CORAM HEALTHCARE CORP, 10-K405/A, 1996-06-06

CORAM HEALTHCARE CORP
10-K405/A, 1996-06-06
HOME HEALTH CARE SERVICES

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

FORM 10-K/A

AMENDMENT NO. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-11343
CORAM HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)

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<S> <C>
DELAWARE 33-0615357
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

1125 SEVENTEENTH STREET, SUITE 1500 80202
DENVER, COLORADO (Zip Code)
(Address of principal executive offices)
</TABLE>

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

Securities registered pursuant to Section 12(b) of the Act:

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<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
Common Stock ($.001 par value per share) New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:

NONE

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/

AS OF MARCH 22, 1996, THERE WERE OUTSTANDING 40,650,265 SHARES OF THE
REGISTRANTS COMMON STOCK, WHICH IS THE ONLY CLASS OF VOTING STOCK OF THE
REGISTRANT. AS OF THE DATE, THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON
STOCK HELD BY NONAFFILIATES OF THE REGISTRANT BASED ON THE CLOSING PRICE FOR THE
COMMON STOCK ON THE NEW YORK STOCK EXCHANGE ON MARCH 22, 1996 WAS APPROXIMATELY
$202.6 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE

THE INFORMATION CALLED FOR BY PART III IS INCORPORATED BY REFERENCE TO THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE COMMISSION NOT
LATER THAN 120 DAYS AFTER DECEMBER 31, 1995.

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PART I

ITEM 1. BUSINESS.

GENERAL

Coram Healthcare Corporation, a Delaware corporation ("Coram" or the
"Company"), is a leading provider of alternate site (outside the hospital)
infusion therapy and related services in the United States, operating 132
branches located in 43 states. Infusion therapy involves the intravenous
administration of anti-infective, biotherapy, chemotherapy, pain management,
nutrition, and other therapies. Other services offered by the Company include
the provision of lithotripsy and other non-intravenous products and services.

The Company was formed on July 8, 1994 pursuant to a merger (the "Four-Way
Merger") by and among T2 Medical, Inc. ("T2"), Curaflex Health Services, Inc.
("Curaflex"), Medisys, Inc. ("Medisys") and HealthInfusion, Inc.
("HealthInfusion"), each of which was a publicly-held national or regional
provider of home infusion therapy and related services. The Four-Way Merger
enabled the Company to become a national provider of home infusion and other
alternate site health care services. On September 12, 1994, the Company further
broadened its geographic coverage by acquiring H.M.S.S., Inc. ("HMSS"), a
leading regional provider of home infusion therapies based in Houston, Texas.
Effective April 1, 1995, the Company acquired substantially all the assets used
in the alternate site infusion business of Caremark International Inc. (the
"Caremark Business"), thereby becoming the largest provider of alternate site
infusion therapy services in the United States based on breadth of service and
total revenues. The Company has substantially completed a branch and corporate
office consolidation of its six predecessor companies.

DELIVERY OF ALTERNATE SITE HEALTH CARE SERVICES

General. Infusion patients are generally referred to the Company following
diagnosis of a specific disease or upon discharge from a hospital. The treating
physician will generally determine whether the patient is a candidate for home
infusion treatment. Either the patient's physician or a managed care payor will
generally determine to which infusion company a patient is referred because
drugs administered intravenously tend to be more potent and complex than oral
drugs. In addition, the delivery of intravenous drugs generally requires patient
training, specialized equipment and periodic monitoring by skilled nurses and
pharmacists. Most therapies require either a gravity-based flow control device
or an electro-mechanical pump to meter the drugs. Some therapies are
administered continuously; most however, are given for a prescribed number of
hours per day. The Company's nurses and pharmacists work with the patient's
doctor to track the patient's condition and update the therapy as necessary.
Treatments can last from a few days to several years.

Branch Facilities. The delivery of infusion services is coordinated through
local or regional infusion centers or "branches," which provide the following
functions: (i) patient intake and monitoring, (ii) drug mixing and preparation
by pharmacists and pharmacy technicians, (iii) clinical pharmacy services, (iv)
nursing services, (v) materials management, including drug and supply inventory
and delivery, (vi) billing, collections and benefit verification, (vii) sales to
local referral sources, including doctors, hospitals and payors and (viii)
general management. The Company's branch facilities typically are leased and
generally consist of 2,000 to 20,000 square feet of office space in suburban
office parks, often in close proximity to major medical facilities. A typical
branch has a fully equipped pharmacy, offices for administrative personnel and a
small storage warehouse. Branches are staffed with three to one hundred
full-time employees, and a typical branch includes a manager, a licensed
pharmacist, registered nurses and sales and administrative personnel. Each
branch serves the metropolitan area in which it is located, generally within a
two-hour driving radius of all patients served, as well as outlying locations
where it can arrange appropriate nursing services. Satellite branches are also
used. These smaller branches contain limited supplies and pharmacy operations,
and are used as dispatch centers serving a specified geographical area. The
Company currently has 126 full branches and 6 satellite branches.

In-Home Patient Care. Before accepting a patient for home infusion
treatment, the staff of the local branch works closely with the patient's
physician or clinicians and hospital personnel in order to assess the patient's
suitability for home care. This assessment process includes an analysis of the
patient's physical and
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emotional condition and of social factors such as the safety and cleanliness of
the home environment and the availability of family members or others who can
assist in the administration of the patient's therapy, if necessary. It also
includes a review of compliance with the requirements of the patient's insurance
carrier, managed care provider and government payor.

When a patient's suitability for home care has been confirmed, the patient
and the patient's family (or others) receive training and education concerning
the therapy to be administered, including proper infusion technique and care and
use of intravenous devices and other equipment used in connection with the
therapy. Assessment and training are generally performed by the Company's
nurses.

Prior to the patient receiving treatment services from the Company, the
treating physician devises the patient's plan of care and transmits it to the
local branch's clinical support team, including its nurses and pharmacists. This
team will work with the treating physician and the managed care coordinator, if
there is one, to administer the plan of care and monitor the patient's progress.
Throughout the patient's therapy, the local branch's clinical support team will
regularly provide the treating physician and the managed care coordinator with
reports on the patient's condition, maintaining an information flow that allows
the treating physician to actively manage the patient's treatment. The treating
physician always remains responsible for the patient's care, including changing
the patient's plan of care to meet the patient's needs and handling patient
emergencies.

Upon the patient's arrival home, a nurse from the local branch typically
oversees the administration of the patient's first home infusion treatment.
Thereafter, the frequency of nursing visits depends upon the particular therapy
of the patient involved. During these subsequent visits, the nurse may check and
adjust the patient's infusion site, intravenous lines and related equipment,
obtain blood samples, change the pump settings and/or drug administration after
consulting with the physician and the pharmacist and assessing the patient's
condition and compliance with the plan of care. The patient's nutrition supplies
and prescription drugs are typically delivered on a weekly basis, depending on
the therapy and the particular drugs being used.

The treating physician and the managed care coordinator remain actively
involved in monitoring the patient's treatment by monitoring the administration
of the plan of treatment and revising the plan as necessary. In addition, each
branch has a medical advisory board comprised of local physicians who review
quality assurance and patient service issues and consult with the Company on
maintaining and improving its quality of care and patient service at the local
level.

Outpatient Facilities. Outpatient facilities, either in separate facilities
or in a branch, are used to treat patients that do not require hospitalization
but are not ideal candidates for home care because of severity of illness,
complexity of therapy or environmental concerns. Patients report to the
outpatient facility for administration of the required therapy and return home
that day.

PRODUCTS AND SERVICES OF THE COMPANY

Infusion Therapy. The Company provides a variety of infusion therapies,
principally anti-infective therapy, parenteral and enteral nutrition,
biotherapy, chemotherapy and pain management therapy. The initiation and
duration of these therapies is determined by a physician based upon a patient's
diagnosis, treatment plan and response to therapy. Certain therapies, such as
anti-infective therapy, are generally used in the treatment of temporary
conditions such as infections, while others, such as parenteral nutrition, may
be required on a long-term or permanent basis. The infusion therapies are
administered at the patient's home by an employee of the Company. In patient
groups such as immune suppressed patients (e.g., AIDS/HIV, cancer and transplant
patients) anti-infective therapy must be provided episodically over the duration
of the primary disease or for the remainder of the patient's life.

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The following table sets forth the estimated aggregate percentages of
infusion therapy net revenue derived by the Company for the fourth quarter of
1995:

<TABLE>
<S> <C>
Anti-Infective......................................................... 30%
Parental and Enteral Nutrition......................................... 31%
Biotherapy............................................................. 7%
Chemotherapy........................................................... 4%
Pain Management........................................................ 3%
Other Therapies........................................................ 25%
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Total.................................................................. 100%
===
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Anti-Infective. Anti-infective therapy is the infusion of antibacterial,
anti-viral or anti-fungal medications into the patient's bloodstream for the
treatment of a variety of infectious diseases, such as osteomyelitis (bone
infections), bacterial endocarditis (infection of the heart valves), wound
infections, infections associated with AIDS and infections of the kidneys and
urinary tract. Generally, intravenous anti-infective drugs are delivered through
a peripheral catheter inserted in a vein in the patient's arm. Anti-infective
drugs are generally more effective when infused directly into the bloodstream
than when taken orally.

Parenteral and Enteral Nutrition. Total parenteral nutrition therapy or
"TPN" involves the intravenous feeding of life-sustaining nutrients to patients
with impaired or altered digestive tracts due to a gastrointestinal illness or
condition such as an intestinal obstruction or inflammatory bowel disease. The
therapy is administered through a central catheter surgically implanted into a
major blood vessel to introduce the nutrient solution into the bloodstream. The
nutrient solutions may contain amino acids, dextrose, fatty acids, electrolytes,
trace minerals or vitamins. In many cases, the underlying illness or condition
from which parenteral nutrition patients suffer is recurrent in nature,
requiring periodic re-hospitalization for treatment followed by resumption of
parenteral nutrition at home. Some patients must remain on parenteral
nutritional therapy for life. Enteral nutrition therapy is administered to
patients who cannot eat as a result of an obstruction to the upper
gastrointestinal tract or other medical condition. Enteral nutrition therapy is
often administered over a long period, generally for more than six months.

Biotherapy. The Company also provides patients with biological response
modifiers, colony stimulating factors such as G-CSF and GM-CSF, erythropoietin
and interferons. In addition, the Company provides therapies for diseases such
alpha-1-antititrypsin (AAT) deficiency, hemophilia, primary immune deficiencies,
and growth deficiencies.

Chemotherapy. Chemotherapy is the administration of cytotoxic drugs to
patients suffering from various types of cancer either alone or as adjuvant (an
immunological agent that increases the antigenic response) to other therapies
such as radiation or surgery. The Company has been advised that breast, lung,
colon, prostate and ovarian cancer, among others, are most conducive to
outpatient chemotherapy treatment. Chemotherapy generally is administered
periodically for several weeks or months. The nature of drugs that are used to
treat cancer is such that side effects such as nausea and amnesia occur in some
patients. This requires the administration of additional agents to treat those
side effects.

Pain Management. Pain management therapy is the administration of analgesic
drugs to patients suffering from acute or chronic pain. It is often administered
in conjunction with intravenous chemotherapy or other intravenous therapies
given to patients with cancer or AIDS. This type of therapy is often
administered in a way that permits the patient to regulate the infusion of
analgesic drugs in proportion to the severity of the pain the patient
experiences, improving the medical outcome while reducing drug use.

Other Therapies. The Company provides other technologically advanced
therapies such as intravenous intropic therapy for patients with congestive
heart failure, or for those who are awaiting cardiac transplants, intravenous
anti-coagulant therapy for prevention of blood clots, and anti-nausea therapy
for chemotherapy induced emesis. Hydration therapy involves the intravenous
administration of fluids; it is often administered in conjunction with
intravenous chemotherapy. Currently, each such therapy amounted to less than 5%,
respectively, of the Company's infusion therapy net revenue for the fiscal year
ended December 31, 1995. The

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Company continually evaluates new infusion therapies and intends to add
therapies which enable it to provide full service to its patients and payors.

Women's Health. The Women's Health business provides alternate site
obstetrical and gynecological support services. The Women's Health services
include: remote monitoring of uterine contractions, monitoring of blood
pressure, heart rate, weight, urine and protein and glucose level; intravenous
and oral drug therapy; dietitian services; integrated nursing support; diabetes
management; pregnancy-induced hypertension management; fertility management and
post partum follow-up.

Lithotripsy. Lithotripsy is a non-invasive technique that uses shock waves
to disintegrate kidney stones. Depending on the particular lithotripter used,
the patient is sedated using either general anesthesia or a mild sedative while
seated in a bath or lying on a treatment table. The operator of the lithotripter
machine locates the stone using fluoroscopy and directs the shock waves toward
the stone. The shock waves then fragment the stone enabling the patient to pass
the fragments through the urinary tract. Because lithotripsy is non-invasive and
is provided on an outpatient basis, lithotripsy is an attractive alternative to
other more invasive techniques otherwise used in treating urinary tract stones.

As of March 1, 1996, the Company owned a controlling interest in 11
lithotripsy partnerships as well as one wholly owned lithotripsy company and a
wholly owned lithotripter maintenance company. The Company's lithotripsy
businesses currently consist of an aggregate of 31 lithotripsy machines that
provide services in 180 locations in 18 states. The other owners of the
partnerships are primarily physicians, many of whom utilize the partnership's
equipment to treat their patients. Ten of the 31 lithotripsy machines are
stationary and located at hospitals or ambulatory surgery centers, while the
other 21 machines are mobile, allowing them to be moved in order to meet patient
needs and market demands. The Company's lithotripsy businesses typically lease
the machine on a per procedure basis to a hospital, ambulatory surgery center or
other facility providing care to the patient. In some cases, the lithotripsy
businesses bill the patient directly for the use of the partnership's machine.

The Company's agreements with its lithotripsy physician partners
contemplate that the Company will acquire the remaining interest in each
partnership at a defined price in the event that legislation is passed or
regulations are adopted that would prevent the physician from owning an interest
in the partnership and using the partnership's lithotripsy equipment for the
treatment of his or her patients. While current interpretations of existing law
are subject to considerable uncertainty, the Company believes that its
partnership arrangements with physicians in its lithotripsy business are in
compliance with current law. If, however, the Company were required to acquire
the minority interest of its physician partners in each of its lithotripsy
partnerships, the cost would be material to the Company. During 1995, the
Company purchased one partnership's minority interest for $9.0 million and the
Company has agreed to acquire the minority interest in one additional
partnership, subject to the consent of the Company's lenders, for approximately
$4.2 million in cash or shares of the Company's common stock (the "Common
Stock").

Within the last two years, the Health Care Financing Administration
("HCFA") released a proposed rule defining the rate at which ambulatory surgery
centers and certain hospitals would be reimbursed for the technical component of
a lithotripsy procedure. This proposed rule has not been finalized. The Company
cannot predict what the final rate for such reimbursement will be or what
effect, if any, the adoption of this proposed rule would have on lithotripsy
revenue and whether this decreased reimbursement rate will be applied to
lithotripsy procedures performed at hospitals, where a majority of the Company's
lithotripsy machines are currently utilized.

The Company's lithotripsy operations have historically contributed a
substantial amount of operating income to the Company. However, there can be no
assurance that lithotripsy reimbursement rates will remain at their current
levels. The Company also believes that the amounts the businesses currently
receive for use of their machines will be increasingly subject to pricing
pressures similar to the pricing pressures that have been exerted on the
Company's infusion therapy business. The Company is currently evaluating whether
or not it should sell its lithotripsy business. No agreement currently exists to
divest the lithotripsy business, however. See Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

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R-Net. The Resource Network or "R-Net" (including the former Home Care
Management Services division acquired with the Caremark Business) is an
alternate site services provider network and supporting management system
developed in 1993. The Company can offer through R-Net "one stop shopping" to
large managed care organizations such as Health Maintenance Organizations
("HMOs") and Preferred Provider Organizations ("PPOs") seeking to arrange for a
variety of alternate site services for their enrollers. In addition, a
sophisticated management information system enables the Company to coordinate
the provision of alternate site services among its network of providers, manage
cases and appropriate utilization and monitor and report outcomes to managed
care payor's who are concerned with combining cost efficiency with good clinical
outcomes. R-Net provides "one stop shopping" for alternate site health care
services through network management of alternate site providers and services.
R-Net allows the Company to accept and manage capitated contracts and fee for
service contracts with managed care organizations and is marketed primarily to
HMOs and PPOs. As of March 1, 1996, R-Net had 13 such arrangements covering
approximately 1.8 million covered lives, of which five covering approximately
0.5 million lives were fully capitated arrangements.

Prescription Services. The prescription service business includes a
centralized mail order pharmacy and sophisticated claim administration with
formulary, drug utilization and evaluation services. This network offers a
comprehensive approach to the management of the patient's pharmaceutical care.

Other Health Care Businesses. In addition to operating infusion therapy
companies and providing the other services described above, the Company was also
involved during 1995 in certain other health care businesses. Such complementary
businesses amounted to less than 5% of the Company's net revenue for the fiscal
year ended December 31, 1995.

ORGANIZATION AND OPERATIONS

General. The Company's alternate site health care business operations are
conducted through 132 branches which are managed through five area offices and
51 market areas. The area office provides each of its branches with key
management direction and support services. The Company's organizational
structure is designed to create operating efficiencies associated with certain
centralized services and purchasing while also promoting local decision making.
The Company believes that its decentralized approach to management facilitates
high quality local decision making, which allows it to attract and retain
experienced local managers and be responsive to local market needs.

Operating Systems and Controls. An important factor in the Company's
ability to monitor its operating locations is its management information
systems. Besides routine revenue and cost reporting, the Company has developed
internal performance standards for monitoring market and branch operations.
Actual operating results derived from the Company's management information
systems will be compared to the performance model, enabling management to
identify areas requiring improvement. The Company believes that the use of
standardized, performance matrixes and the identification of best demonstrated
practices will facilitate operating improvement.

The Company is implementing standardized management information systems
throughout the Company to replace the information systems previously used by the
Company's predecessors. This has enabled the Company to begin standardizing
operating processes, track profit and loss performance by branch, control and
manage accounts receivable, process customer orders, reduce administrative
overhead and gather branch operating statistics for comparisons and management
decision making.

The Company is also standardizing and simplifying its financial systems.
This will enable the Company to access more detailed financial information and
respond accordingly. Moreover, the Company expects that managed care
organizations and other referral sources and health care providers will benefit
from these sophisticated reporting capabilities, thereby giving the Company a
further competitive advantage. R-Net has a clinical outcomes data base of over
70,000 patients that contains specific patient therapy census data.

The Company endeavors to ensure that its local managers have the autonomy
and ability to perform effectively by providing them with training,
comprehensive policies and procedures and standardized systems. The Company has
designed management incentive plans that reward performance based on earnings

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contribution consisting of profitable revenue generation, operating cost
controls and accounts receivable collection.

REIMBURSEMENT OF SERVICES

Virtually all of the revenue of the Company is derived from third-party
payors, including private insurers, managed care organizations such as HMOs and
PPOs, and governmental payors such as Medicare and Medicaid. Similar to other
medical service providers, the Company experiences lengthy reimbursement periods
as a result of third-party payment procedures. Consequently, management of
accounts receivable through effective patient registration, billing, collection
and reimbursement procedures is critical to financial success and continues to
be a high priority for management. The Company has developed substantial
expertise in processing claims and carefully screens new cases to determine
whether adequate reimbursement will be available. Individual branches are
generally responsible for their own billing and collections, within strict
guidelines. The Company believes that accounts receivable management is best
accomplished at the local level because of direct relationships with payors and
the ability of branch personnel to identify and react promptly to billing
discrepancies.

Private payors typically reimburse a higher amount for a given service and
provide a broader range of benefits than governmental payors, although net
revenue and gross profits from private payors have been affected by the
continuing efforts to contain or reduce the costs of health care. An increasing
percentage of the Company's revenue has been derived in recent years from
agreements with HMOs, PPOs and other managed care providers. Although these
agreements often provide for negotiated reimbursement at reduced rates, they
generally result in lower bad debts, provide for faster payment terms and
provide opportunities to generate greater volumes than traditional indemnity
referrals. Reimbursement coverage is provided through private sources, such as
insurance companies, self-insured employers and patients, and through the
federal Medicare and Medicaid programs. Medicare has developed a national fee
schedule for respiratory therapy, home medical equipment and infusion therapy
which provides reimbursement at 80% of the amount of any fee on the schedule.
The remaining 20% co-insurance portion is not paid by Medicare. In most cases,
Medicaid reimburses the remaining 20% for "medically indigent" patients. In
other cases, the Company bills and actively monitors other third-party payors or
patients responsible for co-insurance reimbursement.

The following table sets forth the approximate percentages of the Company's
net revenue attributable to private, governmental and managed care payors,
respectively, for the fourth quarter of 1995.

<TABLE>
<S> <C>
Private Insurance and Other Payors..................................... 41%
Managed Care Organizations............................................. 32%
Medicare and Medicaid Programs......................................... 27%
---
Total.................................................................. 100%
===
</TABLE>

QUALITY ASSURANCE

The Company has established quality improvement programs to ensure that
service standards are implemented and the objectives of those standards are met.
All of the Company's branch facilities are currently accredited under the former
Merged Entities companies' names. As of March 1, 1996 the corporate office and
one branch (office) have been re-surveyed by the Joint Commission Accreditation
of Healthcare Organizations ("JCAHO"), and all branch offices are either in the
process of re-surveying or re-applying for accreditation under the Company's
name. The Company's quality improvement program also includes quality audits of
branches by members of the Company's Clinical Services Department. An additional
component of the Company's quality improvement function is its local
medical/professional advisory boards. Most branches have their own board of
medical advisors that meets quarterly to perform, among others, the following
functions:

- Conduct an annual evaluation of branch programs, policies and
procedures.

- Provide ongoing direction of quality improvement and patient
satisfaction activities.

- Assist in development of new programs or procedures to meet recognized
needs within the branch or community.

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- Furnish advice to branch staff on professional and clinical issues.

- Review quality assurance and patient service issues.

Each medical advisor is also required to be available for periodic
consulting on day to day clinical issues that require the immediate input or
advice of a physician.

COMPETITION

The Company competes on the basis of a number of factors, including quality
of care and service, reputation within the medical community, geographical scope
and price. Competition within the alternate site health care delivery system has
been affected by the decision of third party payors and their case managers to
become more active in monitoring and directing the care delivered to their
beneficiaries. Accordingly, relationships with such payors and their case
managers and inclusion within preferred provider and other networks of approved
or accredited providers may become a prerequisite to the Company's ability to
continue to serve many of its patients. Similarly, the ability of the Company
and its competitors to align themselves with other health care service providers
may increase in importance as managed care providers and provider networks seek
out providers who offer a broad range of services that may exceed the range of
services currently offered directly by the Company.

Moreover, there are relatively few barriers to entry in the local markets
which the Company serves. Local or regional companies are currently competing in
many of the home health care markets served by the Company and others may do so
in the future. The Company also expects competitors to develop new strategic
relationships with providers, referral sources and payors, which could result in
a rapid and dramatic increase in competition. New services introductions and
enhancements and the development of strategic relationships by the Company's
competitors could cause a significant decline in sales or loss of market
acceptance of the Company's services or intense price competition, or make the
Company's services noncompetitive. The Company expects to continue to encounter
increased competition in the future that could limit its ability to maintain or
increase its market share. Such increased competition could have a material
effect on the business, financial condition and results of operations of the
Company. See Item 7, "Risk Factors -- Intensely Competitive Industry."

SALES AND MARKETING

The Company's products and services are marketed through its field sales
force, branch sales personnel and various media formats. Most of the Company's
new patients are referred by physicians, medical groups, hospital discharge
planners, case managers employed by HMOs, PPOs or other managed care
organizations, insurance companies and home care agencies. The Company's sales
force is responsible for establishing and maintaining referral sources. All
sales employees receive a base salary plus incentive compensation based on
profitable revenue growth.

The Company's network of field representatives enables it to market its
services to numerous sources of patient referrals, including physicians,
hospital discharge planners, hospital personnel, HMOs, PPOs and insurance
companies. Marketing is focused on presenting the Company's clinical expertise
tailored to the

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different customer targets. Products and services that are outside of base
infusion therapy are supported by specialty marketing and sales support
personnel.

As a result of escalating pressures to contain health care costs,
third-party payors are participating to a greater extent in decisions regarding
health care alternatives using their significant bargaining power to secure
discounts and to direct referrals of their enrollers to specific providers. In
response, the Company has modified its sales and development focus and is
aggressively pursuing agreements with third party payors, managed service
organizations and provider networks that provide high quality, cost effective
care. The Company has recruited a dedicated sales force to enhance the Company's
efforts to market and sell its services to managed care payors. Managed care
sales representatives are deployed in each branch with additional resources
focused on large national insurance companies. The Company has approximately 700
managed care agreements and is currently focusing its efforts on increasing the
referrals through selected managed care agreements with the goal of being the
exclusive infusion provider as well as selling special programs such as Women's
Health and transplant services to these key customers. Through its R-net
product, the Company has established relationships with managed care companies
serving as an ancillary services manager for all home health services. The
Company will then provide directly the services it can and subcontracts for the
services it cannot provide on its own through its network of providers.

CUSTOMER AND SUPPLIERS

The Company provides alternate site home health care services and products
to a large number of patients and with the exception of Medicare and Medicaid no
single payor accounted for more than 5% of the net revenue of the Company during
the year ended December 31, 1995. The Company purchases products from a large
number of suppliers. The Company considers its relationships with its vendors to
be good and believes that substantially all of its products are available from
alternative sources with terms consistent in all material respects to its
present agreements.

GOVERNMENT REGULATION

General. The Company's alternate site infusion facilities are subject to
extensive federal and state law regulating, among other things, the provision of
pharmacy, home care nursing services, health planning, health and safety,
environmental compliance and toxic waste disposal. The Company is also subject
to fraud and abuse and self referral laws which affect the Company's business
relationships with physicians, other health care providers, referral sources and
government payors. Generally, all states require infusion companies to be
licensed as pharmacies and to have appropriate state and federal registrations
for dispensing controlled substances. Some states require infusion companies to
be licensed as nursing or home health agencies and to obtain medical waste
permits. In addition, certain employees of the Company are subject to state laws
and regulations governing the ethics and professional practice of pharmacy and
nursing. The Company may also be required to obtain certification to participate
in governmental payment programs, such as Medicare and Medicaid. Some states
have established certificate of need programs regulating the establishment or
expansion of health care facilities, including certain of the Company's
facilities.

The failure to obtain, renew or maintain any of the required regulatory
approvals or licenses could adversely affect the Company's business and could
prevent the location involved from offering products and services to patients.
The Company's revenue and net earnings could be adversely affected as a result
of any such sanctions. The Company believes it complies in all material respects
with these and all other applicable laws and regulations. The health care
services industry will continue to be subject to intense regulation at the
federal and state levels, the scope and effect of which cannot be predicted. No
assurance can be given that the activities of the Company will not be reviewed
and challenged or that government sponsored health care reform, if enacted, will
not result in a material adverse change to the Company.

Fraud and Abuse. The Company's operations are subject to the illegal
remuneration provisions of the Social Security Act (sometimes referred to as the
"anti-kickback" statute) and similar state laws that impose criminal and civil
sanctions on persons who knowingly and willfully solicit, offer, receive or pay
any remuneration, whether directly or indirectly, in return for, or to induce,
the referral of a patient for treatment,

8
<PAGE> 10

or, among other things, the ordering, purchasing, or leasing, of items or
services that are paid for in whole or in part by Medicare, Medicaid or similar
state programs. Violations of the federal anti-kickback statute are punishable
by criminal penalties, including imprisonment, fines and exclusion of the
provider from future participation in the Medicare and Medicaid programs. Civil
suspension for anti-kickback violations can also be imposed through an
administrative process, without the imposition of civil monetary penalties. In
addition, violations of the anti-kickback statute may be prosecuted as false
claims under Medicare law, the penalties for which include return of payments
received, fines and exclusion from participation. Federal enforcement officials
may also attempt to use other general federal statutes to get to behavior
considered fraudulent or abusive, including the Federal False Claims Act, which
provides for penalties of up to $10,000 per claim plus treble damages, and
permits private persons to sue on behalf of the government in qui tam actions.
While the federal anti-kickback statute expressly prohibits transactions that
have traditionally had criminal implications, such as kickbacks, rebates or
bribes for patient referrals, its language has been construed broadly and has
not been limited to such obviously wrongful transactions. Some court decisions
state that, under certain circumstances, the statute is also violated when one
purpose (as opposed to the "primary" or a "material" purpose) of a payment is to
induce referrals. Congress has frequently considered federal legislation that
would expand the federal anti-kickback statute to include the same broad
prohibitions regardless of payor source.

In addition to the payment or receipt of illegal remuneration for the
referral or generation of Medicare or Medicaid business, the fraud and abuse law
covers other billing practices that are considered fraudulent (such as
presentation of duplicate claims, or claims for services not actually rendered
or for procedures that are more costly than those actually rendered) or abusive
(such as claims presented for services not medically necessary based upon a
misrepresentation of fact), subject to the same remedies described above.

Similarly, a large number of states in which the Company operates have
varying laws prohibiting certain direct or indirect remuneration between health
care providers for the referral of patients to a particular provider, including
pharmacies and home health agencies. Possible sanctions for violation of these
laws include loss of licensure and civil and criminal penalties.

Prohibition on Physician Referrals. Under the Omnibus Budget Reconciliation
Act of 1993 ("Stark II"), it is unlawful for a physician to refer patients for
certain designated health services reimbursable under the Medicare or Medicaid
program to an entity with which the physician has a financial relationship.
While infusion therapy is not itself listed as a "designated health service,"
component parts of it are specifically: outpatient prescription drugs,
parenteral and enteral nutrition, equipment and supplies, durable medical
equipment and home health services. A "financial relationship" under Stark II is
defined broadly as an ownership or investment interest in, or any type of
compensation arrangement in which remuneration flows between the physician and
the provider. The entity is prohibited from claiming payment under the Medicare
or Medicaid programs for services rendered pursuant to a prohibited referral and
is liable for the refund of amounts received pursuant to prohibited claims. The
entity also can receive civil penalties of up to $15,000 per improper claim and
can be excluded from participation in the Medicare and Medicaid programs.
Comparable provisions applicable to clinical laboratory services became
effective in 1992. Stark II provisions which may be relevant to the Company
became effective on January 1, 1995. Because of its broad language Stark II may
be interpreted by the Office of Inspector General ("OIG") of the Department of
Health and Human Services ("HHS") to apply to the Company's operations. During
1994 and the first quarter of 1995, the Company restructured or terminated a
large number of relationships it had with physicians in order to meet the
requirements of Stark II, the Company's own compliance standards and the
Settlement Agreement between the United States and T(2) in September 1994 (the
"T(2) OIG Settlement Agreement"). Stark II is broadly written and no regulations
have to clarify its meaning or application. regulations for a predecessor law,
Stark I, were published in August 1995. Although the government has indicated
that many substantive provisions in the Stark I regulations will be applied to
Stark II, there are still many areas that lack clarity, and the Stark I
regulations offer little specific guidance on the application of Stark II to the
infusion therapy business. A failure to achieve compliance with the provisions
of Stark II could have a material adverse effect on the Company.

In 1995, amendments to the Stark II law were included in the budget bills
adopted by Congress. The relevant amendments would have increased the ability of
physicians to operate infusion therapy programs out

9
<PAGE> 11

of their medical offices and would have removed "in-patient and out-patient
hospital services" from the list of designated health services, thereby
eliminating any question about whether the Company's lithotripsy operations are
implicated by the Stark II law. However, the budget bill, after being approved
by Congress, was vetoed by the President. It is not currently known whether the
Stark II law will be amended or what form, if any, such amendment may take.

A large number of the states in which the Company operates have enacted
some form of physician self-referral law that regulates ownership interests in
or compensation arrangements between physicians and the health care service
providers to which they refer patients. These laws vary from measures that
require physicians to disclose their financial interests to outright
prohibitions similar to Stark II. In most cases, state physician self-referral
laws apply to all payors, government and private. The Company believes that most
state laws are inapplicable to the businesses in which the Company operates or
contain exemptions that appear to be applicable to the Company's operations.
Where state law does apply, the Company has restructured its business
arrangements or implemented other methods for complying and maintaining
compliance with such laws.

Medicare and Health Care Reform. Congress takes action in almost every
legislative session to modify the Medicare program for the purpose of reducing
the amounts otherwise payable by the program to health care providers in order
to achieve deficit reduction targets, among other reasons. Legislation or
regulations may be enacted in the future that may substantially reduce the
amount paid for the Company's services. Further, statutes or regulations may be
adopted which would impose additional requirements in order for the Company to
be eligible to participate in the federal and state payment programs. Such new
legislation or regulations may adversely affect the Company's business
operations. There is significant national concern today about the availability
and rising cost of health care in the United States. It is anticipated that new
federal and/or state legislation will be passed and regulations adopted to
attempt to provide broader and better health care and to manage and contain its
cost. The Company is unable to predict the content of any legislation or what,
if any, changes may occur in the method and rates of its Medicare and Medicaid
reimbursement or in other government regulations that may affect its businesses,
or, whether such changes, if made, will have a material adverse effect on its
financial position and results of operations.

State Laws Regarding Fee Splitting, Provision of Medicine and Insurance.
The laws of many states prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. Although the Company believes its
operations as currently conducted are in material compliance with existing
applicable laws, certain aspects of the Company's business operations have not
been subject to state or federal regulatory interpretation. There can be no
assurance that review of the Company's business by courts or regulatory
authorities will not result in determinations that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change so as to restrict the Company's existing operations or its expansion.
In addition, expansion of the operations of the Company to certain jurisdictions
may require structural and organizational modifications of the Company's form of
relationships with physician groups, which could have an adverse effect on the
Company.

Most states have laws regulating insurance companies and HMOs. The Company
is not qualified in any state to engage in the insurance or HMO businesses. As
managed care penetration increases, state regulators are beginning to scrutinize
the practices of and relationships among third party payors, medical service
providers and entities providing management and administrative services to
medical service providers, especially with respect to sharing arrangements by
and among such providers, and whether risk bearing entities are subject to
insurance or HMO regulation. The Company believes that its practices are
consistent with those of other health care companies and do not constitute
licensable HMO or insurance activities. However, given the limited regulatory
history with respect to such practices, there can be no assurance that states
will not attempt to assert jurisdiction. The Company may be subject to
prosecution by state regulatory agencies, and accordingly may be required to
change or discontinue certain practices which could have a material adverse
effect on the Company.

10
<PAGE> 12

Pharmacies and Home Health Agencies. All of the Company's pharmacies are
licensed in the states in which they are located. All these pharmacies also have
Controlled Substances Registration Certificates issued by the Drug Enforcement
Administration of the United States Department of Justice. Many states in which
the Company operates also require home infusion companies to be licensed as home
health agencies. The failure of a branch facility to obtain, renew or maintain
any required regulatory approvals or licenses could adversely affect the
existing operations of that branch facility.

Other Regulations. The Company's operations are subject to various state
hazardous waste disposal laws. The laws as currently in effect do not classify
most of the waste produced during the provision of the Company's services to be
hazardous, although disposal of non-hazardous medical waste is also subject to
regulation. OSHA regulations require employers of workers who are occupationally
subject to blood or other potentially infectious materials to provide those
workers with certain prescribed protections against bloodborne pathogens. The
regulatory requirements apply to all health care facilities, including the
Company's branches, and require employers to make a determination as to which
employees may be exposed to blood or other potentially infectious materials and
to have in effect a written exposure control plan. In addition, employers are
required to provide hepatitis-B vaccinations, personal protective equipment,
infection control training, post-exposure evaluation and follow-up, waste
disposal techniques and procedures, and engineering and work practice controls.
Employers are also required to comply with certain record-keeping requirements.
The Company believes it is in material compliance with the foregoing laws and
regulations.

In September 1994, T(2) entered into the T(2) OIG Settlement Agreement
settling charges brought on by an investigation by the OIG into certain
operations of T(2). T(2), in expressly denying liability, agreed to a civil
order which enjoins it from violating federal anti-kickback and false claims
laws related to Medicare/Medicaid reimbursement. The T(2) OIG Settlement
Agreement imposes certain restrictions upon the types of relationships that T(2)
may have with referring physicians and imposes a five year reporting obligation
upon T(2). The Company has implemented measures to ensure compliance with the
T(2) OIG Settlement Agreement and has engaged Richard P. Kusserow, the former
Inspector General of the U.S. Department of Health and Human Services, as a
consultant to assist the Company in its continued development of its compliance
program. The internal regulatory compliance review program is intended to deal
with compliance issues under the T(2) OIG Settlement Agreement and with other
legal, regulatory and ethical compliance issues. However, no assurance can be
made that in the future the Company's business arrangements, past or present,
will not be the subject of an investigation or prosecution by a federal or state
governmental authority. Such investigation could result in any, or any
combination, of the penalties discussed above depending upon the agency involved
in such investigation and prosecution. See Item 7 "Risk Factors -- Governmental
Regulation."

The Company continuously monitors legislative developments and would seek
to restructure a business arrangement if it was determined that any of its
business relationships placed it in material noncompliance with any statute. The
health care service industry will continue to be subject to substantial
regulation at the federal and state levels, the scope and effect of which cannot
be predicted by the Company. Any loss by the Company of its various federal
certifications, its authorization to participate in the Medicare and Medicaid
programs or its licenses under the laws of any state or other governmental
authority from which a substantial portion of its revenues are derived would
have a material adverse effect on its business.

POTENTIAL LIABILITY AND INSURANCE

Health care providers are often subject to lawsuits alleging negligence,
product liability or other similar legal theories, many of which involve large
claims and significant defense costs. The Company is from time to time subject
to such suits as a result of the nature of its business. The Company currently
maintains $50 million of coverage for any general or professional liability
claims. The Company's insurance policies must be renewed annually.

A successful claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect upon the Company's business and
results of operations. Claims against the Company, regardless of their merit or
eventual outcome, also may have a material adverse effect upon the Company's

11
<PAGE> 13

reputation. There can be no assurance that the coverage limits of the Company's
insurance policies will be adequate.

EMPLOYEES

As of March 1, 1996 the Company had approximately 3,600 full-time
equivalent employees. None of the Company's employees are currently represented
by a labor union or other labor organization. Approximately 30% of the employees
are nurses and pharmacists, with the remainder consisting primarily of sales and
marketing, reimbursement, financial and systems professionals. The Company
believes that its employee relations are good.

ITEM 2. PROPERTIES.

The Company's headquarters are located in Denver, Colorado and consist of
approximately 18,000 square feet of office space leased through August 1996. The
Company expects to renew the Denver office space lease through 1999. As of March
1, 1996, the Company had 132 branch facilities throughout the United States,
totaling approximately 1.4 million square feet of facility space currently in
use with monthly rental of this space aggregating approximately $1.3 million.
(The facility space and monthly rental is net of approximately 0.2 million
square feet and $0.2 million for subleased space, respectively). The Company
also owns a building containing approximately 28,200 square feet of space which
formerly served as the headquarters of T(2). As of March 1, 1996, the Company
had agreed in principle to sell the building for $2.5 million in cash and
certain future rental consideration.

ITEM 3. 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 by
Coram to account to Coram for all damages sustained 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., collectively,
("Caremark") 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 by Caremark. 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 Caremark used
improper accounting practices that resulted in overstating Caremark's revenues.
The complaint further alleges that Caremark falsely represented that the OIG
investigation involving Caremark was not going to harm the value of the Caremark
Business sold to the Company.

12
<PAGE> 14

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 its 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. That suit was dismissed on December 22, 1995. The
matter is now on appeal. On January 17, 1996, Caremark Inc., filed a
cross-complaint against the Company in the Superior Court of the State of
California in and for the City and County of San Francisco (File No 972431)
stating allegations similar to those in the Illinois suit and seeking damages of
at least $150 million and punitive damages.

On May 19, 1995 a judgment was entered dismissing with prejudice the class
action shareholder litigation which was initiated against T(2) in 1992. Based on
the terms of the settlement, the Company paid the shareholder class $25.7
million in cash (of which approximately $7.8 million was contributed by the
Company's insurance carriers), and issued warrants to acquire an aggregate of
approximately 2.5 million shares of Common Stock at an exercise price of $22.25.
On August 29, 1995, the plaintiffs filed a Motion to Enforce Stipulation of
Settlement in which they alleged that the value of the warrants for Coram common
stock which they received pursuant to the settlement had been artificially
inflated during the period of settlement negotiations due to the alleged fraud
of the Company and certain of its officers and directors. On October 12, 1995,
the court denied the Motion. Plaintiffs filed a Notice of Appeal from the
Court's Order with the Eleventh Circuit Court of Appeals on November 3, 1995
which the Company is seeking to have dismissed. The Company intends to defend
the appeal if the Eleventh Circuit accepts jurisdiction.

A separate action seeking substantially similar relief against the Company
and certain of its current or former officers and directors was filed in the
United States District Court for the Northern District of Georgia on November
21, 1995: William Hall and Barbara Lisser v. Coram Healthcare Corporation, James
W. Sweeney, Patrick Fortune, and Sam Leno, (File No. 1:950-CV-2994). This action
was brought on behalf of a purported class of plaintiffs who were entitled to
receive warrants pursuant to the settlement of the shareholder litigation
described above. Plaintiffs filed an amended complaint on February 28, 1996, in
which they allege that the defendants made false and misleading statements which
caused a fraud on the market and artificially inflated the price of the
Company's Common Stock during the period from August 1994 through August 1995.
The complaint alleges violations of Section 10(b) and 20(a) of the Securities
Exchange Act of 1934, fraud and breach of the covenant of good faith and fair
dealing. Plaintiffs seek compensatory damages reflecting the difference in value
between the warrants as issued with the trading price of the Company's Common
Stock at its actual price and the same number of warrants at the same exercise
price with the Company's Common Stock trading at its alleged true value. The
defendants filed a motion to dismiss the complaint on March 13, 1996.

Since late 1993, the SEC has been conducting a formal investigation into
the events that led to the restatement of T(2)'s financial statements for the
periods ended December 31, 1992 and March 31, 1993 and certain other matters.
The SEC has subpoenaed certain information and T(2) has responded.

The Company intends to vigorously defend itself in these matters.
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, there have
been no provisions made in the Consolidated Financial Statements for any loss or
recovery that may result upon resolution of the suits. An unfavorable outcome
could have a material adverse effect on the financial position, results of
operations and liquidity of the Company. See Item 7 "Risk Factors -- Certain
Litigation."

In September, 1994, T(2) entered into the T(2) OIG Settlement Agreement.
See Item 1, "Government Regulation -- Other Regulations."

13
<PAGE> 15

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company held its Annual Meeting of Stockholders on December 11, 1995 to
consider and vote upon:

(1) Election of directors to serve until the 1996 Annual Meeting of
Stockholders and until their successors are duly elected and qualified.

(2) Ratification of the appointment of Ernst & Young LLP, as
independent auditors of the Company for the Company's 1995 fiscal year.

All proposals were approved. The results of the voting are as follows:

<TABLE>
<CAPTION>
TOTAL VOTE FOR TOTAL VOTE WITHHELD
EACH DIRECTOR FROM EACH DIRECTOR
-------------- -------------------
<S> <C> <C>
(1) For election as director:
James M. Sweeney........................................ 35,516,839 771,931
Donald J. Amaral........................................ 35,621,594 667,176
Tommy H. Carter......................................... 35,581,010 707,760
Richard A. Fink......................................... 35,601,370 687,400
Stephen G. Pagluica..................................... 35,612,933 675,837
L. Peter Smith.......................................... 35,631,498 657,272
Dr. Gail R. Wilensky.................................... 35,625,991 662,779
Andrew J. Nathanson..................................... 35,616,742 672,028
</TABLE>

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C> <C>
(2) Ratification of the Appointment of
Ernst & Young LLP...................................... 35,921,390 214,662 152,718
</TABLE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.

The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "CRH." The following table sets forth the high and low sale price of
the Common Stock as reported on the New York Stock Exchange Composite Tape for
the periods indicated (from the inception of trading on July 11, 1994):

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
CALENDAR YEAR 1994
First Quarter.......................................................... -- --
Second Quarter......................................................... -- --
Third Quarter (July 11 through September 30)........................... 19 1/8 10 1/2
Fourth Quarter......................................................... 18 3/4 14 1/2
CALENDAR YEAR 1995
First Quarter.......................................................... 26 1/2 15 3/8
Second Quarter......................................................... 26 13
Third Quarter.......................................................... 14 5/8 3 1/4
Fourth Quarter......................................................... 5 7/8 3
CALENDAR YEAR 1996
First Quarter through March 22, 1996................................... 6 3/8 4 1/8
</TABLE>

14
<PAGE> 16

As of March 22, 1996, there were 2,994 record holders of the Company's
Common Stock. On March 22, 1996, the last reported sale price of the Common
Stock on the New York Stock Exchange was $5 per share.

The Company has not paid or declared any cash dividends on its capital
stock since its inception and is currently precluded from doing so under its
borrowing agreements. The Company currently intends to retain all future
earnings for use in operation of its business. Accordingly, the Company does not
anticipate paying cash dividends on its common stock in the foreseeable future.
The payment of any future dividends will depend upon, among other things, terms
of its borrowing agreements, future earnings, operations, capital requirements,
the general financial condition of the Company, contractual restrictions and
general business conditions.

ITEM 6. SELECTED FINANCIAL DATA.

The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and schedule
and accompanying notes and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Historical financial data for
the Company prior to the July 1994 Four-Way Merger is based on the combined
financial data of the predecessor entities, and may not be comparable on a
year-to-year basis. Certain data for the Company for the fiscal year ended
December 31, 1991 is unavailable based upon the accounting records of such
entities. Amounts are in thousands except per share data.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.............................................. $ 602,585 $ 450,496 $462,304 $413,100 $299,851
Cost of service.......................................... 459,710 313,182 285,023 224,356 --
--------- --------- --------- --------- ---------
Gross profit........................................... 142,875 137,314 177,281 188,744 --
Selling, general and administrative expenses........... 133,037 81,907 75,706 48,927 --
Provision for estimated uncollectible accounts......... 68,912 36,817 29,751 24,036 --
Amortization of goodwill............................... 15,307 8,971 7,824 4,832 --
Charge for long-lived assets and acquired receivables
Goodwill and long-lived assets....................... 166,373 -- -- -- --
Valuation of acquired receivables.................... 37,000 -- -- -- --
Merger costs........................................... -- 28,500 2,868 -- --
Provision for litigation settlements................... -- 23,220 -- -- --
Restructuring costs.................................... 6,158 95,500 1,600 2,385 --
--------- --------- --------- --------- ---------
Total operating expenses............................... 426,787 274,915 117,749 80,180 --
--------- --------- --------- --------- ---------
Operating income (loss).................................. (283,912) (137,601) 59,532 108,564 82,144
Interest income........................................ 1,531 2,469 3,746 4,940 --
Interest expense....................................... (49,741) (7,414) (3,916) (2,860) --
Other income (expense), net............................ (2,117) 865 7,862 3,969 --
--------- --------- --------- --------- ---------
Income (loss) before income taxes and minority
interests.............................................. (334,239) (141,681) 67,224 114,613 --
Provision (benefit) for income taxes................... (11,154) (26,231) 28,848 38,117 --
Minority interest in net income of consolidated joint
ventures............................................. 10,964 12,622 9,715 4,638 --
--------- --------- --------- --------- ---------
Net income (loss)........................................ $(334,049) $(128,072) $ 28,661 $ 71,858 $ 56,009
========= ========= ========= ========= =========
Net income (loss) per common share:...................... $ (8.39) $ (3.32) $ 0.76 $ 1.95 $ 1.67
Weighted average common shares outstanding............... 39,802 38,633 37,778 36,812 33,632
Cash dividends per common share(*)....................... -- -- -- -- --
BALANCE SHEET DATA:
Cash and short-term investments.......................... $ 26,735 $ 30,134 $ 50,980 $ 20,874 $ --
Working capital.......................................... 37,422 83,811 124,992 165,150 123,543
Total assets............................................. 687,849 576,439 555,877 476,422 334,613
Long-term debt, net of current portion................... 439,309 119,726 40,156 20,653 15,257
Stockholders equity...................................... 18,040 322,261 438,872 394,514 230,539
</TABLE>

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

* Excludes dividends paid by predecessor entities prior to July 1994 Four-Way
Merger.

15
<PAGE> 17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The Company's business is subject to a number of risks. These risks are
discussed elsewhere in this Annual Report, and in particular, under this Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the captions "Background," "Results of Operations" and
"Liquidity and Capital Resources." Some of those risks are also discussed under
the caption "Risk Factors." These factors should be considered by investors in
the Company's securities. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for forward-looking statements. This Annual Report
contains forward-looking statements within the meaning of the Securities Act of
1933 and the Securities Exchange Act of 1934. The Company's actual results could
differ materially from those projected in any forward-looking statements as a
result of the factors described under this section and elsewhere in this Annual
Report.

BACKGROUND

General. The operations of Coram Healthcare Corporation, a Delaware
corporation commenced on July 8, 1994 as a result of the Four-Way Merger of
T(2), Curaflex, HealthInfusion and 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 HMSS, a
regional provider of alternate site infusion therapy, in a transaction accounted
for as a purchase. Following the merger, the Company initiated a consolidation
plan (the "Coram Consolidation Plan") and recorded significant non-recurring
restructuring costs related to it. The Coram Consolidation Plan, which has been
substantially completed, included consolidation of infusion centers and
corporate offices, personnel reductions and elimination or discontinuance of
certain business activities. The Coram Consolidation Plan is further described
in Note 3 to the Consolidated Financial Statements.

Acquisition of Caremark Business. 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"), 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 excluded
any liabilities associated with the recent governmental investigation of
Caremark. The acquisition was accounted for by the purchase method of accounting
and the results of the Caremark Business have been included in the accompanying
consolidated financial statements since the date of acquisition.

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.

During May 1995, the Company initiated a restructuring plan (the "Caremark
Business Consolidation Plan") which was contemplated by the Company prior to the
acquisition of the Caremark Business. 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. The Caremark Business Consolidation Plan, which has been substantially
completed, is further described in Note 3 to the Consolidated Financial
Statements.

16
<PAGE> 18

The changes to the reimbursement function and the billing and accounts
receivable system started in the second quarter, but most of the changes
occurred in July through September. The effects, which became most pronounced in
the third quarter, were far more disruptive than anticipated, resulting in
significant delays in billing as well as difficulties in receiving timely
reimbursements. The delays were caused in part by the inability to efficiently
complete, obtain or process certain claim documentation and in part by lack of
familiarity with the newly acquired system. Certain documentation necessary for
billing and payment was not obtained timely primarily because of delays related
to the physical transfer of documents between branch locations during the
consolidation as well as delays caused by changes in personnel responsible for
working with individual patient files. The passage of time makes missing
documentation required for billing and 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, provided an addition to its provision for estimated
uncollectible accounts of $20.0 million resulting in a total provision of $37.0
million in the quarter ended September 30, 1995. See "Provision for Estimated
Uncollectible Accounts" below.

The allowance for uncollectible accounts, as established by Caremark 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 requested, 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
receivables 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 complaint against
Caremark. The $37.0 million reduction in the carrying value of accounts
receivable acquired from Caremark is separate from the $20.0 million provision
recorded in the third quarter of 1995 that is discussed above and which was for
deterioration in accounts receivable of both the Company and the Caremark
Business that occurred after the acquisition of the Caremark Business.

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 forma combined 1994
revenue. The anticipated cost savings in the Coram Consolidation Plan and the
Caremark Business Consolidation Plan have been offset by that 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

17
<PAGE> 19

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 overpaid 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 net
assets acquired. The Company further believes that its 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 Note 1 to the Consolidated Financial
Statements, "Goodwill ", and "Goodwill ", below, and Item 3, "Legal
Proceedings."

On September 11, 1995, as amended October 6, 1995, the Company filed suit
against Caremark and Caremark International in California, 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 by Caremark. On October 12, 1995, Caremark and
Caremark International filed suit against the Company in Illinois alleging
fraudulent misrepresentation in its purchase of the Caremark Business and
seeking damages of at least $100 million and punitive damages. That suit was
dismissed on December 22, 1995. The matter is now on appeal. On January 17,
1996, Caremark filed a cross complaint against the Company in the California
court containing allegations substantially similar to those in the Illinois suit
and seeking damages of at least $150 million and punitive damages. The Company
intends to vigorously defend itself in this matter, 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 unfavorable outcome
could have a material adverse effect on the financial position, results of
operations and liquidity of the Company.

Business Strategy. The Company's strategy, which it has been in the process
of implementing since September of 1995, is focused on the basic factors that
could lead to profitability: revenue generation, cost reduction, quality
improvement 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, 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, reduction of corporate
expenses, assessment of poor performing branches and a review of branch
efficiencies. Delivery of quality service will be closely monitored through an
internal task force and more rigorous reporting. Management also intends to
concentrate on improved reimbursement through an emphasis on cash collections
and continued assessment of systems support for reimbursement. While management
believes the implementation of this strategy has improved and will continue to
improve the Company's operations and financial performance, no assurances can be
given as to its ultimate success.

Special Charges. The Company recorded non-recurring and special charges
aggregating $404.3 million in 1994 and 1995. In 1994, the Company recorded
non-recurring and special charges of $164.5 million in its second and third
quarters. These consisted of costs related to the Four-Way Merger of $28.5
million, restructuring costs of $95.5 million related to the Coram Consolidation
Plan, a $23.2 million provision for litigation costs and a $17.3 million special
provision for uncollectible receivables, included in the Provision for
Uncollectible Accounts in the Consolidated Statements of Operations. These
charges are further described in Note 3, 10 and 12, respectively, of the
Consolidated Financial Statements.

During 1995, the Company recorded net non-recurring and special charges of
$259.4 million and benefits related to restructuring charges recorded in 1994
and 1995 of $19.6 million, resulting in net non-recurring

18
<PAGE> 20

and special charges of $239.8 million. This includes net restructuring costs
recorded of $6.2 million, including a $25.8 million charge related to the
Caremark Business Consolidation Plan in the second quarter of 1995. This charge
was offset with benefits recorded in the first quarter and second quarters of
$4.1 million and $0.3 million, respectively, related to the Coram Consolidation
Plan. Additionally, a benefit of $15.2 million was recorded in the fourth
quarter related to favorable experience in relation to original estimates of the
costs of the 1994 Coram and 1995 Caremark Consolidation Plans of $6.0 million
and $9.2 million, respectively. (See Note 3 to the Consolidated Financial
Statements). Also in the fourth quarter, a non-recurring loss of $1.4 million on
disposal of a branch was recorded. In the third quarter, a charge of $166.4
million was made to write-off goodwill and certain other long-lived assets and a
charge of $37.0 million was made to record an adjustment to the valuation of
acquired receivables. (See "Goodwill and Long-Lived Assets" below and
"Acquisition of Caremark Business" above). An additional special reserve of
$20.0 million, included in the Provision for Estimated Uncollectible Accounts in
the Consolidated Statements of Operations, was provided for uncollectible
receivables (See "Acquisition of Caremark Business" above), and a $2.0 million
loss, included in Selling, General and Administrative Expenses in the
Consolidated Statements of Operations, was incurred on the sale of a non-core
business. In the second quarter, $3.4 million of termination expenses related to
the terminated Lincare merger agreement (the "Lincare Agreement") and a $3.4
million loss on payment of a prior credit facility were included in Selling,
General and Administrative Expenses in the Consolidated Statements of
Operations.

The accrual on 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, 1995
was $23.7 million. The Company currently estimates that future cash expenditures
related to that accrual will be made in the following periods: 65% in 1996, 20%
in 1997, 8% in 1998, 7% and in 1999 and thereafter. These estimated amounts and
the periods in which they will be spent may change, based upon future
experience, but the Company does not currently expect expenditures to exceed the
amount provided. No assurances can be given as to the aggregate cost savings
that will be achieved by the Company as a result of the Coram and Caremark
Business Consolidation Plans, or the timing thereof.

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
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
thirty to forty year amortization period of the goodwill, exceeded the carrying
amount of the goodwill and other long-lived assets.

As explained above under "Acquisition of Caremark Business," the Company
concluded as of September 30, 1995 that its sole source of recovery of the
purchase price in excess of the identifiable net assets acquired, as well as
other damages allegedly suffered, was its complaint against Caremark. Outcome of
litigation is inherently uncertain. 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 Company's

19
<PAGE> 21

conclusion that the purchase price in excess of the identifiable net assets
acquired will not be recovered through operations was corroborated by an
analysis prepared by the Company that indicated 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. Potential impairment of those assets
had been indicated by the adverse results of the Caremark Business, the decline
in consolidated 1995 revenues from those forecasted earlier in the year, the
continuing decline in those revenues through the third quarter of 1995, the cash
flow deficits and operating losses and an apparent decline in the fair value of
goodwill. 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 estimated 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 are based upon estimated 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 receivables 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 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 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 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.

Provision for Estimated Uncollectible Accounts. See Note 1 to the
Consolidated Financial Statements -- Provision for Estimated Uncollectible
Accounts for information concerning management's regular review of the
collectibility of accounts receivable and the basis for the additional
provisions of $17.3 million and $20.0 million recorded in the quarters ended
September 30, 1994 and 1995, respectively.

In the six-month period ended December 31, 1994, which comprised 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 million
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. For the year 1995, the provision was 8.1% of revenues, excluding the
$20 million additional provision in September 1995, and 11.4% including it. In
part, the higher

20
<PAGE> 22

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 $37.0 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 Four-Way Merger in July 1994 .

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 last two quarters of 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. In the quarters ended
September 30, and December 31, 1995, the Company utilized a methodology to
derive specific estimated loss percentages for specific aging categories for the
accounts receivable maintained on the former Coram receivable system, based on
information from operating and field finance personnel. These percentages were
applied 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 in the quarter ended September 30, 1995, although the extent
cannot be estimated based on current information because of the adverse
collection experience.

To maintain control during the conversion to the Caremark Business
receivables system, the Company, documented and disseminated procedures, and
conducted extensive training at branch sites and 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.

The Company has substantially completed the restructuring of the billing
and collection process. This included decentralization of reimbursement
activities, development and implementation of standard management reports,
improvements in the reimbursement process and ongoing, concentrated collection
efforts on certain aged receivables and incentivizing billing and collection
efforts.

Management. Effective October 16, 1995, Donald J. Amaral, an experienced
health care 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. Effective March 7, 1996, the Company
announced the appointment of Daniel L. Frank as Senior Vice President, Business
Development, Sales and Marketing and the appointment of Mark Werber as Assistant
to the President.

Factors Adversely Affecting Recent Operating Results. The most significant
factor affecting the Company's performance and financial condition during the
second, third and fourth quarters of 1995 was the underperformance of the
Caremark Business from what the Company expected at the time of acquisition. The

21
<PAGE> 23

revenue of the acquired Caremark Business declined significantly after the
acquisition in the second quarter of 1995. Caremark Business revenue declined
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. Because
of the consolidation of the Caremark Business branches and the former Coram
branches, the declines in the third and fourth quarters cannot be precisely
quantified at this time.

The Company incurred substantial indebtedness to acquire the Caremark
Business, which it expected to service in substantial part through the operating
income and cash flow of the Caremark Business. This fact combined with the
significant underperformance of the Caremark Business materially and adversely
affected the Company's financial condition and results of operations. Further,
the Company believes the guilty plea by Caremark 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. In
addition, Caremark recently announced a substantial settlement with private
payors with whom Caremark did business before selling the Caremark Business to
the Company. The Company believes the causes underlying the settlement have had
an adverse effect on the Company's business.

Other factors which adversely affected 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. The Company
terminated substantially all the physician relationships it believed were
inconsistent with Stark II by December 31, 1994. Many of the other 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 throughout 1995. In addition, the
Company has experienced pricing pressures 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 increased short term infusion
therapies in comparison to long term infusion therapies. Short term therapies
generate less net revenue on generally the same overhead costs associated with
long term infusion therapies. See "Risk Factors -- Governmental Regulation."

To date, the Company's arrangements with managed care organizations have
mostly been on a discounted fee-for-service basis; the Company does not
currently have any significant capitated arrangements. 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 financial position, results of operations and
liquidity of the Company.

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. HCFA 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, the Company completed a major restructuring
of the terms of its debt in October 1995 and has adopted a business plan, as
discussed above, focused on 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. See "Risk Factors -- Recent Operating Losses; Future
Results of Operations Uncertain."

RESULTS OF OPERATIONS

Prior to July 8, 1994, the activities of the Company were conducted
separately by each of the predecessor entities and the acquisition of the
Caremark Business effective April 1, 1995, had a significant effect on the

22
<PAGE> 24

Company. Accordingly, the following table provides certain comparative
information for the last three quarters of 1995, which reflect the acquisition
of the Caremark Business. That information is followed by prior year comparisons
on an annual basis.

CERTAIN QUARTERLY COMPARISONS

The following summarizes the Company's results of operations for the last
three quarters of 1995. Amounts are in thousands, except per share data.

<TABLE>
<CAPTION>
1995 QUARTER ENDED
------------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Net revenue.................................... $153,715 $ 164,741 $179,351 $ 104,778
Cost of service................................ 116,588 129,674 137,840 75,609
-------- --------- -------- -------
Gross profit................................... 37,127 35,067 41,511 29,169
Operating expenses:
Selling, general and administrative
expenses.................................. 32,990 40,844 41,312 17,885
Provision for estimated uncollectible
accounts.................................. 12,333 36,518 16,049 4,013
Amortization of goodwill..................... 4,820 2,947 4,767 2,790
Charge for long-lived assets and acquired
receivables:
Goodwill and other assets................. -- 166,373 --
Valuation of acquired receivables......... -- 37,000 --
Restructuring costs (benefit), net........... (15,203) -- 25,501 (4,131)
-------- --------- -------- -------
Total operating expenses............. 34,940 283,682 87,629 20,557
-------- --------- -------- -------
Operating income (loss)........................ 2,187 (248,615) (46,118) 8,612
Other income (expense):
Interest (expense)........................... (18,116) (14,236) (13,953) (3,436)
Other income (expense), net.................. 631 (1,445) 891 740
-------- --------- -------- -------
Loss before income taxes and minority
interests.................................... (15,298) (264,296) (59,180) 5,916
Provision (benefit) for income taxes......... 156 (10,204) -- (1,105)
Minority interest in net income of
consolidated joint ventures............... 2,195 570 3,771 2,432
-------- --------- -------- -------
Net loss....................................... $(17,649) $(254,662) $(66,347) 4,589
======== ========= ======== =======
Net loss per share............................. $ (.44) $ (6.38) $ (1.67) $ 0.11
======== ========= ======== =======
Weighted average common shares outstanding..... 40,369 39,915 39,685 40,939
======== ========= ======== =======
</TABLE>

FOURTH QUARTER ENDED DECEMBER 31, 1995 COMPARED WITH THIRD QUARTER ENDED
SEPTEMBER 30, 1995.

Net Revenue. Net revenue for the fourth quarter of 1995 decreased by $11.0
million or 6.7% compared with the third quarter 1995. The home infusion therapy
business accounted for $9.1 million of this decrease. This was primarily because
of the loss of certain contracts and a decrease in managed care referrals as
well as continued pricing pressures on this segment of the Company's business.
See "Factors Adversely Affecting Recent Operating Results." The remaining $1.9
million of the decrease was principally because of the continued disposition of
non-core businesses.

Gross Profit. Gross profit for the fourth quarter of 1995 increased $2.1
million or 5.9% compared with the third quarter of 1995. The gross profit
percentage improved from 21.3% to 24.1% of net revenue. The Company believes
that its efforts to control the costs of drugs and supplies are the principal
reason for the improvement.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") decreased $7.9 million or 19.2% for the fourth
quarter of 1995 compared with the third quarter of 1995. The

23
<PAGE> 25

decrease is due to the Company's continuing strategy to cut corporate and field
costs and decreases in salary expenses in conjunction with the Caremark Business
Consolidation Plan. See "Business Strategy." The fourth quarter included a
non-recurring $1.4 million loss on the disposal of a branch as compared with
similar non-recurring items of $4.5 million in the third quarter.

Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $12.3 million, or 8.0% of net revenue, for the
quarter ended December 31, 1995 compared to $37.0 million, or 22.2% of net
revenue, for the quarter ended September 30, 1995. The third quarter included a
special charge of $20.0 million. The decrease from the level of the third
quarter excluding the special charge was $4.2 million. See "Business Strategy."

Amortization of Goodwill. Amortization of goodwill in the third quarter
increased from $2.9 million to $4.8 million in the fourth quarter, or an
increase of $1.9 million, principally because shortening of goodwill
amortization lives to 25 years ($1.3 million) and the write-off of goodwill
related to the sale of a non-core business ($1.0 million). The Company estimates
that the annual effects of the shortened goodwill amortization lives will
increase annual amortization expense by approximately $5.2 million.

Restructuring Costs. In the fourth quarter of 1995, the Company recorded a
benefit to restructuring costs of $6.0 million related to the restructuring and
merger costs as part of the Coram Consolidation Plan recorded in 1994, and $9.2
million of restructuring costs related to the Caremark Business Consolidation
Plan recorded in the second quarter of 1995. As further discussed in Note 3 to
the Consolidated Financial Statements, the Company had generally favorable
experience in relation to original estimates of the costs for personnel
reduction and facility reduction.

Operating Income (Loss). The Company recorded operating income of $2.2
million for the fourth quarter of 1995 compared to an operating loss of $248.6
million in the third quarter of 1995. Third quarter 1995 special charges
affecting the operating loss consisted of $203.4 million of charges for
long-lived assets and valuation of acquired receivables, the $20.0 million
special charge for estimated uncollectible accounts receivable and $4.5 million
of other non-recurring SG&A charges. The balance of the improvement in operating
income (loss) is due principally to a higher gross profit, lower SG&A expenses
and the benefit recorded to restructuring costs.

Other Income (Expense). Other income (expenses) increased by an expense of
$1.8 million for the fourth quarter 1995 compared with the third quarter of
1995. The increase was due mainly to $3.9 million of increased interest expenses
for the period. Interest expense increased principally because of increased
amortization of loan costs, principally related to warrants and deferred
financing costs on the Senior Credit Facility.

Net Loss. Net loss for the fourth quarter of 1995 decreased by $237.0
million compared with the third quarter of 1995. The decrease was primarily due
to a benefit recorded to restructuring costs of $15.2 million in the fourth
quarter, as compared to non-recurring charges of $227.9 million recorded in the
third quarter, increased gross profit of $2.1 million, decreased SG&A of $7.9
million and a decrease in the provision for uncollectible accounts of $24.2
million. These decreases were partially offset by increased amortization of
goodwill of $1.9 million, increases in net other expenses of $1.8 million, and a
reduction of income tax benefits of $10.2 million from the third quarter.

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

24
<PAGE> 26

and payor mix, in part related to the Caremark Business which historically had
lower margins than the Company's former business. Based on current information,
the Company is currently unable to separately quantify each of these reasons.

Selling, General and Administrative Expenses. SG&A expenses decreased $.5
million or 1.1% for the third quarter of 1995 compared with the second quarter
of 1995. Decreases related to salary expense due to the implementation of the
Caremark Business Consolidation Plan and second quarter SG&A expenses of
approximately $3.4 million related to the Lincare Agreement and a $3.4 million
loss on payment of a prior credit facility. These decreases were partially
offset by $.5 million in litigation costs and a $2.5 million SG&A charge in the
third quarter of 1995.

Provision For Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $37.0 million, or 22.2% of net revenue, for the
quarter ended September 30, 1995 compared to $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 $248.6 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 $227.9 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 was the recognition of a $10.2
million tax benefit in the third quarter of 1995.

SECOND QUARTER ENDED JUNE 30, 1995 COMPARED WITH THE FIRST QUARTER ENDED MARCH
31, 1995

Net Revenue. Net revenue for the second quarter of 1995 increased by $74.6
million compared with the first quarter of 1995. The major source of the
increase was approximately $83.0 million of revenue contributed by the Caremark
Business acquired at the beginning of the second quarter. The increase was
partially offset by a decrease in revenue resulting from the termination of
physician agreements and certain businesses as well as the March 31, 1995 sale
of the Company's 51% ownership interest in Pediatric Partners, Inc., doing
business as Kids Medical Club ("Kids Medical"), which contributed $5.6 million
in revenue in the first quarter.

Gross Profit. Gross profit margin decreased from 27.8% in the first quarter
of 1995 to 23.1% in the second quarter of 1995. The decrease is in part related
to the Caremark Business, which historically had lower margins than the
Company's former Coram business, and is in part attributable to a decline in
physician-referred patients, which typically result in higher levels of
reimbursement and an increase in managed care patients which typically result in
lower reimbursement.

Selling, General and Administrative Expenses. SG&A expenses increased $26.8
million for the second quarter of 1995 compared to the first quarter of 1995.
The acquisition of the Caremark Business resulted in an increase of $14.6
million in SG&A expenses in the second quarter and transaction expenses related
to the terminated Lincare merger resulted in an increase of $3.4 million.
Additionally, the Company incurred a loss on the payment of a prior credit
facility of $3.4 million in the second quarter of 1995.

Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $16.0 million, or 8.9% of net revenue, for the second
quarter of 1995 compared to $4.0 million, or 3.8% of net revenue, for the first
quarter. The acquisition of the Caremark Business added $6.7 million to this
charge in the second quarter with the remainder of the increase resulting from
aging of the accounts receivable of the Coram Business.

25
<PAGE> 27

Amortization of Goodwill. Amortization of goodwill increased $2.0 million,
to $4.8 million in the second quarter of 1995 compared to $2.8 million in the
first quarter of 1995. This increase included $1.5 million of amortization
related to the Caremark Business acquisition.

Restructuring Costs. The Company recorded a special charge of $25.8 million
in the second quarter of 1995 related to the Caremark Business Consolidation
Plan. In the first quarter of 1995, a benefit of $4.1 million was recorded as a
result of the sale of Kids Medical. (See Note 3 to the Consolidated Financial
Statements).

Operating Income (Loss). The Company recorded an operating loss of $46.1
million in the second quarter of 1995 compared to operating income of $8.6
million in the first quarter of 1995. The most significant reason for the
decline related to the acquisition of the Caremark Business. This is reflected
in the $25.8 million special charge recorded in the second quarter of 1995
compared to the $4.1 million benefit recorded in the first quarter of 1995, as
discussed above. The acquisition also resulted in the increase in SG&A expenses,
higher provision for uncollectible accounts and greater amortization of goodwill
in the second quarter of 1995 compared to the first quarter.

Other Income and Expenses. Interest expense increased by $10.5 million in
the second quarter of 1995 compared to the first quarter of 1995, primarily due
to increased borrowings by the Company to finance the Caremark Business
acquisition (see Note 6 to the Consolidated Financial Statements) and the
amortization of deferred financing costs.

Provision (Benefit) for Income Taxes. During the second quarter of 1995,
the Company did not record a tax benefit. A benefit of $1.1 million was recorded
in the first quarter of 1995 resulting from recovery of income taxes previously
paid by predecessor entities to the Company that were participants in the
Four-Way Merger.

Net Income (Loss). A net loss of $66.3 million was recorded for the second
quarter of 1995 compared to net income of $4.6 million in the first quarter of
1995. The decline is primarily due to the acquisition of the Caremark Business;
including the $25.8 million special charge related to the Caremark Consolidation
Plan, the increase in SG&A expense, higher provision for uncollectible accounts,
greater amortization of goodwill and increase in interest expense.

26
<PAGE> 28

ANNUAL COMPARISONS

The following table shows certain items as a percentage of the Company's
net revenue for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Net revenue................................................. 100.0% 100.0% 100.0%
Cost of service............................................. 76.3 69.5 61.6
----- ----- -----
Gross profit margin....................................... 23.7 30.5 38.4
Operating expenses:
Selling, general and administrative expenses.............. 22.1 18.2 16.4
Provision for estimated uncollectible accounts............ 11.4 8.2 6.4
Amortization of goodwill.................................. 2.5 2.0 1.7
Charge for long-lived assets and acquired receivables:
Goodwill and other assets.............................. 27.6 -- --
Valuation of acquired receivables...................... 6.2 -- --
Merger expenses........................................... -- 6.3 0.6
Provision for litigation settlements...................... -- 5.2 --
Restructuring costs....................................... 1.0 21.2 0.3
----- ----- -----
Total operating expenses.................................. 70.8 61.1 25.4
Operating income (loss)..................................... (47.1) (30.6) 13.0
Other income (expenses):
Interest expense.......................................... (8.3) (1.6) (0.8)
Other income (expense), net............................... (.3) 0.7 2.3
----- ----- -----
Income (loss) before income taxes and minority interests.... (55.5) (31.5) 14.5
Provision (benefit) for income taxes...................... (1.9) (5.8) 6.2
Minority interest in net income of consolidated joint
ventures............................................... 1.8 2.8 2.1
----- ----- -----
Net income (loss)........................................... (55.4)% (28.5)% 6.2%
===== ===== =====
</TABLE>

1995 COMPARED TO 1994

Net Revenue. Net revenue for the year ended December 31, 1995, increased by
$152.1 million or 33.8% 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 and the first quarter of
1995 (as reported by Caremark) net revenue declined a $224.8 million or 24.3%
from pro-forma 1994 net revenue as a result of the factors discussed above under
"Factors Adversely Affecting Recent Operating Results". The Company is currently
unable to quantify the impact of each factor cited therein. While it believes
the underperformance of the Caremark Business was the most significant factor,
each of the other factors has had a significant adverse affect on net revenues.

Gross Profit. Gross profit for the year ended December 31, 1995, increased
$5.6 million or 4.1% compared with the same period in 1994. While gross profit
increased because of the increase in net revenue, this increase was offset by
the decrease in gross margin percentage for the reasons discussed under "Factors
Adversely Affecting Recent Operating Results." Also offsetting the increase was
the sale of the Company's 51% ownership interest in Kids Medical, which reduced
gross profit in comparison with the prior year period by $9.8 million.

Selling, General and Administrative Expenses. SG&A expenses increased $51.1
million or 62.4% for the twelve months ended December 31, 1995 compared with 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 were $10.2 million of
non-recurring charges: $1.4 million loss on disposal of a branch in the fourth
quarter of 1995, $2.0 million loss on the sale of a non-core business

27
<PAGE> 29

recorded in the third quarter of 1995, $3.4 million transaction expenses related
to the terminated Lincare merger and $3.4 million loss on payment of a prior
credit facility recorded in the second quarter of 1995.

Provision For Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $68.9 million, or 11.4% of net revenue, for the year
ended December 31, 1995 compared with $36.8 million, or 8.2% of net revenue for
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 $6.3 million
from 1994 primarily as a result of amortization of goodwill related to
acquisitions made by the Company in late 1994 and 1995 and a reduction in
amortization lives to 25 years. The reduction in amortization lives increased
amortization expense by approximately $1.3 million in 1995.

Restructuring Costs. The Company recorded a pre-tax charge of $25.8 million
during 1995 for estimated costs related to the Caremark Business Consolidation
Plan. The charge was offset by the $15.2 million benefit recorded to
restructuring costs related to the Coram and Caremark Consolidation Plans in the
fourth quarter of 1995 and a $4.1 million benefit recorded in the first quarter
related to the sale of Kids Medical as part of the Coram Consolidation Plan.
Restructuring costs in 1994 approximated $95.5 million related to the Coram
Consolidation Plan.

Operating Loss. The Company recorded an operating loss of $283.9 million
for the year ended December 31, 1995, compared with a $137.6 million operating
loss for year ended December 31, 1994. The most significant reason underlying
the loss was the acquisition and the underperformance of the Caremark Business.
This is reflected in the $73.9 million increase in special charges in 1995, as
well as higher SG&A expenses, higher provisions for uncollectible accounts and
greater amortization of goodwill in 1995 as compared with 1994.

Other Income and Expenses. Interest expense increased by $42.3 million in
1995 as compared with 1994 primarily due to increased borrowings by the Company
to finance acquisitions, merger costs and other working capital needs as well as
higher interest rates on the Bridge Note and the amortization of deferred
financing costs.

Provision (Benefit) for Income Taxes. During the year ended December 31,
1995 the Company recorded an income tax benefit of $11.2 million, as compared
with a $26.2 million benefit in 1994. (See Note 7 to the Consolidated Financial
Statements.) Benefits available are currently limited to refunds for the
carryback of tax losses. In October 1995, the Company received a $30.2 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 an amended 1995 income tax return. It also has approximately
$14 million of potential benefit available for carryback of certain future tax
operating losses, if any.

Net Loss. Net loss for the year ended December 31, 1995, increased $206.0
million as compared with in 1994. The primary reason for the increased loss is
the $73.9 million increase in special charges and increases in SG&A expenses,
the provision for estimated uncollectible accounts and interest expense, and the
lower tax benefit recorded in 1995.

1994 COMPARED TO 1993

Net Revenue. Net revenue for the year ended December 31, 1994 declined by
2.6% from the prior year. Net revenue from the Company's home infusion therapy
business declined primarily due to the pricing pressures imposed by third-party
indemnity and managed care payors discussed above, the termination of certain
physician relationships by the Company and the retroactive effect of case
management discounts and larger discounts demanded by industry insurance
carriers. Net revenue from the Company's IntraCare (outpatient infusion therapy)
business declined by approximately $12.2 million due to direct competition from
physicians. This decline in net revenue was offset by a $9.5 million increase in
net revenue from the Company's lithotripsy business and the addition of an
estimated $14 million of net revenue resulting from the

28
<PAGE> 30

HMSS acquisition. Additional factors affecting 1994 net revenue were the
implementation of consistent Company-wide policies for recognition of
contractual and other allowances, an effort to eliminate unprofitable business
relationships and the renegotiation of physician relationships which were
potentially incompatible with new regulatory requirements.

Gross Margin. Gross margin decreased to 30.5% in 1994 from 38.4% in 1993.
This decrease was related primarily to the decline in pricing, changes in payor
mix, and the revenue recognition policy changes discussed above and the fact
that branch consolidations and corresponding reductions in fixed costs had not
been fully completed by year end. Other factors that affected gross margin
included patient and therapy mix changes and short-term costs not included in
the restructuring charges which were necessary to facilitate the integration of
the Company's operating companies.

Selling, General and Administrative Expense. SG&A increased 8.2% over the
prior year primarily as a result of the acquisition of HMSS. Excluding
duplicative costs related to the Four-Way Merger and the acquisition of HMSS,
SG&A expenses for 1994 remained substantially constant as compared to the prior
year. Reductions in overall payroll and other administrative costs since the
consummation of the Four-Way Merger were partially offset by costs incurred in
the same period to establish a new corporate office prior to the realization of
cost savings through planned reductions of the corporate staffs of the merged
companies. Due to the integration process, certain personnel and professional
fees, special incentive programs, travel, recruiting, relocation and other
administrative expenses charged to operations, but necessary and related to the
merger and consolidation activities, contributed to the increase in SG&A. The
Company estimates that the incremental expense related to these items was
approximately $3.0 million.

Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts increased to $36.8 million in 1994 from $29.8 million in
1993, increasing to 8.2% of net revenue in 1994 from 6.4% in 1993. This increase
was due to a special provision of $17.3 million taken in 1994.

Amortization of Goodwill. Amortization of goodwill increased in 1994 as a
result of a full year of amortization being taken for acquisitions completed
during 1993, as well as the acquisition of HMSS on September 12, 1994.

Provision for Litigation Settlements. The provision for litigation
settlements represents the estimated cash and non-cash costs of settling certain
litigation matters, including the T(2) shareholder litigation, the T(2) OIG
Settlement Agreement and the settlement of a dispute with the former principals
of a company acquired by T(2) in 1992.

Operating Income (Loss). The Company incurred an operating loss of $137.6
million in 1994, compared to operating income of $59.5 million in the prior
year. Excluding the merger, restructuring, litigation charges and special
accounts receivable provision, which were taken as discussed above, and totaled
$164.5 million, the Company's operating loss would have been $26.9 million.

Net Interest Expense. Interest expense increased over the prior year
primarily due to increased borrowings used to finance acquisitions, merger costs
and other working capital needs.

Other Income. The higher level of other income in 1993 compared to 1994 is
primarily due to the $6.4 million gain realized on the sale of T(2)'s
respiratory business in 1993.

Provision (Benefit for Income Taxes). The Company's effective tax benefit
rate for 1994 was approximately 17%. The rate was substantially below the
expected benefit at combined statutory federal and state rates due primarily to
the non-deductibility of goodwill amortization, certain merger costs and the
realizability of losses created by certain restructuring, litigation and
receivable charges.

Minority Interest. Minority interest in net income of consolidated joint
ventures increased primarily due to the acquisition of majority interests in
several lithotripsy companies during 1993.

29
<PAGE> 31

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents at December 31, 1995, were $26.7
million (excluding restricted cash of approximately $25.3 million). In addition,
the Company had $25.0 million available borrowing under its Senior Credit
Facility at December 31, 1995.

During the year ended December 31, 1995, the Company had negative cash flow
from operations of $16.8 million compared with negative cash flow of $21.6
million in 1994. Cash used by investing activities was $215.4 million for the
year ended December 31, 1995 compared with $56.0 million for 1994 due to
business acquisitions. Cash provided by financing activities was $245.4 million
for the year ended December 31, 1995, compared with $73.2 million for 1994, due
to increased borrowings related to acquisitions.

As of December 31, 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. At
December 31, 1995 the Company was in compliance with all covenants of the Senior
Credit Facility.

As of December 31, 1995, the Company has prepaid $7.8 million of the Senior
Credit Facility. In addition, the Company has prepaid the remaining $2.5 million
due on the first principal payment as of March 13, 1996.

The Company believes that it has adequate working capital to meet its cash
requirements through March 31, 1997, 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 effect 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. At December 31, 1995, the Company had current
maturities of long-term debt of $67.1 million. Management is currently
evaluating refinancing options related to the Senior Credit Facility which
matures on March 31, 1997, and the deferred interest on the Bridge Note that is
also due on such date.

On March 30, 1996 the Company sold its ownership interest in a physician
practice and as of March 31, 1995 had substantially terminated its physician
practice management services operation. Revenue from these businesses was $17.9
million and the operating loss was $1.3 million in 1995. No significant gain or
loss is anticipated on these transactions. Net proceeds will go towards the
prepayment of the Company's debt payment due April 30, 1996. The Company is
currently evaluating whether or not it should sell its lithotripsy business. No
agreement or understanding currently exists to divest the lithotripsy business,
however. The lithotripsy business had net revenue and pre-tax income of
approximately $53 million and $27 million, respectively, in 1995, and $53
million and $30 million, respectively, in 1994. No assurance can be given as to
whether the business will be sold or the proceeds that may be realized.
Proceeds, if any, realized will be applied to reduce amounts outstanding under
the Company's Senior Credit Facility.

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 partnership minority interest for $9.0 million and the
Company has agreed to acquire the minority interest in one additional
partnership, subject to the consent of the Company's lenders for approximately
$4.2 million in cash or shares of Company common stock.

30
<PAGE> 32

See "Risk Factors -- Health Care Reform Legislation", "Potential
Professional Liability Insurance" and "Changes in Technology."

RISK FACTORS

RECENT OPERATING LOSSES; FUTURE OPERATING RESULTS UNCERTAIN

The Company recorded an operating loss of $283.9 million and a net loss of
$334.1 million for the year ended December 31, 1995, and it has experienced
consecutive quarterly losses in each quarter since the quarter ended March 31,
1995. The Company has only been operating as a combined entity since July 8,
1994, and has incurred cumulative net losses of approximately $456.3 million
(including $404.3 million of non-recurring and special charges) from such date
through December 31, 1995. Numerous factors have affected the Company's
performance and financial condition, including the underperformance of the
Caremark Business from what the Company expected at the time such business was
acquired, combined with the substantial indebtedness that 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. See "Factors Adversely Affecting Recent Operating Results." There can
be no assurance that these factors will not continue to have an adverse effect
on the Company's business, financial condition and results of operations in the
future. In addition, there can be no assurance that the Company can increase
revenues or become profitable or achieve positive cash flow from operations in
future periods. The future operating results of the Company will depend on many
factors, including stabilization of operating revenues and pricing pressures,
the ability of the Company to implement its strategy, the level of competition
in the home health care industry, the ability to integrate the Company's
purchased businesses into its current organization, general economic conditions,
the ability to attract and retain qualified personnel at competitive rates, and
government regulation and reimbursement policies. See "Background" above.

A central component of the Company's business strategy is to focus on
revenue generation. The Company intends to increase revenue in part by
redirecting its marketing efforts towards improving its physician relationships.
The Company has experienced and expects to continue to experience difficulties
with its strategy of improving revenues, as a result of several factors. These
factors include a negative perception of the Caremark Business among certain
physicians as a result of Caremark's guilty plea to federal charges and concerns
among payors and providers as to whether the Company would continue as a going
concern. The Company believes the guilty plea by Caremark to criminal felony
charges in June 1995 has negatively impacted revenue referral sources and
employee morale throughout the Company generally. In addition, Caremark recently
announced a substantial settlement with private payors with whom Caremark did
business before selling the Caremark Business to the Company. The Company
believes the guilty plea and the causes underlying the settlement with private
payors have had an adverse effect on the Company's revenues because of a
reluctance of referral sources to continue to refer patients to the business
formerly owned by Caremark, although it is unable to quantify such effect at
this time. There can be no assurance that these factors will not continue to
have an adverse effect on the Company's business, financial condition and
results of operations in the future. See "Background -- Factors Adversely
Affecting Recent Operating Results."

A further factor causing difficulty with the Company's strategy of
improving revenues is concern among payors and providers as to whether the
Company would continue as a going concern. The Company has experienced inquiries
on this matter directly from payors and providers, and believes that these
concerns have negatively impacted referrals and the ability to secure contracts.
The Company believes that the concerns stem from the Company's adverse operating
results during 1995, public disclosures by the Company related thereto and
questions raised by competitors of the Company and the news media. There can be
no assurance that the Company will be successful in mitigating these concerns or
that they will not continue to have an adverse effect on the Company's business,
financial condition and results of operations in the future.

Implementation of the Company's business strategy could also be affected by
a number of other factors beyond the Company's control, such as loss of
personnel, the response of competitors and regulatory developments. Pronounced
changes are expected to occur in the markets which the Company serves, which may
require adjustments to the Company's strategy. Execution of this strategy has
placed and will continue to

31
<PAGE> 33

place significant demands on the Company's financial and management resources
and there can be no assurance that the Company will be successful in
implementing its strategy, or in responding to ongoing changes in its markets
which may require adjustments to its strategy. If the Company fails to
successively implement its strategy or respond to ongoing changes in its
markets, its business, financial condition and results of operations will be
materially adversely affected.

In 1995, the Company's lithotripsy business had net revenue and pre-tax
income and cash flow from operating activities net of minority interest of
approximately $53 million, $19 million and $25 million, respectively, while the
Company had combined net revenue, pre-tax loss, and negative cash flow from
operations of $602.6 million, $334.2 million and $16.8 million, respectively.
The Company is currently evaluating strategic alternatives concerning its
lithotripsy business which may include a sale of such business, and has engaged
an investment bank for that purpose. No agreement or understanding currently
exists to divest the lithotripsy business. While the sale of the lithotripsy
business could have a material adverse effect on the Company's revenue,
operating results and cash flows, the required application of proceeds to the
Senior Credit Facility could substantially reduce the Company's indebtedness
under the Senior Credit Facility and related interest expense, although no
assurances can be given as to the aggregate amount of such reductions.

SUBSTANTIAL LEVERAGE

The Company incurred a significant amount of long-term debt in connection
with the Caremark Transaction. As of December 31, 1995, the Company's
consolidated long-term indebtedness was $506.4 million and its consolidated
stockholders' equity was $18.0 million. The degree to which the Company is
leveraged could impair the Company's ability to finance, through its own cash
flow or from additional financing, its future operations or pursue its business
strategy and make the Company more vulnerable to economic downturns, competitive
and payor pricing pressures and adverse changes in government regulation. See
"Liquidity and Capital Resources." At December 31, 1995, $387.0 million of the
Company's borrowings were under arrangements with variable interest rates.
Interest under the Senior Credit Facility under which there was $227.2 million
outstanding, is payable currently; interest of $9.8 million on the Bridge Note
as of December 31, 1995 is deferred to March 31, 1997. Any significant increase
in the interest rates on those borrowings would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Liquidity; Need for Additional Financing."

LIQUIDITY; NEED FOR ADDITIONAL FINANCING

On October 13, 1995, the Company and its lenders under the Senior Credit
Facility and the holder of the 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 strategy
and provided a new $25 million credit line. The principal covenants relate to
maintenance of minimum revenues, minimum cash receipts, maximum cash
disbursements and minimum earnings before interest, taxes, depreciation and
amortization. In addition covenants among other things, restrict the ability of
the Company and its subsidiaries to dispose of assets, incur debt, pay
dividends, create liens, make capital expenditures and make certain investments
or acquisitions and otherwise restrict corporate activities and requires that
any excess cash balances, as defined, be applied to prepayment of the debt.
Proceeds from the sale of any of the Company's non-core businesses must be
applied directly to reducing principal indebtedness under the Senior Credit
Facility. The ability of the Company to comply with such provisions may be
affected by events beyond its control. The breach of any of these covenants
could result in a default under the terms of such indebtedness. If the Company
were to default under any of its indebtedness agreements, the lenders to the
Company could, at their option, declare all borrowings immediately due and
payable if any default were not cured prior to any such action by the lenders.
Moreover, there can be no assurance that the Company's cash flow from operations
and current borrowings will be sufficient to meet its short or long-term needs,
and additional sources of funds may be required in future periods. 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. There can be no assurance that the
Company's cash flow from

32
<PAGE> 34

operations will be sufficient to satisfy its obligations upon the maturity of
the new line of credit, the Senior Credit Facility or the Bridge Note. In order
to satisfy such obligations, the Company may engage in a public or private
offering of securities or a sale or merger of the Company. Any such transaction
could result in a substantial dilution in the ownership interest of the existing
stockholders and may have an adverse impact on the market price of the Company's
Common Stock. There can be no assurance that the Company will undertake such a
transaction, the timing thereof or that the Company will be able to obtain any
additional funds or complete such a transaction on terms acceptable to the
Company, if at all. See "Liquidity and Capital Resources."

DEPENDENCE ON KEY PERSONNEL; CHANGES IN MANAGEMENT

The Company is substantially dependent upon the services of its executive
officers, which include Donald J. Amaral, Chief Executive Officer and President
and Richard M. Smith, Chief Financial Officer, and the loss of services of
either of these executives could have a material adverse affect on the Company.
Effective October 16, 1995, Mr. Amaral was named President and Chief Executive
Officer of the Company, succeeding James M. Sweeney, who remains the Company's
Chairman. Mr. Smith was named Chief Financial Officer on August 30, 1995. The
Company has experienced substantial turnover in its senior management group over
the past twelve months and several of the Company's executive officers have been
in their current position for only a limited period of time. The Company's
future growth and success depends, in large part, upon its ability to obtain,
retain and expand its staff of professional personnel. There can be no assurance
that the Company will be successful in its efforts to attract and retain such
personnel.

CERTAIN LITIGATION

The Company is a party to several lawsuits that could, if their outcomes
were unfavorable, have a material adverse effect on its business, financial
condition and results of operations. The Company intends to vigorously defend
itself in these matters. Nevertheless, due to the uncertainties inherent in the
early stages of litigation, the ultimate disposition of the litigation cannot be
presently determined. In addition, even if the ultimate outcome of the claims
pending against the Company and the Company's claims against Caremark are
resolved in favor of the Company, such litigation could entail considerable cost
and the diversion of efforts of management, either of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See Item 3 "Legal Proceedings."

DEPENDENCE ON RELATIONSHIPS WITH THIRD PARTIES

The profitability of the Company's business depends in part on its ability
to establish and maintain close working relationships with managed care
organizations, private and governmental third-party payors, hospitals,
physicians, physician groups, home health agencies, long-term care facilities
and other institutional health providers and insurance companies and large
self-insured employers. A central feature of the Company's business strategy is
to improve its relationships with such third parties in general, and with
physicians in particular. There can be no assurance that the Company will be
successful in improving and maintaining such relationships or that the Company's
existing relationships will be successfully maintained or that additional
relationships will be successfully developed and maintained in existing or
future markets. The loss of such existing relationships or the failure to
continue to develop such relationships in the future could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Background -- Business Strategy."

GOVERNMENTAL REGULATION

The Company is subject to extensive federal and state laws regulating,
among other things, the provision of pharmacy, home care nursing services,
health planning, health and safety, environmental compliance and toxic waste
disposal. The Company is also subject to fraud and abuse and self referral laws
and "anti-kickback" statutes which affect the Company's business relationships
with physicians and other health care providers and referral sources and its
reimbursement from government payors. The Company may be required

33
<PAGE> 35

to obtain certification to participate in governmental payment programs, such as
Medicare and Medicaid. Some states have established certificate of need programs
regulating the establishment or expansion of health care facilities, including
certain of the Company's facilities.

Violations of the federal anti-kickback statute are punishable by criminal
or civil penalties, including imprisonment, fines and exclusion of the provider
from future participation in the Medicare and Medicaid programs. Civil
suspension for anti-kickback violations can also be imposed through an
administrative process, without the imposition of civil monetary penalties. The
failure to obtain, renew or maintain any of the required regulatory approvals or
licenses could adversely affect the Company's business and could prevent the
location involved from offering products and services to patients. The Company's
business, financial condition and results of operations could be materially
adversely affected as a result of any such change or sanctions. The health care
services industry will continue to be subject to intense regulation at the
federal and state levels, the scope and effect of which cannot be predicted. No
assurance can be given that the activities of the Company will not be reviewed
and challenged or that government sponsored health care reform, if enacted, will
not have in a material adverse effect on the Company. See Item 1
"Business -- Government Regulation".

DEPENDENCE ON PAYORS AND REIMBURSEMENT RELATED RISKS

The profitability of the Company depends in large part on reimbursement
provided by third party payors. Since alternate site care is generally less
costly to third party payors than hospital-based care, alternate site providers
have historically benefited from cost containment initiatives aimed at reducing
the costs of hospitalization. However, competition for patients, efforts by
traditional third party payors to contain or reduce health care costs and the
increasing influence of managed care payors such as health maintenance
organizations in recent years have resulted in reduced rates of reimbursement
for services provided by alternate site providers such as the Company. Since
1993, the alternate site infusion industry, including the Company, experienced
severe reductions in the pricing of its products and services as a result of
these trends. See "Background -- Factors Adversely Affecting Recent Operation
Results."

The ability of the Company to collect from third party payors depends on
the timely and accurate filing of claims. In 1995, the Company experienced
significant delays in billing as well as difficulty receiving timely
reimbursements. The delays were caused in part by the inability to efficiently
complete, obtain or process certain claim documentation and in part by lack of
familiarity with the billing systems of its predecessor entities and the
Caremark Business. The passage of time makes missing documentation required for
billing and payment difficult or impossible to obtain or replace, and can delay
claim submission past deadlines imposed by certain payors. Any further
disruptions in those procedures could adversely affect the ability of the
Company to collect its accounts receivable, and that would have an adverse
effect on the Company's business, financial condition and results of operations.

Additionally, managed care payors and even traditional indemnity insurers
increasingly are demanding fee structures and other arrangements providing for
the assumption by health care providers of all or a portion of the financial
risk of providing care (e.g., capitation). Capitation arrangements currently do
not comprise a material component of the Company's revenues. While the Company
believes that short-term pricing pressures are stabilizing, no assurance can be
given that pricing pressures will not continue or that the Company's business,
financial condition and results of operations will not be adversely affected by
such trends. A rapid increase in the percentage of revenue derived from managed
care payors without a corresponding decrease in the Company's operating costs
could have an adverse impact on the Company's profit margins.

In addition to infusion therapy and related services, the Company also
provides lithotripsy services. Lithotripsy is a non-invasive technique that uses
shock waves to disintegrate kidney stones. The Company's lithotripsy operations
have historically contributed a substantial amount of operating income to the
Company. The Company has recently experienced modest downward pricing pressures
in its lithotripsy operations and in 1995, lithotripsy revenues per procedure
declined by approximately 5.5%. These operations may continue to experience
pricing pressures in the future. A material change in the operating performance
of the lithotripsy business could have a material adverse effect on the
consolidated operating results of the Company. In 1993, HCFA released a proposed
rule reducing the rate at which ambulatory surgery centers and certain hospitals

34
<PAGE> 36

would be reimbursed for the technical component of a lithotripsy procedure.
Although the HCFA has not taken any further action, the adoption of this
proposed rule could have a material adverse effect on the Company's lithotripsy
revenues. See "-- Recent Operating Losses; Future Operating Results Uncertain."

CONCENTRATION OF LARGE PAYORS

Managed care organizations have grown substantially in terms of the
percentage of the population that is covered by such organizations and in terms
of their control over an increasing portion of the healthcare economy. Managed
care plans have continued to consolidate to enhance their ability to influence
the delivery of healthcare services. The Company has a number of contractual
arrangements with managed care organizations and other parties. None of these
arrangements individually accounted for more than 5% of the Company's net
revenues in the year ended December 31, 1995; however, ten managed care
customers accounted for approximately 12% of the Company's infusion therapy
revenue and the loss of such customers could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Background -- Factors Adversely Affecting Recent Operation Results."

INTENSELY COMPETITIVE INDUSTRY

The alternate site health care market is highly competitive and is
experiencing both horizontal and vertical consolidation. Some of the Company's
current and potential competitors include (i) integrated providers of alternate
site health care services, (ii) large national hospital chains; (iii) local
providers of multiple products and services for the alternate site health care
market; and (iv) physicians, including physicians with whom the Company
previously had business arrangements. The Company has experienced increased
competition from hospitals and physicians who have sought to increase the scope
of services through their offices, including services similar to those offered
by the Company. Integrated alternate site health care companies and certain of
the Company's other competitors have superior financial, marketing and
managerial resources, size, purchasing power and numerous strategic
relationships with providers, referral sources such as physicians and
traditional indemnity and managed care payors. Moreover, there are relatively
few barriers to entry in the local markets which the Company serves. Local or
regional companies are currently competing in many of the home health care
markets served by the Company and others may do so in the future. The Company
expects its competitors to continue to improve their service offerings and price
competitiveness. The Company also expects its competitors to develop new
strategic relationships with providers, referral sources and payors, which could
result in a rapid and dramatic increase in competition. New services
introductions and enhancements, acquisitions and continued industry
consolidation and the development of strategic relationships by the Company's
competitors could cause a significant decline in sales or loss of market
acceptance of the Company's services or intense price competition, or make the
Company's services noncompetitive. The Company expects to continue to encounter
increased competition in the future that could limit its ability to maintain or
increase its market share. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures will not have a material adverse effect on the Company's
business, financial condition and results of operations. See Item 1
"Business -- Competition." See "Background -- Business Strategy" and "Factors
Adversely Affecting Recent Operation Results."

HEALTH CARE REFORM LEGISLATION

In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would effect
major changes in the health care system, either nationally or at the state
level. Among the proposals under consideration are various insurance market
reforms, forms of price control, expanded fraud and abuse and anti-referral
legislation and further reductions in Medicare and Medicaid reimbursement. The
Company cannot predict whether any of the above proposals or any other proposals
will be adopted, and if adopted, no assurance can be given that the
implementation of such reforms will not have a material adverse effect on the
business of the Company.

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<PAGE> 37

POTENTIAL PROFESSIONAL LIABILITY AND INSURANCE

The services of the Company involves an inherent risk of professional
liability and, with respect to such services, while the Company has not had any
material claims for professional liability asserted against it, no assurance can
be given that such claims will not be asserted in the future. While the Company
maintains insurance consistent with industry practice, there can be no assurance
that the amount of insurance currently maintained by it will satisfy all claims
made against it or that the Company will be able to obtain insurance in the
future at satisfactory rates or in adequate amounts. The Company cannot predict
the effect that any such claims, regardless of their ultimate outcome, might
have on its business or reputation or on its ability to attract and retain
patients.

CHANGES IN TECHNOLOGY

The alternate site infusion business of the Company is dependent on
physicians continuing to prescribe the administration of drugs and nutrients
through intravenous and other infusion methods. Intravenous administration is
often the most appropriate method for treating critically ill patients and is
often the only way to administer proteins and biotechnology drugs. Nonetheless,
technological advances in drug delivery systems, the development of therapies
that can be administered orally and the development of new medical treatments
that cure certain complex diseases or reduce the need for infusion therapy could
adversely impact the business of the Company.

POTENTIAL VOLATILITY OF STOCK PRICE

The market price of the Common Stock is likely to be highly volatile and
may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, new products or new contracts
by the Company or its competitors, conditions and trends in the healthcare
industry, adoption of new accounting standards affecting the healthcare
industry, changes in financial estimates by securities analysts, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stocks of healthcare
companies. These broad market fluctuations may adversely affect the market price
of the Common Stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has often been brought against the company. There can be no assurance that such
litigation will not occur in the future with respect to the Company; such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect upon the
Company's business, financial condition and results of operations.

ITEM 8. FINANCIAL STATEMENTS.

The consolidated financial statements and financial statement schedules of
the Company at December 31, 1995, and 1994 and for the years ended December 31,
1995, 1994 and 1993 and the independent auditors' reports thereon are included
in this report on pages F-1 through F-35.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information with respect to directors and executive officers of the Company
is incorporated herein by reference to the information under the caption
"Management -- Directors and Executive Officers" in the Company's Proxy
Statement for the 1996 Annual Meeting of Stockholders.

36
<PAGE> 38

ITEM 11. EXECUTIVE COMPENSATION.

Information with respect to executive compensation is incorporated herein
by reference to the information under the caption "Management Compensation" in
the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information with respect to security ownership of certain beneficial owners
and management is incorporated herein by reference to the tabulation under the
caption "Voting Securities and Principal Stockholders" in the Company's Proxy
Statement for the 1996 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information with respect to certain relationships and related transactions
is incorporated herein by reference to this information under the caption
"Certain Transactions" in the Company's Proxy Statement for the 1996 Annual
Meeting of Stockholders.

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<PAGE> 39

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this report:

1. Financial Statements. The following consolidated financial statements
of the Registrant and Independent Auditors Report are presented on
pages F-1 through F-29:

Report of Independent Auditors

Consolidated Balance Sheets -- December 31, 1995 and 1994

Consolidated Statements of Operations -- Years ended December 31,
1995, 1994 and 1993

Consolidated Statement of Shareholders Equity -- Three year period
ended December 31, 1995

Consolidated Statements of Cash Flows -- Years ended December 31,
1995, 1994 and 1993

Notes to Consolidated Financial Statements

2. Financial Statement Schedules. The following consolidated financial
statement schedule of the Registrant for the years ended December 31,
1994, 1993 and 1992 is presented following the Notes to the
Consolidated Financial Statements.

Schedule II -- Valuation and Qualifying Accounts

Schedules not listed above have been omitted because they are
not applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or notes thereto.

(b) Reports on Form 8-K

On October 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 the President and Chief Executive Officer.

Included as exhibits are the items listed on the Exhibit Index. The
Registrant will furnish a copy of any of the exhibits listed below
upon payment of $5.00 per exhibit to cover the costs to the
Registrant of furnishing such exhibit.

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<PAGE> 40

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
-------------------------------------------------------------------------------------------
<C> <S>
2.4 -- Asset Sale and Note Purchase Agreement, (the "Asset Purchase
Agreement") among the Registrant, Caremark International Inc. and
Caremark Inc. dated as of January 29, 1995 (Incorporated by
reference to Exhibit C of the Registrant's Current Report on Form
8-K dated April 6, 1995). The exhibits and schedules to the Asset
Purchase Agreement are omitted from this Exhibit. The Company
agrees to furnish supplementally any omitted exhibits or schedule
with the Securities and Exchange Commission.
2.5 -- Agreement and Plan of Merger among the Registrant, CHC Acquisition
Corp. and Lincare Holdings Inc., (the "Lincare Merger Agreement")
dated as of April 17, 1995 (Incorporated by reference to Exhibit B
of the Registrant's Current Report on Form 8-K dated May 2, 1995).
The exhibits and schedules to the Lincare Merger Agreement are
omitted from this Exhibit. The Company agrees to furnish
supplementally any omitted exhibit or schedule with the Securities
and Exchange Commission.
3.1 -- Certificate of Incorporation of Registrant, as amended through May
11, 1994 (Incorporated by reference to Exhibit 3.1 of Registration
No. 33-53957 on Form S-4).
3.2 -- Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 of
Registration No. 33-53957 on Form S-4).
4.1 -- Form of Common Stock Certificate for the Registrant's common stock,
$.001 par value per share. (Incorporated by reference to Exhibit
4.1 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.1 -- Amended and Restated Credit Agreement dated as of February 10,
1995, by and among Curaflex, T2, HealthInfusion, Medisys, and HMSS
as Co-Borrowers, Toronto Dominion (Texas), Inc., as Agent (the
"Amended Credit Agreement") (Incorporated by reference to Exhibit
10.1 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994). The exhibits and schedules to the Amended
Credit Agreement are omitted from this Exhibit. The Company agrees
to furnish supplementally any omitted exhibit or schedule to the
Securities and Exchange Commission upon request.
10.2 -- Form of Employment Agreement between the Registrant and Charles A.
Laverty (Incorporated by reference to Exhibit 10.1 of Registration
No. 33-53957 on Form S-4).
10.3 -- Form of Severance/Non-Compete Agreement between the Registrant and
Miles E. Gilman (Incorporated by reference to Exhibit 10.2 of
Registration No. 33-53957 on Form S-4).
10.4 -- Form of Severance/Non-Compete Agreement between the Registrant and
William J. Brummond (Incorporated by reference to Exhibit 10.3 of
Registration No. 33-53957 on Form S-4).
10.5 -- Form of Severance/Non-Compete Agreement between the Registrant and
Tommy H. Carter (Incorporated by reference to Exhibit 10.4 of
Registration No. 33-53957 on Form S-4).
10.6 -- Form of Indemnification Agreement between the Registrant and each
of the Registrant's directors and certain executive officers.
(Incorporated by reference to Exhibit 10.6 of the Registrant's Form
10-K for the year ended December 31, 1994).
</TABLE>

39
<PAGE> 41

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
-------------------------------------------------------------------------------------------
<C> <S>
10.7 -- Registrant's 1994 Stock Option/Stock Issuance Plan and related
forms of agreements (Incorporated by reference to Exhibit 10.15 of
Registration No. 33-53957 on Form S-4).
10.8 -- Registrant's Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.16 of Registration No. 33-53957 on Form
S-4).
10.9 -- 401(k) Plan of T2 dated December 8, 1989 (Incorporated herein by
reference to Exhibit 10(s) of T2 Annual Report on Form 10-K for the
fiscal year ended September 30, 1989, filed with the Commission on
or about December 29, 1988.
10.10 -- 1988 Stock Option Plan of T2, as amended and restated as of July
31, 1990 and as further amended as of (i) August 20, 1991; (ii)
November 12, 1991; and (iii) July 6, 1992 (Incorporated by
reference to Exhibit 10.18 of Registration No. 33-53957 on Form
S-4).
10.11 -- Curaflex 1989 Stock Option Plan (Incorporated by reference to
Exhibit 10.53 of Registration No. 33-53957 on Form S-4).
10.12 -- Curaflex Amended 1990 Stock Option Plan (Incorporated by reference
to Exhibit 10.54 of Registration No. 33-53957 on Form S-4).
10.13 -- Curaflex Directors' Nonqualified Stock Option Plan (Incorporated by
reference to Exhibit 10.59 of Registration No. 33-53957 on Form
S-4).
10.14 -- Clinical Homecare Ltd. 1990 Incentive Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.61 of Registration No.
33-53957 on Form S-4).
10.15 -- Clinical Homecare Ltd. 1990 Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.62 of Registration No.
33-53957 on Form S-4).
10.16 -- 1989 Stock Option Plan of Medisys (Incorporated by reference to
Exhibit 10.85 of Registration No. 33-53957 on Form S-4).
10.17 -- Form of Non-Plan Option Agreement of Medisys (Incorporated by
reference to Exhibit 10.86 of Registration No. 33-53957 on Form
S-4).
10.18 -- Credit Agreement among Coram Healthcare Corporation, Coram, Inc.,
the Lenders named therein and Chemical Bank, as Administrative
Agent, Collateral Agent and Fronting Bank (the "Senior Credit
Facility") dated as of April 6, 1995. (Incorporated by reference to
Exhibit D of the Registrant's Current Report on Form 8-K dated
April 6, 1995). The exhibits and schedules to the Senior Credit
Facility are omitted from this Exhibit. The Company agrees to
furnish supplementally any omitted exhibit or schedule to the
Securities and Exchange Commission.
10.19 -- First Amendment and Waiver to the Credit Agreement, dated as of
August 9, 1995, together with exhibits hereto, among the
Registrant, Coram Inc., each Subsidiary Guarantor (as defined
therein), the Financial Institutions party thereto (as defined
therein), and Chemical Bank as Agent. (Incorporated by reference to
Exhibit 10.19 of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995). Certain exhibits and
schedules of this Exhibit have been omitted. The Registrant agrees
to furnish supplementally any omitted schedule or exhibit to the
Securities and Exchange Commission.
</TABLE>

40
<PAGE> 42

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
-------------------------------------------------------------------------------------------
<C> <S>
10.20 -- Second Amendment to the Credit Agreement dated as of September 7,
1995, by and among the Registrant, Coram Inc., each Subsidiary
Guarantor (as defined therein), the Financial Institutions party
thereto (as defined therein), and Chemical Bank as Agent.
(Incorporated by reference to Exhibit 10.20 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995). Certain exhibits and schedules of this Exhibit have been
omitted. The Registrant agrees to furnish supplementally any
omitted schedule or exhibit to the Securities and Exchange
Commission.
10.21 -- Third Amendment and Limited Waiver to the Credit Agreement, dated
as of September 29, 1995, by and among the Registrant, Coram Inc.,
each Subsidiary Guarantor (as defined therein), the Financial
Institutions party thereto (as defined therein), and Chemical Bank
as Agent (Incorporated by reference to Exhibit 10.21 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995). Certain exhibits and schedules of this Exhibit
have been omitted. The Registrant agrees to furnish supplementally
any omitted schedule or exhibit to the Securities and Exchange
Commission.
10.22 -- Fourth Amendment and Limited Waiver to the Credit Agreement and
First Amendment to Security Documents dated as of October 13, 1995,
together with selected exhibits thereto, by and among the
Registrant, Coram Inc., each Subsidiary Guarantor (as defined
therein), the Financial Institutions Party thereto (as defined
therein) and Chemical Bank as Agent (Incorporated by reference to
the Company's Current Report on Form 8-K as filed October 24,
1995).
10.23 -- Warrant Agreement dated as of October 13, 1995, among the
Registrant, Coram Inc., and the other parties specified therein
(Incorporated by reference to the Company's Current Report on Form
8-K as filed October 24, 1995).
10.24 -- Amendment and Limited Waiver to Bridge Securities Purchase
Agreement, dated as of October 13, 1995, by and among the
Registrant, Coram Inc., and Donaldson, Lufkin & Jenrette.
(Incorporated by reference to Exhibit 10.24 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995). Certain exhibits and schedules of this Exhibit have been
omitted. The Registrant agrees to furnish supplementally any
omitted schedule or exhibit to the Securities and Exchange
Commission.
10.25 -- Form of Employment Agreement between the Registrant and Donald J.
Amaral. (Incorporated by reference to Exhibit 10.25 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
10.26 -- Securities Purchase Agreement ("Securities Purchase Agreement") and
Form of Subordinated Bridge Note, dated as of April 6, 1995, among
Coram Inc., Coram Funding, Inc. and the Registrant (Incorporated by
reference to Exhibit E of the Registrant's Current report on Form
8-K dated April 6, 1995). The exhibits and schedules to the
Securities Purchase Agreement are omitted from this Exhibit. The
Registrant agrees to furnish supplementally any omitted exhibit or
schedule to the Securities and Exchange Commission.
22.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Ernst & Young LLP.*
23.2 -- Consent of Deloitte & Touche LLP.
</TABLE>

41
<PAGE> 43

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
-------------------------------------------------------------------------------------------
<C> <S>
23.3 -- Consent of KPMG Peat Marwick LLP.
23.4 -- Consent of Arthur Andersen LLP.
23.5 -- Consent of Coopers & Lybrand LLP.
27 -- Financial Data Schedule.
</TABLE>

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

* Filed herewith.

42
<PAGE> 44

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on June
5, 1996.

CORAM HEALTHCARE CORPORATION

By: /s/ RICHARD M. SMITH

------------------------------
Richard M. Smith

Chief Financial Officer

43
<PAGE> 45

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

<TABLE>
<S> <C>
Reports of Independent Auditors....................................................... F-2
Consolidated Balance Sheets -- As of December 31, 1995 and 1994....................... F-7
Consolidated Statements of Operations -- Years Ended December 31, 1995, 1994 and
1993................................................................................ F-8
Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1995,
1994 and 1993....................................................................... F-9
Consolidated Statements of Cash Flows -- Years Ended December 31, 1995, 1994 and
1993................................................................................ F-10
Notes to Consolidated Financial Statements............................................ F-12
Schedule II -- Valuation and Qualifying Accounts...................................... F-35
</TABLE>

F-1

<PAGE> 46

REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
Coram Healthcare Corporation

We have audited the accompanying consolidated balance sheets of Coram
Healthcare Corporation as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Coram Healthcare Corporation at December 31, 1995 and 1994, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

We also have audited, as to combination only, the accompanying consolidated
statements of operations, stockholders' equity, and cash flows of Coram
Healthcare Corporation for the year ended December 31, 1993. As described in
Note 1, these statements have been combined from the financial statements of
T(2) Medical, Inc., Curaflex Health Services, Inc., HealthInfusion, Inc., and
Medisys, Inc. (which are not presented separately herein). The report of
Deloitte & Touche LLP, as it relates to T(2) Medical, Inc., as of September 30,
1993, and for the period ended September 30, 1993, and the reports of KPMG Peat
Marwick LLP, as it relates to Curaflex Health Services, Inc., Arthur Andersen
LLP, as it relates to HealthInfusion, Inc., and Coopers & Lybrand, as it relates
to Medisys, Inc. each for the year ended December 31, 1993, who have audited
these statements appear elsewhere herein. In our opinion, the accompanying
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1993 have been properly combined on the basis
described in Note 1.

We also audited the adjustments described in Note 1 that were applied to
present the statements of operations, stockholders' equity, and cash flows, of
T(2) Medical, Inc. for the year ended December 31, 1993. In our opinion, such
adjustments are appropriate and have been properly applied.

ERNST & YOUNG LLP

Denver, Colorado

March 31, 1996

F-2
<PAGE> 47

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of T(2) Medical, Inc.

We have audited the accompanying consolidated balance sheet of T(2)
Medical, Inc. and its subsidiaries (the "Company") as of September 30, 1993, and
the related consolidated statements of income, stockholders equity, and cash
flows for each of the two years in the period ended September 30, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of T(2) Medical, Inc. and
subsidiaries at September 30, 1993, and the results of their operations and
their cash flows for each of the two years in the period ended September 30,
1993 in conformity with generally accepted accounting principles.

As discussed in Note 12, the Company is a defendant in civil suits filed on
behalf of individuals claiming they have purchased Company stock at various
times during the time period from December 2, 1991 through August 12, 1993. The
ultimate outcome of the litigation cannot presently be determined. Accordingly,
no provision for any loss that may result upon resolution of these suits has
been made in the accompanying consolidated financial statements.

DELOITTE & TOUCHE LLP

Atlanta, Georgia
November 17, 1993

(December 23, 1993 as to Note 17)

F-3
<PAGE> 48

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Curaflex Health Services, Inc.:

We have audited the accompanying consolidated statements of operations,
common stockholders' equity and cash flows and financial statement schedule of
Curaflex Health Services, Inc. and subsidiaries for the year ended December 31,
1993. The consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operating and cash
flows of Curaflex Health Services, Inc. and subsidiaries for the year ended
December 31, 1993 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG PEAT MARWICK LLP

Ontario, California

February 28, 1994

F-4
<PAGE> 49

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders of
HealthInfusion, Inc. and subsidiaries:

We have audited the consolidated statements of operations, stockholders'
equity and cash flows of HealthInfusion, Inc. (a Florida corporation) and
Subsidiaries for the year ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
HealthInfusion, Inc. and subsidiaries for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Miami, Florida,

March 18, 1994

F-5
<PAGE> 50

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and
Board of Directors of
Medisys, Inc.:

We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows of Medisys, Inc. and Subsidiaries for the
year ended December 31, 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Medisys, Inc. and Subsidiaries for the year ended December 31,
1993 in conformity with generally accepted accounting principles.

As discussed in note 1 to the consolidated financial statements of Medisys
Inc., and Subsidiaries, in 1993 the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."

COOPERS & LYBRAND LLP

Minneapolis, Minnesota

March 27, 1994

F-6
<PAGE> 51

CORAM HEALTHCARE CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- --------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents........................................... $ 26,735 $ 13,588
Restricted cash..................................................... 25,349 6,458
Investment in available-for-sale securities......................... -- 16,546
Accounts receivable, net of allowance of $63,839 and $17,990........ 153,825 109,087
Inventories......................................................... 17,798 11,864
Prepaid taxes....................................................... 9,975 11,510
Deferred income taxes, net.......................................... 10,428 31,893
Other current assets................................................ 11,935 7,251
--------- --------
Total current assets........................................ 256,045 208,197
Property and equipment, net........................................... 29,276 25,902
Joint ventures and other assets....................................... 31,390 6,262
Deferred income taxes non-current..................................... 183 556
Other deferred costs.................................................. 23,266 2,284
Goodwill, net of accumulated amortization of $36,915 and $27,839...... 347,689 333,238
--------- --------
Total assets.......................................................... $ 687,849 $576,439
========= ========
LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.................................................... $ 63,839 $ 27,098
Current maturities of long-term debt................................ 67,099 5,911
Deferred income taxes............................................... 10,428 5,788
Liabilities for securities sold under agreement to repurchase....... -- 7,430
Reserve for litigation.............................................. 4,588 22,720
Accrued merger and restructuring.................................... 27,392 43,594
Other accrued liabilities........................................... 45,277 11,845
--------- --------
Total current liabilities................................... 218,623 124,386
Long-term debt, including revolving lines of credit................... 439,309 119,726
Minority interest in consolidated joint ventures...................... 7,018 6,599
Other liabilities..................................................... 4,676 1,945
Deferred income taxes non-current..................................... 183 1,522
Stockholders' equity:
Preference stock, par value $.001, authorized 10,000, none issued... -- --
Common stock, par value $.001, authorized 75,000 shares, issued
40,369 in 1995 and 38,964 in 1994................................ 40 39
Additional paid-in capital.......................................... 370,876 341,328
Unrealized loss on available-for-sale securities.................... -- (279)
Retained earnings (deficit)......................................... (352,876) (18,827)
--------- --------
Total stockholders' equity.................................. 18,040 322,261
--------- --------
Total liabilities and stockholders' equity............................ $ 687,849 $576,439
========= ========
</TABLE>

See accompanying notes.

F-7
<PAGE> 52

CORAM HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Net revenue.............................................. $ 602,585 $ 450,496 $462,304
Cost of service.......................................... 459,710 313,182 285,023
--------- --------- ---------
Gross profit............................................. 142,875 137,314 177,281
Operating expenses:
Selling, general and administrative expenses........... 133,037 81,907 75,706
Provision for estimated uncollectible accounts......... 68,912 36,817 29,751
Amortization of goodwill............................... 15,307 8,971 7,824
Charge for long-lived assets and acquired receivables:
Goodwill and other long-lived assets................ 166,373 -- --
Valuation of acquired receivables................... 37,000 -- --
Provision for litigation settlements................... -- 23,220 --
Merger expenses........................................ -- 28,500 2,868
Restructuring costs, net............................... 6,158 95,500 1,600
--------- --------- ---------
Total operating expenses....................... 426,787 274,915 117,749
--------- --------- ---------
Operating income (loss).................................. (283,912) (137,601) 59,532
Other income (expense):
Interest income..................................... 1,531 2,469 3,746
Interest expense.................................... (49,741) (7,414) (3,916)
Equity in net income of unconsolidated joint
ventures.......................................... 1,592 800 1,357
Gain (loss) on sales of property and equipment...... (50) (255) 5,359
Other income (expense), net......................... (3,659) 320 1,146
--------- --------- ---------
Income (loss) before income taxes and minority
interests.............................................. (334,239) (141,681) 67,224
Provision (benefit) for income taxes................ (11,154) (26,231) 28,848
Minority interest in net income of consolidated
joint ventures.................................... 10,964 12,622 9,715
--------- --------- ---------
Net income (loss)........................................ $(334,049) $(128,072) $ 28,661
========= ========= =========
Net income (loss) per common share....................... $ (8.39) $ (3.32) $ 0.76
========= ========= =========
Weighted average common shares outstanding............... 39,802 38,633 37,778
========= ========= =========
</TABLE>

See accompanying notes.

F-8
<PAGE> 53

CORAM HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
COMMON STOCK ADDITIONAL STOCK AVAILABLE RETAINED
--------------- PAID-IN PURCHASE FOR-SALE EARNINGS
SHARES AMOUNT CAPITAL NOTE SECURITIES (DEFICIT) TOTAL
------ ------ ---------- -------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993.................. 36,112 $ 36 $ 303,411 $ (860) $ -- $ 91,927 $ 394,514
Issuance of common stock, net........... 1,681 2 24,979 -- -- -- 24,981
Dividends............................... -- -- -- -- -- (5,012) (5,012)
Distribution of S Corporation
earnings............................. -- -- -- -- -- (4,272) (4,272)
Net income.............................. -- -- -- -- -- 28,661 28,661
------ --- -------- ------ ------ --------- ---------
Balance, December 31, 1993................ 37,793 38 328,390 (860) -- 111,304 438,872
Issuance of common stock and warrants,
net.................................. 1,171 1 12,938 -- -- -- 12,939
Unrealized loss......................... -- -- -- -- (279) -- (279)
Proceeds from stock purchase note....... -- -- -- 860 -- -- 860
Dividends............................... -- -- -- -- -- (2,059) (2,059)
Net loss................................ -- -- -- -- -- (128,072) (128,072)
------ --- -------- ------ ------ --------- ---------
Balance, December 31, 1994................ 38,964 39 341,328 -- (279) (18,827) 322,261
Issuance of common stock and warrants,
net.................................. 1,405 1 29,548 -- -- -- 29,549
Elimination of unrealized loss.......... -- -- -- -- 279 -- 279
Net loss................................ -- -- -- -- -- (334,049) (334,049)
------ --- -------- ------ ------ --------- ---------
Balance, December 31, 1995................ 40,369 $ 40 $ 370,876 $ -- $ -- $(352,876) $ 18,040
====== === ======== ====== ====== ========= =========
</TABLE>

See accompanying notes.

F-9
<PAGE> 54

CORAM HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $(334,049) $(128,072) $ 28,661
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Provision for estimated uncollectible accounts................................ 68,912 36,817 29,751
Depreciation and amortization................................................. 47,322 22,871 18,983
Charge for long-lived assets and acquired receivables:
Goodwill and long-lived assets.............................................. 166,373 -- --
Valuation of acquired receivables........................................... 37,000 -- --
Merger/restructuring benefit.................................................. (19,632) -- --
Merger/restructuring costs not requiring cash................................. 6,600 50,100 --
Litigation settlements not requiring cash..................................... 1,372 5,520 --
Deferred income taxes, net.................................................... 25,140 (26,943) 377
Minority interest in net income of consolidated joint ventures, net........... 2,455 (978) 1,240
(Gain) loss on sales of property and equipment................................ 50 255 (5,359)
(Gain) loss on sales of investments, net...................................... 3,483 (177) (115)
Equity in net income of unconsolidated joint ventures, net.................... (1,186) 562 406
Other, net.................................................................... 919 675 (115)
Change in assets and liabilities, net of acquisitions:
Increase in accounts receivable............................................. (41,930) (20,597) (17,683)
Increase in prepaid expenses, inventories and other assets.................. (13,282) (13,462) (8,360)
Increase (decrease) in current and other liabilities........................ 62,798 (3,112) (3,834)
(Decrease) increase in accrued merger and restructuring..................... (10,996) 37,787 --
(Decrease) increase in reserve for litigation............................... (18,132) 17,200 --
--------- --------- --------
Net cash provided (used) by operating activities........................ (16,783) (21,554) 43,952
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of securities, net...................................................... 16,592 16,207 35,785
Proceeds from sales of long term assets....................................... 16,839 2,150 5,439
Purchase of property and equipment............................................ (7,329) (8,950) (14,701)
Payments for acquisitions of businesses, net of cash acquired................. (241,420) (61,450) (60,364)
Proceeds from long term receivables........................................... 1,229 -- --
Capital contributions to unconsolidated joint ventures........................ (1,333) (3,945) (11,897)
Distributions of S corporation earnings....................................... -- -- (4,272)
--------- --------- --------
Net cash used by investing activities......................................... (215,422) (55,988) (50,010)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net of repurchases and issuance costs.................. 10,387 9,612 1,519
Borrowings on lines of credit................................................. 15,300 120,433 --
Repayments of lines of credit................................................. (123,420) (49,500) --
Securities sold under agreements to repurchase................................ (7,430) 7,430 --
Debt borrowings............................................................... 588,980 2,180 62,941
Repayment of debt............................................................. (218,851) (11,655) (50,823)
Cash paid for debt financing.................................................. (19,614) (3,259) --
Cash dividends paid........................................................... -- (2,059) (5,012)
--------- --------- --------
Net cash provided by financing activities............................... 245,352 73,182 8,625
--------- --------- --------
NET INCREASE (DECREASE) IN CASH................................................. 13,147 (4,360) 2,567
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 13,588 17,948 15,381
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 26,735 $ 13,588 $ 17,948
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for :
Interest.................................................................... $ 17,357 $ 9,596 $ 3,868
========= ========= ========
Income taxes................................................................ $ (30,221) $ 16,692 $ 32,183
========= ========= ========
</TABLE>

F-10
<PAGE> 55

CORAM HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of stock in connection with acquisitions........................... $ 6,897 $ 4,022 $ 23,331
========= ========= ========
Capital lease obligations for purchase of property and equipment............ $ -- $ -- $ 1,700
========= ========= ========
Interest on payment-in-kind notes and deferred interest..................... $ 13,892 $ -- $ --
========= ========= ========
Issuance of notes in connection with acquisition of Caremark Business....... $ 100,000 $ -- $ --
========= ========= ========
Conversion of long term debt to common stock................................ $ 382 $ -- $ --
========= ========= ========
Note payable incurred for commitment fee on Senior Credit Facility.......... $ 2,350 $ -- $ --
========= ========= ========
Warrants issued in connection with debt financing........................... $ 9,793 $ -- $ --
========= ========= ========
Common stock issued for consulting services................................. $ 1,479 $ -- $ --
========= ========= ========
Warrants issued to settle litigation........................................ $ 2,520 $ 500 $ --
========= ========= ========
</TABLE>

See accompanying notes.

F-11
<PAGE> 56

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Business Activity. Coram Healthcare Corporation and its subsidiaries
("Coram" or the "Company") are primarily engaged in providing alternate site
infusion therapy and related services throughout the United States. Other
services offered by the Company include the provision of lithotripsy and other
non-intravenous infusion products and services.

The operations of the Company commenced on July 8, 1994, as a result of a
merger of T(2) Medical, Inc. ("T(2)"), Curaflex Health Services, Inc.
("Curaflex"), HealthInfusion, Inc. ("HealthInfusion") and Medisys, Inc.
("Medisys") (collectively, the "Merged Entities"). Each of these companies
became and are now wholly owned subsidiaries of the Company. Each outstanding
share of the Merged Entities was converted, at varying exchange rates, into
shares of the Company's common stock, resulting in the issuance of 38.6 million
shares of Coram common stock. The transaction was accounted for as a pooling of
interests.

The Company has made a number of acquisitions since that time, the most
significant of which was the acquisition of substantially all of the assets of
the alternate site infusion business and certain related businesses
(collectively, the "Caremark Business") of Caremark Inc. in April 1995. See Note
3 for further information.

Recent Operations and Financial Condition. Most of the Company's revenues
are from alternate site infusion therapy and virtually all of the Company's
revenues are derived from third-party payors such as private insurers, managed
care organizations and governmental payors. The increasingly and highly
competitive market combined with the efforts by third party payors to contain or
reduce healthcare costs contributed to reduced reimbursement rates for services.
These factors are likely to continue, at least in the near term, and may have an
adverse effect on the Company's operations.

During 1995, the Company incurred substantial indebtedness to acquire the
Caremark Business. The Company experienced a substantial decline in revenues
following the acquisition of the Caremark Business, and in both 1995 and 1994
the Company experienced substantial losses. In June 1995 the Company was unable
to meet its debt compliance covenants. In October 1995, the Company concluded a
major restructuring of the terms of its debt after completion of a formal
business plan. The business strategy is focused on stabilizing and increasing
revenues, cost reductions leading to improved operating margins, quality
control, and improved cash collections. The Company is also reviewing the
potential sale of non-core businesses to generate funds to reduce debt. The
Company believes that it has adequate working capital to meet its cash
requirements through March 31, 1997, when its Senior Credit Facility terminates,
and believes that adequate working capital and long-term financing will be
available after that date. However, the failure to achieve the objectives set
forth in the business plan could have a material adverse effect on the Company's
financial position, results of operations and liquidity.

Goodwill and Other Long-Lived Assets. Goodwill represents the excess of the
purchase price over the fair value of net assets acquired through business
combinations accounted for as purchases and is amortized on a straight-line
basis over the expected periods to be benefited. As of October 1, 1995, the
remaining useful lives for goodwill were reduced to 25 years because of
uncertainties in its business environment and recent adverse operating results.
Prior to that date, goodwill was amortized over useful lives ranging from 30 to
40 years. The change in estimated useful lives increased amortization expense by
approximately $1.3 million in 1995. The Company believes that the home health
care market in which it operates provides significant long-term business
opportunities over an indeterminate period. However, it also recognizes that
competitive, legislative and technological changes could affect the value of the
relationships that its recorded goodwill represents. The timing and extent of
the effect, if any, of these uncertainties beyond that experienced by the
Company to date cannot be determined at this time. Recent adverse operating
results are not indicative of operating results that the Company expects in the
future, but when considered with the uncertainties in its business environment,
caused the Company to conclude that a shortening of the estimated useful lives
of goodwill to 25 years was appropriate.

F-12
<PAGE> 57

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1995 the Company implemented Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." 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 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.

The Company believes that its goodwill represents its
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. The Company reviews
goodwill and other long-lived assets for impairment separately for each of its
major businesses, principally home infusion and lithotripsy.

Within the home infusion business, the review is done separately for each
of the 51 market areas in which the Company operates its 101 branches. Market
areas are currently the lowest level for which there are cash flows that are
largely independent of the cash flows of other parts of the business. The
Company had not allocated goodwill and other identifiable intangible assets to
its branches or market areas at the time such assets were acquired, and because
of numerous acquisitions and branch consolidations, it was not practicable to
perform such allocation as of September 30, 1995. Because the Company believes
that its goodwill is closely tied to the revenue generating capacity of each
market area, it has allocated the goodwill to each market area at September 30,
1995 in proportion to the revenues of the market area. The Company believed that
this was the most reasonable and objective basis available at that date. The
allocation of goodwill was made using forecasted 1996 revenues. Other
identifiable intangible assets were allocated in the same manner.

To estimate undiscounted cash flows to determine whether there is any
potential impairment of the goodwill and other long-lived assets, cash flows for
each market area were based on forecasted 1996 cash flows projected forward over
the 25 year life of the goodwill. The Company had not prepared budgets or
forecasts for any periods beyond 1996, and had concluded that in its current
environment the 1996 forecast was the best estimate, based on reasonable and
supportable assumptions and projections, of expected cash flow over the goodwill
amortization period. If potential impairment was indicated, the goodwill and
other long-lived assets in that market area were written down to estimated
market value. Market value at September 30, 1995 was estimated based on a
multiple of cash flows, which is a similar methodology to discounted cash flows.

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

F-13
<PAGE> 58

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 accounts receivable
depends, in part, on its ability to adequately supervise and train personnel in
billing and collections, and minimize losses related to branch consolidations
and system changes. In the quarters ended September 30, 1995 and 1994, the
Company recorded as part of its quarterly provision for estimated uncollectible
accounts, charges of $20.0 million and $17.3 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 accounts receivable.

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,
de-emphasize 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 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 that 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, 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.
Certain documentation necessary for billing and payment was not obtained timely
primarily because of delays related to the physical transfer of documents
between branch locations during the consolidation as well as delays caused by
changes in personnel responsible for working with individual patient files. The
passage of time makes missing documentation required for billing and 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

F-14
<PAGE> 59

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

write-offs than 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 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 3, Caremark Business Acquisition, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Background -- Provision for Uncollectible Accounts".

Concentration of Credit Risks. Financial instruments that potentially
subject the company to concentrations of credit risk consist primarily of cash
and accounts receivable. As of December 31, 1995, approximately 35% of cash is
deposited with the lead bank under the Company's Senior Credit Facility (see
Note 6). No other single institution represented greater than 10% of total cash.
Amounts are generally in excess of the FDIC insurance limits but credit risk is
mitigated as deposits are kept only with high credit quality institutions.
Accounts receivable are primarily from third party payors, including private
insurers, managed care organizations and state and federal governmental payors
such as Medicare and Medicaid, and are unsecured. Credit risk is mitigated by
the large number of entities that comprise the third party payor base and credit
evaluations of patients and third party payors.

Fiscal Year. In conjunction with the merger, the Company adopted a December
31 year end. While Curaflex, HealthInfusion and Medisys previously had year ends
of December 31, T(2) prepared its financial statements on the basis of a
September 30 fiscal year end. The restated financial statements for 1993 include
previously reported T(2) amounts adjusted to conform to a December 31 year end.
The adjustments made to conform T(2) previously reported amounts reflect the
inclusion and exclusion, as necessary, of T(2) results of operations for the
quarters ended December 31, 1993 and 1992. Accordingly, T(2)'s results of
operations as previously reported have been adjusted as follows (in thousands):

<TABLE>
<CAPTION>
NET NET
INCOME REVENUE
------- --------
<S> <C> <C>
As previously reported -- fiscal year ended September 30,
1993.......................................................... $41,468 $273,199
As adjusted to conform to the year ended December 31, 1993...... $35,504 $265,090
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation. The consolidated
financial statements include the accounts of Coram, its subsidiaries and joint
ventures and partnerships in which ownership is 50% or greater and considered to
be under the control of the Company. All material intercompany accounts and
transaction balances have been eliminated in consolidation. The Company uses the
equity method of accounting to account for investments in entities in which it
exhibits significant influence, but not control, and has an ownership interest
of 20% to 50%. The cost method is used to account for investments in which
ownership is less than 20%. Certain amounts in the 1994 financial statements
have been reclassified to conform to the 1995 presentation. The effects are not
material.

Revenue Recognition. Revenue is recognized as services are rendered or
products are delivered. Substantially all of the Company's revenue is billed to
third-party payors, including insurance companies, managed care plans,
governmental payors and contracted institutions. Revenue is recorded net of
contractual adjustments and related discounts. Contractual adjustments represent
estimated differences between service revenue at established rates and amounts
expected to be realized from third-party payors under contractual agreements.

F-15
<PAGE> 60

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management fees, which are collected from entities managed by the Company,
are based principally on a percentage of the entities' revenue. Management fees
were approximately $7.6 million, $28.8 million and $51.6 million in 1995, 1994
and 1993, respectively.

Cash and Cash Equivalents. Cash equivalents include all highly liquid
investments with an original maturity of three months or less. A portion of the
Company's cash balances were restricted as to their use including cash of
partnerships that may only be used for partnership operations and, in 1995, cash
collected on behalf of Caremark. The restricted balances totaled approximately
$25.3 million and $6.5 million at December 31, 1995 and 1994, respectively.

Provision for Estimated Uncollectible Accounts. The Company records a
provision for estimated uncollectible accounts for the portion of recognized net
revenues which it estimates may not be ultimately collected. The provision
includes differences between recorded net revenues and expected collections from
third party payors and patients. The provision and related allowance are
adjusted periodically, based upon the Company's evaluation of current collection
experience and other trends and changes in assessment of realizable value. See
Note 1.

Inventories. Inventories, consisting primarily of pharmaceuticals and
medical supplies, are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.

Property and Equipment. Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of one to 10 years for machinery and equipment, furniture
and fixtures and vehicles, and 30 to 31.5 years for buildings. Leasehold
improvements are amortized over the shorter of the lease term or estimated
useful lives of the related assets.

Goodwill and Other Long-Lived Assets. See Note 1.

Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates. A
material portion of the Company's assets is goodwill. See Note 1, "Goodwill and
Other Long-Lived Assets."

Per Share Data. Per share data have been computed by dividing net income or
loss by the weighted average number of common and common equivalent shares,
dilutive stock options, and warrants outstanding during the period. The weighted
average calculation also includes common shares issuable. Fully diluted per
share calculations are not presented in the financial statements because the
assumed conversions of convertible debt and any additional incremental shares
would be either antidilutive or cause de minimis dilution.

3. ACQUISITIONS AND RESTRUCTURING

Acquisition of Caremark Business. As further discussed in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Background -- Acquisition of Caremark Business", 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.

F-16
<PAGE> 61

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
receivable) 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 Note 1, "Goodwill and
Other Long-Lived Assets" and "Management's Analysis of Financial Condition and
Results of Operations -- Background -- "Goodwill and Other Long-Lived Assets."
At the same time, 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
complaint against Caremark.

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 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>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Net revenue.................................................. $ 698,685 $ 923,500
========= =========
Net loss..................................................... $(344,207) $(179,809)
========= =========
Net loss per share........................................... $ (8.65) $ (4.65)
========= =========
</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. The pro-forma financial information does not reflect the
determination as of September 1995 to record a loss as impairment of long-lived
assets, substantially all of which related to goodwill and other assets recorded
as part of the acquisition of the Caremark Business or to reduce the valuation
of the acquired accounts receivable.

Other Acquisitions. On September 12, 1994, the Company acquired all of the
capital stock of H.M.S.S., Inc. ("HMSS"), an alternate site infusion therapy
provider. The acquisition was accounted for by the purchase method of
accounting, and accordingly, the results of operations of HMSS have been
included in the

F-17
<PAGE> 62

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accompanying consolidated financial statements subsequent to the date of
acquisition. The acquisition was not material to the Company's financial
position or results of operations.

The Company has continued to make acquisitions, primarily of certain
physician owned entities. During the year ended December 31, 1995, the Company
completed nine such acquisitions totaling $25 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.

During 1994, T(2) completed 55 acquisitions totaling $22.8 million which
were accounted for as purchases. Individually and in the aggregate, the
acquisitions were not considered material to the Company's financial position or
results of operations. During 1993, the Merged Entities completed numerous
acquisitions. Four acquisitions accounted for as poolings of interests are
reflected in the accounts and operations of the Merged Entities for all periods
presented. Fifteen acquisitions accounted for as purchases are included in the
operations of the Merged Entities subsequent to the dates of acquisitions.

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
$8.9 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 $6.7 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. Payments made in 1995 were $0.7 million.

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 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 costs associated with each
component of the Coram Consolidation Plan, which the Company believes to be
non-recurring, recorded in the third quarter of

F-18
<PAGE> 63

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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>

Merger costs of $28.5 million consist of executive severance payments of
$11.8 million for payments directly related to the merger based on the forms of
the respective employment agreements, including covenants not to compete, or
prior service provisions, $6.6 million of investment banking fees, $6.9 million
of consulting, legal and accounting fees, and $3.2 million of other costs
incurred a direct result of the merger.

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 and consulting contracts as
part of the restructuring, and approximately $3.5 million of direct incremental
consulting, legal and accounting fees to develop and implement 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 and
corporate offices that will be closed as part of the restructuring, reduced by
any sublease income. These branches are located throughout the United States.
The corporate offices are located in Alpharetta, GA, Houston, TX Miami, FL,
Minneapolis, MN and Ontario, CA. It also includes related costs for equipment
leases and facility closure expenses. Facility reduction costs resulting in
non-cash charges consist principally of the write-down, net of any proceeds on
disposition, of operating assets that have become redundant because of the
consolidation. These 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.

Discontinuance costs are principally non-cash and consist of the loss on
disposal of non-core businesses. The principal businesses are long-term care
("Pharmcare"), ambulatory surgery centers (Surgex), specialized pediatric
services (Kids Medical) and Northside Diet Center. In addition, there are
several dozen smaller entities, including certain joint ventures and
partnerships, that will be disposed of at losses that are not expected to exceed
$1 million individually or $15.4 million in the aggregate.

Actual costs may vary from the recorded charges as the Coram Consolidation
Plan continues. Net revenue of the Company includes revenue from non-core
businesses that will be discontinued or disposed of as part of the Coram
Consolidation Plan approximating $27 million and $40 million in the years ended
December 31, 1995 and 1994, respectively. Operating results of those non-core
businesses were not material.

The Company has continued to evaluate the remaining accruals and the
estimated costs to complete the Coram Consolidation Plan. The Company recorded a
$10.4 million benefit to restructuring costs related to the Coram Consolidation
Plan in 1995. Of this amount, $4.1 million was recorded in the first quarter
related to Kids Medical. In the second quarter, a $0.3 million benefit was
recorded for the sale of a non-strategic asset. In the fourth quarter, many of
the final transaction terms related to the restructuring costs were defined and
a $6.0 million benefit was recorded. In total, personnel reduction costs were
reduced to $5.6 million less than originally estimated, with the major portion
of the savings related to the costs of terminating executives and buying out
employment and consulting contracts. Facility reduction costs are estimated at
$1.1 million over the estimates made in 1994; costs related to branch facilities
leases and redundant equipment leases and

F-19
<PAGE> 64

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operating assets were significantly higher than original loss estimates, offset
by a favorable variance on the sublease of one of the former corporate offices.
Discontinuance costs were $4.5 million less than original estimates, with the
principal favorable variance related to Kids Medical as described below.

In the first quarter of 1995, the Company sold 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. An
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.

At December 31, 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 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 and other adjustments through
December 31, 1995, as follows (in thousands):

<TABLE>
<CAPTION>
CHARGES THROUGH DECEMBER 31, 1995 BALANCE AT DECEMBER 31, 1995
--------------------------------- --------------------------------------
CASH NON-CASH FUTURE CASH TOTAL VARIANCE FROM
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES ESTIMATES
------------ -------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Merger Costs............ $ 25,700 $ 600 $26,300 $2,200 $28,500 --
======= ======= ======= ====== ======= =======
Personnel Reduction
Costs................. 19,000 600 19,600 1,200 20,800 $(5,600)
Facility Reduction
Costs................. 7,400 21,500 28,900 4,100 33,000 1,100
Discontinuance Costs.... -- 29,900 29,900 2,400 32,300 (4,500)
------- ------- ------- ------ ------- -------
Total Restructuring
Costs................. $ 26,400 $52,000 $78,400 $7,700 $86,100 $(9,000)
======= ======= ======= ====== ======= =======
</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 of the Caremark Business Consolidation Plan, charged to
operations as a restructuring cost in the second quarter of 1995, aggregated
$25.8 million, consisting of estimated cash expenditures of $12.4 million for
personnel reduction costs and estimated facility reduction costs of $13.4
million, $6.8 million estimated to be cash expenditures and $6.6 million
estimate to be non-cash charges.

Certain additional restructuring costs were accounted for as an adjustment
to the purchase price of the Caremark Business. Those costs consisted of the
personnel reduction costs of former Caremark employees of $4.8 million, the
facility lease buyout and closure expenses of former Caremark facilities of $2.7
million and vendor contract cancellation charges of former Caremark vendors of
$3.9 million. Those costs, all expected to be cash expenditures, totaled
approximately $11.4 million.

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, buyout 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

F-20
<PAGE> 65

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Total restructuring costs associated with the Caremark Business
Consolidation Plan as of December 31, 1995 are:

<TABLE>
<CAPTION>
CASH NON-CASH
EXPENDITURES CHARGES TOTAL
------------ -------- -------
<S> <C> <C> <C>
Personnel Reduction Costs.......................... $ 17,200 $ -- $17,200
Facility Reduction Costs........................... 13,400 6,600 20,000
------- ------ -------
Total Restructuring Costs.......................... $ 30,600 $6,600 $37,200
======= ====== =======
</TABLE>

The Caremark Business Consolidation Plan initially 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.
The numbers of branch closures was later increased. It also provided for a
corresponding reduction of approximately 730 full-time equivalent field
employees and 240 full-time equivalent corporate employees.

At December 31, 1995, the Company had substantially completed the
consolidation process contemplated by the Caremark Business Consolidation.
Through December 31, 1995, 78 branches have been closed, and 19 have been
downsized and the planned reduction in full-time equivalent employees has 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 and other
adjustments through December 31, 1995, as follows (in thousands):

<TABLE>
<CAPTION>
CHARGES THROUGH DECEMBER 31, 1995 BALANCE AT DECEMBER 31, 1995
--------------------------------- --------------------------------------
CASH NON-CASH FUTURE CASH TOTAL VARIANCE FROM
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES ESTIMATES
------------ -------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Personnel Reduction
Costs................. $ 7,300 -- $ 7,300 $ 3,200 $10,500 $(6,700)
Facility Reduction
Costs................. 3,000 $3,900 6,900 10,600 17,500 (2,500)
------- ------ ------- ------- ------- -------
$ 10,300 $3,900 $14,200 $ 13,800 $28,000 $(9,200)
======= ====== ======= ======= ======= =======
</TABLE>

The Company continues to evaluate the accruals and the estimated costs to
complete the Caremark Consolidation Plan. In the fourth quarter, many of the
final transaction terms related to the personnel reduction costs and certain of
the facility reduction costs were defined and a $9.2 million benefit was
recorded. Estimated personnel reduction costs were reduced $6.7 million below
original estimates. Severance payments were below original estimates because of
voluntary resignations and savings realized from a new corporate severance
policy. Further, use of outside professional services was curtailed by $2.9
million. Estimated facility reduction costs were reduced by $2.5 million
principally because of savings in charges related to inventory originally
estimated to have no future value because of the restructuring. The aggregate
benefit related to the restructuring costs charged to income in the second
quarter of 1995.

F-21
<PAGE> 66

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net restructuring costs in 1995 consisted of the following:

<TABLE>
<S> <C>
Charge related to the Caremark Business Consolidation Plan........ $ 25,800
Benefit related to the Coram Consolidation Plan................... (10,400)
Benefit related to the Caremark Business Consolidation Plan....... (9,200)
--------
Total................................................... $ 6,200
========
</TABLE>

The balance in the "Accrued merger and restructuring" liability at December
31, 1995 consists of future cash expenditures related to:

<TABLE>
<S> <C>
Coram Consolidation Plan........................... $ 7,700
Caremark Business Consolidation Plan............... 13,800
Other.............................................. 5,900
-------
Total.................................... $27,400
=======
</TABLE>

Although subject to future adjustment, the Company believes it had adequate
reserves and liquidity as of December 31, 1995 to complete the Coram
Consolidation Plan and Caremark Business Consolidation Plan.

4. INVESTMENTS

The carrying value of the Company's securities, all of which are classified
as available-for-sale, and their approximate fair values at December 31, 1994
were as follows (in thousands):

<TABLE>
<CAPTION>
AMORTIZED UNREALIZED APPROXIMATE
COST LOSSES FAIR VALUE
--------- ---------- -----------
<S> <C> <C> <C>
U.S. Government agencies.......................... $ 329 $ 4 $ 325
Asset and mortgage-backed securities.............. 8,256 171 8,085
U.S. Treasury obligations......................... 7,531 93 7,438
Corporate obligations............................. 704 11 693
Other securities.................................. 5 -- 5
------- ------- -------
Total................................... $16,825 $279 $16,546
======= ======= =======
</TABLE>

The amortized cost and approximate market value of investment securities at
December 31, 1994, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.

The estimated fair value of investment securities is based on quoted market
prices and dealer quotations.

On December 28, 1994, the Company entered into an agreement to sell and
repurchase U.S. Treasury obligations totaling approximately $7.4 million. The
liability to repurchase securities sold under this agreement is reported as a
current liability in the accompanying consolidated balance sheet because of its
short-term maturity. The related investments were included as available-for-sale
securities at December 31, 1994.

Gross realized gains and losses on sale of available-for-sale securities,
computed using the specific identification method, were as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Gain.................................................. $ 21 $ 8 $ 69
Loss.................................................. $268 $136 $264
</TABLE>

F-22
<PAGE> 67

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Land and buildings............................................... $ 4,113 $ 3,135
Leasehold improvements........................................... 3,791 4,943
Equipment........................................................ 51,528 50,940
Furniture and fixtures........................................... 8,189 5,898
Vehicles......................................................... 3,742 5,493
-------- -------
71,363 70,409
Less accumulated depreciation and amortization................... 42,087 44,507
-------- -------
$29,276 $25,902
======== =======
</TABLE>

The above includes immaterial amounts of equipment under capital leases.

6. LINES OF CREDIT AND LONG-TERM DEBT

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

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Revolving lines of credit...................................... -- $108,099
Senior Credit Facility......................................... $227,200 --
Bridge Note including accrued interest......................... 159,767 --
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................... 77,625 --
Junior non-convertible subordinated PIK note, due October 1,
2005, plus interest payable semi-annually at 12%............. 26,500 --
Subordinated convertible debentures, due June 30, 1996, plus
interest payable semi-annually at 9%, convertible into common
stock at the conversion rate of $16.36....................... 6,618 7,000
Other obligations, including capital leases, at interest rates
ranging from 6% to 16%, collateralized by certain property
and equipment................................................ 8,698 10,538
-------- --------
506,408 $125,637
Less current scheduled maturities.............................. 67,099 5,911
-------- --------
$439,309 $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

F-23
<PAGE> 68

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 Company is currently precluded from
declaring or paying dividends on its capital stock. 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.

Under the terms of the Senior Credit Facility as amended through February
6, 1996, the Company has (i) $192.2 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) $35.0 million outstanding
under a revolving credit facility with a maturity date of March 31, 1997,
including undrawn letters of credit of $0.8 million 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 and foreign indices. The weighted average interest rate on
borrowings at December 31, 1995, was 8.7%. 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, and any excess cash
balances, as defined, 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 principal
covenants relate to maintenance of minimum revenues, minimum cash receipts,
maximum cash disbursements and minimum earnings before interest, taxes,
depreciation and amortization. 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 warrants issued to the Company's lenders under the Senior Credit
Facility were valued at $8.0 million, their fair value at date of issuance and
are being accounted for as interest expense over the remaining term of the
Senior Credit Facility. $1.2 million was charged to expense in the fourth
quarter of 1995.

The Company has contracts expiring in September 1996 limiting its net
interest expense on $100 million of its Senior Credit Facility if the foreign
index upon which its interest rates are based rises above certain levels. At
December 31, 1995, the foreign index was approximately 0.3% below the contract
rate. The unamortized cost and fair value of those contracts are immaterial.

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 (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. Payment of interest on Bridge and Rollover Notes and the duration
fee which had been due quarterly has been deferred to March 31, 1997. As of
December 31, 1995, an additional $9.8 million was issued on the Bridge Note to
DLJ for a total unsecured obligation in the principal amount of $159.8 million.
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 quarterly 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

F-24
<PAGE> 69

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

In August 1995, DLJ's right to appoint one member of the Company's Board of
Directors was accelerated and such director was 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 exercisable until 2005 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>

Warrants issued to DLJ will be accounted for as interest expense. Warrants
on approximately 0.2 million shares of the Company's common stock issued on
December 30, 1995 were valued at approximately $0.9 million, their fair value at
date of issuance.

The Junior Subordinated PIK Notes were issued to Caremark in connection
with the acquisition of the Caremark Business. See Note 3. 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 unless such payment is precluded by subordination provisions of
indebtedness senior to the Junior Subordinated PIK notes, in which case interest
is payable in Junior Subordinated PIK Notes of the same type. 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.

F-25
<PAGE> 70

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1995, the Company was obligated to make principal payments
on long-term debt outstanding as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1996.................................................... $ 67,099
1997.................................................... 173,698
1998.................................................... 624
1999.................................................... 36
2000.................................................... 159,803
Thereafter.............................................. 105,148
--------
$506,408
========
</TABLE>

The above table reflects a $7.8 million prepayment under the Senior Credit
Facility in December 1995. Additional prepayments of $2.5 million were made
through March 13, 1995.

7. INCOME TAXES

The components of consolidated income tax provision (benefit) were as
follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $(36,293) $ 237 $27,019
State............................................... -- 68 3,479
-------- -------- -------
Total....................................... (36,293) 305 30,498
-------- -------- -------
Deferred:
Federal............................................. 16,745 (17,676) (1,440)
State............................................... 8,394 (8,860) (210)
-------- -------- -------
Total....................................... 25,139 (26,536) (1,650)
-------- -------- -------
Provision (benefit) for income taxes........ $(11,154) $(26,231) $28,848
======== ======== =======
</TABLE>

The following table reconciles the effective income tax rate (benefit) to
the federal statutory rate:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.................................... (35.0)% (35.0)% 35.0%
Valuation allowance....................................... 31.9 15.9 6.8
S corporation income...................................... -- -- (3.0)
State income taxes, net of federal income tax benefit..... -- (5.4) 5.8
Non-deductible merger costs............................... -- 3.2 0.3
Goodwill.................................................. 0.5 1.1 2.0
Other..................................................... (.6) 3.1 3.3
----- ----- -----
Effective income tax rate (benefit)....................... (3.2)% (17.1)% 50.2%
===== ===== =====
</TABLE>

F-26
<PAGE> 71

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The temporary differences, tax effected, which give rise to the Company's
net deferred tax asset (liability) were as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- --------
<S> <C> <C>
Deferred tax assets:
Goodwill, net of amortization................................. $ 56,565 $ 0
Restructuring costs........................................... 20,815 33,320
Net operating loss carryforwards.............................. 48,459 14,031
Accrued litigation............................................ 1,767 10,286
Allowance for doubtful accounts............................... 37,062 11,146
Accrued vacation.............................................. 487 975
Other accruals................................................ 2,602 --
Other......................................................... 835 1,303
--------- --------
Total gross deferred tax asset........................... 168,592 71,061
Less valuation allowance................................. (158,164) (38,611)
--------- --------
Total deferred tax asset................................. 10,428 32,450
Deferred tax liabilities:
State taxes................................................. (8,997) (4,911)
Amortization of intangibles................................. (183) (1,492)
Partnerships................................................ (230) (608)
Other....................................................... (1,018) (299)
--------- --------
Total deferred tax liabilities........................... (10,428) (7,310)
--------- --------
Net deferred tax asset (liability)............................ $ -- $ 25,140
========= ========
</TABLE>

The income tax benefit recognized in 1995 and 1994 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 from
those years differ substantially from the expected combined federal and state
income tax (benefit) rates calculated using applicable statutory rates.

The Company has reduced its net deferred tax assets to zero by a valuation
allowance of $158.2 million. Deferred tax assets had been limited to amounts
expected to be recovered through (a) carryback of taxable losses and resulting
recovery of income taxes previously paid by predecessor entities and (b) offset
against deferred tax liabilities that would otherwise become payable in the
carry forward period. The Company believes that realization of the balance of
deferred tax assets is sufficiently uncertain at this time that they should be
offset by a valuation allowance.

As of December 31, 1995, the Company had net operating loss carryforwards
("NOLs") for federal income taxes of approximately $120 million which are
available to offset future federal taxable income, expiring in varying amounts
in the years 2002 through 2009. This includes approximately $43.4 million
generated prior to the Four-Way Merger and subject to separate return
limitations of a predecessor Company as well as an annual usage limitation of
approximately $4.5 million.

During October 1995, the Company received a $30.2 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.

The $10.0 million in prepaid taxes at December 31, 1995, represents
additional refunds expected by the Company, and substantially all of this
related to items in net deferred tax assets.

F-27
<PAGE> 72

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. RELATED PARTY TRANSACTIONS

Prior to the merger, the Merged Entities entered into agreements with
individuals and/or companies considered to be related parties. The majority of
these individuals and/or companies are no longer related parties as these
individuals are no longer Company employees, officers and/or directors. The
following summarizes the significant related party transactions:

At December 31, 1995 and 1994, the Company had outstanding loans to certain
members of management approximating $0.7 million and $1.5 million, respectively.
The loans are collateralized by the individuals' former primary residences and
had interest rates ranging from zero to 7.2% per annum. The principal amount of
the loans and all interest accumulated is due no later than one year from the
date of origination.

In 1994, a note receivable of $0.4 million from a former Director of one of
the Merged Entities was forgiven by the Company as part of his severance.
Receivables from officers and other related parties were approximately $0.7
million at December 31, 1994. No receivables were outstanding as of December 31,
1995.

Certain executive officers and consultants to the Merged Entities had
employment, severance or consulting agreements that entitled such executive
officers or consultants to certain termination, severance and consulting
payments upon consummation of the merger or upon termination of employment
following the merger. In conjunction with the Coram Consolidation Plan (see Note
3), the Company accrued $18.8 million for the termination of the existing
employment, consulting and/or severance agreements with these individuals. This
accrual is included as a component of the Coram Consolidation Plan.

A former Director of one of the Merged Entities is associated with a law
firm that rendered various legal services to the Company. The legal fees to the
firm approximated $0.2 million in 1994 and $0.3 million in 1993.

A Director of the Company is associated with a law firm that rendered
various legal services to the Company. The legal fees to the firm approximated
$2.4 million in 1995 and $1.4 million in 1994.

Certain former Directors of one of the Merged Entities were employed as
consultants. Consulting fees to these individuals approximated $2.5 million and
$0.3 million during 1994 and 1993, respectively. In 1995, no consulting fees
were paid to former Directors and consulting fees paid to a new Director were
approximately $2.0 million.

A director of the Company is an executive officer of an affiliate of an
investment banking firm that rendered financial advisory and investment banking
services to the Company that approximated $6.5 million in 1995.

9. STOCKHOLDERS' EQUITY

At December 31, 1995, the Company was authorized to issue 10 million shares
of preferred stock, $.001 par value, which may be issued at the discretion of
the Company's Board of Directors without further stockholder approval. The Board
can also determine the preferences, rights, privileges and restrictions of any
series of preferred stock. At December 31, 1995 and 1994, there were no shares
of preferred stock issued and outstanding.

In accordance with the Merger Agreement, the Company assumed the
outstanding obligations under the various stock option and stock purchase plans
of the Merged Entities. No further options will be granted under these plans,
unless so determined by the Company's Board of Directors. In addition, the
Company has implemented the 1994 Stock Option Plan (the "1994 Plan") and the
Coram Employee Stock Purchase Plan (the "Purchase Plan") pursuant to which an
aggregate of up to 7.9 million shares of common stock are

F-28
<PAGE> 73

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reserved for issuance. In 1995, options to purchase approximately 7.1 million
shares of Coram stock were issued under the 1994 Plan and no shares were issued
under the Purchase Plan.

On December 28, 1995, the Company's Chairman and the outside members of the
Board of Directors returned stock options held by them for 3.9 million shares.

Common shares reserved for future issuance also include approximately 0.8
million shares related to options outside of the 1994 Plan, 3.3 million shares
related to convertible debt (see Note 6), and 5.8 million shares related to
stock purchase warrants.

Stock Option Plan. The 1994 Plan contains three separate incentive programs
which provide for the granting of stock options to certain officers, key
employees, consultants and non-employee members of the Company's Board of
Directors. Options granted under the 1994 Plan may constitute either incentive
stock options, non-statutory options or stock appreciation rights based on the
type of incentive program utilized. For each of the incentive programs, options
may be granted at exercise prices ranging from 85% to 100% of the fair market
value of the Company's stock at the date of grant. Options granted under the
1994 Plan expire ten years from the date of grant and become exercisable at
varying dates depending upon the incentive program utilized. The 1994 Plan is
administered by a committee of the Board of Directors. The committee has the
authority to determine the employees to whom awards will be made and the
incentive program to be utilized. During the year ended December 31, 1995 the
options granted under the 1994 Plan were all at 100% of fair market value of the
Company's stock at the date of grant with the exception of key executives who
received incentive options at 85% of fair market value. In addition, on
September 8, 1995, the exercise price of the options under the 1994 Plan were
adjusted to $5.50 per share, except for outside directors who returned their
original exercise prices.

The Company had an option agreement outside of the 1994 Plan, with a firm
performing consulting services to the Company for the purchase of 0.6 million
shares of the Company's common stock granted as of November 2, 1994 at an
exercise price of $15.63 and expiring in November 1999. This option was to vest
over a 3 year period, commencing in November 1994. These options were accounted
for using the fair value method of measurement at the date of grant. In
September 1995, those options were canceled and 0.2 million shares of the
Company's common stock was issued to that firm. The cancellation of the options
and the issuance of the Company's stock were accounted for as consulting
expenses in the amount of approximately $1.5 million in the year ended December
31, 1995.

F-29
<PAGE> 74

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the stock option transactions under the prior stock option
plans and the 1994 Plan and other options is as follows (in thousands):

<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
------ --------------
<S> <C> <C>
Balance at January 1, 1993.................................. 3,538 $ 0.79-$92.26
Options granted........................................... 1,254 9.52- 41.67
Options exercised......................................... (258) 0.79- 32.92
Options canceled.......................................... (714) 1.38- 51.19
------ -------------
Balance at December 31, 1993................................ 3,820 1.44- 92.26
Options granted........................................... 5,080 11.00- 18.41
Options exercised......................................... (867) 1.44- 19.84
Options canceled.......................................... (914) 1.44- 92.26
------ -------------
Balance at December 31, 1994................................ 7,119 1.44- 92.26
Options granted........................................... 7,943 2.98- 22.25
Options exercised......................................... (791) 1.44- 24.02
Options canceled or returned.............................. (7,126) 2.84- 92.26
------ -------------
Balance at December 31, 1995................................ 7,145 $ 1.44-$92.26
====== =============
Total options exercisable at December 31, 1995.............. 1,570 $ 1.44-$92.26
====== =============
</TABLE>

In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting and Disclosure of Stock-Based Compensation." Statement No.
123 is applicable for fiscal years beginning after December 15, 1995 and gives
the option to either follow fair value accounting or to follow existing
accounting under Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB No. 25") and related Interpretations. The
Company has not yet determined whether it will elect to use fair value or to
follow APB No. 25 and related Interpretations in accounting for its employee
stock options. The Company has not yet determined the impact on its financial
position or results of operations, should it decide to adopt fair value
accounting.

Warrants to Purchase Common Stock. The following warrants are outstanding
or issuable at December 31, 1995.

<TABLE>
<CAPTION>
EXERCISE PRICE EXPIRATION
SHARES PER SHARE DATE
---------- -------------- -------------------
<S> <C> <C> <C>
Issued to lenders under Senior Credit
Facility (Note 6)................... 2,569,342 nominal October 13, 2000
Issued to DLJ (Note 6)................ 201,845 nominal June 15, 2005
Issued in settlement of T(2)
litigation (Note 10)................ 2,520,000 $22.125 July 10, 1999
Issued in settlement of dispute with
former principals of Company
acquired by T(2) (Note 10).......... 281,250 $4.625 September 30, 1999
Issued by Merged Entities prior to
Four-Way Merger..................... 212,436 $12.58-$29.63 March 1, 1996 to
none
</TABLE>

F-30
<PAGE> 75

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES

Leases. The Company leases office, other operating space and equipment
under various operating and capital leases. The leases provide for monthly
rental payments including real estate taxes and other operating costs. Total
rental expense for 1995, 1994 and 1993 was approximately $17.5 million, $14.8
million and $14.3 million, respectively, exclusive of amounts charged to
restructuring reserves. At December 31, 1995 the aggregate future minimum lease
commitments were as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
------- ---------
<S> <C> <C>
Year Ended December 31,
1996................................................... $ 1,460 $17,450
1997................................................... 1,070 11,862
1998................................................... 520 6,423
1999................................................... -- 3,617
2000................................................... -- 2,147
Thereafter............................................. -- 380
------ -------
Total minimum lease payments........................... 3,050 $41,879
=======
Less amounts representing interest..................... 345
------
Net minimum lease payments............................. $ 2,705
======
</TABLE>

Capital lease obligations are included in other obligations (see Note 3).
Operating lease obligations exclude $7.1 million, less $4.9 million of
subleases, accrued for as part of the restructuring costs under the Coram and
Caremark Business Consolidation Plans (See Note 3).

Employee Benefit Plans. The Merged Entities provide various defined
contribution plans that were available to their employees. Management of the
Company merged these benefit plans during 1995. Eligible employees include all
individuals over the age of 21 and have worked at least 1,000 hours for the
Company in a one year period. The Company offers a matching program of $.50 for
every $1 contributed up to the first 6% of the employees pay. The Company's
contributions vest as follows: 1 year 0%, 2 years 25%, 3 years 50% 4 years 75%
and 5 years 100%. During the years ended December 31, 1995, 1994 and 1993, total
contributions to these plans were approximately $1.9 million, $1.4 million and
$1.3 million, respectively.

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. The Company intends to
vigorously defend itself in these matters, but 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 consolidated financial
statements.

F-31
<PAGE> 76

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 22, 1995. The matter is now on appeal. On January 17, 1996, Caremark
filed a cross complaint against the Company in the California court containing
allegations substantially similar to those in the Illinois suit and seeking
damages of at least $150 million and punitive damages. The Company intends to
vigorously defend itself in this matter, 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 settlement of class action shareholder litigation initiated against
T(2) in 1992 became final on May 19, 1995. Pursuant to the settlement, the
Company paid $25.7 million (of which approximately $7.8 million was contributed
by the Company's insurance carrier) and issued warrants to acquire 2.5 million
shares of the Company's stock at an exercise price of $22.125 per share, which
the Company valued at $1 each. The Company accrued the estimated settlement cost
in 1994. On August 29, 1995, the plaintiffs filed a Motion to Enforce
Stipulation of Settlement in which they alleged that the value of the warrants
for Coram stock which they received pursuant to the settlement had been
artificially inflated during the period of settlement negotiations due to the
alleged fraud of the Company and certain of its officers and directors. On
October 12, 1995, the court denied the Motion. Plaintiffs filed a Notice of
Appeal from the Court's Order with the Eleventh Circuit Court of Appeals On
November 3, 1995 which the Company is seeking to have dismissed. The Company
intends to defend the appeal if the Eleventh Circuit accepts jurisdiction.

A separate action seeking substantially similar relief against the Company
and certain of its current or former officers and directors was filed on
November 21, 1995 in the United States District Court for the Northern District
of Georgia. This action was brought on behalf of a purported class of plaintiffs
who were entitled to receive warrants pursuant to the settlement of the
shareholder litigation, described above. Plaintiffs field an amended complaint
on February 28, 1996, in which they allege that the defendants made false and
misleading statements which caused a fraud on the market and artificially
inflated the price of the Company's common stock during the period from August
1994 through August 1995. The complaint alleges violations of Section 10(b) and
20(a) of the Securities Exchange Act of 1934, fraud and breach of the covenant
of good faith and fair dealing. Plaintiffs seek compensatory damages reflecting
the difference in value between the warrants as issued with the trading price of
the Company's common stock at its actual price and the same number of warrants
at the same exercise price with the Company's common stock trading at its
alleged true value. The defendants filed a motion to dismiss the complaint on
March 13, 1996.

All of the litigation involving shareholders and involving Caremark could
take many years to resolve, including appeals. The Company is seeking to proceed
with the litigation expeditiously, and it is possible some or all of it could be
resolved during 1996. However, the effect on the financial statements of the
resolution of any of these suits in 1996 cannot be determined at this time. An
unfavorable outcome could have a material adverse effect on the financial
position, results of operations and liquidity of the Company.

The $23.2 million provision for litigation settlements recorded in 1994
consists of $17.2 million related to the class action shareholder litigation
described above, and the settlements with the former principal of a Company
acquired by T(2) and the OIG of $3.0 million and $0.5 million, respectively,
described below.

In the fourth quarter of 1995, the Company and the former principals of a
Company acquired by T(2) in 1992 agreed to enter into a new settlement agreement
and rescind a 1994 agreement to settle a dispute related to the valuation of the
acquisition transaction. The 1994 settlement was valued by the Company at $3.0
million and consisted of warrants to acquire 0.5 million shares of the Company's
stock and payments of

F-32
<PAGE> 77

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

up to $4 million contingent on the value of the warrants. Under the 1995
settlement, the Company paid $1.6 million in cash, 0.3 million shares of the
Company's common stock, and warrants to acquire an additional 0.3 million shares
at $4.625 per share. The Company is obligated to make a contingent cash payment
of up to $2.3 million at the end of the five-year term of the warrants provided,
however, that the payment will be reduced, dollar-for-dollar, to the extent of
the aggregate positive spread in excess of $4.625 per share on any warrants
exercised prior to, or exercisable at the end of, the five year term of the
warrants. The Company's obligation to make any cash payment terminates if the
Company's stock price exceeds $12.625 for any five consecutive business days
during the term of the warrants, following the effectiveness of a registration
statement with the Securities and Exchange Commission. The Company is obligated
to pay $0.2 million for each 30 day delay in such effectiveness past March 25,
1996, but any such payment reduces the potential $2.3 million contingent
payment. The net expenses accrued in connection with the settlement and
rescission was $2.2 million.

On September 30, 1994, the U.S. District Court for the Northern District of
Georgia (Atlanta Division) approved the settlement of the investigations
conducted by Office of the Inspector General ("OIG") of the U.S. Department of
Health and Human Services regarding T(2)'s financial arrangements with
physicians. T(2), in expressly denying liability, agreed to a civil order which
enjoins it from violating federal anti-kickback and false claims laws related to
Medicare/Medicaid reimbursement. The order further requires T(2) to comply with
certain standards when providing management or other services to physicians.
Under the terms of the settlement, T(2) paid the federal government $500,000 to
reimburse the government for the costs of its investigation and settle its
claims. T(2) will continue to participate in the Medicare/Medicaid programs.

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 adverse effect on the Company's
consolidated financial position, results of operations or liquidity.

Other Commitments. The Company's agreements with its lithotripsy physician
partners contemplate that the Company will acquire the remaining interest in
each partnership at a defined price in the event that legislation is passed or
regulations are adopted that would prevent the physician from owning an interest
in the partnership and using the partnership's lithotripsy equipment for the
treatment of his or her patients. While current interpretations of existing law
are subject to considerable uncertainty, the Company believes that its
partnership arrangements with physicians in its lithotripsy business are in
compliance with current law.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The financial instruments included in the Company's assets and current
liabilities (excluding long-term debt) are reflected in the financial statements
at amounts approximating their fair value because of the short-term maturity of
those instruments. See Note 4 for further information on the Company's
investment securities.

The Company's long-term debt is not publicly traded, and market quotations
indicative of its fair value are not available. At December 31, 1994, the
estimated fair value of the Company's long-term debt was determined based on
interest rates that were currently available to the Company for issuance of debt
with similar terms and remaining maturities, and the fair value approximated the
carrying amount of $125.6 million.

At December 31, 1995, the Company's ability to borrow was limited and the
following information about the fair value of its long-term debt is furnished.
At December 31, 1995, the Company has long-term debt carried at $506.4 million.
The Senior Credit Facility is carried at $227.2 million and the Company
estimates that its fair value approximates its face value based on the interest
rate, security, covenants and remaining term to maturity.

F-33
<PAGE> 78

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

It is not practicable to determine the fair value as of December 31, 1995
of the Bridge Note, carried at $159.8 million, the subordinated convertible
debentures, carried at $6.6 million, or the Junior Subordinated PIK Notes,
carried at $104.1 million. The obligations are all unsecured and subordinate to
the Company's Senior Credit Facility, and cash payments of principal or interest
cannot be made under terms of the Senior Credit Facility, except for interest on
the Subordinated Convertible Debentures. The timing and amounts of payments that
may be made in the future is not determinable at this time. Further, the Company
is not able to determine at what interest rate subordinated loans may be
available to the Company, or whether loans on a subordinated unsecured basis
would even be available. The Company believes the fair value Bridge Note and the
subordinated convertible debentures at December 31, 1995 may be substantially
less then their carrying amount because of their subordination provisions and
remaining term to maturity and the Company's adverse operating results and
liquidity. In January 1996, Caremark announced that it was taking a charge to
earnings to adjust downward to 25 cents on the dollar the value of the Junior
Subordinated PIK Notes for an "other than temporary" impairment in value; the
Company has no view as to whether such adjustment by Caremark is indication of
the fair value of the Junior Subordinated PIK Notes at that date. As further
described in Note 6, these notes consist of a $77.6 million Junior Convertible
Subordinated PIK Note and a $26.5 million Junior Nonconvertible Subordinated PIK
Note; the former note will become convertible on April 6, 1996 into 2.9 million
shares of the Company common stock which had a quoted market price of
approximately $12.6 million as of December 31, 1995. The subordinated
convertible debentures are convertible into 0.4 million shares of the Company's
common stock which had a quoted market price of $1.8 million at December 31,
1995. The other obligations carried at $8.7 million have an estimated fair value
approximating their carrying amount.

Considerable judgment is required in developing estimates of fair value and
the information furnished above is not meant to be indicative of what such debt
could be settled for. See Note 6 for additional disclosures relating to the
Company's long-term debt.

The Company has investments in unconsolidated subsidiaries totaling
approximately $6.8 million and $3.2 million at December 31, 1995 and 1994,
respectively. Since these subsidiaries are all closely held companies and there
are no quoted market prices, it is not practicable to estimate the fair value of
such investments.

12. QUARTERLY RESULTS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Total revenue................................ $153,715 $ 164,741 $179,351 $104,778
Gross profit................................. 37,127 35,067 41,511 29,170
Net income (loss)............................ (17,649) (254,662) (66,347)* 4,609
======== ========= ======== ========
Net income (loss) per common share........... $ (0.44) $ (6.38) $ (1.67)* $ 0.11
======== ========= ======== ========
Year Ended December 31, 1994
Net revenue.................................. $113,578 $ 110,206 $113,647 $113,065
Gross profit................................. 33,476 31,432 36,356 36,050
Net income (loss)............................ (1,107) (121,176) (9,000) 3,211
======== ========= ======== ========
Net income (loss) per common share........... $ (0.03) $ (3,14) $ (0.23) $ 0.08
======== ========= ======== ========
</TABLE>

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

* The amount previously classified in the second quarter as an extraordinary
loss of $3,396 ($0.08 per share) on early extinguishment of debt is no
longer reported as extraordinary because it is immaterial.

F-34
<PAGE> 79

CORAM HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1995, unusual or infrequently occurring charges included the benefit
related to restructuring reserves of $15.2 million recorded in the fourth
quarter, the Company's accrual of $25.8 million estimated restructuring costs
for the Caremark Business Consolidation Plan in the second quarter and the
charge of $203.4 million for long-lived assets and acquired receivables and a
special provision for uncollectible accounts of $20.0 million in the third
quarter.

In 1994, unusual or infrequently occurring charges included the Company's
provision for litigation settlements of $17.2 million in the second quarter and,
during the third quarter, a special provision for uncollectible accounts of
$17.3 million, a provision for litigation settlements of $6.0 million and the
development and implementation of the Coram Consolidation Plan which resulted in
charges of $28.5 million in estimated Merger Costs and $95.5 million in
estimated Restructuring Costs.

F-35
<PAGE> 80

CORAM HEALTHCARE CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- ------------------------------- ---------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Reserve and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts.................. $ 17,990 $ 68,912 $ 41,124(3) $(64,187)(1) $63,839
Year Ended December 31, 1994
Reserve and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts.................. $ 25,076 $ 36,817 $ 3,901(2) $(46,383)(1) $17,990
2,886(4)
(4,307)(5)
Year ended December 31, 1993
Reserve and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts.................. $ 17,530 $ 29,751 $ 2,834(2) $(24,788)(1) $25,076
(251)(4)
</TABLE>

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

(1) Accounts written off, net of recoveries.

(2) Balance acquired in purchase acquisition(s).

(3) Balance related to the Acquisition of Caremark Business, including $37,000
charged to operations in the quarter ended September 30, 1995.

(4) Other charges.

(5) Reclassification.

F-36
<PAGE> 81

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
-------------------------------------------------------------------------------------------
<C> <S>
2.1 -- Agreement and Plan of Merger dated as of February 6, 1994, by and
among the Registrant, T2, Curaflex, HealthInfusion, Medisys, T2
Acquisition Company, CHS Acquisition Company, HII Acquisition
Company and MI Acquisition Company (Incorporated by reference to
Exhibit 2.1 of Registration No. 33-53957 on Form S-4).
2.2 -- First Amendment to Agreement and Plan of Merger dated as of May 25,
1994, by and among the Registrant, T2 Curaflex, HealthInfusion,
Medisys, T2 Acquisition Company, CHS Acquisition Company, HII
Acquisition Company and MI Acquisition Company (Incorporated by
reference to Exhibit 2.2 of Registration No. 33-53957 on Form S-4).
2.3 -- Second Amendment to Agreement and Plan of Merger dated as of July
8, 1994 by and among the Registrant, T2, Curaflex, HealthInfusion,
Medisys, T2 Acquisition Company, CHS Acquisition Company, HII
Acquisition Company and MI Acquisition Company (Incorporated by
reference to Exhibit 2.3 of the Registrant's Current Report on Form
8-K dated as of July 15, 1994).
2.4 -- Asset Sale and Note Purchase Agreement, (the "Asset Purchase
Agreement") among the Registrant, Caremark International Inc. and
Caremark Inc. dated as of January 29, 1995 (Incorporated by
reference to Exhibit C of the Registrant's Current Report on Form
8-K dated April 6, 1995). The exhibits and schedules to the Asset
Purchase Agreement are omitted from this Exhibit. The Company
agrees to furnish supplementally any omitted exhibits or schedule
with the Securities and Exchange Commission.
2.5 -- Agreement and Plan of Merger among the Registrant, CHC Acquisition
Corp. and Lincare Holdings Inc., (the "Lincare Merger Agreement")
dated as of April 17, 1995 (Incorporated by reference to Exhibit B
of the Registrant's Current Report on Form 8-K dated May 2, 1995).
The exhibits and schedules to the Lincare Merger Agreement are
omitted from this Exhibit. The Company agrees to furnish
supplementally any omitted exhibit or schedule with the Securities
and Exchange Commission.
3.1 -- Certificate of Incorporation of Registrant, as amended through May
11, 1994 (Incorporated by reference to Exhibit 3.1 of Registration
No. 33-53957 on Form S-4).
3.2 -- Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 of
Registration No. 33-53957 on Form S-4).
4.1 -- Form of Common Stock Certificate for the Registrant's common stock,
$.001 par value per share. (Incorporated by reference to Exhibit
4.1 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.1 -- Amended and Restated Credit Agreement dated as of February 10,
1995, by and among Curaflex, T2, HealthInfusion, Medisys, and HMSS
as Co-Borrowers, Toronto Dominion (Texas), Inc., as Agent (the
"Amended Credit Agreement") (Incorporated by reference to Exhibit
10.1 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994). The exhibits and schedules to the Amended
Credit Agreement are omitted from this Exhibit. The Company agrees
to furnish supplementally any omitted exhibit or schedule to the
Securities and Exchange Commission upon request.
10.2 -- Form of Employment Agreement between the Registrant and Charles A.
Laverty (Incorporated by reference to Exhibit 10.1 of Registration
No. 33-53957 on Form S-4).
10.3 -- Form of Severance/Non-Compete Agreement between the Registrant and
Miles E. Gilman (Incorporated by reference to Exhibit 10.2 of
Registration No. 33-53957 on Form S-4).
10.4 -- Form of Severance/Non-Compete Agreement between the Registrant and
William J. Brummond (Incorporated by reference to Exhibit 10.3 of
Registration No. 33-53957 on Form S-4).
10.5 -- Form of Severance/Non-Compete Agreement between the Registrant and
Tommy H. Carter (Incorporated by reference to Exhibit 10.4 of
Registration No. 33-53957 on Form S-4).
10.6 -- Form of Indemnification Agreement between the Registrant and each
of the Registrant's directors and certain executive officers.
(Incorporated by reference to Exhibit 10.6 of the Registrant's Form
10-K for the year ended December 31, 1994).
</TABLE>
<PAGE> 82

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

* Filed herewith.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-55547 and 33-55657) of Coram Healthcare Corporation of our
report dated March 31, 1996, with respect to the consolidated financial
statements and schedule of Coram Healthcare Corporation included in this
Amendment No. 1 to the Annual Report (Form 10-K/A) for the year ended December
31, 1995.

ERNST & YOUNG LLP

Denver, Colorado

June 4, 1996