CORAM HEALTHCARE CORP, 10-Q/A, 1996-08-21

CORAM HEALTHCARE CORP
10-Q/A, 1996-08-21
HOME HEALTH CARE SERVICES

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

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

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

FORM 10-Q/A

AMENDMENT NO. 1

------------------------
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

OR THE QUARTERLY PERIOD ENDED JUNE 30, 1996

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 2-44197

CORAM HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 33-0615337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

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

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

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, $.001
PAR VALUE, AS OF AUGUST 13, 1996 WAS 42,174,191.

===============================================================================
<PAGE> 2

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CORAM HEALTHCARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 26,758 $ 26,735
Restricted cash................................................... 6,957 25,349
Accounts receivable, net of allowance of $61,940 and $63,839...... 120,111 153,825
Inventories....................................................... 16,850 17,798
Prepaid taxes..................................................... 9,766 9,975
Deferred income taxes, net........................................ 7,052 10,428
Other current assets.............................................. 10,026 11,935
--------- ---------
Total current assets...................................... 197,520 256,045
Property and equipment, net......................................... 21,704 29,276
Joint ventures and other assets..................................... 27,897 31,573
Other deferred costs................................................ 17,130 23,266
Goodwill, net of accumulated amortization of $43,328 and $36,915.... 340,290 347,689
--------- ---------
Total assets........................................................ $ 604,541 $ 687,849
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 35,198 $ 63,839
Current maturities of long-term debt.............................. 230,100 67,099
Deferred income taxes............................................. 8,629 10,428
Accrued merger and restructuring.................................. 20,730 27,392
Other accrued liabilities......................................... 40,217 49,865
--------- ---------
Total current liabilities................................. 334,874 218,623
Long-term debt...................................................... 262,256 439,309
Minority interest in consolidated joint ventures.................... 4,416 7,018
Other liabilities................................................... 1,902 4,859
Stockholders' equity:
Preference stock par value $.001, authorized 10,000 shares, none
issued......................................................... -- --
Common Stock, par value $.001, authorized 75,000 shares, issued
42,174 shares in 1996 and 40,369 shares in 1995................ 42 40
Additional paid-in capital........................................ 382,855 370,876
Common stock to be issued......................................... 12,500 --
Retained earnings (deficit)....................................... (394,304) (352,876)
--------- ---------
Total stockholders' equity................................ 1,093 18,040
--------- ---------
Total liabilities and stockholders' equity.......................... $ 604,541 $ 687,849
========= =========
</TABLE>

See accompanying notes.

2
<PAGE> 3

CORAM HEALTHCARE CORPORATION

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue........................................ $133,109 $179,351 $264,734 $284,129
Cost of service.................................... 91,150 137,840 189,308 213,448
-------- -------- -------- --------
Gross profit....................................... 41,959 41,511 75,426 70,681
Operating expenses:
Selling, general and administrative expenses..... 26,576 44,708 51,852 62,593
Provision for estimated uncollectible accounts... 6,831 16,049 15,584 20,061
Amortization of goodwill......................... 3,759 4,767 8,060 7,557
Provision for shareholder litigation
settlement.................................... 12,500 -- 12,500 --
Restructuring costs.............................. -- 25,501 -- 21,370
-------- -------- -------- --------
Total operating expenses................. 49,666 91,025 87,996 111,581
-------- -------- -------- --------
Operating income (loss)............................ (7,707) (49,514) (12,570) (40,900)
Other income (expense):
Interest expense................................. (20,553) (13,953) (39,582) (17,389)
Other income, net................................ 914 891 1,563 1,631
-------- -------- -------- --------
Loss before income taxes and minority interest..... (27,346) (62,576) (50,589) (56,658)
Income tax benefit............................... (5,237) -- (12,653) (1,105)
Minority interest in net income of consolidated
joint ventures................................ 1,417 3,771 3,491 6,203
-------- -------- -------- --------
Net loss........................................... $(23,526) $(66,347) $(41,427) $(61,756)
======== ======== ======== ========
Net loss per share................................. $ (0.58) $ (1.67) $ (1.02) $ (1.53)
======== ======== ======== ========
Weighted average common shares outstanding......... 40,858 39,685 40,762 40,274
======== ======== ======== ========
</TABLE>

See accompanying notes.

3
<PAGE> 4

CORAM HEALTHCARE CORPORATION

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1995
-------- ---------
<S> <C> <C>
Net cash provided (used) by operating activities...................... $ 26,369 $ (18,393)
Cash flows from investing activities:
Proceeds from sale and maturities of available for sale
securities....................................................... -- 3,786
Payments for acquisition of businesses, net of cash acquired........ (6,712) (240,155)
Proceeds from sale of businesses.................................... 12,757 1,473
Other............................................................... (1,906) (1,716)
-------- ---------
Net cash provided (used) by investing activities............ 4,139 (236,612)
-------- ---------
Cash flows from financing activities:
Sales of stock, including exercise of stock options................. 234 8,846
Borrowings (repayments) of lines of credit, net..................... -- (108,120)
Debt borrowings..................................................... -- 557,000
Cash paid for debt restructuring.................................... (250) (13,317)
Repayment of debt................................................... (30,469) (179,688)
Securities sold under agreements to repurchase, net................. -- (1,655)
-------- ---------
Net cash provided (used) by financing activities............ (30,485) 263,066
-------- ---------
Net increase in cash and cash equivalents............................. $ 23 $ 8,061
======== =========
</TABLE>

SUPPLEMENTAL INFORMATION:

Depreciation and amortization (including amortization of financing costs)
was $27,187 and $19,221 in the six-month periods ended June 30, 1996 and 1995,
respectively.

Interest expense through June 30, 1996 consisted of $10,099 currently
payable, $15,592 with deferred payment terms and $13,891 amortization of
warrants and other debt costs. In the same period of 1995, $9,035 of interest
expense was currently payable, $6,648 with deferred payments and $1,706 related
to amortization of other debt costs.

See accompanying notes.

4
<PAGE> 5

CORAM HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 1996

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 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 T2 Medical, Inc. ("T2"), Curaflex Health Services, Inc.,
HealthInfusion, Inc. and Medisys, Inc. (collectively the "Merged Entities").
Each of these other companies became and is now a wholly owned subsidiary 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 operations commenced,
the most significant of which was the acquisition of substantially all of the
assets of the alternate site infusion business and certain related businesses
(the "Caremark Business") from Caremark Inc. a subsidiary of Caremark
International, Inc. (collectively "Caremark") in April 1995. See Note 2 for
further information.

Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such regulations. The unaudited condensed consolidated
financial statements reflect all adjustments and disclosures which are, in the
opinion of management, necessary for a fair presentation. All such adjustments,
other than those relating to the acquisition of the Caremark Business,
consolidation, restructuring, termination of the proposed merger with Lincare
Holdings Inc. ("Lincare"), and litigation settlements are of a normal recurring
nature. Certain amounts in the 1995 financial statements have been reclassified
to conform to the 1996 presentation. The effects are not material. The results
of operations for the interim periods are not necessarily indicative of the
results of the full fiscal year. For further information, refer to the audited
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1995.

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. 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 quarterly to determine if any impairment indicators are present. If it
is determined that such indicators are present and the review indicates that the
assets will not be recoverable, based on undiscounted estimated cash flows over
their remaining depreciation and amortization period, their carrying value is
reduced to estimated fair market value. Impairment indicators include, among
other conditions, cash flow deficits; an historic or anticipated decline in
revenue or operating profit; 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 is
defined by the relationships -- substantially all of which are
non-contractual -- with physicians, medical groups, hospitals, case managers and
managed care organizations and other referral sources to the Company in the
marketplace.

5
<PAGE> 6

CORAM HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

As of October 1, 1995, the Company reduced the remaining useful lives for
goodwill to 25 years because of uncertainties in the Company's 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 $1.4
million during both the first and second quarters of 1996. In the third quarter
of 1995, the Company recorded an impairment loss of $166.4 million related to
goodwill ($158.1 million) and other long-lived assets ($8.3 million) of its home
infusion business based on a review of each of the market areas in which the
Company operates its home infusion business and separately for the lithotripsy
business and each of the Company's other businesses. The Company has continued
to review goodwill and other long-lived assets on this basis through June 30,
1996.

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 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.

Provision for Estimated Uncollectible Accounts. Management regularly
reviews the collectibility of accounts receivable and adjusts the provision for
estimated uncollectible accounts as needed to reflect current collection and
other trends and changes in assessment of realizable value. Management believes
the resulting net carrying amounts for accounts receivable are fairly stated at
each quarter-end based on all information then available.

For receivables maintained on the Caremark Business receivables system,
which the Company has adopted as its primary billing system for its home
infusion business, the Company utilizes system-generated reports which track
collection activity to calculate historical write-off percentages for specific
aging categories to establish the allowance for estimated uncollectible
receivables. Receivables originated by the former Coram branches that were not
originally billed on the Caremark Business billing system had previously been
maintained separately on the former Coram receivable systems. As of June 30,
1996 the Company has substantially completed the process of transferring all of
these receivable balances to the Caremark Business receivables system. For the
balances that have not yet been transferred, the Company has used a methodology
since the quarter ended September 30, 1995 to derive specific estimated loss
percentages for each aging category based on information from operating and
field finance personnel to calculate the provision for estimated uncollectible
accounts. Prior to that, the allowance for estimated uncollectible accounts for
accounts receivable maintained on the former Coram receivable systems had been
determined based on overall review of trends in days-sales-outstanding ("DSO"),
write-offs, and agings of the accounts receivable. 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 in the past.

2. ACQUISITIONS AND RESTRUCTURINGS

Acquisition of Caremark Business. Effective April 1, 1995, the Company
acquired the Caremark Business 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. The Company
assumed only certain specified liabilities of the Caremark Business, which
expressly excluded any liabilities associated with the government investigation
of Caremark, which was settled by Caremark in June 1995. The transaction was
accounted for as a purchase.

The Company commenced a comprehensive examination of its business and
operations following the end of its 1995 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 had declined
significantly in the second quarter of 1995 from $96.1 million (as reported by
Caremark) in the first quarter of 1995 to

6
<PAGE> 7

CORAM HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

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 of 1995. The Company expected the combined 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 of almost $900
million. The anticipated cost savings have been offset by that revenue decline,
and the Company has incurred substantial losses since the acquisition of the
Caremark Business.

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". 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 lawsuit against Caremark. The Company
filed its initial complaint against Caremark on September 11, 1995. See Note 5
and Part II -- Item 1, "Legal Proceedings."

Other Acquisitions. During the six months ended June 30, 1995, the Company
completed eight acquisitions totaling $21.7 million, net of cash acquired, which
were accounted for as purchases. The acquisition activity in the six months
ended June 30, 1996 was limited to the completion of the purchase of certain
minority interest in two lithotripsy joint ventures for approximately $4.7
million in cash. Individually and in the aggregate, the acquisitions were not
considered material to the Company's financial position or results of
operations.

Certain of the Company's historical purchase agreements provide 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 approximately $5.4 million under such contingent
obligations 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
sellers, a maximum of approximately $4.0 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 during the six months ended June 30, 1996 totaled $2.8 million.

Merger and Restructuring. 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. During May 1995, the Company
initiated a second restructuring plan (the "Caremark Business Consolidation
Plan") and charged $25.8 million to operations as a restructuring cost. Certain
additional restructuring costs totaling approximately $11.4 million were
accounted for as adjustments to the purchase price of the Caremark Business.

For both the Coram and the Caremark Business Consolidation Plans, personnel
reduction costs include severance payments, fringe benefits and taxes related to
employees to be terminated, costs of terminating executives and buying out
employment and consulting contracts, and incremental professional fees to
develop and implement the plans. Facility reduction costs 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. They also include related costs for equipment leases and
facility closure expenses.

7
<PAGE> 8

CORAM HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

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. They also include inventory
that has no future value because of the restructuring. For the Coram
Consolidation Plan, merger costs consist of executive severance payments
directly related to the merger based on the relevant employment agreements,
investment banking fees, consulting, legal and accounting fees and other costs
incurred as a direct result of the merger. Discontinuance costs are principally
non-cash and consist of the estimated loss on the disposal of non-core
businesses.

The Company had substantially completed the consolidation process
contemplated by both the Coram and Caremark Business Consolidation Plans in
1995. During 1995, an aggregate benefit of $19.6 million was recorded based on a
continuous evaluation of the accruals and estimated costs to complete the plans,
of which $4.4 million was recognized in the first six months. Net revenue of the
Company includes revenue from non-core businesses that were discontinued or
disposed of as part of the Coram Consolidation Plan approximating $10.6 million
in the quarter ended June 30, 1995, and $4.9 million and $30.7 million in the
six months ended June 30, 1996 and 1995, respectively. There were no non-core
businesses that were discontinued or disposed of during the quarter ended June
30, 1996. Operating results were not material. A substantial portion of the
remaining cash expenditures relates to severance and lease costs that will be
paid in future periods. The Company may continue to adjust amounts recorded, as
contingencies related to proceeds on certain disposals of non-core businesses
are resolved, and lease buyouts, contractual obligations and other facility
reduction costs are finalized. Under the two plans, the Company has made total
payments and total asset disposals through June 30, 1996 as follows (in
thousands):

<TABLE>
<CAPTION>
CHARGES THROUGH BALANCE AT
JUNE 30, 1996 JUNE 30, 1996
----------------------------------- -----------------------
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL EXPENDITURES CHARGES
------------ -------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
CORAM CONSOLIDATION PLAN:
Merger Costs............................ $26,500 $ 600 $27,100 $1,400 $28,500
======= ======= ======= ====== =======
Personnel Reduction Costs............... $19,400 $ 600 $20,000 $1,000 $21,000
Facility Reduction Costs................ 9,600 21,500 31,100 2,400 33,500
Discontinuance Costs.................... 0 29,400 29,400 2,600 32,000
------- ------- ------- ------ -------
Total Restructuring Costs............... $29,000 $51,500 $80,500 $6,000 $86,500
======= ======= ======= ====== =======
CAREMARK BUSINESS CONSOLIDATION PLAN:
Personnel Reduction Costs............... $10,300 $ -- $10,300 $ 300 $10,600
Facility Reduction Costs................ 4,600 3,900 8,500 8,900 17,400
------- ------- ------- ------ -------
Total Restructuring Costs............... $14,900 $ 3,900 $18,800 $9,200 $28,000
======= ======= ======= ====== =======
</TABLE>

The balance in the "Accrued Merger and Restructuring" liability at June 30,
1996 consists of future cash expenditures related to the above items of $16.6
million and $4.1 million of other accruals. The Company currently estimates that
future cash expenditures as shown above related to both the Coram and Caremark
Business Consolidation Plans will be made in the following periods: 63% in 1996,
21% in 1997, 6% in 1998 and 10% in 1999 and thereafter. Although subject to
future adjustment, the Company believes it has adequate reserves and liquidity
as of June 30, 1996 to meet future expenditures related to the Coram
Consolidation Plan and the Caremark Business Consolidation Plan.

8
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CORAM HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT

Long-term debt is as follows (in thousands):

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Senior Credit Facility....................................... $199,800 $227,200
Rollover Note, including accrued interest (Bridge Note
through April 6, 1996)..................................... 176,307 159,767
Junior convertible subordinated PIK note, due October 1,
2005, plus interest payable semiannually at 7%, convertible
into Common Stock at the conversion rate of $27, including
accrued interest........................................... 81,748 77,625
Junior non-convertible subordinated PIK note, due October 1,
2005, plus interest payable semiannually at 12%, including
accrued
interest................................................... 28,933 26,500
Subordinated convertible debentures.......................... -- 6,618
Other obligations, including capital leases, at interest
rates ranging from 6% to 16%, collateralized by certain
property and equipment..................................... 5,568 8,698
-------- --------
492,356 506,408
Less current scheduled maturities............................ 230,100 67,099
-------- --------
$262,256 $439,309
======== ========
</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. The cash
paid by the Company in connection with the acquisition of the Caremark Business
and the repayment of amounts outstanding under a prior credit facility, together
with related fees and expenses, were financed through: (i) borrowings of
approximately $205 million under a Credit Agreement with Chemical Bank as Agent
(the "Senior Credit Facility") and (ii) $150 million from the issuance of a
subordinated bridge note (the "Bridge Note") to an affiliate of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"). 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. The amendments
to the Senior Credit Facility postponed the first principal payment 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 date
of the Senior Credit Facility was shortened from April 6, 2000 to March 31,
1997, and the unused portion of the existing revolving debt commitments of
approximately $64.2 million was terminated. In return, the senior lenders
received warrants to purchase 2.6 million 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 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. This 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.

At June 30, 1996, under the terms of the Senior Credit Facility as amended,
the Company has $199.8 million outstanding with a final maturity date of March
31, 1997, and $25 million unused Overline revolving credit line that matures on
December 31, 1996. Interest is based on margins over certain domestic or foreign
indices. The weighted average interest rate on the Senior Credit Facility
borrowings at June 30, 1996 was 7.99%. 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 the Senior Credit Facility. The Senior
Credit Facility contains financial covenants and conditions limiting the

9
<PAGE> 10

CORAM HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

Company's ability to engage in certain activities. The principal covenants
relate to maintenance of minimum revenue, minimum cash receipts, maximum level
of cash disbursements and minimum earnings before interest, taxes, depreciation
and amortization. At June 30, 1996 the Company was in compliance with all of
these covenants.

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. In the quarter and six months ended June 30, 1996, $1.3
million and $2.7 million, respectively, were charged to interest expense related
to these warrants.

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
June 30, 1996, the foreign index was approximately .38% 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 an affiliate of DLJ, as an
unsecured obligation of the Company in a principal amount of $150 million. The
Bridge Note was not repaid in full on its April 6, 1996 due date, and a Rollover
Note (the "Rollover Note") which matures on October 6, 2000 was issued for the
outstanding principal on the Bridge Note. The interest rate on the Rollover Note
is based on various indices plus a margin which increases by 0.25% quarterly,
but not to exceed 21% per annum. The rate as of June 30, 1996 was approximately
14.75%. Payment of interest on the Bridge and Rollover Notes and the duration
fee which had been due quarterly have been deferred to March 31, 1997. During
the quarter and six months ended June 30, 1996, an additional $11.0 million and
$16.1 million, respectively, were accrued on the Bridge Note to DLJ for a total
unsecured obligation in the amount of $176.3 million (including a funding fee of
approximately $5.0 million due upon issuance of the Rollover Note which was also
deferred). The agreement pursuant to which the Bridge Note and Rollover Note
were issued contains customary covenants and events of default. At June 30,
1996, the Company was in compliance with all of these covenants.

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. As
long as the Rollover Note is outstanding, DLJ will receive warrants to purchase
up to 20% of the outstanding shares of Common Stock of the Company at a nominal
exercise price in accordance with the following table. The schedule, as follows,
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 (Issued December 30, 1995)................................. 0.50%
90-179 days (Issued March 29, 1996).................................. 1.00%
180-269 days (Issued June 28, 1996).................................. 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 are accounted for as interest expense and
shareholders equity as additional paid-in capital. Through June 30, 1996,
warrants on approximately 1.0 million shares of the Company's Common

10
<PAGE> 11

CORAM HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

Stock have been reserved in escrow with a value of $4.9 million. Interest
expense recorded during the quarter and six months ended June 30, 1996, related
to these warrants, was $2.3 million and $3.2 million, respectively.

The Junior Subordinated PIK Notes were issued to Caremark in connection
with the acquisition of the Caremark Business. See Note 2. 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 is 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 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.

On June 30, 1996, the Company entered into an Amendment to 9% Subordinated
Convertible Debenture and Notice of Conversion (collectively the "Amendments")
with each of the holders of its outstanding 9% Subordinated Convertible
Debentures due June 30, 1996 (the "Subordinated Convertible Debentures"). On the
date of the Amendments, Subordinated Convertible Debentures in an aggregate
principal amount of $6.6 million remained outstanding. Pursuant to the
Amendments, the holders of the Subordinated Convertible Debentures agreed to
waive their right to receive cash upon maturity of the debentures and to
exercise their right to convert the Subordinated Convertible Debentures into
shares of the Company's Common Stock in exchange for the Company's agreement to
amend the conversion rate under the debentures so that the number of shares of
Common Stock issuable upon conversion is equal to the number determined by
dividing the principal amount to be converted by $5.18. Previously, the number
of shares issuable upon conversion was determined by dividing the principal
amount to be converted by $16.36. Accordingly, the outstanding Subordinated
Convertible Debentures were converted into an aggregate of 1.3 million shares of
the Company's Common Stock on June 30, 1996.

4. INCOME TAXES

During the three months ended June 30, 1996, the Company recorded an income
tax benefit of $5.2 million. The income tax benefit recognized has been limited
to the estimated amounts recoverable through carryback of losses to the separate
returns of the Company's predecessor entities that were participants in the
Four-Way Merger. Accordingly, the effective income tax (benefit) rates for the
three-month periods ended June 30, 1996 and 1995 differ substantially from the
expected combined federal and state income tax (benefit) rates calculated using
applicable statutory rates. In 1996, the Company has based its tax benefit
recognized on the expected total benefit for the year in relation to its
estimated pre-tax results for the year, exclusive of any significant unusual
items.

The Company has a net deferred tax liability of $1.7 million. Deferred tax
assets are net of a $145.0 million valuation allowance. Realization of deferred
tax assets is dependent upon the ability of the

11
<PAGE> 12

CORAM HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)

Company to generate taxable income in the future. Deferred taxes relate
primarily to temporary differences consisting in part of accrued restructuring
costs, goodwill written off, allowances for doubtful accounts that are not
deductible for income tax purposes until paid or realized and to net operating
loss carryforwards that are deductible against future taxable income.

5. LITIGATION

The Company is a party to several lawsuits that could, if their outcomes
were unfavorable, have a material adverse effect on the Company's financial
position, results of operations and liquidity. These lawsuits include (i) 21
civil suits (which were consolidated into one suit) filed by individuals
claiming to have purchased and sold Common Stock during a specified period in
1995, asserting claims under Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 of the Commission; (ii) two shareholder derivative actions asserting
substantially similar factual allegations; (iii) a lawsuit filed by the Company
against Caremark, and a lawsuit and a cross-complaint filed by Caremark against
the Company, relating to the acquisition of the Caremark Business; and (iv)
actions by plaintiffs in the shareholder litigation which was initiated against
T2 in 1992, related to the T2 Settlement Agreement. The Company intends to
vigorously defend itself in these matters. Nevertheless, due to the
uncertainties inherent in litigation, the ultimate disposition of these matters
cannot be presently determined. See also Part II -- Item 1. "Legal Proceedings."

On August 8, 1996 the Company announced an agreement in principle to settle
the shareholder class actions and certain derivative litigation. The agreement
in principle, which is subject to approval by the U.S. District Court for the
District of Colorado, provides that the Company's insurance policies will pay
$22.5 million and the Company will issue 5.0 million freely tradeable shares of
Common Stock. The agreement in principle contains several contingencies,
including the following: (1) the Company must issue 5.0 million shares of freely
tradeable Common Stock; (2) the insurance carriers must deposit all cash into an
interest-bearing escrow account no later than August 31, 1996; (3) the average
value of Coram's stock must remain above $2.50 during the twenty days
immediately preceding final approval of the settlement; (4) the Company may
cancel the settlement if ten percent or more of the class members opt out of the
settlement; (5) the Company must not voluntarily commence, or be involuntarily
put into, any bankruptcy proceeding prior to the final approval of the
settlement or at any time prior to the effective date of the settlement, and (6)
the Company must not be more than thirty days delinquent in paying interest or
principal on its Senior Credit Facility. During the quarter ended June 30, 1996,
the Company recorded a non-cash charge of $12.5 million in connection with the
expected future issuance of shares. The $12.5 million, which was recorded as a
provision for shareholder litigation settlement in operations and common stock
to be issued in shareholders' equity, represents the 5.0 million shares at the
minimum value under the agreement of $2.50 per share. The actual value of the
shares will be determined once the settlement receives final court approval and
the shares are actually issued. The value of the shares at issuance may be
higher than the $12.5 million and therefore may result in an additional charge
to earnings in a future period. Any additional charge may be material.

12
<PAGE> 13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

BACKGROUND

Business Strategy. The Company has experienced positive trends recently as
a result of the business strategy which it has been in the process of
implementing since September of 1995. The business strategy is focused on the
basic factors that could lead to profitability: revenue generation, cost
reduction, quality improvement and cash collections. The Company continues to
focus on business relationships where it can assure high quality of care and
operate profitably. The Company is continuing to emphasize marketing efforts
aimed at improving its physician relationships and also has continued the
development of its specialty programs such as one-stop shopping for managed care
payors, disease-state carve-outs (i.e., vertical integration along
disease-specific categories), transplant programs and women's health programs.
Cost reduction efforts have focused on field consolidation, reduction of
corporate expenses, assessment of poor performing branches and a review of
branch efficiencies. Delivery of quality service is being closely monitored
through an internal task force, more rigorous reporting and patient satisfaction
surveys gathered throughout the year. Further, management continues to
concentrate on improved reimbursement through an emphasis on improving billing
and cash collections and continued assessment of systems support for
reimbursement. While management believes the implementation of its business
strategy has improved operating performance, no assurances can be given as to
its ultimate success.

Factors Adversely Affecting Recent Operating Results. The most significant
factor affecting the Company's performance and financial condition is the
underperformance of the Caremark Business from what the Company expected at the
time of acquisition. The 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. Management believes that this trend continued into 1996. However,
because of the consolidation of the Caremark Business branches and the former
Coram branches, the declines in Caremark Business revenues since the second
quarter of 1995 cannot be precisely quantified at this time.

The Company incurred substantial indebtedness to acquire the Caremark
Business, which it expected to service primarily 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 related to criminal felony charges in June
1995 has negatively impacted revenue referral sources and employee morale
throughout the Company, further contributing to a loss of revenues. In addition,
during the first quarter of 1996, Caremark announced a settlement with private
indemnity payors with whom Caremark did business before selling the Caremark
Business to the Company. The Company believes the causes underlying the Caremark
settlements have also had an adverse effect on its business. See Note 2 to the
Unaudited Condensed Consolidated Financial Statements --"Acquisitions and
Restructurings -- Acquisition of Caremark Business."

Another factor which has adversely affected the Company's results of
operations is the ongoing pricing pressures in its core infusion business as a
result of a continuing shift in payor mix from private indemnity insurance to
managed care and governmental payors and intense competition among infusion
providers. 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.

13
<PAGE> 14

The following table sets forth the approximate percentages of the Company's
net revenue attributable to private indemnity, managed care and governmental
payors, respectively, for the three months ended June 30, 1996, March 31, 1996
and December 31, 1995:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31,
1996 1996 1995
-------- --------- ------------
<S> <C> <C> <C>
Private Indemnity Insurance and Other Payors........... 36% 39% 41%
Managed Care Organizations............................. 34% 34% 32%
Medicare and Medicaid Programs......................... 30% 27% 27%
---- ---- ----
Total........................................ 100% 100% 100%
</TABLE>

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 they offer through their facilities and
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. The Health Care Financing Administration has
issued a proposed rule that would, if implemented, significantly reduce the
amount Medicare would reimburse its beneficiaries for the cost of lithotripsy
procedures performed in an ambulatory surgery center or on an outpatient basis
at a hospital. Such a proposal might result in similar efforts by other
third-party payors to limit reimbursement for lithotripsy procedures.

14
<PAGE> 15

RESULTS OF OPERATIONS

CERTAIN QUARTERLY COMPARISONS

THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1996

The following summarizes the Company's results of operations for the three
months ended June 30, 1996 and March 31, 1996 (unaudited; in thousands, except
per share data):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
JUNE 30, MARCH 31,
1996 1996
-------- --------
<S> <C> <C>
Net revenue.................................................... $133,109 $131,625
Cost of service................................................ 91,150 98,159
-------- --------
Gross profit................................................... 41,959 33,466
Operating expenses:
Selling, general and administrative expenses................. 26,576 25,277
Provision for estimated uncollectible accounts............... 6,831 8,752
Amortization of goodwill..................................... 3,759 4,301
Provision for shareholder litigation settlement.............. 12,500 --
-------- --------
Total operating expenses............................. 49,666 38,330
-------- --------
Operating income (loss)........................................ (7,707) (4,864)
Other income (expense):
Interest expense............................................. (20,553) (19,029)
Other income, net............................................ 914 650
-------- --------
Loss before income taxes and minority interest................. (27,346) (23,243)
Income tax benefit........................................... (5,237) (7,416)
Minority interest in net income of consolidated joint
ventures.................................................. 1,417 2,074
-------- --------
Net loss....................................................... $(23,526) $(17,901)
======== ========
Net loss per share............................................. $ (0.58) $ (0.44)
======== ========
Weighted average common shares outstanding..................... 40,858 40,652
======== ========
</TABLE>

Net Revenue. Net revenue for the second quarter of 1996 increased by $1.5
million compared with the first quarter of 1996. There were no factors that on
an aggregate basis had a significant effect on revenue from quarter to quarter.
The Company has continued to eliminate unprofitable contractual relationships
and has sold or discontinued non-strategic or unprofitable businesses. In
addition, there continues to be ongoing pricing pressures as a result of a
continuing shift in payor mix from private indemnity insurance to managed care
and governmental payors. See "Factors Adversely Affecting Recent Operating
Results."

Gross Profit. Gross profit for the second quarter of 1996 increased $8.5
million or 25.4% compared with the first quarter of 1996. This improvement is
due to the reduction in cost of service from 74.6% of net revenue in the first
quarter of 1996 to 68.5% of net revenue in the second quarter of 1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased $1.3 million for the second quarter
of 1996 compared with the first quarter of 1996. The increase is due primarily
to increased legal expenses due to the defense of the Company in the shareholder
suits filed against it, in the pursuit of the ongoing suit against Caremark (See
Part II -- Item 1. "Legal Proceedings."), and increased fees paid to collection
agencies as the Company continues to increase resources focused on the
collection of aged accounts receivable. SG&A also includes a non-recurring $1.4
million gain on the conversion of certain debentures to equity recorded in the
second quarter of 1996 and a $1.6 million gain on the disposal of a non-core
business in the first quarter of 1996.

15
<PAGE> 16

Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $6.8 million, or 5.1% of net revenue for the quarter
ended June 30, 1996 compared to $8.8 million, or 6.6% of net revenue for the
quarter ended March 31, 1996. The decrease in the provision is due in part to
the Company's improved collection of its accounts receivable. This is evidenced
by a decrease in the net DSO from 91 days in the first quarter of 1996 to 83
days in the second quarter of 1996.

Provision for Shareholder Litigation Settlement. During the quarter ended
June 30, 1996, the Company recorded a non-cash provision of $12.5 million in
connection with 5.0 million freely tradeable shares to be issued at a future
date under an agreement in principle to settle shareholder litigation. See Part
II -- Item 1. "Legal Proceedings" and Note 5 to the Unaudited Condensed
Consolidated Financial Statements.

Operating Income (Loss). The Company recorded an operating loss of $7.7
million for the second quarter of 1996 compared to an operating loss of $4.9
million in the first quarter of 1996. Eliminating the effects of the $12.5
million non-cash provision for shareholder litigation settlement, operating
income for the quarter ended June 30, 1996 was $4.8 million. The improvement can
be attributed to the increase in gross profit and the decrease in the provision
for estimated uncollectible accounts offset by an increase in SG&A as discussed
above.

Other Income (Expense). Interest expense increased by $1.5 million for the
second quarter of 1996 compared with the first quarter of 1996 due primarily to
interest expense recorded related to warrants of $1.4 million. Interest expense
currently payable was $5.1 million and $5.0 million, respectively, in the first
and second quarters of 1996. The warrants and interest terms on the debt are
described in Note 3 to the Unaudited Condensed Consolidated Financial
Statements.

Income Tax Benefit. During the second quarter of 1996, the Company recorded
a tax benefit of $5.2 million compared to $7.4 million in the first quarter of
1996. This benefit is based on a current estimate of 1996 carryback benefits
available in relation to estimated pre-tax results for the year, exclusive of
any significant unusual items.

Net Loss. The Company recorded a net loss of $23.5 million for the second
quarter of 1996 compared with a net loss of $17.9 million for the first quarter
of 1996. Eliminating the effects of the $12.5 million non-cash provision for
shareholder litigation settlement the net loss for the quarter ended June 30,
1996 was $11.0 million. This improvement is the result of improved gross profit
of $8.5 million and a decrease in the provision for uncollectibles of $1.9
million, offset by an increase in SG&A of $1.3 million, an increase in interest
expense of $1.5 million and a decrease in the income tax benefit recognized of
$2.2 million.

SECOND QUARTER ENDED JUNE 30, 1996 COMPARED WITH SECOND QUARTER ENDED
JUNE 30, 1995

Net Revenue. Net revenue for the second quarter of 1996 decreased by $46.2
million or 25.8% compared with the second quarter of 1995. The home infusion
therapy business accounted for the majority of this decrease primarily as a
result of the impact of the underperformance of the Caremark Business. See
"Factors Adversely Affecting Recent Operating Results." Also contributing to the
decrease in net revenue was the sale or discontinuance of non-strategic or
unprofitable business of approximately $10.6 million and the elimination of
unprofitable contractual relationships since the beginning of 1995.

Gross Profit. Gross profit for the second quarter of 1996 increased $0.4
million or 1.1% compared with the second quarter of 1995. This improvement is
due to the reduction in cost of service from 76.9% of net revenue in the second
quarter of 1995 to 68.5% of net revenue in the second quarter of 1996 offset by
the decrease in net revenue.

Selling, General and Administrative Expenses. SG&A decreased $18.1 million
or 40.6% for the second quarter of 1996 compared with the second quarter of
1995. The decrease is due primarily to the Company's continuing strategy to cut
corporate and field costs. See "Business Strategy." In addition, the second
quarter of 1996 included a $1.4 million gain on the conversion of certain
debentures to equity compared with a $3.4 million loss on the early
extinguishment of debt in the second quarter of 1995. Other non-recurring
expenses incurred during the second quarter of 1995 included $3.4 million
related to the terminated Lincare

16
<PAGE> 17

merger and approximately $2.2 million in integration costs related to the Coram
and Caremark Consolidation Plans not accrued as part of the restructuring.

Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $6.8 million, or 5.1% of net revenue for the quarter
ended June 30, 1996 compared to $16.0 million, or 8.9% of net revenue for the
quarter ended June 30, 1995. The decrease in the provision is due in part to the
Company's improved collection of its accounts receivable.

Amortization of Goodwill. Amortization of goodwill decreased $1.0 million
in the second quarter of 1996 from the same period one year earlier. In the
third quarter of 1995, the Company wrote off goodwill of $158.1 million, which
decreased quarterly amortization expense by approximately $1.8 million. The
decrease was partially offset by the decrease in the remaining life of the
Company's goodwill to 25 years.

Restructuring Costs. The Company recorded a pre-tax charge of $25.8 million
in the second quarter of 1995 for estimated costs related to the Caremark
Business Consolidation Plan. In addition, the Company recorded a $0.3 benefit to
the restructure reserve related to the sale of a non-strategic asset
contemplated in the Coram Consolidation Plan. Both the Coram and the Caremark
Business Consolidation Plans and their status are described in Note 2 to the
Unaudited Condensed Consolidated Financial Statements.

Operating Income (Loss). The Company recorded an operating loss of $7.7
million for the second quarter of 1996 compared to an operating loss of $49.5
million in the second quarter of 1995. Eliminating the effects of the $12.5
million non-cash shareholder litigation settlement in the second quarter of 1996
and the $25.5 million restructuring charge recorded in the second quarter of
1995, there would have been operating income of $4.8 million in the second
quarter of 1996 compared with an operating loss of $24.0 million in the second
quarter of 1995. Excluding those unusual items, operating results improved by
$28.8 million from the second quarter of 1995 to the second quarter of 1996
principally as a result of the decrease in SG&A and the provision for
uncollectibles.

Other Income (Expense). Interest expense increased by $6.6 million, from
$14.0 million in the second quarter of 1995 to $20.6 million in the second
quarter of 1996. This increase is due primarily to interest expense recorded
related to warrants of $3.6 million, $1.4 million increase in interest on the
Rollover Note and $2.2 million increase in amortization of deferred financing
costs. The warrants and interest terms on the debt are described in Note 3 to
the Unaudited Condensed Consolidated Financial Statements.

Income Tax Benefit. During the second quarter of 1996, the Company recorded
a tax benefit of $5.2 million. There was neither a provision nor a benefit
recorded during the second quarter of 1995. The 1996 benefit is based on a
current estimate of 1996 carryback benefits available in relation to estimated
pre-tax results for the year, exclusive of any significant unusual items.

Minority Interest in Net Income of Consolidated Joint Ventures. Minority
interest expense decreased by $2.4 million from the second quarter of 1995 to
the second quarter of 1996. The decrease is due to the sale of one lithotripsy
joint venture in 1995 and the Company's completion of certain purchase of the
minority interest in two lithotripsy joint ventures in the second quarter of
1996.

Net Loss. Net loss for the second quarter of 1996 was $23.5 million
compared to $66.3 million for the second quarter of 1995. Eliminating the
effects of the $12.5 million non-cash shareholder litigation settlement in the
second quarter of 1996 and the $25.5 million restructuring charge recorded in
the second quarter of 1995, the net loss would have been $11.0 million and $40.8
million, respectively, a decrease of $29.8 million. The decrease was due
primarily to an $18.1 million decrease in SG&A expenses, a $9.2 million decrease
in the provision for uncollectibles, a $1.0 million decrease in amortization of
goodwill, an income tax benefit of $5.2 million recorded in the second quarter
of 1996, and a $2.4 million decrease in minority interest expense, offset by an
increase in interest expense of $6.6 million.

17
<PAGE> 18

SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995.

Net Revenue. Net revenue for the six months ended June 30, 1996 decreased
by $19.4 million or 6.8% compared with the six months ended June 30, 1995. On a
pro forma combined basis including the Caremark Business in the first quarter of
1995, as reported by Caremark, net revenue decreased $115.5 million, or 30.4%
from the first six months of 1995 to the first six months of 1996. The decrease
resulted from the factors discussed above under "Factors Adversely Affecting
Recent Operating Results," as well as the sale or discontinuance of
non-strategic or unprofitable businesses with revenue of approximately $30.7
million in the first six months of 1995 compared to $4.9 million in the first
six months of 1996 and the elimination of unprofitable contractual relationships
since the beginning of 1995.

Gross Profit. Gross profit for the first six months of 1996 increased $4.7
million or 6.7% compared with the first six months of 1995. On a pro forma
combined basis including the Caremark Business in the first quarter of 1995, as
reported by Caremark, gross profit decreased 17.0% for the reasons discussed
under the caption "Factors Adversely Affecting Recent Operating Results." The
improvement in actual gross profit is due to the decrease in cost of service
from 75.1% of net revenue for the six months ended June 30, 1995 to 71.5% of net
revenue for the six months ended June 30, 1996.

Selling, General and Administrative Expenses. SG&A decreased $10.7 million
or 17.2% for the first six months of 1996 compared with the first six months of
1995. On a pro forma combined basis including the Caremark Business in the first
six months of 1995 as reported by Caremark, SG&A expenses decreased $24.9
million or 32.5%. Excluding the effects of a $1.6 million gain on the disposal
of non-core businesses and a $1.4 million gain on the conversion of certain
debentures to equity recorded in the first six months of 1996 and the $3.4
million loss recorded for the early extinguishment of debt recorded in the first
six months of 1995, actual SG&A decreased $4.3 million or 7.3%.

Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts was $15.6 million, or 5.9% of net revenue for the six
months ended June 30, 1996 compared to $20.1 million, or 7.1% of net revenue for
the six months ended June 30, 1995. The decrease in the provision is due to in
part the Company's improved collection of its accounts receivable.

Provision for Shareholder Litigation Settlement. During the six months
ended June 30, 1996, the Company recorded a non-cash provision of $12.5 million
in connection with 5.0 million freely tradeable shares to be issued at a future
date under an agreement in principle to settle shareholder litigation. See Part
II -- Item 1. "Legal Proceedings" and Note 5 to the Unaudited Condensed
Consolidated Financial Statements.

Restructuring Costs. During the first six months of 1995, the Company
recorded a pre-tax charge of $25.8 million for estimated costs related to the
Caremark Business Consolidation Plan offset by a $4.4 million benefit recorded
during the first six months of 1995 related to the sale of non-strategic assets
as part of the Coram Consolidation Plan. Both the Coram and the Caremark
Business Consolidation Plans and their status are described in Note 2 to the
Unaudited Condensed Consolidated Financial Statements.

Operating Loss. The Company recorded an operating loss of $12.6 million for
the first six months of 1996 compared to an operating loss of $41.0 million in
the first six months of 1995. Excluding the effects of the $12.5 million
non-cash shareholder litigation settlement, the $1.6 million gain on the
disposal of non-core businesses and the $1.4 million gain on the retirement of
certain debentures to equity recorded in the first six months of 1996 and the
$3.4 million loss recorded for the early extinguishment of debt, and the $21.4
million restructure charge recorded in the first six months of 1995, operating
income improved by $13.0 million.

Other Income (Expense). Interest expense increased by $22.2 million for the
first six months of 1996 compared with the same period in 1995 due to increased
borrowings by the Company to finance acquisitions, consolidation costs and
working capital needs. Of the $39.6 million interest expense recorded for the
six months ended June 30, 1996, $29.5 million was non-cash in nature.

Income Tax Benefit. During the first six months of 1996, the Company
recorded a tax benefit of $12.7 million, as compared with a $1.1 million benefit
in the same period of the prior year. The 1996 benefit is

18
<PAGE> 19

based on a current estimate of 1996 carryback benefits available in relation to
estimated pre-tax results for the year, exclusive of any significant unusual
items.

Minority Interest in Net Income of Consolidated Joint Ventures. Minority
interest expense decreased by $2.7 million from the first six months of 1995 to
the first six months of 1996. The decrease is due to the sale of one lithotripsy
joint venture in 1995 and the Company's completion of the purchase of certain
minority interest in two lithotripsy joint ventures in the first six months of
1996.

Net Loss. Net loss for the first six months of 1996 was $41.4 million
compared to $61.8 for the first six months of 1995. Excluding the effects of the
$12.5 million non-cash shareholder litigation settlement, the $1.6 million gain
on the disposal of non-core businesses and the $1.4 million gain on the
conversion of certain debentures to equity recorded in the first six months of
1996 and the $3.4 million loss recorded for the early extinguishment of debt,
and the $21.4 million restructure charge recorded in the first six months of
1995, the net loss decreased by $5.1 million. This is due primarily to improved
operating performance, increased tax benefits and a decrease in minority
interest expense offset by an increase in interest expense.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents at June 30, 1996 were $26.8 million
(excluding restricted cash of $7.0 million which consists principally of cash
held by consolidated partnerships that may only be used for partnership
operations).

During the six months ended June 30, 1996, the Company generated cash flow
from operations of $26.4 million compared with negative operating cash flow of
$18.4 million for the six months ended June 30, 1995. The improvement is
primarily attributable to improved collections on accounts receivable, decreased
disbursement levels and tax refunds. The Company's improved collections have
included a large number of older accounts. However, as the Company collects or
writes off its older accounts, its rate of cash collections in relation to net
revenue billed may decrease in future periods. Cash flow from investing
activities was $4.1 million for the six months ended June 30, 1996 compared to
cash used of $236.6 million for the six months ended June 30, 1995 due to lower
business acquisitions and fewer earn-out agreements satisfied with cash
payments. Cash used by financing activities was $30.5 million for the six months
ended June 30, 1996, compared with cash provided of $263.1 million for the six
months ended June 30, 1995, due to repayment of borrowings under the Senior
Credit Facility in 1996 as compared with debt borrowings in 1995.

As of June 30, 1996, the Company does not have any material commitments for
capital expenditures.

The Company's Senior Credit Facility matures on March 31, 1997 and the
Company is currently evaluating its alternatives to meet scheduled maturities of
principal and interest, including the engagement of an investment bank to
evaluate the strategic alternatives concerning the divestiture of its
lithotripsy business. The lithotripsy business contributed net revenue, pre-tax
income and operating cash flow of $24.7 million, $7.1 million and $11.0 million,
respectively, for the first six months of 1996. No assurance can be given as to
whether the business will be sold or the amount of proceeds that may be
realized. Proceeds realized, if any, will be applied to reduce amounts
outstanding under the Company's Senior Credit Facility. The Company believes
that it has adequate working capital to meet its cash requirements through March
31, 1997, provided that the objectives of its business strategy are achieved.
The failure of the Company to achieve these objectives 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. As of August 8, 1996 and
since October 13, 1995, the Company has met all scheduled payments, resulting in
a $45.3 million reduction of the principal balance of the Senior Credit
Facility, including a full prepayment of the $10.6 million payment due on
September 30, 1996 and a partial prepayment of the amount due December 31, 1996.

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

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<PAGE> 20

1995, the Company purchased one partnership minority interest for $9.0 million
and in the first six months of 1996, the Company acquired certain minority
interests in two additional partnerships for approximately $4.7 million in cash.

FUTURE HEALTH CARE PROPOSALS AND 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.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In August 1995, the Company and certain of its officers and directors were
named as defendants in 21 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 complaint alleged that the
defendants made false and misleading statements to the public regarding, among
other things, projected earnings, anticipated cost savings and proposed mergers.
The complaint asserts 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 seeks 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, on behalf of Coram Healthcare Corporation v. James Sweeney, et al.,
Civil Action No. 14646 was filed in the Court of Chancery of the State of
Delaware asserting substantially similar factual allegations as the suits
described in the preceding paragraph, and seeking a judgment against the
individual defendants to account to Coram for all damages sustained by Coram as
a result of their alleged actions.

On March 29, 1996, a shareholder derivative suit captioned Nirmala Shevde,
on behalf of Coram Healthcare Corporation v. James Sweeney, et al., File No.
96-N-722, was filed in the United States District Court for the District of
Colorado. The complaint sets forth substantially the same allegations as those
made in the derivative lawsuit previously filed in Delaware, and seeks
substantially similar relief.

20
<PAGE> 21

Facility. During the quarter ended June 30, 1996, the Company recorded a
non-cash charge of $12.5 million in connection with the expected future issuance
of shares. The $12.5 million, which was recorded as provision for shareholder
litigation settlement in operations and common stock to be issued in
shareholders' equity, represents the 5.0 million shares at the minimum value
under the agreement of $2.50 per share. The actual value of the shares will be
determined once the settlement receives final court approval and the shares are
actually issued. The value of the shares at issuance may be higher than the
$12.5 million and therefore may result in an additional charge to earnings in a
future period. Any additional charge may be material.

On September 11, 1995, as amended on October 6, 1995, the Company filed
suit against 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, among other things, that
Caremark used improper accounting practices that resulted in overstating
Caremark's revenues. The complaint further alleges that Caremark falsely
represented that the Office of the Inspector General investigation involving
Caremark was not going to harm the value of the Caremark Business sold to the
Company.

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

On October 12, 1995, Caremark filed suit against the Company in the United
States District Court for Northern District of Illinois (File No. 95-C-5878)
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 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 T2 in 1992. Based on
the terms of the settlement, the Company paid the shareholder class $25.0
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
per share. 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 vigorously oppose the appeal.

On November 21, 1995, 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, et al. (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 T2 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

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<PAGE> 22

complaint alleges violations of Sections 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.

The Company intends to vigorously defend itself in these matters.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of the litigation described in the preceding paragraphs cannot
presently be determined. Accordingly, except as noted above concerning the
agreement in principle to settle the shareholder litigation, 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.

Since late 1993, the Securities and Exchange Commission has been conducting
a formal investigation into the events that led to the restatement of T2'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 T2 has
responded.

The Company is also a party to various other legal actions arising out of
the normal course of its business. Management believes that the ultimate
resolution of such other actions will not have a material adverse effect on the
Company's financial position and results of operations and liquidity of the
Company. Nevertheless, due to the uncertainties inherent in litigation, the
ultimate disposition of these actions cannot presently be determined.

ITEM 2. CHANGE IN SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Stockholders on June 24, 1996 to
consider and vote upon:

(1) Election of directors to serve until the 1997 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 1996 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............................ 33,309,752 2,083,554
Donald J. Amaral............................ 33,911,720 1,481,586
Richard A. Fink............................. 33,619,877 1,773,429
Andrew J. Nathanson......................... 33,666,934 1,726,372
Stephen G. Pagliuca......................... 33,687,921 1,705,385
L. Peter Smith.............................. 33,913,973 1,479,333
Dr. Gail R. Wilensky........................ 33,827,307 1,565,999
</TABLE>

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C> <C>
(2) Ratification of the Appointment of
Ernst & Young LLP............................... 35,021,190 226,266 145,850
</TABLE>

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<PAGE> 23

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
*10.1 -- Exclusive Distribution Agreement -- Healthcare Products and
Biomedical Equipment and Services Agreement between Medical
Specialties Distributors, Inc. ("MSD") and Coram, dated as of June 1,
1996.
*10.2 -- Medical Specialties Master Service Agreement between MSD and Coram,
dated as of June 1, 1996.
*10.3 -- Medical Specialties Master Rental Agreement between MSD and Coram,
dated as of June 1, 1996.
*10.4 -- Coram Healthcare Litigation Memorandum of Understanding between all
parties to In re Coram Healthcare Corp. Securities Litigation, Master
Filed No. 95-N-2074 and Shevde v. Sweeney et al., Civil Action No.
96-N-722, dated as of August 5, 1996.
*27 -- Financial Data Schedule
*99.1 -- Seventh Amendment to Credit Agreement Dated as of July 3, 1996.
</TABLE>

*(B) Reports on Form 8-K

On July 12, 1996, the Company filed a current report on Form 8-K reporting
an Amendment to 9% Subordinated Convertible Debenture and Notice of Conversion
dated as of June 30, 1996, entered into with each of the holders of the
Company's outstanding 9% Subordinated Convertible Debentures due June 30, 1996.

* Previously Filed.

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<PAGE> 24

SIGNATURES

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

CORAM HEALTHCARE CORPORATION

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

August 21, 1996