CORAM HEALTHCARE CORP, 10-Q, 1999-08-16

CORAM HEALTHCARE CORP
10-Q, 1999-08-16
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<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-11343

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

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

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

1125 SEVENTEENTH STREET
SUITE 2100 80202
Denver, CO (Zip Code)
(Address of principal executive offices)

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 10, 1999, was 49,549,366.

===============================================================================

<PAGE> 2

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CORAM HEALTHCARE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 8,001 $ 53
Cash limited as to use .......................................... 1,776 1,557
Accounts receivable, net of allowance of $16,254 and
$18,128 ...................................................... 120,106 113,697
Inventories ..................................................... 23,026 27,203
Deferred income taxes, net ...................................... 280 705
Other current assets ............................................ 5,584 4,963
---------- ------------
Total current assets .................................... 158,773 148,178
Property and equipment, net ....................................... 27,000 26,563
Deferred income taxes, net ........................................ 2,392 4,365
Other assets ...................................................... 17,950 17,574
Other deferred costs .............................................. 3,732 5,243
Goodwill, net of accumulated amortization of $72,693 and
$67,247 ......................................................... 230,648 235,696
---------- ------------
Total assets ............................................ $ 440,495 $ 437,619
========== ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ................................................ $ 72,356 $ 52,930
Accrued compensation ............................................ 7,898 11,205
Interest payable ................................................ 5,460 4,671
Current maturities of long-term debt ............................ 399 260
Income taxes payable ............................................ 495 300
Deferred income taxes ........................................... 319 1,060
Reserve for litigation .......................................... 1,365 2,987
Accrued merger and restructuring ................................ 3,233 3,935
Other current liabilities ....................................... 7,556 6,271
---------- ------------
Total current liabilities ............................... 99,081 83,619
Long-term debt .................................................... 268,574 242,162
Minority interest in consolidated joint ventures .................. 2,353 2,024
Other liabilities ................................................. 13,493 12,947
Deferred income taxes ............................................. 2,352 4,010
Commitments and contingencies ..................................... -- --
---------- ------------
Total liabilities ....................................... 385,853 344,762
Stockholders' equity:
Preferred stock, par value $.001, authorized 10,000
shares, none issued .......................................... -- --
Common stock, par value $.001, authorized 100,000 shares,
issued and outstanding 49,549 at June 30, 1999 and
49,201 at December 31, 1998 .................................. 50 49
Additional paid-in capital ...................................... 427,296 427,133
Accumulated deficit ............................................. (372,704) (334,325)
---------- ------------
Total stockholders' equity .............................. 54,642 92,857
---------- ------------
Total liabilities and stockholders' equity .............. $ 440,495 $ 437,619
========== ============

See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>

2
<PAGE> 3

CORAM HEALTHCARE CORPORATION

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue ........................................... $ 152,797 $ 117,173 $ 313,751 $ 224,862
Cost of service ....................................... 146,846 87,882 269,661 168,382
--------- --------- --------- ---------
Gross profit .......................................... 5,951 29,291 44,090 56,480
Operating expenses:
Selling, general and administrative expenses ........ 28,680 21,625 52,509 42,698
Provision for estimated uncollectible accounts ...... 4,452 3,577 8,613 7,243
Amortization of goodwill ............................ 2,716 2,778 5,448 5,543
Restructuring costs ................................. -- -- 950 --
--------- --------- --------- ---------
Total operating expenses .................... 35,848 27,980 67,520 55,484
--------- --------- --------- ---------
Operating income (loss) ............................... (29,897) 1,311 (23,430) 996
Other income (expenses):
Interest expense .................................... (7,524) (6,083) (14,083) (20,258)
Other income, net ................................... 182 946 391 1,723
--------- --------- --------- ---------
Loss before income taxes and minority interests ....... (37,239) (3,826) (37,122) (17,539)
Income tax expense .................................... 175 400 250 1,400
Minority interests in net income of consolidated
joint ventures......................................... 579 302 1,006 713
--------- --------- --------- ---------

Net loss .............................................. $ (37,993) $ (4,528) $ (38,378) $ (19,652)
========= ========= ========= =========
Loss per common share ................................. $ (0.77) $ (0.09) $ (0.78) $ (0.40)
========= ========= ========= =========
Loss per common share-- assuming dilution ............. $ (0.77) $ (0.09) $ (0.78) $ (0.40)
========= ========= ========= =========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

<PAGE> 4

CORAM HEALTHCARE CORPORATION

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net cash used in operating activities ................. $ (8,888) $ (22,087)
Cash flows from investing activities:
Purchases of property and equipment ................. (5,074) (3,911)
Other ............................................... (525) (620)
------------ ------------
Net cash used in investing activities ............ (5,599) (4,531)
Cash flows from financing activities:
Borrowings on line of credit ........................ 28,500 --
Repayment of debt ................................... (6,065) (80,226)
Sales of stock, including exercise of stock
options ............................................. -- 10
------------ ------------
Net cash provided by (used in)
financing activities ............................. 22,435 (80,216)
------------ ------------
Net increase (decrease) in cash and cash
equivalents ..................................... $ 7,948 $ (106,834)
============ ============
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

4
<PAGE> 5

CORAM HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 1999

1. BASIS OF PRESENTATION

Business Activity. Coram Healthcare Corporation and its subsidiaries
("Coram" or the "Company") are engaged in four principal lines of business:
alternate site (outside the hospital) infusion therapy and related services,
ancillary network management services, pharmacy benefit management and specialty
mail-order pharmacy services and centralized management, administrative and
clinical support for clinical research trials, and medical informatics services.
Other services offered by Coram include non-intravenous home health products
such as durable medical equipment and respiratory therapy services.

Coram delivers its alternate and site infusion therapy services through
approximately 90 branch offices located in 44 states and Ontario, Canada.
Infusion therapy involves the intravenous administration of anti-infective
therapy, intravenous immunoglobulin ("IVIG"), chemotherapy, pain management,
nutrition and other therapies.

The Company provides ancillary network management services through its
Resource Network division ("R-Net"), which manages networks of home health care
providers on behalf of health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs"), at-risk physician groups and other managed
care organizations. R-Net serves its customers through two primary call centers
and three satellite offices.

The Company delivers pharmacy benefit management and specialty pharmacy
services through its Coram Prescription Services division ("CPS"). The division
provides services through a centralized mail order pharmacy and service center
in Orlando, Florida; four regional mail order pharmacies in Plainview, New
York; Omaha, Nebraska; Las Vegas, Nevada; Hayward, California; and one retail
pharmacy in Baltimore, Maryland. The pharmacy benefit management service
provides on-line claims administration, formulary management and certain drug
utilization review services through a nationwide network of retail pharmacies.
CPS's specialty pharmacy services provide centralized distribution, adherence
programs, patient education, and clinical support to patients with high cost,
high risk conditions.

Through its Clinical Research and Medical Informatics division, the Company
provides centralized management and support for clinical research trials. This
division also offers data collection and integration services as well as
pharmaceconomic outcomes and utilization analyses.

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 that are, in the
opinion of management, necessary for a fair presentation. All such adjustments
are of a normal recurring nature. The results of operations for the interim
period ended June 30, 1999, 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, as amended, for the year ended December 31, 1998
and subsequent filings on Forms 10-Q and 8-K in 1999.

Provision for Estimated Uncollectible Accounts. Management believes the net
carrying amount of accounts receivable is fairly stated and that the Company
has made adequate provision for uncollectible accounts based on all information
available. However, 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.

Earnings (Loss) per Share. In 1997, the Financial Accounting Standards Board
(the "FASB") issued Statement No. 128, Earnings per Share ("Statement 128"). In
accordance with Statement 128, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. The following table
sets forth the computation of basic and diluted earnings per share for the three
and six months ended June 30, 1999 and 1998:

5
<PAGE> 6

CORAM HEALTHCARE CORPORATION

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

THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
JUNE 30,1999 JUNE 30, 1998 JUNE 30,1999 JUNE 30,1998
------------- ------------- ------------- -------------

<S> <C> <C> <C> <C>
Numerator for basic and diluted loss per share .................. $ (37,993) $ (4,528) $ (38,378) $ (19,652)
============= ============= ============= =============
Weighted average shares--denominator for basic earnings
per share ..................................................... 49,495 48,818 49,448 48,651
Effect of other dilutive securities:
Stock options ................................................. -- -- -- --
Warrants ...................................................... -- -- -- --
------------- ------------- ------------- -------------
Denominator for diluted earnings per share--
adjusted weighted average shares and assumed conversion ....... 49,495 48,818 49,448 48,651
============= ============= ============= =============
Loss per common share ........................................... $ (0.77) $ (0.09) $ (0.78) $ (0.40)
============= ============= ============= =============
Loss per common share--assuming dilution ........................ $ (0.77) $ (0.09) $ (0.78) $ (0.40)
============= ============= ============= =============
</TABLE>

Diluted earnings (loss) per share computations do not give effect to stock
options or warrants to purchase common stock as their effect would have been
anti-dilutive.

Derivatives and Hedging Activities. In June 1998, the FASB issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"), which requires recording all
derivative instruments as assets or liabilities, measured at fair value.
Statement 133 was effective for fiscal years beginning after June 15, 1999. The
FASB issued, in June 1999, the Statement of Financial Accounting Standards No.
137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement 133. ("Statement 137"), which amends
Statement 133. Statement 137 will apply to all fiscal quarters of all fiscal
years beginning after June 15, 2000. As of June 30, 1999, the Company had not
entered into any derivative and hedging transactions, and as such, the Company
does not believe that adoption of the new requirement will have an effect on the
Company's future financial position or operating results.

Start-up Costs. In 1998, the AICPA issued SOP 98-5 "Reporting on the Costs
of Start-Up Activities," which requires that the costs of start-up activities
be expensed as incurred. Initial adoption of SOP 98-5 was accounted for as a
cumulative effect of an accounting change. The Company adopted the SOP 98-5
effective January 1, 1999 and such adoption did not have a significant effect
on the results of operations or financial position.

2. ACQUISITIONS AND RESTRUCTURING

Acquisitions. Certain agreements related to previously acquired businesses
or interests therein provide for additional contingent consideration to be paid
by the Company. The amount of additional consideration, if any, is generally
based on the financial performance levels of the acquired companies. As of June
30, 1999, the Company may be required to pay a minimum of approximately $2.0
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. These minimum contingent obligations have
been recorded as additional goodwill. Subject to certain elections by the
Company or the sellers, a maximum of approximately $1.1 million of these
contingent obligations, subject to increase, may be paid in cash with the
remaining to be paid in common stock of the Company. If these contingent
payments exceed the minimum contingent amounts, they will be recorded as
additional goodwill in the period in which the payment becomes probable.
Payments during the three months ended June 30, 1999 and 1998 totaled $0.2
million and $0.1 million, respectively.

Merger and Restructuring. As a result of the formation of Coram and the
acquisition of substantially all of the assets of the alternate site infusion
business of Caremark, Inc., a subsidiary of Caremark International, Inc. (the
"Caremark Business"), during May 1995, the Company initiated a 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 incurred and accounted for as
adjustments to the purchase price of the Caremark Business in 1995. In December
1998, the Company evaluated the estimated costs to complete the Caremark
Business Consolidation Plan and other accruals and recognized a restructure
reversal benefit of $0.7 million.

<PAGE> 7

CORAM HEALTHCARE CORPORATION

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

Under the Caremark Business Consolidation plan, the Company has made total
payments, disposals and reversals as follows (in thousands):

BALANCE AT
THROUGH JUNE 30, 1999 JUNE 30, 1999
--------------------------------------------------------- ---------------------------
CASH NON-CASH RESTRUCTURE FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL REVERSAL EXPENDITURES CHARGES
------------ ------------ ------------ ------------ ------------ ------------

<S> <C> <C> <C> <C> <C> <C>
Caremark Business Consolidation
Plan:
Personnel Reduction Costs ....... $ 11,300 $ -- $ 11,300 $ -- $ -- $ 11,300
Facility Reduction Costs ........ 9,496 3,900 13,396 714 2,590 16,700
------------ ------------ ------------ ------------ ------------ ------------
Total Restructuring
Costs ................. $ 20,796 $ 3,900 $ 24,696 $ 714 $ 2,590 $ 28,000
============ ============ ============ ============ ============ ============
</TABLE>

During January 1999, the Company adopted a restructuring plan, which was
initiated in the first quarter of 1999. The plan resulted in an organizational
restructure in which $0.9 million of expense was recognized for severance
costs. The balance in the "Accrued Merger and Restructuring" liability at June
30, 1999 consists of future cash expenditures related to the Caremark Business
Consolidation Plan of $2.6 million, the 1999 restructure plan of $0.3 million
and other accruals of $0.3 million.

The Company estimates that the future cash expenditures related to the
Caremark Business Consolidation Plan and the 1999 restructure plan will be made
in the following periods: 35% through June 30, 2000, 16% through June 30, 2001,
17% through June 30, 2002, and 32% through June 30, 2003, and thereafter.

3. LONG-TERM DEBT

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

JUNE 30, DECEMBER 31,
1999 1998
------------ ------------

<S> <C> <C>
Series A Senior Subordinated Unsecured Notes ................ $ 157,631 $ 153,785
Series B Senior Subordinated Convertible Notes .............. 87,922 87,922
New Senior Credit Facility .................................. 22,500 --
Other obligations, including capital leases, at interest
rates ranging from 6% to 16%, collateralized by certain
property and equipment .................................... 920 715
------------ ------------
268,973 242,422
Less current scheduled maturities ........................... (399) (260)
------------ ------------
$ 268,574 $ 242,162
============ ============
</TABLE>

As of June 30, 1999, the Company's principal credit and debt agreements
included (i) a Securities Exchange Agreement (the "Securities Exchange
Agreement") dated May 6, 1998 with Cerberus Partners, L.P., Goldman Sachs
Credit Partners, L.P. and Foothill Capital Corporation (collectively known as
the "Holders") and the related Series A Senior Subordinated Unsecured Notes
(the "Series A Notes") and the Series B Senior Subordinated Convertible Notes
(the "Series B Notes") contemplated thereby and (ii) a new senior credit
facility with Foothill Income Trust, L.P., Cerberus Partners, L.P. and Goldman
Sachs Credit Partners L.P. (collectively known as the "Lenders") and Foothill
Capital Corporation, as Agent, dated as of August 20, 1998 (the "New Senior
Credit Facility"). Under the outstanding credit and debt agreements, the
Company is precluded from paying cash dividends during the term of the debt
agreement.

Securities Exchange Agreement. On May 6, 1998, the Company entered into the
Securities Exchange Agreement with the Holders of its previously outstanding
subordinated rollover note (the "Rollover Note"). As long as the Rollover Note
was outstanding, the Holders had the right to receive warrants to purchase up
to 20% of the outstanding shares of the common stock of the Company (the
"Warrants") on a fully diluted basis. The Securities Exchange Agreement
provided for the cancellation of the Rollover Note (including deferred interest
and fees) and the Warrants in an exchange (the "Exchange"), effective April 13,
1998, for the payment of $4.3 million in cash and the issuance by the Company
to the Holders of (i) $150.0 million in original principal amount Series A
Notes and (ii) $87.9 million in original principal amount of Series B Notes. In
addition, under the Securities Exchange Agreement, the Holders of the Series A
and Series B Notes were given the right to approve certain new debt and the
right to name one director to the Company's Board of Directors, who was elected
to the board in June 1998 and re-elected in August 1999.

7
<PAGE> 8

CORAM HEALTHCARE CORPORATION

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

On April 9, 1999, the Company entered into Amendment No. 2 (the "Note
Amendment") to the Securities Exchange Agreement with the Holders. Pursuant to
the Note Amendment, the outstanding principal amount of Series B Notes is
convertible into shares of the Company's common stock, par value $.001 per share
(the "Common Stock"), at a price of $2.00 per share (subject to customary
anti-dilution adjustments). Prior to entering into the Note Amendment, the
Series B Notes were convertible into Common Stock at a price of $3.00, which
price was subject to downward (but not upward) adjustment based on prevailing
market prices for the Common Stock on each of April 13, 1999 and October 13,
1999. Based on reported closing prices for trading in the Common Stock prior to
April 13, 1999, this conversion price would have been adjusted to below $2.00 on
such date had the Company not entered into the Note Amendment. Pursuant to the
Note Amendment, the parties also increased the interest rate applicable to the
Series A Notes from 9.875% to 11.5% per annum. The Securities Exchange Agreement
pursuant to which the Series A Notes and the Series B Notes were issued contains
certain other customary covenants and events of default. At June 30, 1999, the
Company was in compliance with all of these covenants, other than covenants
relating to certain relationships its Coram Resource Network, Inc. and Coram
Independent Practice Association, Inc. subsidiaries have with certain parties
that were contracted to provide services pursuant to the Master Agreement,
effective May 1, 1998, (the "Master Agreement") with Aetna U.S. Healthcare, Inc.
("Aetna USHC" or "Aetna") and to certain covenants relating to the
capitalization of certain subsidiaries. The Company has, however, received
waivers from its lenders regarding such noncompliance. There can be no assurance
as to whether further covenant violations will occur in future periods and
whether any necessary waivers will be forthcoming at that time. See Note 4 to
the Company's Unaudited Condensed Consolidated Financial Statements.

Series A Notes. The Series A Notes mature in May 2001 and bore interest at
an initial rate of 9.875% per annum payable quarterly in arrears in cash or
through the issuance of additional Series A Notes at the election of the
Company. Pursuant to the Note Amendment, the parties increased the interest
rate applicable to the Series A Notes to 11.5% per annum. The Holders can
require the Company to pay interest in cash if the Company exceeds a certain
interest coverage ratio. During the quarter ended June 30, 1999, interest
expense on the Series A Notes was approximately $4.5 million. On July 15, 1999,
additional Series A Notes totaling approximately $4.5 million were issued in
lieu of a cash payment of interest due through such date.

Series B Notes. The Series B Notes mature in April 2008 and bear interest
at the rate of 8% per annum, payable quarterly in arrears in cash or through
the issuance of additional Series B Notes at the election of the Company.
Pursuant to the Note Amendment, the outstanding principal amount of Series B
Notes are convertible into shares of the Company's Common Stock at a price of
$2.00 per share subject to customary anti-dilution adjustments including
adjustments for sale of common stock other than pursuant to existing
obligations or employee benefit plans at a price below the conversion price
prevailing at the time of such sale. Cash will be paid in lieu of fractional
shares upon conversion of the Series B Notes. During the quarter ended June 30,
1999, interest expense on the Series B Notes was approximately $1.8 million. On
July 15, 1999, additional Series B Notes totaling approximately $1.8 million
were issued in lieu of a cash payment of interest, due through such date.

The Series A and Series B Notes are redeemable, in whole or in part, at the
option of the Holders thereof in connection with any change of control of the
Company (as defined in the Securities Exchange Agreement), if the Company
ceases to hold and control certain interests in its significant subsidiaries,
or upon the acquisition of the Company or certain of its subsidiaries by a
third party. In such instances, the Series A and Series B Notes are redeemable
at 103% of the then outstanding principal amount plus accrued interest. The
Series B Notes are also redeemable at the option of the Holders thereof upon
maturity of the Series A Notes at the outstanding principal amount thereof plus
accrued interest. In addition, the Series A Notes are callable at any time at
103% of the then outstanding principal amount plus accrued interest at the
option of the Company.

Exchange; New Senior Credit Facility. The consummation of the Exchange was
contingent upon the satisfaction of certain conditions prior to closing of the
Securities Exchange Agreement on June 30, 1998. All conditions were satisfied
with the exception of the condition requiring the Company to execute an
agreement for a new senior credit facility. Accordingly, on June 30, 1998, the
Company entered into the First Amendment and Waiver (the "Amendment") to the
Securities Exchange Agreement, and the Exchange was consummated. The Amendment
waived the condition under the Securities Exchange Agreement requiring the
Company to execute an agreement for a new senior credit facility on or prior to
June 30, 1998. In addition, under the Amendment, the Holders of the Series A
and Series B Notes agreed to extend the Company up to $60.0 million of senior
secured debt (the "New Senior Credit Facility"), subject to the completion of
definitive agreements on or prior to September 30, 1998. On August 20, 1998,
the Company entered into a definitive agreement for the New Senior Credit
Facility providing for the availability of the $60.0 million facility for
acquisitions, working capital, letters of credit and other corporate purposes.
The availability is subject to certain borrowing base calculations as defined
in the underlying agreement. The New Senior Credit Facility matures February
26, 2001 and bears an interest rate of prime plus 1.5%, payable in arrears on
the first business day of each month. The interest rate was 9.25% at June 30,
1999. The New Senior Credit Facility is secured by the capital stock of the
Company's subsidiaries, as well as the accounts receivable and certain

8
<PAGE> 9

CORAM HEALTHCARE CORPORATION

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

other assets held by the Company and its subsidiaries. Under the New Senior
Credit Facility, among other nominal fees, the Company was required to pay an
upfront fee of 1.0% or $0.6 million and is liable for commitment fees on the
unused facility of 3/8 of 1.0% per annum, due quarterly in arrears. During the
quarter ended June 30, 1999, interest and related fees on the New Senior Credit
Facility were approximately $0.8 million. In addition, the terms of the New
Senior Credit Facility provide for the issuance of warrants to purchase up to
1.9 million shares of common stock of the Company at $0.01 per share, subject to
customary adjustments (the "1998 Warrants"). The 1998 Warrants were valued at
their fair value at the date of issuance, and were accounted for as deferred
costs to be amortized over the life of the New Senior Credit Facility. The
Company charged $0.4 million to interest expense during the quarter ended June
30, 1999 related to the 1998 Warrants. The terms of the New Senior Credit
Facility also provide for the issuance of letters of credit of up to $25.0
million provided that available credit would not fall below zero. As of June 30,
1999, the Holders had issued letters of credit totaling approximately $17.1
million thereby reducing the Company's availability under the New Senior Credit
Facility by that amount. The terms of the New Senior Credit Facility also
provide for a fee of 1.0% per annum on the outstanding letter of credit
obligations, due in arrears on the first business day of each month. The terms
of the New Senior Credit Facility also provide for additional fees to be paid on
demand to any letter of credit issuer pursuant to the application and related
documentation under which such letters of credit are issued. As of June 30,
1999, such fees were 0.825% per annum on the amount of outstanding letter of
credit obligations. The New Senior Credit Facility contains certain other
customary covenants and events of default. At June 30, 1999, the Company was in
compliance with all of these covenants, other than the covenants relating to
earnings before interest expense, income taxes, depreciation and amortization
(EBITDA) covenant, interest coverage ratio covenant, and debt ratio covenant as
of June 30, 1999 and for certain other matters. The Company, has, however,
received waivers from its lenders regarding such noncompliance. There can be no
assurance as to whether further covenant violations will occur in future periods
and whether necessary waivers will be forthcoming at that time.

At August 16, 1999, the New Senior Credit Facility had an available
borrowing base of $58.7 million, of which, $37.0 million had been drawn,
including $14.5 million relating to the letters of credit that had been
delivered in accordance with the Master Agreement with Aetna. In addition, after
deducting from the borrowing base the other letters of credit obligations
totaling $2.5 million, the total available under the facility is $19.2 million
as of August 16, 1999.

4. CONTINGENCIES

Litigation. On November 21, 1995, a suit captioned William Hall and Barbara
Lisser v. Coram Healthcare Corporation, James W. Sweeney, Patrick Fortune, and
Sam Leno, No 1:95-CV-2994(WHB) was filed in the United States District Court
for the Northern District of Georgia on behalf of a purported class of
plaintiffs who were entitled to receive warrants pursuant to the settlement of
In re T2 Medical, Inc. Shareholder Litigation. Plaintiffs filed an Amended
Class Action Complaint on February 28, 1996, in which they allege that the
Defendants made false and misleading statements that caused a fraud on the
market and artificially inflated the price of the Company's stock during the
period from August 1994 through August 1995. Such Complaint alleges violations
of Section 10(b) of the Securities Act of 1934, and Rule 10b-5 promulgated
thereunder, against all of the Defendants. The Complaint also alleges
controlling person liability against the individual defendants under Section
20(a) of the Securities and Exchange Act, and further alleges fraud by all of
the Defendants under Georgia law. Finally, Plaintiffs allege a breach of the
covenant of good faith and fair dealing by all Defendants. Plaintiffs seek
compensatory damages reflecting the difference in value between the warrants as
issued pursuant to the settlement of In re T2 Medical, Inc. Shareholder
Litigation 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 stock trading at its alleged true value. The Defendants filed a
Motion to dismiss the Amended Class Action Complaint on March 13, 1996. The
Court granted the Company's Motion to Dismiss the Complaint on February 12,
1997. The Plaintiffs appealed the dismissal to the Eleventh Circuit Court of
Appeals which affirmed the dismissal on October 15, 1998. The Plaintiffs filed
a petition with the United States Supreme Court on March 15, 1999 for a writ of
certiorari and the Company responded to the petition. On May 19, 1999, the
Supreme Court entered an order denying the Plaintiffs' petition for certiorari,
thereby ending the matter.

9
<PAGE> 10

CORAM HEALTHCARE CORPORATION

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

liability portion of the 1995 loss, which would, if the IRS prevails, affect
the prior year's tax liability. On May 14, 1999, the Company received a
statutory notice of deficiency with respect to the proposed adjustments. The
alleged deficiency totaled approximately $12.7 million plus interest and
penalties to be determined. The Company is contesting the notice of deficiency
through administrative proceedings and litigation and will vigorously defend its
position. The most significant adjustment proposed by the IRS relates to the
ability of the Company to categorize certain net operating losses as specified
liability losses and offset income in prior years, for which the Company has
previously received refunds in the amount of approximately $12.7 million. Due to
the uncertainty of final resolution, the Company's financial statements include
a reserve for these potential liabilities. No assurance can be given that the
Company will prevail given the early phase of this matter and the uncertainties
inherent in any proceeding with the IRS or in litigation. If the Company does
not prevail with respect to the proposed material adjustments, the financial
position and liquidity of the Company could be materially adversely affected.
See Part II, Item 1. "Legal Proceedings," and Note 5 to the Company's Unaudited
Condensed Consolidated Financial Statements.

On July 7, 1997, the Company filed suit against Price Waterhouse LLP (now
known as PricewaterhouseCoopers LLP) in the Supreme Court of San Francisco,
California, seeking damages in excess of $165.0 million. As part of the
settlement that resolved a case filed by the Company against Caremark
International, Inc. and Caremark, Inc. (collectively, "Caremark"), Caremark
assigned and transferred to the Company all of Caremark's claims and causes of
action against Price Waterhouse LLP, Caremark's auditors. This assignment of
claims includes claims for damages sustained by Caremark in defending and
settling its lawsuit with the Company. The case was dismissed from the court in
California because of inconvenience to witnesses with a right to re-file in
Illinois. The Company re-filed the lawsuit in state court in Illinois.
PricewaterhouseCoopers LLP filed a motion to dismiss the Company's lawsuit in
the state court in Illinois on several grounds, but their motion was denied on
March 15, 1999. In May, 1999, PricewaterhouseCoopers LLP filed another motion to
dismiss and the Company has submitted an opposition. The hearing on the motion
is set for October 29, 1999. The lawsuit has progressed into the discovery
stage. There can be no assurance of any recovery from PricewaterhouseCoopers
LLP.

On June 30, 1999, the Company filed a complaint (the "Coram Complaint")
against Aetna in the United States District Court for the Eastern District of
Pennsylvania (Civil Action No. 99-CV-3330). The Coram Complaint sets forth
claims against Aetna for fraud, misrepresentation, breach of contract and
rescission relating to the Master Agreement between the parties for ancillary
network management services through Coram's Resource Network Division ("R-Net").
Coram provided its notice of termination of the Master Agreement effective June
30, 1999. Under the arrangement, that was expected to last for five-years, Coram
managed and provided home health care services for over 2,000,000 Aetna
enrollees in eight states for a stated monthly fee per enrollee. Coram began
serving Aetna enrollees under the Master Agreement on approximately July 1,
1998.

As stated in the Coram Complaint, Aetna wrongfully induced Coram to enter
into and continue performing under the Master Agreement by, among other things,
misrepresenting and understating utilization of home health care services, which
utilization has been substantially higher than Aetna represented at the
commencement of the Master Agreement. As also stated in the Coram Complaint,
Aetna has breached the Master Agreement in several respects, including its
failure to pay amounts due under the Master Agreement totaling in excess of
$10.0 million. Furthermore, Aetna's misrepresentations induced Coram to expend
additional amounts for the infrastructure necessary to perform its duties under
the Master Agreement. In the lawsuit, Coram is seeking compensatory and punitive
damages in excess of $50.0 million.

On June 30, 1999, the Company received a copy of a complaint (the "Aetna
Complaint") that had been filed by Aetna on June 29, 1999 in the Court of Common
Pleas of Montgomery County, Pennsylvania (Case No. 99-11025). The Aetna
Complaint seeks equitable and declaratory relief to compel the Company to
perform under the Agreement, including the payment of compensation to the
healthcare providers that have rendered and continue to render services to
Aetna's health plan members. As stated in the Aetna Complaint, Aetna disputes
the Company's right to terminate the Agreement. On approximately July 1, 1999,
Coram removed the Aetna Complaint to federal court. Then, Aetna filed a motion
to remand seeking to have the case transferred back to state court. Aetna
subsequently withdrew its remand motion, such that the Aetna Complaint is also
pending in the United States District Court for the Eastern District of
Pennsylvania (Civil Action No. 99-CV-3378).

On July 20, 1999, Aetna filed a counterclaim against Coram in the federal
court lawsuit brought by Coram (Civil Action No. 99-CV-3330) and a motion to
dismiss the claims of Coram for fraud, misrepresentation and rescission of the
Master Agreement (Coram has filed an opposition to the motion to dismiss.). In
its counterclaim, Aetna has sued Coram for, among other things, breach of the
Master Agreement and fraudulent misrepresentation, contending Coram never
intended to perform the Master Agreement, defamation, interference with
contractual relations with

10
<PAGE> 11

CORAM HEALTHCARE CORPORATION

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

providers and for interference with prospective contractual relations with
other companies that allegedly bid for the Master Agreement. Aetna seeks in
excess of $100.0 million in the lawsuit, plus punitive damages.

Pursuant to an agreed upon order dated July 23, 1999, Coram is transitioning
back to Aetna, in an orderly fashion, the management of home health care
services under the Master Agreement. Coram has learned that Aetna has agreed to
pay network providers for properly authorized home health care services rendered
after July 23, 1999 while reserving its rights to pursue Coram for the cost of
such services as part of its complaint and counterclaim against Coram. The
Company's R-Net division is continuing to process claims submitted by members of
its provider network for services rendered through June 30, 1999.

The Company intends to pursue its claims against Aetna vigorously and to
put forth a vigorous defense against all of the claims brought by Aetna against
Coram and the other Coram parties. Due to the uncertainties inherent in
litigation, the ultimate disposition of the Aetna litigation described in the
preceding paragraphs cannot presently be determined and no provision has been
recorded in the Company's Consolidated Financial Statements for any recovery or
loss that may result upon resolution of the Aetna litigation described above.
An adverse outcome in such litigation could have a material adverse effect on
the financial position, results of operations and liquidity of the Company.

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
financial position, results of operations or liquidity of the Company.
Nevertheless, due to the uncertainties inherent in litigation, the ultimate
disposition of these actions cannot presently be determined.

Contingencies. The Master Agreement provides that the Company would be
financially responsible for certain covered home health services rendered to
covered enrollees in certain Aetna HMO based plans. The Master Agreement also
contemplates that the Company under certain circumstances, would reimburse Aetna
for services paid for directly by Aetna to providers of such services. These
amounts are referred to in the Master Agreement as "leakage." Aetna withheld
certain amounts from each capitation payment made to the Company as a reserve
for the reimbursement of leakage claims. During the term of the Master
Agreement, approximately $5.3 million was withheld by Aetna for payment of
leakage.

The Master Agreement required Aetna to provide the Company with monthly
reports showing its claims for leakage, but Aetna failed to do so. The most
recent of approximately three leakage reports that Aetna did provide purported
to show approximately $19.7 million in leakage claims incurred through
approximately March 1999, with potentially more leakage claims to follow. The
Company's review of the initial reports revealed that the reports were
inaccurate in various respects. The Company reported these inaccuracies to
Aetna, but received no response. At this time, the Company can not determine
whether it will be held responsible for the leakage claims asserted by Aetna due
to the uncertainties of litigation and can not estimate how much, if any, of the
leakage claims are properly the responsibility of the Company. These matters are
among the issues in dispute in the litigation described above.

5. INCOME TAXES

During the six months ended June 30, 1999 and 1998, the Company recorded an
income tax expense of $0.8 million and $0.1 million, respectively. The
effective income tax rates for the six month periods ended June 30, 1999 and
1998 differ substantially from the expected combined federal and state income
tax rates calculated using applicable statutory rates as a result of the
Company providing a full valuation reserve against its deferred tax assets.

11
<PAGE> 12

CORAM HEALTHCARE CORPORATION

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

As of June 30, 1999, deferred tax assets are net of a $134.7 million
valuation allowance. Realization of deferred tax assets is dependent upon the
ability of the Company to generate taxable income in the future. Deferred taxes
relate primarily to temporary differences consisting, in part, of accrued
restructuring costs, the charge for goodwill and other long-lived assets,
allowances for doubtful accounts and other accrued liabilities 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.

In January 1999, the Internal Revenue Service ("IRS") completed the
examination of the federal income tax return of the Company for the year ended
September 30, 1995, and proposed substantial adjustments to the prior tax
liabilities of the Company. The Company has agreed to adjustments of $24.4
million that only affect the net operating loss carryforwards available. The
Company does not agree with the other proposed adjustments regarding the
deduction of warrants, write-off of goodwill and the specified liability portion
of the 1995 loss which would, if the IRS prevails, affect the prior years' tax
liabilities. On May 14, 1999, the Company received a statutory notice of
deficiency with respect to the proposed adjustments. The alleged deficiency
totaled approximately $12.7 million plus interest and penalties to be
determined. The Company is contesting the notice of deficiency through
administrative proceedings and litigation, and will vigorously defend its
position. The most significant adjustment proposed by the IRS relates to the
ability of the Company to categorize certain net operating losses as specified
liability losses and offset income in prior years, for which the Company has
previously received refunds in the amount of approximately $12.7 million. Due to
the uncertainty of final resolution, the Company's financial statements include
a reserve for these potential liabilities. No assurance can be given that the
Company will prevail given the early phase of this matter and the uncertainties
inherent in any proceeding with the IRS or in litigation. If the Company does
not prevail with respect to the proposed material adjustments, the financial
position and liquidity of the Company could be materially adversely affected.

12
<PAGE> 13

CORAM HEALTHCARE CORPORATION

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

6. INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS

Management regularly evaluates the operating performance of the Company by
reviewing results on a product or service provided basis. The Company's
reportable segments are Infusion, R-Net and CPS. Infusion is the Company's base
business, which derives its revenue primarily from alternate site infusion
therapy. R-Net's revenue is derived primarily from management services offered
to HMOs, PPOs, at-risk physician groups and other managed care organizations
for home health services. CPS primarily provides specialty mail-order pharmacy
and pharmacy benefit management services. The other non-reportable segment
represents lithotripsy services for the three and six months ended June 30,
1998 and clinical research services for the three and six months ended June 30,
1999.

Coram uses earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") for purposes of performance measurement. The
measurement basis for segment assets includes net accounts receivable,
inventory, net property and equipment, and other current assets.

Summary information by segment is as follows (in thousands):

AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INFUSION
Revenue from external customers ................ $ 108,430 $ 94,724 $ 214,035 $ 183,522
Intersegment revenue ........................... 8,202 3,784 15,405 7,316
Interest income ................................ 23 17 45 32
Equity in net income of unconsolidated joint
ventures.................................... ... 1 15 1 46
Segment EBITDA profit .......................... 11,461 14,353 23,256 28,021
Segment assets ................................. 136,535 115,408 136,535 115,408
Segment asset expenditures ..................... 965 953 2,456 2,293

R-NET
Revenue from external customers ................ $ 23,226 $ 11,621 $ 59,832 $ 21,393
Intersegment revenue ........................... -- -- -- --
Interest income ................................ 8 5 15 8
Equity in net income of unconsolidated joint
ventures........................................ -- -- -- --
Segment EBITDA loss ............................ (29,429) (714) (24,498) (1,706)
Segment assets ................................. 6,608 6,216 6,608 6,216
Segment asset expenditures ..................... 287 500 813 601

CPS
Revenue from external customers ................ $ 21,011 $ 10,580 $ 39,666 $ 19,300
Intersegment revenue ........................... 533 280 615 499
Interest income ................................ -- -- -- --
Equity in net income of unconsolidated joint
ventures.................................... ... -- -- -- --
Segment EBITDA profit .......................... 839 519 1,406 837
Segment assets ................................. 18,883 7,077 18,883 7,077
Segment asset expenditures ..................... 366 70 822 152

ALL OTHER
Revenue from external customers ................ $ 130 $ 248 $ 218 $ 647
Intersegment revenue ........................... -- -- -- --
Interest income ................................ -- -- -- --
Equity in net income of unconsolidated joint
ventures.................................... ... -- -- -- --
Segment EBITDA profit (loss) ................... (149) 127 (204) 293
Segment assets ................................. 131 -- 131 --
Segment asset expenditures ..................... -- -- -- --
</TABLE>

13
<PAGE> 14

CORAM HEALTHCARE CORPORATION

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

A reconciliation of the Company's segment revenue, segment EBITDA profit
(loss), segment assets and other significant items to the corresponding amounts
in the Consolidated Financial Statements are as follows (in thousands):

AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES
Total for reportable segments ........................ $ 161,402 $ 120,989 $ 329,553 $ 232,030
Other revenue ........................................ 130 248 218 647
Elimination of intersegment revenue .................. (8,735) (4,064) (16,020) (7,815)
------------ ------------ ------------ ------------
Total consolidated revenue ................. $ 152,797 $ 117,173 $ 313,751 $ 224,862
============ ============ ============ ============

LOSS BEFORE INCOME TAXES AND MINORITY
INTERESTS
Total EBITDA profit (loss) for reportable segments ... $ (17,129) $ 14,158 $ 164 $ 27,152
Other EBITDA profit (loss) ........................... (149) 127 (204) 293
Goodwill amortization expense ........................ (2,716) (2,778) (5,448) (5,543)
Depreciation and other amortization expense .......... (2,953) (2,937) (5,752) (5,937)
Interest expense ..................................... (7,524) (6,083) (14,083) (20,258)
All other income (expense), net ...................... (6,768) (6,313) (11,799) (13,246)
------------ ------------ ------------ ------------
Loss before income taxes and
minority interests ....................... $ (37,239) $ (3,826) $ (37,122) $ (17,539)
============ ============ ============ ============

ASSETS
Total assets for reportable segments ................. $ 162,026 $ 128,701 $ 162,026 $ 128,701
Other assets ......................................... 278,469 284,561 278,469 284,561
------------ ------------ ------------ ------------
Consolidated total assets .................. $ 440,495 $ 413,262 $ 440,495 $ 413,262
============ ============ ============ ============
</TABLE>

For each of the years presented, the Company's primary operations and
assets were within the United States. The Company maintains an infusion
operation in Canada; however, the assets and revenue generated from this
business are not material to the Company's operations.

Net revenue from one customer for the Company's reportable segments
represented approximately 13% and 5%, respectively, of the Company's total
consolidated net revenue for the three months ended June 30, 1999 and 1998, and
17% and 5%, respectively, for the six months ended June 30, 1999 and 1998. Net
revenue from the Medicare and Medicaid programs for the Company's Infusion and
CPS segments represented approximately 17% and 23%, respectively, of the
Company's total consolidated net revenue for the three months ended June 30,
1999 and 1998, and 17% and 23%, respectively, for the six months ending June
30, 1999 and 1998.

7. SUBSEQUENT EVENTS

In July 1999, Coram laid off 114 employees in its Whippany, New Jersey,
office, who were responsible for managing the Aetna Master Agreement. Costs
incurred as a result of these lay offs, and other actions taken to reorganize
the R-Net division's Whippany, New Jersey call center operations, will be
recognized in the Company's financial statements for the quarterly period ended
September 30, 1999.

14
<PAGE> 15

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

This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) and information relating to Coram that are based on the beliefs of
the management of Coram as well as assumptions made by and information
currently available to the management of Coram. The Company's actual results
may vary materially from the forward-looking statements made in this report due
to important factors such as: history of operating losses and uncertainties
associated with future operating results; significant outstanding indebtedness;
equity conversion rights held by existing debt holders; limited liquidity;
reimbursement related risks; shifts in the mix of parties that pay for the
Company's services; dependence on relationships with third parties;
concentration of large payors; industry competition; timing of or ability to
complete acquisitions; government regulation of the home health care industry;
certain legal proceedings; dependence on key personnel; recruitment and
retention of trained personnel; potential volatility of stock price; New York
Stock Exchange listing status; and unanticipated impacts from the Year 2000
Issue. See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors" in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 1998. When
used in this report, the words "estimate," "project," "believe," "anticipate,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements. Such statements reflect the current views of Coram
with respect to future events based on currently available information and are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. Coram does not undertake any obligation
to release publicly any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

BACKGROUND

General. The Company is engaged in four principal lines of business:
alternate site (outside the hospital) infusion therapy and related services,
ancillary network management services, pharmacy benefit management and specialty
mail-order pharmacy services and centralized management, administrative and
clinical support for clinical research trials and medical informatics services.
Other services offered by Coram include non-intravenous home health products
such as durable medical equipment and respiratory therapy services.

Business Strategy. The Company's overall business strategy is focused on the
basic factors that could lead to profitability: strategic revenue generation
programs, cost reduction and control, quality improvement and cash collections.
The Company's revenue generation programs include a focus on business
relationships where the Company can provide high quality of care while operating
profitably. In the Company's alternate site infusion therapy business, the
Company is continuing to emphasize marketing efforts aimed at improving its
therapy mix, physician relationships and payor relationships. It also has
continued the development of its specialty programs aimed at serving patients
requiring intravenous nutrition; pre- and post-transplant patients; patients
with HIV/AIDS; and patients with chronic disorders such as hemophilia, immune
deficiencies and alpha-one antitrypsin deficiency. The R-Net division remains
focused on marketing to HMOs, PPOs, at-risk physician groups and other managed
care payors desiring to reduce the cost of their health care expenditures
through management of the home health services utilized by their members.
Meanwhile, the CPS division has focused its marketing efforts on smaller health
plans, including companies with self-insured plans, self-funded employer health
plans, labor unions, managed care payors and patient populations with
specialized needs such as pre- and post-transplant patients, patients with
HIV/AIDS and chronic conditions such as diabetes and asthma. The Company is
pursuing a plan to expand the reach of the CPS division by developing the
capability to accept orders for its specialty mail-order pharmacy services over
the Internet, with the site appearing on the Internet prior to the end of 1999
with revenues beginning in 2000. The Clinical Research and Medical Informatics
division is directing its marketing efforts toward pharmaceutical and medical
device manufacturers that can benefit from the centralized management, data
collection and integration services offered by the Company that can provide
these manufacturers with the opportunity to complete some of the most
challenging aspects of their clinical trials more quickly.

The Company has implemented cost reduction and control programs focused on
the reduction and control of cost of services and operating expenses,
assessment of poorly performing branches and review of branch efficiencies.
Delivery of quality service in the Company's infusion therapy division in
particular is being closely monitored through an internal task force, more
rigorous reporting and independent patient satisfaction surveys. Furthermore,
management throughout the Company is continuing to concentrate on reimbursement
by emphasizing improved billing and cash collections methods and continued
assessment of systems support and support for reimbursement.

15
<PAGE> 16
Strategic alternatives currently being considered by the Company include,
among others: (i) the evaluation of potential acquisitions in markets that would
permit the Company to grow its local or regional business either through one of
its principal lines of business; (ii) CPS's upcoming entrance into the
E-commerce market which would allow the division to transact business over the
Internet; and (iii) the continued investment into and development of services
provided by the Clinical Research and Medical Informatics division. There can be
no assurance that any growth in its local or regional business or other
strategic alternatives will be effected or will be available to the Company on
commercially acceptable terms and there can be no assurance that any investment
capital will be available to the Company.

FACTORS AFFECTING RECENT OPERATING RESULTS

Dispute with Aetna U.S. Healthcare, Inc. On June 30, 1999, the Company
notified Aetna that effective immediately Coram had terminated the Master
Agreement. The Company is now in litigation with Aetna, and the case is
presently scheduled for trial in April 2000. See Part II, Item 1. "Legal
Proceedings."

The Company's performance under the Master Agreement during the three and
six month periods ended June 30, 1999, resulted in losses under the agreement of
approximately $(29.1) million and $(24.0) million, respectively, including costs
of services paid and accrued of approximately $37.2 million and $55.4 million,
respectively. These figures do not take into account the various claims of Aetna
including its leakage claims. Also, due to the uncertainties of litigation in
calculating these losses Coram did not include as part of the recognized revenue
the amounts previously retained by Aetna for alleged leakage claims and included
only the actual capitation payments received as revenue. The costs of service
increased during the three months ended June 30, 1999, due to higher than
expected utilization rates which had previously been misrepresented by Aetna
as alleged in Coram's lawsuit. The Company believes that termination of the
Master Agreement was proper based upon non-payments by Aetna and was a necessary
step toward improving its operating profit and cash flow. The Company will take
a charge in its third quarter financial statements for costs associated with
terminating the Master Agreement in an amount yet to be determined due to the
uncertainties of litigation.

For the three and six month periods ended June 30, 1999, revenue related to
the Company's performance of the Master Agreement represented approximately 7%
and 12%, respectively, of the Company's total revenue. Apart from the Master
Agreement, Coram's infusion therapy branches have historically served Aetna
enrollees under various agreements, including a national ancillary services
agreement executed in April 1998 for home infusion services furnished to Aetna
enrollees not covered by the Master Agreement. The aggregate revenue of the
Company related to all of its relationships with Aetna for the three and six
months ended June 30, 1999 was approximately 13% and 17%, respectively. Although
the Company has not received notice from Aetna that it intends to terminate the
April 1998 national agreement for infusion services, the CPS division received
notice from Aetna that Aetna did not intend to renew its agreement with CPS that
was scheduled to expire in accordance with its terms on September 30, 1999.

The termination of the Master Agreement and related dispute with Aetna may
have other negative effects on the Company's Resource Network division and in
the Company's Infusion business if, for example, Aetna refuses to pay claims for
the services rendered by Coram to Aetna enrollees that are serviced outside the
Master Agreement, or if Aetna causes its newly acquired Prudential affiliates to
cease doing business with Coram. The Company cannot predict the ultimate impact
the dispute with Aetna may have but if the Company does not prevail in its
dispute with Aetna, the Company could incur additional substantial losses.
Further, the Company anticipates incurring significant legal fees associated
with pursuing the litigation related to the dispute with Aetna.

Other Factors Affecting Recent Operating Results. Other significant factors
currently affecting the Company's operating performance and financial condition
are as follows:

(i) restructure of its credit facilities through the repayment of its
former senior credit facility in January 1998, the exchange of its former
subordinated debt for the issuance of the Series A Notes and the Series B Notes
in June 1998 and the establishment of the New Senior Credit Facility in August
1998 and the setting of the conversion price applicable to the Series B Notes
contemplated by the April 1999 amendment to the Securities Exchange Agreement
offset by the increased interest rate applicable to the Series A Notes also
included in such April 1999 amendment;

(ii) expansion and improved sales efforts in the Company's CPS division;

(iii) ongoing pricing pressure in the Company's infusion business as a
result of an unfavorable shift in payor mix from private indemnity insurers to
managed care organizations and other contracted payors, and intense competition
among infusion providers. The following table sets forth the approximate
percentages of the Company's infusion therapy net revenue from certain
categories of payors:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
JUNE 30, MARCH 31, JUNE 30,
1999 1999 1998
-------- --------- --------
<S> <C> <C> <C>
Private Indemnity Insurance and Other Non-
Contracted Payors........................ 24% 23% 27%
Managed Care Organizations and Other
Contracted Payors........................ 54% 54% 47%
Medicare and Medicaid Programs............... 22% 23% 26%
--- --- ---
Total................................ 100% 100% 100%
=== === ===
</TABLE>

(iv) increased competition from hospitals and physicians that have sought to
increase the scope of services they offer through their facilities and offices,
including services similar to those offered by the Company, or that have
entered into risk-bearing relationships with third-party payors pursuant to
which they have been delegated control over the provision of a wide variety of
health care services, including the services offered by the Company; and

(v) increased clinical staffing, delivery, on-call, and other volume
related costs, as well as, increased costs of certain blood and blood
derivative products that are in short supply that have been required by the
increasing numbers of patients served by the Company's infusion division and
the increasing numbers of patients receiving the therapies that require the
products that are in short supply.

16
<PAGE> 17

RESULTS OF OPERATIONS

CERTAIN QUARTERLY COMPARISONS
Unaudited, in thousands except per share data:

THREE MONTHS ENDED
-----------------------------------------
JUNE 30, MARCH 31, JUNE 30,
1999 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue ........................................ $ 152,797 $ 160,954 $ 117,173
Cost of service .................................... 146,846 122,815 87,882
----------- ----------- -----------
Gross profit ....................................... 5,951 38,139 29,291
Operating expenses:
Selling, general and administrative expenses ..... 28,680 23,829 21,625
Provision for estimated uncollectible accounts ... 4,452 4,161 3,577
Amortization of goodwill ......................... 2,716 2,732 2,778
Restructuring costs .............................. -- 950 --
----------- ----------- -----------
Total operating expenses ................. 35,848 31,672 27,980
----------- ----------- -----------
Operating income (loss) ............................ (29,897) 6,467 1,311
Other income (expenses):
Interest expense ................................. (7,524) (6,559) (6,083)
Other income, net ................................ 182 210 946
----------- ----------- -----------
Income (loss) before income taxes and minority
interests ........................................ (37,239) 118 (3,826)
Income tax expense ................................. 175 75 400
Minority interests in net income of consolidated
joint ventures ................................... 579 428 302
----------- ----------- -----------
Net loss ........................................... $ (37,993) $ (385) $ (4,528)
=========== =========== ===========
Loss per common share .............................. $ (0.77) $ (0.01) $ (0.09)
=========== =========== ===========
Loss per common share-- assuming
dilution ......................................... $ (0.77) $ (0.01) $ (0.09)
=========== =========== ===========
</TABLE>

Three Months Ended June 30, 1999 Compared With Three Months Ended March 31,
1999 (unaudited, in millions except per share data):

Net Revenue. Net revenue decreased $8.3 million or 5.2%, to $152.7 million
in the quarter ended June 30, 1999 from $161.0 million in the quarter ended
March 31, 1999. The decrease can be attributed to a decrease in sales at the
R-Net division of $13.4 million in the current quarter, of which $10.0 million
represented adjustments related to amounts that presently are in dispute in the
litigation between the Company and Aetna. See Part II. Item 1 -- "Legal
Proceedings." The overall decrease in net revenue was partially offset by an
increase in sales at the Infusion and CPS divisions of $2.8 million and $2.4
million, respectively, derived from internal sales growth.

Gross Profit. Gross profit decreased $32.2 million to $5.9 million or a
gross margin of 3.9% in the quarter ended June 30, 1999 from $38.1 million or a
gross margin of 23.7% in the quarter ended March 31, 1999. The reduction is due
primarily to increased cost of service of $18.9 million for greater than
anticipated utilization and decreased net revenue of $10.0 million related to
the R-Net division and certain costs associated with the Master Agreement, as
discussed above. In addition, the infusion business reflected a higher cost of
service relating to variable costs that fluctuate with the number of patients
served and higher costs of drugs and supplies caused by current market shortages
of certain blood products. See "Factors Affecting Recent Operating Results" and
Part II, Item 1. "Legal Proceedings."

Selling, General and Administrative Expenses. SG&A increased $4.9 million or
20.6% to $28.7 million in the quarter ended June 30, 1999 from $23.8 million in
the quarter ended March 31, 1999. Excluding in the first quarter of 1999, a $1.8
million recovery of a note receivable, the increase in SG&A is $3.1 million or
13.0%. See "Factors Affecting Recent Operating Results."

Operating Income (Loss). The Company had an operating loss of ($29.9)
million during the three months ended June 30, 1999 compared to operating income
of $6.5 million during the three months ended March 31, 1999. The decline is due
primarily to the decrease in net revenue of $8.3 million, coupled with the
increases in cost of service of $24.0 million and SG&A costs of $4.9 million, as
described above.

Net Loss. Net loss for the quarter ended June 30, 1999 was ($38.0) million
compared to a net loss of ($0.4) million for the quarter ended March 31, 1999.
As discussed above, the decline is due primarily to the cost of service increase
of $18.9 million and revenue decrease of $10.0 million associated with the Aetna
Master Agreement and related dispute, and an increase in SG&A expense of $4.9
million.

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<PAGE> 18

Three Months Ended June, 30 1999 Compared With three Months Ended June 30,
1998 (unaudited; in millions except per share data):

Net Revenue. Net revenue increased $35.5 million or 30.3%, to $152.7 million
in the quarter ended June 30, 1999 from $117.2 million in the quarter ended June
30, 1998. The increase is primarily due to a (i) $9.9 million increase in net
revenue from the infusion business primarily due to a 9.0% increase in patient
census partially offset by an unfavorable shift in payor mix; (ii) $15.7 million
increase in net revenue from the R-Net division primarily relating to the Aetna
Master Agreement, and (iii) $10.1 million increase in net revenue from the CPS
division resulting from an increased number of patients served, generated by
internal sales growth. See "Factors Affecting Recent Operating Results."

Gross Profit. Gross profit decreased $23.4 million, to $5.9 million or a
gross margin of 3.9% in the quarter ended June 30, 1999 from $29.3 million or a
gross margin of 25.0% in the quarter ended June 30, 1998. The decrease results
primarily from the impact of $18.9 million increased cost of service relating to
the Aetna Master Agreement, as described above. See "Factors Affecting Recent
Operating Results."

Selling, General and Administrative Expenses. SG&A increased $7.1 million or
32.9% to $28.7 million in the quarter ended June 30, 1999 from $21.6 million in
the quarter ended June 30, 1998. The increase is due primarily to the growth of
the R-Net and CPS divisions. See "Factors Affecting Recent Operating Results."

Interest Expense. Interest expense increased by $1.4 million to $7.5 million
in the three months ended June 30, 1999 from $6.1 million during the three
months ended June 30, 1998. The increase is attributable to the addition of
draws of $22.5 million on the Senior Credit Facility, a $3.8 million increase in
the Series A Senior Subordinated Unsecured Notes, and a rate change on the
Series A Notes from 9.875% to 11.5% beginning on April 9, 1999.

Operating Income (Loss). The Company had an operating loss of ($29.9)
million during the three months ended June 30, 1999 compared to operating income
of $1.3 million during the three months ended June 30, 1998. The decline is due
primarily to the decrease in gross profit of $23.4 million and increase in SG&A
of $7.1 million, as described above.

Net Loss. Net loss for the quarter ended June 30, 1999 was ($38.0) million
compared to ($4.5) million for the quarter ended June 30, 1998. As discussed
above, the decline can be attributed to the decrease in operating income and the
increase in interest expense. See "Factors Affecting Recent Operating Results."

Six Months Ended June 30, 1999 Compared With Six Months Ended June 30, 1998
(unaudited; in millions except per share data):

Net Revenue. Net revenue increased $88.9 million or 39.6%, to $313.8 million
in the six months ended June 30, 1999 from $224.9 million in the six months
ended June 30, 1998. The increase is primarily due to a (i) $23.1 million
increase in net revenue from the infusion business primarily due to a 10.0%
increase in patient census partially offset by an unfavorable shift in payor
mix, (ii) $46.2 million increase in net revenue from the R-Net division
primarily relating to the Aetna Master Agreement; and (iii) $19.9 million
increase in net revenue from the CPS division resulting from an increased number
of patients served, generated by internal sales growth. See "Factors Affecting
Recent Operating Results."

Gross Profit. Gross profit decreased $12.4 million to $44.1 million or a
gross margin of 14.1% in the six months ended June 30, 1999 from $56.5 million
or a gross margin of 25.1% in the six months ended June 30, 1998. The decrease
results primarily from the increase in net revenue, discussed above, in the
R-Net and CPS divisions, offset by an increase in cost of service associated
with the Aetna Master Agreement, variable costs that fluctuate with the number
of patients served and higher costs of drugs and supplies caused by current
market shortages of certain blood products. See "Factors Affecting Recent
Operating Results."

Selling, General and Administrative Expenses. SG&A increased $9.8 million or
23.0%, to $52.5 million in the six months ended June 30, 1999 from $42.7 million
in the six months ended June 30, 1998. The increase is due primarily to the
growth of the Infusion business, R-Net division, and the CPS division. Expenses
increased primarily from business growth for salary and benefits along with
costs associated with additional personnel such as additional rent for office
space, telephone, and business insurance expense. See "Factors Affecting Recent
Operating Results."

Operating Income (Loss). The Company had an operating loss of ($23.4)
million during the six months ended June 30, 1999 compared to operating income
of $1.0 million during the six months ended June 30, 1998. The decrease in
operating income is due primarily to the decline in gross profit of $12.4
million, coupled with an increase of $9.8 million in SG&A for the quarter ended
June 30, 1999.

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<PAGE> 19

Restructuring Costs. The Company recorded approximately $0.9 million of
charges in March 1999 relating to reorganization of the Company's management
structure completed during the first quarter of 1999.

Interest Expense. Interest expense decreased by $6.1 million to $14.1
million in the six months ended June 30, 1999 from $20.2 million during the six
months ended June 30, 1998. The decrease is due primarily to a decrease of $10.3
million in interest related to the Rollover Note which was cancelled in
connection with the Securities Exchange Agreement and a decrease of $3.2 million
in interest relating to the Warrants issued under the Rollover Note, offset by
interest related to the Securities Exchange Agreement of $7.1 million. See Note
3 to the Unaudited Condensed Consolidated Financial Statements as of June 30,
1999.

Net Loss. During the six months ended June 30, 1999, the Company recognized
a net loss of ($38.4) million compared to a net loss of ($19.7) million during
the six months ended June 30, 1998. As discussed above, the decline can be
attributed to the decrease in operating income (loss), partially offset by a
decrease in interest expense. See "Factors Affecting Recent Operating Results."

LIQUIDITY AND CAPITAL RESOURCES

The Company uses cash generated from operations and available credit under
the New Senior Credit Facility to fund its working capital requirements and
operations. The Company's working capital as of June 30, 1999 was $59.7 million
compared to $64.6 million at December 31, 1998, a decrease of $4.9 million.
During the six months ended June 30, 1999, the primary increases in current
assets related to (i) an increase in cash and cash equivalents of $7.9 million;
(ii) an increase in net accounts receivable of $6.4 million, primarily due to an
approximate three day increase in days sales outstanding (DSO) and additional
sales volume at the CPS division; and (iii) a decrease in inventory of $4.2
million. The increase in cash and cash equivalents was primarily due to
borrowings, net of repayments, on the New Senior Credit Facility. Property and
equipment purchases primarily consisted of $2.1 million for computer systems and
software and the purchase of durable medical equipment for $1.6 million. Total
current liabilities increased in the six months ended June 30, 1999 primarily
due to an increase in accounts payable of $19.4 million coupled with a decrease
in accrued compensation of $3.3 million. These changes primarily relate to
expenses recognized for the R-Net division business with Aetna, through June 30,
1999.

As of June 30, 1999, the Company did not have any material commitments for
capital expenditures.

Under the terms of the New Senior Credit Facility, the maximum funds
available to the Company (defined as the "Revolving Credit Commitment") is an
amount equal to the lesser of (a) the Company's borrowing base as calculated
pursuant to the agreement or (b) the total revolving credit commitment of $60.0
million. As of June 30, 1999, the Company's Revolving Credit Commitment was
$59.1 million. Offset by letter of credit obligations of $17.1 million and
revolver borrowings of $22.5 million, the total available credit under the New
Senior Credit Facility was $19.5 million as of June 30, 1999. As of August 16,
1999, the Company's Revolving Credit Commitment was $58.7 million. Of that
amount, $37.0 million had been drawn against the New Senior Credit Facility,
which includes $14.5 million relating to the letters of credit that had been
delivered in accordance with the Aetna Master Agreement. In addition, after
deducting the other letters of credit obligations totaling $2.5 million, the
total available under the facility is $19.2 million as of August 16, 1999. As of
June 30, 1999, the Company was not in compliance with certain financial and
other covenants set forth in its principal debt agreements. The Company has,
however, received waivers from its lenders regarding such noncompliance. There
can be no assurance as to whether further covenant violations will occur in
future periods and whether any necessary waivers will be forthcoming at that
time. See Note 3 to the Unaudited Condensed Consolidated Financial Statements.

The Company has experienced a reduction in liquidity due to the higher than
expected costs of service as described above with respect to the Master
Agreement and Aetna's draws on letters of credit that increased outstanding debt
by $14.5 million. Liquidity will be further reduced if Aetna should fail to use
the $14.5 million letter of credit proceeds to satisfy claims of participating
providers against Coram for services rendered prior to June 30, 1999 (when Coram
terminated the Master Agreement) and Aetna has indicated that at present it does
not intend to so utilize the funds from the letters of credit. Although the
Company has sought to record a good faith estimate of all service costs related
to the Master Agreement, due to the uncertainties of litigation, there can be no
assurance that the exact amount and nature of all such costs can be presently
identified. If Aetna does not use the letter of credit proceeds to satisfy the
claims of participating providers for services rendered prior to June 30, 1999
or if additional liabilities should arise related to the Master Agreement, the
Company may need to seek additional or alternative sources of liquidity. The
Company is continuing to assess the impact of the Master Agreement at the same
time it is reviewing its business plan and formulating revised plans for
operations and cash flow without the Master Agreement and is under discussions
with its current lenders for a possible restructuring of its principal debt
agreements. The Company also continues to have discussions with other commercial
and investment banks and private equity sources regarding other sources of
capital for refinancing its debt to address its liquidity needs. The Company may
also consider strategic alternatives to provide any needed liquidity. There can
be no assurance that the Company will be able to obtain any needed liquidity on
commercially acceptable terms.

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<PAGE> 20

Year 2000 Issues. The Company believes the most significant risk with the
Year 2000 problem is the effect such issues may have on third party payors, such
as Medicare. While all of the effects of such noncompliance have not been
identified by the Company, any failure of these third party payors to resolve
Year 2000 problems in a timely manner could impact the Company's capital
availability due to a slow down in the payment of accounts receivable associated
with these payors. While the Company has not incurred any payment issues to date
which management can directly attribute to the Year 2000 problem at any specific
payor, no assurance can be made that payment issues will not occur. Such an
impact could have a material adverse effect on the Company's ability to generate
cash from operations and require the Company to use available capital from the
New Senior Credit Facility. Significant delays in collecting accounts receivable
due to Year 2000 problems experienced by third party payors could reduce the
capital available to the Company by reducing the borrowing base under the terms
of the New Senior Credit Facility. In addition, such payment delays due to the
Year 2000 problem could impact the Company's ability to meet its debt
obligations.

Restructure Costs. Of the $3.2 million of remaining accrued restructure
costs, the Company estimates that the future cash expenditures will be made in
the following periods: 35% through June 30, 2000, 16% through June 30, 2001, 17%
through June 30, 2002, and 32% through June 30, 2003, and thereafter. Although
subject to future adjustment and the Company's ability to successfully implement
its business strategy, the Company believes it has adequate reserves and
liquidity as of June 30, 1999 to meet future expenditures related to the plans.
However, there is no assurance that the reserves will be adequate or that the
Company will generate sufficient working capital to meet future expenditures.

YEAR 2000 ISSUES

Background. Some computers, software and other equipment include programming
code in which calendar year data is abbreviated to only two digits. As a result
of this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches and are commonly referred to as the "Millennium Bug" or
"Year 2000 Problem."

Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems to ensure that
the programs and systems will be Year 2000 compliant.

Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of material disruption to its
business. The Company has completed the majority of activity related to the
modification, upgrade or replacement of all major systems that have been
identified as adversely affected by Year 2000. To date, all work has been
completed, fully tested and systems for asset tracking, general accounting,
payroll, branch operations including admissions, pharmacy management, billing,
collections and inventory are fully operational and in compliance. Systems for
our Resource Network Group are compliant for billing and collections. Systems
that support our Coram Prescription Services division for both the pharmacy
benefit management and mail order pharmacy systems have been completed. Systems
that support our Home Medical Equipment locations have been upgraded and are
also in operation. Current plans call for the Company to complete final systems
remediation by September 30, 1999. These areas of remediation include the
upgrade of the Resource Network claims adjudication system, final deployment of
our inventory management system, minor turnkey software upgrades to our data
communications hardware and upgrade or replacement of personal computer
equipment that does not support Year 2000 calculations.

Suppliers. At the end of 1998, the company formally communicated with its
major suppliers to identify any potential adverse situations. During the first
six months of 1999, we have reviewed these responses and worked to resolve
issues involving the Year 2000 problem. However, the Company has limited or no
control over the actions of these suppliers. Thus, while the Company expects
that it will be able to resolve any significant Year 2000 Problems with these
suppliers by September 30, 1999, there can be no assurance that these suppliers
will resolve any or all Year 2000 Problems with any of its customers. Any
failure of these suppliers to resolve Year 2000 Problems with their systems in a
timely manner could have a material adverse effect on the Company's business,
financial condition, and results of operations.

20
<PAGE> 21

Third Party Payors. Management believes that the most significant risk to
the Company for the Year 2000 Problem is the effect such issues may have on
third party payors, such as Medicare. News reports have indicated that various
agencies of the federal government are having difficulty becoming Year 2000
compliant before the Year 2000. The Company has not yet undertaken
quantification of the effects of such noncompliance or to determine whether such
quantification is even possible. The Company has communicated with its third
party payors to identify and, to the extent possible, to resolve issues
involving the Year 2000 Problem. However, the Company has limited or no control
over the actions of these third party payors. Thus, while the Company expects
that it will be able to resolve any significant Year 2000 Problems with these
payors, there can be no assurance that these payors will resolve any or all Year
2000 Problems with their systems before the occurrence of a material disruption
to the business of the Company. Any failure of these third party payors to
resolve Year 2000 Problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, and
results of operations.

Remediation Costs. The Company is using internal and external resources to
reprogram or replace, test and implement the software and equipment
modifications required under this project. The total cost of the Year 2000
remediation project is estimated at $0.8 million and is being funded through
operating cash flows. As of the six months ended June 30, 1999, the Company has
incurred approximately $0.6 million related to this remediation process. Of
these costs, $0.4 million has been expensed and $0.2 million was capitalized as
new equipment or software. Of the remaining estimated remediation costs of $0.2
million, expenses are estimated to be $0.1 million with capitalized equipment
and software at $0.1 million. This estimate is being monitored and will be
revised in future public filings by the Company as additional information
becomes available.

Contingency Plans. The Company's focus in the area of contingency plans is
primarily on the development of plans to ensure the continuation of patient care
in the event of system failures related to Year 2000 that are beyond our
control. The types of contingency's for which plans are being developed include:
local telephone system failures, local power grid failures and
inadequacy/unavailability of medical supplies. In addition, although the Company
anticipates that remediation of its internal systems will be complete by
September 30, 1999, contingency plans are also being developed to ensure
appropriate personnel are immediately available to address any situation in the
event of an unanticipated failure.

Management believes that it is not possible to determine with complete
certainty that all Year 2000 Problems affecting the Company have been identified
or corrected. The number of devices that could be affected and the interactions
among these devices are simply too numerous. In addition, the Company cannot
accurately predict how many Year 2000 Problems related failures will occur or
the severity, duration or financial consequences of any inevitable failures.

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, including competitive bidding by market,
expanded fraud and abuse and anti-referral legislation and further reductions in
Medicare and Medicaid reimbursement. Most recently, on August 5, 1997, President
Clinton signed into law the Budget Reconciliation Act of 1997, which provides
for reductions in Medicare and Medicaid of over $115 billion and $13 billion,
respectively, over five years. The Health Care Financing Administration ("HCFA")
recently proposed a rule that purports to change reimbursement rates for
parenteral and enteral nutrients, equipment and supplies ("PEN"). The preamble
to the proposed rule states that it is intended to be budget neutral in its
first year of application, but would change reimbursement rates to the lesser of
the applicable rates paid in 1995 or 1998 (adjusted for inflation). The PEN
therapies represent the primary therapies that the infusion therapy division
received reimbursement for from the Medicare program. The impact of any
reductions on the health care industry in general and the Company specifically
cannot be determined at this time. Further, the Company cannot predict whether
any of the above proposals, proposed rules or any other proposals will be
adopted. No assurance can be given that the implementation of the Budget
Reconciliation Act or any other reforms will not have a material adverse effect
on the business of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discusses the Company's exposure to market risk related to
changes in interest rates. This discussion contains forward-looking statements
that are subject to risks and uncertainties. Actual results could vary
materially as a result of a number of factors, including but not limited to,
changes in interest rates, and those set forth under Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations:
Background -- Factors Affecting Recent Operating Results."

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<PAGE> 22

As of June 30, 1999, the Company had outstanding debt of $269.0 million of
which $157.6 million matures in May 2001 bears interest at 11.5% per annum and
$87.9 million matures in April 2008 and bears interest at the rate of 8.0% per
annum. On July 15, 1999, Series A and Series B Notes totaling approximately $4.5
million and $1.8 million, respectively were issued in lieu of a cash payment of
interest due through such date. The Company also has a New Senior Credit
Facility providing for the availability of up to $60.0 million for acquisitions,
working capital, letters of credit and other corporate purposes. The New Senior
Credit Facility matures in February 2001 and bears an interest rate of prime
plus 1.5%, which was 9.5% as of August 13, 1999. As of August 16, 1999, the
principal amount outstanding under the New Senior Credit Facility was
approximately $37.0 million. Because substantially all of the interest on the
Company's debt is fixed, a hypothetical 10.0% decrease in interest rates would
not have a material impact on the Company. Increases in interest rates could,
however, increase interest expenses associated with future borrowings by the
Company, if any. The Company does not hedge against interest rate changes.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On November 21, 1995, a suit captioned William Hall and Barbara Lisser v.
Coram Healthcare Corporation, James W. Sweeney, Patrick Fortune, and Sam Leno,
No 1:95-CV-2994(WHB) was filed in the United States District Court for the
Northern District of Georgia on behalf of a purported class of plaintiffs who
were entitled to receive warrants pursuant to the settlement of In re T2
Medical, Inc. Shareholder Litigation. Plaintiffs filed an Amended Class Action
Complaint on February 28, 1996, in which they allege that the Defendants made
false and misleading statements that caused a fraud on the market and
artificially inflated the price of the Company's stock during the period from
August 1994 through August 1995. Such Complaint alleges violations of Section
10(b) of the Securities Act of 1934, and Rule 10b-5 promulgated thereunder,
against all of the Defendants. The Complaint also alleges controlling person
liability against the individual defendants under Section 20(a) of the
Securities and Exchange Act, and further alleges fraud by all of the Defendants
under Georgia law. Finally, Plaintiffs allege a breach of the covenant of good
faith and fair dealing by all Defendants. Plaintiffs seek compensatory damages
reflecting the difference in value between the warrants as issued pursuant to
the settlement of In re T2 Medical, Inc. Shareholder Litigation 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 stock trading at its
alleged true value. The Defendants filed a Motion to dismiss the Amended Class
Action Complaint on March 13, 1996. The Court granted the Company's Motion to
Dismiss the Complaint on February 12, 1997. The Plaintiffs appealed the
dismissal to the Eleventh Circuit Court of Appeals which affirmed the dismissal
on October 15, 1998. The Plaintiffs filed a petition with the United States
Supreme Court on March 15, 1999 for a writ of certiorari and the Company
responded to the petition. On May 19, 1999, the Supreme Court entered an order
denying the Plaintiffs' petition for certiorari, ending the matter.

In January 1999, the Internal Revenue Service ("IRS") completed the
examination of the federal income tax return of the Company for the year ended
September 30, 1995, and proposed substantial adjustments to the prior tax
liabilities of the Company. The Company has agreed to adjustments of $24.4
million that only affect the net operating loss carryforwards available. The
Company does not agree with the other proposed adjustments regarding the
deduction of warrants, write-off of goodwill and the specified liability portion
of the 1995 loss, which affect the prior year's tax liability. On May 14, 1999,
the Company received a statutory notice of deficiency with respect to the
proposed adjustments. The alleged deficiency totaled approximately $12.7 million
plus interest and penalties to be determined. The Company is contesting the
notice of deficiency through administrative proceedings and litigation and will
vigorously defend its position. The most significant adjustment proposed by the
IRS relates to the ability of the Company to categorize certain net operating
losses as specified liability losses and offset income in prior years, for which
the Company has previously received refunds in the amount of approximately $12.7
million. Due to the uncertainty of final resolution, the Company's financial
statements include a reserve for these potential liabilities. No assurance can
be given that the Company will prevail given the early phase of this matter and
the uncertainties inherent in any proceeding with the IRS or in litigation. If
the Company does not prevail with respect to the proposed material adjustments,
the financial position and liquidity of the Company could be materially
adversely affected. See Item-2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations: Risk Factors --- Certain Legal
Proceedings," and Note 5 to the Company's Unaudited Condensed Consolidated
Financial Statements.

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<PAGE> 23

On June 30, 1999, the Company filed a complaint (the "Coram Complaint")
against Aetna U.S. Healthcare, Inc. in the United States District Court for the
Eastern District of Pennsylvania (Civil Action No. 99-CV-3330). The Coram
Complaint sets forth claims against Aetna for fraud, misrepresentation, breach
of contract and rescission relating to the Master Agreement between the parties,
effective May 1, 1998 for ancillary network management services through Coram's
Resource Network Division ("R-Net"). Coram provided its notice of termination of
the Master Agreement effective June 30, 1999. Under the arrangement, that was
expected to last for five-years, Coram managed and provided home health care
services for over 2,000,000 Aetna enrollees in eight states for a stated monthly
fee per enrollee. Coram began serving Aetna enrollees under the Master Agreement
on approximately July 1, 1998.

The Company intends to pursue its claims against Aetna vigorously and to put
forth a vigorous defense against all of the claims brought by Aetna against
Coram and the other Coram parties. Due to the uncertainties inherent in
litigation, the ultimate disposition of the Aetna litigation described in the
preceding paragraphs cannot presently be determined and no provision has been
recorded in the Company's Consolidated Financial Statements for any recovery or
loss that may result upon resolution of the Aetna litigation described above. An
adverse outcome in such litigation could have a material adverse effect on the
financial position, results of operations and liquidity of the Company.

On July 7, 1997, the Company filed suit against Price Waterhouse LLP (now
known as PricewaterhouseCoopers LLP) in the Supreme Court of San Francisco,
California, seeking damages in excess of $165.0 million. As part of the
settlement that resolved a case filed by the Company against Caremark
International, Inc. and Caremark, Inc. (collectively, "Caremark"), Caremark
assigned and transferred to the Company all of Caremark's claims and causes of
action against PricewaterhouseCoopers LLP, Caremark's auditors. This assignment
of claims includes claims for damages sustained by Caremark in defending and
settling its lawsuit with the Company. The case was dismissed from the court in
California because of inconvenience to witnesses with a right to re-file in
Illinois. The Company re-filed the lawsuit in state court in Illinois.
PricewaterhouseCoopers LLP filed a motion to dismiss the Company's lawsuit in
the state court in Illinois on several grounds, but their motion was denied on
March 15, 1999. In May, 1999, PricewaterhouseCoopers LLP filed another motion to
dismiss and the Company has submitted an opposition. The hearing on the motion
is set for October 29, 1999. The lawsuit has progressed into the discovery
stage. There can be no assurance of any recovery from PricewaterhouseCoopers
LLP. See Note 3 and Note 12 to the Company's 1998 10K/A.

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<PAGE> 24

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

A discussion of certain matters of non-compliance with certain covenants
contained in the Company's principal debt agreements and the waivers received
relating to such matters is set forth in Note 3 to the Company's Unaudited
Condensed Consolidated Financial Statements.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

In July 1999, Coram laid off 114 employees in its Whippany, New Jersey,
office, who were responsible for managing the Aetna Master Agreement. Costs
incurred as a result of these lay offs and other actions taken to reorganize the
R-Net division's Whippany, New Jersey call center operations will be recognized
in the Company's financial statements for the quarterly period ended September
30, 1999.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits
EXHIBIT
NUMBER DESCRIPTION
27 -- Financial Data Schedule

(B) Reports on Form 8-K.

On July 12, 1999, the Company filed a report on Form 8-K announcing the
complaint against Aetna U.S. Healthcare, Inc. in the United States District
Court for the Eastern District of Pennsylvania (Civil Action No. 99-CV-3330)
regarding claims set forth against Aetna for fraud, misrepresentation, breach of
contract and rescission.

24
<PAGE> 25

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/ WENDY L. SIMPSON
---------------------------------
Wendy L. Simpson
Executive Vice President and
Chief Financial Officer

August 16, 1999

<PAGE> 26

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 -- Financial Data Schedule

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CORAM HEALTHCARE CORPORATION FOR
THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,777
<SECURITIES> 0
<RECEIVABLES> 136,360
<ALLOWANCES> 16,254
<INVENTORY> 23,026
<CURRENT-ASSETS> 158,773
<PP&E> 84,820
<DEPRECIATION> 57,820
<TOTAL-ASSETS> 440,495
<CURRENT-LIABILITIES> 99,081
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 54,592
<TOTAL-LIABILITY-AND-EQUITY> 440,495
<SALES> 152,797
<TOTAL-REVENUES> 152,797
<CGS> 146,846
<TOTAL-COSTS> 146,846
<OTHER-EXPENSES> 35,848
<LOSS-PROVISION> 4,452
<INTEREST-EXPENSE> 7,524
<INCOME-PRETAX> (37,239)
<INCOME-TAX> 175
<INCOME-CONTINUING> (37,993)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,993)
<EPS-BASIC> (0.77)
<EPS-DILUTED> (0.77)

</TABLE>