HEALTHCOR HOLDINGS INC, S-1/A, 1996-07-01

HEALTHCOR HOLDINGS INC
S-1/A, 1996-07-01
MISC HEALTH & ALLIED SERVICES, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1996

REGISTRATION NO. 333-5779

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

AMENDMENT NO. 1

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

HEALTHCOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 8090 75-2294072
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or
organization) Classification Code Number) Identification No.)
</TABLE>

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5720 LBJ FREEWAY, SUITE 550
DALLAS, TEXAS 75240
(214) 233-7744
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
S. WAYNE BAZZLE
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
HEALTHCOR HOLDINGS, INC.
5720 LBJ FREEWAY, SUITE 550
DALLAS, TEXAS 75240
(214) 233-7744
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:

<TABLE>
<S> <C>
JIM A. WATSON TERRY M. SCHPOK, P.C.
VINSON & ELKINS L.L.P. J. KENNETH MENGES, JR., P.C.
3700 TRAMMELL CROW CENTER AKIN, GUMP, STRAUSS, HAUER AND FELD, L.L.P.
2001 ROSS AVENUE 1700 PACIFIC AVENUE, SUITE 4100
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
(214) 220-7700 (214) 969-2800
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
---------------------

If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. / /

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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<PAGE> 2

HEALTHCOR HOLDINGS, INC.

CROSS REFERENCE SHEET
(FURNISHED PURSUANT TO ITEM 501(B) OF REGULATION S-K)

<TABLE>
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.......................... Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk Factors................ "Prospectus Summary"; "Risk
Factors"
4. Use of Proceeds..................................... "Use of Proceeds"
5. Determination of Offering Price..................... Outside Front Cover Page of
Prospectus; "Underwriting"
6. Dilution............................................ "Dilution"
7. Selling Stockholders................................ "Principal and Selling
Stockholders"
8. Plan of Distribution................................ Outside Front Cover Page of
Prospectus; "Underwriting"
9. Description of Securities to be Registered.......... "Description of Capital Stock"
10. Interest of Named Experts and Counsel............... "Legal Matters"; "Experts"
11. Information with Respect to the Registrant.......... Outside Front Cover Page of
Prospectus; Inside "Prospectus
Summary"; "Dividend Policy";
"Summary Consolidated Financial and
Statistical Data"; "Management's
Discussion and Analysis of
Financial Condition and Results of
Operations"; "Business";
"Management"; "Certain
Transactions"; "Principal and
Selling Stockholders"; "Description
of Capital Stock"; "Shares Eligible
for Future Sale"
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.................... Not Applicable.
</TABLE>
<PAGE> 3

***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************

SUBJECT TO COMPLETION

JULY , 1996

3,250,000 SHARES

[HEALTHCOR HOLDINGS, INC. LOGO]

HEALTHCOR HOLDINGS, INC.

COMMON STOCK

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

Of the 3,250,000 shares of Common Stock offered hereby, 3,000,000 are being
sold by HealthCor Holdings, Inc. ("HealthCor" or the "Company") and 250,000 are
being sold by certain stockholders of the Company (the "Selling Stockholders").
The Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Stockholders. Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $12.50 and $14.50 per
share. See "Underwriting" for the factors to be considered in determining the
initial offering price.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," PAGE 6.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
================================================================================================
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
- ------------------------------------------------------------------------------------------------
Total(2).......................... $ $ $ $
================================================================================================
</TABLE>

(1) Before deducting expenses of the offering estimated at $700,000.
(2) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 487,500 additional shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $
and $ , respectively. See "Underwriting."

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

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about ,
1996.

ALEX. BROWN & SONS BEAR, STEARNS & CO. INC.
INCORPORATED

THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 4

[HEALTHCOR COMPANY LOGO AND MAP]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.

THE COMPANY

HealthCor is a leading provider of comprehensive home health care services
in the southwestern and central United States. The Company provides
fully-integrated home health care services, including nursing, respiratory
therapy/medical equipment and infusion therapy. Since incorporation in 1989, the
Company has expanded from 12 offices in three states to 75 offices in eight
states at May 31, 1996. The Company has successfully diversified its business
mix from approximately 98% nursing in 1989 to 58% nursing on a pro forma basis
as of March 31, 1996, reflecting the Company's evolution to a fully-integrated
home health care provider.

Home health care is among the fastest growing segments of the health care
industry with estimated annual expenditures of $36.1 billion in 1995, up from
$12.9 billion in 1990, representing a compounded annual growth rate of
approximately 23%. The underlying growth factors in the home health care
industry include: (i) the cost-effective nature of home care; (ii) an increasing
number of patients due to growth in the aging population; (iii) technological
advances that expand the range of home care procedures; and (iv) patient
preference for treatment in the home. In addition, the home health care industry
is highly fragmented with over 17,000 companies providing home care services in
the United States.

Managed care organizations and cost containment initiatives by payors have
driven the growth of home health care by emphasizing lower cost alternatives to
hospitals and skilled nursing facilities. These organizations and payors seek
coordinated, consistent quality home health care across broad geographic areas
in order to serve their patients more effectively. The Company believes its
ability to offer comprehensive home health care services is a significant
differentiating factor in its markets and affords it the ability to attract
contracts with payors. In addition, the Company seeks to enhance its market
position by making strategic acquisitions of high-quality companies that
complement and expand its operations.

The Company's business objective is to enhance its position as one of the
leading providers of comprehensive home health care services in the southwestern
and central United States. The Company's strategy is to: (i) provide one-stop
shop home health care to enhance its appeal to referral sources and payors; (ii)
acquire companies to enter new markets and further penetrate existing markets;
(iii) accelerate internal growth by expanding its scope of services; and (iv)
enhance its competitive position through the use of clinically-based management
information technology.

In December 1994, the Company, with the assistance of Rockwell
International Corporation ("Rockwell") and others, began developing a
custom-designed, clinically-based management information system to reduce costs,
improve productivity, produce and analyze clinical outcomes data and manage
growth more effectively. To date, the Company has implemented several phases of
this system, including the nursing component which has increased nurse
productivity by up to 40%. The Company believes that this system will enable it
to compete more effectively in an increasingly competitive managed care
environment and under new government reimbursement models, such as prospective
pay.

HealthCor's predecessor was incorporated in 1984. In 1989, the Company
reorganized under HealthCor Holdings, Inc. The Company's executive offices are
located at 5720 LBJ Freeway, Suite 550, Dallas, Texas 75240, and its telephone
number is (214) 233-7744.

3
<PAGE> 6

RISK FACTORS

The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.................... 3,000,000 shares
Common Stock offered by the Selling Stockholders....... 250,000 shares
Common Stock to be outstanding after the offering...... 9,554,600 shares(1)
Use of proceeds to the Company......................... Repay outstanding indebtedness under its
existing bank credit facilities, fund
potential acquisitions and for general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol................. HCOR
</TABLE>

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(1) Excludes 350,878 shares of Common Stock issuable upon exercise of stock
options granted under the Company's 1989 Stock Option Plan (the "1989 Stock
Option Plan") outstanding at May 31, 1996 at a weighted average exercise
price of $4.68 per share. Also excludes: (i) 237,500 shares of Common Stock
reserved for issuance under the HealthCor Holdings, Inc. 1996 Long-Term
Incentive Plan (the "1996 Incentive Plan"); (ii) 36,622 shares of Common
Stock reserved for issuance under the 1989 Stock Option Plan; and (iii)
25,000 shares of Common Stock issuable upon the exercise of Warrants
outstanding as of May 31, 1996, at a purchase price of $4.00 per share. See
"Management -- Stock Option Plans."

Except as otherwise specified, all information in this Prospectus: (i)
assumes no exercise of the Underwriters' over-allotment option; (ii) reflects a
five-for-two stock split to be effected in the form of a stock dividend upon the
closing of this offering; and (iii) reflects, at the closing of this offering,
the exercise of outstanding warrants to purchase 150,000 shares of Common Stock
and the automatic conversion of all outstanding shares of the Company's Series A
and Series B Convertible Preferred Stock into an aggregate of 3,339,297 shares
of Common Stock (the "Offering Related Transactions"). See "Description of
Capital Stock -- Offering Related Transactions" and "Underwriting."

4
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL AND STATISTICAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)

<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
-----------------------------
THREE MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31, YEAR ENDED ENDED
------------------------------- ------------------- DECEMBER 31, MARCH 31,
1993 1994 1995 1995 1996 1995(1)(2) 1996(2)(3)
------- ------- ------- ------- ------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................... $60,097 $57,151 $81,557 $17,553 $24,255 $ 94,258 $ 27,959
Operating expenses:
Compensation and related
benefits.................... 41,531 38,894 49,724 11,368 13,372 57,130 15,359
General and administrative.... 12,978 12,072 21,272 4,110 7,349 24,165 8,641
Depreciation and amortization
expense..................... 1,181 1,440 2,299 473 894 2,771 991
Provision for doubtful
accounts.................... 1,318 1,115 1,489 342 506 1,664 506
------ ------ ------ ------ ------ ------ ------
Total operating expenses.... 57,008 53,521 74,784 16,293 22,121 85,730 25,497
Income from operations.......... 3,089 3,630 6,773 1,260 2,134 8,528 2,462
Interest, net................... 427 244 987 119 486 122 239
Income before income taxes...... 2,662 3,386 5,786 1,141 1,648 8,406 2,223
Provision for income taxes...... 1,129 1,359 2,202 438 677 3,251 907
Net income...................... $ 1,533 $ 2,027 $ 3,584 $ 703 $ 971 $ 5,155 $ 1,316
Net income per common share..... $ .24 $ .31 $ .55 $ .11 $ .15 $ .54 $ .14
Weighted average common shares
outstanding................... 6,403 6,490 6,546 6,489 6,543 9,546 9,543
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(2)(4)
------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ -- $ -- $ 7,549
Working capital....................................................... (2,750) (3,779) 14,326
Total assets.......................................................... 57,193 71,365 78,914
Total debt, including capital leases.................................. 20,078 33,905 7,509
Redeemable convertible preferred stock................................ 5,340 -- --
Stockholders' equity.................................................. 13,033 18,673 55,638
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
YEARS ENDED DECEMBER THREE MONTHS PRO FORMA THREE MONTHS
31, ENDED YEAR ENDED ENDED
----------------------- MARCH 31, DECEMBER 31, MARCH 31,
1993 1994 1995 1996 1995(1) 1996(3)
----- ----- ----- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA:
Home health care offices (at period end)........ 41 50 67 67 67 75
States of operation (at period end)............. 5 6 8 8 8 8
Number of acquisitions.......................... 0 3 12 0 12 2
Sources of net revenues:
Nursing....................................... 83.0% 79.2% 74.2% 66.8% 68.1% 58.0%
Respiratory therapy/medical equipment......... 12.5 16.5 19.8 25.3 24.1 25.3
Infusion therapy.............................. 4.5 4.3 6.0 7.9 7.8 16.7
----- ----- ----- ----- -----
Total....................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>

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

(1) Gives effect to the acquisitions completed during the period indicated as if
such acquisitions were effective at the beginning of such period. See "Pro
Forma Condensed Consolidated Financial Data."

(2) Adjusted to give effect to the estimated net proceeds of this offering based
on an assumed offering price of $13.50 per share. See "Use of Proceeds."

(3) Gives effect to the acquisition of All Medical, Inc. and I Care of Arkansas,
Inc., I Care Home I.V. Affiliates, Inc. and I Care, Inc. (collectively, the
"I Care Group") as if those acquisitions were effective on January 1, 1996.

(4) Gives effect to the acquisition of All Medical, Inc. and the I Care Group as
of March 31, 1996, the conversion of the Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock into 3,339,297 shares of
Common Stock and the exercise of outstanding warrants to purchase 150,000
shares of Common Stock. See "Description of Capital Stock -- Offering
Related Transactions."

5
<PAGE> 8

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.

Dependence on Reimbursement by Third-Party Payors. In 1995, the percentages
of the Company's net revenues derived from Medicare, Medicaid and other
third-party payors were 81.0%, 1.3% and 17.7%, respectively. The net revenues
and profitability of the Company are affected by the continuing efforts of all
payors to contain or reduce the costs of health care by reducing reimbursement
rates, narrowing the scope of covered services, increasing case management
review of services and negotiating reduced contract pricing. Any changes in
reimbursement levels under Medicare, Medicaid or third-party payor programs and
any changes in applicable government regulations could have a material adverse
effect on the Company's business, financial condition, cash flows or results of
operations. Changes in the mix of the Company's patients among Medicare,
Medicaid and third-party payor categories, and among different types of private
pay sources, including managed care, could have a material adverse effect on the
Company's business, financial condition, cash flows or results of operations.
There can be no assurance that the Company will be able to maintain its current
payor or revenue mix. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Regulation."

Medicare Reimbursement. The Federal Government is considering significant
reductions in planned Medicare spending. The Senate and the House of
Representatives have passed budget resolutions calling for reductions of $256
billion and $280 billion, respectively, in forecasted Medicare program
expenditures over the next seven years. While the resolutions do not provide for
specific means of achieving these reductions, actions under discussion include
the addition of a 20% copayment for Medicare beneficiaries for home health care
services. Such a copayment could have the effect of reducing demand for Medicare
home health services. Another proposal would change Medicare reimbursement for
skilled nursing facilities, rehabilitation services and the first 60 days of
home health care services by "bundling" payments for these services into a
single prospective payment to hospitals to cover "post-acute" care for
beneficiaries who are discharged from a hospital. Other proposals under
consideration would restrict Medicare coverage of nebulizers and aerosol
medications and reduce oxygen reimbursement rates. The adoption of any of such
proposals could have a material adverse effect on the Company's business,
financial condition, cash flows or results of operations. The Department of
Health and Human Services ("DHHS") currently is examining the feasibility of
changing the Medicare reimbursement system for home nursing from the existing
lower of allowable reimbursable cost or actual charges incurred to a prospective
payment system. The impact of such a change, if implemented, on the Company's
results of operations cannot be predicted at this time and would depend, to a
large extent, on the reimbursement rates for home nursing established under a
prospective pay system. There can be no assurance that the reimbursement rates
under a prospective payment system, if enacted, would cover the costs incurred
by the Company to provide home nursing. Changes in the Medicare reimbursement
system for home nursing could have a material adverse effect on the Company's
business, financial condition, cash flows or results of operations. In addition
to being subject to frequent changes in federal and state laws governing
Medicare coverage and reimbursement policies, the Company is subject to audit of
the reimbursements it receives under the Medicare program. Any significant audit
adjustment could have a material adverse effect on the Company's business,
financial condition, cash flows or results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Regulation."

Effect of Government Regulations. The Company's business is subject to
extensive and increasing regulation by federal, state and local government,
including the Department of Health and Human Services, the Health Care Financing
Administration, the Office of the Inspector General, the Food and Drug
Administration, the Drug Enforcement Agency and the Occupational Safety and
Health Administration, as well as state departments of Health and other local
regulatory agencies. Federal laws governing the Company's activities include
regulations concerning the repackaging and dispensing of drugs, Medicare
certification of home health agencies, coverage and reimbursement and payment of
remuneration in exchange for patient referrals. The facilities operated by the
Company must comply with all applicable laws, regulations and licensing
standards. In addition, many of the Company's employees must maintain certain
licenses in

6
<PAGE> 9

order to provide some of the services offered by the Company. There can be no
assurance that federal, state or local governments will not change existing
standards or impose additional standards or that the Company will meet, or
continue to meet, existing or future standards relating to all or a portion of
the Company's activities. Additionally, there can be no assurance that acquired
companies would be in compliance with all applicable laws, regulations and
licenses when acquired. Changes in existing standards, the imposition of
additional standards or the inability of the Company to meet such standards
could have a material adverse effect on the Company's business, financial
condition, cash flows or results of operations. See "Business -- Regulation."

Operation Restore Trust. In May 1995, the Clinton Administration instituted
Operation Restore Trust, a health care fraud and abuse initiative focusing on
nursing homes, home health care agencies and durable medical equipment companies
located in the five states with the largest Medicare populations. Texas, the
Company's corporate base, is one of the targeted states. As of May 13, 1996,
Operation Restore Trust has been responsible for over $24.5 million in criminal
restitutions, fines and recovery of overpayments; over $14.1 million in civil
judgments, settlements and civil monetary penalties; 35 criminal convictions and
18 civil judgments; and 93 exclusions of individuals and corporations from the
Medicare program. Operation Restore Trust has also been expanded to cover six
states, and the Clinton Administration has called for an expansion of this
initiative to all fifty states in fiscal year 1997. The Company cannot predict
the effect of Operation Restore Trust on the Company or its results of
operations. See "Business -- Regulations".

Subpoenas of Records. In May 1993, the Company learned that a complaint
against the Company was filed with the Federal Government and that such
complaint was being reviewed. Shortly thereafter at a meeting requested by the
Company, the FBI agent assigned to the matter would not disclose the nature of
such complaint. The Company subsequently learned that at least one of its former
employees had been interviewed by the government in connection with the
complaint. On April 17, 1995, the U.S. Attorney for the Northern District of
Texas served the Company with grand jury subpoenas duces tecum (the
"Subpoenas"). The Subpoenas sought production of personnel and payroll records
for the period January 1, 1991 to April 17, 1995 concerning 155 of the Company's
current and former employees and certain other payroll tax information, as well
as invoices from the Company's independent auditing firm. The Company tendered
documents responsive to the Subpoenas on May 31, 1995. Since the production of
such documents, no request for additional information has been made by the U.S.
Attorney and on July 27, 1996, the FBI agent in charge of the matter called
counsel for the Company and informed him that the subpoenaed records would be
returned to the Company. No further action has been taken by the government in
connection with this matter, however, there can be no assurance that the U.S.
Attorney or any other government agency will not request further information or
pursue a civil or criminal investigation or proceeding against the Company or
its management. Such investigation or proceeding, if commenced, could result in
one or more of the following: no action, fines, civil monetary penalties,
criminal indictments, recovery of overpayments, criminal restitution,
settlements, civil judgments and exclusion of the Company or individuals from
the Medicare program.

Impact of Health Care Reform. The Company is subject to changes in federal,
state and local regulations which can have a dramatic effect on operating
methods, costs and reimbursement amounts provided by governmental and other
third-party payors. Government officials can be expected to continue to review
and assess alternative health care delivery systems and payment methodologies.
Changes in the law or new interpretations of existing laws may have a dramatic
effect on the definition of permissible or impermissible activities, the
relative costs of doing business and the methods and amounts of payment for
medical care by both governmental and other payors. In addition, the health care
industry is currently experiencing market-driven reforms from forces within the
industry that are exerting pressure on health care companies to reduce health
care costs. Specifically, Medicare, Medicaid and other payors, such as health
maintenance organizations, preferred provider organizations, traditional
indemnity insurers and third-party administrators, are increasing pressure on
health care providers to control health care costs and are limiting increases
in, and in some cases decreasing, reimbursement rates for medical services. Such
reforms could have a material adverse effect on the Company's business,
financial condition, cash flows or results of operations. See "Business --
Regulation."

7
<PAGE> 10

Dependence on Referral Sources. The growth and profitability of the Company
depend on its ability to establish and maintain close working relationships with
referral sources, including payors, hospitals, physicians and other health care
professionals. There can be no assurance that the Company will be able to
successfully maintain significant existing referral sources and develop new
referral sources, or that certain of its referral sources, such as managed care
organizations and hospitals, will not become providers of home health services.
The loss of a significant number of existing referral sources or the failure to
develop important new referral sources (such as managed care organizations)
could have a material adverse effect on the Company's business, financial
condition, cash flows or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."

Reimbursement Payment Delays. The Company is paid for its services by
government health administration authorities, insurance companies and other
third-party payors. The home health care industry is characterized by long
collection cycles for accounts receivable due to the complex and time consuming
requirements for obtaining reimbursement from private and governmental
third-party payors. In addition, reimbursement from government payors is subject
to audit and retroactive adjustment. Such delays or retroactive adjustments may,
from time to time, require the Company to borrow funds to meet its current
obligations. The Company would be adversely affected if it were to experience
such difficulties and were unable to borrow funds on acceptable terms, if at
all. See "Business -- Regulations."

Risk of Acquisitions and Expansion Into New Markets. In attempting to make
acquisitions, the Company competes with other providers, some of which have
greater financial resources than the Company. There can be no assurance that
suitable acquisitions will be identified, that consent from the Company's
lenders, where required, will be obtained, or that acquisitions will be
consummated on acceptable terms. Furthermore, there can be no assurance that
these companies, once acquired, will be integrated successfully into the
Company's operations or that any acquisition will not have a material adverse
effect upon the Company's operating and financial results, especially in the
fiscal quarters immediately following such transactions. In addition, the
Company will be required to comply with laws and regulations of states that
differ from those in which the Company currently operates, and may face
competitors with greater knowledge of such local markets. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Strategy."

Management Information Systems. The Company is in the process of
substantially upgrading its management information systems to enhance its
existing capabilities and to integrate certain of its existing operations with
the operations of newly-acquired companies. The Company is jointly developing
portions of the information system with Rockwell, which along with the Company,
will have the right to offer major aspects of the system to companies in the
home health care industry. There can be no assurance that the Company will
successfully implement planned upgrades or integrate its management information
systems, or that the Company will not experience unanticipated delays and
expenses in such implementation and integration. Any malfunction or increase in
expenses could have a material adverse effect on the Company's business,
financial condition, cash flows or results of operations. See
"Business -- Information Systems."

Need for Additional Financing. The Company's acquisition strategy requires
substantial capital resources. In order to provide the funds necessary for the
Company to continue its acquisition strategy, the Company may incur, from time
to time, additional short- and long-term bank indebtedness. At December 31,
1995, the Company had negative working capital of $1.7 million. The Company also
may issue, in public or private transactions, equity or debt securities, the
availability of which will depend on market and other conditions. There can be
no assurance that any such additional financing will be available on terms
acceptable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

Dependence on Key Personnel. The Company is highly dependent on the
services of S. Wayne Bazzle, the Company's Chairman of the Board and Chief
Executive Officer, and Cheryl C. Bazzle, the Company's President and Chief
Operating Officer, as well as its other senior management and its staff of
health care professionals. The loss of S. Wayne Bazzle or Cheryl C. Bazzle, or
an inability to attract, retain and motivate sufficient numbers of qualified
employees, could adversely affect the Company's business and prospects. In

8
<PAGE> 11

addition, the loss of either S. Wayne Bazzle or Cheryl C. Bazzle constitutes a
default under the Company's credit facilities with its principal lender.

Competition. The home health care industry is highly fragmented, and
competition varies significantly from market to market. The Company faces direct
competition for acquisitions, employees and patients. Many of the Company's
current and potential competitors are larger and have significantly greater
financial and marketing resources than those of the Company. There can be no
assurance that such competition will not limit the Company's ability to maintain
or to increase its market share and will not adversely affect the Company's
business. See "Business -- Competition."

Liability and Adequacy of Insurance. In recent years, physicians, hospitals
and other participants in the health care industry have been subjected to an
increasing number of lawsuits alleging malpractice, product liability or
negligence, many of which involve large claims and significant defense costs. It
is expected that the Company periodically may be subject to such suits. The
Company currently maintains liability insurance intended to cover such claims;
however, there can be no assurance that the coverage limits of the Company's
insurance policies will be adequate. While the Company has been able to obtain
liability insurance in the past, such insurance varies in cost and may not be
available in the future on acceptable terms, if at all. A successful claim
against the Company in excess of the Company's insurance coverage could have a
material adverse effect upon the Company and its financial condition. See
"Business -- Insurance."

Control by Executive Officers and Directors. Upon completion of the
offering, the Company's executive officers and directors and their affiliates
will beneficially own approximately 60.6% of the outstanding shares of the
Common Stock (58.8% if the Underwriters' over-allotment option is exercised in
full). As a result, these stockholders, acting together, would be able to exert
substantial influence over the Company and matters requiring approval by the
stockholders of the Company, including the election of directors. The voting
power of these stockholders under certain circumstances could have the effect of
delaying or preventing a change in control of the Company. See "Management" and
"Principal and Selling Stockholders."

Absence of Prior Public Market; Offering Price Determined by Agreement;
Possible Volatility of Stock Price. Prior to this offering, there has been no
public market for the Company's Common Stock, and there can be no assurance that
an active market will develop or will be sustained following this offering. The
initial public offering price for the shares of Common Stock sold in this
offering will be determined through negotiations between the Company and
representatives of the Underwriters and does not necessarily reflect the market
price for the Common Stock following the offering. The trading price of the
Common Stock may fluctuate widely in response to variations in quarterly
operating results, announcements by the Company or its competitors, new statutes
or regulations, general trends in the industry, general economic conditions and
other events or factors.

Anti-Takeover Provisions. Certain provisions of the Company's Amended and
Restated Certificate of Incorporation and certain provisions of the Delaware
General Corporation Law may make it difficult to change control of the Company
and replace incumbent management. For example, the Company's Amended and
Restated Certificate of Incorporation permits the Board of Directors, without
stockholder approval, to issue additional shares of Common Stock or establish
one or more classes or series of Preferred Stock having such number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations as the Board of Directors may determine. See
"Certain Transactions" and "Description of Capital Stock."

Potential Adverse Impact of Shares Eligible for Future Sale. Sales of
substantial amounts of Common Stock in the public market following this
offering, or the perception that such sales could occur, could adversely affect
the prevailing market price of the Common Stock. The Company cannot predict the
effect, if any, that future sales of Common Stock or the availability of Common
Stock for sale may have on the market price of the Common Stock. In addition
certain existing stockholders have the right to require the Company to register
their Common Stock for resale. See "Description of Capital Stock -- Registration
Rights," "Shares Eligible for Future Sale" and "Underwriting."

9
<PAGE> 12

Dividend Policy and Restrictions. The Company does not intend to pay cash
dividends on the Common Stock in the foreseeable future and anticipates that
future earnings will be retained to finance future operations and expansion. The
Company's revolving credit facility (the "Revolving Credit Facility") with Texas
Commerce Bank National Association ("Texas Commerce Bank") prohibits the Company
from paying dividends on its Common Stock. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Dilution to New Investors. Purchasers of the shares of Common Stock offered
hereby will experience immediate and substantial dilution in the net tangible
book value of their investment from the initial offering price. Additional
dilution will occur upon exercise of outstanding options. See "Dilution" and
"Shares Eligible for Future Sale."

10
<PAGE> 13

USE OF PROCEEDS

The net proceeds to the Company from the sale of 3,000,000 shares of Common
Stock offered by the Company are estimated to be approximately $37.0 million
($40.7 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial offering price of $13.50 per share and after deducting
estimated underwriting discounts and commissions and offering expenses. The
Company will not receive any of the proceeds from the sale of shares of Common
Stock by the Selling Stockholders.

The Company intends to use the net proceeds of this offering to repay
outstanding indebtedness, fund potential acquisitions and for general corporate
purposes, including $25.0 million to repay the Company's acquisition line of
credit with Texas Commerce Bank and approximately $1.0 million to retire notes
issued in connection with acquisitions. Pending such uses, the net proceeds of
the offering will be invested in short-term, investment grade instruments,
certificates of deposit or direct or guaranteed obligations of the United
States.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain any earnings to fund future growth and the
operation of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Moreover, the Company's Revolving Credit
Facility prohibits the payment of dividends or other distributions on the Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

11
<PAGE> 14

CAPITALIZATION

The following table sets forth the capitalization of the Company: (i) as of
March 31, 1996; (ii) on a pro forma basis; and (iii) on a pro forma as adjusted
basis:

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2)
------- ------------ -----------------
<S> <C> <C> <C>
(IN THOUSANDS)
Long-term indebtedness, including capital lease
obligations......................................... $11,607 $ 21,129 $ 2,269
Redeemable convertible preferred stock................ 5,340 -- --
Stockholders' equity:
Common Stock, $.01 par value, 40,000,000 shares
authorized; 3,062,803 shares issued and
outstanding, actual; 6,552,100 shares issued and
outstanding, pro forma; and 9,552,100 shares
issued and outstanding, pro forma as
adjusted(3)...................................... 31 66 96
Additional paid-in capital.......................... 2,471 8,076 45,011
Retained earnings................................... 10,531 10,531 10,531
------- -------- -------
Total stockholders' equity..................... 13,033 18,673 55,638
------- -------- -------
Total capitalization...................... $29,980 $ 39,802 $57,907
======= ======== =======
</TABLE>

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

(1) Gives effect to the acquisition of All Medical, Inc. and the I Care Group as
of March 31, 1996, the conversion of the Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock into 3,339,297 shares of
Common Stock and the exercise of outstanding warrants to purchase 150,000
shares of Common Stock. See "Description of Capital Stock -- Offering
Related Transactions."

(2) Adjusted to give effect to the sale by the Company of Common Stock offered
hereby and the application of the estimated net proceeds therefrom as if the
sale and such application of estimated net proceeds occurred on March 31,
1996. At May 31, 1996, the Company had $25.0 million of indebtedness
outstanding under its acquisition term facility. See "Use of Proceeds."

(3) Excludes options and warrants outstanding on the date hereof to purchase
379,628 shares of Common Stock.

12
<PAGE> 15

DILUTION

The pro forma net tangible book value of the Company as of March 31, 1996
was approximately $(4.5) million, or $(0.69) per share of Common Stock. "Pro
forma net tangible book value per share" is equal to the Company's total
tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding and gives effect to the Offering Related Transactions.
After giving effect to the sale by the Company of 3,000,000 shares of Common
Stock in this offering (at an assumed initial offering price of $13.50 per share
and after deducting estimated underwriting discounts and offering expenses), the
pro forma net tangible book value of the Company as of March 31, 1996 would have
been $32.4 million, or $3.40 per share of Common Stock. This represents an
immediate increase in net tangible book value per share of $4.09 to existing
holders and immediate dilution in net tangible book value of $10.10 per share to
new investors. The following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial offering price per share................................... $13.50
Pro forma net tangible book value per share at March 31, 1996............ $(0.69)
Increase per share attributable to new investors......................... 4.09
------
Pro forma net tangible book value per share after the offering(1).......... 3.40
------
Net tangible book value dilution per share to new investors................ $10.10
======
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by investors purchasing shares offered by the Company hereby.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)............ 6,552,100 68.6% $ 8,141,571 16.7% $ 1.24
New investors....................... 3,000,000 31.4 40,500,000 83.3 $ 13.50
--------- ----- ----------- ----- -------
Total.......................... 9,552,100 100.0% $48,641,571 100.0%
========= ===== =========== =====
</TABLE>

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

(1) Excludes an aggregate of 354,628 shares issuable upon the exercise of
options outstanding as of such date with a weighted average exercise price
of $4.68 per share, of which options to purchase 157,125 shares of Common
Stock are exercisable. As of March 31, 1996, 270,372 shares of Common Stock
were available for issuance under the 1989 Stock Option Plan and the 1996
Incentive Plan. In addition, 25,000 shares of Common Stock will be available
for issuance upon the exercise of Warrants outstanding at May 31, 1996, at a
purchase price of $4.00 per share.

13
<PAGE> 16

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data which
have been derived from the consolidated financial statements of the Company. The
selected financial data for the year ended March 31, 1992, the nine months ended
December 31, 1992 and the years ended December 31, 1993, 1994 and 1995 has been
derived from the audited financial statements of the Company. The selected
financial data for the three months ended March 31, 1995 and 1996 are unaudited.
The following selected financial data is qualified in its entirety and should be
read in conjunction with the Company's financial statements and related notes
included elsewhere in this Prospectus. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS
YEAR ENDED ENDED YEARS ENDED DECEMBER 31, MARCH 31,
MARCH 31, DECEMBER 31, ----------------------------- ------------------
1992 1992 1993 1994 1995 1995 1996
---------- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ 24,443 $ 34,301 $60,097 $57,151 $81,557 $17,553 $24,255
Operating expenses:
Compensation and related benefits..... 17,898 23,257 41,531 38,894 49,724 11,368 13,372
General and administration ........... 5,072 7,394 12,978 12,072 21,272 4,110 7,349
Depreciation and amortization
expense............................. 272 514 1,181 1,440 2,299 473 894
Provision for doubtful accounts....... 250 1,020 1,318 1,115 1,489 342 506
-------- -------- ------- ------- ------- ------- -------
Total operating expenses........ 23,492 32,185 57,008 53,521 74,784 16,293 22,121
-------- -------- ------- ------- ------- ------- -------
Income from operations.................. 951 2,116 3,089 3,630 6,773 1,260 2,134
Interest, net........................... 138 244 427 244 987 119 486
-------- -------- ------- ------- ------- ------- -------
Income before income taxes.............. 813 1,872 2,662 3,386 5,786 1,141 1,648
Provision for income taxes.............. 100 523 1,129 1,359 2,202 438 677
-------- -------- ------- ------- ------- ------- -------
Net income.............................. $ 713 $ 1,349 $ 1,533 $ 2,027 $ 3,584 $ 703 $ 971
======== ======== ======= ======= ======= ======= =======
Net income per common share............. $ .16 $ .23 $ .24 $ .31 $ .55 $ .11 $ .15
Weighted average common shares
outstanding........................... 4,619 5,787 6,403 6,490 6,546 6,489 6,543
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
MARCH 31, --------------------------------------------- ------------------
1992 1992 1993 1994 1995 1995 1996
---------- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 1,594 $ 1,491 $ 506 $ 3,775 $ 1,628 $ 4,726 $ --
Working capital......................... 1,696 1,923 1,292 1,296 (1,737) 1,021 (2,750)
Total assets............................ 8,455 19,444 22,251 24,504 52,573 30,087 57,193
Total debt, including capital leases.... 1,483 2,014 1,678 4,374 19,860 7,970 20,078
Redeemable convertible preferred
stock................................. 1,914 5,342 5,342 5,340 5,340 5,340 5,340
Stockholders' equity.................... 1,488 2,837 5,046 7,074 12,062 13,094 13,033
</TABLE>

14
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements.

OVERVIEW

Since inception in 1984, the Company and its predecessor have expanded
operations from 12 offices in three states to 75 offices in eight states at May
31, 1996. The Company, since January 1995, has acquired 14 home health care
companies, including home nursing, respiratory therapy/medical equipment and
infusion therapy companies with approximately $34.1 million in annualized net
revenues. The operations of the acquired companies are included in the Company's
operations from the dates of acquisition. The following table represents the
Company's changing net revenue mix for the periods shown:

<TABLE>
<CAPTION>
THREE MONTHS PRO FORMA
YEARS ENDED DECEMBER ENDED THREE MONTHS
31, MARCH 31, ENDED
----------------------- -------------- MARCH 31,
1993 1994 1995 1995 1996 1996
----- ----- ----- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Nursing................................... 83.0% 79.2% 74.2% 77.9% 66.8% 58.0%
Respiratory therapy/medical equipment..... 12.5 16.5 19.8 17.0 25.3 25.3
Infusion therapy.......................... 4.5 4.3 6.0 5.1 7.9 16.7
----- ----- ----- ----- ----- -----
Total................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>

As the Company further pursues its fully-integrated home health care
strategy, the Company's revenue mix has shifted from predominately nursing to
higher margin respiratory therapy/medical equipment and infusion therapy. The
Company is paid for its services and products primarily by Medicare, Medicaid
and private payors, including insurance companies, managed care organizations
and other third-party payors. The following table represents the Company's payor
mix:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1993 1994 1995 1996
----- ----- ----- ------------
<S> <C> <C> <C> <C>
Medicare Part A (cost-based)............................. 71.5% 69.5% 67.2% 60.7%
Medicare Part B (charge-based)........................... 4.5 13.7 13.8 16.6
Medicaid................................................. 2.2 1.1 1.3 1.9
Third-party payors and others............................ 21.8 15.7 17.7 20.8
----- ----- ----- -----
Total.................................................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>

Medicare reimburses the Company for both Part A and Part B services.
Medicare Part A reimburses the Company on a "cost basis" based on the lower of
the Company's allowable cost as defined by Medicare regulations, not to exceed
annual cost limits or the Company's actual charges. Allowable cost is the actual
cost directly related to providing nursing, plus an overhead allocation. A cost
report evidencing the fiscal year allowable costs, visit data, charges and other
financial information is filed annually and subject to audit. Medicare Part B is
paid on a fixed fee-for-service basis similar to third-party payors, such as
managed care organizations.

As a result of initiatives aimed at controlling the rising cost of the
Medicare program and the Company's focus on lowering operating costs, the
Company may experience future declines in net revenues attributable to
Medicare's Part A reimbursement system for nursing. The Federal Government is
currently examining the feasibility of changing Medicare reimbursement for
nursing from the existing retrospective cost-based system to a prospective
payment system. The Company believes that reimbursement under a prospective
payment system would consist of either an established fee for a specific
clinical diagnosis or a fixed per diem amount for

15
<PAGE> 18

providing service. The Company believes it could generate a profit from Medicare
nursing by providing such services cost-effectively, which the clinically-based
management information system will facilitate.

RESULTS OF OPERATIONS

The following table sets forth certain items included in the Company's
consolidated statements of income as a percentage of net revenues:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Compensation and related benefits................ 69.1 68.1 61.0 64.8 55.1
General and administration....................... 21.6 21.1 26.1 23.4 30.3
Depreciation and amortization.................... 2.0 2.5 2.8 2.7 3.7
Provision for doubtful accounts.................. 2.2 2.0 1.8 1.9 2.1
----- ----- ----- ----- -----
Total operating expenses................. 94.9 93.7 91.7 92.8 91.2
----- ----- ----- ----- -----
Income from operations............................. 5.1 6.3 8.3 7.2 8.8
Interest, net...................................... 0.7 0.4 1.2 0.7 2.0
----- ----- ----- ----- -----
Income before income taxes......................... 4.4 5.9 7.1 6.5 6.8
Provision for income taxes......................... 1.8 2.4 2.7 2.5 2.8
----- ----- ----- ----- -----
Net income......................................... 2.6% 3.5% 4.4% 4.0% 4.0%
===== ===== ===== ===== =====
</TABLE>

THREE MONTHS ENDED MARCH 31, 1996 AND 1995

The Company's results of operations during the three months ended March 31,
1996 reflect the performance of 12 companies acquired in 1995 for the entire
period; and the results of operations for the three months ended March 31, 1995
reflect the results of two of these acquisitions. Accordingly, the comparison of
the results of operations between 1995 and 1996 is materially affected by these
acquisitions.

Net revenues. Net revenues increased from $17.6 million in the first three
months of 1995 to $24.3 million in the first three months of 1996, an increase
of $6.7 million, or 38.1%. Of this $6.7 million increase, $2.0 million
represents internal growth of 11.4%, and the remaining $4.7 million is
incremental net revenues generated from the acquisitions made after March 31,
1995.

Compensation and related benefits. Compensation and related benefits
increased from $11.4 million to $13.4 million for the three months in 1996, an
increase of $2.0 million, or 17.5%, primarily as a result of personnel employed
by acquisitions made during the year as well as additional administrative
support at the corporate office to support the growth. Compensation and related
benefits include salaries and related benefits associated with providing nursing
and infusion therapy, as well as salary cost and related benefits for
administrative and support staff at both the office and corporate level.

General and administration. General and administration expenses increased
from $4.1 million in the first three months of 1995 to $7.3 million in the first
three months of 1996, an increase of $3.2 million, or 78.0%, primarily as a
result of increased costs of products sold from acquisitions and the related
operating costs associated with the addition of 20 offices after March 31, 1995.
General and administration expenses include the costs for respiratory/medical
equipment, infusion therapy products, nursing supplies, delivery expenses,
occupancy costs and other nonpatient care operating expenses.

Depreciation and amortization. Depreciation and amortization expense
increased from $0.5 million in the first three months of 1995 to $0.9 million in
the first three months of 1996, an increase of $0.4 million, or 80.0%, primarily
as a result of increased acquisitions in 1995 and information services equipment
and costs capitalized as part of the development of the Company's
clinically-based management information system. Depreciation and amortization
expense includes the amortization, over a period of 40 years, of the excess of

16
<PAGE> 19

the costs of acquired businesses over the fair value of the net assets acquired
by the Company. Depreciation expense includes the depreciation of capitalized
equipment generally over a life of 3 to 15 years.

Provision for doubtful accounts. Provision for doubtful accounts increased
from $0.3 million in the first three months of 1995 to $0.5 million the first
three months in 1996, an increase of $0.2 million, or 66.7%, primarily as a
result of an increase in net revenues from both acquisitions and internal
growth.

Interest, net. Interest, net increased from $0.1 million in the first three
months of 1995 to $0.5 million in the first three months in 1996, an increase of
$0.4 million, or 400.0%. This increase occurred primarily as a result of
increased indebtedness related to the 1995 acquisitions and, to a lesser degree,
from 1996 borrowings under the Company's line of credit to support the Company's
growth in operations and capital leases relating to the development of the
Company's clinically-based management information system. Interest, net,
reflects the result of interest paid by the Company for indebtedness, net of
interest income.

Provision for income taxes. Provision for income taxes increased from $0.4
in the first three months of 1995 to $0.7 million in the first three months in
1996, an increase of $0.3 million, or 75.0%, primarily related to the increase
in income before income taxes.

YEARS ENDED DECEMBER 31, 1995 AND 1994

During 1995, the Company completed the acquisition of 12 home health care
companies. In addition, during 1994, the Company acquired three home health care
companies. Primarily due to growth from these acquisitions, the Company operated
50 and 67 home health care offices at the end of 1994 and 1995, respectively.
Accordingly, the comparison of the results of operations between 1994 and 1995
is materially affected by these acquisitions.

Net revenues. Net revenues increased from $57.1 million in 1994 to $81.6
million in 1995, an increase of $24.5 million, or 42.9%. Of this $24.5 million
increase, $4.8 million represents internal growth of 8.4%. Internal growth was
primarily due to a $3.7 million growth in Medicare Part A services and a $1.1
million growth in infusion therapy. The remaining increase of $19.7 million is
primarily attributable to net revenues from acquisitions.

Compensation and related benefits. Compensation and related benefits
increased from $38.9 million in 1994 to $49.7 million in 1995, an increase of
$10.8 million, or 27.8%, primarily as a result of increased personnel and
related benefits associated with the acquisitions made in late 1994 and 1995.
However, relative to a percentage of net revenues, compensation and related
benefits decreased from 68.1% in 1994 to 61.0% in 1995. The percentage decrease
occurred because the mix of acquisitions in 1995 was concentrated in respiratory
therapy/medical equipment and infusion therapy, which have lower compensation
levels as a percentage of net revenues than home nursing.

General and administration. General and administration expenses increased
from $12.1 million in 1994 to $21.2 million in 1995, an increase of $9.1
million, or 75.2%. This increase is attributable primarily to additional
administrative personnel needed to support the Company's acquisitions as well as
costs of products sold associated with the acquisitions.

Depreciation and amortization. Depreciation and amortization expense
increased from $1.4 million in 1994 to $2.3 million in 1995, an increase of $0.9
million, or 64.3%. This increase is attributable primarily to acquisitions
during 1995.

Provision for doubtful accounts. Provision for doubtful accounts increased
from $1.1 million in 1994 to $1.5 million in 1995, an increase of $0.4 million
or 36.4%. This increase is primarily a result of the increase in net revenues
from acquisitions.

Interest, net. Interest, net increased from $0.2 million in 1994 to $1.0
million in 1995, an increase of $0.8 million, or 400.0%. This increase is due
primarily to interest expense on indebtedness incurred to fund acquisitions.

17
<PAGE> 20

Provision for income taxes. Provision for income taxes increased from $1.4
million in 1994 to $2.2 million in 1995, an increase of $0.8 million or 57.1%,
primarily to the increase in income before income taxes.

YEARS ENDED DECEMBER 31, 1994 AND 1993

During 1994, the Company completed the acquisition of three home health
care companies. There were no significant acquisitions during 1993. Primarily
due to growth from these acquisitions, the Company operated 41 and 50 home
health care offices at the end of 1993 and 1994, respectively. Accordingly, the
comparison of the results of operations between 1993 and 1994 is materially
affected by the acquisitions.

Net revenues. Net revenues decreased from $60.1 million in 1993 to $57.2
million in 1994, a decrease of $2.9 million, or 4.8%. This decrease is
attributable primarily to a reduction in Medicare nursing net revenues. As a
result of reduced Medicare cost limits, the Company implemented a cost reduction
program. Although this resulted in a $3.1 million reduction in Medicare net
revenues, it allowed the Company to meet the reduced cost limits. Additionally,
several referral hospitals developed internal home health departments or
agencies causing Medicare visits to decline 9.3%, resulting in reduced net
revenues of $3.5 million. These factors were offset by internal growth from
other services of $0.9 million and $3.3 million from acquisitions.

Compensation and related benefits. Compensation and related benefits
decreased from $41.5 million in 1993 to $38.9 million in 1994, a decrease of
$2.6 million, or 6.3%, primarily as a result of decreased personnel and related
benefits associated with the cost reduction program.

General and administration. General and administration expenses decreased
from $13.0 million in 1993 to $12.1 million in 1994, a decrease of $0.9 million,
or 6.9%. This decrease is attributable primarily to the cost reduction program
associated with nursing.

Depreciation and amortization. Depreciation and amortization expense
increased from $1.2 million in 1993 to $1.4 million in 1994, an increase of $0.2
million, or 16.7%. This increase is attributable primarily to acquisitions in
1994.

Provision for doubtful accounts. Provision for doubtful accounts decreased
from $1.3 million in 1993 to $1.1 million, a decline of $0.2 million or 15.4%.
The decrease is a result of the decline in net revenues and improvements in
respiratory therapy/medical equipment collections.

Interest, net. Interest, net decreased from $0.4 million in 1993 to $0.2
million in 1994, a decrease of $0.2 million, or 50.0%. This decrease is due
primarily to lower utilization of the line of credit in 1994 as a result of
increased cash flow from operations.

Provision for income taxes. Provision for income taxes increased from $1.1
million in 1993 to $1.4 million in 1994, an increase of $0.3 million or 27.3%,
primarily to the increase in income before income taxes.

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<PAGE> 21

SELECTED QUARTERLY OPERATING RESULTS

The following table sets forth certain unaudited quarterly operating
results for 1994, 1995 and the first three months of 1996. The Company believes
this unaudited information has been prepared on the same basis as the annual
financial statements and includes all adjustments necessary for a fair
presentation of the information for the quarters presented when read in
conjunction with the Consolidated Financial Statements included elsewhere in
this Prospectus. The operating results for any quarter are not necessarily
indicative of results for any subsequent quarter. The Company's results of
operations are not significantly affected by seasonality factors.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues................. $13,769 $13,781 $13,754 $15,847 $17,553 $18,368 $21,577 $24,059 $24,255
Income from operations....... 560 830 1,086 1,153 1,260 1,229 1,854 2,430 2,134
Income before income taxes... 499 753 1,042 1,091 1,141 1,096 1,538 2,011 1,648
Net income................... $ 281 $ 446 $ 644 $ 655 $ 703 $ 677 $ 958 $ 1,246 $ 971
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal capital requirements are for acquisitions of
additional home health care companies and expansion of the services provided
through its existing home health care offices. The Company historically has
funded its working capital requirements and capital expenditures primarily from
cash flows provided from operations supplemented by short-term borrowings.

At December 31, 1995, the Company had current assets of $18.3 million and
current liabilities of $20.0 million, resulting in negative working capital of
$1.7 million. The Company also had negative working capital of $2.7 million at
March 31, 1996. This compares to working capital of $1.3 million at December 31,
1994. These decreases in working capital are attributable primarily to increases
in the current portion of long-term indebtedness resulting from acquisitions and
decreases in invested cash used to fund acquisitions. The Company's liquidity is
significantly affected by the timing of payments from government and third-party
payors. These payments average two months after services are provided.
Historically, the Company has been able to fund its operations through
internally generated cash and bank credit facilities.

Accounts receivable at March 31, 1996 were $15.3 million compared to $11.5
million at December 31, 1995 and $4.6 million at December 31, 1994. Days of
Sales Outstanding ("DSO"), defined as accounts receivable divided by average net
revenues for the last three months in the respective period were 57.0, 41.6 and
26.1 for these periods, respectively. The Company receives interim payments from
Medicare A for nursing primarily using the Periodic Interim Payment ("PIP")
program. This program pays the Company a fixed amount every two weeks. The PIP
payment is based upon the Company's historic allowable cost of nursing and is
adjusted quarterly. Because a significant portion of the Company's cash is
received under the PIP program, management believes that the Company's DSO is
lower than other home health care companies. The increase in DSO from December
31, 1995 to March 31, 1996 is attributable primarily to: (i) timing delays
resulting from a mandated change in the Company's Medicare fiscal intermediary;
(ii) net revenue deferrals relating to the reimbursement of certain
re-engineering costs; (iii) changes in net revenue mix towards
respiratory/medical equipment and infusion therapy, which historically have
higher DSO; and (iv) a slowdown by Medicare in paying for respiratory
therapy/medical equipment and infusion therapy. The increase in DSO from
December 31, 1994 to December 31, 1995 is attributable to factors discussed in
(ii) and (iii) above, as well as increases in Medicare cost report receivables.

Net cash provided by operating activities decreased from $6.3 million in
1994 to $5.8 million in 1995. This decrease is attributable primarily to
increases in accounts receivable relating to changes in revenue mix. Net cash
used in investing activities increased from $3.6 million in 1994 to $24.6
million in 1995 as a result of increased acquisition expenditures of $14.7
million. Capital expenditures also increased $6.3 million primarily due to costs
capitalized as part of the re-engineering project. Net cash provided from
financing activities

19
<PAGE> 22

increased from $0.6 million in 1994 to $16.7 in 1995. This increase is
attributable primarily to debt incurred in connection with acquisitions.

On May 16, 1996, the Company entered into a credit agreement with Texas
Commerce Bank (the "Credit Agreement"), consisting of a $10.0 million revolving
line of credit and a $25.0 million term facility, the proceeds of which will be
used, in part, to finance acquisitions. The Credit Agreement replaced a prior
credit agreement between the Company and Texas Commerce Bank (the "Old Credit
Agreement"). The Company's assets have been pledged as security for borrowings
under the Credit Agreement. As of May 31, 1996, the Company had used all of the
term portion of the Credit Agreement and there was $5.6 million outstanding
under the revolving line of credit. At the Company's option, borrowings under
the Credit Agreement bear interest at either the bank's Eurodollar rate plus
rates ranging from 1.25% to 2.75%, or the bank's prime rate plus rates ranging
from 0% to 0.75%, determined by the ratio of funded debt to EBITDA (defined as
earnings before interest, taxes, depreciation and amortization and certain other
non-cash expenditures).

The Credit Agreement contains various financial covenants, including funded
debt to EBITDA ratio, consolidated net worth, fixed charge coverage ratio,
capital expenditures, and unleveraged non-reimbursed capital expenditures. At
December 31, 1995, the Company was not in compliance with certain covenants of
the Old Credit Agreement, but obtained a waiver from the bank. The Credit
Agreement also contains certain covenants which, among other things, impose
certain limitations on the Company with respect to the incurrence of certain
indebtedness, the creation of security interest on the assets of the Company,
the payment of dividends and the redemption or repurchase of securities of the
Company, investments and sales of Company assets. The Company also must obtain
bank consent if the total consideration to be paid by the Company for an
acquisition is more than $3 million or if the total consideration to be paid by
the Company for such acquisition and all other acquisitions completed during the
previous six months exceeds $3 million in the aggregate.

At May 31, 1996, the Company had $4.4 million available under its Credit
Agreement. The Company has received a commitment from its bank to increase its
credit facility from $35 million to $75 million, subject to the completion of
this offering. Management believes that the combination of these sources,
together with the proceeds from the offering and funds generated from
operations, will be sufficient to satisfy its capital expenditure and working
capital needs, fund acquisitions and meet debt repayment requirements for the
next 12 months.

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<PAGE> 23

BUSINESS

OVERVIEW

HealthCor seeks to differentiate itself from other home health care
companies by being a one-stop shop provider of home health care services and
products. Home nursing services continue to comprise an important component of
the Company's strategy because referral sources often will make arrangements for
home nursing services before making arrangements for other home health care
services. The Company believes that its strong market position in the home
health care industry facilitates its ability to sell fully-integrated health
care services to its referral sources and payors.

In December 1994, the Company, with the assistance of Rockwell and others,
began developing a custom-designed, clinically-based management information
system to reduce costs, improve productivity, produce and analyze clinical
outcomes data and manage growth more effectively. To date, the Company has
implemented several phases of this system, including the nursing component,
which has increased nurse productivity by up to 40%. The Company believes that
this system will enable it to compete more effectively in an increasingly
competitive managed care environment and under new government reimbursement
models, such as prospective pay.

INDUSTRY

The home health care industry remains highly fragmented with over 17,000
companies currently providing home health care services in the United States.
Many of these companies are local providers that offer a limited scope of
services in a defined geographical area and lack the capital necessary to
substantially expand their operations. Managed care organizations and cost
containment initiatives by payors have driven the growth of home health care by
emphasizing lower cost alternatives to hospitals and skilled nursing facilities.
These organizations and payors seek coordinated, consistent quality home health
care across broad geographic areas in order to serve their patients more
effectively.

STRATEGY

Provide One-Stop Shop Home Health Care Services. The Company provides payors,
physicians and patients with fully-integrated one-stop shop home health care
services in each of its existing geographic markets. The integration of
comprehensive home health care services enhances the Company's appeal to
referral sources and payors that increasingly prefer single-source providers of
home health care.

21
<PAGE> 24

Acquire Companies to Enter New Markets and Further Penetrate Existing Markets.
In order to increase utilization of the Company's services by payors and
referral sources and enhance its overall market position, the Company has
focused on achieving broad regional market coverage in both urban and non-urban
areas. To this end, the Company seeks high-quality strategic acquisitions that
complement and expand its existing operations. Since January 1995, the Company
has acquired 14 home health care companies, adding 28 offices. These
acquisitions have enabled the Company to enter into key contiguous markets and
expand the range of services offered in existing markets. The Company believes
that due to the fragmentation of the home care industry, a substantial number of
acquisition opportunities exist in its target markets.

Accelerate Internal Growth by Expanding its Scope of Services. As the Company
acquires other health care providers, including nursing, respiratory therapy or
infusion therapy companies, the Company seeks to implement its full range of
services around acquired operations. The Company also seeks to accelerate
internal growth by introducing additional specialized health care services, such
as cardiac monitoring, hospice and primary home care to many of its offices.

Enhance Competitive Position Through the Use of Clinically-Based Information
Technology. The Company seeks to enhance its operations through the use of
clinically-based management information technology. The Company, with the
assistance of Rockwell and others, is developing an innovative, custom-designed,
clinically-based management information system to facilitate the provision of
comprehensive home health care services. By enhancing its operations through the
use of management information technology, the Company seeks to be a more
cost-effective provider in an environment increasingly influenced by managed
care and subject to potential changes in reimbursement, such as prospective pay.

OPERATIONS

The Company believes that home care is a local business dependent in large
part on personal relationships and, therefore, the Company provides its
operating managers with a significant degree of autonomy to encourage prompt and
effective responses to local market demands. The Company also provides, through
its corporate office, its local managers with information and management systems
that typically are not readily available to independent operators. The Company
retains centralized control over those functions necessary to monitor quality of
patient care and to maximize operational efficiency. Services performed at the
corporate level include billing, claims processing, quality improvement
oversight, Medicare and Joint Commission on Accreditation of Health Care
Organizations ("JCAHO") licensing, human resource management, financial and
accounting functions, policy and procedure development, system design,
acquisitions and corporate development.

SERVICES AND PRODUCTS

The Company provides a comprehensive array of services and products that
are essential to the proper implementation of the physician's plan of care in
the home.

Home Nursing. The Company provides a wide variety of nursing services to
individuals with acute illnesses, long-term chronic health conditions, permanent
disabilities, terminal illnesses or post-procedural needs. The home nursing that
the Company provides includes:

General nursing care that is provided by registered nurses and licensed
practical nurses who periodically assess the appropriateness of home health
care, perform clinical procedures and instruct the patient and family
regarding necessary treatments. Patients receiving such care typically
include stabilized post-operative patients in recovery at home, patients
who are acutely ill but who do not require hospitalization and patients who
are chronically or terminally ill.

Specialty nursing care that is provided by nurses with experience or
certification in hospital emergency room, intensive care, oncology,
intravenous therapy, geriatric and neonatal or pediatric nursing. Such
nurses are employed by the Company to provide a variety of infusion
therapies and specialty care regimens to patients in the home. These nurses
also instruct patients and their families in the self-

22
<PAGE> 25

administration of certain infusion therapies and procedures, such as wound
care and infection control, emergency procedures and the proper handling
and usage of medication, medical supplies and equipment.

Therapy services that consist of rehabilitation therapies such as physical,
occupational, speech and respiratory therapy to patients recovering from
strokes, trauma or certain surgeries, services for high risk pregnancies,
post-partum care, mental health care, AIDS therapy, various medical social
services and case management services to insurance companies and
self-insured employers.

Home health aide care that involves personal care services and assistance
with activities of daily living such as personal hygiene and meal
preparation. The Company's home health aides must pass certain competency
tests and are supervised by a registered nurse.

Primary home care that is a state administered program that provides
unskilled homemaker services to the elderly or the disabled, as ordered by
a physician. A registered nurse makes the initial assessment and assigns a
homemaker, who may provide housekeeping, shopping and limited personal
care.

Hospice care that provides palliative support and care for persons in the
last phases of an incurable disease. Support and care under the direction
of a physician may be provided by a skilled nurse, aide, chaplain,
counselor, therapist or volunteer.

Patients are referred to the Company office by primary care and specialty
physicians as well as by hospital discharge planners and case managers. After
reviewing the pertinent medical records and treatment plan, a nurse or home
health aide, where appropriate, visits the patient in the home where care is
provided on either a continuous or intermittent basis. Treatment may involve a
few visits over a short period of time or may extend over several years.

Home Respiratory Therapy and Medical Equipment. The Company provides a wide
variety of home respiratory, monitoring and medical equipment services to
patients. Respiratory therapists manage the needs of the patient according to
the physician-directed plan of care and educate the patient and the care giver
regarding treatment requirements, use of equipment and self-care. The Company's
principal respiratory services include:

Oxygen systems that assist patients with breathing. The Company provides
three types of oxygen systems: (i) oxygen concentrators, which are
stationary units that filter ordinary air in order to provide a continuous
flow of oxygen and are generally the least expensive supply of oxygen for
patients who require a continuous flow of oxygen but do not require
excessive flow rates; (ii) liquid oxygen systems, which are containers used
for patients who require a continuous high flow of supplemental oxygen; and
(iii) high pressure oxygen cylinders, used for portability with oxygen
concentrators.

Nebulizers that deliver aerosol medications that are inhaled directly into
the patients' lungs. Nebulizers are used to treat patients with asthma,
chronic obstructive pulmonary disease, cystic fibrosis and neurologically
related respiratory problems and patients with AIDS.

Home ventilators that mechanically sustain a patient's respiratory function
in cases of severe respiratory failure.

Continuous positive airway pressure therapy that forces air through
respiratory passage-ways during sleep. This treatment is provided to adults
with sleep apnea, a condition in which a patient's normal breathing
patterns are disturbed during sleep.

The Company also rents, sells and services respiratory equipment for
patient use in the home and supplies patients with aerosol medications provided
by the Company for use in respiratory therapy treatments. The Company's
technicians deliver and install respiratory equipment, instruct patients in the
use of such

23
<PAGE> 26

equipment, refill liquid oxygen systems and provide continuing maintenance of
the equipment. The Company's principal monitoring services include:

Cardiac monitoring for the detection of arrhythmias, a condition that is
responsible for 500,000 deaths each year in the United States. The Company
provides cardiac loop event recorders, which in conjunction with
transtelephonic monitoring, have proven to be an efficient and
cost-effective arrhythmia detection device.

Uterine monitoring which detects, records and sends uterine activity
information to the perinatal center to alert healthcare professionals of
pre-term labor in high-risk pregnancies.

Apnea monitors to warn parents of apnea episodes in newborn infants as a
preventive measure against sudden infant death syndrome.

The Company also leases and sells convalescent equipment, in connection
with the provision of its other services to patients in the home. Such equipment
includes hospital beds, wheelchairs, walkers and patient lifts and medical and
surgical supplies such as stethoscopes, orthopedic supplies, urinary catheters,
syringes and needles. The Company benefits from the efficiencies associated with
the provision of home medical equipment and supplies to its patients who are
receiving nursing, respiratory therapy or infusion therapy in the home.

Home Infusion Therapy. The Company provides a wide range of home infusion
therapies. Home infusion therapy involves the administration of nutrients,
antibiotics and other medications intravenously (into the vein), subcutaneously
(under the skin), intramuscularly (into the muscle), intrathecally or epidurally
(via spinal routes) or through feeding tubes into the digestive tract which
often begins during hospitalization of a patient and continues in the home
environment. The Company's principal infusion therapies include:

Antibiotic therapy which is the infusion of antibiotic medications into a
patient's bloodstream to treat a variety of serious infections and
diseases.

Enteral nutrition which is the administration of essential nutrients
through a feeding tube, is necessary for patients who are unable to orally
ingest adequate nutrients.

Total Parenteral Nutrition which is a nutrient solution administered
intravenously to restore and/or maintain electrolyte balance and
nutritional function.

Pain management which is provided to patients experiencing acute pain as a
result of traumatic injury, surgical procedures or other medical disorders.
The Company provides a comprehensive approach to pain management that
includes a thorough knowledge of available agents, routes of administration
and appropriate dosage levels as directed.

Chemotherapy which is provided in the home, allows patients with cancer an
alternative to frequent and expensive hospital stays.

Pentamidine which is an agent used specifically in the treatment of
patients with AIDS who have experienced one or more episodes of
pneumocystis carinii pneumonia.

When a patient is referred to a Company office, a Company pharmacist takes
the prescription order from the treating physician, prepares the prescribed
pharmaceuticals and coordinates their delivery to the patient's home. New
patients are assisted in the administration of infusion therapy and related
services by a registered nurse who is present at the time of the patient's first
home treatment.

INFORMATION SYSTEMS

In 1994, the Company, with the assistance of Rockwell and others, began
developing an innovative clinically-based management information system which
the Company has named HealthCor Medical Information Systems Network or HealthCor
MedisynTM (the "System"). The System is designed to re-engineer all aspects of
the Company's operations by providing automated, paperless data collection and
transmission capabilities that the Company believes will enable it to enhance
operating efficiencies, produce and analyze clinical outcomes data and manage
growth more effectively. The Company believes the System

24
<PAGE> 27

will generate the data required to price and manage the Company's services and
products competitively in a managed care environment and to measure the quality
and cost of care that is delivered in the home.

The implementation of the first phase of the System, which consisted of
equipping and training all of the Company's approximately 800 nurses with
hand-held point-of-care computers, was completed in March 1996. These hand-held
computers, called PtCT units, allow each of the Company's nurses to have an
electronic patient chart in hand and allow the Company to collect clinical,
payroll and billing information. Information is transmitted via modem to the
Company's appropriate client server. Once the clinical data has been recorded,
the System enables the Company to develop clinical assessments of patients via
computer generated documentation. Same-day reporting capabilities reduce
paperwork and transcription errors, which has increased nurse productivity up to
40%. The System also expedites the processing of payroll data, accelerates the
transfer of information to attending physicians and improves the consistency and
completeness of the assessments generated. The Company anticipates equipping and
training all of its home health aides with PtCT units by early 1997, with
respiratory and physical therapists to be equipped by the end of 1997.

The Company intends to implement additional phases of the System over the
next six months, including: (i) a comprehensive general ledger, human resources,
payroll, materials management and cost accounting system; (ii) a central client
intake application and wide area networks to allow regional intake personnel to
enter the referral/admissions information for clients of all services and
transmit such information to the appropriate office's client server; and over
the next 18 months, (iii) a data warehousing application to allow extensive
analysis and reporting of outcomes data, clinical and financial reports.

MARKETING

The Company's market development efforts focus on referral sources which
include physicians, hospital discharge planners, social workers, community
service organizations, managed care organizations and other commercial payors.
In urban areas, managed care organizations are becoming increasingly important
as both referral sources and payors. As a result, the Company has created a
corporate department that develops specialized programs designed to provide
comprehensive, cost effective home care services. A large portion of the
Company's revenues originate in non-urban areas where local referral sources
continue to be very important. At the local market level, the Company's
employees, including office management, licensed professionals and coordinators
of professional services, continually communicate with referral sources in order
to provide such referral sources with knowledge of the services provided by the
Company and the level of reimbursement available from payor sources. The Company
believes that its ability to provide a full range of services to clients in all
of its markets is a strong advantage in developing relationships with managed
care organizations. In addition, the Company works with managed care
organizations to provide custom programs to effectively manage high cost
patients. These programs, coupled with the Company's focus on clinically-based
management information systems, enable the Company to effectively compete for
managed care relationships.

QUALITY ASSURANCE

Management believes that the quality of the Company's services is critical
to its ability to obtain referrals and expand its business. To assure the
delivery of high-quality patient care, and to improve the overall quality of
service, the Company has established policies and procedures prescribing
standards of patient care. The Company has a Progressive Improvement Council
designed to integrate and assess the improvement activities and processes across
all services. The Progressive Improvement Council has a fully-automated survey
tool used to assess each office to ensure compliance with its standards on a
quarterly basis. These standards include the monitoring of clinical and billing
documentation, accountability of clinical personnel by interviews and monitoring
of home visits, evaluating customer satisfaction information, reporting adverse
medical incidents, monitoring risk management and ensuring a safe and
appropriate working environment.

The Company is accredited by JCAHO in a majority of its offices. The
objective standards established by JCAHO are one of the few methods by which
referring health care professionals can assess the quality of services provided.
The Company believes that it is JCAHO certified in all markets where such
certification is

25
<PAGE> 28

important to third-party payors. There have been a number of initiatives to
require such accreditation as a prerequisite for participation in government
reimbursement and private insurance programs, and such accreditation is
generally preferred by managed care and other third-party payors.

HUMAN RESOURCE MANAGEMENT

Competition for qualified managers and personnel in the home health care
industry is intense. The Company continuously recruits, screens, trains and
offers benefits and other programs in an effort to retain its personnel.
Recruiting is conducted primarily through advertising, employment fairs, direct
contact with community groups and the use of bonuses and other employee benefit
programs to encourage new employee referrals by existing employees. The Company
has implemented a computerized interviewing software system to assist in
screening and hiring of potential employees.

The Company operates 11 regional learning centers to provide orientation
and training to new employees and continuing education for existing employees.
All care providers must complete a core curriculum before they begin independent
patient care. The Company routinely develops and distributes quality improvement
in-service materials, manuals and forms to its nurses and has implemented an
internal system of employee recognition and rewards. In addition, skilled nurses
are initially assigned to a nurse preceptor until the Company believes that
these new nurses have acquired a sufficient degree of home health care knowledge
and experience. The Company also has implemented an infusion therapy
verification program for skilled nurses. The Company is recognized as a provider
of continuing education units by the Texas Nursing Association, which is
accredited by the American Nursing Credentialing Center.

PROPERTIES AND OFFICE LOCATIONS

The Company currently leases all of its office space, with the exception of
the office located in Raton, New Mexico which the Company owns. The executive
offices, consisting of approximately 27,900 square feet, are subject to a lease
expiring March 31, 1997. The rent payable thereunder is $28,393 monthly.

On June 10, 1996, the Company executed a lease agreement for new executive
offices, effective November 1, 1996. The new executive offices, comprising
approximately 57,400 square feet, are subject to a lease expiring November 1,
2006. The rent payable thereunder is $65,753 monthly, beginning February 1,
1997.

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<PAGE> 29

The following is a list of the Company's 75 home health care offices.
Unless otherwise indicated, the Company has one office in each city.

Texas(42) Texarkana Arizona(5)
- --------- Tomball -----------
Abilene Tyler Casa Grande
Andrews Wichita Falls Gilbert
Austin Willis Mesa
Beaumont Winnsboro Payson
Bedford Phoenix
Brenham Oklahoma(12)
Bryan ------------- Arkansas(5)
Center Ada ------------
Cleburne Bartlesville Fayetteville
Dallas Edmond Fort Smith
DeLeon(2) Enid Jonesboro
Denton Ft. Gibson Little Rock
El Paso Holdenville Texarkana
Grand Prairie Lawton
Houston(4) Oklahoma City Kansas(2)
Jasper(2) Ponca City ----------
Lake Jackson Sapulpa Kansas City
Longview Stillwater Independence
Lubbock Tulsa
Lufkin New Mexico(2)
Mineral Wells Missouri(6) -------------
Mule Shoe ------------ Hobbs
Odessa Columbia Raton
Rising Star Independence
San Antonio(2) Jefferson City Colorado(1)
Sherman Kirksville -----------
Stephenville(2) Mexico Englewood
Temple(2) Osage Beach

COMPETITION

The Company faces substantial competition in its existing markets. Home
health care providers compete for referrals based primarily on range and quality
of services, price, geographic coverage and pertinent clinical and statistical
information. Most of the markets in which the Company provides home health care
services are highly fragmented with a large number of local, independent
competitors. The Company also competes with local offices of national companies
and hospital-based home health care organizations. Some of the Company's current
and potential competitors have, or may obtain, significantly greater financial
and marketing resources than the Company.

REGULATION

The Company's business is subject to extensive and increasing regulation by
federal, state and local government. Federal agencies which regulate aspects of
the Company's business include the Department of Health and Human Services, the
Health Care Financing Administration, the Office of the Inspector General, the
Food and Drug Administration, the Drug Enforcement Agency and the Occupational
Safety and Health Administration. In most states, home health care providers are
regulated by the state department of health and board of pharmacy and certain
local agencies. See "Risk Factors -- Operation Restore Trust" and "-- Subpoenas
of Records."

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<PAGE> 30

The Company is subject to federal laws covering the repackaging and
dispensing of drugs and regulating interstate motor-carrier transportation and
state laws governing pharmacies, nursing services and certain types of home
health agency activities. Under state laws, the Company's offices must be
licensed prior to commencing business and must renew its licenses periodically.
In Arkansas, the Company is limited to providing nursing services under the
Medicare program to those geographic areas in which it has obtained a Permit of
Approval by demonstrating a need for the particular type of services which it
proposes to provide. The Company believes that the absence of this requirement
in the other states in which the Company operates has proven to be a significant
operational advantage in comparison to home health care providers in states with
this requirement. In addition, certain of the Company's employees are subject to
state laws and regulations governing the professional practice of respiratory
therapy, pharmacy and nursing.

As a provider of services under the Medicare and Medicaid programs, the
Company is subject to the Medicare and Medicaid anti-kickback statute, also
known as "fraud and abuse laws." This law prohibits any offer, payment,
solicitation or receipt of any form of remuneration to induce the referral of
business reimbursable under Medicare or state health programs or in return for
the purchase, lease, or order of items or services covered by Medicare or state
health programs. Violations of the fraud and abuse laws can result in the
imposition of substantial civil and criminal penalties and, potentially,
exclusion from Medicare and state health programs. In addition, several states
in which the Company operates have laws that prohibit certain direct or indirect
payments or fee-splitting arrangements between health care providers if such
arrangements are designed to induce or to encourage the referral of patients to
a particular provider. See "Risk Factors -- Operation Restore Trust" and
"-- Subpoenas of Records."

Congress adopted legislation in 1989, known as the "Stark" legislation,
that generally prohibits or restricts a physician from referring a Medicare
beneficiary's clinical laboratory services to any entity in which such physician
(or a member of his immediate family) has an ownership or individual interest or
with which such physician has a financial relationship, and prohibits such
entity from billing for or receiving reimbursement on account of such referral,
unless a specified exemption is available. Additional legislation became
effective as of January 1, 1993 known as "Stark II," expanding the Stark
legislation to referrals of services eligible for Medicaid reimbursement and
"designated health services," including home health services, durable medical
equipment and outpatient prescription drugs. Pursuant to Stark II, physicians
who own an interest in the Company or who are compensated by the Company will be
prohibited from making referrals to the Company, and the Company will be
prohibited from seeking reimbursement for services rendered to such patients
unless an exception applies. Ownership interests are excepted if the interest
held is a publicly traded security in a company having shareholders' equity of
at least $75 million.

Several of the states in which the Company conducts business have enacted
statutes similar in scope and purpose to the federal fraud and abuse laws and
the Stark Laws. There is no authority interpreting the state fraud and abuse
laws in a manner that applies to the Company's operations. These laws are
generally based upon the federal fraud and abuse law, so that the interpretation
of the federal law may govern the application of the state laws.

In May 1995, the Clinton Administration instituted Operation Restore Trust,
a health care fraud and abuse initiative focusing on nursing homes, home health
care agencies and durable medical equipment companies located in five states
with the largest Medicare populations. Texas, the Company's corporate base, is
one of the targeted states. As of May 13, 1996, Operation Restore Trust has been
responsible for over $24.5 million in criminal restitutions, fines and recovery
of overpayments; over $14.1 million in civil judgments, settlements and civil
monetary penalties; 35 criminal convictions and 18 civil judgments; and 93
exclusions of individuals and corporations from the Medicare program. Operation
Restore Trust has also been expanded to cover six states, and the Clinton
Administration has called for an expansion of this initiative to all fifty
states in fiscal year 1997. The Company cannot predict the effect of Operation
Restore Trust on the Company or its results of operations.

A significant portion of the Company's revenues are derived from the
Medicare program. A number of initiatives are pending in the United States
Congress to control the cost of the Medicare program, including

28
<PAGE> 31

proposals to reduce certain reimbursement rates. It is possible that the amounts
reimbursable for Medicare services will be subject to limitation, if not a
reduction, in the future.

The Company's home medical equipment operations are subject to the Omnibus
Budget Reconciliation Act ("OBRA"). OBRA 1987 created six categories for home
medical equipment reimbursement under the Medicare program. OBRA 1987 also
defined whether products would be paid for on a rental or sale basis and
established fixed payment rates for oxygen services as well as a 15-month rental
ceiling on certain medical equipment. OBRA 1990 made new changes to Medicare
reimbursement that were implemented in 1991. The substantive changes included a
national standardization of Medicare rates for certain equipment categories and
further reductions in amounts paid for home medical equipment rentals. In 1992,
the industry experienced minimal changes in both regulation and in levels of
Medicare reimbursement.

In August 1993, Congress passed OBRA 1993, which included significant
reimbursement reductions to the Medicare program through 1998. These
reimbursement reductions began to take effect on January 1, 1994, and were
estimated to negatively affect the home medical equipment industry by
approximately $81.0 million in 1994. The specific reimbursement changes
effective for fiscal 1994 relate to recategorization of certain home respiratory
therapy products, coupled with a reduction in reimbursement rates for these
products. Offsetting this reduction, OBRA 1993 provided a Consumer Price Index
increase on certain Medicare fees, which was approximately 2.9% in 1994 and 2.5%
in 1995.

INSURANCE

The Company maintains professional liability insurance covering the
negligent acts and omissions of its home health care personnel while rendering
services. This policy provides coverage of $5.0 million in the aggregate or $5.0
million per occurrence for each policy year. The Company believes that the
insurance which it maintains, in relation to the size of its business, is
customary in the home health care industry; however, there can be no assurance
that any such insurance will be adequate to cover the Company's liabilities. The
Company maintains product liability insurance on all of the medical equipment,
supplies and pharmaceuticals that it sells, leases or provides to its home care
patients. This insurance provides coverage of $2.0 million in the aggregate or
$1.0 million per occurrence for each policy year. The Company also maintains
umbrella coverage in excess of its general liability insurance which provides
$4.0 million in the aggregate or $4.0 million per occurrence for each policy
year.

EMPLOYEES

The retention of qualified employees is a high priority for the Company. As
of May 31, 1996, the Company employed over 2,000 individuals. Management
believes that the Company's employee relations are good. None of the Company's
employees are represented by a labor union or other collective bargaining
organization.

LEGAL PROCEEDINGS

The Company is currently not party to any material litigation and is
currently not aware of any pending or threatened litigation that could have a
material adverse effect on the Company's business, financial condition, cash
flow or results of operations.

29
<PAGE> 32

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------
<S> <C> <C>
S. Wayne Bazzle(1)............... 60 Chairman of the Board, Chief Executive Officer and
Secretary
Cheryl C. Bazzle................. 48 President, Chief Operating Officer and Director
Susan L. Belske.................. 49 Vice President and Treasurer
Michael J. Foster(1)(2).......... 43 Director
Robert B. Crates(1)(2)........... 34 Director
</TABLE>

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

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Mr. Bazzle has served as the Chairman of the Board and Chief Executive
Officer of the Company since the Company's incorporation in October 1989. In
addition, Mr. Bazzle served as President of the Company from October 1989 to
October 1991 when Cheryl C. Bazzle was elected President. From October 1985 to
October 1989, Mr. Bazzle served as Chairman of the Board and Chief Executive
Officer of HealthCor, Inc., a predecessor of the Company. From September 1983 to
September 1985, Mr. Bazzle served as a consultant to Concepts of Care, Inc., a
home health care company. Mr. Bazzle was President and Chief Executive Officer
of Drum Financial Corporation, a publicly traded insurance and financial
services corporation from 1976 to 1981. Prior thereto, Mr. Bazzle was employed
with the Bank of Virginia, where he served as President and Chief Administrative
Officer from 1973 to 1976. Mr. Bazzle is married to Cheryl C. Bazzle.

Ms. Bazzle has served as President, Chief Operating Officer and Director
since 1991. From 1989 to 1991, Ms. Bazzle served as Senior Vice President of the
Company. From December 1987 to October 1989, Ms. Bazzle served in various
capacities for HealthCor, Inc., a predecessor and a subsidiary of the Company,
including as Senior Vice President, Chief Operating Officer and President. From
September 1985 to December 1987, Ms. Bazzle served in various capacities for
Concepts of Care, Inc. From September 1981 to October 1985, Ms. Bazzle operated
an equipment leasing company which she founded and no longer operates. Ms.
Bazzle is married to S. Wayne Bazzle.

Ms. Belske has served as Vice President and Treasurer of the Company since
April 1993. From 1987 to 1993, Ms. Belske served as Vice President and Chief
Financial Officer of Nurse Finders, Inc. From 1981 to 1987, she served as Vice
President and Chief Financial Officer of Kimberly Service, Inc., the predecessor
to Kimberly Quality Care. Prior to 1981, Ms. Belske was employed by Ernst &
Young for 11 years. Ms. Belske is a certified public accountant.

Mr. Foster has served as a Director of the Company since October 1991 and
was elected to the Board of Directors pursuant to agreements executed in
connection with the purchase by RFE Investment Partners IV, L.P. ("RFE IV") of
Series B Preferred Stock. Since 1989, Mr. Foster has been employed by RFE
Management Corp., an investment manager of several private equity investment
funds, and a general partner of RFE Associates IV, L.P. the general partner of
RFE IV. Prior thereto, Mr. Foster was a partner with the law firm of O'Sullivan
Graev & Karabell. Mr. Foster has previously served as a director of Community
Health Systems, Inc. and ReLife, Inc. See "Certain Transactions" and "Principal
and Selling Stockholders."

Mr. Crates has served as a Director of the Company since June 1992 and was
elected to the Board of Directors in connection with the purchase by LKCM
Venture Partners I, Ltd., a Texas limited partnership ("LKCM Venture Partners"),
of Series B Preferred Stock, as required by the purchase agreement under which
the Series B Preferred Stock was sold. Since December 1995, Mr. Crates has been
a principal of Crates Thompson Capital, Inc., an investment company engaged in
direct investments. From May 1988 to November 1995, Mr. Crates served as a Vice
President of Luther King Capital Management, an investment advisory firm. In
that capacity, Mr. Crates, individually and as President of RBC Investment
Corp., served as

30
<PAGE> 33

the general partner of LKCM Venture Partners I, Ltd., a stockholder of the
Company which is affiliated with Luther King Capital Management. From October
1994 to January 1995, Mr. Crates concurrently served as Interim Chairman and
Chief Executive Officer of Eddie Haggar Limited, Inc., a company in which LKCM
Venture Partners I, Ltd. had an investment, that filed for protection under
federal bankruptcy laws. See "Certain Transactions" and "Principal and Selling
Stockholders."

The Compensation Committee of the Company's Board of Directors determines
the Company's executive compensation policies and practices and changes in
compensation and benefits for senior management. The Compensation Committee also
administers the 1996 Incentive Plan. See "-- Executive Compensation."

The Audit Committee reviews the internal accounting procedures of the
Company, consults with the Company's independent public accountants and reviews
the services provided by such accountants.

BOARD COMPENSATION

All of the members of the Board of Directors (the "Board") are reimbursed
for expenses incurred in connection with their attendance at Board and Committee
meetings. The Company pays each non-employee director a monthly retainer of
$500, as well as a $750 fee for attending each regular or special meeting of the
Board. In addition, each of the Company's new non-employee directors are
eligible to receive stock options under the 1996 Incentive Plan upon their
election to the Board. See "-- Stock Option Plans."

EXECUTIVE COMPENSATION

The following table sets forth for the year ended December 31, 1995, the
compensation paid by the Company to the Company's Chairman and Chief Executive
Officer, President and Chief Operating Officer and the other most highly
compensated executive officer (collectively, the "Named Executive Officers")
whose cash compensation was in excess of $100,000:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION(1)
-------------------------------- ---------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
COMPEN- OPTIONS/ COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) SATION(4) SARS(#) SATION(5)
- ------------------------------------- ---- --------- -------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
S. Wayne Bazzle
Chairman of the Board and Chief
Executive Officer.................. 1995 $ 240,000 $72,000 $ 2,250 -- $ 12,060
Cheryl C. Bazzle
President and Chief Operating
Officer............................ 1995 200,000 60,000 2,250 -- 6,591
Susan L. Belske
Vice President & Treasurer......... 1995 120,000 15,000 1,927 -- --
</TABLE>

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

(1) The Company did not grant any stock options, stock appreciation rights or
make any long-term incentive plan payments to any of the Named Executive
Officers in 1995.

(2) Represents annual salary, including compensation deferred by the Named
Executive Officers pursuant to the Company's 401(k) Plan.

(3) Represents annual bonus earned by the Named Executive Officers for the
period indicated.

(4) Represents the Company's contribution to its 401(k) Plan made on behalf of
the Named Executive Officers.

(5) Represents amounts paid by the Company for automobile expenses on behalf of
the Named Executive Officers.

OPTIONS GRANTED DURING LAST FISCAL YEAR

During 1995, the Company did not grant any options to any of the Named
Executive Officers.

31
<PAGE> 34

OPTION EXERCISES DURING 1995 AND OPTION VALUES AT DECEMBER 31, 1995

The following table summarizes information regarding the value of all
unexercised options at December 31, 1995 by the Named Executive Officers. No
stock options were exercised by any of the Named Executive Officers during the
fiscal year. The Company does not have any outstanding stock appreciation rights
("SARs").

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END(#) YEAR-END(1)
SHARES VALUE ----------------------------- -----------------------------
NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ -------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Wayne Bazzle... -- -- -- -- -- --
Cheryl C.
Bazzle.......... -- -- -- -- -- --
Susan L. Belske... -- -- 12,500 7,500 $ 118,550 $61,650
</TABLE>

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

(1) Based on an assumed offering price of $13.50.

STOCK OPTION PLANS

1996 Incentive Plan. The Company may grant officers, directors and key
employees awards with respect to shares of Common Stock under the HealthCor
Holdings, Inc. 1996 Long-Term Incentive Plan (the "1996 Incentive Plan"). The
awards under the 1996 Incentive Plan include: (i) incentive stock options
qualified as such under U.S. federal tax laws, (ii) stock options that do not
qualify as incentive stock options, (iii) SARs and (iv) restricted stock awards.
The 1996 Incentive Plan authorizes the issuance of 237,500 shares of Common
Stock pursuant to the exercise of non-transferable options granted to
participating employees. The Company has not granted any options under the 1996
Incentive Plan to any officers, directors or employees.

The 1996 Incentive Plan is administered by the Board or a committee of the
Board (the "Committee") who determines the exercise price of each option granted
under the 1996 Incentive Plan. However, the exercise price for an incentive
stock option must not be less than the fair market value of the Common Stock on
the date of grant. Stock options may be exercised as the Committee determines
but not later than ten years from the date of grant in the case of incentive
stock options. At the discretion of the Committee, holders may use shares of
Common Stock to pay the exercise price, including shares issuable upon exercise
of the option.

An SAR may be awarded in connection with or separate from a stock option.
An SAR is the right to receive an amount in cash or stock equal to the fair
market value of a share of the Common Stock on the date of exercise less the
exercise price specified in the agreement governing the SAR (for SARs not
granted in connection with a stock option) or the exercise price of the related
stock option (for SARs granted in connection with a stock option). An SAR
granted in connection with a stock option will require the holder, upon
exercise, to surrender the related stock option or portion thereof relating to
the number of shares for which the SAR is exercised. The surrendered stock
option, or portion thereof, will then cease to be exercisable. Such an SAR is
exercisable or transferable only to the extent that the related stock option is
exercisable or transferable. An SAR granted independently of a stock option will
be exercisable as the Committee determines. The Committee may limit the amount
payable upon exercise of any SAR and such amounts may be paid in cash or stock.

A restricted stock award is a grant of shares of Common Stock that is
nontransferable or subject to risk of forfeiture until specific conditions are
met. The restrictions will lapse in accordance with a schedule or other
conditions as the Committee determines. During the restriction period, the
holder of a restricted stock award may, in the Committee's discretion, have
certain rights as a stockholder, including the right to vote the stock subject
to the award or to receive dividends thereon. Restricted stock may also be
issued upon exercise or settlement of options or SARs.

32
<PAGE> 35

An award under the 1996 Incentive Plan may have change of control features
as the Committee determines. Such change of control features may provide that
upon the change of control of the Company: (i) the holder of a stock option will
be granted a corresponding SAR, (ii) all outstanding SARs and options will
become immediately and fully vested and exercisable in full and (iii) the
restriction period on any restricted stock award will be accelerated and the
restrictions will expire. Outstanding options under the 1996 Incentive Plan have
the provision described in the preceding clause (ii). A "change in control" of
the Company means: (i) a person other than the Company, certain affiliated
companies or benefit plans, or a company a majority of which is owned directly
or indirectly by the stockholders of the Company becomes the beneficial owner of
50% or more of the voting power of the Company's outstanding voting securities;
(ii) a majority of the Board of Directors is not comprised of the members of the
Board of Directors at June , 1996, and persons whose elections as directors
were approved by those directors of their approved successors; (iii) the Company
merges or consolidates with another corporation or entity (whether the Company
or the other entity is the survivor), or the Company and the holders of the
voting securities of such other corporation or entity (or the stockholders of
the Company and such other corporation or entity) participate in a securities
exchange, other than a merger, consolidation or securities exchange in which the
Company's voting securities are converted into or continue to represent
securities having the majority of voting power in the surviving company; or (iv)
the Company liquidates or sells all or substantially all of its assets, except
sales to an entity having substantially the same ownership as the Company.

If a restructuring of the Company occurs that does not constitute a change
in control of the Company, the Committee may: (i) accelerate in whole or in part
the time of vesting and exercisability of any outstanding stock options and
SARs, in order to permit those stock options and SARs to be exercisable before,
upon, or after the completion of the restructuring; (ii) grant each option
holder corresponding SARs; (iii) accelerate in whole or in part the expiration
of some or all of the restrictions on any restricted stock award; (iv) if the
restructuring involves a transaction in which the Company is not the surviving
entity, cause the surviving entity to assume in whole or in part any one or more
of the outstanding awards under the 1996 Incentive Plan upon such terms and
provisions as the Committee deems desirable; or (v) redeem in whole or in part
any one or more of the outstanding awards (whether or not then exercisable) in
consideration of a cash payment, adjusted for withholding obligations. A
restructuring generally is any merger of the Company or the direct or indirect
transfer of all or substantially all of the Company's assets (whether by sale,
merger, consolidation, liquidation, or otherwise) in one transaction or a series
of transactions.

The options granted in 1996 under the 1996 Incentive Plan to executive
officers automatically vest upon a change in control, termination of their
employment with the Company by the Company without cause or termination of their
employment with the Company by the officer for good reason.

1989 Stock Option Plan. The Company's 1989 Stock Option Plan (the "1989
Stock Option Plan"), which was approved by the Board of Directors in October
1989 and subsequently amended in June 1996, provides for the issuance of
Incentive and Non-Qualified Stock Options to purchase up to 387,500 shares of
Common Stock of the Company. Non-Qualified Stock Options may be granted to
full-time employees (including executive officers and directors other than Mr.
and Ms. Bazzle) of the Company or to part-time employees or persons performing
services for the Company. Incentive Stock Options may only be granted to
full-time employees of the Company. Unexercised options under the 1989 Stock
Option Plan are subject to adjustment if the outstanding shares of Common Stock
of the Company are increased or decreased or changed into or exchanged for a
different number or kind of shares of stock or other securities or other
securities of the Company or of another corporation through a stock split,
combination, reorganization, merger, consolidation or similar transaction.

The 1989 Stock Option Plan is administered by the Board or the Committee
which (i) selects the employees, officers or directors who are to be granted
options, (ii) establishes the number of shares of Common Stock subject to the
options, (iii) determines the exercise prices and (iv) establishes the terms,
restrictions and/or conditions applicable to the options. The exercise price for
an Incentive Stock Option must not be less than the fair market value of the
Common Stock on the date of grant. Options granted under the 1989 Stock Option
Plan vest over a three year period beginning on the date of the grant, with
one-third of the options vesting and becoming exercisable on each anniversary of
the grant. All options will vest automatically

33
<PAGE> 36

upon the occurrence of a change in control triggering event, which includes a
consolidation or merger of the Company with or into any other entity or a sale
or other transfer of substantially all of the property and assets of the
Company. Options are not transferable except by the laws of devise and descent,
and during an optionee's lifetime may only be exercised by the optionee.

As of May 31, 1996, the Company has granted options to purchase 350,878
shares of Common Stock, 185,042 of which options are currently vested. The
number of shares currently available for additional grants under the 1989 Stock
Option Plan is 36,622.

EMPLOYEE STOCK OWNERSHIP PLAN

The Board of Directors adopted an Employee Stock Ownership Plan ("ESOP"),
effective as of April 1, 1990, for eligible employees. The ESOP is an employee
stock ownership plan that is intended to satisfy the applicable qualification
requirements set forth in the Code. The ESOP is designed to invest primarily in
shares of the Company's Common Stock.

Contributions of Common Stock and cash by the Company, when declared at the
discretion of the Board, are allocated to the accounts of participants based on
the ratio each participant's compensation for the year bears to all
participants' compensation for that year. Participants are not vested in any
amounts allocated to them until they have completed at least 1,000 hours of
service per year for one year. After five such years, a participant is 100%
vested in such amounts. Generally, a participant also will be fully vested upon
attaining age 65 or in the event of total and permanent disability, death or
termination of the ESOP.

Shares of Common Stock, together with any other ESOP assets, are held by a
trustee appointed by the Company. Under the ESOP, each participant has a right
to direct the trustee as to the manner in which shares of Common Stock allocated
to his or her account, as well as a portion of the shares of Common Stock held
by the trustee pending allocation to participant accounts, are to be voted at
each meeting of the Company's stockholders. Allocated shares for which no timely
instructions are received will be voted by the trustee proportionally in the
manner as the shares for which voting instructions were received.

Upon termination of employment, a participant is entitled to the amounts
which have been allocated to his or her account and which have become vested. If
a participant dies before receiving vested benefits from the ESOP, then ESOP
assets held for the participant will be distributed to the participant's
beneficiary. Under the ESOP, participants and beneficiaries will receive ESOP
distributions in the form of Common Stock and cash in lieu of any fractional
shares. If the Common Stock is not publicly traded, a participant or beneficiary
receiving a distribution of shares of Common Stock from the ESOP has a put
option to require the Company to purchase the distributed shares at fair market
value.

401(K) PLAN

The Company has a defined contribution plan (the "401(k) Plan") pursuant to
which employees at least 21 years of age and who have completed at least 1,000
hours of service are eligible to participate. Participants in the 401(k) Plan
may contribute up to 10% of his or her pre-tax total compensation with the
Company matching 25% of the participant's contributions, up to 6% of the
participant's compensation. The 401(k) Plan is being modified July 1, 1996, to
merge the 401(k) Plan of an acquired Company into the Company's 401(k) Plan.
Eligible employees are 100% vested in their own contributions.

LIMITATION ON DIRECTORS' LIABILITY

The Company's Amended and Restated Certificate of Incorporation provides
that no director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases; or (iv) for any transaction from which the director derived an
improper personal benefit. The effect of these provisions is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of fiduciary duty as a director (including breaches resulting from
grossly negligent behavior), except in the situations described above.

34
<PAGE> 37

CERTAIN TRANSACTIONS

In June 1992, in connection with an acquisition, the Company issued and
sold an aggregate of 1,250,013 shares of Series B Preferred Stock at a price of
$2.80 per share in a private placement. LKCM Venture Partners I, Ltd., a Texas
limited partnership, participated in this offering at this per share price by
purchasing 803,575 shares. RFE Investment Partners IV, L.P. participated in this
offering at this per share price by purchasing 267,863 shares. The Company's
ESOP also purchased 178,575 shares of Series B Preferred Stock at this per share
price. The shares of Series B Preferred Stock owned by the ESOP were converted
into shares of Common Stock in fiscal 1994.

35
<PAGE> 38

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock of as of May 31, 1996, and as
adjusted to reflect the sale of the shares of Common Stock being offered by the
Company and the Selling Stockholders hereby and giving effect to the Offering
Related Transactions (as defined below) for: (i) each person known by the
Company to own beneficially more than 5% of the outstanding shares of the
Company's Common Stock; (ii) each Selling Stockholder; (iii) each executive
officer and director of the Company; and (iv) all executive officers and
directors of the Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF SHARES TO BE BENEFICIALLY
OFFERING(1)(2) SHARES OWNED AFTER OFFERING(2)
-------------------- BEING -----------------------------
NUMBER PERCENT OFFERED NUMBER PERCENT OF CLASS
--------- ------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C>
S. Wayne Bazzle(3)......................... 2,600,000 39.6% -- 2,600,000 27.2%
Cheryl C. Bazzle
5720 LBJ Freeway, Suite 550
Dallas, Texas 75240
RFE Investment Partners IV, L.P.(4)........ 2,334,828 35.6 -- 2,334,828 24.4
36 Grove Street
New Canaan, Connecticut 06840
LKCM Venture Partners I, Ltd.(5)........... 933,044 14.2 88,800 844,244 8.8
301 Commerce Street
Suite 1600
Fort Worth, Texas 76102
Shadanana P. Attaluri...................... 25,000 * 25,000 -- --
C. Al Buis................................. 4,466 * 4,466 -- --
Breck Ray.................................. 44,641 * 4,500 40,141 *
William G. Ritter.......................... 125,000 1.9 125,000 -- --
Paul T. Stoffel............................ 22,319 * 2,234 20,085 *
Susan L. Belske(6)......................... 12,500 * -- 12,500 *
Michael J. Foster(7)....................... 2,334,828 35.6 -- 2,334,828 24.4
Robert B. Crates(8)........................ 933,044 14.2 88,800 844,244 8.8
All directors and officers as a group (5
persons)................................. 5,880,372 89.6% 88,800 5,791,572 60.6%
</TABLE>

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

* Less than 1%.
(1) Includes shares of Common Stock which an individual has a right to acquire
upon exercise of options or warrants within 60 days of March 31, 1996. Such
shares are deemed to be outstanding for the purpose of computing the
percentage ownership of the individual holding such shares, but are not
deemed outstanding for purposes of computing the percentage of any other
person shown on the table.
(2) The number of shares of Common Stock deemed outstanding prior to this
offering includes shares issuable upon conversion of the Series A Preferred
Stock and the Series B Preferred Stock. The number of shares of Common
Stock deemed outstanding after this offering includes 3,000,000 shares
being offered for sale by the Company in this offering.
(3) Of the shares indicated, 1,175,000 shares are owned by S. Wayne Bazzle,
1,175,000 shares are owned by Cheryl C. Bazzle and 250,000 shares are owned
by the John Bradley Bazzle Trust (the "Trust"). S. Wayne Bazzle and Cheryl
C. Bazzle serve as trustees of the Trust. Each of Mr. and Ms. Bazzle
disclaim beneficial ownership of the shares owned by the other and the
Trust.
(4) In the event the Underwriters' over-allotment option is exercised in full,
RFE Investment Partners will sell 176,300 shares of the 487,500 additional
shares sold solely to cover over-allotments. If such shares are sold by RFE
Investment Partners pursuant to an exercise of such option, RFE Investment
Partners will own 2,158,528 shares, or 21.9%, of the total shares of Common
Stock outstanding upon the closing of this offering and upon the closing of
the sale of the additional shares subject to the over-allotment option.
(5) In the event the Underwriters' over-allotment option is exercised in full,
LKCM Venture Partners will sell 11,200 shares of the 487,500 additional
shares sold solely to cover over-allotments. If such shares are sold by
LKCM Venture Partners pursuant to an exercise of such option, LKCM Venture
Partners will own 833,044 shares, or 8.5%, of the total shares of Common
Stock outstanding upon the closing of this offering and upon the closing of
the sale of the additional shares subject to the over-allotment option.
(6) Represents shares issuable upon exercise of stock options which are vested
or will be vested prior to July 31, 1996.
(7) Michael J. Foster disclaims beneficial ownership of the shares held of
record by RFE Investment Partners except to the extent of his direct
partnership interest in RFE Investment Partners.
(8) Robert B. Crates disclaims beneficial ownership of the shares held of record
by LKCM Venture Partners except to the extent of his direct partnership
interest in LKCM Venture Partners.

36
<PAGE> 39

DESCRIPTION OF CAPITAL STOCK

Upon the consummation of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $.01 par value, and
10,000,000 shares of preferred stock, $.01 par value (the "Preferred Stock").

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share held.
There is no provision in the Company's Amended and Restated Certificate of
Incorporation for cumulative voting with respect to the election of directors.
Accordingly, the holders of more than 50% of the total voting power of the
Common Stock may, if they choose to do so, could elect all of the directors of
the Company. The holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock would be entitled to share in the Company's
assets remaining after the payment of liabilities and after the satisfaction of
the liquidation preference granted to the holders of any outstanding shares of
Preferred Stock. The shares of Common Stock have no preemptive or conversion
rights, redemption rights or sinking fund provisions and are not subject to
calls, assessments or rights of redemption by the Company. The outstanding
shares of Common Stock are, and the shares being offered hereby will be, upon
issuance and sale, duly authorized, validly issued, fully-paid and
nonassessable.

As of May 31, 1996, after giving effect to the Offering Related
Transactions, there were 6,554,600 shares of Common Stock outstanding and held
of record by 12 stockholders. After giving effect to the issuance of 3,000,000
shares of Common Stock to be sold by the Company in this offering, the
conversion of all of the outstanding shares of Series A Preferred Stock and
Series B Preferred Stock and the exercise of warrants to purchase 150,000 shares
of Common Stock, there will be 9,554,600 shares of Common Stock outstanding
after the offering.

PREFERRED STOCK

The Board is authorized, without further action by the Company's
stockholders, to issue Preferred Stock, from time to time, in one or more series
and to fix, as to any such series, the voting rights, if any, applicable to such
series and such other designations, preferences and special rights as the Board
may determine, including dividend, conversion, redemption and liquidation rights
and preferences. Upon the closing of this offering, there will be no shares of
Preferred Stock outstanding. The issuance of shares of Preferred Stock under
certain circumstances could have the effect of delaying or preventing a change
in control of the Company or other corporate actions. See "-- Provisions with
Potential Anti-Takeover Effect."

WARRANTS

In connection with an acquisition completed on June 1, 1992, the Company
issued Warrants to purchase an aggregate of 150,000 shares of Common Stock at a
price of $2.00 per share, exercisable in whole or in part in increments of 1,000
at any time. These Warrants expire June 1, 1997. Unexercised Warrants, and the
exercise price thereof, are subject to adjustment if the Company issues Common
Stock for a consideration per share less than the exercise price (subject to
certain exceptions) or if there is a subdivision or consolidation of the
Company's Common Stock, the payment of a stock dividend or other increase or
decrease in the number of shares of Common Stock outstanding, and the Company
does not receive compensation therefor. In addition, the number and type of
securities subject to a Warrant are subject to adjustment if the Company is
party to a merger or consolidation. The provisions of the Warrant Agreement
relating to adjustment to the exercise price and number of shares for which such
Warrants are exercisable terminate in the event of the consummation of a public
offering of the Company's Common Stock which results in aggregate gross cash
proceeds to the Company of not less than $7,500,000 at a net offering price of
not less than $14.14 per share. The holders of the Warrants are entitled to
certain registration rights with respect to the Common Stock issued upon the
exercise thereof. See "Management -- Principal and Selling Stockholders."

37
<PAGE> 40

In connection with an acquisition completed on November 16, 1994, the
Company issued Warrants to purchase up to 25,000 shares of Common Stock at the
exercise of $4.00 per share, exercisable at any time in whole or in part. These
Warrants expire on November 1, 1999. Unexercised Warrants, and the exercise
price thereof, are subject to adjustment upon a subdivision, consolidation or
reclassification of the Company's Common Stock or a declaration of a stock
dividend. Additionally, the number and type of securities subject to a Warrant
are subject to adjustment if the Company is party to a merger, sale or
consolidation.

REGISTRATION RIGHTS

The Company has entered into an agreement with certain existing holders of
3,179,072 shares of Common Stock pursuant to which: (i) those holders that
formerly represented at least a majority of interest in the Series A Preferred
Stock (the "Former Series A Holders"); or (ii) those holders that formerly
represented at least a majority of interest in the Series B Preferred Stock (the
"Former Series B Holders") may cause the Company to file a registration
statement under the Securities Act of 1933 (the "Securities Act") covering the
shares of Common Stock owned by them. Additionally, upon receipt of notice of a
request to register such shares of Common Stock by such holders or in the event
the Company proposes to register any of its shares of Common Stock under the
Securities Act for its own account, all Former Series A Holders and Former
Series B Holders will be entitled to require the Company to include all, or a
portion of, their shares in such registration, subject to certain conditions and
restrictions. Generally, all fees, costs and expenses (other than underwriting
discounts and commissions) will be borne by the Company.

PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, Delaware law, the Company's 1996 Incentive Plan and the
employment agreements and indemnification agreements of certain executive
officers and directors of the Company summarized in the following paragraphs may
have an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider to be in that stockholder's
best interests, including attempts that might result in a premium over the
market price to be paid for the shares held by stockholders.

Amended and Restated Certificate of Incorporation

Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the Company's Board by resolution may issue additional shares of
Common Stock or establish one or more classes or series of Preferred Stock
having the number of shares, designations, relative voting rights, dividend
rates, liquidation and other rights, preferences and limitations that the Board
fixes without stockholder approval. Any additional issuance of Common Stock or
designation of rights, preferences, privileges and limitations with respect to
Preferred Stock could have the effect of impeding or discouraging the
acquisition of control of the Company by means of a merger, tender offer, proxy
contest, or otherwise, and thereby protect the continuity of the Company's
management. Specifically, if, in the due exercise of its fiduciary obligations,
the Board were to determine that a takeover proposal was not in the Company's
best interest, such shares could be issued by the Board without stockholder
approval in one or more transactions that might prevent, or make more difficult
or costly, the completion of the proposed takeover transaction by diluting the
voting or other rights of the proposed acquirer or insurgent stockholder group,
by putting a substantial voting block in institutional or other hands that might
undertake to support the position of the incumbent Board, by effecting an
acquisition that might complicate or preclude the takeover, or otherwise.

In addition, the Company's Amended and Restated Certificate of
Incorporation prohibits stockholder action by written consent in lieu of a
meeting. As a result, stockholder action can be taken only at an annual or
special meeting of stockholders. This prevents the holders of a majority of the
voting stock of the Company from using the written consent procedure to take
stockholder action without giving all of the stockholders of the Company
entitled to vote on action the opportunity to participate in determining the
proposed action.

38
<PAGE> 41

INDEMNIFICATION OF CERTAIN PERSONS

Upon the closing of this offering, the Company intends to enter into
indemnification agreements with each of its executive officers and directors.
Pursuant to these agreements, the Company will, to the extent permitted under
applicable law, indemnify these persons against all expenses, judgments, fines
and penalties incurred in connection with the defense or settlement of any
actions brought against them by reason of the fact that they are, or were,
officers or directors of the Company or that they assumed certain
responsibilities at the direction of the Company. In addition, the Company's
Certificate of Incorporation provides for certain limitations on directors'
liability. See "Management -- Limitations on Directors' Liability."

OFFERING RELATED TRANSACTIONS

Concurrently with the closing of this offering, the following transactions
(the "Offering Related Transactions") will be consummated: (i) all of the
2,000,000 outstanding shares of the Company's Series A Convertible Preferred
Stock will be converted into an equal number of shares of Common Stock of the
Company; (ii) all of the 1,071,438 outstanding shares of Series B Convertible
Preferred Stock will be converted into 1,339,297 shares of Common Stock of the
Company; and (iii) Warrants to purchase 150,000 shares of Common Stock will be
exercised at an exercise price of $2.00 per share.

DELAWARE ANTI-TAKEOVER STATUTE

The Company is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such date, the Board of Directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is Chemical
Mellon Shareholder Services.

39
<PAGE> 42

SHARES ELIGIBLE FOR FUTURE SALE

Upon the closing of this offering, the Company will have an aggregate of
9,554,600 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
Warrants). Of these shares, the 3,250,000 shares sold in this offering will be
freely transferable without restriction or further registration under the
Securities Act, except that any shares held by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act ("Rule 144"), may
generally only be sold in compliance with the limitations of Rule 144 described
below.

SALES OF RESTRICTED SHARES

The remaining 6,304,600 shares of Common Stock (the "Restricted Shares")
held by existing stockholders were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are thus treated as
"restricted" securities under Rule 144. As of the Effective Date, approximately
6,087,518 of the Restricted Shares are eligible for sale in the public market in
reliance on Rule 144(k) under the Securities Act; 5,779,072 of these shares,
however, are subject to the lock-up arrangements described below (the "Lock-up
Arrangements"). Beginning 90 days after the Effective Date, approximately 87,500
additional Restricted Shares will become eligible for sale in the public market,
pursuant to Rule 144 and Rule 701 under the Securities Act. Beginning 180 days
after the Effective Date, upon the expiration of the Lock-up Arrangements,
approximately 6,087,518 shares in the aggregate will become eligible for sale in
the public market, subject to the provisions of Rule 144 and Rule 701. The
Commission has proposed an amendment to Rule 144 which would reduce the holding
period from two years to one year for shares subject to Rule 144 to become
eligible for sale in the public market. If this proposal were adopted, an
additional 89,583 shares would become eligible for sale to the public 180 days
after the Effective Date.

Any employee, officer or director of or consultant to the Company who
purchased shares pursuant to a written compensatory plan or contract is entitled
to rely on the resale provisions of Rule 701 under the Securities Act, which
permits non-affiliates to sell their Rule 701 shares without having to comply
with Rule 144's holding period restrictions, in each case commencing 90 days
after the Effective Date.

In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned restricted securities within the meaning
of Rule 144 for at least two years would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of the Company's Common Stock (approximately 95,546
shares) or the average weekly trading volume of the Company's Common Stock on
Nasdaq during the four calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least three years, would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. Any future sale of
substantial amounts of Common Stock in the public market may adversely affect
the market price of the Common Stock offered hereby.

OPTIONS

As of May 31, 1996, options to purchase a total of 350,878 shares of Common
Stock were outstanding, of which options to purchase 185,042 shares were then
exercisable; 12,500 shares issuable pursuant to stock options are subject to
certain lock-up arrangements.

Prior to this offering, there has not been any public market for the Common
Stock of the Company. Further sales of substantial amounts of Common Stock in
the open market may adversely affect the market

40
<PAGE> 43

price of the Common Stock and could impair the Company's future ability to raise
capital through the sale of its equity securities.

LOCK-UP ARRANGEMENTS

All directors, officers and certain other stockholders, who hold in the
aggregate 5,779,072 shares of Common Stock and options to purchase 12,500 shares
of Common Stock, have agreed that they will not, without the prior written
consent of the Representatives, sell or otherwise dispose of any shares of
Common Stock or options to acquire shares of Common Stock during the 180-day
period following the Effective Date.

Certain stockholders have the right to cause the Company to register the
sale of their shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights."

41
<PAGE> 44

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Bear, Stearns & Co. Inc., have severally
agreed to purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Alex. Brown & Sons Incorporated...................................................
Bear, Stearns & Co. Inc...........................................................
---------
Total............................................................................. 3,250,000
========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.

The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representatives of
the Underwriters.

The Company and certain Selling Stockholders have granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 487,500 additional shares of Common Stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the above table bears to 3,250,000,
and the Company and certain Selling Stockholders will be obligated, pursuant to
the option, to sell such shares to the Underwriters. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby. If purchased, the Underwriters will offer
such additional shares on the same terms as those on which the 3,250,000 shares
are being offered.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.

The Company, its executive officers, directors and certain stockholders
have agreed that, subject to certain exceptions, they will not, for a period of
180 days after the date of this Prospectus, sell, offer to sell, contract to
sell or otherwise dispose of any of their shares of Common Stock (except for
sales described in or contemplated by this Prospectus) or any other securities
of the Company without the prior written consent of the Representatives of the
Underwriters.

The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock has been determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors considered in such

42
<PAGE> 45

negotiations were prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalizations and stages of development
of other companies which the Company and the Representatives of the Underwriters
believed to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Vinson & Elkins L.L.P., Dallas, Texas. Certain legal matters will be
passed on for the Underwriters by Akin, Gump, Strauss, Hauer and Feld, L.L.P.,
Dallas, Texas.

EXPERTS

The audited financial statements and schedule of the Company as of December
31, 1994 and 1995 and for the years ended December 31, 1993, 1994 and 1995; the
audited combined financial statements of Specialty Med-Equip, Inc., Superior
Med-Equip, Inc. and Cross Timbers Visiting Nurses, Inc. for the year ended
December 31, 1994; the audited combined financial statements of C. Edward Elsey
d/b/a A.M. Medical and Discount Medical Equipment Company for the year ended
December 31, 1994; the audited combined financial statements of Colorado I.V.
Associates, Inc. and Specialized Nursing Services, Inc. for the year ended
December 31, 1994; the audited consolidated financial statements of RTA
HomeCare, Inc. and Subsidiary for the years ended December 31, 1993 and 1994;
and the audited financial statements of Home Hospital Equipment, Inc. for the
year ended December 31, 1994, included in this Prospectus and elsewhere in the
Registration Statement to the extent and for the years indicated in their
reports have been audited by Arthur Andersen LLP, independent public accountants
and are included herein in reliance upon the authority of said firm as experts
in giving said reports.

The audited combined financial statements of I Care of Arkansas, Inc. and
Affiliate as of December 31, 1994 and 1995 and for the years ended December 31,
1993, 1994 and 1995 and the audited financial statements of I Care, Inc. d/b/a I
Care Health Services as of March 31, 1995 and 1996 and for the years ended March
31, 1994, 1995 and 1996 included in this Prospectus and elsewhere in the
Registration Statement to the extent and for the years indicated in their
reports have been audited by Bell & Company, independent public accountants and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.

The audited financial statements of Physician Home Health Network, Inc. for
the ten months ended October 31, 1994 included in this Prospectus and elsewhere
in the Registration Statement to the extent and for the period indicated in
their report have been audited by Ift & Barber, Chartered, independent public
accountants and are included herein in reliance upon the authority of said firm
as experts in giving said reports.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is hereby made to such Registration Statement and the
exhibits and schedules thereto, copies of which may be inspected without charge
at the public reference facilities maintained by the Commission at Judiciary
Plaza, Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549, or obtained
from the Public Reference Section of the Commission, Washington, D.C. 20549,
upon payment of the fees prescribed by the Commission. Such documents may also
be obtained through the Web Site maintained by the Commission at
http://www.sec.gov. The summaries in this Prospectus of additional information
included in the Registration Statement or any exhibit thereto are qualified in
their entirety by reference to such information or exhibit.

43
<PAGE> 46

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................ F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995........................ F-4
Consolidated Statements of Income for the Years Ended December 31, 1993, 1994, and
1995............................................................................. F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1993, 1994, and 1995............................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994,
and 1995......................................................................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
Condensed Consolidated Balance Sheet as of March 31, 1996 (Unaudited)............... F-18
Condensed Consolidated Statements of Income for the Three Months Ended March 31,
1995 and 1996 (Unaudited)........................................................ F-19
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1995 and 1996 (Unaudited)........................................................ F-20
Notes to Condensed Consolidated Financial Statements (Unaudited).................... F-21
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES -- ACQUISITIONS
I CARE OF ARKANSAS, INC. AND AFFILIATE
Independent Auditors' Report........................................................ F-23
Combined Balance Sheets as of December 31, 1994 and 1995............................ F-24
Combined Statements of Income for the Years Ended December 31, 1993, 1994, and
1995............................................................................. F-25
Combined Statements of Retained Earnings for the Years Ended December 31, 1993,
1994, and 1995................................................................... F-26
Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1994, and
1995............................................................................. F-27
Notes to Combined Financial Statements.............................................. F-28
I CARE, INC. D/B/A I CARE HEALTH SERVICES
Independent Auditors' Report........................................................ F-31
Balance Sheets as of March 31, 1995 and 1996........................................ F-32
Statements of Income for the Years Ended March 31, 1994, 1995, and 1996............. F-33
Statements of Retained Earnings for the Years Ended March 31, 1994, 1995, and
1996............................................................................. F-34
Statements of Cash Flows for the Years Ended March 31, 1994, 1995, and 1996......... F-35
Notes to Financial Statements....................................................... F-36
SPECIALTY MED-EQUIP, INC., SUPERIOR MED-EQUIP, INC., AND CROSS TIMBERS VISITING
NURSES, INC.
Report of Independent Public Accountants............................................ F-40
Combined Statement of Income for the Year Ended December 31, 1994................... F-41
Combined Statement of Retained Earnings for the Year Ended December 31, 1994........ F-42
Combined Statement of Cash Flows for the Year Ended December 31, 1994............... F-43
Notes to Combined Financial Statements.............................................. F-44
C. EDWARD ELSEY D/B/A A. M. MEDICAL AND DISCOUNT MEDICAL EQUIPMENT COMPANY
Report of Independent Public Accountants............................................ F-46
Combined Statement of Income for the Year Ended December 31, 1994................... F-47
Combined Statement of Owner's Equity for the Year Ended December 31, 1994........... F-48
Combined Statement of Cash Flows for the Year Ended December 31, 1994............... F-49
Notes to Combined Financial Statements.............................................. F-50
</TABLE>

F-1
<PAGE> 47

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COLORADO I.V. ASSOCIATES, INC. AND SPECIALIZED NURSING SERVICES, INC.
Report of Independent Public Accountants............................................ F-52
Combined Statement of Income for the Year Ended December 31, 1994................... F-53
Combined Statement of Retained Earnings for the Year Ended December 31, 1994........ F-54
Combined Statement of Cash Flows for the Year Ended December 31, 1994............... F-55
Notes to Combined Financial Statements.............................................. F-56
RTA HOMECARE, INC. AND SUBSIDIARY
Report of Independent Public Accountants............................................ F-58
Consolidated Statements of Income for the Years Ended December 31, 1993 and 1994.... F-59
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1993 and 1994.................................................................... F-60
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993 and
1994............................................................................. F-61
Notes to Consolidated Financial Statements.......................................... F-62
HOME HOSPITAL EQUIPMENT, INC.
Report of Independent Public Accountants............................................ F-64
Statement of Income and Retained Earnings for the Year Ended December 31, 1994...... F-65
Statement of Cash Flows for the Year Ended December 31, 1994........................ F-66
Notes to Financial Statements....................................................... F-67
PHYSICIANS HOME HEALTH NETWORK, INC.
Report of Independent Public Accountants............................................ F-69
Statement of Operations and Retained Deficit for the Ten Months Ended October 31,
1994............................................................................. F-70
Statement of Cash Flows for the Ten Months Ended October 31, 1994................... F-71
Notes to Financial Statements....................................................... F-72
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Financial Statements Headnote................................... P-1
Unaudited Pro Forma Condensed Consolidated Statement of Income for the Year Ended
December 31, 1995................................................................ P-2
Unaudited Pro Forma Condensed Consolidated Statement of Income for the Three Months
Ended March 31, 1996............................................................. P-3
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996....... P-4
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements............ P-5
</TABLE>

F-2
<PAGE> 48

Upon the approval by the Company's Board of Directors of the 5-for-2 stock split
and increases in the number of authorized preferred and common shares discussed
in paragraph 3 of Note 13 to the Company's consolidated financial statements, we
expect to be in a position to render the following audit report.

ARTHUR ANDERSEN LLP

June 11, 1996

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors,
HealthCor Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of HealthCor
Holdings, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994
and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthCor Holdings,
Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Dallas, Texas,
March 29, 1996, except as to
paragraph 3 in Note 13, for
which the date is June , 1996

F-3
<PAGE> 49

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $3,774,848.. $ 1,627,940
Accounts receivable, net of allowance for doubtful accounts of
$1,285,000 and $2,056,000 in 1994 and 1995, respectively..... 4,574,598 11,465,655
Supplies inventory.............................................. 726,123 1,709,355
Prepaid expenses and other...................................... 571,388 1,456,958
Income taxes receivable......................................... 15,106 --
Deferred income taxes........................................... 806,820 2,003,328
----------- -----------
Total current assets.................................... 10,468,883 18,263,236
Property and equipment, net of accumulated depreciation of
$3,742,518 and $7,946,627, respectively......................... 3,880,317 11,054,255
Excess of cost of acquired businesses over fair values of net
assets
acquired, net................................................... 10,107,673 23,220,167
Other assets...................................................... 47,113 35,290
----------- -----------
Total assets............................................ $24,503,986 $52,572,948
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued ESOP contribution....................................... $ 1,501,291 $ 1,477,915
Accrued payroll and related expenses............................ 4,401,400 4,836,735
Accounts payable and accrued expenses........................... 1,376,087 4,456,489
Estimated settlements with third-party payors................... 280,450 322,566
Line of credit payable.......................................... -- 2,475,000
Current portion of long-term debt............................... 1,284,503 4,256,973
Current portion of capital lease obligations.................... 328,873 862,505
Income taxes payable............................................ -- 1,311,920
----------- -----------
Total current liabilities............................... 9,172,604 20,000,103
Deferred income taxes and other................................... 157,092 2,905,809
Long-term debt.................................................... 2,501,411 10,668,632
Capital lease obligations......................................... 258,770 1,596,604
----------- -----------
Total liabilities....................................... 12,089,877 35,171,148
Commitments and contingencies
Redeemable Convertible Preferred Stock, $.01 par value, 10,000,000
shares authorized
Series A Preferred Stock, 2,000,000 shares issued and
outstanding, redemption and liquidation values of
$4,079,726................................................... 20,000 20,000
Series B Preferred Stock, 1,071,438 shares issued and
outstanding, redemption and liquidation values of
$4,075,035................................................... 10,714 10,714
Additional paid-in capital on Series A and B Preferred Stocks... 5,309,100 5,309,100
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares authorized;
2,935,720 and 3,062,803 shares issued and outstanding in 1994
and 1995, respectively....................................... 29,357 30,628
Additional paid-in capital...................................... 1,068,234 2,471,129
Retained earnings............................................... 5,976,704 9,560,229
----------- -----------
Total stockholders' equity.............................. 7,074,295 12,061,986
----------- -----------
Total liabilities and stockholders' equity.............. $24,503,986 $52,572,948
=========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-4
<PAGE> 50

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues........................................ $60,096,700 $57,151,154 $81,557,284
Operating expenses:
Compensation and related benefits................. 41,530,959 38,893,904 49,724,055
General and administrative........................ 12,977,724 12,072,232 21,272,118
Depreciation and amortization..................... 1,181,169 1,439,751 2,299,357
Provision for doubtful accounts................... 1,317,485 1,115,705 1,488,885
----------- ----------- -----------
57,007,337 53,521,592 74,784,415
Income from operations.............................. 3,089,363 3,629,562 6,772,869
Other income (expense):
Interest income................................... 7,142 61,345 162,283
Interest expense.................................. (434,149) (304,953) (1,149,260)
----------- ----------- -----------
(427,007) (243,608) (986,977)
Income before income taxes.......................... 2,662,356 3,385,954 5,785,892
Provision for income taxes.......................... 1,129,825 1,359,398 2,202,367
----------- ----------- -----------
Net income.......................................... $ 1,532,531 $ 2,026,556 $ 3,583,525
=========== =========== ===========
Net income per common share......................... $ .24 $ .31 $ .55
=========== =========== ===========
Weighted average common shares outstanding.......... 6,402,848 6,489,563 6,545,615
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE> 51

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992............. 2,600,000 $26,000 $ 393,109 $2,417,617 $ 2,836,726
Exercise of options.................. 25,000 250 19,750 -- 20,000
Issuance of common stock to ESOP..... 87,500 875 655,375 -- 656,250
Net income........................... -- -- -- 1,532,531 1,532,531
--------- ------- ---------- ---------- -----------
Balance, December 31, 1993............. 2,712,500 27,125 1,068,234 3,950,148 5,045,507
Conversion of Series B preferred
stock to common stock............. 223,220 2,232 -- 2,232
Net income........................... -- -- -- 2,026,556 2,026,556
--------- ------- ---------- ---------- -----------
Balance, December 31, 1994............. 2,935,720 29,357 1,068,234 5,976,704 7,074,295
Issuance of common stock to ESOP..... 125,000 1,250 1,398,750 -- 1,400,000
Purchases of common stock............ 2,083 21 4,145 -- 4,166
Net income........................... -- -- -- 3,583,525 3,583,525
--------- ------- ---------- ---------- -----------
Balance, December 31, 1995............. 3,062,803 $30,628 $2,471,129 $9,560,229 $12,061,986
========= ======= ========== ========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE> 52

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $1,532,531 $2,026,556 $ 3,583,525
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 1,181,169 1,439,751 2,299,357
Loss on disposition of leased assets.............. 51,207 14,299 61,784
Changes in operating assets and liabilities, net
of acquired businesses:
Accounts receivable, net........................ (724,966) 3,306,421 (4,790,507)
Supplies inventory.............................. 31,618 80,685 109,842
Prepaid expenses and other...................... 83,699 (228,140) (688,745)
Deferred income taxes........................... (378,521) 490,437 (1,184,566)
Accrued ESOP contribution....................... (462,352) 1,497,242 (23,376)
Third-party payor settlement.................... 875,799 (1,745,349) 42,116
Accounts payable and accrued expenses........... 503,103 (18,696) 2,982,865
Income taxes payable/receivable................. (941,727) (422,957) 919,447
Deferred income taxes and other................. 132,808 (180,443) 2,455,717
---------- ---------- -----------
Net cash provided by operating activities.... 1,884,368 6,259,806 5,767,459
---------- ---------- -----------
Cash flows from investing activities:
Payments for business acquisitions, net of cash
acquired.......................................... (297,346) (2,745,689) (17,458,780)
Additions to property and equipment.................. (1,957,194) (866,001) (7,179,800)
---------- ---------- -----------
Net cash used in investing activities........ (2,254,540) (3,611,690) (24,638,580)
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............. 712,135 3,287,698 47,660,981
Payments on long-term debt........................... (1,129,044) (1,603,333) (32,340,934)
Issuance of common stock............................. 676,250 -- 1,404,166
Proceeds from loans from related parties............. 72,148 -- --
Payments on loans from related parties............... (945,597) (1,063,854) --
---------- ---------- -----------
Net cash provided by (used in) financing
activities................................. (614,108) 620,511 16,724,213
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents... (984,280) 3,268,627 (2,146,908)
Cash and cash equivalents, beginning of period......... 1,490,501 506,221 3,774,848
---------- ---------- -----------
Cash and cash equivalents, end of period............... $ 506,221 $3,774,848 $ 1,627,940
========== ========== ===========
Supplemental disclosure of cash flow information:
Debt issued in acquisitions.......................... $ -- $ 857,241 $ 1,567,321
Liabilities and debt assumed in acquisitions......... 81,453 217,441 566,340
Issuance of capital lease obligation................. 387,000 172,000 2,530,000
Interest paid........................................ 433,000 315,000 828,000
Income taxes paid.................................... 2,317,000 1,481,000 1,826,000
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-7
<PAGE> 53

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, AND 1995

1. GENERAL:

Organization

HealthCor Holdings, Inc., a Delaware corporation, and subsidiaries (the
"Company") commenced operations in October 1989, and provide home healthcare
services to patients including nursing, respiratory therapy, infusion therapy,
and medical equipment. The Company has operations in Arizona, Colorado, Kansas,
Missouri, Oklahoma, Texas, New Mexico, and Arkansas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation and Presentation

The consolidated financial statements of the Company include the accounts
of HealthCor Holdings, Inc. and its wholly owned subsidiaries, HealthCor, Inc.
(HealthCor), HealthCor Oxygen & Medical Equipment, Inc. (HOME), HealthCor
Pharmacy, Inc., Physicians Home Health Network, Inc., and HealthCor
Rehabilitation Services, Inc. All significant intercompany transactions and
accounts have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Supplies Inventory

Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of medical supplies sold directly to patients for
use in their homes.

Property and Equipment

Property and equipment are stated at cost or fair market value at the
acquisition date (see Note 4). The cost of equipment held under capital leases
is equal to the lower of the net present value of the minimum lease commitments
or the fair value of the leased property at the inception of the lease (see Note
7). Property and equipment is depreciated using the straight-line method over
the following useful lives:

<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Furniture and equipment............................................ 10 - 15
Transportation equipment........................................... 4
Computer equipment................................................. 5
Leasehold improvements............................................. 3
</TABLE>

F-8
<PAGE> 54

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Excess of Costs of Acquired Businesses Over the Fair Values of Assets Acquired

The value of excess cost of acquired businesses over the fair values of
assets acquired (goodwill) is recorded at the dates of acquisition. Goodwill is
being amortized on a straight-line basis over a 40-year period in accordance
with the provisions of APB No. 17. Accumulated amortization at December 31, 1994
and 1995, was approximately $717,000 and $1,186,000, respectively.

The Company reviews the carrying value of goodwill at least annually on a
market-by-market basis to determine if facts and circumstances exist which would
suggest that goodwill may be impaired or that the amortization period needs to
be modified. Among the factors the Company considers in making the evaluation
are changes in the Company's market position, reputation, profitability and
geographic penetration. If indicators are present which may indicate impairment
is probable, the Company will prepare a projection of the undiscounted cash
flows of the specific market and determine if goodwill is recoverable based on
these undiscounted cash flows. If impairment is indicated, then an adjustment
will be made to reduce the carrying amount of the goodwill to their fair value.
The Company does not expect the adoption of Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" to have a material impact on its
financial condition or results of operations.

Income Taxes

Deferred income taxes (receivable) provide for temporary differences
between the financial statement and income tax basis of assets and liabilities
in accordance with SFAS No. 109 "Accounting for Income Taxes."

Net Income Per Common Share

Net income per common share (both primary and fully diluted) has been
computed by dividing net income by the weighted average number of equivalent
common shares outstanding each year. The Company has treated the redeemable
convertible preferred stocks as common stock equivalents for purposes of
computing net income per common share. Accordingly, historical and pro forma net
income per common share amounts are equal. (See Note 13)

Pursuant to the requirements of the Securities and Exchange Commissions for
the purposes of computing net income per common share for the three years ended
December 31, 1995, the Company has treated the options granted and common stock
issued during the twelve months immediately preceding the filing of the initial
public offering as if they had been outstanding for all periods presented, using
the treasury stock method.

The Company plans to adopt Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," effective
January 1, 1996. SFAS No. 123 allows companies adopting the pronouncement to
either change the actual accounting methods for stock based compensation in the
financial statements or to disclose certain pro forma results of operations as
if the pronouncement had been adopted in the financial statements. The Company
plans to disclose pro forma information in the footnotes to the financial
statements. As a result, the adoption of SFAS 123 will have no effect on the
consolidated financial statements.

Net Revenues and Estimated Settlements with Third-Party Payors

Revenues are recognized on the date services and related products are
provided to patients and are recorded at estimated net realizable amounts from
patients, third-party payors, and others for services rendered. For the years
ended December 31, 1993, 1994, and 1995, approximately 70% of net patient
service revenues were derived under federal third-party reimbursement programs
which are based on cost reimburse-

F-9
<PAGE> 55

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ment and case payment principles. These revenues are subject to audit and
retroactive adjustment by the respective third-party fiscal intermediary. In the
opinion of management, retroactive adjustments, if any, will not be material to
the financial position or results of operations of the Company. Settlements
based on third-party reimbursement program audits are recorded in the year they
become known.

3. ACCRUED PAYROLL AND RELATED EXPENSES:

Accrued payroll and related expenses consisted of the following:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Salaries.................................................... $2,134,199 $2,391,660
Workers' compensation....................................... 795,288 853,018
Other....................................................... 1,471,913 1,592,057
---------- ----------
$4,401,400 $4,836,735
========== ==========
</TABLE>

4. ACQUISITIONS:

1995 Acquisitions

On January 1, 1995, the Company acquired, in separate transactions, for
$3,675,000 in cash, $254,000 in deferred payments, and $400,000 in debt, the net
assets of Home Hospital Equipment, Inc. and Medi-Networks, Inc. Both are
respiratory therapy companies located in Texas, specializing in providing home
medical and respiratory equipment and supplies to patients.

On June 30, 1995, the Company acquired, in separate transactions, for
$1,870,000 in cash and $546,000 in debt, the net assets of McDuffie's Rentals,
Inc. and Southwest Professional Registry, Inc. Both respiratory therapy
companies are located in Texas, specializing in providing home respiratory
equipment and supplies.

On July 31, 1995, the Company acquired for $6,400,000 in cash and
$1,000,000 in debt, the net assets of RTA Homecare and Subsidiaries (RTA). RTA,
located in Arizona, is a respiratory therapy company specializing in providing
home medical and respiratory equipment, supplies, and pharmaceuticals to
patients.

On August 31, 1995, the Company acquired for $700,000 in cash and $100,000
in debt, the net assets of Colorado I.V. Associates, Inc./Specialized Nursing
Services, Inc. ("Colorado IV"). Colorado IV, located in Colorado, is a
pharmaceutical company specializing in providing home infusion therapy.

On September 30, 1995, in separate transactions, the Company acquired for
$597,000 in cash, the net assets of Newborn Nursing Services, Inc. ("Newborn
Nursing") and Charlie's Discount Drug, Inc. ("Charlie's"). Newborn Nursing,
located in Oklahoma, is a nursing company specializing in providing pediatric
nursing care services and providing leasing and selling of medical equipment.
Charlie's, located in Oklahoma, is a respiratory company specializing in
providing home respiratory equipment and supplies.

On October 31, 1995, in separate transactions, the Company acquired for
$2,952,000 in cash and $450,000 in debt, the net assets of A.M. Medical/Discount
Medical Equipment Company ("A.M. Medical"), Cross Timbers Visiting Nurses, Inc.
("Cross Timbers"), Specialty Med-Equip, Inc. ("Specialty Med-Equip"), and
Superior Med-Equip, Inc. ("Superior Med-Equip"). A.M. Medical, Cross Timbers,
Specialty Med-Equip, and Superior Med-Equip are located in Texas. Cross Timbers
specializes in providing home nursing services. A.M. Medical, Specialty
Med-Equip, and Superior Med-Equip specialize in providing home respiratory
equipment and supplies.

F-10
<PAGE> 56

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1994 Acquisitions

On April 12, 1994, the Company acquired, for $887,000 in cash and $200,000
in debt, all of the outstanding capital stock of Colfax Medical Supply and
Service Company, Inc. ("Colfax"). Colfax, located in New Mexico, is a
respiratory therapy company specializing in providing home medical and
respiratory equipment, supplies, and pharmaceuticals to patients.

On July 22, 1994, the Company acquired, for $500,000 in cash and $157,000
in debt, all of the outstanding capital stock of Ponca Medical Supply, Inc., a
respiratory company located in Oklahoma.

On November 1, 1994, the Company acquired for $1,000,000 in cash and
$500,000 in debt, all of the outstanding capital stock of Physician's Home
Health Network, Inc. (PHHN). At acquisition date, PHHN's liabilities exceeded
its assets by approximately $451,000. PHHN is a nursing company located in
Missouri, which specializes in providing home nursing care to patients.

The 1995 and 1994 acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets acquired (including all identifiable intangible assets, if material) and
liabilities assumed based upon their estimated fair values at the dates of
acquisition in accordance with APB No. 16. The results of operations of the
acquired practices are included in the consolidated financial statements from
the respective dates of acquisition. None of the acquisition agreements contain
earn-out provisions with the sellers.

Pro Forma Information

The following unaudited pro forma information reflects the effect on the
consolidated statements of income assuming that significant acquisitions were
consummated as of January 1, 1994 and 1995. This information does not purport to
be indicative of the results that would have actually been obtained if the
acquisitions had occurred on such dates. Therefore, pro forma information cannot
be considered indicative of future operations. The unaudited proforma
information for the years ended December 31, 1994 and 1995 is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Net revenues................................................... $84,988 $94,258
Net income..................................................... 2,539 4,239
Net income per common share.................................... .39 .65
</TABLE>

5. CREDIT FACILITIES:

The Company has a $5,000,000 revolving line of credit from a bank which
contains certain financial covenants with respect to maintenance of a maximum
ratio of funded debt to adjusted earnings, a minimum current ratio, and a
minimum fixed charge coverage ratio. The line of credit expires on June 30,
1997, and provides for the quarterly payment to the bank of a .25% commitment
fee on the unused portion of the line. Interest is payable at the bank's prime
rate. In addition to the borrowings of $2,475,000 at December 31, 1995, the
Company has committed $200,000 of the line to a letter of credit issued in
connection with the Company's workers' compensation coverage. In 1996, an
additional $165,000 of the line will be committed to obtain a separate letter of
credit in connection with other workers' compensation coverage.

The Company has a $20,000,000 advance-type term facility from the same bank
to be used in connection with acquisitions, which contains the same financial
covenants as above. At December 31, 1995, advances drawn for acquisitions under
this facility totaled $14,230,000, with varying repayment terms as discussed in
Note 5. The facility provides for a quarterly payment of a .25% commitment fee
on the unused amount of the

F-11
<PAGE> 57

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

facility. Interest is payable at either the bank's prime rate or at the
Eurodollar rate plus a specified margin. At December 31, 1995, the applicable
Eurodollar rate was 5.9375%, and the margin was 1.75%. Borrowings on both the
revolving line and acquisition facility are collateralized by substantially all
operating assets of the Company.

The Company is in the process of refinancing all bank debt and is seeking
to increase its working capital line of credit from $5,000,000 to $10,000,000,
to refinance its current bank debt, and to secure an additional acquisition
facility of approximately $5,000,000. It is anticipated that the existing
financial covenants, certain of which the Company was not in compliance with at
December 31, 1995, but were waived by the lender, will also be restructured as
part of the refinancing. The Company is evaluating proposals from several
sources and plans to complete the refinancing during 1996.

6. LONG-TERM DEBT:

Long-term obligations consist of the following:

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Notes payable to individuals in connection with
acquisitions; principal and interest payable monthly at
rates ranging from 6% to 9.5%, matures through September
1998, unsecured......................................... $ 1,716,750 $ 1,661,066
Notes payable to a bank; principal and interest payable
monthly at variable rates (7.6875% at December 31, 1995)
and at rates ranging from prime to prime plus 2 1/4%;
matures through June 1999............................... 130,343 8,467,796
Advance-type facilities with a bank; interest payable
monthly at rates ranging from prime to prime plus 1/4%
or Eurodollar based at the Company's option, matures
through March 1998...................................... 1,908,420 4,505,348
Other..................................................... 30,401 291,395
----------- -----------
3,785,914.. 14,925,605
less: current portion..................................... (1,284,503) (4,256,973)
----------- -----------
$2,501,411.. $10,668,632
=========== ===========
</TABLE>

Aggregate maturities of long-term obligations subsequent to December 31,
1995, are as follows:

<TABLE>
<S> <C>
1996............................................................ $ 4,256,973
1997............................................................ 5,364,696
1998............................................................ 1,916,303
1999............................................................ 3,387,633
2000............................................................ --
-----------
14,925,605
Less -- Current portion......................................... (4,256,973)
-----------
Total................................................. $10,668,632
===========
</TABLE>

F-12
<PAGE> 58

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LEASE COMMITMENTS:

The Company leases office space, furniture, and equipment under
noncancelable operating lease agreements which expire on various dates to 2000
and contain renewal options for up to 5 years.

The Company leases various office equipment under capital lease
arrangements. The capitalized value of leases amounted to approximately
$1,270,000 and $4,217,000 at December 31, 1994 and 1995, respectively, and net
book value amounted to approximately $495,000 and $2,584,000 at December 31,
1994 and 1995, respectively. Future minimum lease payments at December 31, 1995,
under the capital leases and noncancelable operating leases with initial or
remaining terms of one year or more are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
1996...................................................... $1,489,447 $1,114,050
1997...................................................... 752,925 963,584
1998...................................................... 508,757 817,919
1999...................................................... 439,750 26,992
2000...................................................... 319,430 --
---------- ----------
Total minimum payments...................................... $3,510,309 2,922,545
==========
Amount representing interest................................ (463,436)
----------
Present value of minimum payments........................... 2,459,109
Current portion............................................. (862,505)
----------
Total....................................................... $1,596,604
==========
</TABLE>

Rent expense under all operating leases was approximately $1,151,000,
$1,428,000, and $2,270,000 for the years ended December 31, 1993, 1994, and
1995, respectively.

8. INCOME TAXES:

The provision for income taxes includes the following components:

<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal............................................. $1,171,397 $1,017,755 $ 2,896,714
State............................................... 156,644 138,553 329,962
---------- ---------- ----------
1,328,041 1,156,308 3,226,676
---------- ---------- ----------
Deferred:
Federal............................................. (164,916) 193,317 (944,878)
State............................................... (33,300) 9,773 (79,431)
---------- ---------- ----------
(198,216) 203,090 (1,024,309)
---------- ---------- ----------
Total....................................... $1,129,825 $1,359,398 $ 2,202,367
========== ========== ==========
</TABLE>

F-13
<PAGE> 59

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The reconciliation of the provision for income taxes to the federal
statutory rate is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income taxes at statutory rate................. $ 905,201 $1,151,224 $1,967,204
Amortization................................... 79,328 77,351 108,954
State taxes, net of federal tax effect......... 81,406 97,895 165,350
Tax credits utilized........................... -- -- (92,500)
Other.......................................... 63,890 32,928 53,359
---------- ---------- ----------
$1,129,825 $1,359,398 $2,202,367
========== ========== ==========
</TABLE>

Deferred tax assets and deferred tax liabilities consist of the following
items:

<TABLE>
<CAPTION>
1993 1994 1995
---------- --------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Bad debts.................................... $ 343,612 $ 215,378 $ 598,991
Self-insurance and workers' compensation..... 114,822 -- 542,254
Amounts due to third-party payor............. 646,000 361,000 554,361
Accrued compensation......................... 123,066 165,734 193,841
State current liability...................... -- 52,381 106,702
Net operating loss carryforwards............. 168,023 61,508 --
Other........................................ 1,539 5,838 7,179
---------- --------- ----------
Total................................ 1,397,062 861,839 2,003,328
---------- --------- ----------
Deferred tax liabilities:
Depreciation and amortization................ (291,879) (92,722) (469,169)
Other........................................ (38,594) (55,019) --
---------- --------- ----------
Total................................ (330,473) (147,741) (469,169)
---------- --------- ----------
Other tax liability............................ (106,867) (64,370) (37,147)
---------- --------- ----------
Total net assets............................... $ 959,722 $ 649,728 $1,497,012
========== ========= ==========
</TABLE>

9. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

In connection with an acquisition, the Company sold 2,000,000 shares of its
Series A preferred stock ($.01 par value) for $2,000,000, less issuance costs of
$85,532 to an unrelated entity. Each share has a liquidation preference of $1.00
per share, plus accrued dividends. Dividends per share are cumulative at $.20
per annum ($400,000) and are payable only upon liquidation, dissolution,
redemption, or upon certain other events. At the holder's option, the shares are
convertible into 2,000,000 shares of the Company's common stock.

In connection with an acquisition, the Company issued 1,071,438 shares of
its Series B preferred stock ($.01 par value) for $3,000,025 to the Series A
preferred stock investor and an unrelated investor and 178,575 shares of its
Series B preferred stock for $500,010 to the Company's Employee Stock Ownership
Trust (ESOT). The Company paid $72,636 in costs associated with these two
issuances. The Series B preferred shares have a ratable liquidation preference
with the Series A preferred stock. The liquidation preference is $2.80 per
share, plus accrued dividends. The Series B preferred shares carry a 10% annual
dividend rate which is cumulative in nature and payable as declared by the
Company's Board of Directors or upon liquidation, dissolution, redemption, or
upon certain other events. At the holder's option, the Series B preferred shares
are convertible into 1,562,517 shares of the Company's common stock. The
conversion rate is subject to adjustment up to 312,503 common shares based on
the Company's post issuance earnings level. On

F-14
<PAGE> 60

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

November 28, 1994, the 178,575 Series B preferred shares held by the ESOT were
converted to 223,220 common shares. The Series B preferred shares carry a
ratable dividend preference with the Series A preferred stock over all other
existing equity issues.

The shareholders of the Series A and Series B preferred stock are eligible
to vote on all matters put to the common shareholders. The preferred shares
carry voting power equivalent to the number of shares into which the preferred
shares are convertible. The Series A and Series B preferred shares are also
subject to mandatory redemption at such time as the Company's Chairman and Chief
Executive Officer ceases to devote substantially all of his working time on
behalf of the Company, the sale of the Company, or October 15, 1997, whichever
date occurs first. The Company has no funding requirements prior to redemption.

The Series A and Series B preferred shareholders are obligated to convert
all preferred shares in the event the Company's common shares become registered
and traded on a national exchange, subject to certain requirements. Conversion
would eliminate the Company's obligation to pay cumulative unpaid dividends on
the Series A and Series B preferred stock of $2,079,726 and $1,075,010,
respectively, as of December 31, 1995.

10. EMPLOYEE BENEFIT PLANS:

The Company has an incentive and qualified stock option plan and has
reserved 387,500 shares of the Company's common stock for issuance. Options to
purchase shares of the Company's common stock have been granted to nonofficer
and noninvestor directors and key employees. Options are granted at a price
determined by the Board of Directors, which approximates the fair value of the
shares at the dates of grant. Accordingly, no compensation expense is recorded
by the Company. Options granted become exercisable at the rate of 1/3 per year,
and expire 10 years after the date of grant. Information on stock options is as
follows:

<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at beginning of year............ 196,250 148,750 301,375
Granted..................................... 31,250 163,875 118,253
Exercised................................... (25,000) -- (2,083)
Canceled.................................... (53,750) (11,250) (57,918)
------------ ------------ ------------
Outstanding at end of year.................. 148,750 301,375 359,627
============ ============ ============
Exercisable at end of year.................. 57,500 93,338 157,940
============ ============ ============
Price range................................. $.80 - $5.44 $.80 - $6.00 $.80 - $7.04
============ ============ ============
</TABLE>

On April 1, 1990, the Company established an employee stock ownership plan
(ESOP), which will award shares of the Company's common stock on a
noncontributory basis to eligible employees of the Company. The Company
contributed 87,500 and 125,000 common shares in 1993 and 1994, respectively. The
Company made no contributions to the ESOP in 1994.

Effective April 1, 1991, the Company formed a deferred compensation plan
structured under Section 401(k) of the Internal Revenue Code. The plan covers
substantially all employees meeting certain minimum service requirements. Under
the plan, contributions are made by the employees and matched by the Company
subject to certain limitations. The Company's contribution to this plan was
approximately $70,000, $101,000, and $105,000 for the years ended December 31,
1993, 1994, and 1995, respectively.

11. COMMITMENTS AND CONTINGENCIES:

The Company, in the normal course of business, is party to various matters
of litigation. Management is of the opinion that the eventual outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.

F-15
<PAGE> 61

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company self-insures its employees and their dependents for injury and
hospitalization. The Company self-insures claims up to $75,000 per person, with
an insurance company covering claims in excess of this amount up to a maximum of
$1,000,000 per person. The Company has paid or accrued claims of approximately
$1,445,000, $1,609,000, and $1,056,000 for the years ended December 31, 1993,
1994, and 1995, respectively.

In May 1993, the Company learned that a complaint against the Company was
filed with the Federal Government and that such complaint was being reviewed.
Shortly thereafter at a meeting requested by the Company, the FBI agent assigned
to the matter would not disclose the nature of such complaint. The Company
subsequently learned that at least one of its former employees had been
interviewed by the government in connection with the complaint. On April 17,
1995, the U.S. Attorney for the Northern district of Texas served the Company
with grand jury subpoenas duces tecum ("Subpoenas"). The Subpoenas sought
production of personnel and payroll records for the period January 1, 1991, to
April 17, 1995 concerning 155 of the Company's current and former employees and
certain other payroll tax information, as well as invoices from the Company's
independent auditing firm. The Company tendered documents responsive to the
Subpoenas on May 31, 1995. Since the production of such documents, no request
for additional information has been made by the U.S. Attorney and the FBI agent
in charge of the matter called counsel for the Company and informed him that the
subpoenaed records would be returned to the Company. No further action has been
taken by the government in connection with this matter, however, there can be no
assurance that the U.S. Attorney or any other government agency will not request
further information or pursue a civil or criminal investigation or proceeding
against the Company or its management. Such investigation or proceeding, if
commenced, could result in one or more of the following: no action, fines, civil
monetary penalties, criminal indictments, recovery of overpayments, criminal
restitution, settlements, civil judgments and exclusion of the Company or
individuals from the Medicare program.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS:

On January 1, 1995, the Company adopted the Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments." Cash and cash equivalents, accounts receivable, and accounts
payable and accrued liabilities are reflected in the consolidated financial
statements at fair value because of the short-term maturity of those
instruments. In addition, the fair value of the Company's long-term debt and
capital lease obligations were determined to approximate its carrying value
since (i) a substantial amount of the December 31, 1995, long-term debt and
capital lease obligations were issued at fair market value during 1995, and (ii)
certain long-term debt amounts are interest rate variable in nature.

13. SUBSEQUENT EVENTS:

Subsequent to year-end, the Company acquired, for $800,000 in cash and
$200,000 in debt, the net assets of All Medical, Inc., a company located in
Wichita Falls, Texas, and engaged in selling and leasing medical equipment and
supplies to the home healthcare industry. The acquisition was funded through an
advance on the acquisition term facility and was accounted for under the
purchase method.

Additionally, subsequent to year-end, the Company signed a letter of intent
to purchase an infusion therapy services and respiratory therapy equipment
company (I Care for Arkansas, Inc. and Affiliate and I Care, Inc.) for
$12,750,000. The Company anticipates funds for this acquisition will be obtained
through additional bank financing. This acquisition, if completed, will be
accounted for as a purchase.

The Company is currently in the process of an initial public offering (the
"Offering") of its common stock, $.01 par value. The Company plans to use the
net proceeds from the Offering (i) to repay outstanding indebtedness under its
bank credit facilities, (ii) to fund potential acquisitions, and (iii) for
general corporate purposes. On June , 1996, the Company declared a 5 for 2
stock split in the form of a stock dividend of its common stock. The
accompanying consolidated financial statements give retroactive effect to the
stock split.

F-16
<PAGE> 62

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition to the stock split, the Company increased the number of authorized
preferred shares to 10,000,000 and the number of authorized common shares to
40,000,000. In connection with the Offering, the Company's redeemable
convertible preferred stocks will be converted into 3,339,297 shares of common
stock. In addition, the 150,000 warrants will be exercised and converted into
common stock. The pro forma information below gives effect to such conversion at
December 31, 1995.

<TABLE>
<CAPTION>
DECEMBER 31, 1995 (UNAUDITED)
-------------------------------------------------
AS STATED PRO FORMA
----------------------- -----------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Redeemable convertible preferred stock:
Series A and B preferred stocks....... 3,071,438 $ 30,714 -- $ --
Additional paid-in capital............ -- 5,309,100 -- --
Stockholders' equity:
Common stock.......................... 3,062,803 30,628 6,552,100 65,521
Additional paid-in capital............ -- 2,471,129 -- 8,076,051
Retained earnings..................... -- 9,560,229 -- 9,560,229
----------- -----------
Total stockholders' equity.... $12,061,986 $17,701,801
=========== ===========
</TABLE>

F-17
<PAGE> 63

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C>
Current assets:
Accounts receivable, net of allowance for doubtful accounts of $4,901,671..... $15,328,226
Supplies inventory............................................................ 1,626,657
Prepaid expenses and other.................................................... 1,247,962
Deferred income taxes......................................................... 2,420,246
-----------
Total current assets.................................................. 20,623,091
Property and equipment, net..................................................... 13,377,565
Excess of cost of acquired businesses over fair values of net assets acquired,
net........................................................................... 23,192,834
-----------
Total assets.......................................................... $57,193,490
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................................... $ 8,622,793
Accrued payroll and related expenses.......................................... 4,782,987
Estimated settlements with third-party payors................................. 322,566
Line of credit payable........................................................ 2,900,000
Current portion of long-term debt and capital lease obligations............... 5,571,391
Income taxes payable.......................................................... 1,172,929
-----------
Total current liabilities............................................. 23,372,666
Deferred income taxes and other................................................. 3,841,126
Long-term debt and capital lease obligations.................................... 11,606,610
-----------
Total liabilities..................................................... 38,820,402
Commitments and contingencies
Redeemable convertible preferred stock.......................................... 5,339,814
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares authorized; 3,062,803 shares
issued and outstanding..................................................... 30,628
Additional paid-in capital.................................................... 2,471,129
Retained earnings............................................................. 10,531,517
-----------
Total stockholders' equity............................................ 13,033,274
-----------
Total liabilities and stockholders' equity............................ $57,193,490
===========
</TABLE>

The accompanying notes are an integral part of this condensed consolidated
balance sheet.

F-18
<PAGE> 64

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net revenues...................................................... $17,552,547 $24,254,490
Operating expenses:
Compensation and related benefits............................... 11,368,292 13,371,684
General and administrative...................................... 4,109,331 7,349,313
Depreciation and amortization................................... 473,341 893,716
Provision for doubtful accounts................................. 342,221 506,129
----------- -----------
Total operating expenses................................ 16,293,185 22,120,842
----------- -----------
Income from operations............................................ 1,259,362 2,133,648
Interest, net..................................................... (118,966) (485,900)
----------- -----------
Income before income taxes........................................ 1,140,396 1,647,748
Provision for income taxes........................................ 437,713 676,462
----------- -----------
Net income........................................................ $ 702,683 $ 971,286
=========== ===========
Net income per common share....................................... $ .11 $ .15
=========== ===========
Weighted average common shares outstanding........................ 6,489,220 6,543,430
=========== ===========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

F-19
<PAGE> 65

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities............................. $ (296,157) $(2,097,416)
----------- -----------
Cash flows from investing activities:
Payments for business acquisitions, net of cash acquired.......... (2,890,701) (55,883)
Additions to property and equipment............................... (416,332) (3,040,508)
----------- -----------
Net cash used in investing activities..................... (3,307,033) (3,096,391)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and capital leases....... 5,463,697 1,062,190
Payments on long-term debt and capital leases..................... (909,024) (843,904)
----------- -----------
Net cash provided by financing activities................. 4,554,673 218,286
----------- -----------
Net increase (decrease) in cash and cash equivalents................ 951,483 (4,975,521)
Cash and cash equivalents, beginning of period...................... 3,774,848 1,627,940
Amount reflected as an overdraft in accounts payable and accrued
expenses.......................................................... -- 3,347,581
----------- -----------
Cash and cash equivalents, end of period............................ $ 4,726,331 $ --
=========== ===========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

F-20
<PAGE> 66

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. Operating results for the three-
month period ended March 31, 1996, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.

2. ACQUISITIONS:

Effective April 1, 1996, the Company acquired, for $800,000 in cash and
$200,000 in debt, the net assets of All Medical, Inc., a company located in
Wichita Falls, Texas and engaged in selling and leasing medical equipment and
supplies to the home healthcare industry.

Additionally, during 1996, the Company signed a letter of intent to
purchase an infusion therapy services and respiratory therapy equipment company
for $12,750,000. The Company anticipates funds for this acquisition will be
obtained through additional bank financing. The Company completed the
acquisition in April 1996.

Both acquisitions will be accounted for using the purchase method of
accounting. Accordingly, the purchase price will be allocated to the assets
acquired (including all identifiable intangible assets, if material) and
liabilities assumed based upon their estimated fair values at the dates of
acquisition in accordance with APB 16. The excess of the total acquisition costs
over the fair value of the net assets acquired was approximately $9.7 million.
The results of operations of the acquired businesses have been included in the
condensed consolidated statement of income since the dates of acquisition.

3. CREDIT FACILITY:

On May 16, 1996, the Company obtained a $35.0 million credit facility from
a bank, consisting of a $10.0 million revolving line of credit and a $25.0
million term facility to be used to finance acquisitions. The Company's assets
have been pledged as security for borrowings under the credit facility. As of
May 31, 1996, the Company had used all of the term portion of the credit
facility, but there was $5.6 million outstanding under the line of credit. At
the Company's option, borrowings under the credit facility bear interest at
either the bank's Eurodollar rate plus rates ranging from 1.25% to 2.75%, or the
bank's prime rate plus rates ranging from 0% to 0.75%, determined by the ratio
of funded debt to EBITDA, (defined as earnings before interest, taxes,
depreciation and amortization.)

4. INITIAL PUBLIC OFFERING:

The Company is currently in the process of an initial public offering (the
"Offering") of its common stock, $.01 par value. The Company plans to use the
net proceeds from the Offering (i) to repay outstanding indebtedness under its
bank credit facilities, (ii) to fund potential acquisitions, and (iii) for
general corporate purposes. On June , 1996, the Company declared a 5 for 2
stock split in the form of a stock dividend of its common stock. In addition,
the Company increased the number of authorized preferred shares to 10,000,000
and the number of authorized common shares to 40,000,000.

F-21
<PAGE> 67

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the Offering, the Company's redeemable convertible
preferred stocks will be converted into 3,339,297 shares of common stock. In
addition, 150,000 warrants will be exercised and converted into common stock.
The pro forma information below gives effect to such conversion at March 31,
1996.

<TABLE>
<CAPTION>
MARCH 31, 1996 (UNAUDITED)
-------------------------------------------------
AS STATED PRO FORMA
----------------------- -----------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Redeemable convertible preferred stock:
Series A and B preferred stocks....... 3,071,438 $ 30,714 -- $ --
Additional paid-in capital............ -- 5,309,100 -- --
Stockholders' equity:
Common stock.......................... 3,062,803 30,628 6,552,100 65,521
Additional paid-in capital............ -- 2,471,129 -- 8,076,050
Retained earnings..................... -- 10,531,517 -- 10,531,517
----------- -----------
Total stockholders' equity.... $13,033,274 $18,673,088
=========== ===========
</TABLE>

F-22
<PAGE> 68

INDEPENDENT AUDITORS' REPORT

To the Board of Directors,
I Care of Arkansas, Inc. and Affiliate:

We have audited the accompanying combined balance sheets of I Care of Arkansas,
Inc. and Affiliate as of December 31, 1994 and 1995, and the related combined
statements of income, retained earnings, and cash flows for each of the three
years in the period ended December 31, 1995. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of I Care of
Arkansas, Inc. and Affiliate as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

BELL & COMPANY

February 28, 1996, except as to
Note 10, for which the date is
April 15, 1996

F-23
<PAGE> 69

I CARE OF ARKANSAS, INC. AND AFFILIATE

COMBINED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 326,219 $ 807,799
Accounts receivable, net of allowance for uncollectibles of
$456,709 and $1,906,524 in 1994 and 1995, respectively......... 2,570,203 3,315,727
Receivables from related companies................................ 11,520 271,852
Other receivables................................................. 224,771 421,253
Prepaid expenses.................................................. 16,333 19,891
---------- ----------
Total current assets...................................... 3,149,046 4,836,522
Property and equipment:
Land and building................................................. 121,052 121,052
Leasehold improvements............................................ 272,265 272,305
Machinery and equipment........................................... 464,484 470,434
Vehicles.......................................................... 99,649 63,049
---------- ----------
957,450 926,840
Accumulated depreciation and amortization......................... (515,225) (582,560)
---------- ----------
Net property and equipment................................ 442,225 344,280
Other assets........................................................ 6,285 55
---------- ----------
Total assets.............................................. $3,597,556 $5,180,857
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable -- bank.............................................. $ 200,000 --
Note payable -- stockholder....................................... -- 1,000,000
Accounts payable -- trade......................................... 1,381,686 1,444,316
Accounts payable -- related companies............................. 1,593 24,014
Accrued expenses.................................................. 211,199 325,603
Current portion of long-term debt................................. 6,882 7,435
---------- ----------
Total current liabilities................................. 1,801,360 2,801,368
Long-term debt...................................................... 169,278 161,843
---------- ----------
Total liabilities......................................... 1,970,638 2,963,211
Stockholders' equity:
Common stock, $1 par value; 300 shares authorized, issued and
outstanding.................................................... 300 300
Additional paid-in capital........................................ 239,800 239,800
Retained earnings................................................. 1,386,818 1,977,546
---------- ----------
Total stockholders' equity................................ 1,626,918 2,217,646
---------- ----------
Total liabilities and stockholders' equity................ $3,597,556 $5,180,857
========== ==========
</TABLE>

The accompanying notes are an integral part of these combined balance sheets.

F-24
<PAGE> 70

I CARE OF ARKANSAS, INC. AND AFFILIATE

COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Patient service revenue.......................... $11,245,649 $15,794,202 $ 20,040,403
Allowances and uncollectibles.................... (5,271,204) (7,891,597) (10,108,413)
----------- ----------- ------------
Net revenues............................. 5,974,445 7,902,605 9,931,990
Cost of services provided.......................... 2,127,476 3,257,289 4,353,253
----------- ----------- ------------
Gross profit....................................... 3,846,969 4,645,316 5,578,737
----------- ----------- ------------
Operating expenses:
Compensation and related benefits................ 2,339,637 2,637,322 2,919,659
Depreciation..................................... 106,343 96,745 101,375
Interest......................................... 16,579 20,725 15,072
Other operating expenses......................... 1,005,624 982,253 1,225,235
----------- ----------- ------------
Total operating expenses................. 3,468,183 3,737,045 4,261,341
----------- ----------- ------------
Other income:
Interest......................................... 23,197 18,163 28,142
Other............................................ 163,923 98,821 90,516
Loss on sale of assets........................... (1,744) -- --
----------- ----------- ------------
Total other income....................... 185,376 116,984 118,658
----------- ----------- ------------
Net income......................................... $ 564,162 $ 1,025,255 $ 1,436,054
=========== =========== ============
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-25
<PAGE> 71

I CARE OF ARKANSAS, INC. AND AFFILIATE

COMBINED STATEMENTS OF RETAINED EARNINGS

<TABLE>
<S> <C>
Balance, December 31, 1992, as previously stated................................. $ 263,613
Prior year adjustment -- Note 9................................................ (82,442)
----------
Balance, December 31, 1992, as restated.......................................... 181,171
Net income..................................................................... 564,162
Dividends paid................................................................. (99,667)
----------
Balance, December 31, 1993....................................................... 645,666
Net income..................................................................... 1,025,255
Dividends paid................................................................. (366,545)
----------
Balance, December 31, 1994....................................................... 1,304,376
Net income..................................................................... 1,436,054
Dividends paid................................................................. (762,884)
----------
Balance, December 31, 1995....................................................... $1,977,546
==========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-26
<PAGE> 72

I CARE OF ARKANSAS, INC. AND AFFILIATE

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 564,162 $1,025,255 $ 1,436,054
Prior period adjustment -- Note 9.................. -- -- (82,442)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 106,577 96,800 101,375
Loss on sale of assets.......................... 1,744 -- 2,560
Change in operating assets and liabilities:
Accounts receivable........................... 695,728 (724,635) (1,202,340)
Other current assets.......................... (29,232) 19,473 (3,558)
Accounts payable.............................. (1,359,003) 77,832 85,050
Accrued expenses.............................. (177) 32,316 114,405
----------- ---------- -----------
Net cash provided by (used in) operating
activities............................... (20,201) 527,041 451,104
----------- ---------- -----------
Cash flows from investing activities:
Additions to property and equipment................ (16,625) (167,372) (5,990)
Proceeds from sale of property and equipment....... 20,000 -- --
Collections of notes receivable.................... 105,952 57,000 --
Reduction in other assets.......................... -- 671 6,231
----------- ---------- -----------
Net cash provided by (used in) investing
activities............................... 109,327 (109,701) 241
----------- ---------- -----------
Cash flows from financing activities:
Proceeds from note payable to stockholder.......... -- -- 1,000,000
Repayment of note payable.......................... 300,000 (100,000) (200,000)
Proceeds from long-term borrowings................. 110,000 180,000 --
Principal payments of long-term debt............... (107,518) (98,454) (6,881)
Dividends paid..................................... (99,667) (366,545) (762,884)
----------- ---------- -----------
Net cash provided by (used in) financing
activities............................... 202,815 (384,999) 30,235
----------- ---------- -----------
Net increase in cash................................. 291,941 32,341 481,580
Cash and cash equivalents, beginning of period....... 1,937 293,878 326,219
----------- ---------- -----------
Cash and cash equivalents, end of period............. $ 293,878 $ 326,219 $ 807,799
=========== ========== ===========
Supplemental disclosure of cash flow information:
Interest paid...................................... $ 11,753 $ 18,163 $ 12,286
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-27
<PAGE> 73

I CARE OF ARKANSAS, INC. AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Combination

The accompanying combined financial statements include the accounts of I
Care of Arkansas, Inc. and I Care Home IV Affiliates, Inc. (the "Company") which
are under common control. Intercompany transactions and balances have been
eliminated in combination.

Nature of Business

I Care of Arkansas, Inc. was established in March 1992 in Little Rock,
Arkansas, for the purpose of providing home IV and nutritional services to
patients throughout Arkansas by utilizing a network of local free-standing
facilities strategically located with the state.

I Care Home IV Affiliates, Inc. is an Arkansas-based corporation which
provides managerial and clinical support for pharmacies in the home IV therapy
business throughout the United States.

Basis of Accounting

The Company uses the accrual basis of accounting. The Company uses the cash
basis of accounting for income tax purposes.

Accounts Receivable

Uncollectible accounts receivable are provided for using the allowance
method based on historical experience and management's evaluation of outstanding
accounts receivable at the end of each year. The allowance for uncollectibles
consists of amounts expected to be adjusted due to certain contractual
agreements with third-party payors as well as anticipated bad debts.

Property and Equipment

Property and equipment are recorded at cost. Additions and improvements are
capitalized. Ordinary maintenance and repair expenses are charged to expense as
incurred. Depreciation is provided by using straight-line and accelerated
methods over estimated useful lives of related assets which range from 3 to 7
years. Leasehold improvements are amortized using the straight-line method over
lives ranging from 7 to 10 years.

Income Taxes

The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be S corporations. In lieu of corporation income taxes
the Company's shareholders are taxed on their proportionate share of the
Company's taxable income. Therefore, no provision or liability for income taxes
has been included in these combined financial statements.

Use of Estimates

F-28
<PAGE> 74

I CARE OF ARKANSAS, INC. AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

2. OTHER RECEIVABLES:

I Care of Arkansas, Inc. has an operating agreement with Abbott Labs
("Abbott") under which Abbott reimburses the Company for certain pharmaceutical
products and provides certain other pharmaceutical products for the Company to
use in patient treatment. In return, the Company pays commissions to Abbott
based on various contracted percentages of collected revenues. At December 31,
1993, 1994, and 1995, approximately $397,000, $224,000, and $417,000,
respectively, in amounts due from Abbott was included in the accounts
receivable. Additionally, $1,036,787, $1,118,372, and $1,398,853 was accrued and
included in accounts payable for commissions to Abbott for uncollected revenues
included in accounts receivable at December 31, 1993, 1994, and 1995,
respectively.

3. RELATED-PARTY TRANSACTIONS:

Family Medical Center Pharmacy, Inc. is a corporation having common
ownership with I Care of Arkansas, Inc. During 1993, 1994, and 1995, Family
Medical Center Pharmacy, Inc. paid management fees to I Care of Arkansas, Inc.
totaling $24,000, $24,000, and $22,000, respectively.

I Care, Inc. is a corporation having common ownership with I Care of
Arkansas, Inc. During 1993, 1994, and 1995, I Care, Inc. paid management fees to
I Care of Arkansas, Inc. totaling $60,000 annually.

During 1994, I Care of Arkansas, Inc. purchased commercial real estate for
its Fort Smith operations from a stockholder for approximately $121,000. The
property had an appraisal value of $225,000.

4. NOTES PAYABLE:

I Care of Arkansas, Inc. has a note payable on demand to a stockholder,
bearing interest at 8.5%, secured by accounts receivable, property and
equipment. Outstanding borrowings at December 31, 1995 were $1,000,000.

In 1994, I Care of Arkansas, Inc. had a line of credit with a commercial
bank which provides for short-term borrowings up to $500,000 secured by accounts
receivable, property and equipment. Interest accrues on advances at Chase prime
rate (8.25% at December 31, 1994). Outstanding borrowings at December 31, 1994
were $200,000.

5. LONG-TERM DEBT:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
7.5% note payable to a bank in monthly installments of $1,695,
including interest, through June 1999, secured by real
estate....................................................... $176,160 $169,278
Less: Current maturities....................................... (6,882) (7,435)
-------- --------
Long-term debt, less current maturities........................ $169,278 $161,843
======== ========
</TABLE>

Annual aggregate maturities of long-term debt are as follows:

F-29
<PAGE> 75

I CARE OF ARKANSAS, INC. AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

6. PROFIT SHARING PLAN:

The Company has a trusteed, noncontributory profit sharing plan covering
substantially all employees. The Company may contribute amounts as determined by
the Board of Directors, not in excess of the lesser of the maximum deduction
allowable for income tax purposes or a specific percentage of the operating
profits of the Company, as defined in the plan. The Company made contributions
to the plan as follows:

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
I Care of Arkansas, Inc............................... $27,720 $38,612 $40,645
======= ======= =======
I Care Home IV Affiliates, Inc........................ $ 6,120 $ 6,685 $ 2,045
======= ======= =======
</TABLE>

7. LEASE COMMITMENTS:

The Company leases certain vehicles and facilities under noncancelable
operating leases which expire in various years through 2002.

Future minimum lease payments under these noncancelable operating leases
are as follows:

<TABLE>
<S> <C>
1996.............................................................. $285,305
1997.............................................................. 149,325
1998.............................................................. 89,729
1999.............................................................. 68,944
2000.............................................................. 71,627
Thereafter........................................................ 124,800
</TABLE>

Rent expense under all operating leases was approximately $226,475, $258,451,
and $257,202 for the years ended December 31, 1993, 1994, and 1995,
respectively.

8. CONTINGENCIES:

The Company is involved in various legal and regulatory proceedings which
have arisen in the ordinary course of its business and have not been finally
adjudicated. These actions, when ultimately concluded or determined, will not,
in the opinion of management, have a material adverse impact upon the Company's
combined financial position, results of operations or liquidity.

9. PRIOR PERIOD ADJUSTMENT:

Subsequent to December 31, 1995, the Company made a refund to Medicare in
the amount of $82,442 for overpayment of goods and services provided during
1991. An accrual has been provided for this amount on the accompanying financial
statements as a charge to beginning retained earnings.

10. SUBSEQUENT EVENT:

On April 15, 1996, the Company and HealthCor Holdings, Inc. ("HealthCor"),
a Dallas-based home healthcare services provider, entered into an asset purchase
agreement whereby HealthCor agreed to purchase certain assets and assume certain
liabilities of the Company for approximately $12,050,000.

F-30
<PAGE> 76

INDEPENDENT AUDITORS' REPORT

To the Board of Directors,
I Care, Inc.:

We have audited the balance sheets of I Care, Inc. d/b/a I Care Health Services
(an Arkansas corporation) as of March 31, 1995 and 1996, and the related
statements of income, retained earnings, and cash flows for each of the three
years in the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of I Care, Inc. as of March 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles.

BELL & COMPANY

April 18, 1996

F-31
<PAGE> 77

I CARE, INC.
D/B/A
I CARE HEALTH SERVICES

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1995 1996
-------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $119,220 $ 89,996
Accounts receivable -- trade, net of allowance for uncollectibles
of $142,927 in 1995 and $101,679 in 1996, respectively.......... 553,450 482,435
Receivable from affiliate.......................................... 21,615 30,225
Inventories........................................................ 56,177 73,657
Other current assets............................................... 100 35,713
Current deferred taxes............................................. 54,727 47,368
-------- ----------
Total current assets....................................... 805,289 759,394
Property and equipment:
Leasehold improvements............................................. 50,457 56,683
Machinery and equipment............................................ 56,563 81,929
Furniture and fixtures............................................. 8,762 15,310
Vehicles........................................................... 34,853 48,672
Rental equipment................................................... 818,765 1,321,899
-------- ----------
969,400 1,524,493
Accumulated depreciation........................................... (810,890) (878,060)
-------- ----------
Net property and equipment................................. 158,510 646,433
Other assets:
Goodwill, net of amortization...................................... 23,206 167,482
-------- ----------
Total assets............................................... $987,005 $1,573,309
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable....................................................... $ 60,000 --
-------- ----------
Accounts payable-
Trade........................................................... 49,223 59,170
Affiliate....................................................... 222,248 477,954
Accrued expenses................................................... 23,682 50,074
Income taxes payable............................................... 71,390 --
Current portion of long-term debt.................................. -- 155,184
-------- ----------
Total current liabilities.................................. 426,543 742,382
Long-term debt....................................................... -- 247,988
-------- ----------
Total liabilities.......................................... 426,543 990,370
Excess fair value of net assets of company acquired over cost........ 14,630 --
-------- ----------
Deferred income taxes................................................ 6,500 12,112
-------- ----------
Stockholders' equity:
Common stock, $1 par value; 1,000 shares authorized, issued and
outstanding..................................................... 1,000 1,000
Paid-in capital.................................................... 51,642 51,642
Retained earnings.................................................. 486,690 518,185
-------- ----------
Total stockholders' equity................................. 539,332 570,827
-------- ----------
Total liabilities and stockholders' equity................. $987,005 $1,573,309
======== ==========
</TABLE>

The accompanying notes are an integral part of these balance sheets.

F-32
<PAGE> 78

CARE, INC.
D/B/A
I CARE HEALTH SERVICES

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Sales revenues............................................. $1,821,561 $1,881,242 $2,580,477
Cost of sales.............................................. 672,963 659,645 819,620
---------- ---------- ----------
Gross profit............................................... 1,148,598 1,221,597 1,760,857
Operating expenses:
Compensation and related benefits........................ 658,517 745,292 1,191,744
Depreciation and amortization............................ 18,164 13,548 26,831
General and administrative............................... 398,704 366,852 485,838
---------- ---------- ----------
Total operating expenses......................... 1,075,385 1,125,692 1,704,413
Other income (expense):
Interest income.......................................... 2,002 2,330 3,997
Interest expense......................................... (740) -- (15,975)
---------- ---------- ----------
Total other income (expense)..................... 1,262 2,330 (11,978)
---------- ---------- ----------
Income before income taxes................................. 74,475 98,235 44,466
Income taxes............................................... 43,577 25,380 12,971
---------- ---------- ----------
Net income................................................. $ 30,898 $ 72,855 $ 31,495
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-33
<PAGE> 79

I CARE, INC.
D/B/A
I CARE HEALTH SERVICES

STATEMENTS OF RETAINED EARNINGS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year................................. $382,937 $413,835 $486,690
Net income............................................... 30,898 72,855 31,495
-------- -------- --------
Balance, end of year....................................... $413,835 $486,690 $518,185
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-34
<PAGE> 80

I CARE, INC.
D/B/A
I CARE HEALTH SERVICES

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 30,898 $ 72,855 $ 31,495
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 231,486 227,297 189,695
Amortization of excess fair value of net assets of
company acquired over cost....................... (28,666) (28,815) (14,630)
Deferred taxes (benefit)........................... -- (48,227) 12,971
Change in current assets and liabilities:
Accounts receivables............................. (157,070) (5,514) 62,405
Inventories...................................... 11,492 (4,206) (17,480)
Other current assets............................. (3,366) 3,766 (35,613)
Refundable income taxes.......................... 5,256 -- --
Note payables.................................... 139,274 26,451 265,653
Accrued expenses................................. (119,806) 8,012 26,392
Income taxes payable............................. (9,296) 36,616 (71,390)
--------- --------- ---------
Net cash provided by operating activities..... 100,202 288,235 449,498
========= ========= =========
Cash flows from investing activities:
Purchase of intangibles............................... -- (23,352) (150,000)
Additions to property and equipment................... (67,696) (265,442) (212,030)
--------- --------- ---------
Net cash used by investing activities......... (67,696) (288,794) (362,030)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from note payable............................ -- 60,000 --
Payment of note payable............................... -- -- (60,000)
Proceeds from long-term borrowings.................... -- -- 265,000
Payment of long-term borrowings....................... -- -- (321,692)
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................. -- 60,000 (116,692)
--------- --------- ---------
Net increase (decrease) in cash......................... 32,506 59,441 (29,224)
Cash and cash equivalents, beginning of period.......... 27,273 59,779 119,220
--------- --------- ---------
Cash and cash equivalents, end of period................ $ 59,779 $ 119,220 $ 89,996
========= ========= =========
Supplemental disclosure of cash flow information:
Taxes paid............................................ $ 31,500 $ 38,600 $ 101,765
Interest paid......................................... -- -- 15,975
Property and equipment acquired through long-term
debt............................................... -- -- 459,864
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-35
<PAGE> 81

I CARE, INC.
D/B/A
I CARE HEALTH SERVICES

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Description of Business

I Care, Inc. (the "Company") is an Arkansas corporation which operates
under the name I Care Health Services. The Company provides healthcare
professionals and patients throughout Arkansas a complete line of home
healthcare equipment and supplies for sale or rental.

The Company has locations in Little Rock, Fort Smith, Fayetteville,
Jonesboro, and Texarkana. The Company's sister company, I Care of Arkansas,
Inc., provides home IV therapy services.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash equivalents include time
deposits and instruments with original maturities of three months or less.

Accounts Receivable

Uncollectible accounts receivable are provided for using the allowance
method based on historical experience and management's evaluation of outstanding
accounts receivable at the end of each year. All receivables which were
determined to be uncollectible at March 31, 1995 and 1996 have been provided for
in the applicable periods.

Inventories

Inventories consist of medical supplies and equipment and are carried at
the lower of cost (first-in, first-out method) or market.

Property and Equipment

Property and equipment are carried at cost. Depreciation has been provided
using the straight-line and accelerated methods over estimated useful lives of
related assets as follows:

<TABLE>
<CAPTION>
LIVES METHOD
------------- --------------
<S> <C> <C>
Leasehold improvements............................... 7 -- 10 years Accelerated
Machine and equipment................................ 5 -- 7 years Accelerated
Furniture and fixtures............................... 7 years Accelerated
Vehicles............................................. 5 -- 7 years Accelerated
Rental equipment..................................... 3 years Straight-line
</TABLE>

Total depreciation expense for the years ended March 31, 1994, 1995, and
1996 was $231,486, $227,151, and $189,695, respectively, of which $213,323,
$213,749, and $162,864, respectively, was included in cost of sales.

Goodwill

Goodwill is being amortized using the straight-line method over 15 years.

F-36
<PAGE> 82

I CARE, INC.
D/B/A
I CARE HEALTH SERVICES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Income Taxes

Deferred income taxes are based on timing differences between financial
statement and income tax reporting. Timing differences which give rise to
deferred tax assets and liabilities arise from differences in the deductibility
of the allowance for uncollectibles and from the use of accelerated methods of
depreciation.

Use of Estimates

Reclassifications

Certain reclassifications have been made to the 1995 balances in order to
conform to the 1996 presentation.

2. RELATED PARTIES:

The Company pays to I Care of Arkansas, Inc., a company with the same
ownership, management fees for various management consulting services. During
1994, 1995, and 1996, the Company paid management fees to I Care of Arkansas,
Inc. totaling $60,000 annually.

At March 31, 1996, the Company was indebted to I Care of Arkansas, Inc. in
the amount of $477,954 for operating advances and reimbursable expenses.

The Company performs certain product delivery services to patients for I
Care of Arkansas, Inc. During the year ended March 31, 1996, the Company
generated revenues from I Care of Arkansas, Inc. in the amount of $58,050. At
March 31, 1996, the Company has a receivable of $30,225 in connection with those
services.

3. ACQUISITIONS:

During October 1995, the Company purchased certain assets of Respiratory
Care of Arkansas, Inc., an unrelated Arkansas corporation. In connection with
this acquisition, the Company paid $150,000 for goodwill, which represents the
excess of cost of the business over the fair value of the net assets acquired.

During 1994, the Company purchased a subsidiary at a cost below the fair
value of the subsidiary's net assets at the date of acquisition. The deferred
credit represents the unallocated portion of the excess and is being amortized
using the straight-line method over three years.

The results of operations of the acquired entities are not material to the
Company.

4. CAPITALIZED LEASE OBLIGATIONS:

The Company leases equipment from several different leasing companies under
capital leases. The economic substance of these transactions is that the Company
is financing the acquisition of the assets through the lease. Accordingly, the
present value of the minimum lease payments is included in long-term debt.

F-37
<PAGE> 83

I CARE, INC.
D/B/A
I CARE HEALTH SERVICES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following is the future minimum lease payments under capitalized lease
obligations, together with their present value as of March 31, 1996:

<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
---------------------------------------------------------------------
<S> <C>
1997............................................................ $ 86,648
1998............................................................ 59,649
1999............................................................ 28,562
2000............................................................ 8,239
2001............................................................ 395
---------
Total minimum lease payments.................................... 183,493
Less amounts representing interest.............................. (12,184)
---------
Present value of minimum lease payments......................... $ 171,309
=========
</TABLE>

5. LONG-TERM DEBT:

Long-term debt at March 31, 1996, consists of the following:

<TABLE>
<S> <C>
Capitalized lease obligations payable in varying monthly installments of
up to $3,099, secured by equipment...................................... 77,045
8.75% note payable to a bank in monthly installments of $8,397, including
interest, secured by equipment.......................................... 231,863
Capitalized lease obligations payable in monthly installments of up to
$9,266, secured by equipment............................................ 94,264
--------
Total long-term debt...................................................... 403,172
Less current maturities................................................... (155,184)
--------
Long-term debt, less current maturities................................... $247,988
========
</TABLE>

Annual aggregate portion of long-term debt is as follows:

6. INCOME TAXES:

The provision for income taxes is composed of the following:

<TABLE>
<CAPTION>
1994 1995 1996
------- -------- -------
<S> <C> <C> <C>
Current provision.................................... $43,577 $115,055 $ --
Deferred provision (benefit)......................... -- (89,675) 12,971
------- -------- -------
$43,577 $ 25,380 $12,971
======= ======== =======
</TABLE>

F-38
<PAGE> 84

I CARE, INC.
D/B/A
I CARE HEALTH SERVICES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of income tax at statutory rates and the actual income tax
provision is as follows:

<TABLE>
<CAPTION>
1994 1995 1996
------- -------- -------
<S> <C> <C> <C>
Tax at statutory rate........................................ $24,205 $ 31,229 $14,136
State income tax............................................. 4,840 6,386 2,890
Nondeductible expense........................................ 25,712 1,206 1,547
Nontaxable income............................................ (11,180) (11,033) (5,602)
Surtax exemption............................................. -- (2,408) --
------- -------- -------
$43,577 $ 25,380 $12,971
======= ======== =======
</TABLE>

7. LEASE COMMITMENTS:

The Company leases certain vehicles and equipment under noncancelable
operating leases which expire in various years through 1999.

Future minimum lease payments under these noncancelable operating leases
are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------------------------------------------------------------------
<S> <C>
1997.............................................................. $41,608
1998.............................................................. 27,994
1999.............................................................. 12,328
</TABLE>

8. PROFIT SHARING PLAN:

9. SUBSEQUENT EVENT:

F-39
<PAGE> 85

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Specialty Med-Equip, Inc., Superior Med-Equip, Inc.,
and Cross Timbers Visiting Nurses, Inc.:

We have audited the accompanying combined statements of income, retained
earnings, and cash flows of Specialty Med-Equip, Inc., Superior Med-Equip, Inc.,
and Cross Timbers Visiting Nurses, Inc. (the "Company") for the year ended
December 31, 1994. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations, retained earnings,
and cash flows of the Company for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Dallas, Texas,
December 27, 1995

F-40
<PAGE> 86

SPECIALTY MED-EQUIP, INC., SUPERIOR MED-EQUIP, INC.,
AND CROSS TIMBERS VISITING NURSES, INC.

COMBINED STATEMENT OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Sales and rental income...................................................... $ 4,450,684
Cost of sales................................................................ 256,856
-----------
Total gross profit................................................. 4,193,828
-----------
Operating expenses:
Compensation and related benefits.......................................... 2,563,396
Rents and leases........................................................... 161,212
Purchased services, supplies, and other.................................... 1,243,027
Provision for doubtful accounts............................................ 131,064
Depreciation and amortization.............................................. 105,254
Interest expense........................................................... 41,419
-----------
Total expenses..................................................... 4,245,372
-----------
Net loss..................................................................... $ (51,544)
===========
</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

F-41
<PAGE> 87

SPECIALTY MED-EQUIP, INC., SUPERIOR MED-EQUIP, INC.,
AND CROSS TIMBERS VISITING NURSES, INC.

COMBINED STATEMENT OF RETAINED EARNINGS

<TABLE>
<S> <C>
Balance, January 1, 1994.......................................................... $168,468
Net loss........................................................................ (51,544)
Balance, December 31, 1994........................................................ $116,924
</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

F-42
<PAGE> 88

SPECIALTY MED-EQUIP, INC., SUPERIOR MED-EQUIP, INC.,
AND CROSS TIMBERS VISITING NURSES, INC.

COMBINED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Cash flows from operating activities:
Net loss................................................................... $ (51,544)
Adjustments to reconcile net loss to net cash provided by operating
activities
Depreciation and amortization........................................... 105,254
Changes in assets and liabilities
Increase in trade accounts receivable, net............................ (52,839)
Increase in other receivables......................................... (46,065)
Increase in inventory................................................. (2,130)
Increase in prepaid expenses.......................................... (11,695)
Increase in trade accounts payable.................................... 28,320
Increase in accrued liabilities and other............................. 46,010
---------
Net cash provided by operating activities.......................... 15,311
---------
Cash flows from investing activities:
Purchases of property and equipment, net................................... (173,109)
---------
Net cash used in investing activities.............................. (173,109)
---------
Cash flows from financing activities:
Increase in notes payable.................................................. 67,096
Proceeds from issuance of common stock..................................... 57,902
---------
Net cash provided by financing activities.......................... 124,998
---------
Net decrease in cash and cash equivalents.................................... (32,800)
Cash and cash equivalents, beginning of period............................... 66,443
---------
Cash and cash equivalents, end of period..................................... $ 33,643
=========
Supplemental disclosure of cash flow information:
Interest paid.............................................................. $ 41,518
</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

F-43
<PAGE> 89

SPECIALTY MED-EQUIP, INC., SUPERIOR MED-EQUIP, INC.,
AND CROSS TIMBERS VISITING NURSES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994

1. ORGANIZATION:

Specialty Med-Equip, Inc. ("Specialty") is a Texas S corporation
incorporated in 1992. Specialty is engaged in the rental of durable medical
equipment as well as the sale of various other medical supplies. As of December
31, 1994, Specialty had three store locations in DeLeon, Stephenville, and
Richardson, Texas.

The stockholders and executive officers of Specialty and their ownership
percentage at December 31, 1994, were as follows:

<TABLE>
<CAPTION>
OWNERSHIP
POSITION PERCENTAGE
-------------------- ----------
<S> <C> <C>
Mike McCrary............................. President 32%
Coy A. Noles, Jr......................... Secretary/Treasurer 32%
Others................................... -- 36%
</TABLE>

Superior Med-Equip, Inc. ("Superior") is a Texas corporation incorporated
in 1988. Superior is engaged in the rental of durable medical equipment as well
as the sale of various other medical supplies. As of December 31, 1994, Superior
had three store locations in Muleshoe, Alpine, and Abilene, Texas.

The stockholders and executive officers of Superior and their ownership
percentage at December 31, 1994, were as follows:

<TABLE>
<CAPTION>
OWNERSHIP
POSITION PERCENTAGE
-------------------- ----------
<S> <C> <C>
Valeri, Carrie & Taylor Noles............. -- 53%
Coy A. Noles, Jr.......................... President 42%
Gae Noles................................. Secretary Treasurer 5%
Mike McCrary.............................. Vice President --
</TABLE>

Cross Timbers Visiting Nurses, Inc. ("Cross Timbers") is a Texas
corporation incorporated in 1991. Cross Timbers is engaged in the business of
providing home healthcare services to homebound patients, primarily patients
covered by the Medicare and Medicaid programs.

The stockholders and executive officers of Cross Timbers and their
ownership percentage at December 31, 1994, were as follows:

<TABLE>
<CAPTION>
OWNERSHIP
POSITION PERCENTAGE
------------------------------------------- ----------
<S> <C> <C>
Coy A. Noles, Jr........... Chief Executive Officer 29%
Mike McCrary............... -- 28%
Jan Hoover................. Executive Vice President and Administrator 10%
Julie Thomas............... Vice President and Assistant Administrator 10%
Wanda Baird................ Vice President 10%
Others..................... -- 13%
</TABLE>

As a home nursing services provider, Cross Timbers is certified by the
Medicare Part A program. As of December 31, 1994, Cross Timbers had four offices
located in DeLeon, Rising Star, Richardson (closed in May 1995), and Mineral
Wells, Texas.

Specialty, Superior, and Cross Timbers (the "Company") jointly rent a
corporate office located in Abilene, Texas.

F-44
<PAGE> 90

SPECIALTY MED-EQUIP, INC., SUPERIOR MED-EQUIP, INC.,
AND CROSS TIMBERS VISITING NURSES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The accompanying financial statements are presented on a combined basis
because of the common ownership by Coy A. Noles, Jr., Mike McCrary, and certain
other stockholders.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Operating Revenues

Operating revenues are reported at the estimated net realizable amounts
from Medicare and Medicaid payors, private insurance companies, and cash sales
to customers. Payment for the retail sale and rental of durable medical
equipment and supplies to Medicare and Medicaid beneficiaries is based on the
lower of actual charges and approved fee schedules subject to certain
limitations.

Property and Equipment

Property and equipment are valued at cost at the date of acquisition and
are depreciated over their estimated useful lives using the straight-line
method. Maintenance and repairs are expensed at the time the expenditures are
incurred. The estimated useful lives of the assets are as follows:

<TABLE>
<S> <C>
Durable medical equipment....................................... 2 - 7 years
Furniture and fixtures.......................................... 5 - 7 years
Transportation equipment........................................ 5 years
</TABLE>

Start-up cost resulted from expenses incurred in 1991 before Cross Timbers
was issued a provider number and commenced operations. The cost is being
amortized over five years.

Income Taxes

In lieu of corporation income taxes, the Company's shareholders are taxed
on their proportionate share of the Company's taxable income.

3. OPERATING LEASES:

Specialty and Superior lease office and retail space at all locations. The
office space in Abilene, Texas, is leased by Cross Timbers month-to-month and
sublet to Specialty and Superior. Total rent expense for 1994 was approximately
$68,000.

4. COMMITMENTS AND CONTINGENCIES:

The Company is a party to various suits; however, in the opinion of
management, no claim will ultimately require a material settlement by the
Company over the amount covered by outside insurance policies.

5. SUBSEQUENT EVENT:

On October 31, 1995, Specialty and Superior were acquired by HealthCor
Holdings, Inc. ("HealthCor"), a Dallas-based home healthcare services provider,
for cash and debt totaling approximately $1,100,000 and $100,000, respectively.
The acquisition included the net assets of both companies excluding certain
assets and liabilities. Additionally, HealthCor acquired the fixed assets, and
medical supplies of Cross Timbers for cash and debt of approximately $714,000
and $200,000, respectively.

F-45
<PAGE> 91

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO C. EDWARD ELSEY:

We have audited the accompanying combined statements of income, owner's equity,
and cash flows of C. Edward Elsey dba A. M. Medical and Discount Medical
Equipment Company (the "Company") for the year ended December 31, 1994. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations, owner's equity, and
cash flows of the Company for the year ended December 31, 1994, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Dallas, Texas,
December 15, 1995

F-46
<PAGE> 92

C. EDWARD ELSEY DBA A. M. MEDICAL AND
DISCOUNT MEDICAL EQUIPMENT COMPANY

COMBINED STATEMENT OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Sales and rental income...................................................... $1,942,218
Cost of sales................................................................ 578,552
----------
Total gross profit................................................. 1,363,666
----------
Operating expenses:
Compensation and related benefits.......................................... 535,951
Rents and leases........................................................... 30,566
Professional fees.......................................................... 39,283
Purchased services, supplies, and other.................................... 254,127
Provision for doubtful accounts............................................ 30,993
Depreciation and amortization.............................................. 151,709
Interest expense........................................................... 37,542
----------
Total expenses..................................................... 1,080,171
----------
Net income................................................................... $ 283,495
==========
</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

F-47
<PAGE> 93

C. EDWARD ELSEY DBA A. M. MEDICAL AND
DISCOUNT MEDICAL EQUIPMENT COMPANY

COMBINED STATEMENT OF OWNER'S EQUITY

<TABLE>
<S> <C>
Balance, January 1, 1994......................................................... $ 395,199
Net income..................................................................... 283,495
Distributions to the owner, net................................................ (206,617)
---------
Balance, December 31, 1994....................................................... $ 472,077
=========
</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

F-48
<PAGE> 94

C. EDWARD ELSEY DBA A. M. MEDICAL AND
DISCOUNT MEDICAL EQUIPMENT COMPANY

COMBINED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Cash flows from operating activities:
Net income................................................................. $ 283,495
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization........................................... 151,709
Changes in assets and liabilities-
Increase in trade accounts receivable, net............................ (106,968)
Increase in inventory................................................. (7,754)
Increase in prepaid expenses and other................................ (23,279)
Decrease in trade accounts payable and accrued liabilities............ (111,204)
---------
Net cash provided by operating activities............................. 185,999
---------
Cash flows from investing activities:
Purchases of property and equipment........................................ (154,762)
---------
Net cash used in investing activities.............................. (154,762)
---------
Cash flows from financing activities:
Increase in notes payable.................................................. 206,622
Decrease in capital lease obligation....................................... (15,229)
Distributions to the owner................................................. (206,617)
---------
Net cash used in financing activities.............................. (15,224)
---------
Net increase in cash......................................................... 16,013
Cash, beginning of period.................................................... 5,122
---------
Cash, end of period.......................................................... $ 21,135
=========
Supplemental disclosure of cash flow information:
Interest paid.............................................................. $ 37,542
</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

F-49
<PAGE> 95

C. EDWARD ELSEY DBA A. M. MEDICAL AND
DISCOUNT MEDICAL EQUIPMENT COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994

1. ORGANIZATION:

A. M. Medical is a sole proprietorship registered in the county of El Paso,
Texas, in 1971. A. M. Medical is engaged in the retail sale and rental of
durable medical equipment as well as the sale of various other medical supplies.

Discount Medical Equipment Company ("Discount Medical") is a sole
proprietorship registered in the county of El Paso, Texas, in 1993. Discount
Medical is engaged in the discount retail sale of certain types of durable
medical equipment. Both A. M. Medical and Discount Medical (the "Company") are
owned and operated by C. Edward Elsey and Linda Elsey. As a result of common
ownership, the financial statements are presented on a combined basis.

As of December 31, 1994, A. M. Medical and Discount Medical each has one
primary store location serving El Paso, Texas, and its surrounding areas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Accounting

The Company's combined financial statements are presented using the accrual
method of accounting. Revenues are recognized when earned and expenses when
incurred.

Revenues are reported at the estimated net realizable amounts from private
insurance companies, contracted payors, Medicare and Medicaid programs, and cash
sales to customers.

Property and Equipment

<TABLE>
<S> <C>
Buildings................................................................ 30 years
Durable medical equipment................................................ 5 years
Furniture and fixtures................................................... 5-10 years
Transportation equipment................................................. 3-5 years
</TABLE>

Federal Income Taxes

The Company operates as a sole proprietorship. Under the provisions of the
Internal Revenue Code, the owner is liable for federal income taxes on the
Company's taxable income. Accordingly, no provision or liability for federal
income taxes has been made in the accompanying combined financial statements.

3. OPERATING LEASES:

The Company leases certain types of office equipment and transportation
equipment which are accounted for as operating leases. The future minimum lease
payments under noncancelable operating leases are as follows:

F-50
<PAGE> 96

C. EDWARD ELSEY DBA A. M. MEDICAL AND
DISCOUNT MEDICAL EQUIPMENT COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

4. COMMITMENTS AND CONTINGENCIES:

The Company, in its regular course of business, is a party to various law
suits; however, in the opinion of management, no claim will ultimately require a
material settlement by the Company over the amount covered by outside insurance
policies.

5. SUBSEQUENT EVENT:

On October 31, 1995, the Company and HealthCor Holdings, Inc.
("HealthCor"), a Dallas-based home healthcare services provider, entered into an
asset purchase agreement whereby HealthCor agreed to purchase certain assets and
assume certain liabilities of the Company for approximately $1,300,000.

F-51
<PAGE> 97

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Colorado I.V. Associates, Inc.
and Specialized Nursing Services, Inc.:

We have audited the accompanying combined statements of income, retained
earnings, and cash flows of Colorado I.V. Associates, Inc. and Specialized
Nursing Services, Inc. (the "Company") for the year ended December 31, 1994.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.

ARTHUR ANDERSEN LLP

Dallas, Texas,
December 21, 1995

F-52
<PAGE> 98

COLORADO I.V. ASSOCIATES, INC. AND SPECIALIZED NURSING SERVICES, INC.

COMBINED STATEMENT OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Sales and service income, net................................................ $1,897,456
Cost of sales................................................................ 570,053
----------
Total gross profit................................................. 1,327,403
----------
Operating expenses:
Compensation and related benefits.......................................... 624,297
Rents and leases........................................................... 38,488
Professional fees.......................................................... 24,723
Purchased services, supplies, and other.................................... 165,115
Provision for doubtful accounts............................................ 487,174
Depreciation and amortization.............................................. 15,999
Interest expense........................................................... 3,477
----------
Total expenses..................................................... 1,359,273
----------
Net loss..................................................................... $ (31,870)
==========
</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

F-53
<PAGE> 99

COLORADO I.V. ASSOCIATES, INC. AND SPECIALIZED NURSING SERVICES, INC.

COMBINED STATEMENT OF RETAINED EARNINGS

<TABLE>
<S> <C>
Balance, January 1, 1994.......................................................... $596,157
Net loss........................................................................ (31,870)
--------
Balance, December 31, 1994........................................................ $564,287
========
</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

F-54
<PAGE> 100

COLORADO I.V. ASSOCIATES, INC. AND SPECIALIZED NURSING SERVICES, INC.

COMBINED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Cash flows from operating activities:
Net loss................................................................... $ (31,870)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization........................................... 15,999
Changes in assets and liabilities-
Increase in trade accounts receivable, net............................ (2,541)
Increase in inventory................................................. (1,036)
Decrease in other assets.............................................. 213
Decrease in trade accounts payable and accrued liabilities............ (813)
---------
Net cash used in operating activities.............................. (20,048)
---------
Cash flows from investing activities:
Additions of property and equipment........................................ (5,392)
---------
Net cash used in investing activities.............................. (5,392)
---------
Cash flows from financing activities:
Payments on long-term notes payable........................................ (9,052)
---------
Net cash used in financing activities.............................. (9,052)
---------
Net decrease in cash......................................................... (34,492)
Cash, beginning of period.................................................... 100,401
---------
Cash, end of period.......................................................... $ 65,909
=========
Supplemental disclosure of cash flow information:
Interest paid.............................................................. $ 3,477
=========
</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

F-55
<PAGE> 101

COLORADO I.V. ASSOCIATES, INC. AND SPECIALIZED NURSING SERVICES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION:

Colorado I.V. Associates, Inc. (CIVA) is a Colorado S corporation
incorporated in 1990. CIVA is engaged in the business of providing home infusion
therapy to home healthcare patients. CIVA has one office location in the Denver
metropolitan area.

The shareholders and executive officers of CIVA and their respective
ownership percentage at December 31, 1994, were as follows:

<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP POSITION
---------- ------------------------
<S> <C> <C>
Priscilla Steinhauer............................. 50% President
Gregg Pederson................................... 50 Vice-President/Treasurer
</TABLE>

Specialized Nursing Services, Inc. (SNS) is a Colorado S corporation
incorporated in 1988. SNS is engaged in the business of providing skilled
nursing services to patients requiring I.V. therapy at home. SNS was purchased
in May 1990 from Ann Damore as a stock acquisition by Gregg Pederson. The
shareholders of SNS and their respective ownership percentage at December 31,
1994, were as follows:

SNS operates from the CIVA location using CIVA's administrative personnel.

At December 31, 1994, CIVA and SNS (the "Company") were under the common
ownership and control of Priscilla Steinhauer and Gregg Pederson. As a result,
the financial statements are presented on a combined basis.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Revenues

Revenues are reported at the estimated net realizable amounts from Medicare
and Medicaid payors and private insurance companies.

Property and Equipment

Property and equipment is valued at cost at the date of acquisition and is
depreciated over their estimated useful lives between five to seven years using
the straight-line method. Maintenance and repairs are expensed at the time the
expenditures are incurred.

Federal Income Taxes

The Company, with the consent of its shareholders, elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, the Company does not pay federal income taxes on its taxable income.
Instead, the shareholders are liable for federal income taxes on the Company's
taxable income. Accordingly, no provision or liability for federal income taxes
has been made in these combined financial statements.

F-56
<PAGE> 102

COLORADO I.V. ASSOCIATES, INC. AND SPECIALIZED NURSING SERVICES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

3. OPERATING LEASES:

The Company leases office space in Denver, Colorado. The future minimum
lease payments under noncancelable operating leases for buildings are as
follows:

<TABLE>
<S> <C>
1995....................................................................... $22,080
1996....................................................................... 9,200
-------
Total................................................................. $31,280
=======
</TABLE>

Rent expense under all operating leases was approximately $22,500 for the
year ended December 31, 1994.

4. RETIREMENT PLANS:

The Company provides a defined contribution pension plan and a profit
sharing plan for employees who meet certain eligibility requirements. The
Company is obligated to contribute $42,224 to the pension plan for the year
ended December 31, 1994. Contributions to the profit sharing plan are at the
discretion of the Company's management, and no contribution was made to the plan
for 1994 as the Company incurred a net loss.

5. SUBSEQUENT EVENT:

In August 1995, the Company's assets were acquired by HealthCor Holdings,
Inc., a Dallas-based home healthcare services provider, for approximately
$800,000.

F-57
<PAGE> 103

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors,
RTA Homecare, Inc. and Subsidiary:

We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows of RTA Homecare, Inc. and subsidiary (the
"Company") for the years ended December 31, 1993 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations, shareholders'
equity, and cash flows of RTA Homecare, Inc. and subsidiary for the years ended
December 31, 1993 and 1994, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Dallas, Texas,
November 30, 1995

F-58
<PAGE> 104

RTA HOMECARE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1993 1994
---------- ----------
<S> <C> <C>
Sales and rental income............................................. $4,965,640 $5,846,048
Cost of sales....................................................... 852,870 1,518,382
---------- ----------
Total gross profit........................................ 4,112,770 4,327,666
---------- ----------
Operating expenses:
Compensation and related benefits................................. 1,936,355 1,941,376
Rents and leases.................................................. 245,098 338,124
Purchased services, supplies, and other........................... 847,089 1,002,581
Provision for doubtful accounts................................... 171,404 97,619
Depreciation and amortization..................................... 168,212 311,917
---------- ----------
Total expenses............................................ 3,368,158 3,691,617
---------- ----------
Income from operations.............................................. 744,612 636,049
Benefit (provision) for income taxes................................ (187,663) 92,625
Minority interest in income (loss) of subsidiary.................... 3,426 (51,114)
---------- ----------
Net income.......................................................... $ 560,375 $ 677,560
========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-59
<PAGE> 105

RTA HOMECARE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------ ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1992................................ $5,050 $1,018,902 $1,023,952
Net income.............................................. -- 560,375 560,375
------ ---------- ----------
Balance, December 31, 1993................................ 5,050 1,579,277 1,584,327
Net income.............................................. -- 677,560 677,560
------ ---------- ----------
Balance, December 31, 1994................................ $5,050 $2,256,837 $2,261,887
====== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-60
<PAGE> 106

RTA HOMECARE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1993 1994
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 560,375 $ 677,560
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization.................................. 168,212 311,917
Changes in assets and liabilities --
Increase in trade accounts receivable, net................... (297,868) (94,988)
Increase in inventory........................................ (223,344) (89,332)
Decrease (increase) in employee advances..................... 50,674 (3,274)
Decrease (increase) in other assets.......................... (19,990) 9,269
Increase in accounts payable................................. 179,135 114,633
Increase (decrease) in accrued liabilities................... 155,103 (177,455)
Increase in deferred income taxes payable.................... 152,195 71,924
--------- ---------
Net cash provided by operating activities................. 724,492 820,254
--------- ---------
Cash flows from investing activities:
Additions of property and equipment............................... (587,326) (985,179)
Issuance of notes receivable...................................... -- (380,779)
Payments on notes receivable...................................... 5,786 --
--------- ---------
Net cash used in investing activities..................... (581,540) (1,365,958)
--------- ---------
Cash flows from financing activities:
Issuance of notes payable......................................... -- 446,980
Payments on notes payable......................................... (97,209) --
Net change in minority interest in subsidiary..................... (3,426) 51,114
--------- ---------
Net cash provided by (used in) financing activities....... (100,635) 498,094
--------- ---------
Net increase (decrease) in cash..................................... 42,317 (47,610)
Cash, beginning of period........................................... 69,859 112,176
--------- ---------
Cash, end of period................................................. $ 112,176 $ 64,566
========= ==========
Supplemental disclosure of cash flow information:
Interest paid..................................................... $ 20,815 $ 25,448
Taxes paid........................................................ $ 138,648 $ 88,213
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-61
<PAGE> 107

RTA HOMECARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994

1. ORGANIZATION:

RTA Homecare, Inc. ("Homecare"), an Arizona corporation, commenced
operations in June 1988. Homecare is engaged in the retail sale and rental of
durable medical equipment as well as the sale of various other medical supplies
and apparel. As of December 31, 1994, Homecare had four store locations in the
Phoenix, Arizona, metropolitan area and one location in southeastern Arizona.

The shareholders and executive officers of Homecare and their respective
ownership percentages at December 31, 1994, were as follows:

<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP POSITION
---------- -------------------------------
<S> <C> <C>
Steven J. Shcolnik............... 45.45% Director & President
Beverly A. Shcolnik.............. 45.45 Director & Secretary/Treasurer
Bryan L. Faith................... 4.55 Director/Vice President
David A. and Bonita Shcolnik..... 4.55 Shareholders
</TABLE>

RTA Infusion, Inc. ("Infusion"), an 80%-owned subsidiary of Homecare, is an
Arizona corporation that commenced operations in October 1990. Infusion provides
infusion services, supplies, and equipment to individual patients as prescribed
by physicians. Infusion operates from a separate office facility with its own
personnel and agents.

Homecare and Infusion (the "Company") derives a significant portion of its
income from the rental of various items of medical equipment as prescribed by
physicians. A majority of the rental charges are reimbursed by Medicare or other
insurance carriers.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Operating Revenues

Property and Equipment

<TABLE>
<S> <C>
Buildings and leasehold improvements........................... 31 - 39 years
Durable medical equipment...................................... 4 - 7 years
Furniture and fixtures......................................... 5 - 7 years
Transportation equipment....................................... 5 years
</TABLE>

F-62
<PAGE> 108

RTA HOMECARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Federal Income Taxes

The Company is taxed as a Subchapter C corporation under the Internal
Revenue Code. Deferred income taxes are provided for temporary differences
between the financial statement and income tax basis of assets and liabilities
in accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes."

3. OPERATING LEASES:

The Company leases office and retail space at all locations except for the
Phoenix retail location. In addition to the annual base liability of the retail
store and offices, an additional liability exists if the sales for a location
exceed $480,000 per year. The liability is computed at 4% of excess sales. The
Company also leases various vehicles under noncancelable operating leases.

The future minimum lease payments under noncancelable operating leases for
buildings and vehicles are:

Rent expense under all operating leases was approximately $165,000 and
$228,000 for December 31, 1993 and 1994 respectively.

4. RELATED-PARTY TRANSACTIONS:

Homecare owns 100% of RTA Hospice, Inc. ("Hospice"), an Arizona
corporation, which commenced operations in December 1993. Hospice provides
nursing care to terminally ill, homebound patients. Hospice was not consolidated
in the accompanying consolidated financial statements, as it was not included in
the purchase by HealthCor Holdings, Inc. (see Note 6).

5. PROFIT SHARING PLAN:

The Company provides a profit sharing plan for its employees which is
administered by an independent agency. Employees become participants after one
year of employment if they are at least 21 years old. The Company contributed
$60,000 and $80,000 to the plan for the years ended December 31, 1993 and 1994,
respectively.

6. SUBSEQUENT EVENT:

On July 31, 1995, the Company was acquired by HealthCor Holdings, Inc., a
Dallas-based home healthcare services provider, for approximately $7,400,000.
The acquisition included the net assets and liabilities of the Company excluding
certain fixed assets, liabilities, and a Hospice.

F-63
<PAGE> 109

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Home Hospital Equipment, Inc.:

We have audited the accompanying statement of income and retained earnings and
cash flows of Home Hospital Equipment, Inc. (a Texas corporation) for the year
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations, retained earnings, and cash
flows of the Company for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Dallas, Texas,
July 17, 1995

F-64
<PAGE> 110

HOME HOSPITAL EQUIPMENT, INC.

STATEMENT OF INCOME AND RETAINED EARNINGS

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Revenues:
Medical equipment rental income............................................ $1,318,885
Sale of medical equipment and supplies..................................... 326,073
Cost of sales.............................................................. (193,224)
----------
Net sale of medical equipment and supplies......................... 132,849
----------
Total revenues..................................................... 1,451,734
----------
Expenses:
Compensation and related benefits.......................................... 463,694
General and administrative................................................. 356,760
Depreciation............................................................... 218,863
Provision for doubtful accounts............................................ 86,818
Interest................................................................... 62,249
----------
1,188,384
----------
Income from operations....................................................... 263,350
Other income................................................................. 1,072
----------
Net income................................................................... 264,422
Accumulated deficit, beginning of year....................................... (2,064)
----------
Retained earnings, end of year............................................... $ 262,358
==========
</TABLE>

The accompanying notes are an integral part of this statement.

F-65
<PAGE> 111

HOME HOSPITAL EQUIPMENT, INC.

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Cash flows from operating activities:
Net income................................................................. $264,422
Adjustments to reconcile net income to net cash provided by operating
activities --
Depreciation............................................................ 218,863
Changes in operating assets and liabilities --
Decrease in accounts receivable....................................... 150,181
Increase in inventory................................................. (64,018)
Increase in prepaid expenses.......................................... (14,311)
Increase in accounts payable.......................................... 4,778
Decrease in accrued liabilities....................................... (41,668)
--------
Net cash provided by operating activities.......................... 518,247
--------
Cash flows from investing activities:
Additions to property and equipment........................................ (239,306)
--------
Net cash used in investing activities.............................. (239,306)
--------
Cash flows from financing activities:
Payments on advances from related parties.................................. (132,000)
Payments on bank line of credit............................................ (100,000)
--------
Net cash used in financing activities.............................. (232,000)
--------
Net increase in cash......................................................... 46,941
Cash, beginning of period.................................................... 10,746
--------
Cash, end of period.......................................................... $ 57,687
========
Supplemental disclosure of cash flow information:
Interest paid.............................................................. $ 62,249
========
</TABLE>

The accompanying notes are an integral part of this statement.

F-66
<PAGE> 112

HOME HOSPITAL EQUIPMENT, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994

1. ORGANIZATION:

Home Hospital Equipment, Inc. (the "Company") is a Texas S corporation
incorporated since 1993. The Company is engaged in the retail sale and rental of
durable medical equipment in San Antonio, Texas.

The stockholders and executive officers of the Company and their respective
ownership percentage at December 31, 1994, were:

<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP POSITION
--------- ---------------
<S> <C> <C>
William E. Gay, Jr.............................. 50% President
Erwin E. Ward................................... 50% Vice-President
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Revenues

Revenues are reported at the estimated net realizable amounts from Medicare
and Medicaid payors, private insurance companies, and cash sales to customers.
Payment for the retail sale and rental of durable medical equipment and supplies
to Medicare and Medicaid beneficiaries is based on the lower of actual charges
and approved fee schedules subject to certain limitations. Charges derived from
Medicare and Medicaid beneficiaries were approximately 66% as a percentage of
total charges for the year ended December 31, 1994.

Property and Equipment

Property and equipment is valued at cost at the date of acquisition and
depreciated over the respective estimated useful lives using the straight-line
method. Maintenance and repairs are expensed at the time the expenditures are
incurred. The estimated useful lives of the assets are as follows:

<TABLE>
<S> <C>
Durable medical equipment....................................... 5 years
Office furniture and equipment.................................. 5 to 7 years
</TABLE>

Federal Income Taxes

The Company, with the consent of its stockholders, elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, the Company does not pay federal income taxes on its taxable income.
Instead, the stockholders are liable for federal income taxes on the Company's
taxable income. Accordingly, no provision or liability for federal income taxes
has been made in these financial statements.

3. RELATED-PARTY TRANSACTIONS:

The Company has received various advances from stockholders. These advances
bear interest at prime plus 1.5% and are due June 3, 1997. The following is a
summary of amounts owed under the arrangements as of December 31, 1994:

<TABLE>
<S> <C>
William E. Gay, Jr................................................ $301,435
Erwin E. Ward..................................................... 301,435
--------
$602,870
========
</TABLE>

Interest expense on officer advances was approximately $52,000 for the year
ended December 31, 1994.

F-67
<PAGE> 113

HOME HOSPITAL EQUIPMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. COMMITMENTS AND CONTINGENCIES:

The Company leases office and warehouse facilities in San Antonio,
vehicles, and medical equipment held for rent under noncancelable operating
leases expiring on various dates through 2000. At December 31, 1994, the
Company's future minimum rental payments for operating leases having remaining
noncancelable lease terms in excess of one year are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C> <C>
1995.......................................................... $111,960
1996.......................................................... 109,254
1997.......................................................... 100,895
1998.......................................................... 81,286
1999.......................................................... 71,056
Thereafter.................................................... 11,843
--------
$486,294
========
</TABLE>

Rental expense for operating leases was $94,884 during the year ended
December 31, 1994.

5. SUBSEQUENT EVENT:

On January 20, 1995, the Company and HealthCor Oxygen and Medical
Equipment, Inc. (HOME), a wholly owned subsidiary of HealthCor Holdings, Inc.,
closed an asset purchase agreement whereby HOME purchased certain assets and
assumed certain liabilities of the Company for approximately $4,329,000.

F-68
<PAGE> 114

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors,
Physicians Home Health Network, Inc.:

We have audited the accompanying statement of operations and retained deficit
and cash flows of Physicians Home Health Network, Inc. for the ten months ended
October 31, 1994. These financial statements are the responsibility of
management of Physicians Home Health Network, Inc. Our responsibility is to
express an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and retained deficit, and cash
flows for the ten months ended October 31, 1994, in conformity with generally
accepted accounting principles.

IFFT & BARBER, CHARTERED

Leawood, Kansas
December 23, 1994

F-69
<PAGE> 115

PHYSICIANS HOME HEALTH NETWORK, INC.

STATEMENTS OF OPERATIONS AND RETAINED DEFICIT

<TABLE>
<CAPTION>
TEN MONTHS
ENDED
OCTOBER 31, 1994
----------------
<S> <C>
Net revenues.................................................................. $8,572,590
----------
Operating expenses:
Professional care of patients............................................... 5,476,768
General and administrative.................................................. 2,986,786
Occupancy................................................................... 91,229
Depreciation and amortization............................................... 4,000
----------
Total operating expense............................................. 8,558,783
----------
Operating income before interest expense...................................... 13,807
Interest expense.............................................................. 18,802
----------
Net loss...................................................................... (4,995)
Retained deficit at beginning of year......................................... (90,226)
----------
Retained deficit at end of year............................................... $ (95,221)
==========
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-70
<PAGE> 116

PHYSICIANS HOME HEALTH NETWORK, INC.

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
TEN MONTHS
ENDED
OCTOBER 31, 1994
----------------
<S> <C>
Cash flows from operating activities:
Cash received from services................................................. $8,586,929
Cash paid to employees and suppliers........................................ (8,402,151)
Interest paid............................................................... (20,371)
Deposits paid............................................................... (1,400)
----------
Net cash provided by operating activities........................... 163,007
----------
Cash flows from financing activities:
Payments on lines of credit................................................. (274,999)
Payments on long-term debt.................................................. (30,215)
----------
Net cash used in financing activities............................... (305,214)
----------
Net (decrease) in cash and cash equivalents................................... (142,207)
Cash and cash equivalents, beginning of year.................................. 227,360
----------
Cash and cash equivalents, end of year........................................ $ 85,153
==========
Reconciliation of net loss to net cash provided by operating activities:
Net loss................................................................. $ (4,995)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization.......................................... 4,000
Decrease in accounts receivable........................................ 14,339
Decrease in due from affiliate......................................... 40,203
Decrease in accounts payable........................................... (60,232)
Increase in accrued payroll and vacation costs......................... 178,622
Decrease in accrued interest........................................... (1,569)
Decrease in due to affiliate........................................... (5,961)
Increase in deposits................................................... (1,400)
----------
Net cash provided by operating activities........................... $ 163,007
==========
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-71
<PAGE> 117

PHYSICIANS HOME HEALTH NETWORK, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

General

Physicians Home Health Network, Inc. (the "Company") was incorporated in
January 1985 in Missouri. The Company provides health and supportive services to
individuals at their homes.

The Company is located in Columbia, Missouri, and serves patients in 45
counties in mid-Missouri.

Net Patient Service Revenue

Net patient service revenue represents the estimated net realizable amounts
from Medicare.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using the straight line method over the estimated
lives of the assets or over the term of the leases.

Income Taxes

The Company has elected to be taxed as a S corporation effective January 1,
1987. As such, the Company does not pay federal corporate income taxes on its
taxable income, rather, the shareholders are responsible for individual federal
income taxes on their respective shares of the Company's taxable income.
Accordingly, income taxes are not provided in the accompanying financial
statements.

2. NET REVENUES AND ESTIMATED SETTLEMENTS WITH THIRD PARTY PAYORS:

All of net revenue was derived under federal third-party reimbursement
programs. These revenues are based on cost reimbursement principles and are
subject to audit and retroactive adjustment by the respective third party
intermediary. In the opinion of management, retroactive adjustments, if any,
would not be material to the financial position, results of operations or cash
flows of the Company.

3. RETIREMENT PLAN:

The Company has a salary reduction/profit sharing plan under provisions of
Section 401(k) of the Internal Revenue Code to provide retirement benefits for
its eligible employees. The plan covers all employees who have completed one
full year of service and have worked over 1,000 hours. Each plan year the
Company has the option to make a discretionary employer contribution to the
plan. During 1994, the Company matched 100% of the first 8% of an employee's
salary deferral contribution for the first three months of the year, and 100% of
the first 5% of an employee's salary deferral contribution for the last seven
months of the year. The matching contribution for 1994 was $112,716 plus
approximately $8,000 in administrative costs. The plan has a graded vesting
schedule for the Company contributions with 100% vesting after five years.

4. RELATED PARTIES:

The Company provides administrative and personnel functions for Home Health
Network, a related party. Home Health Network is charged $3,000 monthly for
these services. The total amount due the Company from Home Health Network was
$12,638 at October 31, 1994.

The Company entered into an operating lease with a related party (see Note
5).

F-72
<PAGE> 118

PHYSICIANS HOME HEALTH NETWORK, INC.

NOTES TO FINANCIAL STATEMENTS

5. COMMITMENTS AND CONTINGENCIES:

Leases that do not meet the criteria for capitalization are classified as
operating leases with related rentals charged to operations as incurred.

The following is a schedule by year of future minimum lease payments under
operating leases as of October 31, 1994, that have remaining lease terms of over
one year:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------
<S> <C>
1994 (two months ended)............................................... $ 46,672
1995.................................................................. 380,652
1996.................................................................. 352,925
1997.................................................................. 319,418
1998.................................................................. 301,306
1999.................................................................. 291,532
Thereafter............................................................ 2,687,344
----------
$4,379,849
==========
</TABLE>

Total rental expense in 1994 for all operating leases was $125,707.

The Company entered into an operating lease to rent office space commencing
October 1, 1994. The lease term is for 15 years with a monthly rental payment of
$22,969. The former principal shareholder and president of the Company has
ownership interest in the office space under this lease.

6. SUBSEQUENT EVENT:

In November, 1994, the shareholders sold all the outstanding shares of
capital stock of the Company to HealthCor Holdings, Inc., a Dallas-based home
healthcare services provider, for $1,500,000.

F-73
<PAGE> 119

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited pro forma condensed consolidated statements of
income for the year ended December 31, 1995, and the three-month period ended
March 31, 1996, reflect (i) the acquisitions by the Company in 1995 and 1996
(referred to as the "Recent Acquisitions") using the purchase method of
accounting and (ii) the receipt and application of the net proceeds (after
deducting offering related expenses) from the sale of common stock offered
hereby and the exercise of 150,000 warrants to purchase common stock. The
unaudited pro forma condensed consolidated statements of income do not purport
to represent the Company's results of operations had the transactions occurred
in January 1, 1995, or to project the Company's results of operations for any
future periods.

The following unaudited pro forma condensed consolidated balance sheet as
of March 31, 1996, reflects (i) the Recent Acquisitions by the Company in 1996
using the purchase method of accounting, (ii) the receipt and application of the
net proceeds (after deducting offering related expenses) from the sale of common
stock offered hereby and the exercise of 150,000 warrants to purchase common
stock, and (iii) the conversion of the redeemable convertible preferred stock
into common stock, as if such transactions had occurred as of March 31, 1996.

The Company usually implements significant changes to the operations of the
entities that it acquires to enhance profitability. The expected benefits and
cost reductions anticipated by the Company have not been reflected in the
accompanying unaudited proforma condensed consolidated financial statements.
Accordingly, these pro forma financial statements are not necessarily indicative
of the operating results that would have been achieved had the Recent
Acquisitions occurred at the beginning of each period presented.

The pro forma adjustments are based upon available information. These
adjustments are directly attributable to the transactions referenced above, and
are expected to have a continuing impact on the Company's business, results of
operations, and financial condition. The following unaudited pro forma
consolidated financial statements should be read in conjunction with the
historical financial statements of the Company and the companies acquired, which
are included elsewhere in this Prospectus.

P-1
<PAGE> 120

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
HEALTHCOR RECENT PRO FORMA
HOLDINGS, INC. ACQUISITIONS ADJUSTMENTS OFFERING AS ADJUSTED
-------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues.................... $ 81,557,284 $12,700,355(A) $ -- $ -- $94,257,639
Operating expenses:
Compensation and related
benefits.................... 49,724,055 7,405,983(A) -- -- 57,130,038
General and administrative.... 21,272,118 2,893,304(A) -- -- 24,165,422
Depreciation and
amortization................ 2,299,357 310,747(A) 160,283(B) -- 2,770,387
Provision for doubtful
accounts.................... 1,488,885 175,141(A) -- -- 1,664,026
----------- ----------- --------- ----------- -----------
74,784,415 10,785,175 160,283 -- 85,729,873
Income from operations.......... 6,772,869 1,915,180 (160,283) -- 8,527,766
Interest, net................... (986,977) 1,118(A) (663,760)(C) 1,527,598(D) (122,021)
----------- ----------- --------- ----------- -----------
Income before income taxes...... 5,785,892 1,916,298 (824,043) 1,527,598 8,405,745
Provision for income taxes...... 2,202,367 766,519(E) (329,617)(E) 611,039(E) 3,250,308
----------- ----------- --------- ----------- -----------
Net income...................... $ 3,583,525 $ 1,149,779 $(494,426) $ 916,559 $ 5,155,437
=========== =========== ========= =========== ===========
Net income per common share:
Net income per common share... $ .55 $ .54
=========== ===========
Weighted average common shares
outstanding................. 6,545,615 9,545,615
=========== ===========
</TABLE>

The accompanying notes are an integral part of the
Pro Forma Condensed Consolidated Financial Statements.

P-2
<PAGE> 121

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
HEALTHCOR RECENT PRO FORMA
HOLDINGS, INC. ACQUISITIONS ADJUSTMENTS OFFERING AS ADJUSTED
-------------- ------------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues....................... $ 24,254,490 $3,704,020(A) $ -- $ -- $27,958,510
Operating expenses:
Compensation and related
benefits....................... 13,371,684 1,986,692(A) -- -- 15,358,376
General and administrative....... 7,349,313 1,291,921(A) -- -- 8,641,234
Depreciation and amortization.... 893,716 30,397(A) 66,317(B) -- 990,430
Provision for doubtful
accounts....................... 506,129 -- -- -- 506,129
------------ ---------- --------- -------- -----------
22,120,842 3,309,010 66,317 -- 25,496,169
------------ ---------- --------- -------- -----------
Income from operations............. 2,133,648 395,010 (66,317) -- 2,462,341
Interest, net...................... (485,900) -- (270,976)(C) 517,575(D) (239,301)
------------ ---------- --------- -------- -----------
Income before income taxes......... 1,647,748 395,010 (337,293) 517,575 2,223,040
Provision for income taxes......... 676,462 158,004(E) (134,917) (E) 207,030(E) 906,579
------------ ---------- --------- -------- -----------
Net income......................... $ 971,286 $ 237,006 $(202,376) $310,545 $ 1,316,461
============ ========== ========= ======== ===========
Net income per common share:
Net income per common share...... $ .15 $ .14
============ ===========
Weighted average common shares
outstanding.................... 6,543,430 9,543,430
============ ===========
</TABLE>

The accompanying notes are an integral part of the
Pro Forma Condensed Consolidated Financial Statements

P-3
<PAGE> 122

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
RECENT
ACQUISITIONS
AND
HISTORICAL OFFERING
HEALTHCOR RELATED PRO FORMA
HOLDINGS, INC. TRANSACTIONS(F) PRO FORMA OFFERING(G) AS ADJUSTED
-------------- --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..... $ -- $ -- $ -- $ 7,548,913 $ 7,548,913
Accounts receivable, net...... 15,328,226 2,425,378 17,753,604 -- 17,753,604
Supplies inventory............ 1,626,657 857,230 2,483,887 -- 2,483,887
Prepaid expenses and other.... 1,247,962 37,444 1,285,406 -- 1,285,406
Deferred income taxes......... 2,420,246 -- 2,420,246 -- 2,420,246
----------- ----------- ------------ ----------- -----------
Total current
assets.............. 20,623,091 3,320,052 23,943,143 7,548,913 31,492,056
Property and equipment, net..... 13,377,565 991,229 14,368,794 -- 14,368,794
Excess of cost of acquired
businesses over fair values of
net assets acquired........... 23,192,834 9,860,697 33,053,531 -- 33,053,531
----------- ----------- ------------ ----------- -----------
Total assets.......... $ 57,193,490 $14,171,978 $71,365,468 $ 7,548,913 $78,914,381
=========== =========== ============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses................... $ 8,622,793 $ 44,933 8,667,726 $(3,019,687) $ 5,648,039
Accrued payroll and related
expenses................... 4,782,987 -- 4,782,987 -- 4,782,987
Estimated settlements with
third-party payors......... 322,566 -- 322,566 -- 322,566
Line of credit payable........ 2,900,000 -- 2,900,000 2,900,000
Current portion of long-term
debt and capital lease
obligations................ 5,571,391 4,304,512 9,875,903 (7,536,032) 2,339,871
Income taxes payable.......... 1,172,929 -- 1,172,929 -- 1,172,929
----------- ----------- ------------ ----------- -----------
Total current
liabilities......... 23,372,666 4,349,445 27,722,111 (10,555,719) 17,166,392
Deferred income taxes and
other......................... 3,841,126 -- 3,841,126 -- 3,841,126
Long-term debt and capital lease
obligations................... 11,606,610 9,522,533 21,129,143 (18,860,368) 2,268,775
----------- ----------- ------------ ----------- -----------
Total liabilities..... 38,820,402 13,871,978 52,692,380 (29,416,087) 23,276,293
Redeemable convertible preferred
stocks........................ 5,339,814 (5,339,814) -- -- --
Stockholders' equity:
Common stock.................. 30,628 34,893 65,521 30,000 95,521
Additional paid-in capital.... 2,471,129 5,604,921 8,076,050 36,935,000 45,011,050
Retained earnings............. 10,531,517 -- 10,531,517 -- 10,531,517
----------- ----------- ------------ ----------- -----------
Total stockholders'
equity.............. 13,033,274 5,639,814 18,673,088 36,965,000 55,638,088
----------- ----------- ------------ ----------- -----------
Total liabilities and
stockholders'
equity.............. $ 57,193,490 $14,171,978 $71,365,468 $ 7,548,913 $78,914,381
=========== =========== ============ =========== ===========
</TABLE>

The accompanying notes are an integral part of the
Pro Forma Condensed Consolidated Financial Statements

P-4
<PAGE> 123

NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(A) Reflects the historical net revenues, compensation and related benefits
expense, general and administrative expense, depreciation and
amortization expense, provision for doubtful accounts, interest, net,
and provision for income taxes for the Recent Acquisitions on a
consolidated basis if such acquisitions had occurred at the beginning
of the periods.

(B) Reflects incremental depreciation and amortization expense as a result
of the Recent Acquisitions.

(C) Reflects additional interest expense that would have been incurred had
the debt issued, assumed or incurred to finance the Recent Acquisitions
been outstanding from the beginning of the period to the dates of
acquisition.

(D) Reflects an adjustment to reduce interest expense relating to the use
of proceeds of the offering. See "Use of Proceeds".

(E) Represents an adjustment to reflect income tax expense at an assumed
effective tax rate of 40%.

(F) Represents the acquisitions of All Medical, Inc. and the I Care Group
completed during 1996. The estimated fair market values reflected are
based on preliminary estimates and assumptions and are subject to
revision. In management's opinion, the preliminary allocation is not
expected to be materially different than the final allocation. The
estimated excess of cost over fair values of net assets acquired
(goodwill) is being amortized over a 40-year period in accordance with
the provisions of APB No. 17. See Note 2 to the Company's Consolidated
Financial Statements for information regarding the Company's periodic
evaluation of recorded goodwill amounts and the related amortization
period. Also includes the conversion of 2,000,000 shares of Series A
Preferred Stock and 1,071,438 shares of Series B Preferred Stock into
2,000,000 and 1,339,297 shares of Common Stock, respectively and the
exercise of warrants to purchase 150,000 shares of Common Stock at an
exercise price of $2.00 per share.

(G) Adjustments for this offering include the issuance of 3,000,000 shares
of Common Stock offered by the Company hereby and the retirement of
approximately $26.0 million of indebtedness outstanding under the
Company's credit facility. See "Use of Proceeds".

P-5
<PAGE> 124
================================================================================

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTA TION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN TATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTI TUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 11
Dividend Policy........................ 11
Capitalization......................... 12
Dilution............................... 13
Selected Consolidated Financial Data... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 15
Business............................... 21
Management............................. 30
Certain Transactions................... 35
Principal and Selling Stockholders..... 36
Description of Capital Stock........... 37
Shares Eligible for Future Sale........ 40
Underwriting........................... 42
Legal Matters.......................... 43
Experts................................ 43
Additional Information................. 43
Index to Financial Statements.......... F-1
</TABLE>

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

3,250,000 SHARES

[HEALTHCOR HOLDINGS LOGO]

HEALTHCOR HOLDINGS, INC.

COMMON STOCK

-------------------
PROSPECTUS
-------------------

ALEX. BROWN & SONS
INCORPORATED

BEAR, STEARNS & CO. INC.

, 1996

================================================================================
<PAGE> 125

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The estimated expenses payable by the registrant in connection with the
registration, issuance and distribution of the Common Stock offered hereby,
other than underwriting discounts and commissions, are as follows.

<TABLE>
<S> <C>
SEC registration fee...................................................... $ 18,938
NASD filing fee........................................................... 6,000
Nasdaq National Market listing fee........................................ 41,380
Printing and engraving expenses........................................... 125,000
Legal fees and expenses................................................... 200,000
Accounting fees and expenses.............................................. 150,000
Fees and expenses of Transfer Agent....................................... 50,000
"Blue Sky" fees and expenses (including legal fees)....................... 20,000
Miscellaneous expenses.................................................... 88,682
--------
Total........................................................... $700,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Tenth of the registrant's Amended and Restated Certificate of
Incorporation provides that the registrant shall indemnify its officers and
directors to the maximum extent allowed by the Delaware General Corporation Law.
Pursuant to Section 145 of the Delaware General Corporation Law, the registrant
generally has the power to indemnify its present and former directors and
officers against expenses and liabilities incurred by them in connection with
any suit to which they are, or are threatened to be made, a party by reason of
their serving in those positions so long as they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best interests
of the registrant, and with respect to any criminal action, so long as they had
no reasonable cause to believe their conduct was unlawful. With respect to suits
by or in the right of the registrant, however, indemnification is generally
limited to attorneys' fees and other expenses and is not available if the person
is adjudged to be liable to the registrant, unless the court determines that
indemnification is appropriate. The statute expressly provides that the power to
indemnify authorized thereby is not exclusive of any rights granted under any
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
The registrant also has the power to purchase and maintain insurance for its
directors and officers. Additionally, Article Tenth of the Company's Amended and
Restated Certificate of Incorporation provides that, in the event that an
officer or director files suit against the registrant seeking indemnification of
liabilities or expenses incurred, the burden will be on the registrant to prove
that the indemnification would not be permitted under the Delaware General
Corporation Law.

The preceding discussion of the registrant's Amended and Restated
Certificate of Incorporation and Section 145 of the Delaware General Corporation
Law is not intended to be exhaustive and is qualified in its entirety by the
Amended and Restated Certificate of Incorporation and Section 145 of the
Delaware General Corporation Law.

The registrant intends to enter into indemnification agreements with the
registrant's directors and officers. Pursuant to such agreements, the registrant
will, to the extent permitted by applicable law, indemnify such persons against
all expenses, judgments, fines and penalties incurred in connection with the
defense or settlement of any actions brought against them by reason of the fact
that they were directors or officers of the registrant or assumed certain
responsibilities at the direction of the registrant.

The form of Underwriting Agreement included as Exhibit 1.1 provides for
indemnification of the registrant and certain controlling persons under certain
circumstances, including indemnification for liabilities under the Securities
Act of 1933.

II-1
<PAGE> 126

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

All securities described below were sold in reliance upon the exemption
from registration under the Securities Act provided by sections 3(a)(11), 3(b)
and/or 4(2) of the Securities Act and the rules promulgated thereunder.

1. Since June 1, 1992, the Company has periodically issued and
contributed an aggregate of 435,717 shares of Common Stock to the Company's
ESOP. Participation in the ESOP by the Company's employees is mandatory and
non-contributory. Accordingly, these contributions do not involve a sale of
securities.

2. On May 14, 1993, the Company issued and sold 25,000 shares of
Common Stock at an exercise price of $0.80 per share, to an individual
exercising stock options granted to such individual pursuant to the 1989
Stock Option Plan. In issuing such securities, the Company relied upon the
exemption from registration and prospectus delivery requirements of the
Securities Act provided by Section 4(2) and Rule 701 promulgated
thereunder.

3. On November 16, 1994, the Company issued, in connection with an
acquisition, a warrant to purchase 25,000 shares of Common Stock at an
exercise price of $2.00 per share. In issuing such securities, the Company
relied upon the exemption from registration and prospectus delivery
requirements of the Securities Act provided by Section 4(2).

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen Stock Certificate of the Company.
4.2 Credit Agreement by and between the Company and Texas Commerce Bank
National Association, dated May 16, 1996.
5.1 Opinion of Vinson & Elkins L.L.P.
10.1 Registration Rights Agreement, dated as of June 1, 1992 between the
Company and certain stockholders of the Company.
10.2 HealthCor Holdings, Inc. 1989 Stock Option Plan effective October 18,
1989.
10.3 Form of HealthCor Holdings, Inc. 1996 Long-Term Incentive Plan.
10.4 HealthCor Holdings, Inc. Employee Stock Ownership Plan and Trust, dated
April 1, 1990, as amended.
10.5 Warrant Agreement among the Company and certain individuals to purchase
Common Stock of the Company, dated as of June 1, 1992.
10.6 Warrant Agreement between the Company and an individual to purchase
Company Stock of the Company, dated as of November 1, 1994.
10.7 Form of Indemnification Agreement to be entered between the Company and
its executive officers and directors.
10.8 Stock Purchase Agreement, dated April 15, 1995, regarding the
acquisition of all of the outstanding capital stock of I Care, Inc. and
I Care Home I.V. Affiliates, Inc. and the assets of I Care of Arkansas,
Inc.
11.1 Statement concerning Computation of net income per common share.
</TABLE>

II-2
<PAGE> 127

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------------------- ------------------------------------------------------------------------
<C> <S>
21.1 List of Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Bell & Company.
*23.3 Consent of IFT & Barber, Chartered.
23.4 Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-4).
27.1 Financial Data Schedule.
</TABLE>

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

* Filed herewith.

(b) Financial Statement Schedule.

Report of Independent Public Accountants on Schedule.

Schedule II -- Valuation and Qualifying Accounts.

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes that:

(1) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-3
<PAGE> 128

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 1st day of July, 1996.

HEALTHCOR HOLDINGS, INC.

By: /s/ S. WAYNE BAZZLE
---------------------------------
S. Wayne Bazzle
Chairman of the Board and
Chief Executive Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature to the
registration statement appears below hereby appoints S. Wayne Bazzle and Cheryl
C. Bazzle, or either of them, as his attorney-in-fact with full power to act
alone, with full power of substitution or resubstitution, for him and in his
name, place and stead, in any and all capacities to sign on his behalf,
individually and in the capacities stated below, and to sign any and all
amendments and post-effective amendments to this registration statement, which
amendment or amendments may make such changes and additions as such
attorney-in-fact may deem necessary or appropriate and to file the same, with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or his or their substitutes, may lawfully do or cause
to be done by virtue hereof.

<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ------------------------------ ---------------
<C> <S> <C>
/s/ S. WAYNE BAZZLE Chairman of the Board, Chief July 1, 1996
- --------------------------------------------- Executive Officer and
S. Wayne Bazzle Director (Principal

Executive Officer)
/s/ CHERYL C. BAZZLE President, Chief Operating July 1, 1996
- --------------------------------------------- Officer and Director
Cheryl C. Bazzle

/s/ SUSAN L. BELSKE Vice President and Treasurer July 1, 1996
- --------------------------------------------- (Principal Financial and
Susan L. Belske Accounting Officer)

/s/ MICHAEL J. FOSTER Director July 1, 1996
- ---------------------------------------------
Michael J. Foster

/s/ ROBERT B. CRATES Director July 1, 1996
- ---------------------------------------------
Robert B. Crates
</TABLE>

II-4
<PAGE> 129

Upon the approval by the Company's Board of Directors of the 5 for 2 stock
split and increases in the number of authorized preferred and common shares
discussed in the third paragraph of Note 13 to the Company's consolidated
financial statements, we expect to be in a position to render the following
audit report.

ARTHUR ANDERSEN LLP

June 11, 1996

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To HealthCor Holdings, Inc.:

We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of HealthCor Holdings, Inc. and subsidiaries
included in this registration statement and have issued our report dated March
29, 1996 (except as to paragraph 3 in Note 12 for which the date is June ,
1996).

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commissions rules and are not part of the basis financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Dallas, Texas
March 29, 1996

S-1
<PAGE> 130

SCHEDULE II

HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- --------------------------------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
December 31, 1993:
Allowance for Doubtful Accounts...... $1,333,000 $1,317,000 $ (836,000)(b)(c) $1,814,000
Accumulated Amortization of
Intangible Assets................. 239,000 233,000 -- 472,000
---------- ---------- ----------- ----------
Total Reserves and
Allowances................. $1,572,000 $1,550,000 $ (836,000) $2,286,000
========== ========== =========== ==========
December 31, 1994:
Allowance for Doubtful Accounts...... $1,814,000 $1,116,000 $(1,645,000)(b)(c) $1,285,000
Accumulated Amortization of
Intangible Assets................. 472,000 245,000 -- 717,000
---------- ---------- ----------- ----------
Total Reserves and
Allowances................. $2,286,000 $1,361,000 $(1,645,000) $2,002,000
========== ========== =========== ==========
December 31, 1995:
Allowance for Doubtful Accounts...... $1,285,000 $1,489,000 $ (718,000)(b)(c) $2,056,000
Accumulated Amortization of
Intangible Assets................. 717,000 469,000 -- 1,186,000
---------- ---------- ----------- ----------
Total Reserves and
Allowances................. $2,002,000 $1,958,000 $ 718,000 $3,242,000
========== ========== =========== ==========
</TABLE>

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

(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.

(b) Recovery of bad debt write-off.

S-2
<PAGE> 131

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------------------- ------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen Stock Certificate of the Company.
4.2 Credit Agreement by and between the Company and Texas Commerce Bank
National Association, dated May 16, 1996.
5.1 Opinion of Vinson & Elkins L.L.P.
10.1 Registration Rights Agreement, dated as of June 1, 1992 between the
Company and certain stockholders of the Company.
10.2 HealthCor Holdings, Inc. 1989 Stock Option Plan effective October 18,
1989.
10.3 Form of HealthCor Holdings, Inc. 1996 Long-Term Incentive Plan.
10.4 HealthCor Holdings, Inc. Employee Stock Ownership Plan and Trust, dated
April 1, 1990, as amended.
10.5 Warrant Agreement among the Company and certain individuals to purchase
Common Stock of the Company, dated as of June 1, 1992.
10.6 Warrant Agreement between the Company and an individual to purchase
Company Stock of the Company, dated as of November 1, 1994.
10.7 Form of Indemnification Agreement to be entered between the Company and
its executive officers and directors.
10.8 Stock Purchase Agreement, dated April 15, 1995, regarding the
acquisition of all of the outstanding capital stock of I Care, Inc. and
I Care Home I.V. Affiliates, Inc. and the assets of I Care of Arkansas,
Inc.
11.1 Statement concerning Computation of net income per common share.
21.1 List of Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Bell & Company.
*23.3 Consent of IFT & Barber, Chartered.
23.4 Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-4).
27.1 Financial Data Schedule.
</TABLE>

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

* Filed herewith.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement.

ARTHUR ANDERSEN LLP

Dallas, Texas

July 1, 1996

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement.

BELL & COMPANY, PA

July 1, 1996

<PAGE> 1

EXHIBIT 23.3

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement.

IFFT & BARBER, CHARTERED

Leawood, Kansas
July 1, 1996