Edgar Filing: CORAM HEALTHCARE CORP

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

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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 SEPTEMBER 30, 2001

[ ] 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

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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.)

1675 Broadway
Suite 900
Denver, CO 80202
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 292-4973

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

The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of November 16, 2001 was 49,638,452.

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 18,230 $ 27,259
Cash limited as to use ............................................ 320 387
Accounts receivable, net of allowances of $14,863 and $17,912 .... 77,387 90,286
Inventories ....................................................... 12,092 12,796
Deferred income taxes, net ........................................ 365 428
Other current assets .............................................. 5,892 4,759
--------- ---------
Total current assets ...................................... 127,185 123,016
Property and equipment, net ......................................... 14,930 15,292
Deferred income taxes, net .......................................... 1,612 1,697
Other deferred costs and intangible assets, net of
accumulated amortization of $18,809 and $16,963 .................. 6,905 8,448
Goodwill, net of accumulated amortization of
$95,044 and $87,770 ............................................... 186,582 193,855
Other assets ........................................................ 6,043 3,068
--------- ---------
Total assets .............................................. $ 343,257 $ 345,376
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable .................................................. $ 24,149 $ 21,450
Accrued compensation and related liabilities ...................... 14,366 17,098
Current maturities of long-term debt .............................. 8 179
Insurance and accreditation notes payable ......................... 876 --
Income taxes payable .............................................. 537 773
Deferred income taxes ............................................. 956 52
Accrued merger and restructuring costs ............................ 814 2,301
Accrued reorganization costs for administrative professionals ..... 7,836 4,831
Other accrued liabilities, including interest payable ............. 7,704 6,849
--------- ---------
Total current liabilities not subject to compromise ............... 57,246 53,533
Total current liabilities subject to compromise (See Note 2) .... 167,610 166,627
--------- ---------
Total current liabilities ........................................... 224,856 220,160
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities ........................... 170 24
Minority interests in consolidated joint ventures and
preferred stock issued by a subsidiary ......................... 6,079 5,978
Other liabilities ................................................. 19,108 13,630
Deferred income taxes ............................................. 1,021 2,073
Net liabilities of discontinued operations .......................... 26,506 26,533
--------- ---------
Total liabilities ......................................... 277,740 268,398

Commitments and contingencies ....................................... -- --

Stockholders' equity:
Preferred stock, par value $.001, authorized
10,000 shares, none issued ..................................... -- --
Common stock, par value $.001, 150,000 shares
Authorized, 49,638 shares issued and outstanding ............... 50 50
Additional paid-in capital ........................................ 427,360 427,357
Accumulated deficit ............................................... (361,893) (350,429)
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Total stockholders' equity ................................ 65,517 76,978
--------- ---------
Total liabilities and stockholders' equity ................ $ 343,257 $ 345,376
========= =========

See accompanying notes to unaudited condensed
consolidated financial statements.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
--------- --------- --------- ---------

Net revenue ............................................................ $ 93,762 $ 102,866 $ 287,446 $ 367,886
Cost of service ........................................................ 68,651 75,667 207,309 272,391
--------- --------- --------- ---------
Gross profit ........................................................... 25,111 27,199 80,137 95,495
Operating expenses:
Selling, general and administrative expenses ......................... 19,383 22,109 61,122 70,618
Provision for estimated uncollectible accounts ....................... 2,859 3,357 8,787 10,148
Amortization of goodwill ............................................. 2,424 2,562 7,273 7,670
Restructuring cost recovery .......................................... -- -- (583) --
--------- --------- --------- ---------
Total operating expenses ..................................... 24,666 28,028 76,599 88,436
--------- --------- --------- ---------

Operating income (loss) from continuing operations ..................... 445 (829) 3,538 7,059
Other income (expense):
Interest income ...................................................... 113 307 1,070 602
Interest expense (excluding post-petition contractual interest of
$3.5 million and $10.4 million for the three and nine months
ended September 30, 2001, respectively) .......................... (4,072) (6,866) (6,284) (20,313)
Gains on sales of businesses ......................................... -- 18,456 -- 18,456
Equity in net income of unconsolidated joint ventures ................ 259 322 727 698
Other income (expense), net .......................................... 9 (125) 47 (78)
--------- --------- --------- ---------
Income (loss) from continuing operations before reorganization
expenses, income taxes and minority interests ........................ (3,246) 11,265 (902) 6,424
Reorganization expenses, net ........................................... (3,739) (1,861) (10,003) (1,861)
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes
and minority interests ............................................... (6,985) 9,404 (10,905) 4,563
Income tax expense ..................................................... 50 75 150 250
Minority interests in net income of consolidated joint ventures ........ 75 129 409 466
--------- --------- --------- ---------
Income (loss) from continuing operations ............................... (7,110) 9,200 (11,464) 3,847
Income (loss) from disposal of discontinued operations ................. -- 324 -- (3,157)
--------- --------- --------- ---------
Net income (loss) ...................................................... $ (7,110) $ 9,524 $ (11,464) $ 690
========= ========= ========= =========

Basic Income (Loss) Per Share
Income (loss) from continuing operations ........................... $ (0.14) $ 0.18 $ (0.23) $ 0.07
Income (loss) from discontinued operations ......................... -- 0.01 -- (0.06)
--------- --------- --------- ---------
Net income (loss) .................................................. $ (0.14) $ 0.19 $ (0.23) $ 0.01
========= ========= ========= =========
Diluted Income (Loss) Per Share
Income (loss) from continuing operations ........................... $ (0.14) $ 0.17 $ (0.23) $ 0.07
Income (loss) from discontinued operations ......................... -- 0.01 -- (0.06)
--------- --------- --------- ---------
Net income (loss) .................................................. $ (0.14) $ 0.18 $ (0.23) $ 0.01
========= ========= ========= =========

See accompanying notes to unaudited condensed
consolidated financial statements.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
-------- --------

Net cash provided by continuing operations before
reorganization expenses ..................................... $ 6,735 $ 30,513
Net cash used by reorganization expenses ...................... (6,962) (1,001)
-------- --------
Net cash provided by (used in) continuing operations
(net of reorganization expenses) .............................. (227) 29,512
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ......................... (4,792) (2,778)
Proceeds from sales of businesses ........................... -- 41,513
Proceeds from dispositions of property and equipment ........ 69 60
-------- --------
Net cash provided by (used in) investing activities ........... (4,723) 38,795
-------- --------
Cash flows from financing activities:

Borrowings on line of credit ............................... -- 1,500
Repayments of debt obligations ............................. (277) (55,376)
Payment of debtor-in-possession financing costs
(post-petition) .......................................... -- (503)
Repayments of insurance note payable ....................... (1,372) --
Deposits to collateralize letters of credit ................ (2,095) --
Cash distributions paid to minority interests .............. (308) (850)
-------- --------
Net cash used in financing activities ......................... (4,052) (55,229)
-------- --------
Net increase (decrease) in cash from continuing operations .... $ (9,002) $ 13,078
======== ========

Net cash used in discontinued operations ...................... $ (27) $ (3,192)
======== ========

See accompanying notes to unaudited condensed
consolidated financial statements.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2001

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Business Activity. As of September 30, 2001, Coram Healthcare Corporation
("CHC") and its subsidiaries ("Coram" or the "company") were engaged primarily
in the business of furnishing alternate site (outside the hospital) infusion
therapy, including non-intravenous home health products such as durable medical
equipment and respiratory services. Other services offered by Coram include
centralized management, administration and clinical support for clinical
research trials. Coram delivers its alternate site infusion therapy services
through 76 branch offices located in 40 states and Ontario, Canada. CHC and its
first tier wholly owned subsidiary, Coram, Inc. ("CI") (collectively the
"Debtors"), filed voluntary petitions under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") on August 8, 2000. Since that date, the
Debtors have been operating as debtors-in-possession subject to the jurisdiction
of the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). None of the company's other subsidiaries is a debtor in the
proceeding. See Note 2 for further details.

In December 1999, Coram announced that it was repositioning its business to
focus on its core alternate site infusion therapy business and the clinical
research business operated by its subsidiary, CTI Network, Inc. Accordingly,
Coram's primary business strategy is to focus its efforts on the delivery of its
core infusion therapies, including nutrition, anti-infective therapies and
intravenous immunoglobulin ("IVIG") therapy for persons receiving transplants
and coagulant and blood clotting therapies for persons with hemophilia. Coram
has also implemented programs focused on the reduction and control of the costs
of providing services and operating expenses, assessment of under-performing
branches and review of branch efficiencies. Pursuant to this review, several
branches have been closed or scaled back to serve as satellites for other
branches and personnel have been eliminated. See Note 6 for further details.
Most of the company's net revenue is derived from third-party payers such as
private indemnity insurers, managed care organizations and governmental payers.

Prior to August 1, 2000, the company delivered pharmacy benefit management
and specialty mail-order pharmacy services for chronically ill patients through
its Coram Prescription Services ("CPS") business from one primary mail order
facility, four satellite mail order facilities and one retail pharmacy. The
pharmacy benefit management service provided on-line claims administration,
formulary management and certain drug utilization review services through a
nationwide network of retail pharmacies. CPS's specialty mail-order pharmacy
services were delivered through its six facilities, which provided distribution,
compliance monitoring, patient education and clinical support to a wide variety
of patients. On July 31, 2000, Coram completed the sale of its CPS business to a
management-led group financed by GTCR Golder Rauner, L.L.C. for a one-time
payment of approximately $41.3 million. See Note 4 for further details.

Prior to January 1, 2000, the company provided ancillary network management
services through its subsidiaries, Coram Resource Network, Inc. and Coram
Independent Practice Association, Inc. (collectively the "Resource Network
Subsidiaries" or "R-Net"), which managed networks of home healthcare providers
on behalf of HMOs, PPOs, at-risk physician groups and other managed care
organizations. R-Net served its customers through two primary call centers and
three satellite offices. In April 1998, the company entered into a five-year
capitated agreement with Aetna U.S. Healthcare, Inc. ("Aetna") (the "Master
Agreement") for the management and provision of certain home health services,
including home infusion, home nursing, respiratory therapy, durable medical
equipment, hospice care and home nursing support for several of Aetna's disease
management programs. Effective July 1, 1998, the company began receiving
capitated payments on a monthly basis for members covered under the Master
Agreement, assumed financial risk for certain home health services and began
providing management services for a network of home health providers through
R-Net. The agreements that R-Net had for the provision of ancillary network
management services have been terminated and R-Net is no longer providing any
ancillary network management services. Coram and Aetna were previously involved
in litigation over the Master Agreement; however, the litigation was amicably
resolved and the case was dismissed on April 20, 2000. The Resource Network
Subsidiaries filed voluntary bankruptcy petitions on November 12, 1999 with the
Bankruptcy Court under Chapter 11 of the United States Bankruptcy Code and the
Resource Network Subsidiaries are being liquidated pursuant to such proceedings.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

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 (the "Commission") and
reflect all adjustments and disclosures (consisting of normal recurring accruals
and, effective August 8, 2000, all adjustments pursuant to the adoption of SOP
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ("SOP 90-7")) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows as
of and for the interim periods presented herein. 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 the applicable Commission regulations. The results of
operations for the interim periods ended September 30, 2001 are not necessarily
indicative of the results for the full fiscal year. For further information,
refer to the audited consolidated financial statements and notes thereto
included in the company's Annual Report on Form 10-K for the year ended December
31, 2000.

The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Debtors' bankruptcy filings and
circumstances relating thereto, including the company's leveraged financial
structure and cumulative losses from operations, such realization of assets and
liquidation of liabilities are subject to significant uncertainty. During the
pendency of the Debtors' Chapter 11 bankruptcy proceedings, the company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the Condensed Consolidated Financial Statements.
Further, a confirmed plan of reorganization in the Chapter 11 bankruptcy
proceedings could materially change the amounts reported in the Condensed
Consolidated Financial Statements, which do not give effect to any adjustments
of the carrying value of assets or liabilities that might be necessary as a
consequence of a confirmed plan of reorganization (see Note 2 for further
details). The company's ability to continue as a going concern is dependent
upon, among other things, confirmation of a plan of reorganization, future
profitable operations, the ability to comply with the terms of the company's
financing agreements, the ability to remain in compliance with the physician
ownership and referral provisions of the Omnibus Budget Reconciliation Act of
1993 (commonly known as "Stark II") and the ability to generate sufficient cash
from operations and/or financing arrangements to meet its obligations.

Reclassifications. Certain amounts in the 2000 condensed consolidated
financial statements have been reclassified to conform to the 2001 presentation.

Provision for Estimated Uncollectible Accounts. Management regularly
reviews the collectibility of accounts receivable utilizing system-generated
reports which track collection and write-off activity. Estimated write-off
percentages are then applied to each aging category by payer classification to
determine the allowance for estimated uncollectible accounts. Additionally, the
company establishes appropriate additional reserves for accounts that are deemed
uncollectible due to occurrences such as bankruptcy filings by the payers. The
allowance for estimated uncollectible accounts is adjusted as needed to reflect
current collection, write-off and other trends, including changes in assessment
of realizable value. While management believes the resulting net carrying
amounts for accounts receivable are fairly stated at each quarter-end and that
the company has made adequate provision for uncollectible accounts based on all
information available, no assurances 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. The company's ability to successfully collect its
accounts receivable depends, in part, on its ability to adequately supervise and
train personnel in billing and collections, and minimize losses related to
branch consolidations and system changes.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

Earnings per Share. Basic income (loss) per share excludes any dilutive
effects of options, warrants and convertible securities. The company experienced
losses from continuing operations for the three and nine months ended September
30, 2001 and, in accordance with the provisions of Financial Accounting
Standards Board ("FASB") Statement No. 128, Earnings Per Share, the denominator
utilized to calculate earnings (loss) per share does not increase when losses
from continuing operations are in evidence because to do so would be
anti-dilutive. However, the company experienced income from continuing
operations for the three and nine months ended September 30, 2000. The following
table sets forth the computations of basic and diluted income (loss) per share
for the three and nine months ended September 30, 2001 and 2000 (in thousands,
except per share amounts):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------

Numerator for basic and diluted income (loss) per share
Income (loss) from continuing operations ................... $ (7,110) $ 9,200 $ (11,464) $ 3,847
Income (loss) from discontinued operations ................. -- 324 -- (3,175)
---------- ---------- ---------- ----------
Net income (loss) ............................................. $ (7,110) $ 9,524 $ (11,464) $ 690
========== ========== ========== ==========
Weighted average shares - denominator for basic
Income (loss) per share .................................... 49,638 49,638 49,638 49,638
Effects of other dilutive securities:
Stock options .............................................. -- -- -- 1
Warrants ................................................... -- 3,136 -- 3,187
---------- ---------- ---------- ----------
Denominator for diluted income (loss) per share - adjusted
Weighted average shares and assumed conversion .............. 49,638 52,774 49,638 52,826
========== ========== ========== ==========
Basic income (loss) per share:
Income (loss) from continuing operations ................... $ (0.14) $ 0.18 $ (0.23) $ 0.07
Income (loss) from discontinued operations ................. -- 0.01 -- (0.06)
---------- ---------- ---------- ----------
Net income (loss) .......................................... $ (0.14) $ 0.19 $ (0.23) $ 0.01
========== ========== ========== ==========
Diluted income (loss) per share:
Income (loss) from continuing operations ................... $ (0.14) $ 0.17 $ (0.23) $ 0.07
Income (loss) from discontinued operations ................. -- 0.01 -- (0.06)
---------- ---------- ---------- ----------
Net income (loss) .......................................... $ (0.14) $ 0.18 $ (0.23) $ 0.01
========== ========== ========== ==========

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 the recognition of all
derivative instruments as assets or liabilities, measured at fair value.
Statement 133 was effective for fiscal years beginning after June 15, 2000.
Accordingly, the company adopted the new accounting pronouncement effective
January 1, 2001; however, it had no effect on the company's financial position
or operating results.

Business Combinations. In July 2001, the FASB issued Statement of Financial
Accounting Standards No. 141, Business Combinations ("Statement 141"), which
requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain. Statement 141 is effective for the company's financial statements for the
year ending December 31, 2002. The adoption of this accounting pronouncement is
not currently anticipated to have a material impact on the company's financial
position or results of operations.

Goodwill and Other Intangible Assets. In July 2001, the FASB issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("Statement 142"), which primarily addresses the accounting
for goodwill and intangible assets subsequent to their acquisition. Statement
142 requires that goodwill and indefinite long-lived intangible assets no longer
be amortized to earnings, but instead be reviewed periodically for impairment.
Statement 142 is effective for the company's financial statements for the year
ending December 31, 2002. Management is currently evaluating the impact that the
adoption of this accounting pronouncement will have on the company's financial
position and results of operations.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

2. REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE

On August 8, 2000, CHC and CI filed voluntary petitions under Chapter 11 of
the Bankruptcy Code. Following the filing of the voluntary Chapter 11 petitions,
the Debtors have been operating as debtors-in-possession subject to the
jurisdiction of the Bankruptcy Court. None of the company's other subsidiaries
is a debtor in the proceeding. The Debtors' need to seek the relief afforded by
the Bankruptcy Code was due, in part, to their requirement to remain in
compliance with the physician ownership and referral provisions of the Omnibus
Budget Reconciliation Act of 1993 (commonly referred to as "Stark II") after
December 31, 2000 (see discussion of Stark II in Note 10) and the scheduled May
27, 2001 maturity of the Series A Senior Subordinated Unsecured Notes.
Accordingly, the Debtors sought advice and counsel from a variety of sources
and, in connection therewith, the Board of Directors unanimously concluded that
the bankruptcy and restructuring were the only viable alternatives.

On August 9, 2000, the Bankruptcy Court approved the Debtors' motions for:
(i) payment of employee wages and salaries and certain benefits and other
employee obligations; (ii) payment of critical trade vendors, utilities and
insurance in the ordinary course of business for both pre and post-petition
expenses; (iii) access to a debtor-in-possession financing arrangement (see Note
7 for details of the executed agreement); and (iv) use of all company bank
accounts for normal business operations. In September 2000, the Bankruptcy Court
approved the Debtors' motion to reject four unexpired, non-residential real
property leases and any associated subleases. The rejected leases include
underutilized locations in: (i) Allentown, Pennsylvania; (ii) Denver, Colorado;
(iii) Philadelphia, Pennsylvania; and (iv) Whippany, New Jersey. The successful
rejection of the Whippany, New Jersey lease caused the company to reverse
certain reserves that had previously been established related to closure of its
discontinued operations. Additionally, in September 2001 the Bankruptcy Court
approved the Debtors' motion for an extension of the period of time in which the
Debtors can reject unexpired leases of non-residential real property up to and
including January 1, 2002. Certain other motions filed by the Debtors have been
granted and others are presently pending.

In September 2000 and October 2000, the Bankruptcy Court approved payments
of up to approximately $2.6 million for retention bonuses to certain key
employees. The bonuses were scheduled to be paid in two equal installments on
(i) the later of the date of emergence from bankruptcy or December 31, 2000 and
(ii) December 31, 2001. Due to events that have delayed the emergence from
bankruptcy, the Bankruptcy Court approved early payment of the first installment
to most individuals within the retention program and such payments, aggregating
approximately $0.7 million, were made on March 15, 2001. The remaining portion
of the first installment of approximately $0.5 million, which relates to the
company's Chief Executive Officer and Executive Vice President, is scheduled for
payment upon approval of a plan of reorganization by the Bankruptcy Court, and
the second installment remains scheduled to be paid on December 31, 2001. The
company is accruing monthly amounts as earned pursuant to the provisions of the
retention plan.

On September 7, 2001, the Bankruptcy Court approved payments of up to $2.7
million for management incentive compensation bonuses (the "MIP Plan") related
to the year ended December 31, 2000 for all individuals participating in the MIP
Plan, except for the company's Chief Executive Officer. In connection therewith,
payments were made to those individuals in September 2001.

On or about May 9, 2001, the Bankruptcy Court approved the Debtors' motion
requesting authorization to enter into an insurance premium financing agreement
with AICCO, Inc. (the "Financing Agreement") to finance the payment of premiums
under certain of the Debtors' insurance policies. Under the terms of the
Financing Agreement, the Debtors made a down payment of approximately $1.1
million. The amount financed is approximately $2.1 million and is secured by the
unearned premiums and loss payments under the insurance policies covered by the
Financing Agreement. The amount financed is being paid in eight monthly
installments of approximately $0.3 million each, including interest at a per
annum rate of 7.85%. In addition, AICCO, Inc. has the right to terminate the
insurance policies and collect the unearned premiums (as administrative
expenses) if the Debtors do not make the monthly payments called for by the
Financing Agreement.

On October 29, 2001, the Debtors filed a motion with the Bankruptcy Court
requesting approval of a proposed asset purchase agreement which would provide
the authority for a non-debtor subsidiary of the company to sell certain durable
medical equipment presently located at its New Orleans branch to a third party.
A hearing on the motion will be held in November 2001; however, no assurances
can be given that the Bankruptcy Court will approve the proposed transaction or
that the parties will ultimately agree on a final asset purchase agreement.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

The Debtors are currently paying the post-petition claims of their vendors
in the ordinary course of business and are, pursuant to an order of the
Bankruptcy Court, causing their subsidiaries to pay their own debts in the
ordinary course of business. Even though the filing of the Chapter 11 cases
constituted defaults under the company's principal debt instruments, the
Bankruptcy Code imposes an automatic stay that will generally preclude the
creditors and other interested parties under such arrangements from taking
remedial action in response to any such resulting default without prior
Bankruptcy Court approval.

On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtors' Chapter 11 proceedings seeking, among other things, to have the two
separate bankruptcy proceedings substantively consolidated into one proceeding.
The Resource Network Subsidiaries and the Debtors engaged in discovery related
to this substantive consolidation motion and, in connection therewith, the
parties reached a settlement agreement in November 2000, which was approved by
an order of the Bankruptcy Court. See Note 10 for further details.

On the same day that the Chapter 11 cases were filed, the Debtors filed
their joint plan of reorganization (the "Joint Plan") and their joint disclosure
statement with the Bankruptcy Court. The Joint Plan was subsequently amended and
restated (the "Restated Joint Plan") and, on or about October 10, 2000, the
Restated Joint Plan and the First Amended Disclosure Statement with respect to
the Restated Joint Plan were authorized for distribution by the Bankruptcy
Court. Among other things, the Restated Joint Plan provided for: (i) a
conversion of all of the CI obligations represented by the company's Series A
Senior Subordinated Unsecured Notes (the "Series A Notes") and the Series B
Senior Subordinated Unsecured Convertible Notes (the "Series B Notes") into (a)
a four-year, interest only note in the principal amount of $180 million, that
would bear interest at the rate of 9% per annum and (b) all of the equity in the
reorganized CI; (ii) the payment in full of all secured, priority and general
unsecured debts of CI; (iii) the payment in full of all secured and priority
claims against CHC; (iv) the impairment of certain general unsecured debts of
CHC, including, among others, CHC's obligations under the Series A Notes and the
Series B Notes; and (v) the complete elimination of the equity interests of CHC.
Furthermore, pursuant to the Restated Joint Plan, CHC would be dissolved as soon
as practicable after the effective date of the Restated Joint Plan and the stock
of CHC would no longer be publicly traded. Therefore, under the Debtors'
Restated Joint Plan, as filed, the existing stockholders of CHC would have
received no value for their shares and all of the outstanding equity of CI as
the surviving entity would be owned by the holders of the company's Series A
Notes and Series B Notes. Representatives of the company negotiated the
principal aspects of the Joint Plan with representatives of the holders of the
company's Series A Notes and Series B Notes and Senior Credit Facility prior to
the filing of such Joint Plan.

On or about October 20, 2000, the Restated Joint Plan and First Amended
Disclosure Statement were distributed for a vote among persons holding impaired
claims that were entitled to a distribution under the Restated Joint Plan. The
Debtors did not send ballots to the holders of other types of claims and
interested parties, including equity holders, as the holders of such claims and
interested parties were deemed to reject the Restated Joint Plan. The tabulated
vote of the unsecured creditors was in favor of the company's Restated Joint
Plan. However, culminating at a confirmation hearing on December 21, 2000, the
Restated Joint Plan was not approved by the Bankruptcy Court. On April 25, 2001
and July 11, 2001, the Bankruptcy Court extended the period during which the
Debtors have the exclusive right to file a plan or plans before the Bankruptcy
Court to July 11, 2001 and August 1, 2001, respectively. Additionally, on August
2, 2001, the Bankruptcy Court extended the Debtors' exclusivity period to
solicit acceptances of any filed plan or plans to November 9, 2001 (the date to
solicit acceptances of the plan for CHC's equity holders was subsequently
extended to November 12, 2001). On or about November 7, 2001, the company filed
a motion seeking to extend the exclusivity dates to file a plan or plans and
solicit acceptances thereof to December 31, 2001 and March 4, 2002,
respectively. A hearing on the motion is scheduled for December 2001.

In order for the company to remain compliant with the requirements of Stark
II, on December 29, 2000, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $97.7 million of the Series A Notes and approximately
$11.6 million of accrued but unpaid interest on the Series A Notes and the
Series B Notes for 905 shares of CI Series A Cumulative Preferred Stock (see
Notes 7 and 9 for further details). This transaction generated an extraordinary
gain on troubled debt restructuring of approximately $107.8 million, net of tax,
which was recorded in the fourth quarter of the year ended December 31, 2000. At
December 31, 2000, the company's stockholders' equity exceeded the minimum Stark
II requirement necessary to comply with the public company exemption. See Note
10 for further discussion regarding Stark II.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

On or about February 6, 2001, the Official Committee of the Equity Security
Holders (the "Equity Committee") filed a motion with the Bankruptcy Court
seeking permission to bring a derivative lawsuit directly against the company's
Chief Executive Officer, a former member of the Board of Directors and Cerberus
Partners, L.P. (a party to the company's debtor-in-possession financing
agreement, Senior Credit Facility and Securities Exchange Agreement). On
February 26, 2001, the Bankruptcy Court ruled that the Equity Committee's motion
would not be productive at that time and, accordingly, the motion was denied
without prejudice. On the same day, the Bankruptcy Court approved the Debtors'
motion and appointed Goldin Associates, L.L.C. ("Goldin") as independent
restructuring advisors to the Independent Committee of the Board of Directors
(the "Independent Committee"). Among other things, the scope of Goldin's
services include (i) reporting its findings to the Independent Committee,
including its assessment of the appropriateness of the Restated Joint Plan, and
advising the Independent Committee respecting an appropriate course of action
calculated to bring the Debtors' bankruptcy proceedings to a fair and
satisfactory conclusion, (ii) preparing a written report as may be required by
the Independent Committee and/or the Bankruptcy Court and (iii) appearing before
the Bankruptcy Court to provide testimony, as needed. Goldin was also appointed
as a mediator among the Debtors, the Equity Committee and other parties in
interest.

Based upon Goldin's findings and recommendations, as set forth in the
Report of Independent Restructuring Advisor, Goldin Associates, L.L.C. (the
"Goldin Report"), on July 31, 2001, the Debtors filed with the Bankruptcy Court
a Second Joint Disclosure Statement, as amended (the "Second Disclosure
Statement"), with respect to their Second Joint Plan of Reorganization, as
amended (the "Second Joint Plan"). The Second Joint Plan, which was also filed
on July 31, 2001, provides for terms of reorganization similar to those
described in the Restated Joint Plan; however, utilizing Goldin's
recommendations, as set forth in the Goldin Report, the following substantive
modifications are included in the Second Joint Plan:

o the payment of up to $3.0 million to the holders of allowed
general unsecured claims of CHC;

o the payment of up to $10.0 million to the holders of CHC equity
interests (contingent upon such holders voting in favor of the
Second Joint Plan);

o cancellation of the issued and outstanding CI Series A Cumulative
Preferred Stock; and

o a $7.5 million reduction in certain performance bonuses payable
to Daniel D. Crowley, the company's Chief Executive Officer.

Under certain circumstances, as more fully discussed in the Second
Disclosure Statement, the general unsecured claim holders may be entitled to
receive a portion of the $10.0 million cash consideration allocated to the
holders of CHC equity interests.

In order to become effective, the Second Joint Plan is subject to a vote by
certain impaired creditors and equity holders and final approval of the
Bankruptcy Court. On September 6, 2001 and September 10, 2001, hearings before
the Bankruptcy Court considered the adequacy of the Second Disclosure Statement
and, in connection therewith, the Second Disclosure Statement was approved for
distribution to holders of certain claims in interests who are entitled to vote
on the Second Joint Plan. On or about September 21, 2001, the Debtors mailed
ballots to those parties entitled to vote on the Second Joint Plan.

Among other things, the Equity Committee's motion to terminate the Debtors'
exclusivity periods and file its own plan of reorganization was denied by the
Bankruptcy Court on August 1, 2001. The Equity Committee also filed a motion
protesting and objecting to the Debtors' Second Joint Plan. Moreover, the
Official Committee of the Equity Security Holders and Official Committee of
Unsecured Creditors in the Resource Network Subsidiaries' bankruptcy proceedings
filed objections to confirmation of the Second Joint Plan and a motion to lift
the automatic stay to pursue their claims against the company. Management of the
company cannot predict what impact the Equity Committee or any other interested
parties, including those parties associated with the Resource Network
Subsidiaries' bankruptcy proceedings, will have on the Second Joint Plan.

The tabulation of the ballots distributed to the holders of certain claims
in interests who were entitled to vote on the Second Joint Plan resulted in the
CHC equity holders voting against confirmation of the Second Joint Plan and all
other classes of claimholders voting in favor of the Second Joint Plan. The
Bankruptcy Court may ultimately confirm a plan of reorganization notwithstanding
the non-acceptance of the plan by an impaired class of creditors or equity
holders if certain conditions of the Bankruptcy Code are satisfied; however, no
assurances can be given regarding the confirmation of the Second Joint Plan.
Bankruptcy Court confirmation hearings for final confirmation of the Second
Joint Plan have commenced and will continue through early December 2001.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

Court of allowed claims for contingencies and other disputed amounts. Parties
affected by the rejections may file claims with the Bankruptcy Court in
accordance with the provisions of the Bankruptcy Code and applicable rules.
Claims secured by the Debtors' assets also are stayed, although the holders of
such claims have the right to petition the Bankruptcy Court for relief from the
automatic stay and foreclose on the property securing their claims.
Additionally, certain claimants have sought relief from the Bankruptcy Court to
remove the automatic stay and continue pursuit of their claims against the
Debtors or the Debtors' insurance carriers.

The principal categories and balances of Chapter 11 bankruptcy claims
accrued in the Condensed Consolidated Balance Sheets and included in liabilities
subject to compromise are summarized as follows (in thousands) (December 31,
2000 liabilities subject to compromise have been adjusted from amounts
previously reported to reflect the proposed $7.5 million reduction in
performance bonuses payable to the company's Chief Executive Officer):

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------

Series A and Series B Notes in default and other long-term debt obligations ...... $153,422 $153,422
Management incentive compensation liability ...................................... 7,500 7,500
Liabilities of discontinued operations subject to compromise ..................... 2,936 2,936
Earn-out obligation .............................................................. 1,268 1,268
Accounts payable ................................................................. 1,113 111
Accrued merger and restructuring costs (primarily severance liabilities) ......... 468 468
Legal and professional liabilities ............................................... 98 113
Other ............................................................................ 805 809
-------- --------
Total liabilities subject to compromise ........................................ $167,610 $166,627
======== ========

Subsequent to December 31, 2000, one of the Debtors' creditors issued
pre-petition credits of approximately $1.1 million. These credits have been
filed as claims against the Debtors' estates in the bankruptcy proceedings and
have therefore been recorded as liabilities subject to compromise in the
company's Condensed Consolidated Financial Statements.

In addition to the amounts disclosed in the table above, the holders of
Coram, Inc.'s Series A Cumulative Preferred Stock continue to maintain a claim
position within the Debtors' bankruptcy proceedings in the aggregate amount of
their cumulative liquidation preference. Notwithstanding the debt to equity
exchange, the aforementioned holders' priority in the Debtors' bankruptcy
proceedings will be no less than it was immediately prior to said exchange.

Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to the Second Joint
Plan, which, as discussed above, has been voted on and is now subject to
confirmation by the Bankruptcy Court. Therefore, it is not possible to fully or
completely estimate the fair value of the liabilities subject to compromise at
September 30, 2001 due to the Debtors' Chapter 11 cases and the uncertainty
surrounding the ultimate amount and settlement terms for such liabilities.

Reorganization expenses are items of expense or income that are incurred or
realized by the company as a result of the reorganization. These items include,
but are not limited to, professional fees, expenses related to key employee
retention plans, United States Trustee fees and other expenditures incurred
relating to the Chapter 11 proceedings, offset by interest earned on cash
accumulated related to the Debtors not paying their pre-petition liabilities and
other expenditures incurred relating to the Chapter 11 proceedings. The
principal components of reorganization expenses for the three and nine months
ended September 30, 2001 are as follows (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
-------- -------- -------- --------

Legal, accounting and consulting fees ............ $ 3,525 $ 1,554 $ 8,771 $ 1,554
Key employee retention plan expenses ............. 413 310 1,498 310
United States Trustee fees ....................... 12 10 31 10
Interest income .................................. (211) (13) (297) (13)
-------- -------- -------- --------
Total reorganization expenses, net ............... $ 3,739 $ 1,861 $ 10,003 $ 1,861
======== ======== ======== ========

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

3. DISCONTINUED OPERATIONS

In November 1999, following the filing of voluntary bankruptcy petitions
for the Resource Network Subsidiaries and the plan to liquidate the R-Net
division, Coram disclosed as Net Liabilities of Discontinued Operations in the
Condensed Consolidated Financial Statements the excess of R-Net's liabilities
over its assets. Coram also separately reflected R-Net's operating results in
the Condensed Consolidated Statements of Operations as Discontinued Operations.

For the three and nine months ended September 30, 2001, no Losses from
Operations of Discontinued Operations of R-Net were reflected in the company's
Condensed Consolidated Statements of Operations. The $3.2 million Loss from
Disposal of Discontinued Operations for the nine months ended September 30, 2000
includes additional reserves for litigation and other wind-down costs resulting
from R-Net's Chapter 11 bankruptcy proceedings. The components of the net
liabilities of discontinued operations included in the Condensed Consolidated
Balance Sheets are summarized as follows (in thousands):

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------

Cash .................................................................... $ 1,401 $ 1,162
Intercompany receivable (payable) ....................................... (34) 500
Accounts payable ........................................................ (29,461) (28,619)
Accrued expenses ........................................................ (1,348) (1,512)
Other long-term liabilities ............................................. -- (1,000)
-------- --------
(29,442) (29,469)
Net liabilities subject to compromise under Debtors' Chapter 11 case .... 2,936 2,936
-------- --------
Net liabilities of Discontinued Operations .............................. $(26,506) $(26,533)
======== ========

As of September 30, 2001, approximately $27.5 million of the liabilities
related to the discontinued operations were subject to compromise under the
R-Net Chapter 11 bankruptcy proceedings.

All of the R-Net locations have been closed in connection with the pending
liquidation of R-Net. Additionally, Coram employees who were members of the
Resource Network Subsidiaries' Board of Directors resigned during the year ended
December 31, 2000 and currently only the Chief Restructuring Officer appointed
by the Bankruptcy Court remains on the Board of Directors to manage and operate
the liquidation of the R-Net business.

4. SALE OF CPS AND OTHER BUSINESSES

On July 31, 2000, the company completed the sale of substantially all of
the assets and assignment of certain related liabilities of the CPS business to
Curascript Pharmacy, Inc. and Curascript PBM Services, Inc. (collectively the
"Buyers") for a one-time cash payment of approximately $41.3 million. The Buyers
were effectively a management-led group that was financed by GTCR Golder Rauner,
L.L.C. During the quarter ended September 30, 2000, the company recorded a gain
of approximately $18.1 million related to the sale of the CPS business. The cash
proceeds, after related expenses, were applied to the remaining principal
balance under the company's revolving line of credit of $28.5 million and an
additional $9.5 million was applied to the principal balance of the Series A
Senior Subordinated Unsecured Notes. See Note 7 for further details.

Pursuant to a contingent consideration arrangement related to one of the
company's operating subsidiaries, approximately $0.4 million was recognized as
incremental proceeds during the three months ended September 30, 2000. The
contingency related to the operating activities of the subsidiary through June
30, 2000. Upon payment of the contingent consideration, substantially all
conditions of the initial sale and purchase agreement were satisfied.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

5. RELATED PARTY TRANSACTIONS

The company's current Chairman, Chief Executive Officer and President,
Daniel D. Crowley, owns a consulting company (Dynamic Healthcare Solutions, LLC
("DHS")) from which the company purchased services. Effective with the Debtors'
Chapter 11 filings in the Bankruptcy Court, DHS employees who were serving as
consultants to Coram terminated their employment with DHS and became fulltime
Coram employees. Subsequent to December 31, 2000 and through November 16, 2001,
approximately $0.2 million was paid to Mr. Crowley's company for overhead costs
of the consulting company's Sacramento, California location that are directly
attributable to the duties that Mr. Crowley performed on behalf of Coram in
2001. For the three and nine months ended September 30, 2000, the company paid
approximately $0.1 million and $0.4 million, respectively, to Mr. Crowley's
consulting company for consulting services and reimbursable expenses.

Effective August 2, 2000, the company's Board of Directors approved a
contingent bonus to Mr. Crowley. Under the agreement, subject to certain
material terms and conditions, Mr. Crowley is to be paid $1.8 million following
the successful refinancing of the company's debt. In connection therewith and
the debt to preferred stock exchange discussed in Notes 2 and 7, the company
recorded a $1.8 million reorganization expense for the success bonus in 2000.
Such success bonus will not be payable until such time as the Debtors' or
another interested party's plan of reorganization is fully approved by the
Bankruptcy Court.

As more fully discussed in Note 2, Mr. Crowley's incentive compensation may
be reduced by $7.5 million in connection with the Debtors' Second Joint Plan.
Such amount is recorded as current liabilities subject to compromise in the
accompanying Condensed Consolidated Balance Sheets.

Effective August 1, 1999, Mr. Crowley and Cerberus Capital Management, L.P.
(an affiliate of Cerberus Partners, L.P. ("Cerberus"), a party to the company's
debtor-in-possession financing agreement, Senior Credit Facility and Securities
Exchange Agreement), executed an agreement whereby Mr. Crowley is paid by
Cerberus approximately $1 million per annum plus the potential of performance
related bonus opportunities, equity options and fringe benefits. The services
rendered by Mr. Crowley to Cerberus include, but are not limited to, providing
business and strategic healthcare investment advice to executive management at
Cerberus and its affiliates. Moreover, Mr. Crowley is the Chairman of the Board
of Directors of Winterland Productions, Inc. ("Winterland"), a privately held
affinity merchandise company in which an interest is owned by an affiliate of
Cerberus. On January 2, 2001, Winterland voluntarily filed for protection under
Chapter 11 of the United States Bankruptcy Code in the Northern District of
California.

6. 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
September 30, 2001, the company may be required to pay approximately $1.3
million under such contingent obligations. However, payment of such amounts has
been stayed by the Debtors' bankruptcy proceedings. Subject to certain elections
by the company or the sellers, $0.6 million of these contingent obligations may
be paid in cash. In the period these payments become probable, they are recorded
as additional goodwill. No payments were made during the nine months ended
September 30, 2001 but approximately $0.1 million was paid during the nine
months ended September 30, 2000. See Note 10 for further details concerning
contingencies relative to earn-out payments.

Merger and Restructuring. As a result of the formation of Coram and the May
1995 acquisition of substantially all of the assets of the alternate site
infusion business of Caremark, Inc., a subsidiary of Caremark International,
Inc., the company initiated a restructuring plan (the "Caremark Business
Consolidation Plan") and charged approximately $25.8 million to operations as a
restructuring cost.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

During December 1999, the company initiated an organizational restructure
and strategic repositioning plan (the "Coram Restructure Plan") and charged
approximately $4.8 million to operations as a restructuring cost. The Coram
Restructure Plan resulted in the closing of additional facilities and reduction
of personnel. In connection therewith, the company reserved for (i) personnel
reduction costs relating to severance payments, fringe benefits and taxes for
employees that have been or may be terminated and (ii) facility closing costs
that consist of rent, common area maintenance and utility costs for fulfilling
lease commitments of approximately fifteen branch and corporate facilities that
have been or may be closed or downsized. Reserves for facility closing costs are
offset by amounts arising from sublease arrangements, but not until such
arrangements are in the form of signed and executed contracts. As part of the
Coram Restructure Plan, the company informed certain reimbursement sites of
their estimated closure dates. Such operations were closed during the first half
of 2001 and, in connection therewith, approximately 80 related employees were
terminated.

Under the Caremark Business Consolidation Plan and the Coram Restructure
Plan, the total charges through September 30, 2001, the estimate of total future
cash expenditures and the estimated total charges are as follows (in thousands):

CHARGES THROUGH SEPTEMBER 30, 2001 BALANCES AT SEPTEMBER 30, 2001
----------------------------------- ------------------------------
ESTIMATED
CASH NON-CASH FUTURE CASH TOTAL
EXPENDITURES CHARGES TOTAL ESTIMATED CHARGES
------------ -------- -------- -------- --------

Caremark Business Consolidation Plan:
Personnel reduction costs .......................... $ 11,300 $ -- $ 11,300 $ -- $ 11,300
Facility reduction costs ........................... 10,250 3,900 14,150 543 14,693
-------- -------- -------- -------- --------
Subtotal ........................................ 21,550 3,900 25,450 543 25,993

Coram Restructure Plan:
Personnel reduction costs .......................... 2,361 -- 2,361 104 2,465
Facility reduction costs ........................... 995 -- 995 635 1,630
-------- -------- -------- -------- --------
Subtotal ........................................ 3,356 -- 3,356 739 4,095
-------- -------- -------- -------- --------
Totals ............................................... $ 24,906 $ 3,900 $ 28,806 $ 1,282 $ 30,088
======== ======== ======== ========
Restructuring costs subject to compromise ....... (468)
Accrued Merger and Restructuring Costs --------
Per the Condensed Consolidated Balance Sheets ... $ 814
========

During the nine months ended September 30, 2001, significant items
impacting the restructuring reserves that were not subject to compromise are
summarized as follows (in thousands):

Balance at December 31, 2000 ................................... $ 2,301
Activity during the nine months ended September 30, 2001:
Payments under the plans ..................................... (904)
Reversals principally due to changes in estimates
attributable to leased facilities (lease assumption by a
third party) and severance obligations ...................... (583)
-------
Balance at September 30, 2001 .................................. $ 814
=======

The company estimates that the future cash expenditures related to the
restructuring plans stated above will be made in the following periods: 66%
through September 30, 2002, 18% through September 30, 2003, 9% through September
30, 2004 and 7% thereafter.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

7. DEBT OBLIGATIONS

Debt obligations are as follows (in thousands):

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------

Debtor-In-Possession Financing Agreement ..................................................... $ -- $ --
Senior Credit Facility ....................................................................... -- --
Series A Senior Subordinated Unsecured Notes in default ...................................... 61,208 61,208
Series B Senior Subordinated Unsecured Convertible Notes in default .......................... 92,084 92,084
Insurance and accreditation notes payable .................................................... 1,028 --
Other obligations, including capital leases, at interest rates ranging from 7.5% to 13.1% .... 156 333
--------- ---------
154,476 153,625
Less: Debt obligations subject to compromise ................................................ (153,422) (153,422)
Less: Current scheduled maturities .......................................................... (884) (179)
--------- ---------
$ 170 $ 24
========= =========

As a result of the Debtors' Chapter 11 Bankruptcy Court filings,
substantially all short and long-term debt obligations at the August 8, 2000
filing date have been classified as liabilities subject to compromise in the
accompanying Condensed Consolidated Balance Sheets in accordance with SOP 90-7.
Under the United States Bankruptcy Code, actions against the Debtors to collect
pre-petition indebtedness are subject to an automatic stay. As of August 8,
2000, 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 the "Holders") and the related Series
A Senior Subordinated Unsecured Notes (the "Series A Notes") and the Series B
Senior Subordinated Unsecured Convertible Notes (the "Series B Notes") and (ii)
a Senior Credit Facility with Foothill Income Trust L.P., Cerberus Partners,
L.P. and Goldman Sachs Credit Partners, L.P. (collectively the "Lenders") and
Foothill Capital Corporation as agent thereunder. Subsequent to the petition
date, the Debtors entered into a secured debtor-in-possession financing
agreement with an affiliate of Cerberus Partners, L.P. Pursuant to the terms and
conditions of the aforementioned credit and debt agreements, the company is
precluded from paying cash dividends or making other capital distributions.
Moreover, the Debtors' voluntary Chapter 11 filings caused events of default to
occur under the Securities Exchange Agreement and the Senior Credit Facility,
thereby terminating the Debtors' ability to make additional borrowings under the
Senior Credit Facility through its expiration on February 6, 2001.

The recognition of interest expense pursuant to SOP 90-7 is appropriate
during the Chapter 11 proceedings if it is probable that such interest will be
an allowed priority, secured or unsecured claim. The Debtors' Second Joint Plan
(see Note 2), if approved, will effectively eliminate all post-petition interest
on pre-petition borrowings. Accordingly, no interest expense is being recorded
on pre-petition unsecured indebtedness. The ultimate confirmed plan put forth by
the Debtors or any other party in interest may have a similar effect on
post-petition interest; however, appropriate approvals in accordance with the
Bankruptcy Code will be required.

Exit Financing Facility. In connection with the Chapter 11 cases, on
October 26, 2001, CI filed a draft of the Exit Financing Facility with the
Bankruptcy Court together with other draft documents relating to the Second
Joint Plan. The proposed lenders under the Exit Financing Facility would include
the Holders or affiliates thereof. The agreement contemplates that CI could
access, as necessary, a revolving credit facility of up to $40 million for use
in connection with payments under the Second Joint Plan and for general working
capital and corporate purposes of the company and its subsidiaries. If approved,
the Exit Financing Facility will mature the earlier of December 2004 or the date
on which the revolving loans shall become due and payable in accordance with the
terms of the agreement. No assurances can be given that the parties will
ultimately agree to the terms and conditions as set forth in the proposed Exit
Financing Facility agreement or that such agreement will be approved by the
Bankruptcy Court.

Debtor-In-Possession ("DIP") Financing Agreement. In connection with the
Chapter 11 Bankruptcy Court filings, effective August 30, 2000, the Debtors
entered into a secured debtor-in-possession financing agreement with Madeleine
L.L.C. ("Madeleine"), an affiliate of Cerberus Partners, L.P. Prior to entering
into the DIP financing agreement, management and the Board of Directors
solicited advice from the company's financial advisors. Such advisors indicated
that the terms and conditions of the DIP financing agreement were generally
favorable when compared to a company with Coram's financial history. The
agreement provided that the Debtors could access, as necessary, a line of credit
of up to $40 million for use in connection with the operation of their
businesses and the businesses of their subsidiaries. On September 12, 2000, the
Bankruptcy Court issued an order approving the DIP financing agreement.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

The DIP financing agreement expired by its terms on August 31, 2001. The
DIP financing agreement provided for maximum borrowings generally equal to the
product of: (i) 65% of Net Eligible Accounts Receivable, as defined in the
underlying agreement, and (ii) 95%. During the term of the DIP financing
agreement, no borrowings had been made thereunder. The DIP financing agreement
was secured by the capital stock of the Debtors' subsidiaries, as well as, the
accounts receivable and certain other assets held by the Debtors and their
subsidiaries. Under the DIP financing agreement, among other nominal fees, the
Debtors paid a fee of 1% or $0.4 million and were liable for commitment fees on
the unused facility at a rate of 0.5% per annum, payable monthly in arrears.

Management is currently negotiating a renewal of the DIP financing
agreement; however, no assurances can be given that the parties will ultimately
agree to the terms and conditions of such renewal or that a renewal will be
approved by the Bankruptcy Court.

Senior Credit Facility. On August 20, 1998, the company entered into the
Senior Credit Facility, which provided for the availability of up to $60.0
million for acquisitions, working capital, letters of credit and other corporate
purposes. The terms of the agreement also provided for the issuance of letters
of credit of up to $25.0 million provided that available credit would not fall
below zero. In connection with the sale of CPS, effective July 31, 2000, the
company reduced its outstanding borrowings under the Senior Credit Facility by
$28.5 million, leaving only irrevocable letter of credit obligations totaling
$2.7 million outstanding. Furthermore, on September 21, 2000 and January 29,
2001, the company permanently reduced the Senior Credit Facility commitment to
$2.7 million and $2.1 million, respectively, in order to reduce the fees related
to commitments on which the company was not able to borrow against due to the
Debtors' bankruptcy proceedings. Effective February 6, 2001, the Lenders and the
company terminated the Senior Credit Facility. In connection with the
termination of the Senior Credit Facility and pursuant to orders of the
Bankruptcy Court, the company established new letters of credit through Wells
Fargo Bank Minnesota, NA ("Wells Fargo") and such new letters of credit are
fully secured by interest bearing cash deposits of the company held by Wells
Fargo.

The Senior Credit Facility provided for interest on outstanding
indebtedness at the rate of prime plus 1.5%, payable in arrears. Additionally,
the terms of the agreement provided for a fee of 1.0% per annum on the
outstanding letter of credit obligations, also payable in arrears. The Senior
Credit Facility further provided 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. The Senior Credit Facility was
secured by the capital stock of the company's subsidiaries, as well as, the
accounts receivable and certain other assets held by the company and its
subsidiaries. The Senior Credit Facility contained other customary covenants and
events of default.

Among other fees, the company incurred approximately $0.8 million upon
consummation of the Senior Credit Facility and was thereafter liable for
commitment fees on the unused facility at 0.375% per annum, due quarterly in
arrears. Additionally, the terms of the agreement provided for the issuance of
warrants to purchase up to 1.9 million shares of the company's common stock at
$0.01 per share, subject to customary anti-dilution adjustments (the "1998
Warrants"). The estimated fair value of the 1998 Warrants was determined on the
date of issuance and capitalized as deferred debt issuance costs. Such costs
were amortized ratably to interest expense over the life of the Senior Credit
Facility; however, contemporaneous with the permanent reduction of the borrowing
capacity on September 21, 2000, the company charged to interest expense
approximately $1.1 million of remaining deferred debt issuance costs related to
the Senior Credit Facility. The 1998 Warrants expired on February 6, 2001 when
the Senior Credit Facility was terminated.

Securities Exchange Agreement. On May 6, 1998, the company entered into the
Securities Exchange Agreement with the Holders of its subordinated rollover note
(the "Rollover Note"). While the Rollover Note was outstanding, the Holders had
the right to receive warrants to purchase up to 20% of the outstanding common
stock of the company (the "Rollover Note Warrants") on a fully diluted basis.
Effective April 13, 1998, the Securities Exchange Agreement provided for the
cancellation of the Rollover Note, including deferred interest and fees, and the
Rollover Note Warrants in an exchange for the payment of $4.3 million in cash
and the issuance by the company to the Holders of (i) $150.0 million in
principal amount of Series A Notes and (ii) $87.9 million in principal amount of
8.0% Series B Notes. Additionally, the Holders of the Series A Notes and the
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. Such director was elected
to the Board of Directors in June 1998 and reelected in August 1999; however,
the designated board member resigned in July 2000 and has not been replaced.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
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 at a conversion 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 conversion price of $3.00 per share, which was subject to
downward (but not upward) adjustment based on prevailing market prices for the
company's common stock on April 13, 1999 and October 13, 1999. Based on reported
market closing prices for the company's 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.

On December 28, 2000, the Debtors announced the Bankruptcy Court's approval
of their request to exchange a sufficient amount of debt and related accrued
interest for equity in the form of Coram, Inc. Series A Cumulative Preferred
Stock in order to maintain compliance with the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly referred
to as "Stark II"). On December 29, 2000, the Securities Exchange Agreement was
amended ("Amendment No. 4") and an Exchange Agreement was simultaneously
executed among the Debtors and the Holders. Pursuant to such arrangements, the
Holders agreed to exchange approximately $97.7 million aggregate principal
amount of the Series A Notes and $11.6 million of aggregate unpaid accrued
contractual interest on the Series A Notes and the Series B Notes as of December
29, 2000 for 905 shares of Coram, Inc. Series A Cumulative Preferred Stock (see
Note 9 for further details regarding the preferred stock). Following the
exchange, the Holders retain approximately $61.2 million aggregate principal
amount of the Series A Notes and $92.1 million aggregate principal amount of the
Series B Notes. Pursuant to Amendment No. 4, the per annum interest rate on both
the Series A Notes and the Series B Notes has been adjusted to 9.0%. Moreover,
the Series A Notes' and Series B Notes' original scheduled maturity dates of May
2001 and April 2008, respectively, have both been modified to June 30, 2001. Due
to the Holders receipt of consideration with a fair value less than the face
value of the exchanged principal and accrued interest, the exchange transactions
qualified as a troubled debt restructuring pursuant to Statement of Financial
Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings ("SFAS No. 15"). In connection therewith, the company
recognized an extraordinary gain during the fourth quarter of the year ended
December 31, 2000 of approximately $107.8 million, net of tax.

Although the principal amounts under the Series A Notes and Series B Notes
were not paid on June 30, 2001 and the company is in technical default of the
Securities Exchange Agreement, the Holders are stayed from any remedies pursuant
to the provisions of the United States Bankruptcy Code.

The Securities Exchange Agreement, pursuant to which the Series A Notes and
the Series B Notes were issued, contains customary covenants and events of
default. Upon the Debtors' Chapter 11 bankruptcy filings, the company was in
violation of certain covenants and conditions thereunder; however, such
bankruptcy proceedings have stayed any remedial actions by either the Debtors or
the Holders. Additionally, the company was not in compliance with other
covenants relating to certain contractual relationships its wholly-owned
Resource Network Subsidiaries had with certain parties that were contracted to
provide services pursuant to the Aetna Master Agreement, effective May 1, 1998,
and to other covenants relating to the capitalization of subsidiaries. The
company received waivers from its lenders regarding such events of
noncompliance. The voluntary filing of Chapter 11 bankruptcy petitions by the
Resource Network Subsidiaries caused further defaults under the Securities
Exchange Agreement; however, such defaults were waived by the Holders. In
connection with these waivers and the waivers provided for certain matters of
noncompliance under the Senior Credit Facility, the company and the Holders
entered into an amendment on November 15, 1999 pursuant to which the Holders
agreed that no interest on the Series A Notes and the Series B Notes would be
due for the period from November 15, 1999 through the earlier of (i) final
resolution of the litigation with Aetna or (ii) May 15, 2000. The Aetna
litigation was settled on April 20, 2000 and, as a result, the obligation to pay
interest on the Series A Notes and the Series B Notes resumed on such date.
However, due to the Debtors' Chapter 11 bankruptcy filings no interest is being
paid subsequent to August 8, 2000.

Other than the aforementioned default for non-payment of principal on June
30, 2001, management believes that at September 30, 2001 the company was in
compliance with all other covenants of the Securities Exchange Agreement. There
can be no assurance as to whether further covenant violations or defaults will
occur in future periods and whether any necessary waivers would be granted.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

At the election of the company, the Series A Notes and the Series B Notes
are scheduled to pay interest quarterly in arrears in cash or through the
issuance of pari passu debt securities, except that Holders can require the
company to pay interest in cash if the company exceeds a predetermined interest
coverage ratio. Notwithstanding the contractual terms of the Securities Exchange
Agreement, no interest is being paid subsequent to August 8, 2000 due to the
Debtors' ongoing bankruptcy proceedings. Pursuant to the troubled debt
restructuring rules promulgated under SFAS No. 15 and other accounting rules
under SOP 90-7, no interest expense was recognized in the company's consolidated
financial statements relative to the Series A Notes and the Series B Notes from
December 29, 2000 through September 30, 2001.

The Series A Notes and the Series B Notes are callable, in whole or in
part, at the option of the Holders 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 notes are callable 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 redeemable at 103% of the then outstanding principal amount,
plus accrued interest at the option of the company.

In connection with the disposition of CPS, effective July 31, 2000, the
company applied $9.5 million of the net cash proceeds derived therefrom to
prepay a portion of the principal amount outstanding under the Series A Notes.
The Holders of the Series A Notes waived the 103% prepayment premium thereby
permitting the company to reduce the then outstanding principal balance by the
full amount of the payment.

8. INCOME TAXES

During the nine months ended September 30, 2001 and 2000, the company
recorded income tax expense of approximately $0.2 million and $0.3 million,
respectively. The effective income tax rate for the nine-month period ended
September 30, 2001 is higher than the statutory rate because the company is not
recognizing the deferred income tax benefits potentially generated by the
current period loss. The effective income tax rate for the nine-month period
ended September 30, 2000 is lower than the statutory rate because the company is
able to utilize net operating loss carryforwards ("NOLs") which are fully
reserved in the valuation allowance. As of September 30, 2001, deferred tax
assets were net of a $146.5 million valuation allowance. Realization of deferred
tax assets is dependent upon the company's ability to generate taxable income in
the future. Deferred tax assets have been limited to amounts expected to be
recovered, net of deferred tax liabilities that would otherwise become payable
in the carryforward period. As management believes that realization of the
balance of deferred tax assets is sufficiently uncertain at this time, the
balances were fully offset by valuation allowances at both September 30, 2001
and December 31, 2000.

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, R-Net reserves and other
accrued liabilities that are not deductible for income tax purposes until paid
or realized and NOLs that may be deductible against future taxable income. As of
September 30, 2001, the company had NOLs of approximately $174.0 million that
are available to offset future federal taxable income and expire in varying
amounts in the years 2002 through 2019. This NOL balance includes approximately
$36.4 million generated prior to the creation of Coram through the merger by and
among T2 Medical, Inc., Curaflex Health Services, Inc., HealthInfusion, Inc. and
Medisys, Inc. Such pre-merger NOL amounts are subject to an annual usage
limitation of approximately $4.5 million. The ability to utilize the full amount
of the $174.0 million of NOLs is uncertain due to income tax rules related to
changes in ownership.

As a result of the issuance of Coram, Inc. Series A Cumulative Preferred
Stock in December 2000 (see Note 9), the company effectuated a deconsolidation
of its group for federal income tax purposes. Accordingly, subsequent income tax
returns will be filed with Coram, Inc. as the parent company of the new
consolidated group and Coram Healthcare Corporation will file its own separate
income tax returns. The issuance of the preferred stock also caused an ownership
change at Coram, Inc. for federal income tax purposes. However, Coram, Inc.
currently operates as a debtor-in-possession under the jurisdiction of the
Bankruptcy Court and it meets certain other bankruptcy related conditions of the
Internal Revenue Code ("IRC"). The bankruptcy provisions of IRC Section 382
impose limitations on the utilization of NOLs and other tax attributes.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

In January 1999, the Internal Revenue Service ("IRS") completed an
examination of the company's federal income tax return for the year ended
September 30, 1995 and proposed substantial adjustments to the prior tax
liabilities. The company previously agreed to adjustments of $24.4 million that
only affect available NOLs. The issues involve the deductibility of warrants,
write-off of goodwill and the ability of the company to categorize certain NOLs
as specified liability losses and offset income in prior years. The alleged
deficiency totaled approximately $12.7 million (obtained from federal tax
refunds), plus interest and penalties to be determined. In May 1999, the company
received a statutory notice of deficiency with respect to the proposed
adjustments seeking to recover the amount of taxes previously refunded. In
August 1999, the company filed a petition with the United States Tax Court ("Tax
Court") contesting the notice of deficiency. The IRS responded to the petition
and requested the petition be denied. The Tax Court proceeding is currently
stayed by reason of the Debtors' bankruptcy proceedings.

Pursuant to standard IRS procedures, the resolution of the issues contained
in the Tax Court petition were assigned to the administrative appeals function
of the IRS. The company has tentatively reached a settlement agreement with the
IRS Appeals office on the aforementioned issues. The settlement, if approved by
the Joint Committee of Taxation and, if necessary, the Bankruptcy Court, would
result in a federal tax liability of approximately $9.9 million, plus interest.
In connection therewith, the accompanying Condensed Consolidated Financial
Statements include reserves for the proposed liabilities, including
approximately $5.5 million of incremental interest expense for the nine months
ended September 30, 2001. The federal income tax adjustments would also give
rise to additional state tax liabilities. If the company is not able to
negotiate an installment plan with the IRS with respect to the proposed
settlement amount or if either the Joint Committee of Taxation or the Bankruptcy
Court do not approve the proposed settlement amount, the financial position and
liquidity of the company could be materially adversely affected.

9. MINORITY INTERESTS

The following summarizes the minority interests in consolidated joint
ventures and preferred stock issued by a subsidiary (in thousands):

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------

Series A Cumulative Preferred Stock of Coram, Inc. ..... $ 5,522 $5,522
Majority-owned companies ............................... 557 456
------- ------
Total minority interests ............................... $ 6,079 $5,978
======= ======

On December 29, 2000, Coram, Inc. ("CI"), a wholly-owned subsidiary of
Coram Healthcare Corporation, executed the Exchange Agreement with the Holders
of CI's Securities Exchange Agreement (see Note 7 for further details) to
exchange approximately $97.7 million of the Series A Notes and approximately
$11.6 million of accrued but unpaid interest on the Series A Notes and Series B
Notes in exchange for 905 shares of CI Series A Cumulative Preferred Stock,
$0.001 par value per share, having an aggregate liquidation preference of
approximately $109.3 million (hereinafter referred to as the "Preferred Stock").
The Preferred Stock was issued to the Holders on a pro rata basis. Through an
independent valuation, it was determined that the Preferred Stock had a fair
value of approximately $6.1 million and such amount, offset by certain legal and
other closing costs, nets to approximately $5.5 million.

The authorized CI Preferred Stock consists of 10,000 shares, and the only
shares issued and outstanding at September 30, 2001 are those pursuant to the
Exchange Agreement. So long as any shares of the Preferred Stock are
outstanding, the Holders are entitled to receive preferential dividends at a
rate of 15% per annum on the liquidation preference amount. Dividends are
payable on a quarterly basis on the last business day of each calendar quarter.
Prior to the effective date of the Debtors' plan of reorganization, dividends
are to be paid in the form of additional shares of Preferred Stock having a
liquidation preference amount equal to such dividend amount. Subsequent to the
effective date of a plan of reorganization, at CI's election, dividends will be
payable in cash or shares of common stock of CI having a fair value equal to
such cash dividend payment, as determined by a consensus of investment banking
firms acceptable to the Holders. In the event of default, the dividend rate
shall increase to 16% per annum until such time that the event of default is
cured. All dividends are to include tax indemnities and gross-up provisions
(computed subsequent to the company's tax fiscal year end in connection with the
preparation of the company's income tax returns) as are appropriate for
transactions of this nature. In-kind dividends earned during the nine months
ended September 30, 2001, exclusive of any tax indemnities and gross-up
provisions, aggregated approximately 107 shares and had a liquidation preference
of approximately $12.9 million.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

The agreements and bylaws underlying the Preferred Stock include usual and
customary affirmative and negative covenants for a security of this nature,
including, but not limited to (i) providing timely access to certain financial
and business information; (ii) authorization to communicate with independent
certified public accountants with respect to the financial conditions and other
affairs of the company; (iii) maintaining tax compliance; (iv) maintaining
adequate insurance coverage; (v) adherence to limitations on transactions with
affiliates; (vi) adherence to limitations on acquisitions or investments; (vii)
adherence to limitations on the liquidation of assets or businesses; and (viii)
adherence to limitations on entering into additional indebtedness.

Subsequent to the effective date of a plan of reorganization, each share of
Preferred Stock will be entitled to one vote and shall vote together with the
shares of CI's common stock on all matters submitted to a vote of stockholders.
The Preferred Stock would have had 47.5% of CI's total voting power on December
31, 2000; however, such voting rights are temporarily suspended during the
Debtors' bankruptcy proceedings. Subsequent to the effective date of a plan of
reorganization, the Holders will have the right to appoint three directors out
of a total of seven directors to CI's Board of Directors, and a quorum in
meetings of the Board of Directors shall be constituted by the presence of a
majority of the members, at least two of whom must be directors appointed by the
Holders. During the pendency of CI's bankruptcy proceedings, the Holders have
the right to appoint two directors to CI's Board of Directors. Alternatively, if
no Board of Directors representation is elected by the Holders, they retain the
right to appoint one observer.

The Preferred Stock is redeemable at the option of CI, in whole or in part,
at any time, on not less than thirty days prior written notice, at the
liquidation preference amount plus any accrued but unpaid dividends. Redemption
may be made in the form of cash payments only. As of November 16, 2001, the
aggregate Preferred Stock liquidation preference was approximately $122.2
million.

The Debtors' Second Joint Plan (Note 2), if confirmed in its current form,
would effectively retire all of the currently outstanding Preferred Stock on or
before the Plan's effective date.

10. LITIGATION AND CONTINGENCIES

Bankruptcy Proceedings. On August 8, 2000, the Debtors filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court for the District of Delaware, In Re: Coram
Healthcare Corporation and Coram, Inc., Case Nos. 00-3299 (MFW) and 00-3300
(MFW) (collectively the "Chapter 11 Cases"), respectively. The proceedings have
been consolidated for administrative purposes only by the United States
Bankruptcy Court in Delaware and are being administered under the docket of In
Re: Coram Healthcare Corporation, Case No. 00-3299 (MFW). None of the Debtors'
other subsidiaries are a debtor in the proceeding. See Note 2 for further
details.

Except as may otherwise be determined by the Bankruptcy Court overseeing
the Chapter 11 Cases, the protection generally afforded by Chapter 11
automatically stays any litigation proceedings pending against either or both of
the Debtors. All such claims will be addressed through the proceedings
applicable to the Chapter 11 Cases. The automatic stay would not, however, apply
to actions brought against the company's non-debtor subsidiaries.

Official Committee of the Equity Security Holders' Matters. A committee of
persons claiming to own shares of the company's publicly-traded common stock
(the "Equity Committee") filed motions objecting to the Restated Joint Plan and
the Second Joint Plan of reorganization, contending, among other things, that
the company's valuation upon which the Restated Joint Plan of reorganization was
premised and the underlying projections and assumptions were flawed. On December
21, 2000, the Bankruptcy Court determined not to confirm the Restated Joint
Plan. The company and the Equity Committee are involved in a review of certain
company information regarding, among other things, the Equity Committee's
contentions. Moreover, on July 30, 2001, the Equity Committee filed a motion to
terminate the Debtors' exclusivity period and file its own plan or
reorganization; however, the motion was denied by the Bankruptcy Court. The CHC
equity holders, including the Equity Committee, voted against confirmation of
the Second Joint Plan.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

Additionally, on or about February 6, 2001, the Equity Committee filed a
motion with the Bankruptcy Court seeking permission to bring a derivative
lawsuit directly against the company's Chief Executive Officer, a former member
of the Board of Directors and Cerberus Partners, L.P. (a party to the company's
debtor-in-possession financing agreement, Senior Credit Facility and Securities
Exchange Agreement). The Equity Committee's lawsuit alleged a collusive plan
whereby the named parties conspired to devalue the company for the benefit of
the company's creditors under the Securities Exchange Agreement. On February 26,
2001, the Bankruptcy Court ruled that the Equity Committee's motion would not be
productive at that time and, accordingly, the motion was denied without
prejudice.

Management cannot predict whether any future objections of the Equity
Committee will be forthcoming or if they would prevent confirmation of the
Second Joint Plan set forth by management. Management also cannot predict if any
other actions of the Equity Committee will have adverse consequences to the
company.

Resource Network Subsidiaries' Bankruptcy. On November 12, 1999, the
Resource Network Subsidiaries filed voluntary petitions under Chapter 11 of the
United States Code in the United States Bankruptcy Court for the District of
Delaware, Case No. 99-2889 (MFW). On August 19, 1999, a small group of parties
with claims against the Resource Network Subsidiaries filed an involuntary
bankruptcy petition under Chapter 11 against Coram Resource Network, Inc. in the
United States Bankruptcy Court for the District of Delaware. The two proceedings
were consolidated by stipulation of the parties and the case is pending under
the style, In Re Coram Resource Network, Inc. and Coram Independent Practice
Association, Inc., Case No. 99-2889 (MFW). The Resource Network Subsidiaries are
now being liquidated pursuant to the proceedings. The Chief Restructuring
Officer of the Resource Network Subsidiaries had threatened suit on behalf of
the estates against CHC. The draft complaint included claims for damages against
CHC and certain of its former and current officers and directors in excess of
$41 million. The draft complaint included a threat to pierce the corporate veil
of the Resource Network Subsidiaries to reach CHC and included claims of
breaches by the officers and directors of their fiduciary duties to the Resource
Network Subsidiaries and CHC.

On September 11, 2000, the Resource Network Subsidiaries filed a motion in
the Debtor's Chapter 11 proceedings seeking, among other things, to have the two
separate bankruptcy proceedings substantively consolidated into one proceeding.
If granted, the Chapter 11 proceedings involving the Resource Network
Subsidiaries and the Chapter 11 proceedings involving the Debtors would have
been combined such that the assets and liabilities of the Resource Network
Subsidiaries would be joined with the assets and liabilities of the Debtors, the
liabilities of the combined entity would be satisfied from their combined funds
and all intercompany claims would be eliminated. Furthermore, the creditors of
both proceedings would have voted on any reorganization plan for the combined
entities. The Resource Network Subsidiaries and the Debtors engaged in discovery
related to this substantive consolidation motion and, in connection therewith,
the parties reached a settlement agreement in November 2000. The settlement
agreement was approved by the Bankruptcy Court in December 2000 and the Debtors
made a payment of $0.5 million to the Resource Network Subsidiaries in January
2001.

Notwithstanding the withdrawal of the substantive consolidation motion, the
Resource Network Subsidiaries still maintain proofs of claim in excess of $41
million against each of CHC's and CI's estates and the company maintains a
reciprocal claim of approximately the same amount against the Resource Network
Subsidiaries' estate. Additionally, the Official Committee of the Equity
Security Holders and Official Committee of Unsecured Creditors in the Resource
Network Subsidiaries' bankruptcy proceedings filed an objection to confirmation
of the Second Joint Plan and a motion to lift the automatic stay to pursue their
claims against the company. The ultimate outcome of these matters cannot be
predicted with any degree of certainty, but management, in consultation with
legal counsel, does not believe that the final resolution of these matters or
other matters raised by the Resource Network Subsidiaries' Chief Restructuring
Officer will have a material adverse impact on the company's financial position
or results of operations.

Aetna U.S. Healthcare, Inc. 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 setting 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 the Resource Network Subsidiaries. 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. The Aetna Complaint sought specific performance, injunctive relief
and declaratory relief to compel the company to perform under the Master
Agreement, including the payment of compensation to the healthcare providers
that had rendered and continued to render services to Aetna's health plan
members. As stated in the Aetna Complaint, Aetna disputed the company's right to
terminate the Agreement. The company removed the Aetna Complaint to federal
court. On July 20, 1999, Aetna filed a counterclaim against the company in the
federal court lawsuit brought by the company. In its counterclaim, Aetna sued
the company for, among other things, breach of the

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

Master Agreement and fraudulent misrepresentation, contending the company never
intended to perform under the Master Agreement, defamation, interference with
contractual relations with providers and interference with prospective
contractual relations with other companies that allegedly bid for the Master
Agreement.

On April 20, 2000, the company and Aetna reached an amicable resolution to
the then outstanding disputes and, in connection therewith, all claims and
counterclaims amongst the parties were dismissed from the courts of appropriate
jurisdiction. The final resolution of these matters did not have a material
effect on the company's consolidated financial position or results of
operations. The impact of this dispute resolution has been charged to
discontinued operations in the accompanying condensed consolidated financial
statements during the nine months ended September 30, 2000.

Apria Healthcare, Inc. Apria Healthcare, Inc. and one of its affiliates,
Apria Healthcare of New York State, Inc., (collectively "Apria") filed suit
against CHC and the Resource Network Subsidiaries in the Superior Court of
Orange County, California. Apria's claims related to services that were rendered
as part of certain home health provider networks managed by the Resource Network
Subsidiaries. Apria's complaint alleged that, among other things, the Resource
Network Subsidiaries operated as the alter ego of CHC and, as a result, CHC
should be declared responsible for the alleged breaches of the contracts that
the Resource Network Subsidiaries had with Apria. The complaint included
requests for declaratory, compensatory and other relief in excess of $1.4
million. On February 21, 2001, the company and Apria agreed to a "dismissal
without prejudice" from the Superior Court of Orange County, California with
each party responsible for its own legal fees.

TBOB Enterprises, Inc. On July 17, 2000, TBOB Enterprises, Inc. ("TBOB")
filed an arbitration demand against CHC (TBOB Enterprises, Inc. f/k/a Medical
Management Services of Omaha, Inc. against Coram Healthcare Corporation, in the
American Arbitration Association office in Dallas, Texas). In its demand, TBOB
claims that the company breached its obligations under an agreement entered into
by the parties in 1996 relating to a prior earn-out obligation of the company
that originated from the acquisition of the claimant's prescription services
business in 1993 by a wholly-owned subsidiary of the company. The company
operated the business under the name Coram Prescription Services ("CPS") and the
assets of the CPS business were sold on July 31, 2000. See Note 4 for further
details. TBOB alleges, among other things, that the company has impaired the
earn-out payments due TBOB by improperly charging certain expenses to the CPS
business and failing to fulfill the company's commitments to enhance the value
of CPS by marketing its services. The TBOB demand alleges damages of more than
$0.9 million. TBOB contends that this amount must be paid in addition to the
final scheduled earn-out payment of approximately $1.3 million that was due in
March 2001. Furthermore, pursuant to the underlying agreement with TBOB,
additional liabilities related to post-petition interest on the final scheduled
earn-out payment may result. In accordance with SOP 90-7, such interest,
aggregating approximately $0.1 million through September 30, 2001 based on an
18% interest rate, has not been recorded in the company's Condensed Consolidated
Financial Statements because TBOB is an unsecured creditor in the Debtors'
bankruptcy proceedings and the interest claim may not be sustainable. TBOB
reiterated its monetary demand through a proof of claim filed against CHC's
estate for the aggregate amount of approximately $2.2 million (the scheduled
earn-out payment plus the alleged damages). Any action relating to the final
$1.3 million earn-out payment that was scheduled for March 2001, the alleged
damages of $0.9 million and any interest accrued thereon have been stayed by
operation of the Bankruptcy Code. On July 5, 2001, the company received a letter
from TBOB's legal counsel requesting that the aforementioned arbitration remain
in abeyance pending resolution of the bankruptcy proceedings. Management does
not believe that final resolution of this matter will have a material adverse
impact on the company's financial position or results of operations.

Internal Revenue Service Negotiations. CHC is contesting a notice of
deficiency issued by the Internal Revenue Service through administrative
proceedings and litigation. See Note 8 for further details.

Alan Furst et al. v. Stephen Feinberg, et al. A complaint was filed in the
United States District Court for the Third District of New Jersey on November 8,
2000 and an Amended Class Action Complaint was filed on November 15, 2000,
alleging that certain current and former officers and directors of the company
and the company's principal lenders, Cerberus Partners, L.P., Foothill Capital
Corporation and Goldman Sachs & Co., implemented a scheme to perpetrate a fraud
upon the stock market regarding the common stock of CHC. A second Amended Class
Action Complaint (the "Second Amended Complaint") was filed on March 21, 2001,
which removed all of the officers and directors of the company as defendants,
except the company's Chief Executive Officer and another current member of the
Board of Directors and continued to name Cerberus Partners, L.P., Foothill
Capital Corporation and Goldman Sachs & Co. as defendants. The plaintiffs
alleged that the defendants artificially depressed the trading price of the
company's publicly traded shares and created the false impression that
stockholders' equity was decreasing in value and was ultimately worthless. The
plaintiffs further alleged that members of the class sustained total investment
losses of $50 million or more. On June 14, 2001, a third

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

Amended Class Action Complaint (the "Third Amended Complaint") was filed naming
the same defendants as the Second Amended Complaint. The plaintiffs' allegations
in the Third Amended Complaint were substantially similar to the allegations in
the Second Amended Complaint; however, the Third Amended Complaint eliminated
references to the corporate assets of Coram. The defendants filed a motion to
dismiss the Third Amended Complaint, as they believe the claims are inadequately
pleaded and meritless. That motion has not yet been adjudicated. The company
notified its insurance carrier of the lawsuit and intends to avail itself of any
appropriate insurance coverage for its directors and officers, who are
vigorously contesting the allegations. The company cannot predict the outcome of
this case nor can it predict the scope and nature of any indemnification that
the directors and officers may have with the company's insurance carrier.

General. Management of the company and its subsidiaries intends to
vigorously defend the company in the matters described above. Nevertheless, due
to the uncertainties inherent in litigation, including possible indemnification
against other parties, the ultimate disposition of such matters cannot presently
be determined. Adverse outcomes in some or all of the proceedings could have a
material adverse effect on the financial position, results of operations and
liquidity of the company.

The company and its subsidiaries are also parties to various other legal
actions arising out of the normal course of their businesses, including employee
claims, reviews of cost reports submitted to Medicare and examinations by
regulators such as Medicare and Medicaid fiscal intermediaries and the Centers
for Medicare and Medicaid Services (formerly the Health Care Financing
Administration). 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.

PricewaterhouseCoopers LLP. On July 7, 1997, the company filed suit against
Price Waterhouse LLP (now known as PricewaterhouseCoopers LLP) in the Superior
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 Caremark's independent auditors, PricewaterhouseCoopers
LLP, related to the lawsuit filed by the company against Caremark. 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 California court because of inconvenience to witnesses with a right to
re-file in Illinois. The company re-filed the lawsuit in state court in Illinois
and PricewaterhouseCoopers LLP filed a motion to dismiss the company's lawsuit
on several grounds, but its motion was denied on March 15, 1999.
PricewaterhouseCoopers LLP filed an additional motion to dismiss the lawsuit in
May 1999, and that motion was dismissed on January 28, 2000. On April 19, 2001,
PricewaterhouseCoopers LLP filed a motion for partial summary judgement with
regard to a portion of Caremark's claims; however, this motion was subsequently
denied. The lawsuit is currently in the discovery stage and a trial is scheduled
to commence after June 22, 2002. There can be no assurance of any recovery from
PricewaterhouseCoopers LLP.

Government Regulation. Under the physician ownership and referral
provisions of the Omnibus Budget Reconciliation Act of 1993 (commonly referred
to as "Stark II"), it is unlawful for a physician to refer patients for certain
designated health services reimbursable under the Medicare or Medicaid programs
to an entity with which the physician and/or the physician's family, as defined
under Stark II, has a financial relationship, unless the financial relationship
fits within an exception enumerated in Stark II or regulations promulgated
thereunder. A "financial relationship" under Stark II is defined broadly as an
ownership or investment interest in, or any type of compensation arrangement in
which remuneration flows between the physician and the provider. The company has
financial relationships with physicians and physician owned entities in the form
of medical director agreements and service agreements pursuant to which the
company provides pharmacy products. In each case, the relationship has been
structured, based upon advice of legal counsel, using an arrangement management
believes to be consistent with the applicable exceptions set forth in Stark II.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

In addition, the company is aware of certain referring physicians (or their
immediate family members) that have had financial interests in the company
through ownership of shares of the company's common stock. The Stark II law
includes an exception for the ownership of publicly traded stock in companies
with equity above certain levels. This exception of Stark II requires the
issuing company to have stockholders' equity of at least $75 million either as
of the end of its most recent fiscal year or on average over the last three
fiscal years. Due principally to the extraordinary gain on troubled debt
restructuring (see Note 7) and the disposition of the CPS business, at December
31, 2000 the company's stockholders' equity was above the required level.
However, as of September 30, 2001, the company's total stockholders' equity was
approximately $65.5 million. As a result, the company will no longer qualify for
the Stark II exception without a significant increase in stockholders' equity
effective January 1, 2002. The penalties for failure to comply with Stark II
include, among other things, non-payment of claims and civil penalties that
could be imposed upon the company and, in some instances upon the referring
physician, regardless of whether the company intended to violate the law.

Management has been advised by counsel that a company whose stock is
publicly traded has, as a practical matter, no reliable way to implement and
maintain an effective compliance plan for addressing the requirements of Stark
II other than complying with the public company exception. Accordingly, if the
company's common stock remains publicly traded and its stockholders' equity
falls below the required levels, the company would be forced to cease accepting
referrals of patients covered by the Medicare or Medicaid programs or run a
significant risk of noncompliance with Stark II. Because referrals of the
company's patients with such government-sponsored benefit programs comprise
approximately 25% and 23% of the company's consolidated net revenue (excluding
CPS) for the nine months ended September 30, 2001 and the year ended December
31, 2000, respectively, discontinuing the acceptance of patients with
government-sponsored benefit programs would have a material adverse effect on
the financial condition, results of operations and cash flows of the company.
Additionally, ceasing to accept such referrals could materially adversely affect
the company's business reputation in the market as it may cause the company to
be a less attractive provider to which a physician could refer his or her
patients. The company previously requested a Stark II waiver from the Health
Care Financing Administration, but such waiver request was denied.

11. INDUSTRY SEGMENT AND GEOGRAPHIC AREA OPERATIONS

Management regularly evaluates the operating performance of the company by
reviewing results on a product or service basis. The company's reportable
segments are Infusion and CPS. Infusion is the company's base business, which
derives its revenue primarily from alternate site infusion therapy and related
services (including non-intravenous home health products such as durable medical
equipment and respiratory therapy services). CPS, which was divested by the
company on July 31, 2000, primarily provided specialty mail-order pharmacy and
pharmacy benefit management services. The other non-reportable segment
principally represents centralized management, administration and clinical
support for clinical research trials.

Management uses earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA") for purposes of performance
measurement. For the three and nine months ended September 30, 2001 and 2000,
corporate costs were allocated on a revenue basis. For the three and nine months
ended September 30, 2000, EBITDA has been reclassified to conform to the 2001
presentation. EBITDA excludes net reorganization expenses, merger and
restructuring charges and results from discontinued operations. The measurement
basis for segment assets includes net accounts receivable, inventories, net
property and equipment and other current assets.

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

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

AS OF AND FOR THE THREE MONTHS AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ -----------------------------
2001 2000 2001 2000
--------- --------- --------- ---------

INFUSION
Revenue from external customers ............................... $ 93,547 $ 94,108 $ 286,915 $ 304,070
Intersegment revenue .......................................... 28 (53) 131 1,123
Interest income ............................................... 22 18 117 67
Equity in net income of unconsolidated joint ventures ......... 259 322 727 698
Segment EBITDA profit ......................................... 5,770 5,072 20,319 24,904
Segment assets ................................................ 118,866 104,607 118,866 104,607
Segment asset expenditures .................................... 1,385 578 3,548 2,548
CPS
Revenue from external customers ............................... $ -- $ 8,353 $ -- $ 61,375
Intersegment revenue .......................................... -- -- -- 11
Interest income ............................................... -- 10 -- 13
Equity in net income of unconsolidated joint ventures ......... -- -- -- --
Segment EBITDA loss ........................................... -- (461) -- (2,311)
Segment assets ................................................ -- -- -- --
Segment asset expenditures .................................... -- 6 -- 230
ALL OTHER
Revenue from external customers ............................... $ 215 $ 405 $ 531 $ 2,441
Intersegment revenue .......................................... -- -- -- --
Interest income ............................................... -- 4 -- 4
Equity in net income of unconsolidated joint ventures .... -- -- -- --
Segment EBITDA profit (loss) .................................. 131 154 (274) 481
Segment assets ................................................ 130 284 130 284
Segment asset expenditures .................................... -- -- -- --

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

AS OF AND FOR THE THREE MONTHS AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------- -----------------------------
2001 2000 2001 2000
--------- --------- --------- ---------

NET REVENUE
Total for reportable segments ...................................... $ 93,575 $ 102,408 $ 287,046 $ 366,579
Other revenue ...................................................... 215 531 405 2,441
Elimination of intersegment revenue (expense) ...................... (28) 53 (131) (1,134)
--------- --------- --------- ---------
Total consolidated revenue ......................................... $ 93,762 $ 102,866 $ 287,446 $ 367,886
========= ========= ========= =========
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND MINORITY INTERESTS
Total EBITDA profit for reportable segments ........................ $ 5,770 $ 4,611 $ 20,319 $ 22,593
Other EBITDA profit (loss) ......................................... 131 154 (274) 481
Goodwill amortization expense ...................................... (2,424) (2,562) (7,273) (7,670)
Depreciation and other amortization expense ........................ (2,512) (2,277) (7,497) (7,208)
Interest expense ................................................... (4,072) (6,866) (6,284) (20,313)
Gains on sales of businesses ....................................... -- 18,456 -- 18,456
Reorganization expenses, net ....................................... (3,739) (1,861) (10,003) (1,861)
All other income (loss), net ....................................... (139) (251) 107 85
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes and
Minority interests ............................................ $ (6,985) $ 9,404 $ (10,905) $ 4,563
========= ========= ========= =========
ASSETS
Total assets for reportable segments ............................... $ 118,866 $ 104,607 $ 118,866 $ 104,607
Other assets ....................................................... 224,391 239,732 224,391 239,732
--------- --------- --------- ---------
Consolidated total assets ....................................... $ 343,257 $ 344,339 $ 343,257 $ 344,339
========= ========= ========= =========

For each of the periods 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 consolidated operations.

Sales to Aetna U.S. Healthcare ("Aetna") and its affiliated payers for the
company's Infusion and CPS segments represented approximately 2% of the
company's consolidated net revenue from continuing operations both the three
months ended September 30,

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

2001 and 2000, and 2% and 4% for the nine months ended September 30, 2001 and
2000, respectively. The National Ancillary Services Agreement with Aetna
applicable to the company's home infusion business was terminated effective
April 12, 2000. The company and Aetna have agreed to use their good faith
efforts to negotiate new local agreements for home infusion services. As of
September 30, 2001, four such agreements for home infusion services have been
entered into by Coram subsidiaries and local Aetna plans.

Net revenue from the Medicare and Medicaid programs represented
approximately 25% of the company's consolidated net revenue for both the three
months ended September 30, 2001 and 2000 and 23% of the company's consolidated
net revenue for both the nine months ended September 30, 2001 and 2000.

Accounts receivable under the Medicare program represented approximately
35% and 30% of the company's consolidated accounts receivable as of September
30, 2001 and December 31, 2000, respectively. No other individual payer exceeded
5% of consolidated accounts receivable at those dates.

12. DEBTOR/NON-DEBTOR FINANCIAL STATEMENTS

In accordance with SOP 90-7, the Debtors are presenting the following
Condensed Consolidating Financial Statements as of and for the nine months ended
September 30, 2001 (in thousands):

CONDENSED CONSOLIDATING BALANCE SHEET

DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
-------- ----------- ------------ ------------

ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 17,894 $ 336 $ -- $ 18,230
Cash limited as to use .............................................. 161 159 -- 320
Accounts receivable, net ............................................ -- 90,286 -- 90,286
Inventories ......................................................... -- 12,092 -- 12,092
Deferred income taxes, net .......................................... -- 365 -- 365
Other current assets ................................................ 3,864 2,028 -- 5,892
-------- -------- --------- --------
Total current assets ............................................... 21,919 105,266 -- 127,185
Property and equipment, net .......................................... 2,161 12,769 -- 14,930
Deferred income taxes, net ........................................... -- 1,612 -- 1,612
Other deferred costs and intangible assets, net ...................... 295 6,610 -- 6,905
Goodwill, net ........................................................ -- 186,582 -- 186,582
Investments in and advances to wholly-owned subsidiaries, net ........ 243,816 -- (243,816) --
Other assets ......................................................... 4,600 1,443 -- 6,043
-------- -------- --------- --------
Total assets ....................................................... $272,791 $314,282 $(243,816) $343,257
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities not subject to compromise:
Accounts payable .................................................... $ 11,984 $ 12,165 $ -- $ 24,149
Accrued compensation and related liabilities ........................ 9,157 5,209 -- 14,366
Current maturities of long-term debt ................................ -- 8 -- 8
Insurance and accreditation notes payable ........................... 876 -- -- 876
Income taxes payable ................................................ 199 338 -- 537
Deferred income taxes ............................................... -- 956 -- 956
Accrued merger and restructuring costs .............................. 481 333 -- 814
Accrued reorganization costs for administrative professionals ....... 7,836 -- -- 7,836
Other accrued liabilities, including interest payable ............... 3,457 4,247 -- 7,704
-------- -------- --------- --------
Total current liabilities not subject to compromise ................ 33,990 23,256 -- 57,246
Total current liabilities subject to compromise ...................... 167,610 -- -- 167,610
-------- -------- --------- --------
Total current liabilities ............................................ 201,600 23,256 --
Long-term liabilities not subject to compromise:
Long-term debt, less current maturities ............................ 152 18 -- 170
Minority interests in consolidated joint ventures and preferred
stock issued by a subsidiary ..................................... 5,522 557 -- 6,079
Other liabilities ................................................... -- 19,108 -- 19,108
Deferred income taxes ............................................... -- 1,021 -- 1,021
Net liabilities of discontinued operations ........................... -- 26,506 -- 26,506
-------- -------- --------- --------
Total liabilities .................................................. 207,274 70,466 -- 277,740
Net assets, including amounts due to Debtors ......................... -- 243,816 (243,816) --
Total stockholders' equity ........................................... 65,517 -- -- 65,517
-------- -------- --------- --------
Total liabilities and stockholders' equity ......................... $272,791 $314,282 $(243,816) $343,257
======== ======== ========= ========

CORAM HEALTHCARE CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

DEBTORS NON-DEBTORS ELIMINATIONS CONSOLIDATED
-------- ----------- ------------ ------------

Net revenue .......................................................... $ -- $ 287,446 $-- $ 287,446
Cost of service ...................................................... -- 207,309 -- 207,309
-------- --------- -------- ---------
Gross profit ......................................................... -- 80,137 -- 80,137
Operating expenses:
Selling, general and administrative expenses ........................ 12,202 48,920 -- 61,122
Provision for estimated uncollectible accounts ...................... -- 8,787 -- 8,787
Amortization of goodwill ............................................ -- 7,273 -- 7,273
Restructuring cost recovery ......................................... -- (583) -- (583)
-------- --------- -------- ---------
Total operating expenses ........................................... 12,202 64,397 -- 76,599
-------- --------- -------- ---------

Operating income (loss) from continuing operations ................... (12,202) 15,740 -- 3,538
Other income (expense):
Interest income ..................................................... 955 115 -- 1,070
Interest expense .................................................... (747) (5,537) -- (6,284)
Equity in net income of wholly-owned subsidiaries ................... 10,532 -- (10,532) --
Equity in net income of unconsolidated joint ventures ............... -- 727 -- 727
Other income, net ................................................... 1 46 -- 47
-------- --------- -------- ---------
Income (loss) from continuing operations before reorganization
expenses, income taxes and minority interests ..................... (1,461) 11,091 (10,532) (902)
Reorganization expenses, net ......................................... (10,003) -- -- (10,003)
-------- --------- -------- ---------
Income (loss) from continuing operations before income taxes and
minority interests ................................................ (11,464) 11,091 (10,532) (10,905)
Income tax expense .................................................. -- 150 -- 150
Minority interests in net income of consolidated joint ventures .... -- 409 -- 409
-------- --------- -------- ---------
Net income (loss) from continuing operations ......................... $(11,464) $ 10,532 $(10,532) $ (11,464)
======== ========= ======== =========

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

DEBTORS NON-DEBTORS CONSOLIDATED
-------- ----------- ------------

Net cash provided by (used in) continuing operations before
reorganization expenses ....................................... $ (8,186) $ 14,921 $ 6,735
Net cash used by reorganization expenses ....................... (6,962) -- (6,962)
-------- -------- --------
Net cash provided by (used in) continuing operations (net
of reorganization expenses) ................................... (15,148) 14,921 (227)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ........................... (1,301) (3,491) (4,792)
Cash advances from wholly-owned subsidiaries .................. 11,073 (11,073) --
Proceeds from dispositions of property and equipment .......... 6 63 69
-------- -------- --------
Net cash provided by (used in) investing activities ............ 9,778 (14,501) (4,723)
-------- -------- --------
Cash flows from financing activities:
Repayments of debt obligations ................................ (100) (177) (277)
Repayments of insurance note payable .......................... (1,372) -- (1,372)
Deposits to collateralize letters of credit ................... (2,095) -- (2,095)
Cash distributions paid to minority interests ................. -- (308) (308)
-------- -------- --------
Net cash used in financing activities .......................... (3,567) (485) (4,052)
-------- -------- --------
Net decrease in cash from continuing operations ................ $ (8,937) $ (65) $ (9,002)
======== ======== ========
Net cash used in discontinued operations ....................... $ -- $ (27) $ (27)
======== ======== ========

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 Healthcare Corporation ("CHC")
and its subsidiaries ("Coram" or the "company") that is 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 the outcome of the bankruptcy proceedings of CHC and
its first tier wholly owned subsidiary, Coram, Inc. ("CI") (collectively the
"Debtors") and certain other factors, which are described in greater detail
later in this Item 2 under the caption "Risk Factors." 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 management 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. Management does not undertake any obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

The accompanying Condensed Consolidated Financial Statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Debtors' bankruptcy filings and
circumstances relating thereto, including the company's leveraged financial
structure and cumulative losses from operations, such realization of assets and
liquidation of liabilities are subject to significant uncertainty. During the
pendency of the Debtors' Chapter 11 bankruptcy proceedings, the company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the Condensed Consolidated Financial Statements.
Further, the Debtors' Second Joint Plan of Reorganization, as amended (the
"Second Joint Plan"), filed in the Chapter 11 proceedings could materially
change the amounts reported in the Condensed Consolidated Financial Statements,
which do not give effect to any adjustments of the carrying value of assets or
liabilities that might be necessary as a consequence of a plan of reorganization
(see Note 2 to the company's Condensed Consolidated Financial Statements for
further details). The company's ability to continue as a going concern is
dependent upon, among other things, confirmation of a plan of reorganization,
future profitable operations, the ability to comply with the terms of the
company's financing agreements, the ability to remain in compliance with the
physician ownership and referral provisions of the Omnibus Budget Reconciliation
Act of 1993 (commonly known as "Stark II") and the ability to generate
sufficient cash from operations and/or financing arrangements to meet its
obligations.

Background. During 2000, Coram and its subsidiaries were engaged primarily
in two principal lines of business: (i) alternate site (outside the hospital)
infusion therapy, including non-intravenous home health products such as durable
medical equipment and respiratory therapy services, and (ii) pharmacy benefit
management and specialty mail-order pharmacy services. Effective July 31, 2000,
the company sold its pharmacy benefit management and specialty mail-order
pharmacy services business to Curascript Pharmacy, Inc. and Curascript PBM
Services, Inc. (collectively the "Buyers"). The Buyers were a management-led
group that was financed by GTCR Golder Rauner, L.L.C. Other services offered by
Coram include centralized management, administration and clinical support for
clinical research trials. See Note 4 to the company's Condensed Consolidated
Financial Statements for further details.

Additionally, Coram's R-Net subsidiaries are being liquidated through
proceedings that are currently pending in the United States Bankruptcy Court for
the District of Delaware. These proceedings originated in August 1999 following
the filing of an involuntary bankruptcy petition against Coram Resource Network,
Inc. in such court. All of the R-Net locations have been closed in connection
with the pending liquidation of R-Net. Additionally, Coram employees who were
members of the Resource Network Subsidiaries' Board of Directors resigned during
the year ended December 31, 2000 and currently only the Chief Restructuring
Officer appointed by the Bankruptcy Court remains on the Board of Directors to
manage and operate the liquidation of the R-Net business. See Note 3 to the
company's Condensed Consolidated Financial Statements for further details.

Reorganization. On August 8, 2000, CHC and CI filed voluntary petitions
under Chapter 11 of the Bankruptcy Code. Following the filing of the voluntary
Chapter 11 petitions, the Debtors have been operating as debtors-in-possession
subject to the jurisdiction of the Bankruptcy Court. None of the company's other
subsidiaries is a debtor in the proceeding. The Debtors' need to seek the relief
afforded by the Bankruptcy Code was due, in part, to their requirement to remain
in compliance with the physician ownership and referral provisions of the
Omnibus Budget Reconciliation Act of 1993 (commonly referred to as "Stark II")
after December 31, 2000 (see discussion of Stark II in Note 10 to the company's
Condensed Consolidated Financial Statements) and the scheduled May 27, 2001
maturity of the Series A Senior Subordinated Unsecured Notes. Accordingly, the
Debtors sought advice and counsel from a variety of sources and, in connection
therewith, the Board of Directors unanimously concluded that the bankruptcy and
restructuring were the only viable alternatives.

On August 9, 2000, the Bankruptcy Court approved the Debtors' motions for:
(i) payment of employee wages and salaries and certain benefits and other
employee obligations; (ii) payment of critical trade vendors, utilities and
insurance in the ordinary course of business for both pre and post-petition
expenses; (iii) access to a debtor-in-possession financing arrangement (see Note
7 to the company's Condensed Consolidated Financial Statements for details of
the executed agreement); and (iv) use of all company bank accounts for normal
business operations. In September 2000, the Bankruptcy Court approved the
Debtors' motion to reject four unexpired, non-residential real property leases
and any associated subleases. The rejected leases include underutilized
locations in: (i) Allentown, Pennsylvania; (ii) Denver, Colorado; (iii)
Philadelphia, Pennsylvania; and (iv) Whippany, New Jersey. The successful
rejection of the Whippany, New Jersey lease caused the company to reverse
certain reserves that had previously been established related to closure of its
discontinued operations. Additionally, in September 2001 the Bankruptcy Court
approved the Debtors' motion for an extension of the period of time in which the
Debtors can reject unexpired leases of non-residential real property up to and
including January 1, 2002. Certain other motions filed by the Debtors have been
granted and others are presently pending.

On September 7, 2001, the Bankruptcy Court approved payments of up to $2.7
million for management incentive compensation bonuses (the "MIP Plan") related
to the year ended December 31, 2000 for all individuals participating in the MIP
Plan, except the company's Chief Executive Officer. In connection therewith,
payments were made to those individuals in September 2001.

Restated Joint Plan and the stock of CHC would no longer be publicly traded.
Therefore, under the Debtors' Restated Joint Plan, as filed, the existing
stockholders of CHC would have received no value for their shares and all of the
outstanding equity of CI as the surviving entity would be owned by the holders
of the company's Series A Notes and Series B Notes. Representatives of the
company negotiated the principal aspects of the Joint Plan with representatives
of the holders of the company's Series A Notes and Series B Notes and Senior
Credit Facility prior to the filing of such Joint Plan.

In order for the company to remain compliant with the requirements of Stark
II, on December 29, 2000, pursuant to an order of the Bankruptcy Court, CI
exchanged approximately $97.7 million of the Series A Notes and approximately
$11.6 million of accrued but unpaid interest on the Series A Notes and the
Series B Notes for 905 shares of CI Series A Cumulative Preferred Stock (see
Notes 7 and 9 to the company's Condensed Consolidated Financial Statements for
further details). This transaction generated an extraordinary gain on troubled
debt restructuring of approximately $107.8 million, net of tax, which was
recorded in the fourth quarter of the year ended December 31, 2000. At December
31, 2000, the company's stockholders' equity exceeded the minimum Stark II
requirement necessary to comply with the public company exemption. See Note 10
to the company's Condensed Consolidated Financial Statements for further
discussion regarding Stark II.

Based upon Goldin's findings and recommendations, as set forth in the
Report of Independent Restructuring Advisor, Goldin Associates L.L.C. (the
"Goldin Report"), on July 31, 2001 the Debtors filed with the Bankruptcy Court a
Second Joint Disclosure Statement, as amended (the "Second Disclosure
Statement"), with respect to their Second Joint Plan. The Second Joint Plan,
which was also filed on July 31, 2001, provides for terms of reorganization
similar to those described in the Restated Joint Plan; however, utilizing
Goldin's recommendations, as set forth in the Goldin Report, the following
substantive modifications are included in the Second Joint Plan:

o the payment of up to $3.0 million to the holders of allowed
general unsecured claims of CHC;

o the payment of up to $10.0 million to the holders of CHC equity
interests (contingent upon such holders voting in favor of the
Second Joint Plan);

o cancellation of the issued and outstanding CI Series A Cumulative
Preferred Stock; and

o a $7.5 million reduction in certain performance bonuses payable
to Daniel D. Crowley, the company's Chief Executive Officer.

Among other things, the Equity Committee's motion to terminate the Debtors'
exclusivity periods and file its own plan of reorganization was denied by the
Bankruptcy Court on August 1, 2001. The Equity Committee also filed a motion
protesting and objecting to the Debtors' Second Joint Plan. Moreover, the
Official Committee of the Equity Security Holders and Official Committee of
Unsecured Creditors in the Resource Network Subsidiaries' bankruptcy proceedings
filed objections to confirmation of the Second Joint Plan. Management of the
company cannot predict what impact the Equity Committee or any other interested
parties, including those parties associated with the Resource Network
Subsidiaries' bankruptcy proceedings, will have on the Second Joint Plan.

Under the Bankruptcy Code, certain claims against the Debtors in existence
prior to the filing date are stayed while the Debtors continue their operations
as debtors-in-possession. These claims are reflected in the Condensed
Consolidated Balance Sheets as liabilities subject to compromise. Additional
Chapter 11 bankruptcy claims have arisen and may continue to arise subsequent to
the filing date resulting from the rejection of executory contracts, including
certain leases, and from the determination by the Bankruptcy Court of allowed
claims for contingencies and other disputed amounts. Parties affected by the
rejections may file claims with the Bankruptcy Court in accordance with the
provisions of the Bankruptcy Code and applicable rules. Claims secured by the
Debtors' assets also are stayed, although the holders of such claims have the
right to petition the Bankruptcy Court for relief from the automatic stay and
foreclose on the property securing their claims. Additionally, certain claimants
have sought relief from the Bankruptcy Court to remove the automatic stay and
continue pursuit of their claims against the Debtors or the Debtors' insurance
carriers.

The holders of Coram, Inc.'s Series A Cumulative Preferred Stock continue
to maintain a claim position within the Debtors' bankruptcy proceedings in the
aggregate amount of their cumulative liquidation preference. Notwithstanding the
debt to equity exchange, the aforementioned holders' priority in the Debtors'
bankruptcy proceedings will be no less than it was immediately prior to said
exchange.

Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to the Second Joint
Plan, which, as discussed above, has been voted on and is now subject to
confirmation by the Bankruptcy Court. Therefore it is not possible to fully or
completely estimate the fair value of the liabilities subject to compromise at
September 30, 2001 due to the Debtors' Chapter 11 cases and the uncertainty
surrounding the ultimate amount and settlement terms for such liabilities.

RESULTS OF OPERATIONS

As discussed in Note 3 to the company's Condensed Consolidated Financial
Statements, the company considers R-Net's operating results as part of
discontinued operations; however, for the three and nine months ended September
30, 2001 and 2000 the Resource Network Subsidiaries had no operations.

Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2000

Net Revenue. Net revenue decreased $9.1 million or 8.8% to $93.8 million in
the three months ended September 30, 2001 from $102.9 million in the three
months ended September 30, 2000. The decrease is primarily due to a permanent
reduction, effective July 1, 2001, in the Average Wholesale Price ("AWP") for,
among others, the antibiotic drug Vancomycin. The direct impact of the AWP
reduction resulted in an

unfavorable pricing variance of $3.2 million for the three months ended
September 30, 2001 compared to the three months ended September 30, 2000 (see
"Risk Factors" for further AWP discussion), the sale of CPS on July 31, 2000
(CPS had net revenue of $8.4 million during the three months ended September 30,
2000) and a $0.2 million decline in net revenue attributable to the company's
subsidiary, CTI Network, Inc. ("CTI"). These decreases are partially offset by
net revenue increases from initiatives to focus on core infusion therapies.

Gross Profit. Gross profit decreased $2.1 million to $25.1 million or a
gross margin of 26.8% in the three months ended September 30, 2001 from $27.2
million or a gross margin of 26.4% in the three months ended September 30, 2000.
The gross margin percentage increase is primarily due to a more favorable
product/therapy mix and the sale of CPS, which had a lower gross margin
percentage than that of the infusion business segment, thereby causing a lower
blended consolidated percentage during the three months ended September 30,
2000. However, commencing on July 1, 2001, there was an offsetting decrease in
gross profit due to reductions in the AWP reimbursement rates for Vancomycin and
certain other drugs used in the company's operations. The components of gross
profit are as follows (in millions):

FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
------- -------

Infusion .............. $24,921 $25,877
CPS ................... -- 934
CTI ................... 190 388
------- -------
Total gross profit .... $25,111 $27,199
======= =======

Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
decreased $2.7 million or 12.2% to $19.4 million in the three months ended
September 30, 2001 from $22.1 million in the three months ended September 30,
2000. The decrease during the three months ended September 30, 2001 is primarily
due a decrease in expenses related to management incentive compensation of $4.4
million and approximately $0.4 million of SG&A expenses directly related to CPS
personnel and other CPS related activities that were eliminated upon the
divestiture of the CPS business segment. The aforementioned expense decreases
are partially offset by costs incurred by the company to enhance its
risk-management profile and expand its sales force.

Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts is $2.9 million or 3.0% of net revenue in the three
months ended September 30, 2001 compared to $3.4 million or 3.3% of net revenue
in the three months ended September 30, 2000. The percentage decrease is
primarily attributable to a higher level of bad debt write-offs in the three
months ended September 30, 2000.

Interest Expense. Interest expense decreased $2.8 million to $4.1 million
in the three months ended September 30, 2001 from $6.9 million in the three
months ended September 30, 2000. The decrease is primarily due to (i) reduced
outstanding borrowings on revolving credit arrangements and (ii) the
non-recognition of interest expense related to the Series A Senior Subordinated
Unsecured Notes (the "Series A Notes") and the Series B Senior Subordinated
Unsecured Convertible Notes (the "Series B Notes") in connection with the
execution of the Exchange Agreement on December 29, 2000, which qualified as a
troubled debt restructuring (see Notes 7 and 9 to the company's Condensed
Consolidated Financial Statements for further details). These decreases are
partially offset by the recognition of approximately $4.1 million of interest
expense on the proposed settlement of a dispute with the Internal Revenue
Service, which is more fully described in Note 8 to the company's Condensed
Consolidated Financial Statements.

Gains on Sales of Businesses. During the three months ended September 30,
2000, the company recorded gains on sales of businesses of approximately $18.5
million consisting primarily of the gain on the sale of the CPS business and an
earn-out payment relating to one of the company's operating subsidiaries. See
Note 4 to the company's Condensed Consolidated Financial Statements for further
details.

Reorganization Expenses, Net. In the three months ended September 30, 2001,
the company recognized $3.7 million in net reorganization expenses compared to
$1.9 million during the three months ended September 30, 2000 related to the
Debtors' Chapter 11 bankruptcy proceedings. The principal reason for the
increased reorganization expenses is the commencement of the company's
bankruptcy proceedings in the middle of the three month period ended September
30, 2000 and the continuation of such proceedings during the entire three month
period ended September 30, 2001. These expenses include, but are not limited to,
professional fees, expenses related to employee retention plans, United States
Trustee fees and other expenditures during the Chapter 11 proceedings, offset by
interest earned on accumulated cash due to the Debtors not paying their
liabilities subject to compromise. See Note 2 to the company's Condensed
Consolidated Financial Statements for further details.

Income Tax Expense. See Note 8 to the company's Condensed Consolidated
Financial Statements for discussion of the variance between the statutory income
tax rate and the company's effective income tax rate.

Income from Disposal of Discontinued Operations. During the three months
ended September 30, 2000, Coram recognized income in the aggregate amount of
$0.3 million related to proceeds from certain insurance recoveries. See Note 3
to the company's Condensed Consolidated Financial Statements for further
discussion of the discontinued operations.

Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000

Net Revenue. Net revenue decreased $80.4 million or 21.9% to $287.5 million
in the nine months ended September 30, 2001 from $367.9 million in the nine
months ended September 30, 2000. The decrease is primarily due to the sale of
CPS on July 31, 2000 (CPS had net revenue of $61.4 million during the nine
months ended September 30, 2000), a $1.9 million decline in net revenue
attributable to CTI and a permanent reduction, effective July 1, 2001, in the
AWP for, among others, the antibiotic drug Vancomycin. The direct impact of the
AWP reduction resulted in an unfavorable pricing variance of $1.0 million for
the nine months ended September 30, 2001 compared to the nine months ended
September 30, 2000 (see "Risk Factors" for further AWP discussion).
Additionally, a decrease in infusion net revenue of approximately $17 million is
due, in part, to the termination of the Aetna National Ancillary Services
Agreement, effective April 12, 2000.

Gross Profit. Gross profit decreased $15.4 million to $80.1 million or a
gross margin of 27.9% in the nine months ended September 30, 2001 from $95.5
million or a gross margin of 26.0% in the nine months ended September 30, 2000.
The gross margin percentage increase is primarily due to a more favorable
product/therapy mix and the sale of CPS, which had a lower gross margin
percentage than that of the infusion business segment, thereby causing a lower
blended consolidated percentage during the nine months ended September 30, 2000.
However, commencing on July 1, 2001, there was an offsetting decrease in gross
profit due to reductions in the AWP reimbursement rates for Vancomycin and
certain other drugs used in the company's operations. The components of gross
profit are as follows (in millions):

FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
------- -------

Infusion .............. $79,716 $86,017
CPS ................... -- 8,059
CTI ................... 421 1,419
------- -------
Total gross profit .... $80,137 $95,495
======= =======

Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
decreased $9.5 million or 13.5% to $61.1 million in the nine months ended
September 30, 2001 from $70.6 million in the nine months ended September 30,
2000. The decrease during the nine months ended September 30, 2001 is primarily
due to approximately $4.5 million of SG&A expenses directly related to CPS
personnel and other CPS related activities that were eliminated upon the
divestiture of the CPS business segment and a decrease in expenses related to
management incentive compensation of $8.4 million (in connection with the plans
approved by the company's Compensation Committee of the Board of Directors and
filed with the Bankruptcy Court, the company recorded management incentive
compensation expenses of $1.5 million and $9.9 million for the nine months ended
September 30, 2001 and 2000, respectively). The aforementioned expense decreases
are partially offset by costs incurred by the company to enhance its
risk-management profile and expand its sales force.

Provision for Estimated Uncollectible Accounts. The provision for estimated
uncollectible accounts is $8.8 million or 3.1% of net revenue in the nine months
ended September 30, 2001 compared to $10.1 million or 2.8% of net revenue in the
nine months ended September 30, 2000. The percentage increase is primarily
attributable to the sale of CPS, which had a lower bad debt experience rate than
that of the infusion business segment, thereby causing a lower blended
consolidated effective rate during the nine months ended September 30, 2000.
Additionally, the company experienced a bad debt recovery of $0.3 million during
the nine months ended September 30, 2000.

Restructuring Cost Recovery. During the nine months ended September 30,
2001, the company recognized restructuring cost recoveries of approximately $0.6
million related to the assumption of one of the company's real property leases
by a third party and certain changes in estimates attributable to severance
liabilities. Such items were previously reserved for as part of accrued merger
and restructuring costs.

Interest Expense. Interest expense decreased $14.0 million to $6.3 million
in the nine months ended September 30, 2001 from $20.3 million in the nine
months ended September 30, 2000. The decrease is primarily due to (i) reduced
outstanding borrowings on revolving credit arrangements and (ii) the
non-recognition of interest expense related to the Series A Notes and the Series
B Senior Notes in connection with the execution of the Exchange Agreement on
December 29, 2000, which qualified as a troubled debt restructuring (see Notes 7
and 9 to the company's Condensed Consolidated Financial Statements for further
details). These decreases are partially offset by the recognition of
approximately $5.5 million of interest expense on the proposed settlement of a
dispute with the Internal Revenue Service, which is more fully described in Note
8 to the company's Condensed Consolidated Financial Statements.

Gains on Sales of Businesses. During the nine months ended September 30,
2000, the company recorded gains on sales of businesses of approximately $18.5
million consisting primarily of the gain on the sale of the CPS business and an
earn-out payment relating to one of the company's operating subsidiaries. See
Note 4 to the company's Condensed Consolidated Financial Statements for further
details.

Reorganization Expenses, Net. In the nine months ended September 30, 2001,
the company recognized $10.0 million in net reorganization expenses compared to
$1.9 million in the nine months ended September 30, 2000 related to the Debtors'
Chapter 11 bankruptcy proceedings. The principal reason for the increased
reorganization expenses is the commencement of the company's bankruptcy
proceedings late in the nine month period ended September 30, 2000 and the
continuation of such proceedings during the entire nine month period ended
September 30, 2001. These expenses include, but are not limited to, professional
fees, expenses related to employee retention plans, United States Trustee fees
and other expenditures during the Chapter 11 proceedings, offset by interest
earned on accumulated cash due to the Debtors not paying their pre-petition
liabilities. See Note 2 to the company's Condensed Consolidated Financial
Statements for further details.

Loss on Disposal of Discontinued Operations. During the nine months ended
September 30, 2000, Coram recorded charges in the aggregate amount of $3.5
million, which includes additional reserves for litigation and other wind-down
costs of the Resource Network Subsidiaries. These charges are partially offset
by $0.3 million in proceeds related to certain insurance recoveries. See Note 3
to the company's Condensed Consolidated Financial Statements for further
discussion of the discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

Bankruptcy Proceedings. The Debtors filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code on August 8, 2000. Since
that date, the Debtors have been operating as debtors-in-possession subject to
the jurisdiction of the Bankruptcy Court. None of the company's other
subsidiaries is a debtor in the proceeding. Although the filing of the Chapter
11 cases constitutes defaults under the company's principal debt instruments,
Section 362 of the Bankruptcy Code imposes an automatic stay that will generally
preclude creditors and other interested parties under such arrangements from
taking remedial action in response to any such default without prior Bankruptcy
Court approval. In addition, the Debtors may reject executory contracts and
unexpired leases. Parties affected by the rejections may file claims with the
Bankruptcy Court in accordance with the provisions of the Bankruptcy Code and
applicable rules. See Note 2 to the company's Condensed Consolidated Financial
Statements for further details.

Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Debtors'
accounting records. Differences between amounts shown by the Debtors and claims
filed by creditors are being investigated and resolved. The ultimate amount and
the settlement terms for such liabilities will be subject to the Debtors' Second
Joint Plan, which, as discussed above, has been voted on and is now subject to
confirmation by the Bankruptcy Court. Therefore, it is not possible to fully or
completely estimate the fair value of the liabilities subject to compromise at
September 30, 2001 due to the Debtors' Chapter 11 cases and the uncertainty
surrounding the ultimate amount and settlement terms for such liabilities.

Credit Facilities. On August 20, 1998, the company entered into the Senior
Credit Facility, which provided for the availability of up to $60.0 million for
acquisitions, working capital, letters of credit and other corporate purposes.
The terms of the agreement also provided for the issuance of letters of credit
of up to $25.0 million provided that available credit would not fall below zero.
In connection with the sale of CPS, effective July 31, 2000, the company reduced
its outstanding borrowings under the Senior Credit Facility by $28.5 million,
leaving only irrevocable letter of credit obligations of $2.7 million
outstanding. Furthermore, on September 21, 2000 and January 29, 2001, the
company permanently reduced the Senior Credit Facility commitment to $2.7
million and $2.1 million, respectively, in order to reduce the fees related to
commitments on which the company was not be able to borrow against due

to the Debtors' bankruptcy proceedings. Effective February 6, 2001, the Senior
Credit Facility lenders and the company terminated the Senior Credit Facility.
In connection with the termination of the Senior Credit Facility and pursuant to
orders of the Bankruptcy Court, the company established new letters of credit
aggregating $2.1 million through Wells Fargo Bank Minnesota, NA ("Wells Fargo")
and such new letters of credit are fully secured by interest bearing cash
deposits of the company held by Wells Fargo. Due to certain hemophilia and
intravenous immunoglobulin product shortages and the pendency of the Debtors'
bankruptcy proceedings, the company may be required to enhance exiting letters
of credit or establish new letters of credit in order to ensure the availability
of such products for its patients' medical needs.

The Debtors entered into a secured debtor-in-possession ("DIP") financing
agreement with Madeleine L.L.C., an affiliate of Cerberus Partners, L.P. (a
party to the Senior Credit Facility and the Securities Exchange Agreement), as
of August 30, 2000. Prior to entering into the DIP financing agreement,
management and the Board of Directors solicited advice from the company's
financial advisors. Such advisors indicated that the terms and conditions of the
DIP financing agreement were generally favorable when compared to a company with
Coram's financial history. The agreement provided that the Debtors could access,
as necessary, up to $40 million depending upon borrowing base availability, for
use in connection with the operations of their businesses and the businesses of
their subsidiaries. On September 12, 2000, the Bankruptcy Court approved the DIP
agreement. The DIP financing agreement expired by its terms on August 31, 2001
with the company making no draw-downs thereunder through the term of the
financing. See Note 7 to the company's Condensed Consolidated Financial
Statements for further details.

On December 29, 2000, the Securities Exchange Agreement was amended
("Amendment No. 4") and an Exchange Agreement was simultaneously executed among
the Debtors and Cerberus Partners, L.P., Goldman Sachs Credit Partners, L.P. and
Foothill Capital Corporation (collectively the "Holders"). Pursuant to such
arrangements, the Holders agreed to exchange approximately $97.7 million
aggregate principal amount of the Series A Notes and $11.6 million of aggregate
unpaid accrued contractual interest on the Series A Notes and the Series B Notes
as of December 29, 2000 for 905 shares of Coram, Inc. Series A Cumulative
Preferred Stock (see Note 9 to the company's Condensed Consolidated Financial
Statements for further details regarding the preferred stock). Following the
exchange, the Holders retain approximately $61.2 million aggregate principal
amount of the Series A Notes and $92.1 million aggregate principal amount of the
Series B Notes. Pursuant to Amendment No. 4, the per annum interest rate on both
the Series A Notes and the Series B Notes has been adjusted to 9.0%. Moreover,
the Series A Notes' and Series B Notes' original scheduled maturity dates of May
2001 and April 2008, respectively, have both been modified to June 30, 2001. See
Note 7 to the company's Condensed Consolidated Financial Statements for
discussion of certain continuing defaults under the Securities Exchange
Agreement. Due to the Holders' receipt of consideration with a fair value less
than the face value of the exchanged principal and accrued interest, the
exchange transactions qualified as a troubled debt restructuring pursuant to
Statement of Financial Accounting Standards No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings. In connection therewith, the company
recognized an extraordinary gain during the fourth quarter of the year ended
December 31, 2000 of approximately $107.8 million, net of tax. As of November
16, 2001, the aggregate Preferred Stock liquidation preference was approximately
$122.2 million.

The money necessary for CI to make payments pursuant to the Second Joint
Plan is expected to be obtained from the company's available cash balances and
cash flow from operations of reorganized CI and may also include funds from the
Exit Financing Facility.

General. The company's Consolidated Financial Statements have been prepared
on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Debtors' bankruptcy filings and
circumstances relating thereto, including the company's leveraged financial
structure and cumulative losses from operations, such realization of assets and
liquidation of liabilities is subject to significant uncertainty. During the
pendency of the Debtors' Chapter 11 bankruptcy proceedings, the company may sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the Condensed Consolidated Financial Statements.
Further, a confirmed plan

of reorganization in the Chapter 11 proceedings could materially change the
amounts reported in the Condensed Consolidated Financial Statements, which do
not give effect to any adjustments of the carrying value of assets or
liabilities that might be necessary as a consequence of a confirmed plan of
reorganization. The company's ability to continue as a going concern is
dependent upon, among other things, confirmation of a plan of reorganization,
future profitable operations, the ability to comply with the terms of the
company's financing agreements, the ability to remain in compliance with the
physician ownership and referral provisions of Stark II and the ability to
generate sufficient cash from operations and/or financing arrangements to meet
its obligations.

Coram used cash generated from operations and cash reserves to fund its
reorganization activities, working capital requirements and operations for the
nine months ended September 30, 2001. Coram's working capital deficit as of
September 30, 2001 was $97.7 million as compared to a working capital deficit of
$97.1 million at December 31, 2000. The working capital deficits at such dates
are primarily due to (i) liabilities subject to compromise classified as current
liabilities, including the full amount of the company's Series A Notes and the
Series B Notes aggregating $153.3 million, (ii) accruals for management
incentive compensation and (iii) accruals for administrative costs of the
Debtors' bankruptcy proceedings. Events impacting the net working capital
deficit during the nine months ended September 30, 2001 were the requisite
deposit of $2.1 million needed to collateralize certain letters of credit and
obligations to purchase new financial and human resource software packages. As
discussed above under Credit Facilities, the company may be required to provide
additional cash collateral or new and/or enhanced letters of credit. Changes in
current assets related to (i) a decrease in cash and cash equivalents of $9.0
million, (ii) an increase in accounts receivable of $12.9 million primarily due
to unfavorable effects resulting from the consolidation of the company's
reimbursement sites, (iii) a decrease in inventories of $0.7 million and (iv) an
increase in other current assets of $1.1 million. Total current liabilities
changed primarily due to (i) an increase in accrued compensation and related
liabilities of $2.7 million, (ii) a decrease in merger and restructuring costs
of $1.5 million (including a non-cash reserve reversal of $0.6 million), (iii)
an increase in accrued reorganization costs for administrative professionals of
$3.0 million and (iv) an increase in other accrued liabilities of $0.8 million.

Management throughout the company is continuing to concentrate on enhancing
timely reimbursement by emphasizing improved billing and cash collection
methods, continued assessment of systems support for reimbursement and
concentration of the company's expertise and managerial resources into certain
reimbursement locations. In December 2000, Coram announced that as part of its
continuing efforts to improve efficiency and overall performance, several
Patient Financial Service Centers (reimbursement sites) were being consolidated
and the related reimbursement positions were to be eliminated. By consolidating
to fewer sites, management expects to implement improved training, more easily
standardize "best demonstrated practices," enhance specialization related to
payers such as Medicare and achieve more consistent and timely cash collections.
Management does not expect this change to affect Coram's patients or payers, but
believes, instead, that in the long-term they will receive better, more
consistent service. The transition was accomplished in stages, commencing April
1, 2001 and ending July 2001. Management had taken certain actions to mitigate
the potential shortfall in cash collections during and after the transition
period, including, but not limited to, offering incentives for personnel to stay
with the company until the completion of their corresponding regional
consolidation. Notwithstanding management's efforts, the company experienced
deterioration in its days sales outstanding ("DSO") since the commencement of
the reimbursement consolidation plan and a substantial growth in accounts
receivable. No assurances can be given that the consolidation of the company's
Patient Financial Service Centers will be successful in enhancing timely
reimbursement, that the company will not continue to experience a significant
shortfall in cash collections after the transition period or that the
aforementioned deterioration in DSO and accounts receivable growth will not
continue.

Management believes that the costs for the Debtors' reorganization and
bankruptcy proceedings will result in significant use of cash for the year
ending December 31, 2001 and thereafter. These items principally consist of
professional fees and expenses and expenditures related to key employee success
and retention plans. Management believes that such costs will primarily be
funded through available cash balances, cash provided by operations and, if the
terms of the Exit Financing Facility are approved by the Bankruptcy Court and if
the parties ultimately agree to final terms and conditions, funds provided by
the Exit Financing Facility.

The company sponsors a Management Incentive Plan ("MIP"), which provides
for annual bonuses payable to certain key employees. The bonuses are predicated
on overall corporate performance (principally cash collections and earnings
before interest, taxes, reorganization expenses, restructuring costs,
depreciation and amortization), as well as, individual performance targets and
objectives. On March 20, 2001, the Compensation Committee of the company's Board
of Directors approved an overall award of approximately $13.6 million for the
year ended December 31, 2000 for those individuals participating in the MIP. The
Second Joint Plan, if approved, will reduce the MIP and other incentive
compensation by $7.5 million related to amounts payable to Daniel D. Crowley,
the company's Chief Executive Officer. On September 7, 2001, the Bankruptcy
Court approved payment of up to approximately $2.7 million for the MIP related
to the year ended December 31, 2000 to all individuals participating in the MIP,
except for the amounts due to Mr. Crowley. In connection therewith, such
payments to those individuals were made in September 2001. The $7.5 million
incentive compensation bonus for Mr. Crowley that is subject to potential
downward adjustment is recorded in current liabilities subject to compromise in
the accompanying Condensed Consolidated Balance Sheets.

On or about May 9, 2001, the Bankruptcy Court approved the Debtors' motion
requesting authorization to enter into an insurance premium financing agreement
with AICCO, Inc. (the "Financing Agreement") to finance the payment of premiums
under certain of the Debtors' insurance policies. Under the terms of the
Financing Agreement, the Debtors made a down payment of approximately $1.1
million. The amount financed is approximately $2.1 million and is secured by the
unearned premiums and loss payments under the insurance policies covered by the
Financing Agreement. The amount financed is being paid in eight monthly
installments of approximately $0.3 million each, including interest at a per
annum rate of 7.85%, which commenced on May 15, 2001. In addition, AICCO, Inc.
has the right to terminate the insurance policies and collect the unearned
premiums (as administrative expenses) if the Debtors do not make the monthly
payments called for by the Financing Agreement.

The final liquidation of the Resource Network Subsidiaries through their
bankruptcy proceedings may result in certain additional cash expenditures by the
company beyond the cash accounts already deemed to be a part of R-Net's
bankruptcy estate. While management does not expect that such amounts, if any,
will be material to the financial condition or cash flows of the company, no
assurances can be given as to the company's aggregate amount of expenditures
anticipated related to the Resource Network Subsidiaries' bankruptcy. See Note
10 to the company's Condensed Consolidated Financial Statements for further
details.

The Board of Directors approved management's request to upgrade Coram's
company-wide information systems. In connection therewith, on May 17, 2001 the
company entered into an agreement whereby new financial and human resource
software packages and related licenses will be procured. The total purchase
price for such software and licenses will be approximately $1.2 million, of
which $0.5 million was paid on May 18, 2001 and the remaining balance is accrued
in the accompanying Condensed Consolidated Balance Sheets. Additional internal
and external costs will be incurred to implement this software. The company also
entered into an agreement to purchase certain hardware necessary for the new
information systems. The aggregate purchase price for the hardware will be
approximately $1.4 million, including $0.3 million and $0.9 million paid in
September 2001 and October 2001, respectively. Additional hardware components
will be required in order to make the new software fully functional and, in
connection therewith, management is currently evaluating several alternatives.
The company intends to fund its current and future capital commitments with its
available cash balances, cash provided by operations and, if approved by the
Bankruptcy Court and if the parties ultimately agree to final terms and
conditions, funds from the Exit Financing Facility.

Coram is currently in negotiations to settle a dispute with the Internal
Revenue Service regarding certain tax refunds previously received by the
company. If the company is not able to negotiate an installment payment plan
with the IRS with respect to the proposed settlement amount or if either the
Joint Committee of Taxation or the Bankruptcy Court do not approve the proposed
settlement amount, the financial position and liquidity of the company could be
materially adversely affected. Furthermore, management cannot predict whether
any future objections of the Official Committee of the Equity Security Holders
or other interested parties in the Debtors' bankruptcy proceedings will be
forthcoming or if they would prevent confirmation of the Debtors' Second Joint
Plan. Outcomes unfavorable to the company or unknown additional actions could
require the company and the Debtors to access significant additional funds. See
Notes 8 and 10 to the company's Condensed Consolidated Financial Statements for
further details.

RISK FACTORS

There can be no assurance regarding Coram's ability to continue operations
in light of the Chapter 11 Proceedings.

The company's ability to continue operations is dependent upon, among other
things, confirmation of a plan of reorganization, success of future operations
after such confirmation and the ability to generate sufficient cash from
operations and financing sources to meet obligations. There can be no assurances
that the Debtors' Second Joint Plan or any other plan of reorganization will be
approved by the Bankruptcy Court or that such a plan will allow the company to
operate profitably. Any plan of reorganization and

other actions during the Chapter 11 proceedings could change materially the
financial condition and/or outlook of the company. Furthermore, the future
availability or terms of financing cannot be determined in light of the Chapter
11 filings and there can be no assurances that the amounts available through the
proposed Exit Financing Facility will be sufficient to fund the operations of
the company or that other financing instruments will not be necessary during the
pendancy of the Debtors' bankruptcy proceedings. In addition, the company may
experience difficulty in attracting and maintaining patients and appropriate
personnel as a result of the Chapter 11 proceedings.

Coram's common stock is subject to a high degree of risk and market
volatility.

As a result of the Chapter 11 bankruptcy filings of the Debtors, the equity
interests of the common stockholders are subject to a high degree of risk.
Should a plan of reorganization similar to the Second Joint Plan of
reorganization be approved, the complete elimination of the equity interests of
CHC would occur in accordance with the terms of the Second Joint Plan. There can
be no assurances that the Second Joint Plan will be approved by Bankruptcy
Court. See Note 2 to the company's Condensed Consolidated Financial Statements
for further details.

There has historically been and may continue to be significant volatility
in the market price for Coram's common stock. Factors include, but not limited
to, the Debtors' Chapter 11 bankruptcy proceedings, actual or anticipated
fluctuations in Coram's operating results, new products or services introduced
or new contracts entered into by the company or its competitors, conditions and
trends in the healthcare industry including changes in government reimbursement
policies, changes in financial estimates by securities analysts, general market
conditions and other factors could cause the market price of Coram's common
stock to fluctuate substantially. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market price for the common stock of healthcare
companies. These broad market fluctuations may adversely affect the market price
of the common stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has been brought against that company. There can be no assurances that such
litigation will not occur in the future with respect to Coram. Such litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon Coram's business,
financial condition and results of operations.

Under the Stark II law, Coram will need to maintain certain equity
requirements in order to be able to avoid disruption in accepting referrals of
certain patients from physicians who may own shares of Coram common stock.

Coram is aware that certain referring physicians (or their immediate family
members) have, from time to time, owned shares of its common stock. A federal
law, known as Stark II, prohibits a physician from making Medicare or Medicaid
referrals for certain "designated health services," including durable medical
equipment, parenteral and enteral nutrition therapy and outpatient prescription
drugs, to entities with which the physician or an immediate family member has a
financial relationship, unless an exception to the law is available. The Stark
II law includes an exception for the ownership of publicly traded stock in
companies with equity above certain levels. This exception of Stark II requires
the issuing company to have stockholders' equity of at least $75 million either
as of the end of its most recent fiscal year or on average over the last three
fiscal years. The company currently meets the public company exception based on
stockholders' equity as of December 31, 2000. However, in light of the company's
losses during the nine months ended September 30, 2001, management's ability to
achieve an appropriate level of stockholders' equity as of January 1, 2002
cannot be reasonably assured. The penalties for failure to comply with Stark II
include, among other things, non-payment of claims and civil penalties that
could be imposed upon the company and, in some instances, upon the referring
physician. Some of such penalties can be imposed regardless of whether the
company intended to violate the law. Accordingly, if the company's common stock
remains publicly traded and its stockholders' equity falls below the required
levels, the company would be forced to cease accepting referrals of patients
covered by the Medicare or Medicaid programs or run a significant risk on
noncompliance with Stark II. Ceasing to accept such referrals could materially
adversely affect the company's financial condition and business reputation in
the market as it may cause the company to be a less attractive provider to which
a physician could refer his or her patients. The company previously requested a
Stark II waiver from the Health Care Financing Administration, but such waiver
request was denied.

In the absence of the confirmation and effectuation of the Debtors' Second
Joint Plan on or before December 31, 2001, management is considering certain
alternatives in order to remain compliant with the provisions of Stark II.
However, there can be no assurances that the company will be able to
successfully implement any of management's plans or that the Bankruptcy Court
would approve any such plans put forth by management or the company. Failure to
comply with Stark II would have a material adverse impact on the company's
operations and financial condition.

Coram may find itself unable to procure the products necessary to serve its
patients.

Due to the nature of factor manufacturing processes, intermittent product
shortages may be experienced from time to time, which may make it difficult for
Coram to meet the needs of its patients and may have an adverse impact on
Coram's future results of operations. Furthermore, limited allocations of
products from manufacturers, including, but not limited to, recombinant factor
VIII (rVIII), greatly impact the company's ability to expand its customer base.
These shortages could be due to insufficient donor pools, failed production
lots, contamination, regulations and other factors beyond Coram's control. The
ability to acquire factor products under normal conditions is volatile, but
currently the international demand for certain factor products far exceeds the
supply. Availability of factor product from manufacturers is spotty, thereby
requiring the company to purchase through the blood broker market wherein
pricing may not be favorable to the company and product availability can change
significantly from day to day. During times of such shortages, prices can rise
significantly with limited ability on the part of the company to pass these
additional costs on to patients.

Average Wholesale Price ("AWP") changes may trend in a direction that is
adverse to net revenue and profitability.

For most of the drugs that Coram provides to its patients, it is reimbursed
by governmental and third party payers according to rate schedules that are
based on the AWP of the drugs as published by commercial pricing services. For
example, the Medicare program generally pays 95 percent of the published AWP of
a drug. AWP is an industry term that is typically understood to represent a
suggested resale price for wholesale sales to pharmacies. The AWP does not
necessarily reflect the price paid by either wholesalers or other end-user
purchasers.

In the last several years, state and federal government enforcement
agencies have conducted an ongoing investigation of manufacturers' practices
with respect to AWP in which they have suggested that "inflated" AWPs have led
to excessive government payments for prescription drugs and biologicals. At
least one private class action suit has also been filed against manufacturers
based on similar allegations. As a byproduct of these investigations, federal
and state policymakers have begun to question the appropriateness of continuing
to reimburse for drugs and biologicals under federal programs using AWP-based
methodologies.

For example, the Medicare, Medicaid and SCHIP Benefits and Improvement and
Protection Act of 2000 ("BIPA") required the General Accounting Office ("GAO")
to study Medicare reimbursement for drugs and biologicals and for related
services. The Secretary of Health and Human Services is required to revise the
current Medicare payment methodologies for covered drugs and biologicals and
related services based on the GAO's recommendations. Similarly, on November 14,
2001, members of the House Commerce Committee outlined a proposal to the Centers
for Medicare & Medicaid Services administrator for a proposed new methodology
under which payments for drugs and biologicals would be based on a new "average
sales price" concept, which would be intended to more accurately reflect
providers' actual acquisition cost for drugs and biologicals.

In addition, as part of the government investigation of AWP described
above, the Department of Justice and states' attorneys general developed
"revised" AWPs for a number of drugs and biologicals which are generally lower
than those published by commercial services. The Medicare program proposed that
these revised AWPs be used in determining reimbursement amounts, but this
proposal was withdrawn in light of the BIPA provisions described above.
According to a recent report by the Department of Health and Human Services
Office of Inspector General, however, approximately 30 state Medicaid programs
are using the revised AWPs to establish reimbursement amounts for some of the
listed drugs and biologicals.

There can be no assurances that government or private healthcare programs
will continue to reimburse for drugs and biologicals based on current AWP-based
methodologies, or that future AWPs or revised AWPs will reflect acquisition
prices available to purchasers such as the company. If government or private
health insurance programs discontinue or modify the use of AWP or otherwise
implement payment methods that reduce the reimbursement for drugs and
biologicals, the product margins that the company receives may be reduced, and
may, in many cases may be inadequate to cover the cost of clinical services and
overhead expenses associated with the delivery and administration of the drugs.
This could produce a material adverse impact on the company's overall profit
margins.

In particular, effective July 1, 2001, the margin between Coram's
reimbursement rate and the cost of the acquired drug Vancomycin has decreased as
a result of the reduction in the AWP reimbursement rate. To possibly mitigate
the decrease of net revenue from the resulting decrease in AWP reimbursement,
the company has made modifications to its drug purchasing formulary. While the
company is implementing changes to reduce the adverse effect on net revenue and
the direct impact to profitability, no assurances can be made that the company
will be successful in implementing these changes. See Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further discussion.

For a discussion of other risks that have impacted or may impact the
company, readers are instructed to review the discussion under the heading "Risk
Factors" which appears in Item 7. of the company's Annual Report on Securities
and Exchange Commission Form 10-K for the year ended December 31, 2000.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.

As of September 30, 2001, the company had outstanding long-term debt of
$154.5 million of which $153.3 million matured on June 30, 2001 and bore
interest at 9.0% per annum; however, the $153.3 million was not paid on such
date and the creditors' remedies are currently stayed pursuant to the Debtors'
bankruptcy proceedings. The company also had a debtor-in-possession ("DIP")
financing agreement providing for the availability of up to $40.0 million for
use in connection with the operation of its businesses and the businesses of its
subsidiaries. The DIP financing agreement expired on August 31, 2001. No
borrowings were provided thereunder during its term. Management is currently
negotiating a renewal of the DIP financing agreement; however, no assurances can
be given that the parties will ultimately agree to the terms and conditions of
such renewal or that a renewal will be approved by the Bankruptcy Court. Because
substantially all of the interest on the company's debt is fixed, a hypothetical
10.0% change in interest rates would not have a material impact on the company.
Increases in interest rates could, however, increase interest expense associated
with future borrowings by the company, if any. The company does not hedge
against interest rate changes.

The debt to equity exchange transaction described in Note 7 to the
company's Condensed Consolidated Financial Statements qualified as a troubled
debt restructuring pursuant to Statement of Financial Accounting Standards No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. In
accordance therewith and the provisions of SOP 90-7, the Debtors did not
recognize any interest expense on the Series A Notes and the Series B Notes
during the nine months ended September 30, 2001.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Descriptions of the material legal proceedings to which the company is a
party are set forth in Note 10 to the company's Condensed Consolidated Financial
Statements.

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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

A discussion of defaults and certain matters of non-compliance with certain
covenants contained in the company's principal debt agreements is set forth in
Note 7 to the company's Condensed Consolidated Financial Statements.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

None

(B) Reports on Form 8-K.

None

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/ SCOTT R. DANITZ
-----------------------------------------------
Scott R. Danitz
Senior Vice President, Chief Financial Officer
and Treasurer

November 19, 2001