maturity dates were shortened from April 6, 2000 to March 31,
1997, and the unused portion of the existing revolving debt commitments of
approximately $64.2 million were terminated. In return, the lenders received
warrants to purchase 2,569,342 shares of common stock of the Company or, at the
option of the lenders, 6% of the shares of Coram Inc., a wholly owned
subsidiary of the Company and the immediate parent of the Company's operating
subsidiaries, exercisable at a nominal price over five years. The lender under
the Bridge Note agreed to defer the due date of all interest payments to March
31, 1997. The lender had previously been granted the right to receive certain
warrants on an accelerated basis (see below), and the right to appoint one
director to the Company's Board of Directors. As a result of the restructuring
of terms, the Company is no longer classifying its long-term debt as a current
liability.

The fair value of the warrants issued to the lenders under the Senior
Credit Facility and any warrants issued to the lenders under the Bridge Note
will be accounted for as interest expense over the term of the related debt.
The estimated fair value of the warrants issued to the lenders under the Senior
Credit Facility was $8 million.

Under the terms of the Senior Credit Facility as amended through
October 13, 1995, the Company has (i) $200 million outstanding under a term
loan facility (the "Term Loan Facility") with payments commencing March 31,
1996 and a final maturity date of March 31, 1997, and (ii) $35.8 million
outstanding under a revolving credit facility with a maturity date of March 31,
1997, including undrawn letters of credit of $836,000, under which no
additional borrowings can be made, and (iii) $25 million available under the
Overline revolving credit line maturing December 31, 1996. Interest is based
on margins over certain domestic or foreign indices. The weighted average
interest rate on borrowings at September 30, 1995, was 8.67%. The Senior Credit
Facility is secured by the stock of all of the Company's subsidiaries and a
collateral interest in the Company's principal bank accounts. All net proceeds
from sales of assets, other than those sold in the ordinary course of business,
must be applied to prepayment of the Senior Credit Facility. The Senior Credit
Facility contains financial covenants and conditions limiting the Company's
ability to engage in certain activities. The proceeds of the loans in April
1995 under the Senior Credit Facility were used to repay amounts outstanding
under a prior credit facility, to fund a portion of the cash purchase price for
the Caremark Business and to pay certain expenses in connection therewith.

The Bridge Note was issued on April 6, 1995 to DLJ, as an unsecured
obligation of the Company in a principal amount of $150 million. The Bridge
Note initially bears interest at an annual rate equal to the sum of (i) the
rate of interest publicly announced by The Bank of New York from time to time
as its prime rate plus

12
<PAGE> 14
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

(ii) 3.00% plus (iii) an additional 0.50% from and including each quarterly
anniversary of such date for as long as the Bridge Note remains outstanding.
The principal amount of the Bridge Note will initially be due and payable in
full on April 5, 1996. The Bridge Note also bears a duration fee of 0.25% of
the average principal amount outstanding. The agreement pursuant to which the
Bridge Note was issued contains customary covenants and events of default. If
the Bridge Note is not repaid in full as of April 6, 1996, rollover notes (the
"Rollover Notes") which mature on October 6, 2000 will be issued in an amount
equal to the then-outstanding principal amount of the Bridge Note, with
interest at a rate based on various indices but no lower than the rate on the
Bridge Note at the rollover date, and increasing by an additional 0.25%
quarterly, but not in excess of 21%, and a cash payment of 3% of the Rollover
Notes issued. Payment of interest on Bridge and Rollover Notes and the duration
fee which had been due quarterly has been deferred to March 31, 1997.

In August 1995, DLJ's right to appoint one member of the Company's
Board of Directors was accelerated and such director is expected to be
appointed in November 1995. DLJ will receive warrants to purchase up to 20% of
the outstanding shares of Common stock of the Company at a nominal exercise
price in accordance with the following table as long as the Rollover Notes are
outstanding. The schedule has been accelerated to commence December 30, 1995
and will continue on that basis until such time as all deferred interest and
duration fees (together with all interest due thereon) have been paid in full,
at which time it will revert back to the original schedule with no return of
issued warrants.

<TABLE>
<S> <C>
0-89 days . . . . . . . . . . . . . . . . . . 0.50%
90-179 days . . . . . . . . . . . . . . . . . 1.00%
180-269 days . . . . . . . . . . . . . . . . 1.00%
270-359 days . . . . . . . . . . . . . . . . 1.50%
360-449 days . . . . . . . . . . . . . . . . 2.00%
450-539 days . . . . . . . . . . . . . . . . 2.50%
540-629 days . . . . . . . . . . . . . . . . 2.50%
630-719 days . . . . . . . . . . . . . . . . 3.00%
720-809 days . . . . . . . . . . . . . . . . 3.00%
810 days and thereafter . . . . . . . . . . . 3.00%
------
20.00%
======

</TABLE>

Prior to April 6, 1997, interest on the Junior Subordinated PIK Notes
is payable in Junior Subordinated PIK Notes of the same type. Thereafter,
interest will be payable in cash. No principal or interest payments may be made
if there is a default, or an event of default, on indebtedness senior to the
Junior Subordinated PIK Notes. In the event that there is a change in control
of the Company, the holder of the Junior Subordinated PIK Notes may require the
Company to repurchase such notes at a purchase price equal to the principal
amount thereof, plus accrued interest thereon.

The Junior Convertible Subordinated PIK Note may not be prepaid or
redeemed prior to April 6, 1998 without the written consent of the holder
thereof. Thereafter, the Junior Convertible Subordinated PIK Note is, at the
option of the Company, redeemable, in whole or in part, subject to normal
redemption terms and conditions. The Junior Convertible Subordinated PIK Note
will be convertible, at the holder's option, at any time subsequent to April 6,
1996, in whole or in part. The conversion price of the Junior Convertible
Subordinated PIK Note is $27 per share, subject to adjustment. The Company is
required to file, and use its best efforts to cause it to become effective on
or before April 6, 1996, a registration statement covering the shares of the
Company's Common Stock issuable upon conversion. The Company is required to
maintain the effectiveness of that registration statement for a three year
period following its original effective date.

The Junior Non-Convertible Subordinated PIK Note may be prepaid or
redeemed, in whole or in part, at any time at the Company's option, without
penalty or premium, and subject to restrictions on optional redemption
contained in the Senior Credit Facility.

13
<PAGE> 15
CORAM HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1995

4. INCOME TAXES

During the nine months ended September 30, 1995, the Company recorded
an income tax benefit of $11.3 million compared with a $25.4 million benefit
recorded in the comparable period of the prior year. The income tax benefit
recognized in both periods has been limited to the estimated amounts
recoverable through carryback of losses to the separate returns of the
Company's predecessor entities that were participants in the Four-Way Merger.
Accordingly, the effective income tax (benefit) rates for the nine month
periods ending September 30, 1995 and 1994 differ substantially from the
expected combined federal and state income tax (benefit) rates calculated using
applicable statutory rates.

The Company has recognized net deferred tax assets of approximately
$8.3 million, net of refunds receivable included in prepaid taxes, at September
30, 1995 related primarily to accrued restructuring costs, goodwill written
off, allowances for doubtful accounts that are not deductible for income tax
purposes until paid or realized and to net operating loss carryforwards that
are deductible against future taxable income. This amount is net of a valuation
allowance of $156.1 million that has been provided to reduce the gross amount
of deferred tax assets to amounts expected to be recovered through (a)
carryback of taxable losses and resulting recovery of income taxes previously
paid by predecessor entities and (b) offset against deferred tax liabilities
that would otherwise become payable in the carry forward period. Realization of
$156.1 million of deferred tax assets, for which a valuation allowance has been
established at September 30, 1995, is dependent upon the ability of the Company
to generate taxable income in the future.

During October 1995, the Company received a $30.3 million refund
related to the carryback of tax losses for its tax year ended September 30,
1995. Of this amount, $17 million related to items in net deferred tax assets,
$11 million related to current year tax losses and $2 million related to other
items not affecting the results of operations.

5. LITIGATION

In mid-August 1995, a number of law suits purporting to be class
actions were filed against the Company and certain of its officers and
directors. The suits allege various violations of the Securities Exchange Act
of 1934 and other matters and seek damages related to the decrease in the
trading price of the Company's stock. On November 2, 1995, a shareholder
derivative action asserting substantially similar allegations was filed against
the directors and a former director of the Company. While management believes
it has meritorious defenses in these actions, their ultimate disposition cannot
be determined at this time. Accordingly, no provision for any loss that may
result upon resolution of the suits has been made in the unuadited condensed
consolidated financial statements. An adverse outcome could be material to the
financial position, results of operations and liquidity of the Company.

The Company is involved in various legal proceedings incidental to the
normal course of business. While it is not possible to predict the outcome of
such proceedings with certainty, management is of the opinion that their
ultimate disposition will not have a material effect on the Company's financial
position, results of operations or liquidity.

See Note 2, Caremark Business Acquisition, for litigation related to that
transaction.

14
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BACKGROUND

General. The operations of Coram Healthcare Corporation, a Delaware
corporation ("Coram" or the "Company") commenced on July 8, 1994 as a result of
a merger (the "Four-Way Merger") of T2 Medical, Inc. ("T2") , Curaflex Health
Services, Inc. ("Curaflex"), HealthInfusion, Inc., ("HealthInfusion") and
Medisys, Inc. ("Medisys") (collectively, the "Merged Entities"), each of which
was a publicly-held national or regional provider of alternate site infusion
therapy and related services. Pursuant to the Four-Way Merger, which was
accounted for as a pooling of interests, each of the Merged Entities became and
is now an indirect wholly-owned subsidiary of the Company. On September, 12,
1994, the Company acquired all of the capital stock of H.M.S.S., Inc. ("HMSS"),
a regional provider of alternate site infusion therapy, in a transaction
accounted for as a purchase. Effective April 1, 1995, the Company acquired
substantially all of the assets used in the alternate site infusion therapy and
related businesses (collectively the "Caremark Business") of Caremark Inc.
("Caremark"), a California corporation and wholly-owned subsidiary of Caremark
International, Inc. (the "Caremark Transaction"). The Caremark Transaction was
accounted for as a purchase. The Company assumed only certain specified
liabilities of the Caremark Business, which expressly exclude any liabilities
associated with the recent government investigation of Caremark.

Financing. On June 30, 1995, the Company had classified its long-term
debt as a current liability because it had violated certain minimum financial
ratios of the Senior Credit Facility. Short-term waivers of such violations
were received at that time. As of September 30, 1995, the Company continued to
be in violation of those financial ratios and received short-term waivers of
such violations and payment extensions. On October 13, 1995 the Company
concluded a major restructuring of the terms of its debt. As a result of this
restructured financing, the Company is no longer classifying its long-term debt
as a current liability. The debt restructuring was the culmination of extensive
discussions with its lenders and the completion of a formal business plan by
senior management (described below). The business plan was the result of a
comprehensive examination of the Company's business and operations, reflecting
both the factors that have adversely affected the Company's recent operations
as well as the impacts of the acquisition of the Caremark Business.

Business Plan. The business plan is focused on returning management's
attention to the basic factors that could lead to profitability for the
Company: revenue generation, cost reduction and cash collections. To generate
increased revenue, the Company intends to redirect its marketing efforts
towards improving its physician relationships in addition to developing new
programs such as one-stop shopping for managed care payors or disease-state
carve-outs (i.e., vertical integration along disease specific categories) and
improving billing and collections. Cost reduction efforts will be focused on
field consolidation and a reduction of corporate expenses, assessment of poor
performing branches and a review of branch efficiencies. Management also
intends to concentrate on improved reimbursement through an emphasis on cash
collections throughout the organization and the reassessment of systems support
for reimbursement. While management believes the implementation of this
business plan will improve the Company's operations and financial performance,
no assurances can be given as to its ultimate success.

Special Charges. During the quarter ended September 30, 1995, the
Company recorded special charges of $228.4 million, which are further described
below. A charge of $203.4 million was made to write-off goodwill and other
long-lived assets and valuation of acquired receivables associated with the
acquisition of the Caremark Business, an additional special reserve of $20
million was provided for uncollectible receivables, a $2.0 million loss was
incurred on the sale of a non-core business and $3.0 million was provided as a
non-recurring SG&A charge for asset write-offs and litigation costs.

Goodwill and Other Long-Lived Assets. At September 30, 1995, before
the write-off described herein, the Company had goodwill of $512.7 million, or
53.6% of its assets, including $166.4 million cost in excess of identifiable
net assets acquired that was added to goodwill in 1995 as a result of the
Caremark

15
<PAGE> 17
Business acquisition. It is the Company's policy to review the recoverability
of goodwill and other long-lived assets at least quarterly. If such a review
indicated that they would not be recoverable, based on undiscounted estimated
future net cash flows over their remaining depreciation and amortization
period, their carrying value would be reduced to the estimated fair value. An
inability to recover such assets may be suggested by, among other conditions,
cash flow deficits; an historic or anticipated decline in revenues or operating
profits; adverse legal, regulatory or reimbursement developments; accumulation
of costs significantly in excess of amounts originally expected to acquire the
asset; or, a material decrease in the fair value of some or all of the assets.
Most of the Company's goodwill and a significant portion of its other
long-lived assets relate to the alternate site infusion therapy business. The
goodwill and other long-lived assets related to that business were reviewed in
the aggregate, for the entire alternate site infusion therapy business, at June
30 and at September 30, 1995 before the additional analysis described below.
Such review indicated that the undiscounted estimated future net cash flows, in
the aggregate, even at the relatively low levels in the Company's projections,
when projected over the there to forty year amortization period of the
goodwill, exceeded the carrying amount of the goodwill and other long-lived
assets.

The Company commenced a comprehensive examination of its business and
operations following the end of its second quarter, which revealed that the
Caremark Business was significantly weaker than indicated by its 1994 financial
statements. The revenue of the acquired Caremark Business declined
significantly in the second quarter of 1995 from $96.1 million (as reported by
Caremark) in the first quarter of 1995 to approximately $83.0 million in the
second quarter, or a 13.6% decline. The severity and persistence of the
underperformance of the Caremark Business and the negative impact of the June
1995 guilty plea by Caremark to criminal felony charges on the Company's
referral sources and employee morale, neither of which were expected at the
time of the acquisition, became evident in the third quarter. At the time of
acquisition of the Caremark Business, the pro forma combined annual revenue of
the Company and the Caremark Business was almost $900 million based on 1994
results. The company expected the business to grow and expected to realize
substantial cost savings, principally through elimination of geographically
duplicative branches and consolidation of corporate functions, However, in the
third quarter of 1995, on an annualized basis, revenue was almost one-third
lower than the pro form combined 1994 revenue. The anticipated cost savings in
the Coram Consolidation Plan and the Caremark Business Consolidation Plan have
been offset by the revenue decline, and the Company has incurred substantial
losses since the acquisition of the Caremark Business.

A business plan completed by the Company at the end of the third
quarter of 1995 showed operating results and cash flows far below amounts
estimated at the time the Caremark Business was acquired, causing the Company
to re-examine whether the acquisition cost of the Caremark Business would be
recovered from incremental cash flows. According to the plan, there were no
such incremental cash flows. The fair value of the goodwill was recorded based
upon its cost as of April 1, 1995, and was equal to the purchase price of the
Caremark business in excess of the identifiable net assets acquired. The
Company expected to realize substantial incremental cash flows from the
Caremark Business revenues and cost savings implemented after the acquisition.
However, the Company has not realized the incremental cash flows it had
anticipated and no longer expects to recover such cash flows through
operations. As a result, the company now believes that it substantially over
paid for the Caremark Business due to inaccuracies in Caremark's
representations and warranties. Therefore, based upon its finding that the
Caremark Business would not yield any incremental cash flows, the Company
concluded that there was no future value for the purchase price of the Caremark
Business in excess of the identifiable et assets acquired. The Company further
believes that is sole source of recovery of the purchase price in excess of the
identifiable net assets acquired, as well as its other damages, is through its
litigation against Caremark, the outcome of which is inherently uncertain See
Part II, Item 1, "Legal Proceedings."

Therefore, in its financial statements for the third quarter of 1995
as originally prepared, the Company charged operations to write off the net
purchase price in excess of the identifiable net assets acquired of $166.4
million and to record an adjustment to the valuation of acquired receivables of
$37.0 million, for a total charge of $203.4 million. (This amount was reported
as a write-off of goodwill in the third quarter of 1995; it is now classified
and reported as described herein.) The $37.0 million charge for the valuation
of acquired receivables in discussed below under the caption "Valuation of
Receivables Acquired from Caremark." The Company's conclusion that the purchase
price in excess of the identifiable net assets

16
<PAGE> 18
acquired will not be recovered through operations was corroborated by an
analysis prepared by the Company that indicted that the fair value of the
goodwill associated with the Company's alternate site infusion therapy
business, including the increment added by the Caremark Business acquisition,
was approximately $200 million less than its carrying value.

Subsequent to the write-off in the third quarter, the Company
performed additional analysis and revised the basis for the evaluation of
recoverability of goodwill and other long-lived assets. The Company determined
to shorten the future amortization period for all of its goodwill to a
remaining life of 25 years as of October 1, 1995 because of uncertainties in
its business environment and the recent adverse operating results, and to
perform a review for impairment as of September 30, 1995 separately for each of
the 51 market areas in which the Company operates its home infusion therapy
business. If the undiscounted net cash flows over the future amortization
period for a market area are less than the carrying amounts of the goodwill and
other long-lived assets related to that area, then an impairment loss is
recognized by a charge to income equal to the excess of the carrying amount of
the assets over their estimate fair value. Corporate costs that are
substantially related to branch operations are allocated to the market areas.
The Company believes that its goodwill is defined by the
relationships--substantially all of which are non-contractual-- with
physicians, medical groups, hospitals, case managers at managed care
organizations, and other referral sources to the Company in the marketplace,
and has therefore allocated the goodwill to each market area in proportion to
revenues. Fair value of the assets estimated area based upon future cash flows
from each market area.

The impairment loss calculated in this manner as of September 30, 1995
was $159.2 million, of which $150.9 million related to goodwill, and $8.3
million related to other assets. The impairment loss of $159.2 million and the
adjustment to the valuation of the acquired receivable of $37.0 aggregates
$196.2 million. That amount approximated the $203.4 million goodwill write-off
previously recorded. The Company based the aggregate charge on the amount
originally reported and did not restate its previously reported net loss. The
Company believes that most of this amount relates to assets recorded as part of
the acquisition of the Caremark Business.

The recoverability of goodwill and other long-lived assets for other
businesses of the Company, principally lithotripsy, is evaluated separately
using the same methodology, and there is no indication of an impairment loss.
The Company continues to closely monitor its remaining goodwill and other
long-lived assets. The evaluation of the recoverability of goodwill is
significantly affected by estimates of future cash flows from each of the
Company's market areas. If the estimate of future cash flows from operations
decrease, the Company be required to further write down its goodwill and other
long-lived assets in the future. Any such write down could have a material
adverse effect on the financial position results of operations of the Company.
Further, any such decrease could have an adverse effect on the Company's
liquidity and its ability to continue its operations.

Valuation of Receivables Acquired from Caremark. The allowance for
uncollectible accounts, as established by Caremark's at April 1, 1995, the
effective date of the Company's acquisition of the Caremark Business, was $4.3
million, or 3.0% of the gross receivables of $142.3 million at that date. The
Company was not permitted to perform extensive investigation of the accounts
receivable or related allowance for uncollectible accounts prior to the
acquisition, but had received specific representations and warranties from
Caremark that the accounts receivable were collectible in the ordinary course
of business and also that the values were in accordance with generally accepted
accounting principles. Based on the limited due diligence investigation the
Company was permitted to conduct, it appeared to the Company that the allowance
was low in comparison to its own allowance, but based on the limited due
diligence conducted by the Company, the Company request, received and relied on
the representations and warranties from Caremark as to collectibility. After
the acquisition, the Company engaged independent accounting consultants to
review the accounts receivable acquired from Caremark. It was concluded that
Caremark had made significant errors in its calculations of estimated
uncollectible accounts, because of, among other things, Caremark's failure to
properly recognize bad debts and contractual allowances, and that the acquired
receivable were overstated by $37.0 million as of April 1, 1995. The Company
reduced the valuation of the acquired receivables by an aggregate of $37.0
million and charged that amount to operations in the third quarter of 1995 when
it concluded that its sole source of recovery was its complain against
Caremark.

17
<PAGE> 19
Provision for Estimated Uncollectible Accounts. Management regularly
reviews the collectibility of accounts receivable and makes adjustments to the
provision for estimated uncollectible accounts as needed to reflect current
collection and other trends and changes in the assessment of realizable value.
Management believes the resulting net carrying amounts for accounts receivable
are fairly stated at each quarter-end based on all information then available.
The Company has continued to become more sophisticated in its approach to the
estimation process as it gains experience with estimates for the consolidated
entities. While management believes the Company has made adequate provision for
uncollectible accounts based on all information available, no assurance can be
given as to the level of future provisions for uncollectible accounts, or how
they will compare to the levels experienced by the constituent entities before
1995.

The Company's ability to successfully collect its receivables depends,
in part, on its ability to adequately supervise and train personnel in billing
and collections, and minimize losses related to branch consolidations and
system changes. In the quarters ended September 30, 1994 and 1995, the Company
recorded as part of its quarterly provision for estimated uncollectible
accounts charges of $17.3 million and $20.0 million, respectively, which
management believes resulted principally from events that transpired as part of
the consolidation of the various constituent companies' billing systems
ultimately into one billing system for use at substantially all locations and
to move its billing and collections functions from a centralized to a
decentralized structure. Any further disruptions in those procedures could
adversely affect the ability of the Company to collect its receivables.

The Coram Consolidation Plan included a broad restructuring of the
Company's reimbursement organization and systems, including the
decentralization of centralized collection activities located in four locations
and the relocation of such activities to 100 branch locations. In connection
with the Coram Consolidation Plan and as a result of the Company's decision to
implement standardized policies for recognition of allowances, de-emphasize
certain businesses and provide for the potential disruptions expected during
the merger and post-merger transition process. $17.3 million was recorded as
part of the provision for estimated uncollectible accounts in the quarter ended
September 1994, the first quarter-end following the Four-Way Merger that
occurred in July 1994. In this quarter, the Company noted a significant
increase in aging of receivables at various branches, which management
concluded had resulted from distractions related to the merger and
consolidation process, the transfer of billing information and patient files
between branch offices, the termination of certain employees experienced in
billing and collection, and the inability to efficiently complete, obtain or
process certain claim documentation necessary to secure payment because of the
termination of certain physician relationships and the elimination of some
experienced branch personnel as part of the consolidation of branches then
occurring. The amount of the charge was determined based on those factors, and
also included a provision of $3.4 million for specific accounts rendered
uncollectible because of relationships terminated as part of the merger.
Management believes a minor portion of the overall provision may also be
attributable to the accounting impact of implementing standardized policies for
recognition of contractual and other allowances; however, the Company is unable
to distinguish the impact of this factor in the Company's overall provision for
estimated uncollectible accounts of $21.5 million for this quarter.

Following the Company's acquisition of the Caremark Business in April
1995 andas part of the Caremark Business Consolidation Plan (as defined below)
the Company undertook the conversion of its billing and accounts receivable
systems to the acquired Caremark Business system while at the same time it
reorganized the acquired Caremark Business reimbursement function from a
centralized to a decentralized organization. These changes started in the
second quarter, but most of the changes occurred in July through September.
Their effects, which became most pronounced in the third quarter, were far more
disruptive than anticipated, resulting in significant delays in billing and
collection and difficulties in receiving timely reimbursements. Those delays
were in part caused by the inability to efficiently complete, obtain or process
certain claim documentation and in part by lack of familiarity with the newly
acquired system. The passage of time makes missing documentation required for
payment difficult or impossible to obtain or replace, and can delay claim
submission past deadlines imposed by certain payors. Because of this, the
Company experienced larger write-offs than experienced in prior quarters and,
therefore, provided an addition to its provision for estimated uncollectible
accounts of $20.0 million resulting in a total provision of $36.5 million in
the quarter

18
<PAGE> 20
ended September 30, 1995. This $20.0 million provision was for deterioration in
accounts receivable that occurred after the acquisition of the Caremark
Business, and its separate from the $37.0 million reduction in the carrying
value of accounts receivable acquired from Caremark that related to an
overstatement of those accounts as of April 1, 1995 when they were purchased by
the Company as part of the Caremark Business Acquisition. See "Valuation of
Receivables Acquired from Caremark" above.

In the six-month period ended December 31, 1994, which comprises the
first two quarters after the Four-Way Merger, the Company's provisions for
uncollectible accounts aggregated 3.9% of revenues, excluding the $17.3 of
additional provision recorded in the third quarter of 1994, and 11.7% of
revenues including the $17.3 million additional provision. In the first, second
and third quarters of 1995, the provisions for uncollectible accounts,
excluding the $20 million recorded in September 1995 discussed above,
aggregated 3.8%, 7.1% and 8.1% of 1995 year-to-date revenues, respectively, and
12.6% of September 1995 year-to-date revenues including the $20 million
additional provision. In part, the higher level of provisions in the second and
third quarters of 1995 resulted from the acquisition of the Caremark Business
as of April 1, 1995. The annual provision for estimated uncollectible accounts
recorded by Caremark International Inc. ranged from 5.1% to 7.4%, excluding the
effect of the $37 million adjustment to the valuation of the acquired
receivables. In contrast, the annual provision for estimated uncollectible
accounts by the companies that were parties to the Four-Way Merger generally
aggregated between 4.3% and 6.4% of revenues in the three year period preceding
the July 1994 merger.

A benefit of the accounts receivable system acquired as part of the
Caremark Business is a computer-aided ability to track collection activity
which can then be used to calculate historical write-off percentages for
specific aging categories for use in establishing the allowance for estimated
uncollectible receivables. The Company concluded that it is a useful system if
properly applied and, since the Company was adopting the Caremark Business
receivable system, decided to adopt this aspect of the system as well. During
the quarter ended September 30, 1995, much of the Company's new billings were
transferred to the Caremark Business receivables system and the allowance for
uncollectible accounts for receivables maintained on the Caremark Business
receivables system was estimated using that system with updated historical
write-off percentages.

Receivables originated by the former Coram branches that were not
originally billed on the Caremark Business billing system are maintained
separately on the former Coram receivables system, since it has not been
practical to transfer these balances to the Caremark Business receivables
system. For the accounts receivable maintained on the former Coram receivables
system, in the quarter ended September 30, 1995 the Company developed a
methodology to derive specific estimated loss percentages for specific aging
categories based on information from operating and field finance personnel, and
applied these percentages to the specific aging categories in order to achieve
consistency in the manner of establishing the provision for estimated
uncollectible accounts to the extent possible. Prior to the quarter ended
September 30, 1995, the allowance for estimated uncollectible accounts for
accounts receivable maintained on the former Coram receivables system had been
determined based on an overall review of trends in days-sales-outstanding,
write-offs, and agings of the accounts receivable.

The Company believes that the adoption of the new estimation procedure
caused the provision for estimated uncollectible accounts to be higher than it
would have been, although the extent cannot be estimated based on current
information because of the adverse collection experience in the quarter ended
September 30, 1995.

To control the conversion to the Caremark Business receivables system,
the Company, among other steps, documented and disseminated procedures, and
conducted extensive training at branch sites and for approximately 250 people
to date at the corporate office. Training was conducted by the Company's Area
Reimbursement Managers and by outside consultants proficient in the new system.
The Company also retained certain key reimbursement personnel from discontinued
branches, initiated collection incentive programs and controlled losses by
using the write-off approval process already in the new system. The complexity
of the Caremark Business receivables system, coupled with personnel,
supervisory and management changes partially offset expected benefits of the
above steps during the transition.

19
<PAGE> 21
The Company plans to continue to take steps to complete the
restructuring of the billing and collection process and accelerate collections,
including decentralization of reimbursement activities, development and
implementation of standard management reports, improvements in the
reimbursement process, concentrated collection efforts on certain aged
receivables and incentivizing billing and collection efforts.

Coram Consolidation Plan and Caremark Business Consolidation Plan. In
the quarters ended September 30, 1994 and June 30, 1995, the Company recorded
significant non-recurring restructuring costs related to the Coram and the
Caremark Business Consolidation Plans. The Plans and their status are described
in Note 2 to the Unaudited Condensed Consolidated Financial Statements. No
assurances can be given as to the aggregate cost savings which will be achieved
by the Company as a result of these Consolidation Plans, or the timing thereof.

The Coram Consolidation Plan includes consolidation of infusion
centers and corporate offices, personnel reductions and elimination or
discontinuance of certain business activities. The consolidation process
contemplated by the Coram Consolidation Plan is substantially complete. The
Caremark Business Consolidation Plan includes consolidation of infusion centers
and corporate offices, and reorganization of the Caremark Business
reimbursement function from a centralized to a decentralized function. It also
includes the conversion of the Company's billing and accounts receivable system
to the Caremark Business system. While an increase in accounts receivable
write-offs has occurred in the conversion, management has taken steps aimed at
minimizing losses from these system conversions.

The accrual in the Company's Consolidated Balance Sheet for estimated
future cash expenditures related to the Four-Way Merger and the Coram
Consolidation Plan and Caremark Business Consolidation Plan at December 31,
1994 was $42.8 million. The Company currently estimates that future cash
expenditures related to that accrual will be made in the following periods: 37%
in 1995, 46% in 1996, 10% in 1997 and 7% in 1998 and thereafter. These
estimated amounts and the periods in which they will be spent may change as
cost estimates are finalized, and such changes may be material.

Management. Effective October 16, 1995, Donald J. Amaral, an
experienced healthcare company executive, was named President and Chief
Executive Officer of the Company, succeeding James M. Sweeney who remains the
Company's Chairman. Effective August 30, 1995, Richard M. Smith, previously
Vice President Treasury and Tax, was named Chief Financial Officer succeeding
G. Rodney Wolford who had been Acting Chief Financial Officer since July 1995.
On August 2, 1995 the Company announced the appointment of Kelly J. McCrann and
John T. Gallatin, previously Presidents of operating divisions of the Company,
as Executive Vice Presidents of the Company. Mr. McCrann is responsible for
corporate and administrative functions and Mr. Gallatin is responsible for the
Company's field operations.

Factors Adversely Affecting Recent Operating Results. The most
significant factor which affected the Company's performance and financial
condition during the second and third quarter of 1995 was the underperformance
of the Caremark Business from what the Company expected at the time such
business was acquired. The revenues of the acquired Caremark Business declined
significantly from the first quarter of 1995 to the third quarter of 1995. That
fact combined with the substantial indebtedness which the Company incurred to
acquire the Caremark Business, which the Company expected to service in
substantial part through the operating income and cash flow of the Caremark
Business, materially and adversely affected the Company's financial condition
and results of operations. Further, the Company believes the result of Caremark
pleading guilty to criminal felony charges in June 1995 has negatively impacted
revenue referral sources and employee morale throughout the Company generally,
further contributing to a loss of revenues.

Other factors which adversely effect the Company's results of
operations were the Company's implementation of a policy of terminating
physician arrangements and certain businesses which it inherited from the
Merged Entities which were potentially in conflict with new federal and state
law. Many of the physician arrangements were terminated in the fourth quarter
of 1994 and the first quarter of 1995. As a result, the Company lost a number
of historical referral sources which, when combined with the loss of the
terminated businesses, resulted in a decline in revenues on a year-to-year
basis and for the first three quarters

20
<PAGE> 22
of 1995 in its operations other than the Caremark Business. In addition, the
Company has experienced pricing pressure in its core infusion business as a
result of a continuing shift in payor mix from traditional indemnity insurers
to managed care and government payors and intense competition among infusion
providers. The Company has also experienced a disruption in certain
relationships as a result of its headcount reductions and consolidation.
Further, the Company has experienced increased competition from hospitals and
physicians who have sought to increase the scope of services through their
offices, including services similar to those offered by the Company. There can
be no assurance that these factors will not continue to have an adverse effect
on the Company's financial condition and results of operations in the future.

In addition, the Company has experienced modest downward pricing
pressures in its lithotripsy operations. These operations may continue to
experience pricing pressures in the future. The Health Care Financing
Administration has issued a proposed rule that would, if implemented,
significantly reduce the amount Medicare would reimburse its beneficiaries for
the cost of lithotripsy procedures performed in an ambulatory surgery center or
on an out-patient basis at a hospital. Such a proposal might result in similar
efforts by other third-party payors to limit reimbursement for lithotripsy
procedures.

To counter the above factors, senior management of the Company has
recently completed a major restructuring of the terms of its debt and has
adopted a business plan, as discussed above, focused on returning management's
attention to the basic factors that could lead to profitability for the
Company: revenue generation, cost reduction and cash collections. While
management believes the implementation of this business plan will improve the
Company's operations and financial performance, no assurances can be given as
to its ultimate success.

RESULTS OF OPERATIONS

Prior to July 8, 1994, the activities of the Company were conducted
separately by each of the predecessor entities. Accordingly, the following
discussion provides certain comparative information for the third quarter of
1995 compared with the second quarter of 1995 in addition to prior year
comparisons.

THIRD QUARTER ENDED SEPTEMBER 30, 1995 COMPARED WITH SECOND QUARTER ENDED JUNE
30, 1995

Net Revenue. Net revenue for the third quarter of 1995 decreased by
$14.6 million or 8.1% compared with the second quarter 1995. The decrease is
due primarily to increased competition, a decrease in case management referrals
and continued pricing pressure in the Company's core infusion business
resulting from a continuing shift in payor mix, discussed further under the
caption " Factors Adversely Affecting Recent Operating Results."

Gross Profit. Gross profit for the third quarter of 1995 decreased
$6.4 million or 15.5% compared with the second quarter of 1995 due to decreased
net revenues and a decline in the gross profit margin from 23.1% to 21.3%. The
principal reasons for the decline in gross profit percentage were unfavorable
changes in therapy and payor mix, in part related to the Caremark Business
which historically had lower margins than the Company's former Coram business;
based on current information, the Company is currently unable to separately
quantify each of these reasons.

Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses decreased $2.5 million or 6.0% for the third
quarter of 1995 compared with the second quarter of 1995. The decrease is
attributable to a decrease in salary expense due to the implementation of the
Caremark Business Consolidation Plan and a second quarter SG&A expense of
approximately $3.4 million related to the Lincare Agreement. These decreases
were partially offset by litigation costs of ($.5 million) and $2.5 million
non-recurring SG&A charge in the third quarter of 1995 for asset write-offs and
a $2.0 million non-recurring loss on the sale of a non-core business

Provision For Estimated Uncollectible Accounts. The provision for
estimated uncollectible accounts was $36.5 million, or 22.2% of net revenue,
for the quarter ended September 30, 1995 compared to

21
<PAGE> 23
$16.0 million, or 8.9% of net revenue, for the quarter ended June 30, 1995. The
increase in the third quarter was because of the special charge of $20.0
million for estimated uncollectible accounts receivable.

Operating Loss. The Company recorded an operating loss of $246.6
million for the third quarter of 1995 compared to an operating loss of $46.1
million in the second quarter of 1995. The increased operating loss was
principally due to the higher level of special charges in the third quarter of
1995 as compared with the second quarter of 1995. Third quarter 1995 charges
affecting the operating loss totaled $226.4 million, consisting of the $203.4
million charge for long-lived assets and valuation of acquired receivables, the
$20.0 million special charge for estimated uncollectible accounts receivable
and $3.0 million of other non-recurring SG&A charges. This compares with a
$25.8 million pre-tax charge recorded in the second quarter of 1995 for
estimated costs related to the Caremark Consolidation Plan. The balance of the
increased operating loss is due to a lower gross profit offset by lower SG&A
expenses in the third quarter as compared to the second quarter of 1995.

Net Loss. Net loss for the third quarter of 1995 increased $188.3
million compared with the second quarter of 1995 primarily as a result of the
$202.6 million increase in special charges. The decrease in gross profit from
the second quarter of 1995 further contributed to the comparative increase in
the net loss. Partially offsetting these increases were the decrease in SG&A
expenses in the third quarter of 1995 as compared to the second quarter of
1995, the recognition of a $10.2 million tax benefit in the third quarter of
1995 and the recording of a $3.4 million extraordinary loss in the second
quarter of 1995 for the early extinquishment debt.

THIRD QUARTER ENDED SEPTEMBER 30, 1995 COMPARED WITH THIRD QUARTER ENDED
SEPTEMBER 30, 1994.

Net Revenue. Net revenue for the third quarter of 1995 increased by
$54.5 million or 49.5% compared with the same period in 1994. The acquisition
of the Caremark Business accounted for the increase. However, on a pro-forma
combined basis, third quarter 1995 net revenue declined 24.8% from pro-forma
third quarter 1994 net revenue due primarily to the factors discussed above.

Gross Profit. Gross profit for the third quarter of 1995 increased
$3.6 million or 11.6% compared with the same period in 1994. The increase is
due to the acquisition of the Caremark Business offset by a decrease in the
gross profit margin from 28.5% to 21.3% for the reasons discussed under the
caption "Factors Adversely Affecting Recent Operating Results." Also
contributing to the decrease was the sale of the Company's home pediatrics
business ("Kids Medical"), which decreased gross profit by $2.7 million.

Selling, General and Administrative Expenses. SG&A expenses increased
$17.9 million or 85.6% for the third quarter of 1995 compared with the same
period in 1994. The principal reasons for the increase were the acquisition of
the Caremark Business and a higher level of corporate expense related to the
consolidation of duplicate corporate facilities, $0.5 million for litigation
costs and non-recurring charges of $2.5 million for asset write-offs and $2.0
million for the loss on the sale of a non-core business.

Provision For Estimated Uncollectible Accounts. The provision for
estimated uncollectible accounts was $36.5 million, or 22.2% of net revenue,
for the quarter ended September 30, 1995, compared to $21.5 million, or 19.5%
of net revenue, for the quarter ended September 30, 1994. The third quarter of
1995 includes a special charge of $20.0 million, and the third quarter of 1994
includes a special charge of $17.3 million, both as described above. The
balance of the increase in the provision in 1995 was due primarily to the
higher level of revenues and to refinements in the Company's evaluation process
and to factors related to the Caremark Business Consolidation Plan.

Operating Loss. The Company recorded an operating loss of $246.6
million for the third quarter of 1995 compared with a $143.1 million in the
third quarter of 1994. The increased operating loss was principally due to the
higher level of special charges in 1995 as compared with 1994. Third quarter
1995 special charges affecting operating loss totaled $226.4 million,
consisting of the $203.4 million charge for long-lived assets and valuation of
acquired receivables, $20.0 million special charge for estimated uncollectible
accounts receivable, and $3.0 million of other non-recurring SG&A charges. This
compares

22
<PAGE> 24
with the $147.3 million recorded in the third quarter of 1994 for T2
litigation, merger and restructuring expenses, and the $17.3 million special
provision for uncollectible accounts receivable.

Other Income (Expenses). Interest expense increased by $12.2 million
for the third quarter of 1995, compared with the same period in 1994 due to
increased borrowings by the Company to finance acquisitions, merger costs and
working capital needs.

Provision (Benefit) for Income Taxes. During the third quarter of
1995, the Company recorded a tax benefit of $10.2 million, as compared with a
$26.8 million benefit in the same period of the prior year.

Net Loss. Net loss for the third quarter of 1995 increased $133.5
million compared with the same period in 1994 primarily as a result of the
$81.1 million increase in special charges, the increases in SG&A expenses, in
the provision for estimated uncollectible accounts and in interest expense, and
the lower tax benefit recorded in 1995.

NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1994

Net Revenue. Net revenue for the nine months ended September 30, 1995,
increased by $112.0 million or 33.2% compared with the same period in 1994. The
acquisition of the Caremark Business accounted for the increase. However, on a
pro-forma combined basis including the Caremark Business in 1994, 1995 net
revenue declined 21.6% from pro-forma 1994 net revenue as a result of the
factors discussed above under "Factors Adversely Affecting Recent Operating
Results".

Gross Profit. Gross profit for the nine months ended September 30,
1995, increased $1.9 million or 1.8% compared with the same period in 1994. The
increase is due to the acquisition of the Caremark Business offset by a
decrease in the gross profit margin from 30.8% to 23.6% for the reasons
discussed under the caption "Factors Adversely Affecting Recent Operating
Results." Also contributing to the decrease was the sale of Kids Medical, which
reduced gross profit in comparison with the prior year period by $6.3 million.

Selling, General and Administrative Expenses. SG&A expenses increased
$38.5 million or 64.8% for the nine months ended September 30, 1995 compared
with the same period in 1994. The principal reason for the increase was the
acquisition of the Caremark Business and a higher level of corporate expenses
related to the duplicate corporate facilities. Also contributing to the
increase was a $0.5 million charge for litigation costs recorded in the third
quarter of 1995 and non-recurring charges of $2.5 million for asset write-offs
and $2.0 million for the loss on the sale of a non-core business and $3.4
million transaction expenses related to the terminated Lincare merger recorded
in the second quarter of 1995. The Company expects that SG&A spending will
decrease both in absolute amounts and as a percentage of net revenue as the
Coram and Caremark Business Consolidation Plans are completed and its new
business plan is implemented.

Provision For Estimated Uncollectible Accounts. The provision for
estimated uncollectible accounts was $56.6 million, or 12.6% of net revenue,
for the nine months ended September 30, 1995 compared with $32.2 million, or
9.5% of net revenue for the nine months ended September 30, 1994. As described
above, special charges were recorded in the third quarters of 1995 and 1994 of
$20.0 million and $17.3 million, respectively. The balance of the increase in
the provision was due principally to the higher level of revenues and
refinements in the Company's evaluation process.

Amortization of Goodwill. Amortization of goodwill increased $4.1
million from 1994 primarily as a result of amortization of goodwill related to
acquisitions made by the Company in late 1994 and 1995.

Restructuring Costs. The Company recorded a pre-tax charge of $25.8
million during the nine months ended September 30, 1995 for estimated costs
related to the Caremark Business Consolidation Plan. The charge was offset by a
$4.1 million benefit related to the sale of Kids Medical as part of the Coram
Consolidation Plan.

23
<PAGE> 25
Operating Loss. The Company recorded an operating loss of $284.1
million for the nine months ended September 30, 1995, compared with a $141.5
million operating loss for the nine months ended September 30, 1994. The
principal reason for the increase was the $83.2 million increase in special
charges in 1995. The balance of the increase is attributable to higher SG&A
expenses, higher provisions for uncollectible accounts and greater amortization
of goodwill in the first months of 1995 as compared with the same period of
1994.

Other Income and Expenses. Interest expense increased by $26.9 million
for the nine months ended September 30, 1995, compared with the same period in
the previous year primarily due to increased borrowings by the Company to
finance acquisitions, merger costs and other working capital needs.

Provision (Benefit) for Income Taxes During the nine months ended
September 30, 1995 the Company recorded an income tax benefit of $11.3 million,
as compared with a $25.4 million benefit in the comparable period of the prior
year. (See Note 4 to the Unaudited Condensed Consolidated Financial
Statements.)

Benefits available are currently limited to refunds for the carryback
of tax losses. In October 1995, the Company received a $30.3 million refund
related to the carryback of tax losses for its tax year ended September 30,
1995. The majority of this refund represented the realization of items included
in net deferred tax assets and the carryback of current year losses. The
Company expects to realize most of the balance of its net deferred tax assets
on filing its 1996 income tax return. It also has approximately $20 million of
potential benefit available for carryback of certain future operating losses,
if any.

Net Loss. Net loss for the nine months ended September 30, 1995,
increased $189.5 million as compared with the same period in 1994. The primary
reason for the increased loss is the $85.2 million increase in special charges,
in SG&A expenses and in the provision for estimated uncollectible accounts and
interest expense, and the lower tax benefit recorded in 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash, cash equivalents and marketable securities at
September 30, 1995, were $54.0 million (including restricted cash of
approximately $13.5 million).

During the nine months ended September 30, 1995, the Company had
negative cash flow from operations of $19.9 million compared with negative cash
flow of $10.2 million for the nine months ended September 30, 1994. Cash used
by investing activities was $233.2 million for the nine months ended September
30, 1995 compared with $64.7 million for the nine months ended September 30,
1994 due to business acquisitions. Cash provided by financing activities was
$279.9 million for the nine months ended September 30, 1995, compared with
$70.0 million for the nine months ended September 30, 1994, due to increased
borrowings related to acquisitions.

As of September 30, 1995, the Company does not have any material
commitments for capital expenditures.

As of June 30, 1995, and September 30, 1995, the Company had violated
certain minimum financial ratios of the Senior Credit Facility and received
short-term waivers of such violations and payment extensions. On October 13,
1995, the Company and its lenders under its Senior Credit Facility and its
Bridge Note agreed to a restructuring of the major terms of both agreements,
which postponed the first principal payment due on the Senior Credit Facility
from September 30, 1995 to March 31, 1996, redefined covenants to be consistent
with the Company's new business plan and provided a new $25 million credit
line. The new line expires and matures on December 31, 1996, and the entire
Senior Credit Facility has a new maturity date of March 31, 1997. The lender
under the Bridge Notes agreed to defer all interest payments until March 31,
1997. As a result of the restructuring of terms, the Company is no longer
classifying its long-term debt as a current liability.

24
<PAGE> 26
The Company believes that it has adequate working capital to meet its
cash requirements through December 31, 1996, provided that the objectives in
the business plan are achieved. The failure of the Company to achieve the
objectives set forth in the business plan could have a material adverse affect
on the Company's financial position, results of operations and liquidity.
Moreover, it may still be necessary for the Company to arrange additional
equity or debt financing or make additional sales of non-core assets, including
its lithotripsy businesses, in order to meet scheduled maturities of principal
and interest commencing December 31, 1996. There can be no assurance that such
financing will be available to the Company.

If the Company decides to sell non-core assets, including its
lithotripsy businesses, it would expect to realize substantial proceeds on such
sales, although such proceeds may be less then the related book values. No
assurance can be given as to whether any such a sale will occur or the amount
of estimated proceeds therefrom. Net proceeds from asset sales other than in
the ordinary course of business must go to pay down the term debt portion of
the Senior Credit Facility. While the Company is currently evaluating sale of
the lithotripsy business, no decision has been made concerning its disposition.
The lithotripsy businesses had revenue and pre-tax net income of approximately
$40 million and $12.4 million, respectively, for the nine months ended
September 30, 1995.

Joint venture agreements within the Company's lithotripsy operations
contemplate that, in certain situations, the Company would be required to
repurchase the minority interests in such joint ventures. During 1995, the
Company purchased one of these minority interests and discussions are currently
underway to acquire an additional minority interest in one of the joint
ventures. Such an acquisition would require the Company to pay cash or issue
common stock with a value of over $4.0 million subject to the consent of the
Company's lenders.

FUTURE HEALTH CARE PROPOSALS AND LEGISLATION

Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. Current
pending legislation could significantly decrease the restrictions currently
imposed upon physician ownership in compensation arrangements for infusion
services provided by physicians at their offices. The impact on the Company is
currently under evaluation. The Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care
delivery systems and payment methodologies and public debate of these issues
will likely continue in the future. Due to uncertainties regarding the ultimate
features of reform initiatives and their enactment and implementation, the
Company cannot predict which, if any, of such reform proposals will be adopted,
when they may be adopted or what impact they may have.

25
<PAGE> 27
PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In August 1995, the Company and certain of its officers and directors
were named as defendants in 20 civil suits filed on behalf of individuals
claiming to have purchased and sold Coram Common Stock during the time period
from approximately February 16, 1995 through August 11, 1995. The suits were
filed in the United States District Court for the District of Colorado and have
been consolidated into one suit captioned: In Re: Coram Healthcare Corporation
Securities Litigation, Master File No. 95-N-2074. The complaint seeks
certification of a plaintiff's class. In general, the complaints allege that
the defendants made false and misleading statements to the public regarding,
among other things, projected earnings, anticipated cost savings, and proposed
mergers. The complaints assert claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 of the Securities
and Exchange Commission, and seek unspecified compensatory damages, attorneys'
fees and costs. The Company will seek coverage under existing directors and
officers insurance policies for any settlements, judgments, and costs of
defense in connection with these cases, within outstanding policy limits. There
can be no assurance, however, that such insurance coverage will be adequate to
cover all potential liabilities and costs that may be incurred.

On November 2, 1995, a shareholder derivative suit captioned Martin J.
Siegal v. James Sweeney, et. al., and Coram Healthcare Corporation, Civil
Action No. 14646 was filed in the court of Chancery of the State of Delaware
asserting substantially similar factual allegations as the suits described in
the preceding paragraph, and seeking a judgment against the individual
defendants to account to Coram for all damages sustained by Coram as a result
of their alleged actions.

On September 11, 1995 as amended on October 6, 1995, the Company filed
suit against Caremark Inc., and Caremark International, Inc., alleging
fraudulent misrepresentations of the value of accounts receivable and amounts
of revenues, concealment of important information concerning a criminal
investigation of Caremark's business practices, and other material
misrepresentations and breaches of contract terms. The suit seeks relief in the
form of damages, including damages to the Company's business resulting from the
misrepresentations and breaches aggregating $5.2 billion. In the complaint,
filed in the Superior Court of the State of California in and for the City and
County of San Francisco, the Company alleges that during 1994 Caremark Inc. and
Caremark International Inc. (collectively, "Caremark") used improper accounting
practices that resulted in overstating Caremark's revenues.

The complaint further alleges that Caremark falsely represented that
the OIG investigation was not going to harm the value of the Caremark Business
sold to the Company.

The Company's complaint notes that Caremark represented that it had
net assets on December 31, 1994 of $329.3 million, including $140.2 million in
accounts receivable and $200.1 million in goodwill and that its financial
statements presented fairly in all material respects the financial position and
results of operations. The Company alleges in its complaint that these
representations, among others, were false, giving rise to claims for breach of
contract and fraud. The Company seeks compensatory and punitive damages. A
trial date on the Company's claims has been set for February 1997.

On October 12, 1995, Caremark Inc., and Caremark International, Inc.,
filed suit against the Company in the United States District Court for Northern
District of Illinois (File No. 95C 5878) alleging fraudulent misrepresentation
in its purchase of the Caremark Businesses and seeking damages of at least $100
million, and punitive damages.

The Company believes that it has meritorious defenses in these
actions. Nevertheless, due to the uncertainties inherent in the early stages of
litigation, the ultimate disposition of the litigation described in the
preceding paragraphs cannot presently be determined. Accordingly, no provision
for any loss or recovery that may result upon resolution of the suits has been
made in the consolidated financial statements. An adverse outcome could be
material to the financial position, results of operations and liquidity of the
Company.

27
<PAGE> 28
The Company is also a party to various other legal actions arising out
of the normal course of its business. Management believes that the ultimate
resolution of such other actions will not have a material adverse effect on the
Company's financial position and results of operations or liquidity of the
Company.

ITEM 2. CHANGE IN SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)

Exhibit Description
------- -----------
27 Financial Data Schedules*

10.19 First Amendment and Waiver to the Credit Agreement, dated as of August
9, 1995, together with exhibits thereto, among the Registrant, Coram Inc., each
Subsidiary Guarantor (as defined therein), the Financial Institutions party
thereto (as defined therein), and Chemical Bank as Agent.*

10.20 Second Amendment to the Credit Agreement dated as of September 7,
1995, by and among the Registrant, Coram Inc., each Subsidiary Guarantor (as
defined therein), the Financial Institutions party thereto (as defined
therein), and Chemical Bank as Agent.*

10.21 Third Amendment and Limited Waiver to the Credit Agreement, dated as
of September 29, 1995, by and among the Registrant, Coram Inc., each Subsidiary
Guarantor (as defined therein), the Financial Institutions party thereto (as
defined therein), and Chemical Bank as Agent.*

10.22 Fourth Amendment and Limited Waiver to the Credit Agreement and First
Amendment to Security Documents dated as of October 13, 1995, together with
selected exhibits thereto, by and among the Registrant, Coram Inc., each
Subsidiary Guarantor (as defined therein), the Financial Institutions Party
thereto (as defined therein) and Chemical Bank as Agent (Incorporated by
reference from the Company's Current Report on Form 8-K as filed October 24,
1995).

10.23 Warrant Agreement dated as of October 13, 1995, among the Registrant,
Coram Inc., and the other parties specified therein. (Incorporated by reference
from the Company's Current Report on Form 8-K as filed October 24, 1995).

10.24 Amendment and Limited Waiver to Bridge Securities Purchase Agreement,
dated as of October 13, 1995, by and among the Registrant, Coram Inc., and
Donaldson, Lufkin & Jenrette.*

10.25 Form of Employment Agreement between the Registrant and Donald J.
Amaral.*

28
<PAGE> 29
*Filed in original filing.

(B) REPORTS ON FORM 8-K

On July 26, 1995, the Company filed a current report on Form 8-K
announcing the termination of the merger agreement with Lincare.

On October 24, 1995, the Company filed a current report on Form 8-K
announcing that it had concluded a major debt restructuring and named Donald J.
Amaral as its President and Chief Executive Officer.

29
<PAGE> 30
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CORAM HEALTHCARE CORPORATION

By: /s/ Richard M. Smith
------------------------
Richard M. Smith
Chief Financial Officer

April 3, 1996