ODYSSEY HEALTHCARE INC, S-1, 2000-12-08

ODYSSEY HEALTHCARE INC
S-1, 2000-12-08

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 2000

REGISTRATION NO. 333-
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--------------------------------------------------------------------------------

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

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------

ODYSSEY HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 8050 43-1723043
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>

<TABLE>
<S> <C>
RICHARD R. BURNHAM
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
ODYSSEY HEALTHCARE, INC.
717 N. HARWOOD 717 N. HARWOOD
SUITE 1500 SUITE 1500
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
(214) 922-9711 (214) 922-9711
(Address, Including Zip Code, and Telephone (Name, Address, Including Zip Code, and
Number, Including Telephone Number,
Area Code, of Registrant's Principal Executive Including Area Code, of Agent For Service)
Offices)
</TABLE>

Copies of all communications to:

<TABLE>
<S> <C>
JEFFREY A. CHAPMAN PETER J. LOUGHRAN
P. GREGORY HIDALGO DEBEVOISE & PLIMPTON
VINSON & ELKINS L.L.P. 875 THIRD AVENUE
2001 ROSS AVENUE, SUITE 3700 NEW YORK, NEW YORK 10022
DALLAS, TEXAS 75201 TELEPHONE: (212) 909-6000
TELEPHONE: (214) 220-7700 FACSIMILE: (212) 909-6836
FACSIMILE: (214) 220-7716
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this 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, please check the following box
and list the Securities Act 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, check the following box and list the Securities Act
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(d)
under the Securities Act, check the following box and list the Securities Act
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,
please check the following box. [ ]
----------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value.......................... $57,500,000 $15,180
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.

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

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

The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and it is not soliciting an offer
to buy these securities in any state where the offer or sale is not
permitted.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED DECEMBER 8, 2000
PROSPECTUS

[ODYSSEY HEALTHCARE 4/C LOGO]
COMMON STOCK
----------------------
This is Odyssey HealthCare, Inc.'s initial public offering of common
stock. We are selling all of the shares.

We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "ODSY."

INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
----------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Odyssey HealthCare............ $ $
</TABLE>

The underwriters may also purchase up to an additional
shares from us at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.

The shares will be ready for delivery on or about , 2001.

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

MERRILL LYNCH & CO.
CIBC WORLD MARKETS
SG COWEN

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

The date of this prospectus is , 2001
<PAGE> 3

[DESCRIPTION OF ARTWORK:
MAP OF THE UNITED STATES INDICATING LOCATIONS OF OUR HOSPICES IN LANDSCAPE
FORMAT.]
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 7
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Consolidated Financial and Operating Data.......... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 34
Management.................................................. 57
Certain Relationships and Related Transactions.............. 65
Security Ownership of Principal Stockholders and
Management................................................ 68
Description of Capital Stock................................ 71
Shares Eligible for Future Sale............................. 77
Underwriting................................................ 79
Legal Matters............................................... 82
Experts..................................................... 82
Where You Can Find More Information......................... 82
Index to Financial Statements............................... F-1
</TABLE>

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

You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
<PAGE> 5

(This page has been left blank intentionally.)
<PAGE> 6

SUMMARY

This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including the risk factors and
the consolidated financial statements and the notes to those financial
statements appearing elsewhere in this prospectus, before you decide whether to
invest in our common stock.

ODYSSEY HEALTHCARE

OVERVIEW

We are a leading provider of hospice services in the United States. As a
hospice care provider, our goal is to improve the quality of life of terminally
ill patients and their families. Hospice services focus on palliative care for
patients with life-limiting illnesses, which is care directed at managing pain
and other discomforting symptoms and addressing the psychosocial and spiritual
needs of patients and their families. We believe that our overriding focus on
the delivery of quality, responsive service differentiates us from other hospice
care providers.

We have grown rapidly since we opened our first hospice location in January
1996. Through a series of acquisitions and the development of new hospice
locations, we now have 32 hospice locations to serve patients and their families
in 18 states. During September 2000, our average daily census was 2,242
patients, which represents a 95.0% increase over our average daily census in
September 1999 of 1,150 patients. Our net patient service revenue increased from
$1.0 million in 1996 to $46.5 million in 1999. Our net patient service revenue
of $58.9 million for the nine months ended September 30, 2000 represents an
increase of 83.5% over our net patient service revenue of $32.1 million for the
nine months ended September 30, 1999. We intend to continue our growth through a
disciplined strategy of acquisitions, development of new hospice locations and
internal growth.

Hospice care is a covered benefit under the Medicare program, which is the
largest payor for hospice services. Medicare pays hospice providers fixed daily
or hourly amounts based on the level of care provided to hospice patients and
their families. In addition to Medicare, hospice care is covered by Medicaid in
43 states and the District of Columbia and by most private insurance plans.

HOSPICE INDUSTRY AND MARKET OPPORTUNITY

The hospice industry has grown significantly during the last decade.
According to the Health Care Financing Administration, Medicare payments for
hospice services increased from approximately $118 million in 1988 to
approximately $2.5 billion in 1999. According to the United States General
Accounting Office, 1,208 Medicare-certified hospices operated in the United
States in 1992, serving more than 143,000 Medicare beneficiaries who elected
hospice care. By 1998, the number of Medicare-certified hospices increased to
2,196, serving nearly 360,000 Medicare beneficiaries. We believe that these
significant increases are due in large part to increasing public awareness and
acceptance of hospice care and to the benefits hospice care provides to patients
and their families and payors.

We believe that a number of factors will drive growth in the hospice
industry, and that we are well positioned to take advantage of these growth
opportunities:

- The population of the United States is aging.

- The market for hospice care and services is underserved.

- Hospice care provides significant cost savings to the Medicare program.

- The hospice industry is highly fragmented.

- There is increasing public awareness and acceptance of hospice care.

1
<PAGE> 7

OUR COMPETITIVE ADVANTAGES

We have grown rapidly and achieved profitability as a result of the
following competitive advantages:

WE ARE ONE OF THE LARGEST PROVIDERS OF HOSPICE CARE. We are one of the
largest providers of hospice care in the United States in terms of both average
daily census and number of locations. We believe that our size provides us with
numerous operating advantages over our competitors, including:

- We maintain a professionally trained and dedicated marketing team.

- We actively manage costs across our multiple hospice locations and have
centralized corporate services.

- We have developed and implemented and maintain a comprehensive quality
assurance program.

WE HAVE A PROVEN TRACK RECORD IN GROWING OUR BUSINESS THROUGH A BALANCED
GROWTH STRATEGY. We have grown rapidly through a focused strategy of
acquisitions, development of new hospice locations and internal growth. Of our
32 hospice locations, we acquired 21 hospices, developed nine and are currently
developing two additional locations. We have successfully increased our patient
referrals in each of the markets in which we operate by utilizing our marketing
representatives to establish and develop referral sources, as well as by
providing responsive, quality service.

WE ARE A RESPONSIVE, COMPREHENSIVE PROVIDER OF QUALITY HOSPICE
SERVICES. We focus on the prompt and efficient delivery of services to our
patients and their families. We believe that our ability to consistently provide
quality, responsive and comprehensive service to our patients and their families
has been a key factor in our ability to increase patient referrals.

WE HAVE A STANDARDIZED AND EFFICIENT OPERATING MODEL. We operate in a
fixed payment environment, with payments based on the level of care that we
provide to our patients and their families. Accordingly, controlling our costs
is essential to maintaining our profitability. Our standardized operating model
and our centralized corporate services enable us to quickly control costs at our
hospice locations, while providing quality, responsive and comprehensive service
to our patients and their families.

WE HAVE AN EXPERIENCED MANAGEMENT TEAM. Our six executive officers have
over 35 years of combined experience in the hospice industry. Our senior
management team operates as a cohesive, complementary group, reflecting
extensive marketing experience, as well as operating knowledge and understanding
of the regulatory environment in which we operate.

OUR BUSINESS STRATEGY

Our goal is to become the leading provider of hospice care in the United
States. To achieve this goal, we have adopted the following strategies:

SELECTIVELY ACQUIRE HOSPICES. We intend to expand our business by actively
pursuing strategic acquisitions of hospices in new and existing markets
throughout the United States. We believe that significant opportunities exist
for growth through acquisitions of hospices. The hospice industry consists of
over 2,000 hospice locations, most of which are operated by small,
community-based providers. We believe that many of these providers lack the
expertise and capital resources necessary to readily provide all levels of
hospice care, operate efficiently and compete effectively.

DEVELOP NEW HOSPICE LOCATIONS. In addition to our acquisitions initiative,
we intend to expand our business by actively pursuing the development of new
hospice locations in new and existing markets throughout the United States.
After we identify a market in which to develop a new hospice location, we
utilize our standardized approach to develop the location. This approach has
been successful in increasing patient census at our new locations.

INCREASE PATIENT REFERRALS. We actively seek to increase patient referrals
at all locations by both increasing patient referrals from existing referral
sources and establishing new referral sources. In each of

2
<PAGE> 8

our markets, we have implemented a marketing plan designed to address the
specific needs of the patient referral sources in that market and to promote the
services we provide to our patients and their families.

MANAGE PATIENT CARE COSTS BY APPLYING OUR ACUITY-BASED CASE MANAGEMENT
MODEL. We actively manage our patient care costs through an acuity-based case
management model. This model allows us to efficiently allocate our resources,
including staffing, to optimize patient care in a cost-appropriate manner. Our
model focuses on providing services to patients and their families by tailoring
our care to the individualized and changing needs of our patients and their
families.

OTHER INFORMATION

We were incorporated in Delaware in August 1995 and began operations in
January 1996. Our executive offices are located at 717 N. Harwood, Suite 1500,
Dallas, Texas 75201, and our telephone number is (214) 922-9711. Our website
address is www.odyssey-healthcare.net. INFORMATION CONTAINED ON OUR WEBSITE DOES
NOT CONSTITUTE PART OF THIS PROSPECTUS.

3
<PAGE> 9

THE OFFERING

Common stock offered by Odyssey
HealthCare.......................... shares

Common stock outstanding after the
offering............................ shares

Use of proceeds..................... We estimate that our net proceeds
from this offering, after deducting
underwriting discounts and estimated
expenses, will be approximately $
million. We intend to use the net
proceeds:

- to repay all outstanding
indebtedness under our credit
agreement;

- to repay our 12% senior
subordinated notes;

- to finance potential
acquisitions of hospices and the
development of new hospice
locations; and

- for general corporate purposes.

See "Use of Proceeds."

Risk Factors........................ See "Risk Factors" and other
information included in this
prospectus for a discussion of
factors you should carefully
consider before deciding to invest
in our common stock.

Proposed Nasdaq National Market
symbol.............................. ODSY

Unless we indicate otherwise, all information in this prospectus (1)
assumes no exercise of the over-allotment option granted to the underwriters;
(2) assumes the conversion into common stock of each outstanding share of our
outstanding preferred stock, which will happen automatically upon the completion
of this offering; (3) gives effect to a one for reverse stock split of
our outstanding shares of common stock to be completed prior to the completion
of this offering; and (4) excludes:

- 1,977,627 shares of common stock issuable upon the exercise of
outstanding stock options granted by us with exercise prices ranging from
$0.05 to $1.55 per share and a weighted average exercise price of $0.59
per share; and

- 2,063,513 shares of common stock issuable upon the exercise of
outstanding warrants issued by us with exercise prices ranging from $0.01
to $1.25 per share and a weighted average exercise price of $0.08 per
share.

4
<PAGE> 10

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table summarizes the consolidated statement of operations and
consolidated balance sheet data for our business. The historical results
presented below are not necessarily indicative of the results to be expected for
any future period. For a more detailed explanation of this financial data, see
"Selected Consolidated Financial and Operating Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and the notes thereto appearing elsewhere in
this prospectus.

The unaudited pro forma consolidated balance sheet data give effect to the
automatic conversion of all of our preferred stock into common stock upon
completion of this offering.

The unaudited pro forma consolidated balance sheet data, as adjusted, give
further effect to the sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share, after deducting
underwriting discounts and our estimated offering expenses and the application
of a portion of the net proceeds to repay outstanding indebtedness under our
credit agreement and our 12% senior subordinated notes.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient service revenue........ $ 6,901 $ 27,239 $ 46,460 $ 32,063 $ 58,854
Operating expenses:
Direct hospice care.............. 4,849 16,389 24,014 16,926 30,348
General and administrative....... 6,167 14,527 18,750 13,406 20,351
Stock-based compensation
charges....................... -- -- -- -- 321
Provision for uncollectible
accounts...................... 187 1,203 2,031 1,370 2,024
Depreciation and amortization.... 140 722 1,691 1,142 1,222
---------- ---------- ---------- ---------- -----------
Total operating expenses........... 11,343 32,841 46,486 32,844 54,266
---------- ---------- ---------- ---------- -----------
Income (loss) from operations...... (4,442) (5,602) (26) (781) 4,588
Other income (expense):
Interest income.................. 308 165 35 30 22
Interest expense................. (9) (1,086) (2,209) (1,534) (2,179)
---------- ---------- ---------- ---------- -----------
299 (921) (2,174) (1,504) (2,157)
---------- ---------- ---------- ---------- -----------
Income (loss) before income
taxes............................ (4,143) (6,523) (2,200) (2,285) 2,431
---------- ---------- ---------- ---------- -----------
Provision for income taxes......... -- -- -- 15 270
---------- ---------- ---------- ---------- -----------
Net income (loss).................. (4,143) (6,523) (2,200) (2,300) 2,161
Preferred stock dividends.......... 847 1,122 1,320 990 973
---------- ---------- ---------- ---------- -----------
Net income (loss) applicable to
common stockholders.............. $ (4,990) $ (7,645) $ (3,520) $ (3,290) $ 1,188
========== ========== ========== ========== ===========
Net income (loss) per common share:
Basic............................ $ (1.37) $ (2.06) $ (0.91) $ (0.85) $ 0.31
Diluted.......................... $ (1.37) $ (2.06) $ (0.91) $ (0.85) $ 0.09
Weighted average shares
outstanding:
Basic............................ 3,637,570 3,705,866 3,886,395 3,884,775 3,892,002
Diluted.......................... 3,637,570 3,705,866 3,886,395 3,884,775 23,839,897
</TABLE>

(continued on following page)

5
<PAGE> 11

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ---------------------
1997 1998 1999 1999 2000
------- -------- ------- ----------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Number of hospice locations(1)............ 10 25 30 25 29
Admissions(2)............................. 1,282 5,145 8,303 5,991 9,321
Average daily census(3)................... 165 651 1,158 1,071 1,878
Days of care(4)........................... 60,144 237,589 422,577 293,365 514,475
Adjusted EBITDA(5)........................ $(4,302) $ (4,880) $ 1,665 $ 361 $ 6,131
Adjusted EBITDA as a % of net patient
service revenue(5)...................... (62.3)% (17.9)% 3.6% 1.1% 10.4%
Cash flows provided by (used in) operating
activities.............................. $(4,629) $(11,054) $(1,588) $ (298) $ 3,107
Cash flows used in investing activities... $(2,400) $ (5,880) $(5,340) $(1,360) $ (397)
Cash flow provided by (used in) financing
activities.............................. $ 8,038 $ 14,917 $ 6,702 $ 1,155 $(2,934)
</TABLE>

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................... $ (533) $ (533) $
Total assets................................................ 34,943 34,943
Total long-term debt, including current portion............. 19,035 19,035
Total convertible redeemable preferred stock................ 20,833 -- --
Common stockholders' equity (deficit)....................... (15,147) 5,686
</TABLE>

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

(1) Number of hospice locations at end of period. We transferred our operations
in New Orleans (Kenner), Louisiana to our New Orleans (Metairie) hospice
location, which resulted in a decrease in the number of our hospice
locations from December 31, 1999 to September 30, 2000.

(2) Represents the total number of patients admitted into our hospice program
during the period.

(3) Represents the average number of patients for whom we provided hospice care
each day during the period.

(4) Represents average daily census multiplied by the number of days during the
period.

(5) Adjusted EBITDA consists of income (loss) before interest, income taxes,
depreciation and amortization, and excludes stock-based compensation
charges. We present adjusted EBITDA to enhance the understanding of our
operating results. Adjusted EBITDA is not a measure of financial performance
under generally accepted accounting principles. Items excluded from adjusted
EBITDA are significant components in understanding and assessing financial
performance. Adjusted EBITDA is a key measure used by us to evaluate our
operations and provides useful information to investors. Adjusted EBITDA
should not be considered in isolation or as an alternative to net income,
cash flows generated by operations, investing or financing activities, or
other financial statement data presented in the consolidated financial
statements as indicators of financial performance or liquidity. Because
adjusted EBITDA is not a measurement determined in accordance with generally
accepted accounting principles and is thus susceptible to varying
calculations, adjusted EBITDA as presented may not be comparable to other
similarly titled measures of performance of other companies.
]

6
<PAGE> 12

RISK FACTORS

An investment in our common stock will be subject to the significant risks
inherent in our business. You should consider carefully the risks and
uncertainties described below and the other information included in this
prospectus before you decide to purchase any shares of our common stock. If any
of the events described below occurs, our business could be adversely affected
in a material way. This could cause the trading price of our common stock to
decline, perhaps significantly.

IF THERE ARE CHANGES IN THE RATES OR METHODS OF GOVERNMENT PAYMENTS FOR OUR
SERVICES, OUR NET PATIENT SERVICE REVENUE AND PROFITS COULD MATERIALLY DECLINE.

We are highly dependent on payments from Medicare and Medicaid.
Approximately 93.8%, 93.1%, 94.1% and 95.3% of our net patient service revenue
for the years ended December 31, 1997, 1998 and 1999 and for the nine months
ended September 30, 2000, respectively, consisted of payments from the Medicare
and Medicaid programs. Because we generally receive fixed payments for our
hospice care services based on the level of care provided to our hospice
patients, we are at risk for the cost of services provided to our hospice
patients. Reductions in amounts paid by government programs for our services or
changes in methods or regulations governing payments could cause our net patient
service revenue and profits to materially decline.

WE OPERATE IN AN INDUSTRY THAT IS SUBJECT TO EXTENSIVE FEDERAL, STATE AND LOCAL
REGULATION, AND CHANGES IN LAW AND REGULATORY INTERPRETATIONS COULD REDUCE OUR
NET PATIENT SERVICE REVENUE AND PROFITABILITY.

The healthcare industry is subject to extensive federal, state and local
laws, rules and regulations relating to, among others:

- payment for services;

- conduct of operations, including fraud and abuse, anti-kickback
prohibitions, physician self-referral prohibitions and false claims; and

- facility and professional licensure, including certificates of need,
surveys, certification and recertification requirements, and corporate
practice of medicine prohibitions.

In recent years, Congress and some state legislatures have introduced an
increasing number of proposals to make significant changes in the healthcare
system. Changes in law and regulatory interpretations could reduce our net
patient service revenue and profitability.

Recently, there have been heightened coordinated civil and criminal
enforcement efforts by both federal and state government agencies relating to
the healthcare industry. There has also been an increase in the filing of
actions by private individuals on behalf of the federal government against
healthcare companies alleging the filing of false or fraudulent Medicare or
Medicaid claims. This heightened enforcement activity increases our potential
exposure to damaging lawsuits, investigations and other enforcement actions. Any
such action could distract our management and adversely affect our business
reputation and profitability.

In the future, different interpretations or enforcement of laws, rules and
regulations governing the healthcare industry could subject our current business
practices to allegations of impropriety or illegality or could require us to
make changes in our facilities, equipment, personnel, services and capital
expenditure programs, increase our operating expenses and distract our
management. If we fail to comply with these extensive laws and government
regulations, we could become ineligible to receive government program payments,
suffer civil and criminal penalties or be required to make significant changes
to our operations. In addition, we could be forced to expend considerable
resources responding to an investigation or other enforcement action under these
laws or regulations. See "Business -- Government Regulation."

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<PAGE> 13

OUR GROWTH STRATEGY TO ACQUIRE OTHER HOSPICES MAY NOT BE SUCCESSFUL AND THE
INTEGRATION OF FUTURE ACQUISITIONS MAY BE DIFFICULT AND DISRUPTIVE TO OUR
ONGOING BUSINESS.

A significant element of our growth strategy is expansion through the
acquisition of other hospices. We cannot assure you that our acquisition
strategy will be successful. The success of our acquisition strategy is
dependent upon a number of factors, including:

- our ability to identify suitable acquisition candidates and negotiate
favorable acquisition terms, including purchase price;

- our ability to compete effectively with other acquirors which may have
greater financial resources than we do;

- the availability of financing on terms favorable to us, or at all;

- our ability to satisfy possible higher debt service obligations resulting
from acquisitions;

- financial covenants under our existing credit agreement or future credit
agreements that may limit our ability to finance future acquisitions;

- our ability to integrate effectively the systems and operations of
acquired hospices;

- our ability to manage a large and geographically diverse group of hospice
locations;

- the financial performance of acquired hospices after acquisition;

- our ability to retain key personnel of acquired hospices; and

- our ability to obtain required regulatory approvals.

Acquisitions involve a number of other risks, including diversion of
management's attention from other business concerns and the assumption of known
or unknown liabilities of acquired hospices, including liabilities for failure
to comply with healthcare laws and regulations. We may not successfully overcome
these risks or any other problems encountered in connection with our acquisition
strategy.

An estimated 63% of hospices in the United States are not-for-profit
programs. Accordingly, it is likely that a substantial number of acquisition
opportunities will involve hospices operated by not-for-profit entities. In
recent years, several states have increased review and oversight of transactions
involving the sale of healthcare facilities by not-for-profit entities. Although
the level of interest varies from state to state, the current trend is to
provide for increased governmental review, and in some cases approval, of
transactions in which a not-for-profit entity sells a healthcare facility or
business. This increased scrutiny may increase the difficulty in completing or
prevent the completion of acquisitions in some states in the future.

OUR GROWTH STRATEGY TO DEVELOP NEW HOSPICE LOCATIONS IN NEW AND EXISTING MARKETS
MAY NOT BE SUCCESSFUL, WHICH COULD ADVERSELY IMPACT OUR GROWTH AND
PROFITABILITY.

In addition to acquiring existing hospices, a significant element of our
growth strategy is expansion of our business by developing new hospice locations
in new and existing markets. This aspect of our growth strategy may not be
successful, which could adversely impact our growth and profitability. We cannot
assure you that we will be able to:

- identify markets that meet our selection criteria for new hospice
locations;

- hire and retain a qualified management team to operate each of our new
hospice locations;

- manage a large and geographically diverse group of hospice locations;

- become Medicare and Medicaid certified in new markets;

8
<PAGE> 14

- generate sufficient hospice admissions in new markets to operate
profitably in these new markets; or

- compete effectively with existing hospices in new markets.

OUR LOSS OF KEY MANAGEMENT PERSONNEL OR OUR INABILITY TO HIRE AND RETAIN SKILLED
EMPLOYEES COULD ADVERSELY AFFECT OUR BUSINESS AND OUR ABILITY TO INCREASE
PATIENT REFERRALS.

Our future success depends, in significant part, upon the continued service
of our senior management personnel, particularly Richard R. Burnham, our
Chairman, President and Chief Executive Officer, and David C. Gasmire, our
Executive Vice President and Chief Operating Officer. The loss of the services
of one or more of our key senior management personnel or our inability to hire
and retain new skilled employees could adversely affect our future operating
results. In addition, the loss of key marketing representatives could negatively
impact our ability to maintain or increase patient referrals, a key aspect of
our growth strategy.

Competition for skilled employees is intense, and the process of locating
and recruiting skilled employees with the combination of qualifications and
attributes required to care effectively for terminally ill patients and their
families can be difficult and lengthy. We cannot assure you that we will be
successful in attracting, retaining or training highly skilled nursing,
management, marketing, operations, admissions and other personnel. Our business
could be disrupted and our growth and profitability negatively impacted if we
are unable to attract and retain skilled employees.

IF ANY OF OUR HOSPICE LOCATIONS FAILS TO COMPLY WITH THE MEDICARE CONDITIONS OF
PARTICIPATION, THAT HOSPICE LOCATION COULD BE TERMINATED FROM THE MEDICARE
HOSPICE PROGRAM, THEREBY ADVERSELY AFFECTING OUR NET PATIENT SERVICE REVENUE AND
PROFITABILITY.

Each of our hospice locations must comply with the extensive conditions of
participation of the Medicare hospice program. If any of our hospice locations
fails to meet any of the Medicare conditions of participation, that hospice
location may receive a notice of deficiency from the applicable state surveyor.
If that hospice location then fails to institute a plan of correction and
correct the deficiency within the correction period provided by the state
surveyor, that hospice location could be terminated from the Medicare program.
For example, under the Medicare hospice program, each of our hospice locations
must demonstrate that volunteers provide administrative and direct patient care
services in an amount equal to at least five percent of the total patient care
hours provided by our employees and contract staff at the hospice location. If
we are unable to attract a sufficient number of volunteers at one of our hospice
locations to meet this requirement, that location could be terminated from the
Medicare hospice program if the location fails to address the deficiency within
the applicable correction period. Any termination of one or more of our hospice
locations from the Medicare hospice program for failure to satisfy the volunteer
or other conditions of participation could adversely affect our net patient
service revenue and profitability.

IF WE ARE UNABLE TO MAINTAIN RELATIONSHIPS WITH EXISTING PATIENT REFERRAL
SOURCES OR TO ESTABLISH NEW REFERRAL SOURCES, OUR GROWTH AND PROFITABILITY COULD
BE ADVERSELY AFFECTED.

Our success is heavily dependent on referrals from physicians, nursing
homes, assisted living facilities, adult care centers, hospitals, managed care
companies, insurance companies and other patient referral sources in the
communities that our hospice locations serve, as well as on our ability to
maintain good relations with these referral sources. Our referral sources are
not contractually obligated to refer hospice patients to us and may refer their
patients to other hospice care providers, or not at all. Our growth and
profitability depend significantly on our ability to establish and maintain
close working relationships with these patient referral sources and to increase
awareness and acceptance of hospice care by our referral sources and their
patients. We cannot assure you that we will be able to maintain our existing
referral source relationships or that we will be able to develop and maintain
new relationships in existing or new markets. Our loss of existing relationships
or our failure to develop new relationships could adversely affect

9
<PAGE> 15

our ability to expand our operations and operate profitably. Moreover, we cannot
assure you that awareness or acceptance of hospice care will increase.

MANY STATES HAVE CERTIFICATE OF NEED LAWS OR OTHER REGULATORY PROVISIONS THAT
MAY ADVERSELY IMPACT OUR ABILITY TO EXPAND INTO NEW MARKETS AND THEREBY LIMIT
OUR ABILITY TO GROW AND TO INCREASE OUR NET PATIENT SERVICE REVENUE.

Many states have enacted certificate of need laws that require prior state
approval to open new healthcare facilities or expand services at existing
facilities. Some states apply these laws to hospices. In addition, a few states
have additional barriers to entry. For example, Florida places restrictions on
the ability of for-profit corporations to own and operate hospices, and New York
places restrictions on the corporate ownership of hospices. Accordingly, we
cannot operate in Florida and New York. These laws could affect our ability to
expand into new markets and to expand our services and facilities in existing
markets.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST OTHER HOSPICE PROVIDERS, AND
COMPETITIVE PRESSURES MAY LIMIT OUR ABILITY TO MAINTAIN OR INCREASE OUR MARKET
POSITION AND ADVERSELY AFFECT OUR PROFITABILITY.

Hospice care in the United States is competitive. In many areas in which
our hospices are located, we compete with a large number of organizations,
including:

- community-based hospice providers;

- national and regional companies;

- hospital-based hospice and palliative care programs;

- nursing homes; and

- home health agencies.

Some of our current and potential competitors have or may obtain
significantly greater financial and marketing resources than us. Various
healthcare companies have diversified into the hospice market. For example, a
few large healthcare providers, including Beverly Enterprises, Inc. and Manor
Care, Inc., have entered the hospice business directly or through affiliates.
Relatively few barriers to entry exist in our local markets. Accordingly, other
companies, including hospitals and other healthcare organizations that are not
currently providing hospice care, may expand their services to include hospice
care. We may encounter increased competition in the future that could negatively
impact patient referrals to us, limit our ability to maintain or increase our
market position and adversely affect our profitability.

IF OUR COSTS WERE TO INCREASE MORE RAPIDLY THAN THE FIXED PAYMENT ADJUSTMENTS WE
RECEIVE FOR OUR HOSPICE SERVICES FROM MEDICARE AND MEDICAID, OUR PROFITABILITY
COULD BE NEGATIVELY IMPACTED.

We generally receive fixed payments for our hospice services based on the
level of care that we provide to patients and their families. Accordingly, our
profitability is largely dependent on our ability to manage costs of providing
hospice services. Medicare and Medicaid currently provide for an annual
adjustment of the various hospice payment rates based on the increase or
decrease of the medical care expenditure category of the Consumer Price Index;
however, the increases have historically been less than actual inflation. If
this adjustment were eliminated or reduced, or if our costs of providing hospice
services, over one-half of which consist of labor costs, increased more than the
annual adjustment, our profitability could be negatively impacted. In addition,
cost pressures resulting from shorter patient lengths of stay and the use of
more expensive forms of palliative care, including drugs and drug delivery
systems, could negatively impact our profitability.

10
<PAGE> 16

NEW FEDERAL AND STATE LEGISLATIVE AND REGULATORY INITIATIVES RELATING TO PATIENT
PRIVACY COULD REQUIRE US TO EXPEND SUBSTANTIAL SUMS ON ACQUIRING AND
IMPLEMENTING NEW INFORMATION SYSTEMS, WHICH COULD NEGATIVELY IMPACT OUR
PROFITABILITY.

There are currently numerous legislative and regulatory initiatives at both
the state and federal levels that address patient privacy concerns. In
particular, the Health Insurance Portability and Accountability Act of 1996
contains provisions that may require us to implement expensive new computer
systems and business procedures designed to protect the privacy of each of our
hospice patient's individual health information. Because final regulations
addressing patient privacy have not been issued, we cannot predict the total
financial or other impact of these regulations on us. Compliance with these
rules could require us to spend substantial sums, which could negatively impact
our profitability. See "Business -- Government Regulation."

OUR NET PATIENT SERVICE REVENUE AND PROFITABILITY MAY BE CONSTRAINED BY COST
CONTAINMENT INITIATIVES UNDERTAKEN BY INSURERS AND MANAGED CARE COMPANIES.

Initiatives undertaken by insurers and managed care companies to contain
healthcare costs affect the profitability of our hospices. We have a number of
contractual arrangements with insurers and managed care companies for providing
hospice care for a fixed fee. These payors attempt to control healthcare costs
by contracting with hospices and other healthcare providers to obtain services
on a discounted basis. We believe that this trend may continue and may limit
payments for healthcare services, including hospice services. In addition,
future changes in Medicare related to Medicare HMO programs could result in
managed care companies becoming financially responsible for providing hospice
care. As a result, managed care companies would be responsible for payments to
us out of their Medicare payments, and a greater percentage of our net patient
service revenue could come from managed care companies. As managed care
companies attempt to control hospice-related costs, they could reduce payments
to us for hospice services. These developments could negatively impact our net
patient service revenue and profitability.

WE HAVE A LIMITED HISTORY OF PROFITABILITY AND MAY INCUR SUBSTANTIAL NET LOSSES
IN THE FUTURE.

We began operations in January 1996. For the years ended December 31, 1996,
1997, 1998 and 1999, we reported net losses of $1.6 million, $4.1 million, $6.5
million and $2.2 million, respectively. Although we reported net income of $2.2
million for the nine months ended September 30, 2000, we cannot assure you that
we will operate profitably in the future. In addition, we may experience
significant quarter-to-quarter variations in operating results. We are pursuing
a growth strategy focused on acquisitions of hospices and development of new
hospice locations. Our growth strategy may involve, among other things,
significant cash expenditures, debt incurrence, additional operating losses,
amortization of intangible assets of acquired companies and expenses that could
negatively impact our profitability on a quarterly and an annual basis. Our net
patient service revenue could be adversely impacted by a number of factors, in
particular, reductions in Medicare payment rates and patient lengths of stay,
which may not be within our control.

THE ACCELERATION OF THE AMORTIZATION OF OUR GOODWILL OR A SIGNIFICANT REDUCTION
IN THE CARRYING VALUE OF OUR GOODWILL COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR PROFITABILITY.

A substantial portion of our total assets consist of intangible assets,
primarily goodwill. Goodwill, net of accumulated amortization, accounted for
approximately 45.2% of our total assets as of September 30, 2000 and is being
amortized over a period of 20 years. Any event which results in the significant
acceleration of amortization of our goodwill or a significant reduction in the
carrying value of our goodwill, such as closure of a hospice location or
sustained operating losses, could have a material adverse effect on our
profitability.

11
<PAGE> 17

PROFESSIONAL AND GENERAL LIABILITY CLAIMS MAY HAVE AN ADVERSE EFFECT ON US
EITHER BECAUSE OUR INSURANCE COVERAGE MAY BE INADEQUATE TO COVER THE LOSSES OR
BECAUSE CLAIMS AGAINST US, REGARDLESS OF MERIT OR EVENTUAL OUTCOME, MAY
ADVERSELY AFFECT OUR REPUTATION, OUR ABILITY TO OBTAIN PATIENT REFERRALS OR OUR
ABILITY TO EXPAND OUR BUSINESS.

In recent years, participants in the healthcare industry have become
subject to an increasing number of lawsuits, including allegations of medical
malpractice. Many of these lawsuits involve large claims and substantial defense
costs. From time to time, we are subject to these types of lawsuits. While we
maintain professional and general liability insurance, some risks and
liabilities, including claims for punitive damages, are not covered by
insurance. In addition, we cannot assure you that our coverage will be adequate
to cover potential losses. While we have been able to obtain liability insurance
in the past, insurance can be expensive and may not be available in the future
on terms acceptable to us, or at all. Claims, regardless of their merit or
eventual outcome, may also adversely affect our reputation, our ability to
obtain patient referrals or our ability to expand our business, as well as
divert management resources from the operation of our business.

WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH,
AND WE MAY NOT BE ABLE TO OBTAIN IT ON TERMS ACCEPTABLE TO US, OR AT ALL.

Continued expansion of our business, including growth through acquisitions
and the development of new hospice locations, may require additional capital. In
the past, we have relied on funds raised through private issuances of debt and
equity and also through bank financing and cash flows from operations to support
our growth. In the future, required financing may not be available or may be
available only on terms that are not favorable to us. If we are unable to raise
additional funds, we may have to delay or abandon some or all of our growth
strategy. Further, if additional funds are raised through the issuance of
additional equity securities, the percentage ownership of our stockholders would
be diluted. Any new equity securities may have rights, preferences or privileges
senior to those of our common stock.

IF THE OWNERSHIP OF OUR COMMON STOCK CONTINUES TO BE HIGHLY CONCENTRATED, IT MAY
PREVENT YOU AND OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE
DECISIONS AND MAY RESULT IN CONFLICTS OF INTEREST.

Following the closing of this offering, Capital Resource Lenders III, L.P.;
Highland Capital Partners III Limited Partnership; Oak Investment Partners VI,
Limited Partnership; Three Arch Partners, L.P.; WPG Enterprise Fund II, L.P.;
Weiss, Peck & Greer Venture Associates III, L.P.; and our officers and directors
will beneficially own a majority of the outstanding shares of our common stock.
As a result, these stockholders, acting together, will be able to control
fundamental corporate transactions, including:

- the election of directors;

- mergers, consolidations or acquisitions;

- the sale of all or substantially all of our assets;

- the amendment of our charter; and

- our dissolution.

This concentration of ownership may delay, deter or prevent acts that would
result in a change of control favored by our other stockholders. As a result,
the market price of our common stock could decline or stockholders might not
receive a change of control premium over the then-current market price of our
common stock. The interests of our existing stockholders may conflict with the
interests of our other stockholders. See "Security Ownership of Principal
Stockholders and Management."

12
<PAGE> 18

PROVISIONS IN OUR CHARTER DOCUMENTS, UNDER DELAWARE LAW AND IN OUR STOCKHOLDER
RIGHTS PLAN COULD DISCOURAGE A TAKEOVER THAT STOCKHOLDERS MAY CONSIDER
FAVORABLE.

Our certificate of incorporation and bylaws may discourage, delay or
prevent a merger or acquisition that a stockholder may consider favorable
because they:

- authorize the issuance of "blank check" preferred stock;

- provide for a classified board of directors with staggered, three-year
terms;

- prohibit cumulative voting in the election of directors;

- prohibit our stockholders from acting by written consent;

- limit the persons who may call special meetings of stockholders;

- prohibit our stockholders from amending our bylaws unless the amendment
is approved by the holders of at least 80% of our shares of common stock;
and

- establish advance notice requirements for nominations for election to the
board of directors or for proposing matters to be approved by
stockholders at stockholder meetings.

In addition, our certificate of incorporation prohibits the amendment by
our stockholders of many provisions of our certificate of incorporation unless
the amendment is approved by the holders of at least 80% of our shares of common
stock.

Delaware law may also discourage, delay or prevent someone from acquiring
or merging with us. In addition, purchase rights distributed under our
stockholder rights plan will cause substantial dilution to any person or group
that attempts to acquire us without conditioning the offer on our redemption of
the rights.

As a result of these anti-takeover provisions, our stock price may decrease
and our stockholders might not receive a change of control premium over the
then-current market price of the common stock. For a detailed description of the
anti-takeover provisions in our charter documents, stockholder rights plan and
Delaware law, see "Description of Capital Stock."

OUR STOCK PRICE MAY FLUCTUATE AFTER THIS OFFERING. AS A RESULT, INVESTORS IN OUR
COMMON STOCK MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE INITIAL
PUBLIC OFFERING PRICE.

Prior to this offering, there has been no public market for shares of our
common stock. An active market may not develop following completion of this
offering or, if developed, may not be maintained. We will negotiate the initial
public offering price with the underwriters. The initial public offering price
may not be indicative of the price at which our common stock will trade
following completion of this offering. Healthcare provider companies have been
especially subject to sharp declines and volatility in market price. The market
price of our common stock may also be influenced by many factors, some of which
are beyond our control, including:

- changes in financial estimates by securities analysts;

- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;

- variations in quarterly operating results;

- changes or proposed changes in healthcare laws or regulations or
enforcement of these laws and regulations, or announcements relating to
these matters;

- hospice industry trends, such as variations in patient length of stay;

- future sales of our common stock; and

- investor perceptions of us and the healthcare industry.

13
<PAGE> 19

Our status as a for-profit, publicly-held company engaged in the hospice
business could result in unfavorable public comments or reactions which, in
turn, could affect the views of government officials, investors or others in
ways that might adversely affect our business and the market price of our common
stock.

As a result of these factors, investors in our common stock may not be able
to resell their shares at or above the initial offering price. In addition, the
stock market in general, and the Nasdaq National Market in particular, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of healthcare provider
companies. These broad market and industry factors may materially reduce the
market price of our common stock, regardless of our operating performance.

FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.

After this offering, we will have outstanding shares of common
stock. Sales of a substantial number of shares of common stock in the public
market following this offering, or the perception that these sales could occur,
could substantially decrease the market price of our common stock. All the
shares sold in this offering will be freely tradable, other than those shares
sold in this offering to any of our affiliates. Substantially all of the
remaining shares of our common stock are available for resale in the public
market, subject to the restrictions on sale or transfer during the 180-day
lockup period after the date of this prospectus that is described in
"Underwriting -- No Sales of Similar Securities." In addition, the holders of
shares of common stock that will be issued upon conversion of the outstanding
shares of our preferred stock upon completion of this offering and other holders
of our common stock or warrants to purchase our common stock have the right to
require us to register their shares for resale after six months after the date
of this prospectus. As restrictions on resale end or upon registration of any of
these shares for resale, the market price of our common stock could drop
significantly if the holders of these shares sell them or are perceived by the
market as intending to sell them.

INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.

The initial public offering price is substantially higher than the pro
forma net tangible book value per share of our common stock. Purchasers of
common stock in this offering will experience immediate and substantial dilution
in the pro forma net tangible book value of their stock of $ per share,
assuming an initial offering price for our common stock of $ per share. In
the past, we issued options and warrants to acquire common stock at prices
significantly below the initial public offering price. To the extent that these
outstanding options and warrants are exercised, there will be further dilution
to investors. See "Dilution."

MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
YOU MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD A RETURN.

Management will retain broad discretion over the use of the proceeds from
this offering. Stockholders may not deem the uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. Management
intends to use the proceeds from this offering for repayment of indebtedness, to
finance potential acquisitions and the development of new hospice locations, and
for other general corporate purposes. There are a number of factors that will
influence our use of the net proceeds from this offering, and these uses may
vary substantially from our current plans.

14
<PAGE> 20

FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. All statements other
than statements of historical facts contained in this prospectus, including
statements regarding our future financial position, business strategy and plans
and objectives of management for future operations, are forward-looking
statements. The words "believe," "may," "will," "estimate," "continue,"
"anticipate," "intend," "expect" and similar expressions, as they relate to us,
are intended to identify forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends that we believe may affect our
financial condition, results of operations, business strategy and financial
needs. These forward-looking statements are subject to a number of risks,
uncertainties and assumptions described in "Risk Factors," including, among
other things:

- reductions in amounts paid to us by the Medicare and Medicaid programs;

- changes in healthcare regulation and payment methods;

- our ability to identify suitable hospices to acquire on favorable terms;

- our ability to integrate effectively the operations of acquired hospices;

- our ability to develop new hospice locations in new markets or markets
that we currently serve;

- our ability to attract and retain key personnel and skilled employees;
and

- our dependence on patient referrals.

In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this prospectus may not occur and actual
results could differ materially from those anticipated or implied in the
forward-looking statements.

15
<PAGE> 21

USE OF PROCEEDS

We expect to receive approximately $ million in net proceeds from the
sale of shares of common stock in this offering at an assumed initial public
offering price of $ per share, after deducting underwriting discounts and
estimated offering expenses, which we expect to be approximately $ million.

We intend to use $ million of the net proceeds of this offering to
repay in full outstanding indebtedness under our credit agreement with Heller
Healthcare Finance, Inc., including accrued and unpaid interest. Our credit
agreement provides us with a $20 million revolving line of credit bearing
interest at fluctuating rates equal to 1.0% above the prime rate of interest
designated by Citibank, with a floor of 10% per annum, and with a maturity date
of October 2, 2003. As of September 30, 2000, the interest rate under our credit
agreement was 10.5%. A portion of the outstanding indebtedness under our credit
agreement was used to finance hospice acquisitions. We also intend to use $
million to repay in full our 12% senior subordinated notes due March 31, 2005,
including accrued and unpaid interest. As of September 30, 2000, $ million
in principal amount of the notes was payable to Capital Resource Lenders III,
L.P., one of our 5% stockholders. We expect to use the balance of the net
proceeds to finance potential acquisitions of hospices and the development of
new hospice locations and also for general corporate purposes.

Depending on future events, we may determine at a later time to use our net
proceeds for different purposes. Pending these uses, we intend to invest the net
proceeds in short-term, interest-bearing, investment-grade instruments.

DIVIDEND POLICY

We have not declared or paid any dividends on our common stock, and we do
not anticipate declaring or paying any dividends on our common stock in the
foreseeable future. We currently intend to retain all future earnings to fund
the development and growth of our business. The payment of any future dividends
will be at the discretion of our board of directors and will depend on:

- any applicable contractual restrictions limiting our ability to pay
dividends;

- our earnings;

- our financial condition;

- our ability to fund our capital requirements; and

- other factors our board deems relevant.

Currently, our credit agreement restricts the amount of dividends and other
distributions that we may pay or that our subsidiaries may pay to us upon our
lender's notice to us of an event of default under our credit agreement. We are
not in default under our credit agreement at this time. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

16
<PAGE> 22

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2000:

- on an actual basis;

- on a pro forma basis giving effect to the automatic conversion of
16,175,228 shares of outstanding preferred stock into 16,175,228 shares
of common stock upon the completion of this offering. Accumulated and
unpaid dividends on our outstanding preferred stock will be canceled upon
the conversion of these shares. As a result, accrued dividends of $4.3
million are reflected as an adjustment to the accumulated deficit; and

- on a pro forma basis as adjusted to give effect to the sale of
shares of common stock in this offering at an assumed initial public
offering price of $ per share, after deducting the estimated
underwriting discounts and our estimated offering expenses, and the
application of a portion of the net proceeds to repay all outstanding
indebtedness under our credit agreement and our 12% senior subordinated
notes.

You should read this table together with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the notes thereto appearing elsewhere
in this prospectus.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Credit agreement.......................................... $ 4,021 $ 4,021 $ --
12% senior subordinated notes due 2005.................... 11,276 11,276 --
Other long-term debt...................................... 3,738 3,738 3,738
-------- -------- -------
Total debt............................................. 19,035 19,035 3,738
-------- -------- -------
Convertible redeemable preferred stock:
Series A convertible redeemable preferred stock........... 4,619 -- --
Series B convertible redeemable preferred stock........... 10,319 -- --
Series C convertible redeemable preferred stock........... 5,895 -- --
-------- -------- -------
Total convertible redeemable preferred stock........... 20,833 -- --
-------- -------- -------
Stockholders' equity (deficit):
Preferred stock $0.001 par value:
16,386,221 shares authorized and 16,175,228 shares
issued and outstanding actual; shares authorized,
no shares issued or outstanding pro forma and pro forma
as adjusted............................................ --(1) -- --
Common stock $0.001 par value:
24,112,741 shares authorized, 3,892,149 shares issued
and outstanding actual; 24,112,741 shares authorized,
20,067,377 shares issued and outstanding pro forma;
shares authorized, shares issued and
outstanding pro forma as adjusted.................... 4 20
Additional paid-in capital................................ 2,620 19,154
Deferred compensation..................................... (929) (929)
Accumulated deficit....................................... (16,842) (12,559)
-------- -------- -------
Total stockholders' equity (deficit)................... (15,147) 5,686
-------- -------- -------
Total capitalization................................... $ 24,721 $ 24,721 $
======== ======== =======
</TABLE>

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

(1) Number of shares issued and outstanding actual represents all issued and
outstanding shares of convertible redeemable preferred stock.

17
<PAGE> 23

DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of our common
stock after this offering.

Net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares of common stock
then outstanding. Our net tangible book value at September 30, 2000 would have
been $(10.1) million, or $(0.50) per share of common stock, after giving effect
to the automatic conversion of 16,175,228 shares of outstanding preferred stock
into 16,175,228 shares of common stock upon completion of this offering. After
giving further effect to the sale of the shares of common stock in this
offering at an assumed initial public offering price of $ per share, and
after deducting estimated underwriting discounts and estimated offering
expenses, our pro forma net tangible book value at September 30, 2000 would have
been $ million, or $ per share. This represents an immediate increase in
the pro forma net tangible book value of $ per share to existing
stockholders and immediate and substantial dilution of $ per share to new
investors purchasing common stock in this offering. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share at September 30, 2000... $(7.95)
Increase per share attributable to preferred stock
conversion............................................. 7.45
------
Pro forma net tangible book value per share before this
offering............................................... (0.50)
Increase per share attributable to new investors..........
------
Pro forma net tangible book value per share after this
offering
------
Dilution in pro forma net tangible book value per share to
new investors(1).......................................... $
======
</TABLE>

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

(1) If the underwriters' over-allotment option is exercised in full, dilution
per share to new investors will be $ .

The following table summarizes on a pro forma basis as of September 30,
2000 the total number of shares of common stock purchased from us, the total
consideration paid to us, and the average price per share paid by existing
stockholders and by new investors purchasing shares of common stock from us in
this offering at an assumed initial public offering price of $ per share and
before deducting underwriting discounts and estimated offering expenses:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 3,892,149 % $ 152 % $0.04
Existing stockholders -- conversion of
preferred stock......................... 16,175,228 16,274 1.01
New investors(1)..........................
---------- ----- ------- ------
Total................................... 100.0% $100.0%
========== ===== ======= ======
</TABLE>

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

(1) If the underwriters' over-allotment option is exercised in full, we will
sell an additional shares.

18
<PAGE> 24

The foregoing discussion and tables assume no exercise of outstanding stock
options or warrants. As of September 30, 2000, there were:

- options outstanding to purchase a total of 1,829,627 shares of our common
stock at a weighted average exercise price of $0.51 per share; and

- warrants outstanding to purchase a total of 2,063,513 shares of our
common stock at a weighted average price of $0.08 per share.

To the extent that any of these stock options or warrants are exercised,
there will be further dilution to new investors. See "Capitalization,"
"Management -- Stock Option Plan," "Management -- 2000 Equity-Based Compensation
Plan," "Management -- Employee Stock Purchase Plan" and note 6 to our
consolidated financial statements included elsewhere in this prospectus.

19
<PAGE> 25

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected consolidated statement of operations data set forth below for
the years ended December 31, 1997, 1998 and 1999 and the nine months ended
September 30, 2000 and the consolidated balance sheet data at December 31, 1998
and 1999 and September 30, 2000 are derived from our financial statements that
have been audited by Ernst & Young LLP, and that are included elsewhere in this
prospectus, and are qualified by reference to those financial statements. The
selected consolidated statement of operations data set forth below for the four
months ended December 31, 1995 and the year ended December 31, 1996 and the
balance sheet data at December 31, 1995, 1996 and 1997 are derived from our
financial statements that have been audited by Ernst & Young LLP, but are not
included in this prospectus. The selected consolidated statement of operations
data for the nine months ended September 30, 1999 are derived from unaudited
financial statements included elsewhere in this prospectus. We have prepared the
unaudited financial information on the same basis as the audited financial
statements and have included all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position at this date and our operating results for this period.

The historical results presented below are not necessarily indicative of
the results to be expected for any future period. You should read the selected
financial information set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes appearing elsewhere in
this prospectus.

<TABLE>
<CAPTION>
FOUR MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
------------ ---------- ---------- ---------- ---------- ----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net patient service revenue........ $ -- $ 1,003 $ 6,901 $ 27,239 $ 46,460 $ 32,063 $ 58,854
Operating charges:
Direct hospice care.............. -- 550 4,849 16,389 24,014 16,926 30,348
General and administrative....... 72 2,017 6,167 14,527 18,750 13,406 20,351
Stock-based compensation
charges........................ -- -- -- -- -- -- 321
Provision for uncollectible
accounts....................... -- 26 187 1,203 2,031 1,370 2,024
Depreciation and amortization.... -- 37 140 722 1,691 1,142 1,222
---------- ---------- ---------- ---------- ---------- ---------- -----------
Total operating expenses........... 72 2,630 11,343 32,841 46,486 32,844 54,266
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) from operations...... (72) (1,627) (4,442) (5,602) (26) (781) 4,588
Other income (expense):
Interest income.................. -- 75 308 165 35 30 22
Interest expense................. -- -- (9) (1,086) (2,209) (1,534) (2,179)
---------- ---------- ---------- ---------- ---------- ---------- -----------
-- 75 299 (921) (2,174) (1,504) (2,157)
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before income
taxes............................ (72) (1,552) (4,143) (6,523) (2,200) (2,285) 2,431
Provision for income taxes......... -- -- -- -- -- 15 270
---------- ---------- ---------- ---------- ---------- ---------- -----------
Net income (loss).................. (72) (1,552) (4,143) (6,523) (2,200) (2,300) 2,161
Preferred stock dividends.......... -- 251 847 1,122 1,320 990 973
---------- ---------- ---------- ---------- ---------- ---------- -----------
Net income (loss) applicable to
common stockholders.............. $ (72) $ (1,803) $ (4,990) $ (7,645) $ (3,520) $ (3,290) $ 1,188
========== ========== ========== ========== ========== ========== ===========
Net income (loss) per common share:
Basic............................ $ (0.02) $ (0.51) $ (1.37) $ (2.06) $ (0.91) $ (0.85) $ 0.31
Diluted.......................... $ (0.02) $ (0.51) $ (1.37) $ (2.06) $ (0.91) $ (0.85) $ 0.09
Weighted average shares
outstanding:
Basic............................ 3,505,000 3,505,000 3,637,570 3,705,866 3,886,395 3,884,775 3,892,002
Diluted.......................... 3,505,000 3,505,000 3,637,570 3,705,866 3,886,395 3,884,775 23,839,897

(continued on following page)
</TABLE>

20
<PAGE> 26

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
----------- ------- ------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................. $103 $ 1,569 $ 3,251 $ 4,738 $ (2,356) $ (533)
Total assets........................................... 168 2,230 7,434 22,578 31,925 34,943
Total long-term debt, including current portion........ -- -- 169 12,600 21,852 19,035
Total convertible redeemable preferred
stock................................................ -- 3,585 12,424 18,539 19,860 20,833
Common stockholders' (deficit)......................... (6) (1,810) (6,730) (13,320) (16,657) (15,147)
</TABLE>

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

(2) Represents the total number of patients admitted into our hospice program
during the period.

(3) Represents the average number of patients for whom we provided hospice care
each day during the period.

(4) Represents average daily census multiplied by the number of days during the
period.

21
<PAGE> 27

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

The following discussion of our financial condition and results of
operations should be read in conjunction with our selected consolidated
financial and operating data and the consolidated financial statements and
related notes included elsewhere in this prospectus.

OVERVIEW

We are a leading provider of hospice services in the United States. We have
grown rapidly since we opened our first hospice location in January 1996.
Through a series of acquisitions and the development of new hospice locations,
we now have 32 hospice locations to serve patients and their families in 18
states. Our net patient service revenue increased from $1.0 million in 1996 to
$46.5 million in 1999. We operate most of these hospice locations through our
operating subsidiaries. Our net patient service revenue of $58.9 million for the
nine months ended September 30, 2000 represents an increase of 83.6% over our
net patient service revenue of $32.1 million for the nine months ended September
30, 1999. We reported net income of $2.2 million for the nine months ended
September 30, 2000.

ACQUISITIONS

During 1997, we acquired three hospices for a combined purchase price of
$2.1 million in cash. We financed our acquisitions in 1997 with proceeds from
the issuance of our Series B preferred stock.

During 1998, we acquired 15 hospices for a combined purchase price of $8.0
million. We financed our acquisitions in 1998 with $5.3 million in cash obtained
from borrowings under our credit agreement and proceeds from the issuance of our
Series C preferred stock and 12% senior subordinated notes, and also with
promissory notes payable to sellers in aggregate principal amount of $2.7
million.

During 1999, we acquired eight hospices for a combined purchase price of
$8.1 million. We financed our acquisitions in 1999 with borrowings of $4.8
million under our credit agreement and promissory notes payable to sellers in
the aggregate principal amount of $3.3 million.

During 2000, we have acquired one hospice for a purchase price of $1.2
million. We paid the purchase price in cash of $0.7 million obtained from
borrowings under our credit agreement and a promissory note payable to the
seller in the principal amount of $0.5 million.

We accounted for these acquisitions as purchases.

Goodwill from our hospice acquisitions, net of accumulated amortization,
was $15.8 million as of September 30, 2000. Goodwill, net of accumulated
amortization, was 277.8% of convertible redeemable preferred stock and common
stockholders' deficit and 45.2% of total assets as of September 30, 2000. Based
on management's assessment of the estimated useful life of our goodwill, we
amortize our goodwill over 20 years.

22
<PAGE> 28

The following table lists our acquisitions and patient census data:

ACQUISITIONS

<TABLE>
<CAPTION>
PATIENT
CENSUS AVERAGE DAILY
ON DATE OF CENSUS
HOSPICE ACQUISITION (SEPTEMBER 2000)
------- ----------- ----------------
<S> <C> <C>
1997
Phoenix, Arizona............................................ 15 189(1)
Las Vegas, Nevada........................................... 46 79
Dallas, Texas............................................... 39 140
1998
San Jose, California........................................ 3 54
Denver, Colorado............................................ 10 40
New Orleans (Kenner), Louisiana............................. 33 N/A(2)
New Orleans (Metairie), Louisiana........................... 32 198(2)
Detroit (Novi), Michigan.................................... 45 74
Minneapolis, Minnesota...................................... 1 N/A(3)
Kansas City, Missouri....................................... 66 131
Oklahoma City, Oklahoma..................................... 17 77
Nashville, Tennessee........................................ 8 67
Houston (Baytown), Texas.................................... 53 90
Houston (Bellaire), Texas................................... 10 67
Irving, Texas............................................... 24 N/A(4)
San Antonio, Texas.......................................... 44 N/A(5)
Milwaukee, Wisconsin........................................ 9 N/A(6)
Milwaukee, Wisconsin........................................ 45 102(6)
1999
Phoenix (Mesa), Arizona..................................... 6 9
Phoenix (Peoria), Arizona................................... 6 7
Phoenix, Arizona............................................ 134 N/A(1)
Tucson, Arizona............................................. 8 9
Tucson, Arizona............................................. 116 137
Orange County (Garden Grove), California.................... 77 103
Riverside, California....................................... 8 29
San Diego, California....................................... 75 82
2000
Los Angeles (Culver City), California....................... 45 N/A(7)
</TABLE>

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

(1) Operations of our Phoenix, Arizona hospice acquired in 1999 were transferred
to our Phoenix, Arizona hospice acquired in 1997.

(2) The operations of our New Orleans (Kenner), Louisiana hospice were
transferred to our New Orleans (Metairie), Louisiana hospice.

(3) Our Minneapolis, Minnesota hospice was closed in March 1999.

(4) Operations were transferred to our Fort Worth, Texas hospice opened in 1997.

(5) Operations were transferred to our San Antonio, Texas hospice opened in
1997.

(6) Operations of the Milwaukee, Wisconsin hospice with a patient census of 9 on
the date of acquisition were transferred to our Milwaukee, Wisconsin hospice
also acquired in 1998.

(7) Our Los Angeles (Culver City), California location was acquired on November
20, 2000.

23
<PAGE> 29

NET PATIENT SERVICE REVENUE

We recognize net patient service revenue in the month in which our services
are delivered. Services provided under the Medicare and Medicaid programs
represented approximately 93.8%, 93.1%, 94.1% and 95.3% of our net patient
service revenue for the years ended December 31, 1997, 1998 and 1999 and the
nine months ended September 30, 2000, respectively. The payments we receive from
the Medicare and Medicaid programs are calculated using daily or hourly rates
for each of the four levels of care we deliver and are adjusted based on
geographic location.

Routine home care is the largest component of our net patient service
revenue, representing 88.3% of net patient service revenue for the year ended
December 31, 1999. Inpatient care represented 10.3% of net patient service
revenue for the year ended December 31, 1999. Continuous care and respite care,
combined, represented most of the remaining 1.4% of net patient service revenue
for this period.

The principal factors that impact net patient service revenue are our
average daily census, levels of care provided to our patients and changes in
Medicare and Medicaid payment rates due to adjustments for inflation. Average
daily census is affected by the number of patients referred by new and existing
referral sources, and admitted into our hospice program, and average length of
stay of those patients once admitted. Average length of stay is impacted by
patients' decisions of when to enroll in hospice care after diagnoses of
terminal illnesses and, once enrolled, the length of the terminal illnesses. See
"Business -- Hospice Industry and Market Opportunity."

Payment rates under the Medicare and Medicaid programs are indexed for
inflation annually; however, the increases have historically been less than
actual inflation. Reductions in the rate of increase in Medicare and Medicaid
payments may have an adverse impact on our net patient service revenue. See
"Business -- Government Regulation -- Overview of Government Payments."

EXPENSES

Because we generally receive fixed payments for our hospice services, our
profitability is largely dependent on our ability to manage the expenses of
providing hospice services. We recognize expenses as incurred and classify
expenses as either direct hospice care expenses or general and administrative
expenses. Direct hospice care expenses primarily include direct patient care
salaries and payroll taxes, pharmaceuticals, medical equipment and supplies, and
inpatient costs. Length of stay impacts our direct hospice care expenses as a
percentage of net patient service revenue because, if lengths of stay decline,
direct hospice care expenses, which are often highest during the latter days of
care for a patient, are spread against fewer days of care.

For our patients receiving nursing home care under a state Medicaid program
who elect hospice care under Medicare or Medicaid, we contract with nursing
homes for the nursing homes' provision to patients of room and board services.
The state must pay us, in addition to the applicable Medicare or Medicaid
hospice daily or hourly rate, an amount equal to at least 95% of the Medicaid
daily nursing home rate for room and board furnished to the patient by the
nursing home. Under our standard nursing home contracts, we pay the nursing home
for these room and board services at the Medicaid daily nursing home rate. We
refer to these costs, net of Medicaid payments, as "nursing home costs, net."
See note 1 to our consolidated financial statements included elsewhere in this
prospectus.

General and administrative expenses primarily include non-patient care
salaries, employee benefits and office leases.

24
<PAGE> 30

The following table sets forth the percentage of net patient service
revenue represented by the items included in direct hospice care expenses and
general and administrative expenses for the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1997 1998 1999 1999 2000
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Direct hospice care expenses:
Salaries and payroll taxes................................ 42.8% 32.6% 28.5% 30.1% 29.2%
Pharmaceuticals........................................... 8.5 6.6 7.5 7.3 7.2
Medical equipment and supplies............................ 7.2 6.4 6.0 6.1 6.0
Inpatient costs........................................... 11.4 7.4 3.8 4.2 2.7
Other (including nursing home costs, net)................. 0.4 7.2 5.9 5.1 6.5
---- ---- ---- ---- ----
Total.................................................. 70.3% 60.2% 51.7% 52.8% 51.6%
==== ==== ==== ==== ====
General and administrative expenses:
Salaries and benefits..................................... 45.8% 30.9% 25.4% 26.2% 22.1%
Leases.................................................... 4.8 4.6 4.3 4.3 3.6
Other..................................................... 38.7 17.8 10.7 11.3 8.9
---- ---- ---- ---- ----
Total.................................................. 89.3% 53.3% 40.4% 41.8% 34.6%
==== ==== ==== ==== ====
</TABLE>

STOCK-BASED AND OTHER COMPENSATION CHARGES

Stock-based compensation charges represent the difference between the
exercise price of stock options granted and the deemed fair value of our common
stock on the date of grant determined in accordance with Accounting Principles
Board Opinion No. 25 and its related interpretations. We recognize compensation
charges over the vesting periods of the stock options using a graded
amortization methodology in accordance with Financial Accounting Standards Board
Interpretation No. 28. For purposes of the period-to-period comparisons included
in our results of operations, general and administrative expenses exclude these
stock-based compensation charges, which are reflected as a separate line item.

We have recorded deferred stock-based compensation related charges to
unvested stock options granted to employees and directors during the nine months
ended September 30, 2000. Based on the number of outstanding stock options
granted during the nine months ended September 30, 2000, we expect to amortize
approximately $1.3 million of deferred stock-based compensation during the year
ended December 31, 2000 and in future periods, in the following approximate
amounts:

- $0.6 million during 2000;

- $0.3 million during 2001;

- $0.2 million during 2002;

- $0.1 million during 2003; and

- $0.1 million in the aggregate during 2004 and 2005.

In addition, we granted additional stock options to purchase 148,000 shares
of common stock on November 30, 2000, of which 90,000 shares were fully vested
at that time. On November 30, 2000 we also fully vested stock options to
purchase 40,000 shares of common stock that were previously granted to one of
our directors. We expect to amortize approximately $1.0 million of deferred
stock-based compensation, of which $0.7 million will be amortized in 2000 and
the remaining $0.3 million will be amortized from 2001 through 2005.

25
<PAGE> 31

We anticipate that the exercise price of stock options granted after this
offering will be at the then current market price of our common stock, and,
therefore, no additional deferred stock-based compensation will result.

Upon the completion of this offering, we will forgive the repayment of
promissory notes payable to us by Richard R. Burnham, our President and Chief
Executive Officer, and David C. Gasmire, our Executive Vice President and Chief
Operating Officer. We expect to record a compensation charge of $0.3 million in
connection with the forgiveness of these notes in the quarter in which this
offering is completed. See "Certain Relationships and Related
Transactions -- Other Transactions."

ADJUSTED EBITDA

Adjusted EBITDA consists of income (loss) before interest, income taxes,
depreciation and amortization, and excludes stock-based compensation charges. We
present adjusted EBITDA to enhance the understanding of our operating results.
Adjusted EBITDA is not a measure of financial performance under generally
accepted accounting principles. Items excluded from adjusted EBITDA are
significant components in understanding and assessing financial performance.
Adjusted EBITDA is a key measure used by us to evaluate our operations and
provides useful information to investors. Adjusted EBITDA should not be
considered in isolation or as an alternative to net income, cash flows generated
by operations, investing or financing activities, or other financial statement
data presented in the consolidated financial statements as indicators of
financial performance or liquidity. Because adjusted EBITDA is not a measurement
determined in accordance with generally accepted accounting principles and is
thus susceptible to varying calculations, adjusted EBITDA as presented may not
be comparable to other similarly titled measures of performance of other
companies.

The following table reconciles our net income (loss) to adjusted EBITDA for
the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1997 1998 1999 1999 2000
------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss)..................... $(4,143) $(6,523) $(2,200) $(2,300) $2,161
Interest expense (income), net...... (299) 921 2,174 1,504 2,157
Provision for income taxes.......... -- -- -- 15 270
Depreciation and amortization
expense.......................... 140 722 1,691 1,142 1,222
Stock-based compensation charges.... -- -- -- -- 321
------- ------- ------- ------- ------
Adjusted EBITDA....................... $(4,302) $(4,880) $ 1,665 $ 361 $6,131
======= ======= ======= ======= ======
</TABLE>

PROVISION FOR INCOME TAXES

Our provision for income taxes consists of current and deferred federal and
state income tax expenses. At September 30, 2000, our net operating loss
carryforward was $11.3 million, which will be available to reduce future taxable
income and our effective income tax rate in future periods, until fully
utilized. For the nine months ended September 30, 2000, we generated taxable
income that allowed us to realize a benefit of $6.0 million from net operating
loss carryforwards accumulated from 1995 through 1999. As a result, our
effective income tax rate for the nine months ended September 30, 2000 was
11.1%. We have provided a full valuation allowance for our net deferred tax
asset, which consists primarily of our net operating loss carryforwards, because
we do not currently meet the criteria for recognizing the net deferred tax asset
under generally accepted accounting principles. See note 11 to our consolidated
financial statements included elsewhere in this prospectus.

26
<PAGE> 32

RESULTS OF OPERATIONS

The following table sets forth selected consolidated financial information
as a percentage of net patient service revenue for the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net patient service revenue................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct hospice care...................... 70.3 60.2 51.7 52.8 51.6
General and administrative............... 89.3 53.3 40.4 41.8 34.6
Stock-based compensation charges......... -- -- -- -- 0.5
Provision for uncollectible accounts..... 2.7 4.4 4.4 4.3 3.4
Depreciation and amortization............ 2.0 2.7 3.6 3.5 2.1
----- ----- ----- ----- -----
164.3 120.6 100.1 102.4 92.2
----- ----- ----- ----- -----
Income (loss) from operations.............. (64.3) (20.6) (0.1) (2.4) 7.8
Interest (income) expense, net............. (4.3) 3.4 4.6 4.7 3.7
----- ----- ----- ----- -----
Income (loss) before income taxes.......... (60.0) (24.0) (4.7) (7.1) 4.1
Provision for income taxes................. -- -- -- 0.1 0.4
----- ----- ----- ----- -----
Net income (loss).......................... (60.0)% (24.0)% (4.7)% (7.2)% 3.7%
===== ===== ===== ===== =====
Adjusted EBITDA............................ (62.3)% (17.9)% 3.6% 1.1% 10.4%
===== ===== ===== ===== =====
</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999 (UNAUDITED)

Net Patient Service Revenue

Net patient service revenue increased $26.8 million, or 83.6%, from $32.1
million for the nine months ended September 30, 1999 to $58.9 million for the
nine months ended September 30, 2000 due primarily to an increase in average
daily census, based on days of care, of 75.4%, from 293,365 days of care in 1999
to 514,475 days of care in 2000. This increase was primarily due to hospice
acquisitions completed in 1999, increases in patient referrals from existing and
new referral sources in 2000 and increases in length of stay.

Direct Hospice Care Expenses

Direct hospice care expenses increased $13.4 million, or 79.3%, from $16.9
million for the nine months ended September 30, 1999 to $30.3 million for the
nine months ended September 30, 2000. This increase was primarily due to direct
hospice care expenses of hospices acquired in 1999 and patient census growth
during the nine months ended September 30, 2000. As a percentage of net patient
service revenue, direct hospice care expenses decreased from 52.8% for the nine
months ended September 30, 1999 to 51.6% for the nine months ended September 30,
2000, as we realized operating efficiencies at our hospice locations.

General and Administrative Expenses

General and administrative expenses increased $7.0 million, or 51.8%, from
$13.4 million for the nine months ended September 30, 1999 to $20.4 million for
the nine months ended September 30, 2000. This increase was due to the growth of
our operations at each of our hospice locations, including hospice locations
acquired after September 30, 1999, to support our patient census growth during
the nine months ended September 30, 2000. As a percentage of net patient service
revenue, general and administrative expenses decreased from 41.8% for the nine
months ended September 30, 1999 to 34.6% for the nine months ended September 30,
2000, as our hospice and corporate costs were spread over increased patient
census volume.
27
<PAGE> 33

Stock-Based Compensation Charges

We did not recognize any stock-based compensation charges for the nine
months ended September 30, 1999. Stock-based compensation charges were $0.3
million for the nine months ended September 30, 2000. This charge related to
stock options granted to management with exercise prices below the deemed fair
value of our common stock. See "-- Stock-Based and Other Compensation Charges."

Provision for Uncollectible Accounts

Our provision for uncollectible accounts increased by $0.6 million, or
47.7%, from $1.4 million for the nine months ended September 30, 1999 to $2.0
million for the nine months ended September 30, 2000, due to our increased net
patient service revenue. As a percentage of net patient service revenue, our
provision for uncollectible accounts decreased from 4.3% for the nine months
ended September 30, 1999 to 3.4% for the nine months ended September 30, 2000
due to improved collection efforts at all of our hospice locations.

Depreciation and Amortization Expense

Depreciation and amortization expense increased by $0.1 million, or 7.0%,
from $1.1 million for the nine months ended September 30, 1999 to $1.2 million
for the nine months ended September 30, 2000. The increase was due to increased
depreciation expense on purchases of property and equipment and increased
amortization expense from our 1999 hospice acquisitions. As a percentage of net
patient service revenue, depreciation and amortization expense decreased from
3.5% for the nine months ended September 30, 1999 to 2.1% for the nine months
ended September 30, 2000.

Net Interest Expense

Net interest expense increased by $0.7 million, or 43.4%, from $1.5 million
for the nine months ended September 30, 1999 to $2.2 million for the nine months
ended September 30, 2000, due primarily to increased borrowings under our credit
agreement. The increase in borrowings was a result of an acquisition completed
in the fourth quarter of 1999 and increased working capital needs.

Provision for Income Taxes

Our provision for income taxes was $0.3 million for the nine months ended
September 30, 2000, as compared to $15,000 for the prior comparable period. We
had an effective income tax rate of 11.1% for the nine months ended September
30, 2000, resulting primarily from state income taxes and federal alternative
minimum tax and our use of net operating loss carryforwards. For the nine months
ended September 30, 2000, we utilized $6.0 million of net operating loss
carryforwards.

Net Income (Loss)

Net income increased $4.5 million, from a net loss of $(2.3) million for
the nine months ended September 30, 1999 to net income of $2.2 million for the
nine months ended September 30, 2000.

Adjusted EBITDA

Adjusted EBITDA increased $5.7 million, from $0.4 million for the nine
months ended September 30, 1999 to $6.1 million for the nine months ended
September 30, 2000. As a percentage of net patient service revenue, adjusted
EBITDA increased from 1.1% for the nine months ended September 30, 1999 to 10.4%
for the nine months ended September 30, 2000.

28
<PAGE> 34

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Net Patient Service Revenue

Net patient service revenue increased $19.3 million, or 70.6%, from $27.2
million in 1998 to $46.5 million in 1999 due primarily to an increase in average
daily census, based on days of care, of 77.9%, from 237,589 days of care in 1998
to 422,577 days of care in 1999. This increase was primarily due to hospice
acquisitions completed in 1998 and 1999 and increases in patient referrals from
existing and new referral sources in 1999.

Direct Hospice Care Expenses

Direct hospice care expenses increased $7.6 million, or 46.5%, from $16.4
million in 1998 to $24.0 million in 1999. This increase was primarily due to
direct hospice care expenses of hospices acquired in 1998 and 1999 and patient
census growth during 1999. As a percentage of net patient service revenue,
direct hospice care expenses decreased from 60.2% in 1998 to 51.7% in 1999, as
we realized operating efficiencies from our acquisitions in 1998 and 1999.

General and Administrative Expenses

General and administrative expenses increased $4.2 million, or 29.1%, from
$14.5 million in 1998 to $18.7 million in 1999. This increase was due to the
growth of our operations at each of our hospice locations, including hospice
locations acquired or developed after 1998, to support our patient census growth
in 1999. As a percentage of net patient service revenue, general and
administrative expenses decreased from 53.3% in 1998 to 40.4% in 1999, as our
hospice and corporate costs were spread over increased patient census volume.

Provision for Uncollectible Accounts

Our provision for uncollectible accounts increased by $0.8 million, or
68.8%, from $1.2 million in 1998 to $2.0 million in 1999, due to our increased
net patient service revenue. As a percentage of net patient service revenue, our
provision for uncollectible accounts remained unchanged at 4.4% in 1998 and
1999.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $1.0 million, or 134.2%,
from $0.7 million in 1998 to $1.7 million in 1999. Depreciation and amortization
expense in 1999 included a one-time charge of $0.2 million because, due to
unfavorable market conditions, we closed a hospice in Minneapolis, Minnesota
that was acquired as part of a multi-hospice acquisition in 1998. In addition,
we changed the estimated useful life of goodwill from 25 years in 1998 to 20
years in 1999, which increased amortization expense by $0.2 million in 1999. A
portion of the overall increase was also due to increased depreciation expense
on purchases of property and equipment and increased amortization expense from
our 1999 acquisitions. As a percentage of net patient service revenue,
depreciation and amortization expense increased from 2.7% in 1998 to 3.6% in
1999.

Net Interest Expense

Net interest expense increased $1.3 million, or 136.0%, from $0.9 million
in 1998 to $2.2 million in 1999, due primarily to increased borrowings under our
credit agreement and the issuance of our 12% senior subordinated notes in 1998.
The increase in borrowings was a result of acquisitions completed in the fourth
quarter of 1999 and increased working capital needs.

Provision for Income Taxes

We reported no provision for income taxes in 1998 or 1999 due to operating
losses incurred in both years.

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<PAGE> 35

Net Loss

Net loss decreased $4.3 million, or 66.3%, from $(6.5) million in 1998 to
$(2.2) million in 1999.

Adjusted EBITDA

Adjusted EBITDA increased $6.6 million, from $(4.9) million in 1998 to $1.7
million in 1999. As a percentage of net patient service revenue, adjusted EBITDA
increased from (17.9)% in 1998 to 3.6% in 1999.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Net Patient Service Revenue

Net patient service revenue increased $20.3 million, or 294.7%, from $6.9
million in 1997 to $27.2 million in 1998 due primarily to an increase in average
daily census, based on days of care, of 294.7%, from 60,144 days of care in 1997
to 237,589 days of care in 1998. This increase was primarily due to hospice
acquisitions completed in 1997 and 1998 and increases in patient referrals from
existing and new referral sources in 1998.

Direct Hospice Care Expenses

Direct hospice care expenses increased $11.6 million, or 238.0%, from $4.8
million in 1997 to $16.4 million in 1998. This increase was primarily due to
direct hospice care expenses of hospices acquired in 1997 and 1998 and patient
census growth during 1998. As a percentage of net patient service revenue,
direct hospice care expenses decreased from 70.3% in 1997 to 60.2% in 1998, as
we realized operating efficiencies from our acquisitions in 1997 and 1998.

General and Administrative Expenses

General and administrative expenses increased $8.3 million, or 135.6%, from
$6.2 million in 1997 to $14.5 million in 1998. This increase was due to growth
of our operations at each of our hospice locations, including hospice locations
acquired or developed after 1997, to support our patient census growth in 1998.
As a percentage of net patient service revenue, general and administrative
expenses decreased from 89.3% in 1997 to 53.3% in 1998, as our hospice and
corporate costs were spread over increased patient census volume.

Provision for Uncollectible Accounts

Our provision for uncollectible accounts increased by $1.0 million, or
543.3%, from $0.2 million in 1997 to $1.2 million in 1998, due to our increased
net patient service revenue. As a percentage of net patient service revenue, our
provision for uncollectible accounts increased from 2.7% in 1997 to 4.4% in
1998.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $0.6 million, or 415.7%,
from $0.1 million in 1997 to $0.7 million in 1998, due to hospice acquisitions
completed in 1998. As a percentage of net patient service revenue, depreciation
and amortization expense increased from 2.0% in 1997 to 2.7% in 1998.

Net Interest (Income) Expense

Net interest (income) expense increased $1.2 million, or 308.0%, from
$(0.3) million in 1997 to $0.9 million in 1998, due to increased borrowings
under our credit agreement in 1998.

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Provision for Income Taxes

We reported no provision for income taxes in 1997 or 1998 due to operating
losses incurred in both years.

Net Loss

Net loss increased $2.4 million, or 57.4%, from $(4.1) million in 1997 to
$(6.5) million in 1998.

Adjusted EBITDA

Adjusted EBITDA decreased $0.6 million, from $(4.3) million in 1997 to
$(4.9) million in 1998. As a percentage of net patient service revenue, adjusted
EBITDA decreased from (62.3)% in 1997 to (17.9)% in 1998.

LIQUIDITY AND CAPITAL RESOURCES

Our principal liquidity requirements have historically been for working
capital, hospice acquisitions, hospice development projects and other capital
expenditures. We have financed these requirements primarily with cash flows
generated from operations, borrowings under our credit facility, proceeds from
the issuance of convertible preferred stock, warrants and our 12% senior
subordinated notes, seller financing of hospice acquisitions, operating and
capital leases, and normal trade credit terms. At September 30, 2000, we had
cash and cash equivalents of $0.2 million, working capital deficit of $(0.5)
million, and available borrowing capacity of $6.0 million under our credit
agreement.

Cash provided by (used in) operations was $(4.6) million, $(11.1) million,
$(1.6) million and $3.1 million for the years ended December 31, 1997, 1998 and
1999, and for the nine months ended September 30, 2000, respectively. Cash used
in operations in 1997, 1998 and 1999 were primarily attributable to operating
losses and increases in working capital. The increase in cash provided by
operations during the nine months ended September 30, 2000 was primarily
attributable to the increase in net income during that period, partially offset
by increases in working capital requirements due to the growth of our business.

Investing activities, consisting primarily of cash paid to purchase
hospices, used cash of $2.4 million, $5.9 million and $5.3 million for the years
ended December 31, 1997, 1998 and 1999, respectively. For the nine months ended
September 30, 2000, investing activities consisted of purchases of property and
equipment of $0.4 million.

Net cash provided by (used in) financing activities was $8.0 million, $14.9
million, $6.7 million and $(2.9) million for the years ended December 31, 1997,
1998 and 1999, and for the nine months ended September 30, 2000, respectively,
and represented borrowings under our credit agreement and proceeds from the sale
of capital stock, warrants and our 12% senior subordinated notes.

In July and December 1998, we issued $12.0 million of our 12% senior
subordinated notes due March 31, 2005. We have not made any principal payments
on these notes. We paid $1.8 million and $1.1 million in accrued interest in
1999 and during the nine months ended September 30, 2000, respectively. We will
repay the principal balance and any accrued and unpaid interest in full upon
completion of this offering.

In connection with our acquisition of the hospice program of Dignita
Hospice Care, LLC in November 1999, we issued two promissory notes payable to
Dignita in the principal amounts of approximately $0.9 million and $1.6 million,
each bearing interest at the rate of 7% per annum. On October 31, 2000 we paid
Dignita $1.3 million of the outstanding principal balance of these notes, plus
accrued and unpaid interest of $0.2 million. The remaining principal balance,
plus accrued and unpaid interest thereon, is due and payable to Dignita on or
before October 31, 2001.

Our credit agreement with Heller Healthcare Finance, Inc. provides us with
a $20 million revolving line of credit for working capital, acquisitions and
general corporate purposes, as amended on October 2,
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2000. Prior to being amended, our credit agreement provided us with a $10
million revolving line of credit. Our revolving line of credit bears interest at
fluctuating rates equal to 1.0% above the prime rate of interest designated by
Citibank, with a floor of 10% per annum, and will mature on October 2, 2003. As
of September 30, 2000, outstanding borrowings under our credit agreement were
$4.0 million, plus accrued and unpaid interest of $80,000, and the interest rate
was 10.5%. As of September 30, 2000, $6.0 million was available for borrowing
under our credit agreement. Our revolving line of credit is secured by all of
our accounts receivable and any other right to payment for goods sold or leased
or services rendered by us and all other property in our possession or under our
control. We and our subsidiaries are subject to affirmative and negative
covenants, including:

- limitations on indebtedness, mergers, acquisitions and dispositions of
assets, dividends, investments and liens;

- license maintenance covenants; and

- financial maintenance covenants.

We expect to repay all outstanding indebtedness, including accrued and
unpaid interest, under our credit agreement with a portion of the net proceeds
from this offering. We may in the future refinance our credit agreement with a
new credit agreement with our existing lender or new lenders.

In November 2000, we acquired a hospice located in Los Angeles, California
for a purchase price of $1.2 million. We paid the purchase price in cash of $0.7
million obtained from borrowings under our credit agreement and a promissory
note payable to the seller in the principal amount of $0.5 million. The
promissory note bears interest at the rate of 8% per annum and is payable in two
installments, with $0.2 million of the principal amount, plus accrued and unpaid
interest, due and payable on November 19, 2001 and the remaining principal
amount, plus accrued and unpaid interest, due and payable on May 19, 2002.

We expect that the proceeds from this offering, together with our funds
from operations, existing funds and borrowings under our credit agreement, will
be sufficient to fund our operations, hospice acquisitions, debt service
requirements, hospice development projects and our other capital requirements
for at least the 12 months following this offering.

PAYMENT, LEGISLATIVE AND REGULATORY CHANGES

We are highly dependent on payments from the Medicare and Medicaid
programs. These programs are subject to statutory and regulatory changes,
possible retroactive and prospective rate adjustments, administrative rulings,
rate freezes and funding reductions. Reductions in amounts paid by these
programs for our services or changes in methods or regulations governing
payments for our services could materially adversely affect our net patient
service revenue and profits.

INFLATION

The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when labor shortages occur in the
marketplace. In addition, suppliers pass along rising costs to us in the form of
higher prices. We have implemented cost control measures designed to curb
increases in operating expenses. We have, to date, offset increases in operating
costs by increasing patient census However, we cannot predict our ability to
cover or offset future cost increases.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. This statement was amended deferring the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000.
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<PAGE> 38

SFAS 133 is effective for the first quarter of 2001, and is not expected to have
a material effect on our financial position or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Our primary market risk is exposure to changes in interest rates on debt
instruments. As of September 30, 2000, we had $18.8 million in outstanding debt
comprised of various fixed and variable rate debt instruments of $14.8 million
and $4.0 million, respectively.

Changes in interest rates would affect the fair market value of our fixed
rate debt instruments but would not have an impact on our earnings or cash
flows. Fluctuations in interest rates on our variable rate debt instruments,
which are tied to the prime rate, would affect our earnings and cash flows but
would not affect the fair market value of the variable rate debt. For each
percentage point change in interest rates our annual interest expense would
increase by approximately $40,000 based on our outstanding variable debt as of
September 30, 2000.

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BUSINESS

OVERVIEW

HOSPICE CARE

The first hospice in the United States opened in 1974. In 1982, Congress
enacted legislation creating the Medicare hospice program. Hospice care became a
covered benefit under the Medicare program in 1983, separate and distinct from
home health care and nursing home care. Unlike home health care, which focuses
on the curative treatment of patients, hospice care focuses primarily on
improving the quality of life of terminally ill patients and their families.

A central concept of hospice care involves the creation of an
interdisciplinary team that provides comprehensive management of the healthcare
services and products needed by hospice patients and their families. An
interdisciplinary team is typically comprised of:

- a physician;

- a patient care manager;

- one or more registered nurses;

- one or more certified home health aides;

- a medical social worker;

- a chaplain;

- a homemaker; and

- one or more specially trained volunteers.

We assign each of our hospice patients to an interdisciplinary team, which
assesses the clinical, psychosocial and spiritual needs of the patient and his
or her family, develops a plan of care, and delivers, monitors and coordinates
that plan with the goal of providing appropriate care for the patient and his or
her family. This interdisciplinary team approach offers significant benefits to
hospice patients, their families and payors including:

- the provision of coordinated care and treatment;

- clear accountability for clinical outcomes and cost of services; and

- the potential reduction of stress and dysfunction of patients and their
families.

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In contrast, the treatment of terminally ill patients outside the hospice
setting often results in the patient receiving medical services from physicians,
hospitals, home health agencies, skilled nursing facilities, home infusion
therapy companies and/or pharmacies, with little or no effective coordination
among the providers. This lack of coordination often results in a lack of clear
accountability for clinical outcomes and the cost of services provided. In
addition, the provision of services in this uncoordinated fashion may cause
additional stress and dysfunction to patients and their families and result in
higher costs.

Medicare-certified hospice providers must provide the following four
distinct levels of care:

- Routine Home Care. Routine home care is hospice care provided to
patients and their families at home or in a long-term care facility where
the patient resides. Routine home care involves regular visits by members
of the interdisciplinary team. Routine home care is the largest component
of services provided by hospice care providers.

- General Inpatient Care. General inpatient care is provided in instances
where short-term inpatient care is required for pain control or symptom
management that cannot feasibly be provided in other settings. These
services are provided in either a free-standing inpatient facility, a
hospital or a long-term care facility.

- Continuous Home Care. Continuous home care is provided during periods of
crisis when a patient requires constant care, primarily nursing care, to
achieve palliation or management of acute medical symptoms. To qualify
for Medicare continuous home care payments, the care must be provided for
a minimum of eight hours during a 24-hour day and nursing care must
account for more than one-half of the care provided during the periods.

- Respite Care. Respite care is short-term inpatient care provided to a
patient only when necessary to relieve the patient's family or other
caregiver from the demands of providing care and support to hospice
patients in their homes. These services are provided in inpatient
facilities similar to those used to provide general inpatient care.

For a complete description of our hospice services, see "-- Our Hospice
Services."

THE HOSPICE INDUSTRY AND MARKET OPPORTUNITY

THE HOSPICE INDUSTRY

The Medicare program, which is the largest payor for hospice services, pays
hospice providers fixed daily or hourly amounts based on the level of care
provided to hospice patients and their families. In addition to Medicare,
hospice care is covered by Medicaid in 43 states and the District of Columbia
and by most private insurance plans.

According to the Health Care Financing Administration, Medicare payments
for hospice services increased from approximately $118 million in 1988 to
approximately $2.5 billion in 1999. According to the United States General
Accounting Office, referred to in this prospectus as the "GAO," the number of
Medicare beneficiaries electing hospice care increased over 150% between 1992
and 1998. We believe that these significant increases are due in large part to
increasing public awareness and acceptance of hospice care and the benefits it
provides to hospice patients and their families and payors.

Despite the rapid growth of the Medicare hospice program, hospice services
represented only approximately one percent of total Medicare spending in 1999.
Although hospice services represent only a small portion of the total annual
Medicare budget, they generate significant savings for the Medicare program:

- A 1995 industry study concluded that Medicare beneficiaries who elected
hospice care incurred $3,192 less cost in the last month of life than
those beneficiaries who did not elect hospice care.

- The same 1995 industry study estimated that for every dollar Medicare
spends on hospice care, Medicare saves $1.52 in Medicare expenditures.
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In the past decade, the number of hospice providers and beneficiaries in
the United States has increased significantly. According to the GAO, 1,208
Medicare-certified hospices operated in the United States in 1992, serving more
than 143,000 Medicare beneficiaries who elected hospice care. By 1998, the
number of Medicare-certified hospices increased to 2,196, serving nearly 360,000
Medicare beneficiaries. Approximately 63% of these hospices are not-for-profit
hospices.

As the hospice industry has grown significantly, the types of medical
conditions of patients who have chosen hospice care have broadened. In 1992,
according to the GAO, 75.6% of the Medicare beneficiaries electing hospice care
had conditions related to cancer. By 1998, the percentage of Medicare
beneficiaries electing hospice care who had conditions related to cancer
declined to 57.4%. According to the GAO, from 1992 to 1998, hospice enrollment
by Medicare beneficiaries with cancer increased 91%, while enrollment by
beneficiaries with all other conditions increased 338%. We believe that the
increasing diversity of the medical conditions of the hospice patient population
represents a growing acceptance and understanding of hospice care by the general
public and healthcare practitioners. Common conditions of hospice patients, and
the approximate percentage of Medicare beneficiaries electing hospice care in
1998 with those conditions, are as follows:

<TABLE>
<CAPTION>
PRIMARY DIAGNOSIS PERCENT
----------------- -------
<S> <C>
Cancer...................................................... 57.4%
Congestive heart failure.................................... 6.8%
Chronic obstructive pulmonary disease....................... 4.4%
Stroke...................................................... 3.7%
Alzheimer's disease......................................... 3.3%
Other (including dementia, ALS, renal disease and liver
disease).................................................. 24.4%
-----
Total.................................................. 100.0%
=====
</TABLE>

The hospice industry has experienced declining average lengths of stay over
the past several years. Although more Medicare beneficiaries choose hospice
care, many are doing so closer to the time of death. According to the GAO, the
average hospice length of stay declined from 74 days in 1992 to 59 days in 1998.
Decisions about whether and when to use hospice care depend on physician
preferences and practices, patient choice and diagnosis, and public and
professional awareness of the Medicare hospice benefit. Along with these
factors, increases in regulatory scrutiny of compliance with Medicare program
eligibility requirements may have contributed to declines in the average length
of stay of hospice patients. In response to this decline, the Health Care
Financing Administration sent a letter to all Medicare-certified hospices in
September 2000 reaffirming that Medicare hospice beneficiaries are not limited
to six months of coverage and that there is no limit on how long a Medicare
beneficiary can receive hospice benefits and services, provided that the
beneficiary continues to meet the eligibility criteria under the Medicare
hospice program. See "-- Government Regulation -- Overview of Government
Payments."

MARKET OPPORTUNITY

We believe that a number of factors will drive growth in the hospice
industry. We believe that we are well positioned to take advantage of these
growth opportunities:

- Aging Population in the United States. According to industry statistics,
patients age 65 and over comprise approximately 68% of all hospice
patients. According to the United States Census Bureau, an estimated 34.8
million persons, or approximately 12.6% of the total United States
population, were age 65 and over as of August 1, 2000. The United States
Census Bureau projects that the population of persons age 65 and over
will rise to an estimated 53.7 million persons, or approximately 16.5% of
the total United States population, by the year 2020.

- Underserved Hospice Market. In 1998, approximately 2.3 million persons
died in the United States. Of these, approximately 1.7 million were age
65 and over. According to the GAO, only approximately 19% of Medicare
beneficiaries who died in 1998 received hospice care. We believe

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that a significant percentage of Medicare beneficiaries who do not
receive hospice services would be appropriate for hospice care. As of
September 30, 2000, approximately one-half of our hospice patients
resides in nursing homes and other long-term care facilities. According
to a recent article published in the Journal of the American Medical
Association, nearly half of all persons in the United States who live to
age 65 will enter a nursing home before they die. Many nursing home
patients have medical conditions that may make them appropriate for
hospice care. However, only an estimated one percent of the nursing home
population enrolls in hospice care. We believe that the relatively low
level of hospice care penetration and the growing population of persons
age 65 and over demonstrate that the market for hospice care services is
substantially underserved.

- Cost Savings of Hospice Care to the Medicare Program. According to the
Health Care Financing Administration, Medicare beneficiaries incur an
estimated 28% of all Medicare costs in their last year of life, with an
estimated 50% of that total incurred in the last two months of life.
Studies have demonstrated that hospice care generates significant savings
to the Medicare program. These Medicare savings are generated because
patients are typically treated in their residence throughout their
illness without the need for treatment in expensive acute care
facilities. We believe that the cost savings related to hospice care,
combined with the projected substantial increase in Medicare
beneficiaries, further enhance the potential growth of the hospice
industry.

- Fragmented Hospice Market. The hospice industry is highly fragmented,
consisting of over 2,000 hospice locations throughout the country, most
of which are operated by small, community-based providers. Many of these
providers lack the expertise and capital resources necessary to readily
provide all levels of hospice care, operate efficiently and compete
effectively. The current healthcare environment presents these providers
with additional challenges, such as changing regulatory requirements and
increasing cost pressures. We believe that these factors provide
significant opportunities for consolidation in the hospice industry.

- Increasing Public Awareness and Acceptance of Hospice Care. Between 1992
and 1998 the number of Medicare beneficiaries electing hospice care
increased over 150% and the diversification of medical conditions of
patients electing hospice care also increased significantly. Public and
professional awareness and acceptance of hospice care significantly
influences the use of hospice care. The need for greater public and
professional understanding of options for end-of-life care, including
hospice, has been highlighted in recent congressional hearings and other
public forums and by medical societies, patient advocacy groups and the
hospice industry. We believe that public awareness and acceptance of
hospice care is increasing and is likely to continue to increase in the
future.

OUR COMPETITIVE ADVANTAGES

We have grown rapidly and achieved profitability as a result of the
following competitive advantages:

WE ARE ONE OF THE LARGEST PROVIDERS OF HOSPICE CARE.

We are one of the largest providers of hospice care in the United States in
terms of both average daily census and number of locations. Our average daily
census for September 2000 was 2,242 patients, and we currently have 32 hospice
locations to serve patients and their families in 18 states. We believe that our
size provides us with numerous operating advantages over our competitors,
including:

- Professionally Trained Marketing Team. We maintain a professionally
trained team of more than 90 employed marketing representatives who
regularly educate new and existing patient referral sources about the
benefits of hospice care and the services that we provide. Our team of
marketing representatives has enabled us to develop a significant base of
patient referral sources in our markets. Unlike many hospice care
providers, we have the resources to maintain this dedicated marketing
staff.

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- Active Cost Management and Centralized Corporate Services. We actively
manage and monitor several daily indicators to track performance across
our multiple hospice locations, which enables us to develop best
practices, improve efficiencies, manage costs and increase operating
margins. A key aspect of our patient care cost management is our
acuity-based management model, which optimizes patient care in a cost
appropriate manner. In addition, we have centralized many of our
administrative functions, thereby enabling us to spread administrative
costs over our multiple hospice locations. We also believe that our size
and local market presence allow us to negotiate more favorable purchasing
arrangements with suppliers of drugs, durable medical equipment and
disposable medical supplies. We believe that many hospice providers,
particularly not-for-profit organizations, lack the resources or
incentives to actively manage costs.

- Comprehensive Quality Assurance Program. We have developed and
implemented and maintain a comprehensive quality assurance program as
part of our provision of centralized corporate services to our 32 hospice
locations. This program facilitates the delivery of responsive, quality
service to our patients and their families. We believe that many hospice
providers lack the resources to effectively implement and maintain a
comprehensive quality assurance program.

WE HAVE A PROVEN TRACK RECORD IN GROWING OUR BUSINESS THROUGH A BALANCED
GROWTH STRATEGY.

We have grown rapidly through a focused strategy of acquisitions,
development of new hospice locations and internal growth. Since we began our
operations, our net patient service revenue has increased from $1.0 million in
1996 to $58.9 million for the nine months ended September 30, 2000. We reported
net income of $2.2 million for the nine months ended September 30, 2000.

We have acquired 27 hospice locations since beginning our operations in
1996. Five of these locations were combined with other locations and one
location was subsequently closed. We have successfully integrated our acquired
hospice locations into our operations by implementing our standardized operating
model, including daily cost management, and our marketing programs to increase
patient referrals. In the second half of 1999, for example, we completed two
acquisitions consisting of eight separate hospice locations, including three
inpatient facilities. The combined patient census for these acquired hospice
locations was 430 at the time of acquisition. The combined average daily census
for these locations in September 2000 was 526, representing an increase of
approximately 22.3%.

We have also developed nine new hospice locations, and we are developing
two additional locations. When developing a new hospice location, we utilize our
standardized operating model that, as with acquisitions, focuses on minimizing
costs while growing patient census. Applying our standardized development
approach, on average, we have reached breakeven, as measured by EBITDA excluding
corporate overhead allocations, at our new locations within approximately ten
months from the date we began development.

We have successfully increased our patient referrals in each of the markets
in which we operate by utilizing our marketing representatives to establish and
develop referral sources, as well as by providing responsive, quality service.

WE ARE A RESPONSIVE, COMPREHENSIVE PROVIDER OF QUALITY HOSPICE SERVICES.

We focus on the prompt and efficient delivery of services to our patients
and their families by adhering to our 14 service standards, which stress:

- patient admissions within three hours after receiving a physician's order
for hospice care;

- daily contact with our patients and their families to assess their needs;

- prompt, responsive and comprehensive service for our patients and their
families at all times; and

- satisfaction of individualized patient and family needs.

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We believe that our ability to consistently provide responsive, quality
service to our patients and their families has been a key factor in our ability
to increase patient referrals. We also believe that our commitment to provide
comprehensive hospice care is an important factor in increasing patient
referrals. For example, we are committed to providing continuous care directly
at all of our locations to all patients who are appropriate for this level of
care. While all Medicare-certified hospice providers must be able to provide all
four levels of care, we believe that this commitment distinguishes us from most
hospice providers who, because of staffing and other resource constraints,
generally rely on contract labor to provide continuous care rather than
full-time, dedicated continuous care employees.

WE HAVE A STANDARDIZED AND EFFICIENT OPERATING MODEL.

We operate in a fixed payment environment, with payments based on the level
of care that we provide to our patients and their families. Accordingly,
controlling our costs is essential to maintaining our profitability.

We actively manage and monitor several day-to-day indicators, including
admissions, discharges by type of discharge, admission conversions and
appropriate utilization of services on a daily basis. We also track on a regular
basis various key measures of our costs per day of care, including costs of
labor, medication, durable medical equipment, medical supplies and patient care
mileage expense. These measurement tools assist us in tracking the performance
of our business and efficiently providing quality, responsive care to our
patients and their families. We believe that many hospice providers do not have
the resources to implement systems to effectively monitor and manage the cost of
providing hospice care.

Each of our hospice locations is supported by our corporate office in
Dallas, Texas, which provides coordination, centralized resources and corporate
services to each of our hospice locations. The support services that our
corporate office provides allows us to reduce our administrative overhead and
should allow us to gain additional operating efficiencies as we grow.

We can apply our standardized operating model at acquired and start-up
hospice locations quickly and efficiently. Our standardized operating model and
our centralized corporate services enable us to quickly control costs at our
hospice locations, while providing prompt, responsive and comprehensive quality
service to our patients and their families.

WE HAVE AN EXPERIENCED MANAGEMENT TEAM.

Our ability to grow profitably, deliver quality services and implement our
operating model has been in large part the result of our senior management team.
Our six executive officers have over 35 years of combined experience in the
hospice industry. In addition, four of our executive officers, including our
chief executive officer and chief operating officer, have worked together
previously for another for-profit hospice provider. Our senior management team
operates as a cohesive, complementary group, reflecting extensive marketing
experience, as well as operating knowledge and understanding of the regulatory
environment in which we operate. We believe that our management team
differentiates us from other hospice providers, many of which are small,
community-based hospices lacking the resources to attract and maintain an
experienced management team.

OUR BUSINESS STRATEGY

Our goal is to become the leading provider of hospice care in the United
States. To achieve this goal, we have adopted the following strategies:

EXPAND OUR BUSINESS IN NEW AND EXISTING MARKETS BY SELECTIVELY ACQUIRING
HOSPICES

We intend to expand our business by actively pursuing strategic
acquisitions of hospices in new and existing markets throughout the United
States. We believe that significant opportunities exist for growth through
acquisitions of hospices. The hospice industry consists of over 2,000 hospice
locations, most of which are operated by small, community-based providers. We
believe that many of these providers lack

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the expertise and capital resources necessary to readily provide all levels of
hospice care, operate efficiently and compete effectively. The current
healthcare environment presents these providers with additional challenges, such
as changing regulatory requirements and increasing cost pressures. We believe
that the fragmented nature of the hospice industry, combined with these other
factors, provides us with significant opportunities to grow our business through
acquisitions. To take advantage of acquisition opportunities, we have developed
a focused acquisitions program that is overseen and coordinated by our director
of business development.

In identifying new and existing markets in which to acquire a hospice, we
consider the following criteria, among others:

- demographics evidencing a significant and growing population of persons
age 65 and older;

- the number of nursing home beds located in the market and the receptivity
to hospice care by these nursing homes;

- the level of competition in the market, with emphasis on the market share
of existing hospice providers and their quality of care and reputation;
and

- the regulatory environment.

Before completing an acquisition, we actively seek to retain employees of
the acquired hospice by emphasizing our compensation and benefits programs, our
corporate philosophy and their future responsibilities with us. After we acquire
a hospice, we:

- continue to seek to retain employees and maintain the existing patient
referral base of the hospice;

- improve operations by implementing our efficient operating model,
appropriate expense controls and service standards at the hospice;

- implement our marketing program to increase patient referrals by, among
other things, hiring marketing representatives; and

- conduct extensive marketing and clinical training, including customer
service and quality assurance, at the hospice.

EXPAND OUR BUSINESS IN NEW AND EXISTING MARKETS BY DEVELOPING NEW HOSPICE
LOCATIONS

In addition to our acquisitions initiative, we intend to expand our
business by actively pursuing the development of new hospice locations in new
and existing markets throughout the United States. We identify markets in which
to develop a new hospice location by employing the same criteria utilized in
identifying markets for acquisitions.

After we identify a market in which to develop a new hospice location, we
utilize our standardized approach to the development of the new location,
beginning with the identification and recruitment of a general manager who is
familiar with the local market, the hiring of other key personnel and the
leasing of office space. We then begin training key personnel and preparing for
the initial Medicare survey. During this phase, we also hire three or more
marketing representatives to allow time for extensive training and the
development of relationships in the community. This approach has been successful
in increasing patient census at our new locations. We also begin establishing
contractual arrangements with local suppliers, nursing homes, assisted living
facilities, adult care centers and managed care companies. During the next phase
of the start-up model, which generally occurs during the third month of the
development of a new location, we seek to admit our first patients, at which
time we request the Medicare survey. After we complete the initial Medicare
survey and become certified, we aggressively expand marketing and admissions
activities and begin billing for our services.

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ACTIVELY SEEK TO INCREASE PATIENT REFERRALS

We actively seek to increase patient referrals at all locations by both
increasing patient referrals from existing referral sources and establishing new
referral sources. Our referrals originate from:

- physicians;

- long-term care facilities, including nursing homes, assisted living
facilities and adult care centers;

- hospitals;

- managed care companies; and

- insurance companies.

In each of our markets, we have implemented a marketing plan designed to
address the specific needs of the patient referral sources in that market and to
promote the quality, responsive and comprehensive service we provide to our
patients and their families. We utilize three or more dedicated marketing
representatives in each of our markets and currently employ more than 90
marketing representatives company-wide. Each marketing representative seeks to
develop relationships with patient referral sources located in the marketing
representative's territory by regularly calling on these referral sources and
educating groups of physicians, social workers, nurses and nursing home
personnel regarding hospice care generally and our services specifically. As
part of a marketing representative's ongoing contact with a patient referral
source, the marketing representative assists the referral source in identifying
patients and families who are appropriate for hospice care and provides periodic
information on a referred patient's status.

At each of our locations, our general manager, patient care manager and
marketing representatives coordinate their efforts to obtain contracts with
nursing homes, managed care companies and insurance companies. In addition, in
many of the markets we serve, we conduct local public relations campaigns that
promote hospice care. We also actively participate in community-related projects
to increase public awareness of hospice care.

We believe that our marketing efforts, combined with our quality,
responsive and comprehensive service, will enable us to continue to increase
patient referrals.

ACTIVELY MANAGE PATIENT CARE COSTS BY APPLYING OUR ACUITY-BASED CASE
MANAGEMENT MODEL

Because we operate in a fixed payment environment, controlling costs is
critical to our profitability. We actively manage our patient care costs through
an acuity-based case management model. This model allows us to efficiently
allocate our resources, including staffing, to optimize patient care in a cost-
appropriate manner. We devised our acuity-based case management model to provide
the best care for patients and their families and to ensure that the appropriate
resources are utilized at the appropriate time. Our model focuses on providing
services to patients and their families at each phase along the care continuum
by tailoring our care to their individualized and changing needs. We allocate
our resources to patients and their families according to their changing needs
rather than providing all services at all times. Along a patient's care
continuum, the patient and his or her family may have greater psychosocial and
spiritual needs initially and later have greater medical needs.

OUR HOSPICE SERVICES

When a patient is referred to us, one of our admissions coordinators
contacts the referral source to obtain the necessary patient information and
physician approvals. We then contact the patient and his or her family to set up
an appointment, at which time we explain our hospice program and the services we
provide in greater detail and obtain all necessary patient and family consents
and forms. In order to qualify for the Medicare hospice benefit, the patient's
treating physician and our medical director must certify that the patient has
less than six months to live if the disease runs its normal course, and the
patient must sign an elective statement indicating that the patient understands
the nature of the illness and of hospice care.
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By signing the statement, the patient surrenders any rights to other Medicare
benefits related to the patient's terminal illness while receiving hospice care.
Once all of the paperwork is obtained, a full nursing assessment is performed by
one of our nurses, and we assign the patient to an interdisciplinary team that
assumes responsibility for developing and delivering the patient's plan of care.

In keeping with the hospice concept, we provide intensive treatment of the
physical and emotional pain and symptoms associated with terminally ill
patients. This palliative care focuses primarily on enhancing a patient's
comfort and overall quality of life and is generally provided in the patient's
home, a nursing home or a hospital. Our services are available 24 hours a day,
seven days a week and include, among others:

- Nursing Care. Registered nurses coordinate the care for every patient,
provide direct patient care and check symptoms and medications.

- Home Care Aide and Homemaker Services. Home care aides provide personal
care to patients, such as bathing, feeding and dressing. Homemaker
services include light housekeeping and assistance with daily living.

- Spiritual Support and Counseling. Clergy and other counselors provide
spiritual support and counseling to patients and their families.

- Medical Social Services. Social workers provide advice and counseling to
patients and their families.

- Physical, Occupational and Speech Therapy Services. Professional
therapists provide therapy to patients to assist them in remaining
independent.

- Medications, Equipment and Supplies. We provide drugs, equipment and
supplies to patients to treat physical pain and symptoms and to enable
patients to receive hospice care where they reside.

- Continuous Home Care. During periods of crisis, we provide continuous
home care to our patients and their families. This care is predominantly
nursing care and is provided in increments of at least eight hours in a
24-hour period. We provide continuous care when, because of the need for
pain and symptom management, constant monitoring and support are
required, but inpatient care is not yet needed.

- Respite Care. We provide or arrange for short-term care to patients in
inpatient facilities to provide respite to family members caring for the
hospice patient.

- Hospice Inpatient Care. We provide or arrange for short-term hospice
inpatient care when adequate care is not feasible in the patient's home
due to the patient's condition.

- Volunteer Services and Support. Trained volunteers assist with everyday
tasks, such as shopping, and provide support and companionship, respite
sitting, personal care services and certain professional services.

- Financial Counseling. We provide financial counseling to hospice
patients and their families to assist them in handling the financial
issues associated with a terminal illness.

- Bereavement Care and Counseling. We provide counseling services to
family members for a period of up to one year following the patient's
death.

We provide most hospice services to our patients and their families where
they reside. We provide or arrange for inpatient and respite care and services
in one of three settings:

- long-term care facilities and hospitals under contractual relationships;

- free-standing inpatient facilities operated by us; or

- inpatient units leased from hospitals and operated by us.

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We currently operate four free-standing inpatient hospice facilities. We
have two inpatient facilities in Phoenix, Arizona, and one each in Tucson,
Arizona, and Las Vegas, Nevada. The Phoenix and Tucson facilities each have
eleven beds. The Las Vegas facility has twenty-two beds.

We also operate one inpatient hospice unit that we lease from DeKalb
Medical Center located in the Atlanta, Georgia metropolitan area. DeKalb Medical
Center provides us and our patients with dedicated space, housekeeping and
dietary services and other ancillary services. We provide the administrative and
clinical staff to operate the inpatient unit at DeKalb Medical Center.

In markets in which we do not operate free-standing inpatient hospice
facilities or inpatient units at hospitals, we contract with hospitals and
long-term care facilities to provide inpatient hospice care on an as-needed
basis. Under these arrangements, our interdisciplinary team implements and
provides hospice services through the hospital's or long-term care facility's
employees. Our interdisciplinary team remains ultimately responsible for the
patient and the quality of the services provided to the patient. In addition, we
provide all hospice services that the hospital or long-term care facility does
not provide.

We often provide hospice care to patients residing in nursing homes,
assisted living facilities and other similar long-term care facilities, treating
the facility essentially as the patient's home. We have entered into agreements
with these facilities to render hospice care to patients residing in these
facilities. During the nine months ended September 30, 2000, patients who
resided in long-term care facilities accounted for approximately 44.0% of days
of care during that period.

MARKETING

Our patient referral sources are physicians, hospitals, nursing homes,
assisted living facilities, adult care centers, managed care companies and
insurance companies. We have an employed staff of more than 90 dedicated
marketing representatives who seek to develop relationships with patient
referral sources located in their respective markets by regularly calling on
these referral sources and educating groups of physicians, social workers,
nurses, and staff at nursing homes and other long-term care facilities regarding
hospice care generally and our services specifically. As part of a marketing
representative's ongoing contact with a patient referral source, the marketing
representative assists the referral source in identifying patients and families
who are appropriate for hospice care and provides periodic information on
referred patients' status. In addition to our marketing representatives, our
more than 700 caregivers, who routinely have contact with our referral sources,
regularly assist our referral sources in identifying patients who are
appropriate for hospice care.

When we acquire a hospice, we hire additional marketing representatives as
needed. In each start-up location, we hire three or more marketing
representatives prior to the planned opening of the location to allow time for
extensive training and the development of relationships in the community.

We have also developed tailored marketing plans to meet the specific needs
of each of our patient referral sources:

- Physicians. Our marketing representatives target a broad variety of
physicians, including primary care physicians and specialists, who
regularly see a high number of patients potentially eligible for hospice
care. We have developed disease specific marketing materials that we
provide to these physicians. We update each physician who refers a
patient to us on the patient's condition on a regular basis according to
each physician's instructions. We actively involve the local physician
community in assisting us in creating the type of hospice programs that
best meet its needs as well as those of patients and their families.

- Hospitals. Our marketing representatives call on physicians, patient
discharge planners and social workers at hospitals. We utilize our
disease specific marketing materials when marketing to the various
hospital departments, including oncology and cardiology. We educate
hospital staff on the benefits and cost advantages of hospice care over
traditional inpatient care for those patients who are candidates for
hospice care.

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- Long-Term Care Facilities. We negotiate contracts with nursing homes and
have arrangements with assisted living facilities and adult care centers
to provide routine home care, inpatient care and respite care at these
facilities. Our marketing representatives regularly call on nurses,
social workers, directors of nursing, administrators and other staff
members at these facilities who are in a position to identify or refer
hospice patients. In addition, our marketing representatives conduct
regular training programs for the staff of these facilities to educate
them on hospice care and its benefits.

- Managed Care Companies and Insurance Companies. Our marketing
representatives regularly call on case managers for managed care
companies and insurance companies to remind them of the advantages of our
hospice services. We regularly conduct training programs to educate case
managers of the benefits of hospice care, including potential cost
savings. Our general managers and marketing representatives coordinate
their efforts to obtain contracts with managed care companies and
insurance companies. Because managed care companies and insurance
companies often have special needs, we strive to meet their requirements
by providing them with individualized patient reports.

In many of the markets that we serve, we also conduct local public
relations campaigns to promote hospice awareness.

CENTRALIZED OPERATIONS AND INFORMATION SYSTEMS

CENTRALIZED OPERATIONS

We have designed our organizational structure to achieve a high level of
patient and family satisfaction, provide quality care, permit our hospice
locations to continue to grow and develop, and minimize overhead. Our corporate
office in Dallas, Texas supports each of our hospice locations by providing
coordination, centralized resources and corporate services to each of our
hospice locations, including:

- financial accounting systems;

- information and telecommunications systems;

- clinical support services;

- human resources administration;

- regulatory compliance and quality assurance;

- marketing and educational materials; and

- training and development.

We process all billing electronically at our corporate office. Our
corporate office bills Medicare monthly and generally receives payment
electronically within fourteen working days. Our corporate accounting personnel
prepare monthly operating statements for each of our locations and review these
statements for operating trends and compliance with budget forecasts. We prepare
annual operating budgets for each of our hospice locations. We also provide
centralized cash management and accounts payable and payroll processing.

INFORMATION SYSTEMS

We utilize a server-based system and laptop and desktop computers to
connect all of our locations to one another electronically. We utilize a
server-based billing system, which we installed in April 2000. Each local office
enters all initial patient registration information and updates to the billing
status through our intranet system. Our new billing system and the use of our
intranet system has resulted in greater accuracy and more rapid collections. We
recently updated our human resources system to accommodate our anticipated
growth for the next two years. We continue to seek ways to implement relevant
technology to enhance business processes, thereby increasing efficiency. We have
appointed a task force to direct our

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compliance with proposed federal regulations regarding the privacy and security
of patient medical information. See "-- Government Regulation."

FACILITIES

Below is a listing of our current locations by city and average daily
census of each location.

<TABLE>
<CAPTION>
AVERAGE
DAILY
ACQUIRED/ CENSUS
LOCATION LOCATION TYPE OPENED YEAR ACQUIRED/OPENED (SEPTEMBER 2000)
-------- ------------------ --------- -------------------- ----------------
<S> <C> <C> <C> <C>
ALABAMA
Birmingham..................... Hospice Office Opened 1998 86
ARIZONA
Phoenix (Mesa)................. Inpatient Facility Acquired 1999 9
Phoenix (Peoria)............... Inpatient Facility Acquired 1999 7
Phoenix........................ Hospice Office Acquired 1997/1999 189(1)
Tucson......................... Inpatient Facility Acquired 1999 9
Tucson......................... Hospice Office Acquired 1999 137
CALIFORNIA
Orange County (Garden Grove)... Hospice Office Acquired 1999 103
Los Angeles (Culver City)...... Hospice Office Acquired 2000 N/A(2)
Riverside...................... Hospice Office Acquired 1999 29
San Diego...................... Hospice Office Acquired 1999 82
San Jose....................... Hospice Office Acquired 1998 54
COLORADO
Denver......................... Hospice Office Acquired 1998 40
GEORGIA
Atlanta........................ Hospice Office Opened 1997 94
Atlanta (DeKalb)............... Inpatient Facility Opened 1999 10
ILLINOIS
Chicago........................ Hospice Office Opened 2000 N/A(3)
INDIANA
Indianapolis................... Hospice Office Opened 1996 79
LOUISIANA
New Orleans (Metairie)......... Hospice Office Acquired 1998 198
MICHIGAN
Detroit (Novi)................. Hospice Office Acquired 1998 74
MISSOURI/KANSAS
Kansas City.................... Hospice Office Acquired 1998 131
NEVADA
Las Vegas...................... Hospice Office Acquired 1997 79
Las Vegas...................... Inpatient Facility Opened 1997 16
NEW JERSEY
Edison......................... Hospice Office Opened 1997 43
OKLAHOMA
Oklahoma City.................. Hospice Office Acquired 1998 77
PENNSYLVANIA
Pittsburgh..................... Hospice Office Opened 1996 100
TENNESSEE
Nashville...................... Hospice Office Acquired 1998 67
</TABLE>

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

(1) We transferred the operations of our Phoenix, Arizona hospice acquired in
1999 to our Phoenix, Arizona hospice acquired in 1997.

(2) We acquired our Los Angeles (Culver City), California location on November
20, 2000, at which time the average daily census was 45.

(3) We are currently developing new locations in Chicago, Illinois and El Paso,
Texas. We anticipate admitting our first hospice patients at these new
locations in the first quarter of 2001.

Our corporate headquarters are located in Dallas, Texas. We currently lease
approximately 22,000 square feet of space at 717 N. Harwood, Suite 1500, Dallas,
Texas. We believe that these facilities are adequate for our current uses and
that additional space is available to accommodate our anticipated growth.

We lease the facilities where our various hospice agencies conduct their
operations. Our leases have varying terms from one to ten years.

GOVERNMENT REGULATION

GENERAL

The healthcare industry and our hospices are subject to extensive federal
and state regulation. Our hospice agencies are licensed as required under state
law as either hospices or home health agencies, or both, depending on the
regulatory requirements of each particular state. In addition, our hospices are
required to meet participation conditions to be eligible to receive payments
under the Medicare and Medicaid programs. All of our hospice locations, other
than our locations currently in development, are certified for participation in
the Medicare program and are also eligible to receive payments as hospices in
the Medicaid programs of the states in which we operate who offer a Medicaid
hospice benefit. Our hospices are subject to periodic survey by governmental
authorities to assure compliance with both state licensing and certification
requirements.

Medicare is a federally funded and administered health insurance program,
primarily for individuals entitled to social security benefits who are 65 years
of age or older or who are disabled. Medicaid is a health insurance program
jointly funded by state and federal governments that provides medical assistance
to qualifying low income persons. Each state Medicaid program has the option to
provide payment for hospice services. Sixteen of the 18 states in which we
currently operate cover Medicaid hospice services; however, we cannot assure you
that these states will continue to cover hospice services or that states into
which we expand our operations may cover or continue to cover hospice services.

Medicare Conditions of Participation. The Medicare program requires each
of our hospice locations to satisfy prescribed conditions to be eligible to
receive payments, including the following:

- Governing Body. Each hospice must have a governing body that is
responsible for the overall operation of the hospice and for ensuring
that all services are provided consistent with accepted

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standards of practice. The governing body must designate one individual
who is responsible for the day-to-day administrative operations of the
hospice.

- Medical Director. Each hospice must have a medical director that is
responsible for the medical component of patient care.

- Professional Management. A hospice may arrange for the provision of
non-core services by another individual or entity. The hospice must,
however, retain professional management responsibility for arranged
services and ensure that these services are furnished safely and
effectively by qualified personnel in accordance with the patient's plan
of care.

- Plan of Care. The patient's attending physician, the medical director
and the interdisciplinary team must establish a written plan of care
prior to providing care to the patient.

- Continuation of Care. A hospice cannot discontinue or reduce care
provided to a Medicare beneficiary because of the beneficiary's inability
to pay for that care.

- Informed Consent. The hospice must obtain from either the hospice
patient or a family member an informed consent form that specifies the
type of care and services that may be provided as hospice care during the
illness.

- In-Service Training. A hospice must provide an ongoing training program
for its employees.

- Quality Assurance. A hospice must provide an ongoing, comprehensive,
integrated self-assessment of the quality and appropriateness of care.
See "-- Compliance and Quality Improvement Programs."

- Interdisciplinary Team. A hospice must have an interdisciplinary team
that establishes policies and supervises the provision of hospice care
and services. The team must include at least a physician, registered
nurse, social worker and pastoral or other counselor. All of the members
of the team must be employees of the hospice with the exception of the
physician, who may be under contract with the hospice.

- Volunteers. Hospices must recruit and train volunteers to provide care
and services under the supervision of hospice employees. These volunteers
must provide administrative or direct patient care in an amount that, at
a minimum, equals five percent of the total patient care hours provided
by all paid hospice employees and contract staff.

- Licensure. Each hospice and all hospice personnel must be licensed,
certified or registered in accordance with applicable state laws and
regulations.

- Central Clinical Records. Hospices must maintain centralized clinical
records for each hospice patient. The records must meet standards
relating to content and protection.

- Furnishing Care Services. Substantially all "core services" must be
provided directly by hospice employees. "Core services" include nursing,
medical, social, physician and counseling services. The hospice may use
contracted staff to perform core services during periods of peak patient
loads or under extraordinary circumstances, but the hospice must maintain
professional, financial and administrative responsibility for the
services.

In addition to the above conditions of participation, Medicare regulations
also establish additional conditions of participation related to the provision
of other hospice care services and supplies, including physical therapy,
occupational therapy, speech therapy, home health aide and homemaker services,
medical supplies, short-term inpatient care and direct inpatient care. Each of
our hospices, excluding our two hospices under development, is certified for
participation in the Medicare program and is eligible to receive payment as a
hospice in the Medicaid hospice program, if any, of the state in which it
operates. We anticipate that our two hospices under development will be Medicare
certified and Medicaid eligible during the first quarter of 2001. We believe
that we are in material compliance with all conditions of participation for the
Medicare programs and all eligibility requirements for the Medicaid program.
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Surveys and Audits. Each of our hospices is subject to periodic survey by
federal and state governmental authorities to assure compliance with both state
licensing and certification requirements. From time to time, we receive survey
reports containing statements of deficiencies for alleged failure to comply with
the various regulatory requirements. These survey reports and statements of
deficiencies are common in the healthcare industry. We review these reports,
prepare responses, and take appropriate corrective action, if required. The
reviewing agency is generally authorized to take various adverse actions against
a hospice found to be in non-compliance, including the imposition of fines or
suspension or revocation of a hospice's license. If this adverse action were
taken against any of our hospices, this action could materially adversely affect
that hospice's ability to continue to operate and to participate in the Medicare
and Medicaid programs. This could materially adversely affect our net patient
service revenue and profitability. None of our hospices has been suspended at
any time from participation in the Medicare or Medicaid programs or had its
state licensure suspended or revoked. We believe that each of our hospices is in
material compliance with these licensing and certification requirements.

Certificate of Need Laws and Other Restrictions. Many states have enacted
certificate of need laws that require state approval prior to opening new
healthcare facilities or expanding services at existing healthcare facilities.
Approval under the certificate of need laws is generally conditioned on the
showing of a demonstrable need for services in the community. Certificate of
need laws in some states apply to hospice services. Many states with certificate
of need requirements permit the transfer of a certificate of need from an
existing provider to a new provider. Our hospice in Tennessee is our only
hospice located in a state that has a certificate of need law in effect;
however, in the future we may seek to acquire or develop hospices in other
states that may have certificate of need laws. While several states have
abolished certificate of need laws, and other states do not apply them to
hospice services, these laws could affect our ability to expand services at our
existing hospices or to expand into new geographic markets.

In addition, a few states have additional laws that restrict the
development and expansion of hospices. For example, Florida does not permit the
operation of a hospice by a for-profit corporation, except in limited
circumstances. Under Florida law, a for-profit hospice incorporated on or before
July 1, 1978 is exempt from the restriction and may continue to operate as a
for-profit hospice. In addition, under Florida law an exempt hospice may
transfer its operations and license to another for-profit entity. Under New York
law, a hospice cannot be owned by a corporation that has another corporation as
a stockholder. These additional state restrictions could affect our ability to
expand into these states and other jurisdictions with similar restrictions.

OVERVIEW OF GOVERNMENT PAYMENTS

Substantially all of our net patient service revenue is attributable to
payments received from the Medicare and Medicaid programs. 94.1% and 95.3% of
our net patient service revenue for the year ended December 31, 1999 and for the
nine months ended September 30, 2000 were attributable to Medicare and Medicaid
payments. Payment from Medicare and Medicaid is affected by budgetary pressures
and is subject to changes in legislation and regulation. Our revenues and
profitability, similar to other healthcare companies, are subject to the effect
of such legislative or regulatory changes and to possible reductions in coverage
or payment rates by private third-party payors.

As with most government programs, the Medicare and Medicaid programs are
subject to statutory and regulatory changes, possible retroactive and
prospective rate adjustments, administrative rulings, freezes and funding
reductions, all of which may adversely affect the level of program payments to
us for our services. Reductions or changes in Medicare or Medicaid funding could
significantly affect our results of operations. We cannot predict at this time
whether any additional healthcare reform initiatives will be implemented or
whether there will be other changes in the administration of governmental
healthcare programs or interpretations of governmental policies or other changes
affecting the healthcare system.

Medicare. Medicare pays us based on a prospective payment system under
which we receive one of several predetermined rates for each day in which the
Medicare beneficiary is under our care. As discussed below, these rates are
subject to annual adjustments for inflation and are also adjusted in some

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circumstances based on geographic location. The rate we receive from Medicare
for a day of hospice care varies depending on which of the following four levels
of care is being furnished to the beneficiary:

- Routine Home Care. During the twelve months ending September 30, 2001,
we will receive between $93.88 and $133.33 per day for routine home care,
depending on the location of the service. We are paid the routine home
care rate for each day a patient is under our care and not receiving one
of the other categories of hospice care. This rate is not adjusted for
the volume or intensity of routine home care services provided on a given
day. This rate is also paid when a patient is receiving hospital care for
a condition unrelated to the terminal condition. Routine home care
services accounted for 88.3% of our net patient service revenue for the
year ended December 31, 1999.

- General Inpatient Care. During the twelve months ending September 30,
2001, we will receive between $420.04 and $583.54 per day for general
inpatient care, depending on the location of the inpatient facility.
General inpatient care services accounted for 10.3% of our net patient
service revenue for the year ended December 31, 1999.

- Continuous Home Care. During the twelve months ending September 30,
2001, we will receive between $547.92 and $778.08 per day for continuous
home care, depending on the location of the service. This daily
continuous home care rate is divided by 24 in order to arrive at an
hourly rate. The hourly rate is paid for every hour that continuous home
care is furnished, up to 24 hours in a single day. A minimum of eight
hours must be provided in a single day to qualify for this rate.
Continuous home care services accounted for 0.4% of our net patient
service revenue for the year ended December 31, 1999.

- Respite Care. During the twelve months ending September 30, 2001, we
will receive between $98.86 and $131.01 per day for respite care,
depending on the location of the inpatient facility. Respite care is
provided when the family or caregiver of a patient requires a temporary
reprieve for certain reasons. We can receive payment for respite care
provided to a given patient for up to five consecutive days. Our payment
for any additional days of respite care provided to the patient is
limited to the routine home care rate. Respite care services accounted
for 0.2% of our net patient service revenue for the year ended December
31, 1999.

The Medicare program has entered into contracts with managed care companies
to provide a managed care benefit to electing Medicare beneficiaries. These
managed care programs are often referred to as Medicare HMO programs or Medicare
risk contracts. We provide hospice care to many Medicare beneficiaries who
participate in Medicare HMO programs. Under Medicare HMO programs, Medicare pays
the hospice directly. This direct payment reduces the per member per month
payment otherwise receivable by the managed care company. As a result, our
payments for services provided to Medicare beneficiaries enrolled in Medicare
HMO programs are processed in the same way and at the same rates as those of
other Medicare beneficiaries.

Medicare limits the amount of payment we may receive for inpatient care
services. Under the so-called "80-20" rule, if the number of inpatient care days
furnished by us to Medicare beneficiaries exceeds 20% of the total days of
hospice care furnished by us to Medicare beneficiaries, Medicare payments to us
for inpatient care days exceeding the inpatient cap will be reduced to the
routine home care rate. This determination is made annually based on the twelve
month period beginning on November 1st of each year. This limit is computed on
an agency-by-agency basis. None of our hospices has exceeded the cap on
inpatient care services. However, we cannot assure you that one or more of our
hospices will not exceed the inpatient cap in the future.

Overall payments made by Medicare to us are also subject to a cap amount
calculated by the Medicare fiscal intermediary at the end of the hospice cap
period. The hospice cap period runs from November 1st of each year through
October 31st of the following year. Total Medicare payments to us during this
period are compared to the cap amount for this period. Payments in excess of the
cap amount must be returned by us to Medicare. The cap amount is calculated by
multiplying the number of
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<PAGE> 55

beneficiaries electing hospice care during the period by a statutory amount that
is indexed for inflation. The per-beneficiary cap amount is $15,917 for the
twelve month period ending October 31, 2001. The hospice cap amount is computed
on a hospice-by-hospice basis. None of our hospices has exceeded the cap amount
in past years. However, we cannot assure you that one or more of our hospices
will not exceed the cap amount in the future.

Direct patient care physician services delivered by physicians employed by
or contracted with us are billed separately by us to the Medicare intermediary
and paid at the lesser of the actual charge or 100% of the Medicare allowable
charge for these services. This payment is in addition to the daily rates we
receive for hospice care. Payment for our contractual and employed physicians'
administrative and general supervisory activities are included in the daily
payment rates discussed above. Payments for a patient's attending physician's
professional services, other than services furnished by physicians employed by
or contracted with us, are not paid to us, but rather are paid directly to the
attending physician by the Medicare carrier based on the Medicare physician fee
schedule. Physician services represented 0.5% of our net patient service revenue
for the year ended December 31, 1999.

Medicare fiscal intermediaries periodically conduct focused medical reviews
and other audits on our claims. Focused medical reviews and other audits of our
hospices could result in material recoupments or denials of claims. Further,
Medicare payments for hospice services may not continue to remain at their
current levels or keep pace with the costs of providing hospice services.

The Balanced Budget Act of 1997 made changes in Medicare coverage of and
payment for hospice care services. The law reduced the amount of anticipated
increases in Medicare payments for hospice services by setting the payment rate
increases at the "market basket" inflation rate minus one percentage point for
each of the Medicare fiscal years 1998 through 2002. The Medicare fiscal year
begins on October 1 of each year and runs through September 30 of the following
year. In addition, the Balanced Budget Act of 1997 requires us to file annual
cost reports with the Department of Health and Human Services on each of our
hospices for informational purposes. The Balanced Budget Act of 1997 also
requires us to submit claims on the basis of the location where we actually
furnish the hospice services. The purpose of this requirement is to adjust
payment rates for regional differences in wage costs.

Congress enacted the Balanced Budget Refinement Act of 1999 to alleviate
some of the payment reductions resulting from the Balanced Budget Act of 1997.
One of the changes provided for in the Balanced Budget Refinement Act of 1999 is
to increase the Medicare payment for hospice services by 0.5% for Medicare
fiscal year 2001 and 0.75% for Medicare fiscal year 2002.

Medicare Six-Month Eligibility Rule. In order for a Medicare beneficiary
to qualify for the Medicare hospice benefit, two physicians must certify that
the beneficiary has less than six months to live, assuming the disease runs it
normal course. In addition, the Medicare beneficiary must affirmatively elect
hospice care and waive any rights to other Medicare benefits related to the
beneficiary's terminal illness. Every six months, a physician must recertify
that the Medicare beneficiary's life expectancy is six months or less in order
for the beneficiary to continue to qualify for and to receive the Medicare
hospice benefit. There is no limit on the number of periods that a Medicare
beneficiary may be recertified. A Medicare beneficiary may revoke his or her
election at anytime and resume receiving regular Medicare benefits.

Increased regulatory scrutiny of compliance with the Medicare six-month
eligibility rule has impacted the hospice industry. The Health Care Financing
Administration, however, has recently reaffirmed that Medicare hospice
beneficiaries are not limited to six months of coverage and that there is no
limit on how long a Medicare beneficiary can continue to receive hospice
benefits and services, provided that the beneficiary continues to meet the
eligibility criteria under the Medicare hospice program.

Medicaid. State Medicaid programs are another source of net patient
service revenue. Medicaid is a state-administered program financed by state
funds and matching federal funds to provide medical assistance to the indigent
and certain other eligible persons. In 1986, hospice services became an optional
state Medicaid benefit. For those states that elect to provide a hospice
benefit, the Medicaid program is required to pay us rates that are at least
equal to the hospice rates paid to us by the Medicare program.

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<PAGE> 56

For our patients receiving nursing home care under a state Medicaid program who
elect hospice care under Medicare or Medicaid, the state must pay us, in
addition to the applicable Medicare or Medicaid hospice per diem rate, an amount
equal to at least 95% of the Medicaid per diem nursing home rate for "room and
board" furnished to the patient by the nursing home. We contract with various
nursing homes for the nursing homes' provision of certain "room and board"
services that the nursing homes would otherwise provide Medicaid nursing home
patients. We bill and collect from the applicable state Medicaid program an
amount equal to at least 95% of the amount that would otherwise have been paid
directly to the nursing home under the state's Medicaid plan. Under our standard
nursing home contracts, we pay the nursing home for these "room and board"
services at the Medicaid per diem nursing home rate. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Expenses."

OTHER HEALTHCARE REGULATIONS

Fraud and Abuse Laws. Provisions of the Social Security Act, commonly
referred to as the fraud and abuse provisions, prohibit the filing of false or
fraudulent claims with Medicare or Medicaid and the payment or receipt of any
form of remuneration in return for the referral of Medicare or Medicaid patients
or arranging for the referral of patients, or in return for the recommendation,
arrangement, purchase, lease or order of items or services that are covered by
Medicare or Medicaid programs. Violation of these provisions could constitute a
felony criminal offense and applicable sanctions include imprisonment of up to
five years, criminal fees of up to $25,000, civil money penalties of up to
$50,000 per act plus three times the amount claimed or three times the
remuneration offered and exclusion from the Medicare and Medicaid programs. Many
states have adopted similar prohibitions against payments that are intended to
induce referrals of Medicaid and other third-party payor patients. The Office of
Inspector General, Department of Health and Human Services, referred to in this
prospectus as the "OIG," has published numerous "safe harbors" that exempt some
practices from enforcement action under the federal fraud and abuse laws. These
safe harbors exempt specified activities, including bona fide employment
relationships, some contracts for the rental of space or equipment, and some
personal service arrangements and management contracts. While the failure to
satisfy all of the requirements of a particular safe harbor does not necessarily
mean that the arrangement is unlawful, arrangements that do not satisfy a
particular safe harbor may be subject to scrutiny by the OIG.

We are required under the Medicare conditions of participation and some
state licensing laws to contract with numerous healthcare providers and
practitioners, including physicians, hospitals and nursing homes, and to arrange
for these individuals or entities to provide services to our patients. In
addition, we have contracts with other suppliers, including pharmacies,
ambulance services and medical equipment companies. Some of these individuals or
entities may refer, or be in a position to refer, patients to us, and we may
refer, or be in a position to refer, patients to these individuals or entities.
These arrangements may not qualify for a safe harbor. We believe that our
contracts and arrangements with providers, practitioners and suppliers are not
in violation of applicable fraud and abuse laws. We cannot assure you, however,
that these laws will ultimately be interpreted in a manner consistent with our
practices.

From time to time, various federal and state agencies, such as the
Department of Human Services, issue a variety of pronouncements, including fraud
alerts, the Office of Inspector General's Annual Work Plan and other reports,
identifying practices that may be subject to heightened scrutiny. For example,
in March 1998, the OIG issued a special fraud alert titled "Fraud and Abuse in
Nursing Home Arrangements with Hospices." This special fraud alert focused on
payments received by nursing homes from hospices. The OIG listed the following
specific practices that may violate the federal fraud and abuse laws:

- a hospice offering free goods or goods at below fair market value to
induce a nursing home to refer patients to the hospice;

- a hospice paying "room and board" payments to the nursing home in amounts
in excess of what the nursing home would have received directly from
Medicaid had the patient not been enrolled in hospice;

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<PAGE> 57

- a hospice paying amounts to the nursing home for "additional" services
that Medicaid considers to be included in its room and board payment to
the hospice;

- a hospice referring its patients to a nursing home to induce the nursing
home to refer its patients to the hospice;

- a hospice providing free (or below fair market value) care to nursing
home patients, for whom the nursing home is receiving Medicare payment
under the skilled nursing facility benefit, with the expectation that
after the patient exhausts the skilled nursing facility benefit, the
patient will receive hospice services from that hospice; and

- a hospice providing staff at its expense to the nursing home to perform
duties that otherwise would be performed by the nursing home.

We do not participate in any of the practices listed above and discussed in
this special fraud alert. We believe that we are in material compliance with all
applicable federal and state fraud and abuse laws. However, we cannot assure you
that these laws will not be interpreted in the future in such a way as to cause
us to be in violation of these laws.

False Claims Act. In addition to federal fraud and abuse laws, under
separate statutes, the submission of claims for items and services that are "not
provided as claimed" may lead to civil money penalties, criminal fines and
imprisonment, and/or exclusion from participation in federally funded healthcare
programs, including the Medicare and Medicaid programs. These false claims
statutes include the Federal False Claims Act. Under the Federal False Claims
Act, in addition to actions being initiated by the federal government, a private
party may bring an action on behalf of the federal government. These private
parties are often referred to as qui tam relators, and are entitled to share in
any amounts recovered by the government. Both direct enforcement activity by the
government and qui tam actions have increased significantly in recent years and
have increased the risk that a healthcare company, like us, will have to defend
a false claims action, pay fines or be excluded from the Medicare and/or
Medicaid programs as a result of an investigation arising out of this type of an
action. Because of the complexity of the government regulations applicable to
our industry, we cannot assure you that we will not be the subject of an action
under the False Claims Act.

The Stark Law and State Physician Self-Referral Laws. Section 1877 of the
Social Security Act, commonly known as the "Stark Law," prohibits physicians,
subject to the exceptions described below, from referring Medicare or Medicaid
patients to any entity providing "designated health services" in which the
physician has an ownership or investment interest or with which the physician
has entered into a compensation arrangement. Persons who violate the Stark Law
are subject to civil monetary penalties and exclusion from the Medicare and
Medicaid programs.

Hospice care is not specifically enumerated as a health service subject to
this prohibition; however, some of the ten designated health services under the
Stark Law, including physical therapy, pharmacy services and certain infusion
therapies, are among the specific services furnished by our hospices.
Regulations interpreting the Stark Law currently provide that investments by
referring physicians in a hospice will not violate the Stark Law. We cannot
assure you, however, that future regulatory changes will not result in us
becoming subject to the Stark Law's prohibition in the future.

Many states have also enacted physician self-referral laws, which generally
prohibit financial relationships with referral sources that are not limited to
services for which Medicare or Medicaid payment may be made. Similar penalties,
including loss of license or eligibility to participate in government programs
and civil and criminal fines, apply to violations of these state self-referral
laws. These laws vary from state to state and have seldom been interpreted by
the courts or regulatory agencies. We believe that our relationships with
physicians do not violate these state self-referral laws. However, we cannot
assure you that these laws will not be interpreted in the future in such a way
as to call into question our relationships with physicians.

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Corporate Practice of Medicine and Fee-Splitting. Some states have laws
that prohibit unlicensed persons or business entities, including corporations,
from employing physicians. Some states also have adopted laws that prohibit
direct or indirect payments or fee-splitting arrangements between physicians and
unlicensed persons or business entities. Possible sanctions for violations of
these restrictions include loss of a physician's license, civil and criminal
penalties and rescission of business arrangements. These laws vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies.

We employ and contract with physicians to provide medical direction and
patient care services. A state with these prohibitions could determine that the
provision of patient care services by our employed and/or contracted physicians
violates the corporate practice of medicine and/or fee-splitting prohibitions.
We structure our arrangements with healthcare providers to comply with the
relevant state law. However, we cannot assure you that government officials
charged with the responsibility for enforcing these laws will not assert that
we, or transactions in which we are involved, are in violation of these laws.
These laws may also be interpreted by the courts in a manner inconsistent with
our interpretations. The determinations or interpretations by a state may
require us to restructure our arrangements with physicians in the applicable
state.

Health Information Practices. The Health Insurance Portability and
Accountability Act of 1996, commonly referred to as "HIPAA," contains, among
other measures, provisions that may require many organizations, including us, to
implement very significant, potentially expensive new computer systems and
business procedures designed to protect each patient's individual healthcare
information. HIPAA requires the Department of Health and Human Services to issue
rules to define and implement patient privacy standards. Among the standards
that the Department of Health and Human Services will adopt pursuant to HIPAA
are standards for the following:

- electronic transactions and code sets;

- unique identifiers for providers, employers, health plans and
individuals;

- security and electronic signatures;

- privacy; and

- enforcement.

On August 12, 1998, the Secretary of the Department of Health and Human
Services issued a proposed rule that establishes, in part, standards for the
security of health information by health plans, healthcare clearinghouses and
healthcare providers that maintain or transmit any health information in
electronic form, regardless of format. Under the proposed rule we would be an
affected entity. These security standards require affected entities to establish
and maintain reasonable and appropriate administrative, technical and physical
safeguards to ensure integrity, confidentiality and availability of the
information. The security standards were designed to protect health information
against reasonably anticipated threats or hazards to the security or integrity
of the information and to protect the information against unauthorized use or
disclosure. Although the security standards do not reference or advocate a
specific technology, and affected entities have the flexibility to choose their
own technical solutions, we expect that the security standards will require us
to implement significant systems.

On November 3, 1999, the Secretary of the Department of Health and Human
Services issued a proposed rule establishing standards for the privacy of
individually identifiable health information. These privacy standards would
apply to all health plans, all healthcare clearinghouses and many healthcare
providers, including healthcare providers that transmit health information in an
electronic form in connection with certain standard transactions. We would be a
covered entity under the proposed rule. The privacy standards apply to protect
individually identifiable health information that is or has been electronically
transmitted or maintained by a covered entity, including information when it is
in non-electronic form or discussed orally. As proposed, these standards not
only require our compliance with rules governing the use and disclosure of
protected health information, but they also require us to impose those rules, by
contract, on any business partner to whom such information is disclosed. Under
the
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<PAGE> 59

proposed privacy standards, patients would be required to be made third-party
beneficiaries of our contracts with business partners, which would, in many
states, entitle them to sue either us or the business partner for improper uses
or disclosures of their protected health information.

The Department of Health and Human Services finalized the new transaction
standards on August 17, 2000, and we will be required to comply with them by
October 16, 2002. The security and privacy regulations under HIPAA are currently
scheduled to be finalized by the Department of Health and Human Services prior
to the end of the year 2000. Once these security and privacy regulations are
issued in final form, we will have approximately two years to be fully
compliant. Sanctions for failing to comply with HIPAA privacy standards include
criminal penalties and civil sanctions.

We expect that compliance with these standards will require significant
commitment and action by us. We have appointed a task force comprised of members
of our management team to direct our compliance with these standards. Although
we and other covered entities generally are not required to be in compliance
with these standards until two years following the effective date of the final
rules issued or to be issued by the Secretary of the Department of Health and
Human Services, implementation will require us to conduct extensive preparation
and make significant expenditures. Because the privacy and security standards
are proposed regulations, we cannot predict the total financial impact of the
regulations on our operations.

Additional Federal and State Laws. The federal government and all states
also regulate other aspects of the hospice industry. In particular, our
operations are subject to federal and state laws covering professional services,
the dispensing of drugs and other types of hospice activities. Some of our
employees are subject to state laws and regulations governing the ethics and
practice of medicine, respiratory therapy, pharmacy and nursing. Our operations
are subject to periodic survey by government entities to assure compliance with
applicable state licensing and Medicare and Medicaid certification, as the case
may be. From time to time in the ordinary course of business, we, like other
healthcare companies, receive survey reports containing deficiencies for alleged
failure to comply with applicable requirements. We review these reports and take
appropriate corrective action. The failure to effect corrective action or to
obtain, renew or maintain any of the required regulatory approvals,
certifications or licenses could materially adversely affect our business and
could prevent our hospices involved from offering hospice services to patients.
In addition, laws and regulations often are adopted to regulate new products,
services and industries. We cannot assure you that either the states or the
federal government will not impose additional regulations upon our activities
that might adversely us.

We maintain an internal corporate compliance program and from time to time
retain regulatory counsel for guidance on applicable laws and regulations.
However, we cannot assure you that our practices, if reviewed, would be found to
be in compliance with applicable health regulatory laws, as the laws ultimately
may be interpreted.

COMPLIANCE AND CONTINUOUS QUALITY IMPROVEMENT PROGRAMS

We have a comprehensive company-wide compliance program. Our compliance
program provides for:

- the appointment of a compliance officer and committee;

- adoption of an ethics and business conduct code;

- employee education and training;

- implementation of an internal system for reporting concerns;

- ongoing auditing and monitoring programs; and

- a means for enforcing the compliance programs policies.

As part of our ongoing auditing and monitoring programs, we conduct
periodic, at least annual, internal regulatory audits and mock surveys at each
of our hospices. If a hospice does not achieve a

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satisfactory rating, we require the hospice to prepare and implement a plan of
correction. We then perform a follow-up audit and survey to verify that all
deficiencies identified in the initial audit and survey have been corrected.

As required under the Medicare conditions of participation, we have a
continuous quality improvement program in place. Our continuous quality
improvement program involves:

- on-going education of staff and quarterly continuous quality improvement
meetings at each of our hospices and at our corporate office;

- quarterly comprehensive audits of patient charts performed by each of our
hospices; and

- at least once a year, a comprehensive audit of patient charts performed
on each of our hospices by our corporate staff.

If a hospice fails to achieve a satisfactory rating on a patient chart audit, we
require the hospice to prepare and implement a plan of correction. We then
conduct a follow-up patient chart audit to verify that appropriate action has
been taken to prevent future deficiencies.

We continually expand and refine our compliance and continuous quality
improvement programs. Specific written policies, procedures, training and
educational materials and programs, as well as auditing and monitoring
activities, have been prepared and implemented to address the functional and
operational aspects of our business. Our programs also address specific problem
areas identified through regulatory interpretation and enforcement activities.
Our policies, training, standardized documentation requirements, reviews and
audits also specifically address our financial arrangements with our referral
sources, including fraud and abuse laws and physician self-referral laws.

COMPETITION

Hospice care in the United States is competitive. The hospice care market
is highly fragmented and we compete with a large number of organizations, some
of which have or may obtain significantly greater financial and marketing
resources than us. Based on industry data, we estimate that approximately 63% of
existing hospices are local not-for-profit hospices. Most hospices are small,
community-based hospices.

In addition, we compete with a number of national and regional hospice
providers, hospitals, nursing homes, home health agencies and other healthcare
providers, including those with which we presently maintain contractual
relationships, that offer hospice and/or palliative care services. Many of them
offer home care to patients who are terminally ill, and some actively market
palliative care and "hospice-like" programs. In addition, various healthcare
companies have diversified into the hospice market. For example, Beverly
Enterprises, Inc. and Manor Care, Inc. compete with us in some of our markets.

Relatively few barriers to entry exist in the markets served by us.
Accordingly, other companies that are not currently providing hospice care may
enter these markets and expand the variety of services offered.

INSURANCE

We maintain general liability and umbrella coverage on a company-wide basis
with a limit of $10.0 million. We also maintain malpractice liability insurance
coverage on a claims-made basis with limits of liability of $1.0 million per
occurrence and $3.0 million in the aggregate. While we believe that our
insurance coverage is adequate for our current operations, we cannot assure you
that our coverage will cover all future claims or will be available in adequate
amounts or at a reasonable cost.

EMPLOYEES

As of September 30, 2000, we had 1,015 full-time employees and 295
part-time employees. None of our employees are covered by collective bargaining
agreements. We believe that our relations with our employees are good.
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LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this prospectus, we are not aware of any legal proceedings pending or
threatened that we expect would have a material adverse effect on us.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information with respect to our
executive officers and directors:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard R. Burnham........................... 58 President, Chief Executive Officer and Chairman
of the Board
David C. Gasmire............................. 45 Executive Vice President, Chief Operating
Officer and Assistant Secretary
Douglas B. Cannon............................ 38 Vice President, Chief Financial Officer,
Secretary and Treasurer
Brenda A. Belger............................. 46 Vice President, Human Resources
Patricia G. Gross............................ 44 Vice President, Sales and Marketing
Kathleen A. Ventre........................... 52 Vice President, Clinical and Regulatory Affairs
David W. Cross(1)............................ 53 Director
Alexander McGrath(2)......................... 39 Director
Martin S. Rash(1)(2)......................... 45 Director
David L. Steffy(2)........................... 57 Director
Mark A. Wan(1)............................... 35 Director
</TABLE>

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

(1) Member of Compensation Committee.

(2) Member of Audit Committee.

RICHARD R. BURNHAM co-founded us in 1995 and has served as our President,
Chief Executive Officer and Chairman of the Board since that time. Prior to
founding us, Mr. Burnham served as a Regional Vice President for Vitas
Healthcare, Inc., a for-profit provider of hospice services, from June 1990 to
October 1994. Mr. Burnham served as Regional Vice President of Olsten Kimberly
Quality Care, Inc., a home healthcare and nurse personnel staffing company, from
January 1990 to June 1990. He was also employed from June 1971 to August 1989 by
Baxter Healthcare Corporation, a manufacturer of medical supplies, and also by
its subsidiary Caremark Inc.

DAVID C. GASMIRE co-founded us in 1995 and has served as our Executive Vice
President and Chief Operating Officer since that time. Mr. Gasmire's diverse
healthcare experience includes General Management and Business Development for
Vitas Healthcare, Inc. from April 1992 to September 1995, Vice President of
Operations for United Dental Care Inc., a provider of prepaid dental services,
from April 1986 to April 1992 and Regional Manager for American Critical Care, a
division of American Hospital Supply Corporation, from July 1979 to April 1986.

DOUGLAS B. CANNON joined us as our Vice President, Chief Financial Officer,
Secretary and Treasurer in January 1999. From September 1989 to September 1998,
Mr. Cannon served as Chief Financial Officer of Cornerstone Health Management
Company, a specialty provider of geriatric services to hospitals and operator of
long-term acute hospitals.

BRENDA A. BELGER joined us as our Vice President of Human Resources in
April 1997. Ms. Belger served as Director of Human Resources for Morven
Partners, L.P. from July 1994 to April 1996.

PATRICIA G. GROSS joined us as our Vice President of Sales and Marketing in
February 1996. Ms. Gross served as a Regional Sales Trainer and as a Sales
Representative for Vitas Healthcare, Inc. from January 1993 to October 1995.

KATHLEEN A. VENTRE joined us as our Vice President of Clinical and
Regulatory Affairs in May 1998. From January 1994 to March 1998, Ms. Ventre
served as a Patient Care Manager and Director of Patient Care Services with
Vitas Healthcare, Inc.

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DAVID W. CROSS co-founded us in 1995 and has served as one of our directors
since February 1996. Mr. Cross has served as Senior Vice President and Chief
Development Officer for Select Medical Corporation, a private healthcare
company, since December 1998. He was co-founder of Intensiva HealthCare
Corporation, a provider of highly specialized, acute long-term care, and served
as its President and Chief Executive Officer from May 1994 until its merger with
Select Medical Corporation in December 1998. Mr. Cross was founder, President
and Chief Executive Officer and a director of Advanced Rehabilitation Resources,
Inc., a provider of outsourcing and management of comprehensive medical
rehabilitation, subacute and outpatient therapy programs and contract therapy
services, serving in each of these capacities from 1990 to 1993.

ALEXANDER MCGRATH has served as one of our directors since July 1998. Mr.
McGrath has served as a managing member of CRP Investment Partners III, L.L.C.,
a private equity fund, since 1997. He has also served as a managing member of
Capital Resource Partners III, L.L.C., the sole general partner of Capital
Resource Lenders III, L.P., a private equity fund, since 1996.

MARTIN S. RASH has served as one of our directors since July 2000. Mr. Rash
has served as the Chief Executive Officer of Province Healthcare Company, an
operator of non-urban acute care hospitals, since February 1996.

DAVID L. STEFFY co-founded us in 1995 and has served as one of our
directors since February 1996. Mr. Steffy has served as a director for Province
Healthcare Company, an operator of non-urban acute care hospitals, since August
1998. He co-founded Intensiva HealthCare Corporation, a provider of highly
specialized, acute long-term care, and served as a director for Intensiva from
May 1994 to December 1998. He co-founded Community Health Systems, Inc., a
provider of general hospital healthcare services, in May 1985 and served as Vice
Chairman until May 1996.

MARK A. WAN has served as one of our directors since January 1996. Since
October 1993, Mr. Wan has served as general partner of Three Arch Management,
L.P., which is the general partner of Three Arch Partners, L.P. Mr. Wan has
served as a director of various other privately held companies.

BOARD OF DIRECTORS

Upon completion of this offering, our board of directors will be divided
into three classes serving staggered three-year terms. Each year, the directors
of one class will stand for election as their terms of office expire. Messrs.
McGrath and Wan have been designated as Class I directors with their terms of
office expiring in 2002; Messrs. Cross and Steffy have been designated as Class
II directors with their terms of office expiring in 2003; and Messrs. Burnham
and Rash have been designated as Class III directors with their terms of office
expiring in 2004.

BOARD COMPENSATION

Directors who are also our officers or employees do not receive
compensation for their services as directors. Each independent director in
office following each annual stockholder's meeting is entitled to an award of
stock options to purchase 7,500 shares of common stock at an exercise price
equal to the fair market value of our common stock on the date of grant.
Directors are entitled to reimbursement of their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
Board of Directors or committees thereof.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Prior to the completion of this offering, we will enter into agreements to
indemnify our directors and executive officers. Under these agreements, we will
be obligated to indemnify our directors and officers to the fullest extent
permitted under the Delaware General Corporation Law for expenses, including
attorneys' fees, judgments, fines and settlement amounts incurred by them in any
action or proceeding arising out of their services as a director or officer. We
believe that these agreements are helpful in attracting and retaining qualified
directors and officers.

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COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth certain information concerning the
compensation of our chief executive officer and our four most highly paid
executives serving in such capacity as of December 31, 1999, whose total annual
salary and bonus exceeded $100,000 for the year ended December 31, 1999. These
five individuals are referred to in this prospectus as the "named executive
officers."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#)
--------------------------- --------- -------- ------------
<S> <C> <C> <C>
Richard R. Burnham.......................................... $228,561 $65,520 --
President, Chief Executive Officer and Chairman of the
Board
David C. Gasmire............................................ 195,695 58,800 --
Executive Vice President, Chief Operating Officer and
Assistant Secretary
Douglas B. Cannon........................................... 132,692 -- 241,127
Vice President, Chief Financial Officer, Secretary and
Treasurer
Brenda A. Belger............................................ 100,615 13,464 55,000
Vice President, Human Resources
Patricia G. Gross........................................... 94,638 16,704 25,000
Vice President, Sales and Marketing
</TABLE>

The following table provides information regarding stock options granted to
our named executive officers during 1999.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
GRANT DATE
INDIVIDUAL GRANTS VALUE
--------------------------------------------------------- ----------
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE PRICE GRANT DATE
OPTIONS IN FISCAL OR BASE PRICE EXPIRATION PRESENT
NAME GRANTED YEAR PER SHARE DATE VALUE(1)
---- ---------- ------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Richard R. Burnham.............. -- -- -- -- --
David C. Gasmire................ -- -- -- -- --
Douglas B. Cannon............... 241,127(2) 37.9% $0.50 01/28/2009
Brenda A. Belger................ 30,000(2) 4.7% $0.50 01/28/2009
25,000(3) 3.9% $0.50 10/27/2009
Patricia G. Gross............... 25,000(3) 3.9% $0.50 10/27/2009
</TABLE>

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

(1) The present value of each grant is estimated on the date of grant using the
minimum value option pricing model with the following weighted average
assumptions: fair market value of common stock of $ per share;
dividend yield of % for all years; expected volatility of %;
risk-free interest rate of % to %; and expected life of
years.

(2) 20% of the stock options became exercisable on January 28, 2000, and 20% of
the stock options will become exercisable on each January 28th thereafter.

(3) 20% of the stock options became exercisable on October 27, 2000, and 20% of
the stock options will become exercisable on each October 27th thereafter.

59
<PAGE> 65

The following table provides summary information with respect to stock
options held by our named executive officers as of December 31, 1999. The value
of unexercised in-the-money options is based on an assumed initial public
offering price of $ , less the exercise price payable for the shares.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF THE UNEXERCISED
SHARES UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR-END AT FISCAL YEAR-END
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard R. Burnham......... -- $ -- 35,417 89,583 $ $
David C. Gasmire........... -- -- 120,833 129,167
Douglas B. Cannon.......... -- -- -- 241,127
Brenda A. Belger........... -- -- 20,667 79,333
Patricia G. Gross.......... -- -- 55,000 45,000
</TABLE>

COMMITTEES OF THE BOARD

Our board of directors has established an audit committee and a
compensation committee.

Audit Committee. The audit committee is comprised of Messrs. McGrath, Rash
and Steffy. The audit committee reports on its activities to the board of
directors and is responsible for reviewing:

- the recommendation to our board of the appointment of our independent
accountants;

- the scope, timing and results of the audit and non-audit services
performed by our independent accountants;

- the appropriateness of our accounting policies;

- the adequacy of our accounting and financial controls;

- compliance with our accounting policies and accounting and financial
controls; and

- the reliability of the financial information we report to the public.

Compensation Committee. The compensation committee is comprised of Messrs.
Cross, Rash and Wan. The primary functions of the compensation committee are to:

- consider and establish the salaries, bonuses and other compensation of
our executive officers;

- formulate, approve and adopt policies, plans and performance criteria
concerning the salaries, bonuses and other compensation of our executive
officers;

- establish and review policies regarding executive officer perquisites;

- monitor and administer, and, as appropriate, make changes to, all our
equity-based incentive and other compensation plans, practices and
policies; and

- authorize the issuance of capital stock under, and in accordance with,
our incentive and other compensation plans.

EMPLOYMENT AGREEMENTS

Richard R. Burnham. On March 1, 1999, we entered into a three-year
employment agreement with Mr. Burnham which provides that he will serve as our
President and Chief Executive Officer. The employment agreement provides for
annual base salary of $235,377 in 2000, subject to annual review by the
compensation committee. Mr. Burnham's employment agreement provides for an
annual bonus to be determined by the board and Mr. Burnham based on our
achieving certain goals. In addition, the employment agreement provides that Mr.
Burnham is entitled to an automobile allowance and is eligible to participate in
all benefit programs for which employees and/or senior executives are generally
eligible.

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<PAGE> 66

Under his employment agreement, we may terminate Mr. Burnham's services for
cause or without cause. If Mr. Burnham is terminated without cause,

- he will be entitled to receive his base salary, payable on regularly
scheduled paydays and in accordance with our regular payroll practice,
for twelve months;

- he will be entitled to receive his pro rata share of his annual bonus
payable at the earlier of the date it would have been due if he was not
terminated or twelve months after termination; and

- non-vested stock options granted to Mr. Burnham as of March 1, 1999, will
vest immediately, with stock options granted prior to such date remaining
exercisable for a period of two years from the date of termination.

If Mr. Burnham is terminated within two years following a change of control
without cause or without good reason, he will be entitled to the same severance
benefits. However, the period for which he will be entitled to such severance
benefits will be the greater of the period for termination without cause or the
remainder of the two years following the date of the change of control. During
the employment term, we must nominate Mr. Burnham as a member of the board of
directors. The employment agreement also contains a covenant not to compete
during the employment term or for a period of twelve months thereafter as well
as confidentiality provisions. The employment agreement will be renewed
automatically for additional one year periods unless sixty days prior written
notice is given by either party in advance of any one-year renewal period.

David C. Gasmire. On March 1, 1999, we entered into a three-year
employment agreement with Mr. Gasmire which provides that he will serve as our
Chief Operating Officer. The employment agreement provides for annual base
salary of $207,656 in 2000, subject to annual review by the compensation
committee. Mr. Gasmire's employment agreement provides for an annual bonus to be
determined by the board and Mr. Gasmire based on our achieving certain goals.
Under his employment agreement, we may terminate Mr. Gasmire's services for
cause or without cause. If Mr. Gasmire is terminated without cause,

- he will be entitled to receive his base salary, payable on regularly
scheduled paydays and in accordance with our regular payroll practice,
for twelve months;

- he will be entitled to receive his pro rata share of his annual bonus
payable at the earlier of the date it would have been due if he was not
terminated or twelve months after termination; and

- non-vested stock options granted to Mr. Gasmire as of March 1, 1999, will
vest immediately, with any stock options granted prior to such date
remaining exercisable for a period of two years from the date of
termination.

If Mr. Gasmire is terminated within two years following a change of control
without cause or without good reason, he will be entitled to the same severance
benefits. However, the period for which he will be entitled to such severance
benefits will be the greater of the period for termination without cause or the
remainder of the two years following the date of the change of control. The
employment agreement also contains a covenant not to compete during the
employment term or for a period of twelve months thereafter, as well as
confidentiality provisions. The employment agreement will be renewed
automatically for additional one year periods unless sixty days prior written
notice is given by either party in advance of any one-year renewal period.

Douglas B. Cannon. On March 1, 1999, we entered into a three-year
employment agreement with Mr. Cannon which provides that he will serve as our
Chief Financial Officer. The employment agreement provides for annual base
salary of $157,500 in 2000, subject to annual review by the compensation
committee. Mr. Cannon's employment agreement provides for an annual bonus to be
determined by the

61
<PAGE> 67

board and Mr. Cannon based on our achieving certain goals. Under his employment
agreement, we may terminate Mr. Cannon's services for cause or without cause. If
Mr. Cannon is terminated without cause,

- he will be entitled to receive his base salary, payable on regularly
scheduled paydays and in accordance with our regular payroll practice,
for twelve months;

- he will be entitled to receive his pro rata share of his annual bonus
payable at the earlier of the date it would have been due if he was not
terminated or twelve months after termination; and

- non-vested stock options granted to Mr. Cannon as of March 1, 1999, will
vest immediately, with any stock options granted prior to such date
remaining exercisable for a period of two years from the date of
termination.

If Mr. Cannon is terminated within two years following a change of control
without cause or without good reason, he will be entitled to the same severance
benefits. However, the period for which he will be entitled to such severance
benefits will be the greater of the period for termination without cause or the
remainder of the two years following the date of the change of control. The
employment agreement also contains a covenant not to compete during the
employment term or for a period of twelve months thereafter, as well as
confidentiality provisions. The employment agreement will be renewed
automatically for additional one year periods unless sixty days prior written
notice is given by either party in advance of any one-year renewal period.

STOCK OPTION PLAN

We adopted our Odyssey HealthCare, Inc. Stock Option Plan in 1996. A total
of 2,278,000 shares of common stock are authorized for issuance under the plan.
We do not intend to grant any stock options under this plan after the completion
of this offering. The plan provides for grants of incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code of 1986, to our
employees, including officers and employee-directors, and for grants of
nonstatutory stock options to our employees, consultants and nonemployee
directors. The purposes of the plan are to:

- closely associate the interests of management and certain other key
employees with our stockholders by reinforcing the relationship between
the participant's rewards and stockholder gains;

- provide management and certain other key employees equity ownership in us
commensurate with our performance;

- maintain competitive compensation levels; and

- provide an incentive to management and certain other key employees for
continued employment with us.

Our compensation committee administers the plan. Our compensation committee
will designate the individuals to receive the options, the number of shares
subject to the options, and the terms and conditions of each option granted
under the plan.

While our compensation committee determines the terms of options granted
under the plan, the term of any incentive stock option cannot exceed ten years
from the date of the grant and any incentive stock option granted to an employee
who possesses more than ten percent of the total combined voting power of all
classes of our shares within the meaning of Section 422(b)(6) of the Internal
Revenue Code cannot be exercisable after the expiration of five years from the
date of grant.

At our compensation committee's discretion, awards granted under the plan
may constitute performance awards and should not be subject to the deduction
limitations imposed by Section 162(m) of the Internal Revenue Code.

Our compensation committee determines the exercise price of options granted
under the plan. Further, the exercise price of any incentive stock option
granted to an employee who possesses more than

62
<PAGE> 68

ten percent of the total combined voting power of all classes of our shares
within the meaning of Section 422(b)(6) of the Internal Revenue Code must be at
least 110% of the fair market value of the underlying share at the time the
option is granted. The exercise price of options granted under the plan will be
paid in full in a manner prescribed by our compensation committee.

As a condition to receiving grants of options under the plan, an employee
is required to enter into a non-compete agreement pursuant to which the employee
agrees, at any time during which the employee is employed by us and for one year
thereafter, not to own 5% or more of any of our competitor's equity interest,
hold any management position with any of our competitors or hire or otherwise
induce the termination of employment with us of any of our employees.

2000 EQUITY-BASED COMPENSATION PLAN

Our board of directors adopted our 2000 Equity-Based Compensation Plan in
November 2000, to become effective upon completion of this offering. We expect
our stockholders to approve the plan prior to the completion of this offering.
At any given time, the number of shares of common stock issued under the plan
plus the number of shares of common stock issuable upon the exercise of all
outstanding awards under the plan may not exceed the lesser of 100 million
shares or 10% of the total number of shares of common stock then outstanding,
assuming the exercise of all outstanding options and warrants and the conversion
or exchange or exercise of all securities convertible into or exchangeable or
exercisable for common stock. The plan provides for grants of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of 1986,
to our employees, including officers and employee-directors, and for grants of
nonstatutory stock options, restricted stock awards, stock appreciation rights,
phantom stock awards and annual incentive awards to our employees, consultants
and nonemployee directors. The purposes of the plan are:

- to attract and retain the best available personnel for positions of
substantial responsibility;

- to provide additional incentives to our employees and consultants; and

- to promote the success of our business.

Our compensation committee administers the plan and at all times will be
comprised of two or more individuals that constitute "outside directors" for
purposes of Section 162 of the Internal Revenue Code of 1986 and "nonemployee
directors" for purposes of Rule 16b-3 promulgated pursuant to the Securities
Exchange Act of 1934. Our compensation committee will designate the individuals
to receive the awards, the number of shares subject to the awards, and the terms
and conditions of each award.

While our compensation committee determines the terms of awards granted
under the plan, the term of any incentive stock option cannot exceed ten years
from the date of grant and any incentive stock option granted to an employee who
possesses more than ten percent of the total combined voting power of all
classes of our shares within the meaning of Section 422(b)(6) of the Internal
Revenue Code of 1986 cannot be exercisable after the expiration of five years
from the date of grant.

While the compensation committee determines the exercise price of options
granted under the plan, the exercise price of any incentive stock option granted
to an employee who possesses more than ten percent of the total combined voting
power of all classes of our shares within the meaning of Section 422(b)(6) of
the Internal Revenue Code of 1986 must be at least 110% of the fair market value
of the underlying share at the time the option is granted. The exercise price of
options granted under the plan will be paid in full in a manner prescribed by
our compensation committee.

The plan is not subject to the Employee Retirement Income Security Act of
1974; however, the plan is designed to allow for awards that constitute
performance-based awards as provided for in Section 162(m) of the Internal
Revenue Code of 1986. Therefore, awards may be exempt from the limitations on
the deductibility of compensation that exceeds $1 million.

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<PAGE> 69

EMPLOYEE STOCK PURCHASE PLAN

Our board of directors adopted our Employee Stock Purchase Plan in November
2000, to become effective upon completion of this offering. We expect our
stockholders to approve the plan prior to the completion of this offering. A
total of 1,500,000 shares of common stock are authorized for issuance under the
plan. The plan provides for the grant of stock options to selected eligible
employees. The purpose of the plan is to provide eligible employees with an
incentive to advance our interests by providing an opportunity to purchase stock
of the company at a favorable price. The plan is administered by our
compensation committee.

Any eligible employee may elect to participate in the plan by authorizing
our compensation committee to make payroll deductions to pay the exercise price
of an option at the time and in the manner prescribed by our compensation
committee. This payroll deduction may be a specific amount or a designated
percentage to be determined by the employee, but the specific amount may not be
less than an amount established by us and the designated percentage may not
exceed an amount of eligible compensation established by us from which the
deduction is made. In no event will an employee be granted an option under the
plan that would permit him to purchase stock with a fair market value in excess
of $25,000, or to purchase more than 15,000 shares, in a period established by
us.

There will be two six-month offering periods for the plan in each calendar
year. The date of grant and the date of exercise for the first option period is
January 1 and June 30, respectively, and the date of grant and date of exercise
for the second option period is July 1 and December 31, respectively. The first
offering period of the plan will commence on the date we close this offering,
and will conclude on June 30, 2001. The exercise price of options granted under
the plan will be an amount equal to the lesser of 85% of the fair market value
of the stock on the date of exercise or on the date of grant.

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<PAGE> 70

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

WARRANTS

We issued a warrant, dated May 22, 1998, to David L. Steffy, a director, to
purchase 12,726 shares of our Series B convertible preferred stock at an
exercise price of $1.25 per share. Upon completion of this offering, the warrant
will be exercisable to purchase 12,726 shares of our common stock at an exercise
price of $1.25 per share. The warrant will terminate on May 21, 2008.

We issued a warrant, dated June 30, 1998, to Capital Resource Lenders III,
L.P., a 5% stockholder, to purchase 1,777,752 shares of our common stock at an
exercise price of $0.01 per share. We also issued a warrant, dated December 31,
1998, to Capital Resource Lenders III, L.P. to purchase 160,909 shares of our
common stock at an exercise price of $0.01 per share. These warrants will
terminate on March 31, 2005.

In December 2000, we amended these warrants such that upon completion of
this offering, the warrants will be exercisable to purchase shares of our common
stock instead of Series B convertible preferred stock.

12% SENIOR SUBORDINATED NOTES

In July and December 1998, we issued $12.0 million of our 12% senior
subordinated notes due March 31, 2005 to, among others, Capital Resource Lenders
III, L.P., a 5% stockholder that holds $11,970,000 aggregate principal amount of
these notes. We have not made any principal payments on these notes. We paid
$1.8 million and $1.1 million in accrued interest on the notes in 1999 and
during the nine months ended September 30, 2000, respectively. We will repay in
full the principal balance of the notes and any accrued and unpaid interest on
the notes upon completion of this offering.

STOCKHOLDERS AGREEMENT

We entered into a second amended and restated stockholders agreement, dated
July 1, 1998, with:

- Richard R. Burnham;

- David C. Gasmire;

- David W. Cross;

- David L. Steffy;

- Three Arch Partners, L.P.;

- Three Arch Associates, L.P.;

- Weiss, Peck & Greer Venture Associates III, L.P.;

- WPG Enterprise Fund II, L.P.;

- Highland Capital Partners III, Limited Partnership;

- Capital Resource Lenders III, L.P.; and

- other holders of our preferred stock and warrants to purchase our common
stock.

The stockholders agreement contains:

- a right of first offer on the sale of capital stock, whereby a
stockholder who is a party to the stockholders agreement must first offer
to sell all of its shares back to us, with the other securityholders who
are parties to the stockholders agreement having the opportunity to
purchase these shares if we do not exercise our purchase right; if we or
the other securityholders do not purchase all of the offered shares, the
selling stockholder may sell these shares to a third party;

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<PAGE> 71

- the agreement of the stockholders to vote for:

- three board nominees designated by, among others, Richard R. Burnham,
David W. Cross, David L. Steffy, David C. Gasmire and Three Arch
Partners, L.P.;

- four board nominees designated by, among others, Three Arch Partners,
L.P., Weiss, Peck & Greer Venture Associates III, L.P., WPG Enterprise
Fund II, L.P., Oak Investment Partners VI, Limited Partnership, Highland
Capital Partners III Limited Partnership and Capital Resource Lenders
III, L.P.;

- one board nominee designated by, among others, Three Arch Partners,
L.P., Weiss, Peck & Greer Venture Associates III, L.P., WPG Enterprise
Fund II, L.P., Highland Capital Partners III Limited Partnership and
Capital Resource Lenders III, L.P.; and

- one board nominee that is knowledgeable of our industry as agreed upon
and designated by, among others, Richard R. Burnham, David W. Cross,
David L. Steffy, David C. Gasmire, Three Arch Partners, L.P., Weiss,
Peck & Greer Venture Associates III, L.P., WPG Enterprise Fund II, L.P.,
Oak Investment Partners VI, Limited Partnership, Highland Capital
Partners III Limited Partnership and Capital Resource Lenders III, L.P.;

- our agreement to provide financial and other information to the
securityholders;

- our agreement not to engage in specified transactions without the prior
consent of the senior subordinated note holders and the holders of at
least two-thirds of our preferred stock; and

- preemptive rights for each stockholder for new issuances of shares of our
capital stock, excluding issuances of common stock in this offering.

This agreement will automatically terminate upon the completion of this
offering.

REGISTRATION RIGHTS AGREEMENT

Richard R. Burnham, David C. Gasmire, David W. Cross, David L. Steffy,
Three Arch Partners, L.P., Three Arch Associates, L.P., Capital Resource Lenders
III, L.P. and other holders of our preferred stock and warrants to purchase our
common stock are entitled under a second amended and restated registration
rights agreement with us, dated July 1, 1998, to the following registration
rights for the shares of common stock held by them or issuable upon conversion
of our preferred stock or upon exercise of warrants to purchase our common
stock:

- at any time after the earlier of six months after the date of completion
of this offering or July 1, 2002, holders constituting at least
two-thirds of the total shares of these registrable securities may
require, on two occasions only, that we use our best efforts to register
registrable securities for public resale, provided that the aggregate
offering price is at least $1 million;

- if we register any common stock at any time, either for our own account
or for the account of other security holders, the holders of registrable
securities are entitled to include their shares of common stock in the
registration, subject to the ability of the underwriters to limit the
number of shares included in the offering in view of market conditions;
and

- holders of at least 40% of the registrable securities may require us to
use our best efforts to register the securities on a Form S-3
registration statement or any successor form after we become eligible to
use the form, provided that the aggregate offering price is at least $1
million.

In most cases, we will bear all registration expenses other than
underwriting discounts. Registration rights terminate on the earlier to occur of

- the times at which shares of registrable securities may be sold under
Rule 144 of the Securities Act, or

- July 1, 2006.

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<PAGE> 72

OTHER TRANSACTIONS

On April 25, 1996, we loaned $125,500 to Richard R. Burnham, our President
and Chief Executive Officer, in exchange for a promissory note to us bearing
interest at the rate of 7% per annum. The promissory note is secured by 251,000
shares of our preferred stock owned by Mr. Burnham. Interest is due and payable
in annual installments. If principal or interest is not paid when due, interest
shall accrue at the rate of 12% per annum. The principal balance of the
promissory note matured on April 25, 2000. We have not received any payments of
principal or interest on the promissory note, and we have not exercised our
rights to the shares of preferred stock pledged to secure the promissory note.
We will forgive repayment of this promissory note, including unpaid interest,
upon the completion of this offering. As of September 30, 2000, the balance of
the promissory note, including accrued and unpaid interest, was approximately
$0.2 million.

On April 25, 1996, we loaned $45,500 to David C. Gasmire, our Executive
Vice President and Chief Operating Officer, in exchange for a promissory note to
us bearing interest at the rate of 7% per annum. The promissory note is secured
by 91,000 shares of our preferred stock owned by Mr. Gasmire. Interest is due
and payable in annual installments. If principal or interest is not paid when
due, interest shall accrue at the rate of 12% per annum. The principal balance
of the promissory note matured on April 25, 2000. We have not received any
payments of principal or interest on the promissory note, and we have not
exercised our rights to the shares of preferred stock pledged to secure the
promissory note. We will forgive repayment of this promissory note, including
unpaid interest, upon the completion of this offering. As of September 30, 2000,
the balance of the promissory note, including accrued and unpaid interest, was
approximately $72,000.

We intend to enter into indemnification agreements with each of our
executive officers and directors prior to the completion of this offering. See
"Management -- Indemnification of Directors and Officers."

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<PAGE> 73

SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

The following table sets forth information with respect to the beneficial
ownership of our common stock as of December 31, 2000, after giving effect to
the automatic conversion of 16,175,228 shares of outstanding preferred stock
into 16,175,228 shares of common stock upon completion of this offering, and as
adjusted to reflect the sale of the common stock in this offering, by:

- each stockholder known by us to own beneficially more than five percent
of our common stock;

- each of our directors;

- each of our named executive officers; and

- all directors and executive officers as a group.

We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Unless otherwise indicated, the persons
included in this table have sole voting and investment power with respect to all
the shares of common stock beneficially owned by them, subject to applicable
community property laws. The number of shares beneficially owned by a person
includes shares of common stock that are subject to stock options or warrants
that are either currently exercisable or exercisable within 60 days after
December 31, 2000. These shares are also deemed outstanding for the purpose of
computing the percentage of outstanding shares owned by the person. These shares
are not deemed outstanding, however, for the purpose of computing the percentage
ownership of any other person.

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
SHARES OWNED
BENEFICIALLY ----------------------
OWNED PRIOR TO BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER THE OFFERING OFFERING OFFERING
------------------------ -------------- ---------- ---------
<S> <C> <C> <C>
Entities affiliated with Capital Resource Partners(1)....... 3,086,377 14.02%
Entities affiliated with Highland Capital Partners(2)....... 1,812,022 9.02%
Entities affiliated with Oak Investment Partners(3)......... 3,974,096 19.77%
Entities affiliated with Three Arch Partners(4)............. 4,082,714 20.31%
Entities affiliated with Weiss Peck & Greer(5).............. 4,031,751 20.06%
Brenda A. Belger(6)......................................... 47,832 *
Richard R. Burnham(7)....................................... 1,467,500 7.27%
Douglas B. Cannon(6)........................................ 96,450 *
David W. Cross(8)........................................... 988,501 4.92%
David C. Gasmire(9)......................................... 663,496 3.27%
Patricia G. Gross(6)........................................ 77,500 *
Alexander McGrath(10)....................................... 3,108,877 14.11%
Martin S. Rash(6)........................................... 40,000 *
David L. Steffy(11)......................................... 1,685,032 8.38%
Mark A. Wan(12)............................................. 4,105,214 20.40%
All directors and executive officers as a group (11
persons).................................................. 12,284,402 54.01%
</TABLE>

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

* Less than one percent (1%).

(1) Consists of (i) 1,140,000 shares issuable upon conversion of our preferred
stock held of record by Capital Resource Lenders III, L.P., (ii) 1,938,661
shares issuable upon exercise of outstanding warrants held of record by
Capital Resource Lenders III, L.P., (iii) 2,857 shares issuable upon
conversion of our preferred stock held of record by CRP Investment Partners
III, L.L.C. and (iv) 4,859 shares issuable upon exercise of outstanding
warrants held of record by CRP Investment Partners III, L.L.C. The address
of Capital Resource Partners is 85 Merrimac Street, Suite 200, Boston,
Massachusetts 02114.

(2) Consists of (i) 1,726,227 shares issuable upon conversion of our preferred
stock held of record by Highland Capital Partners III Limited Partnership,
(ii) 13,315 shares issuable upon exercise of

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<PAGE> 74

outstanding warrants held of record by Highland Capital Partners III
Limited Partnership, (iii) 71,926 shares issuable upon conversion of our
preferred stock held of record by Highland Entrepreneur's Fund III Limited
Partnership and (iv) 554 shares issuable upon exercise of outstanding
warrants held of record by Highland Entrepreneur's Fund III Limited
Partnership. The address of Highland Capital Partners is Two International
Place, Boston, Massachusetts 02110.

(3) Consists of (i) 3,853,761 shares issuable upon conversion of our preferred
stock held of record by Oak Investment Partners VI, Limited Partnership,
(ii) 29,727 shares issuable upon exercise of outstanding warrants held of
record by Oak Investment Partners VI, Limited Partnership, (iii) 89,915
shares issuable upon conversion of our preferred stock held of record by
Oak VI Affiliates Fund, Limited Partnership and (iv) 693 shares issuable
upon exercise of outstanding warrants held of record by Oak VI Affiliates
Fund, Limited Partnership. The address of Oak Investment Partners is 1
Gorham Island, Westport, Connecticut 06880.

(4) Consists of (i) 4,080 shares held of record by Three Arch Partners, L.P.,
(ii) 3,303,311 shares issuable upon conversion of our preferred stock held
of record by Three Arch Partners, L.P., (iii) 25,512 shares issuable upon
exercise of outstanding warrants held of record by Three Arch Partners,
L.P., (iv) 920 shares held of record by Three Arch Associates, L.P., (v)
743,152 shares issuable upon conversion of our preferred stock held of
record by Three Arch Associates, L.P. and (vi) 5,739 shares issuable upon
exercise of outstanding warrants held of record by Three Arch Associates,
L.P. The address of Three Arch Partners is 2800 Sand Hill Road, Suite 270,
Menlo Park, California 94025.

(5) Consists of (i) 2,184,486 shares issuable upon conversion of our preferred
stock held of record by WPG Enterprise Fund, L.P., (ii) 16,850 shares
issuable upon exercise of outstanding warrants held of record by WPG
Enterprise Fund, L.P., (iii) 1,816,404 shares issuable upon conversion of
our preferred stock and held of record by Weiss Peck & Greer Venture
Associates III, L.P. and (iv) 14,011 shares issuable upon exercise of
outstanding warrants held of record by Weiss Peck & Greer Venture
Associates III, L.P. The address of Weiss Peck & Greer is 555 California
Street, Suite 4760, San Francisco, California 94104.

(6) Consists solely of shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.

(7) Consists of (i) 1,104,001 shares held of record, (ii) 251,000 shares
issuable upon conversion of our preferred stock and (iii) 112,499 shares
issuable upon exercise of stock options that have already vested or will
vest within 60 days.

(8) Consists of (i) 966,001 shares held of record and (ii) 22,500 shares
issuable upon exercise of stock options that have already vested or will
vest within 60 days.

(9) Consists of (i) 349,997 shares held of record, (ii) 91,000 shares issuable
upon conversion of our preferred stock and (iii) 222,499 shares issuable
upon exercise of stock options that have already vested or will vest within
60 days.

(10) Consists of (i) 22,500 shares issuable upon exercise of stock options that
have already vested or will vest within 60 days and (ii) the shares held by
the entities affiliated with Capital Resource Partners as previously
described in Note (1). Mr. McGrath is a managing member of Capital Resource
Partners III, L.L.C., the sole general partner of Capital Resource Lenders
III, L.P., and is a managing member in CRP Investment Partners III, L.L.C.,
sharing beneficial ownership with three other managing members. Mr. McGrath
disclaims beneficial ownership of these shares except for those shares
issuable upon exercise of stock options.

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<PAGE> 75

(11) Includes (i) 966,001 shares held of record, (ii) 683,805 shares issuable
upon conversion of our preferred stock, (iii) 22,500 shares issuable upon
exercise of stock options that have already vested or will vest within 60
days and (iv) 12,726 shares issuable upon exercise of outstanding warrants.

(12) Consists of (i) 22,500 shares issuable upon exercise of stock options that
have already vested or will vest within 60 days and (ii) the shares held by
the entities affiliated with Three Arch Partners as previously described in
Note (4). Mr. Wan is a general partner of the general partner of each of
the partnerships, and shares beneficial ownership with two other general
partners. Mr. Wan disclaims beneficial ownership of these shares except for
those shares issuable upon exercise of stock options.

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<PAGE> 76

DESCRIPTION OF CAPITAL STOCK

Our fifth amended and restated certificate of incorporation, which will
become effective prior to the consummation of this offering, authorizes up to of
shares of common stock, par value $0.001 per share, and up to
shares of preferred stock, par value $0.001 per share. We refer
to our fifth amended and restated certificate of incorporation in this
prospectus as our "certificate of incorporation." As of September 30, 2000:

- 3,892,149 shares of common stock were issued and outstanding;

- 6,918,091 shares of Series A preferred stock were issued and outstanding;

- 6,400,000 shares of Series B preferred stock were issued and outstanding;
and

- 2,857,137 shares of Series C preferred stock were issued and outstanding.

As of September 30, 2000, we had 13 holders of record of our common stock.
All of our outstanding shares of preferred stock will be converted automatically
into shares of our common stock upon completion of this offering.

The following descriptions of our capital stock and provisions of our
certificate of incorporation and second amended and restated bylaws, referred to
in this prospectus as our "bylaws," are summaries of all of their material terms
and provisions and are qualified by reference to our certificate of
incorporation and bylaws, copies of which have been filed with the SEC as
exhibits to our registration statement of which this prospectus is a part. The
descriptions of the common stock and preferred stock reflect changes to our
capital structure, certificate of incorporation and bylaws that will occur upon
the closing of the offering.

COMMON STOCK

Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends that may be declared by our board of directors,
subject to any preferential dividend rights of outstanding preferred stock. In
the event of our liquidation, dissolution or winding up, holders of common stock
will be entitled to receive proportionately any of our assets remaining after
the payment of liabilities and subject to the prior rights of any outstanding
preferred stock. Holders of common stock have no preemptive, subscription,
redemption or conversion rights.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into 16,175,228 shares of common stock and automatically
returned to our authorized, unissued and undesignated shares of preferred stock.
Thereafter, our board of directors will have the authority, without further
action by the stockholders, to issue up to shares of preferred
stock in one or more series and to designate the rights, preferences, privileges
and restrictions of each series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting power
of the common stock, impairing the liquidation rights of the common stock or
delaying or preventing our change in control without further action by the
stockholders. We have no present plans to issue any shares of preferred stock
after the completion of this offering.

REGISTRATION RIGHTS

Some of our security holders are entitled to registration rights under a
second amended and restated registration rights agreement with us, dated July 1,
1998, for the shares of common stock held by them or issuable upon conversion of
our preferred stock or upon exercise of warrants to purchase our common stock.
See "Certain Relationships and Related Transactions -- Registration Rights
Agreement."

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<PAGE> 77

DESCRIPTION OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS

A number of provisions in our certificate of incorporation and bylaws and
under the Delaware General Corporation Law may make it more difficult to acquire
control of us. These provisions could deprive the stockholders of opportunities
to realize a premium on the shares of common stock owned by them. In addition,
these provisions may adversely affect the prevailing market price of the common
stock. These provisions are intended to:

- enhance the likelihood of continuity and stability in the composition of
our board of directors;

- discourage some types of transactions that may involve an actual or
threatened change in control of us;

- discourage certain tactics that may be used in proxy fights;

- ensure that our board of directors will have sufficient time to act in
what the board believes to be in the best interests of us and our
stockholders; and

- encourage persons seeking to acquire control of us to consult first with
our board to negotiate the terms of any proposed business combination or
offer.

Classified Board of Directors

Our certificate of incorporation provides that our board of directors will
be divided into three classes of even number or nearly even number, with each
class elected for three-year terms expiring in successive years. Section 141 of
the Delaware General Corporation Law provides that, in the case of a corporation
having a staggered board, holders of a majority of the shares then entitled to
vote in an election of directors may remove a director only for cause. Our
certificate of incorporation defines "cause" as (i) a final conviction of a
felony involving moral turpitude or (ii) willful misconduct that is materially
and demonstrably injurious economically to us. No act, or failure to act, by a
director will be considered "willful" unless committed in bad faith and without
a reasonable belief that the act or failure to act was in the best interest of
us or any of our affiliates. "Cause" will not exist unless and until we have
delivered to the director written notice of the act or failure to act that
constitutes "cause" and the director has not cured the act or omission within 90
days after delivery of the notice. The effect of this provision may be to
restrict the ability of stockholders to remove directors from our board of
directors. Our certificate of incorporation also allows the board of directors
to fix the number of directors.

Stockholder Meetings and Proposals

Our certificate of incorporation provides that special meetings of
stockholders may be called only by a majority of the members of our board of
directors. There are advance notice procedures in our bylaws for the nomination,
other than by or at the direction of the board of directors, of candidates for
election as directors as well as for other stockholder proposals to be
considered at annual stockholder meetings. In general, notice of intent to
nominate a director or raise business at annual meetings must be received by us
not less than 90 nor more than 120 days before the meeting. The notice must
contain specific information concerning the person to be nominated or the
matters to be brought before the meeting and concerning the stockholder
submitting the proposal. These provisions may preclude a nomination for the
election of directors or preclude the conduct of business at a particular annual
meeting if the proper procedures are not followed. Furthermore, these provisions
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors or otherwise attempting to obtain control of
us, even if the conduct of such solicitation or attempt might be beneficial to
us and our stockholders.

Stockholder Action

Our certificate of incorporation does not allow stockholders to act by
written consent without a meeting. The effect of this provision is to restrict
stockholders' ability to circumvent the notice requirements relating to an
annual meeting.

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<PAGE> 78

Business Combination Under Delaware Law

We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:

- the board of directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained that status;

- upon consummation of the transaction that resulted in the stockholder's
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 shares owned by persons who are
directors and also officers; or

- on or subsequent to the time that the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders
by the holders of at least 66 2/3% of our outstanding voting stock which
is not owned by the interested stockholder.

A "business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior to the determination of interested
stockholder status, did own, 15% or more of a corporation's voting stock.

Limitation of Liability of Directors

Our certificate of incorporation provides that no director will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability:

- for any breach of the director's duty of loyalty to us or our
stockholders;

- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of laws;

- for unlawful payment of a dividend or an unlawful stock purchase or stock
redemption; and

- for any transaction from which the director derived an improper personal
benefit.

The effect of these provisions is to eliminate our rights and the rights of
our stockholders, through stockholder derivative suits on our behalf, 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.

Amendments to Certificate of Incorporation

Our certificate of incorporation requires the affirmative vote of the
holders of not less than eighty percent of our shares entitled to vote in an
election of directors to amend, alter or repeal the following provisions in our
certificate of incorporation:

- the classified board;

- the prohibition on stockholder actions by written consent;

- the prohibition on the right of stockholders to call special meetings of
stockholders; and

- limitations on the power of our stockholders to amend our bylaws.

This requirement makes it more difficult for our stockholders to make
changes to the provisions in our certificate of incorporation that could have
anti-takeover effects.
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<PAGE> 79

Amendments to Bylaws

Our certificate of incorporation provides that our bylaws may be amended,
altered or repealed by our board of directors or the affirmative vote of the
holders of not less than eighty percent of our shares entitled to vote in an
election of directors.

STOCKHOLDER RIGHTS PLAN

We anticipate that, immediately upon completion of this offering, our board
of directors will declare, pursuant to a rights agreement, a dividend
distribution of one common share purchase right for each outstanding share of
our common stock. Each right will entitle the registered holder to purchase from
us one thousandth of a share of our Series A Junior Participating Preferred
Stock, par value $.001 per share, at a price per share to be determined by our
board with the advice of our financial advisor about the long-term prospects for
our value, subject to adjustment. Each thousandth of a junior preferred share
will be economically equivalent to one share of our common stock. The purchase
price is expected to be significantly higher than the trading price of our
common stock. Therefore, the dividend will have no initial value and no impact
on our financial statements. The following summary of the rights does not
purport to be complete and is qualified in its entirety by reference to the
rights agreement, which is an exhibit to the registration statement of which
this prospectus is a part.

Initially, the rights will be attached to all certificates representing
shares of our common stock then outstanding, and no separate certificates
representing the rights will be distributed. Subject to extension by a majority
of our directors acting on our behalf, the rights will separate from our common
stock upon the distribution date, which is defined as the earlier of:

- ten business days following a public announcement that a person or group
of affiliated or associated persons has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding shares
of our common stock, other than Mark A. Wan, one of our directors, and
Oak Investment Partners VI, LP and Three Arch Partners, L.P., 5%
stockholders, for whom a different ownership threshold applies, any of
the foregoing persons being an acquiring person; or

- ten business days following the commencement of, or after the date of the
first public announcement of, a tender offer or exchange offer that would
result in a person or group beneficially owning 15% or more of the
outstanding shares of our common stock.

Until the distribution date or earlier redemption or expiration of the
rights:

- with respect to any shares of our common stock outstanding on the date
that we issue the rights, the rights will be evidenced (A) with respect
to shares of our common stock that are held in certificated form, by the
certificates representing the shares with a copy of a summary of rights
attached and (B) with respect to shares of our common stock that are held
in book-entry form, by a notation in the records of the rights agent and
the records of our transfer agent if different from the rights agent;

- the rights will be transferred with and only with shares of common stock;

- new common stock certificates issued after the date we issue the rights,
upon transfer or new issuance of shares of the common stock, will contain
a notation incorporating the rights agreement by reference; and

- the surrender for transfer (A) of any certificates for common stock
outstanding as of the date that we issue the rights, even without the
notation or a copy of a summary of rights being attached thereto, and (B)
of any shares of our common stock held in book-entry form, will also
constitute the transfer of the rights associated with the common stock
represented by the certificate.

As soon as practicable after the distribution date, separate certificates
evidencing the rights will be mailed to holders of record of our common stock.

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<PAGE> 80

The rights are not exercisable until the distribution date and will expire
ten years after consummation of this offering, unless earlier redeemed by us.

If a person or group were to acquire 15% or more of the then outstanding
shares of our common stock, each right then outstanding and not owned by an
acquiring person would become a right to buy that number of shares of our common
stock, or under specified circumstances, the equivalent number of one
one-thousandths of a junior preferred share, that at the time of the acquisition
would have a market value of two times the purchase price of the right. For
example, at an exercise price of $100.00 per right, each right not owned by an
acquiring person following an event described above would entitle its holder to
purchase from us $200.00 worth of common stock, or in specified circumstances,
the equivalent number of one one-thousandths of a junior preferred share, for
$100.00. Assuming that our common stock had a current market price per share of
$20.00 at that time, the holder of each valid right would be entitled to
purchase ten shares of common stock for $100.00. Notwithstanding the foregoing,
following the occurrence of any of the events set forth in this paragraph, all
rights that are, or, under circumstances specified in the rights agreement were,
beneficially owned by an acquiring person will be null and void.

In the event that, at any time following the date that a person has become
an acquiring person, which is referred to as a shares acquisition date,

- we are acquired in a merger or other combination transaction in which we
are not the surviving entity;

- we consolidate with or merge with or into any other person pursuant to
which we are the surviving entity but all or a part of the shares of our
common stock are changed into or exchanged for stock of another person or
cash or other property; or

- 50% or more of our assets or earning power is sold or transferred;

each holder of a right, except rights that previously have been voided as
described above, shall thereafter have the right to receive, upon exercise,
common stock or other securities of the acquiring company having a value equal
to two times the exercise price of the right.

At any time after the acquisition by a person or group of affiliated or
associated persons other than Mark A. Wan, Oak Investment Partners VI, L.P. and
Three Arch Partners, L.P., of beneficial ownership of 15% or more of the then
outstanding shares of our common stock and before the acquisition by a person or
group, other than Mark A. Wan, Oak Investment Partners VI, L.P. and Three Arch
Partners, L.P., of 50% or more of the outstanding shares of our common stock,
our board of directors may, at its option, issue shares of common stock in
mandatory redemption of, and in exchange for, all or part of the then
outstanding and exercisable rights, other than rights owned by an acquiring
person. The exchange would be made at an exchange ratio of one share of common
stock for each two shares of common stock for which each right is then
exercisable.

The purchase price payable and the number of junior preferred shares or
other securities or property issuable upon exercise of the rights are subject to
adjustment from time to time if we at any time after the date of the rights
agreement:

- declare a dividend on the junior preferred shares payable in junior
preferred shares;

- subdivide the outstanding junior preferred shares;

- combine the outstanding junior preferred shares into a smaller number of
junior preferred shares; or

- issue any shares of our capital stock in a reclassification of the junior
preferred shares, including any reclassification in connection with a
consolidation or merger in which we are the continuing or surviving
corporation.

With several exceptions, no adjustment to the purchase price will be
required until cumulative adjustments require an adjustment of at least one
percent to the purchase price. Upon the exercise of a

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<PAGE> 81

right, we will not be required to issue fractional junior preferred shares or
fractional shares of our common stock, other than fractions in multiples of one
one-thousandths of a junior preferred share, and, in lieu thereof, an adjustment
in cash may be made based on the market price of the junior preferred shares or
our common stock on the last trading date prior to the date of exercise.

At any time prior to the time any person becomes an acquiring person, our
board of directors may redeem all but not less than all the then outstanding
rights at a price of $0.00001 per right. The redemption of the rights may be
made effective at the time, on the basis and with the conditions as our board of
directors in its sole discretion may establish. Immediately upon the action of
our board of directors ordering redemption of the rights, the right to exercise
the rights will terminate and the only right of the holders of rights will be to
receive the $0.00001 redemption price.

Until a right is exercised, the holder of the right will have no rights as
a stockholder of ours, including, without limitation, the right to vote or to
receive dividends. While the distribution of the rights will not be taxable to
stockholders or to us, stockholders may, depending upon the circumstances,
recognize taxable income in the event that any of the rights are exercised for
our common stock, or other consideration, or for common stock or other
securities of the acquiring company as set forth above.

The terms of the rights may be amended by our board of directors without
the consent of the holders of the rights, including an amendment to extend the
expiration date of the rights, and, provided a distribution date has not
occurred, to extend the period during which the rights may be redeemed, except
that after any person becomes an acquiring person, no amendment may materially
and adversely affect the interests of the holders of the rights.

The rights have several anti-takeover effects. The rights will cause
substantial dilution to any person or group that attempts to acquire us without
conditioning the offer on our redemption of the rights. The rights should not
interfere with any merger or other business combination approved by our board of
directors because the board of directors may, at its option, at any time prior
to the time any person becomes an acquiring person or ten years after the
adoption of the rights agreement, redeem all, but not less than all, of the then
outstanding rights at $.00001 per right.

LISTING

We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "ODSY."

TRANSFER AGENT AND REGISTRAR

The transfer agent for our common stock is U.S. Stock Transfer Corporation.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of our common stock. After this offering
is completed, the number of shares available for future sale into the public
markets will be subject to legal and contractual restrictions, some of which are
described below. The lapsing of these restrictions will permit sales of
substantial amounts of our common stock in the public market or could create the
perception that these sales could occur, which could adversely affect the market
price for our common stock. These factors could also make it more difficult for
us to raise funds through future offerings of common stock.

After this offering, shares of common stock will be outstanding,
or shares if the underwriters' exercise their over-allotment option in
full. Of these shares, all of the shares sold in this offering, plus any shares
issued upon exercise of the underwriters' over-allotment option, will be freely
tradable without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act. The
remaining shares of common stock that will be outstanding after this offering
are "restricted securities" within the meaning of Rule 144 and Rule 701.
Restricted securities may be sold in the public market only if they are
registered under the Securities Act or are sold pursuant to an exemption from
registration under Rule 144 or Rule 701 under the Securities Act, which are
summarized below. Subject to the lockup agreements described below, shares held
by our affiliates that are not restricted securities or that have been owned for
more than one year may be sold subject to compliance with Rule 144 of the
Securities Act without regard to the prescribed one-year holding period under
Rule 144.

Upon completion of this offering, we intend to file one or more
registration statements under the Securities Act to register the shares of
common stock to be issued under our stock option plan, equity-based compensation
plan and stock purchase plan and, as a result, all shares of common stock
acquired upon exercise of stock options and other equity-based awards granted
under these plans will also be freely tradable under the Securities Act unless
purchased by our affiliates.

All of our executive officers and directors and our existing stockholders,
warrant holders and stock option holders have agreed, subject to limited
exceptions, not to sell or transfer any common stock for 180 days after the date
of this prospectus without first obtaining the written consent of Merrill Lynch.
This lockup provision applies to common stock and to securities convertible into
or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.

Following the lockup period, substantially all of the shares of our common
stock that are outstanding as of the date of this prospectus will be eligible
for sale in the public market in compliance with Rule 144 or Rule 701 under the
Securities Act.

Some of our securityholders have the right to require us to register shares
of common stock for resale in some circumstances. See "Certain Relationships and
Related Transactions -- Registration Rights Agreement."

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, any person or persons whose shares are aggregated,
including an affiliate, who has beneficially owned restricted securities for a
period of at least one year is 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 common stock, which will equal
approximately shares immediately after this offering; or

- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which the notice of the sale is filed with the Securities and Exchange
Commission.

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Sales under Rule 144 are also subject to provisions relating to notice,
manner of sale, volume limitations and the availability of current public
information about us.

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares for at least two years, including the holding
period of any prior owner other than an "affiliate," is entitled to sell the
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 under the Securities Act may be relied upon for the
resale of our common stock originally issued by us before the date of this
prospectus to our employees, directors, officers, consultants or advisers under
written compensatory benefit plans, including our stock option plans, or
contracts relating to the compensation of these persons. Shares of our common
stock issued in reliance on Rule 701 are "restricted securities" and, beginning
90 days after the date of this prospectus, may be sold by non-affiliates subject
only to the manner of sale provisions of Rule 144 and by affiliates under Rule
144 without compliance with the one-year holding period, in each case subject to
the lockup agreements.

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UNDERWRITING

GENERAL

Merrill Lynch, Pierce, Fenner & Smith Incorporated, CIBC World Markets
Corp. and SG Cowen Securities Corporation are acting as representatives of the
underwriters named below. Subject to the terms and conditions described in a
purchase agreement among us and the underwriters, we have agreed to sell to the
underwriters, and the underwriters severally have agreed to purchase from us,
the number of shares listed opposite their names below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- -----------
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
CIBC World Markets Corp. ................................................
SG Cowen Securities Corporation..........................................
-----------
Total.......................................................
===========
</TABLE>

The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.

We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, and
as if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.

COMMISSIONS AND DISCOUNTS

The representatives have advised us that the underwriters propose initially
to offer the shares to the public at the initial public offering price set forth
on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $ per share. The underwriters may allow, and
the dealers may reallow, a discount not in excess of $ per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

The following table shows the public offering price, underwriting discount
and proceeds before expenses to us. The information assumes either no exercise
or full exercise by the underwriters of their over-allotment option.

<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.............................. $ $ $
Underwriting discount.............................. $ $ $
Proceeds, before expenses, to Odyssey HealthCare... $ $ $
</TABLE>

The total expenses of the offering, not including the underwriting
discount, are estimated at $ and are payable by us.

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OVER-ALLOTMENT OPTION

We have granted an option to the underwriters to purchase up to
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise this option for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
this option, each will be obligated, subject to conditions contained in the
purchase agreement, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.

RESERVED SHARES

At our request the underwriters have reserved for sale, at the initial
public offering price, approximately % of the shares offered by this
prospectus for sale to some of our employees and persons having business
relationships with us. If these persons purchase reserved shares, the number of
shares available for sale to the general public will be reduced accordingly. Any
reserved shares that are not orally confirmed for purchase within one business
day of the pricing of this offering will be offered by the underwriters to the
general public on the same terms as the other shares offered by this prospectus.

NO SALES OF SIMILAR SECURITIES

We and our executive officers and directors and our existing stockholders,
warrant holders and stock option holders have agreed, subject to limited
exceptions, not to sell or transfer any common stock for 180 days after the date
of this prospectus without first obtaining the written consent of Merrill Lynch.
Specifically, we and these other persons have agreed not to directly or
indirectly:

- offer, pledge, sell or contract to sell any common stock;

- sell any option or contract to purchase any common stock;

- purchase any option or contract to sell any common stock;

- grant any option, right or warrant for the sale of any common stock;

- lend or otherwise dispose of or transfer any common stock;

- request or demand that we file a registration statement related to the
common stock; or

- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any swap or transaction is to be settled by delivery of shares or other
securities, in cash or otherwise.

This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.

QUOTATION ON THE NASDAQ NATIONAL MARKET

We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "ODSY."

Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the representatives. In addition to prevailing market conditions, the
factors to be considered in determining the initial public offering price are:

- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;

- our financial information;

80
<PAGE> 86

- the history of, and the prospects for, our company and the industry in
which we compete;

- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues;

- the present state of our development; and

- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.

An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price. The underwriters do not expect to
sell more than five percent of the shares being offered in this offering to
accounts over which they exercise discretionary authority.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.

The underwriters may purchase and sell the common stock in the open market.
These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional shares from the
issuer in the offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common shares in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common shares made by the underwriters in
the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that might otherwise exist in the open market.

Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the representatives make any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.

81
<PAGE> 87

INTERNET DISTRIBUTION OF PROSPECTUS

Merrill Lynch will be facilitating Internet distribution for this offering
to several of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus will be available on the website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch website relating to this offering is not a part of this
prospectus.

LEGAL MATTERS

The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Vinson & Elkins L.L.P., Dallas, Texas. Debevoise &
Plimpton, New York, New York, has acted as counsel for the underwriters with
regard to certain legal matters in connection with the offering.

EXPERTS

Our consolidated financial statements at December 31, 1998 and 1999 and
September 30, 2000, and for each of the three years in the period ended December
31, 1999 and for the nine months ended September 30, 2000, appearing in this
prospectus and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the common stock we are offering by this prospectus.
This prospectus is a part of that registration statement. As allowed by SEC
rules, this prospectus does not include all of the information contained in the
registration statement or the exhibits to the registration statement. You should
refer to the registration statement and its exhibits for additional information.

When we complete this offering, we will be required to file annual,
quarterly and special reports, proxy statements and other information with the
SEC. You can obtain our SEC filings, including the registration statement, over
the Internet at the SEC's website at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, Suite
1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of these
documents at prescribed rates by writing to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0300 for further information on the operation of the public reference
facilities.

82
<PAGE> 88

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ODYSSEY HEALTHCARE, INC.
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and September 30, 1999 (unaudited) and September 30,
2000...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999, the nine months ended
September 30, 1999 (unaudited) and the nine months ended
September 30, 2000........................................ F-4
Consolidated Statements of Changes in Preferred Stock and
Common Stockholders' Deficit for the years ended December
31, 1997, 1998 and 1999 and the nine months ended
September 30,
2000...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999, the nine months ended
September 30, 1999 (unaudited), and the nine months ended
September 30, 2000........................................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 89

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and Stockholders
Odyssey HealthCare, Inc.

We have audited the accompanying consolidated balance sheets of Odyssey
HealthCare, Inc. and subsidiaries as of December 31, 1998, 1999 and September
30, 2000, and the related consolidated statements of operations, changes in
preferred stock and common stockholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1999 and for the nine months ended
September 30, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Odyssey HealthCare, Inc. and subsidiaries, as of December 31, 1998, 1999 and
September 30, 2000, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 and
for the nine months ended September 30, 2000, in conformity with accounting
principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Dallas, Texas
November 3, 2000

F-2
<PAGE> 90

ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents........................ $ 600,202 $ 373,990 $ 97,289 $ 150,329
Accounts receivable from patient services, net of
allowance for uncollectible accounts of
$922,679 at December 31, 1998, $1,085,000 at
December 31, 1999, $1,641,000 at September 30,
1999 and $2,758,645 at September 30, 2000...... 10,160,970 12,789,572 10,369,842 16,622,590
Other current assets............................. 516,351 658,319 567,155 768,033
------------ ------------ ------------ ------------
Total current assets...................... 11,277,523 13,821,881 11,034,286 17,540,952
Property and equipment, net........................ 1,451,878 1,708,186 1,551,409 1,527,786
Debt issue costs, net.............................. 63,704 46,245 50,620 33,122
Goodwill, net...................................... 9,741,672 16,309,967 9,945,932 15,795,797
Other.............................................. 43,504 38,946 30,995 45,419
------------ ------------ ------------ ------------
Total assets.............................. $ 22,578,281 $ 31,925,225 $ 22,613,242 $ 34,943,076
============ ============ ============ ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................. $ 2,533,201 $ 3,313,876 $ 1,545,819 $ 2,387,704
Accrued compensation............................. 711,955 1,035,526 853,467 2,031,851
Accrued nursing home costs....................... 880,704 1,210,575 2,149,912 2,890,404
Other accrued expenses........................... 632,303 1,309,869 1,315,470 2,912,965
Line of credit................................... -- 6,455,194 708,003 4,021,288
Current maturities of long-term debt and capital
lease obligations.............................. 1,781,445 2,852,457 1,613,890 3,830,023
------------ ------------ ------------ ------------
Total current liabilities................. 6,539,608 16,177,497 8,186,561 18,074,235
Long-term debt and capital lease obligations, less
current maturities............................... 10,818,797 12,544,472 11,322,936 11,183,295
Commitments and contingencies
Convertible Redeemable Preferred Stock, bearing
liquidation preferences:
Series A, $.001 par value, cumulative:
Authorized, issued and outstanding shares --
7,009,091 at December 31, 1998 and 1999 and
September 30, 1999 and 6,918,091 at September
30, 2000, net of shareholder loans of
$216,500 in 1998 and 1999 and $171,100 in
2000......................................... 4,145,605 4,425,970 4,355,878 4,618,739
Series B, $.001 par value, cumulative:
Authorized shares -- 6,519,993; issued and
outstanding shares -- 6,400,000 at December
31, 1998 and 1999 and September 30, 1999 and
2000......................................... 9,198,856 9,838,856 9,678,857 10,318,856
Series C, $.001 par value, cumulative:
Authorized, issued and outstanding shares --
2,857,137 at December 31, 1998 and 1999 and
September 30, 1999 and 2000.................. 5,195,034 5,595,033 5,495,033 5,895,032
Common stockholders' deficit:
Common stock, $.001 par value:
Authorized shares -- 24,112,741
Issued and outstanding shares -- 3,873,149 at
December 31, 1998, 3,891,149 at December 31,
1999, 3,891,149 at September 30, 1999 and
3,892,149 at September 30, 2000.............. 3,873 3,891 3,891 3,892
Additional paid-in capital....................... 1,186,355 1,369,660 1,369,644 2,620,124
Deferred compensation............................ -- -- -- (929,146)
Accumulated deficit.............................. (14,509,847) (18,030,154) (17,799,558) (16,841,951)
------------ ------------ ------------ ------------
Total common stockholders' deficit........ (13,319,619) (16,656,603) (16,426,023) (15,147,081)
------------ ------------ ------------ ------------
Total liabilities and stockholders'
deficit................................. $ 22,578,281 $ 31,925,225 $ 22,613,242 $ 34,943,076
============ ============ ============ ============
</TABLE>

See accompanying notes.

F-3
<PAGE> 91

ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net patient service revenue.......... $ 6,901,273 $27,238,627 $46,460,090 $32,063,434 $58,853,390
Operating expenses:
Direct hospice care................ 4,849,271 16,389,141 24,014,468 16,925,788 30,347,865
General and administrative......... 6,166,695 14,526,484 18,749,645 13,405,955 20,351,007
Stock-based compensation charges... -- -- -- -- 320,819
Provision for uncollectible
accounts........................ 187,016 1,203,215 2,031,015 1,370,745 2,024,234
Depreciation and amortization...... 140,615 721,934 1,691,332 1,141,846 1,221,700
----------- ----------- ----------- ----------- -----------
11,343,598 32,840,774 46,486,460 32,844,334 54,265,625
----------- ----------- ----------- ----------- -----------
Income (loss) from operations........ (4,442,325) (5,602,147) (26,370) (780,900) 4,587,765
Other income (expense):
Interest income.................... 307,757 165,231 35,241 29,893 22,138
Interest expense................... (8,771) (1,085,668) (2,208,814) (1,533,447) (2,179,299)
----------- ----------- ----------- ----------- -----------
298,986 (920,437) (2,173,573) (1,503,554) (2,157,161)
----------- ----------- ----------- ----------- -----------
Income (loss) before provision for
income taxes....................... (4,143,339) (6,522,584) (2,199,943) (2,284,454) 2,430,604
Provision for income taxes........... -- -- -- 15,000 269,633
----------- ----------- ----------- ----------- -----------
Net income (loss).................... (4,143,339) (6,522,584) (2,199,943) (2,299,454) 2,160,971
Preferred stock dividends............ 846,720 1,122,007 1,320,364 990,272 972,768
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to
common stockholders................ $(4,990,059) $(7,644,591) $(3,520,307) $(3,289,726) $ 1,188,203
=========== =========== =========== =========== ===========
Net income (loss) per common share:
Basic.............................. $ (1.37) $ (2.06) $ (0.91) $ (0.85) $ 0.31
Diluted............................ (1.37) (2.06) (0.91) (0.85) 0.09
Weighted average common shares
outstanding:
Basic.............................. 3,637,570 3,705,866 3,886,395 3,884,775 3,892,002
Diluted............................ 3,637,570 3,705,866 3,886,395 3,884,775 23,839,897
</TABLE>

See accompanying notes.

F-4
<PAGE> 92

ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND COMMON STOCKHOLDERS'
DEFICIT
<TABLE>
<CAPTION>
CONVERTIBLE REDEEMABLE PREFERRED STOCK
-------------------------------------------------------------------------
SERIES A SERIES B SERIES C
---------------------- ----------------------- ---------------------- NOTES FROM
SHARES AMOUNT SHARES AMOUNT SHARES CAPITAL STOCKHOLDERS
--------- ---------- --------- ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997............ 7,009,091 $3,801,377 -- $ -- -- $ -- $(216,500)
Issuance of Series B Convertible
Preferred Stock, net............... -- -- 6,400,000 7,992,500 -- -- --
Series A Convertible Preferred Stock
dividends.......................... -- 280,364 -- -- -- -- --
Series B Convertible Preferred Stock
dividends.......................... -- -- -- 566,356 -- -- --
Issuance of common stock............. -- -- -- -- -- -- --
Exercise of stock options............ -- -- -- -- -- -- --
Net loss............................. -- -- -- -- -- -- --
--------- ---------- --------- ----------- --------- ---------- ---------
Balance at December 31, 1997.......... 7,009,091 4,081,741 6,400,000 8,558,856 -- -- (216,500)
Issuance of Series C Convertible
Preferred Stock, net............... -- -- -- -- 2,857,137 4,993,391 --
Series A Convertible Preferred Stock
dividends.......................... -- 280,364 -- -- -- -- --
Series B Convertible Preferred Stock
dividends.......................... -- -- -- 640,000 -- -- --
Series C Convertible Preferred Stock
dividends.......................... -- -- -- -- -- 201,643 --
Issuance of Series B Convertible
Preferred Stock warrants........... -- -- -- -- -- -- --
Issuance of Common Stock warrants.... -- -- -- -- -- -- --
Exercise of stock options............ -- -- -- -- -- -- --
Net loss............................. -- -- -- -- -- -- --
--------- ---------- --------- ----------- --------- ---------- ---------
Balance at December 31, 1998.......... 7,009,091 4,362,105 6,400,000 9,198,856 2,857,137 5,195,034 (216,500)
Series A Convertible Preferred Stock
dividends.......................... -- 280,365 -- -- -- -- --
Series B Convertible Preferred Stock
dividends.......................... -- -- -- 640,000 -- -- --
Series C Convertible Preferred Stock
dividends.......................... -- -- -- -- -- 399,999 --
Issuance of Common Stock warrants.... -- -- -- -- -- -- --
Exercise of stock options............ -- -- -- -- -- -- --
Net loss............................. -- -- -- -- -- -- --
--------- ---------- --------- ----------- --------- ---------- ---------
Balance at December 31, 1999.......... 7,009,091 4,642,470 6,400,000 9,838,856 2,857,137 5,595,033 (216,500)
Exercise of stock options............ -- -- -- -- -- -- --
Cancellation of Series A Convertible
Preferred Stock.................... (91,000) (45,400) -- -- -- -- 45,400
Series A Convertible Preferred Stock
dividends, net of dividends on
cancelled stock.................... -- 192,769 -- -- -- -- --
Series B Convertible Preferred Stock
dividends.......................... -- -- -- 480,000 -- -- --
Series C Convertible Preferred Stock
dividends.......................... -- -- -- -- -- 299,999 --
Deferred compensation related to
stock options...................... -- -- -- -- -- -- --
Amortization of deferred
compensation....................... -- -- -- -- -- -- --
Net income........................... -- -- -- -- -- -- --
--------- ---------- --------- ----------- --------- ---------- ---------
Balance at September 30, 2000......... 6,918,091 $4,789,839 6,400,000 $10,318,856 2,857,137 $5,895,032 $(171,100)
========= ========== ========= =========== ========= ========== =========

TOTAL
COMMON STOCK ADDITIONAL COMMON
------------------ PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIT
--------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997............ 3,505,000 $3,505 $ 61,962 $ -- $(1,875,197) $ (1,809,730)
Issuance of Series B Convertible
Preferred Stock, net............... -- -- -- -- -- --
Series A Convertible Preferred Stock
dividends.......................... -- -- -- -- (280,364) (280,364)
Series B Convertible Preferred Stock
dividends.......................... -- -- -- -- (566,356) (566,356)
Issuance of common stock............. 138,000 138 68,862 -- -- 69,000
Exercise of stock options............ 20,000 20 980 -- -- 1,000
Net loss............................. -- -- -- -- (4,143,339) (4,143,339)
--------- ------ ---------- ----------- ------------ ------------
Balance at December 31, 1997.......... 3,663,000 3,663 131,804 -- (6,865,256) (6,729,789)
Issuance of Series C Convertible
Preferred Stock, net............... -- -- -- -- -- --
Series A Convertible Preferred Stock
dividends.......................... -- -- -- -- (280,364) (280,364)
Series B Convertible Preferred Stock
dividends.......................... -- -- -- -- (640,000) (640,000)
Series C Convertible Preferred Stock
dividends.......................... -- -- -- -- (201,643) (201,643)
Issuance of Series B Convertible
Preferred Stock warrants........... -- -- 150,000 -- -- 150,000
Issuance of Common Stock warrants.... -- -- 891,104 -- -- 891,104
Exercise of stock options............ 210,149 210 13,447 -- -- 13,657
Net loss............................. -- -- -- -- (6,522,584) (6,522,584)
--------- ------ ---------- ----------- ------------ ------------
Balance at December 31, 1998.......... 3,873,149 3,873 1,186,355 -- (14,509,847) (13,319,619)
Series A Convertible Preferred Stock
dividends.......................... -- -- -- -- (280,365) (280,365)
Series B Convertible Preferred Stock
dividends.......................... -- -- -- -- (640,000) (640,000)
Series C Convertible Preferred Stock
dividends.......................... -- -- -- -- (399,999) (399,999)
Issuance of Common Stock warrants.... -- -- 181,073 -- -- 181,073
Exercise of stock options............ 18,000 18 2,232 -- -- 2,250
Net loss............................. -- -- -- -- (2,199,943) (2,199,943)
--------- ------ ---------- ----------- ------------ ------------
Balance at December 31, 1999.......... 3,891,149 3,891 1,369,660 -- (18,030,154) (16,656,603)
Exercise of stock options............ 1,000 1 499 -- -- 500
Cancellation of Series A Convertible
Preferred Stock.................... -- -- -- -- -- --
Series A Convertible Preferred Stock
dividends, net of dividends on
cancelled stock.................... -- -- -- -- (192,769) (192,769)
Series B Convertible Preferred Stock
dividends.......................... -- -- -- -- (480,000) (480,000)
Series C Convertible Preferred Stock
dividends.......................... -- -- -- -- (299,999) (299,999)
Deferred compensation related to
stock options...................... -- -- 1,249,965 (1,249,965) -- --
Amortization of deferred
compensation....................... -- -- -- 320,819 -- 320,819
Net income........................... -- -- -- -- 2,160,971 2,160,971
--------- ------ ---------- ----------- ------------ ------------
Balance at September 30, 2000......... 3,892,149 $3,892 $2,620,124 $ (929,146) $(16,841,951) $(15,147,081)
========= ====== ========== =========== ============ ============
</TABLE>

See accompanying notes.

F-5
<PAGE> 93

ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- -------------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)........................ $(4,143,339) $ (6,522,584) $ (2,199,943) $ (2,299,454) $ 2,160,971
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization....... 140,615 721,934 1,691,332 1,141,846 1,221,700
Stock-based compensation............ -- -- -- -- 320,819
Provision for uncollectible
accounts......................... 187,016 1,203,215 2,031,015 1,370,745 2,024,234
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable............ (1,772,847) (9,338,630) (4,659,617) (1,579,617) (5,857,252)
Other current assets........... (130,428) (261,796) (141,968) (50,804) (109,714)
Other assets................... -- (43,504) 4,558 12,509 (6,473)
Accounts payable, accrued
nursing home costs and
accrued expenses............ 1,090,296 3,187,791 1,686,683 1,106,505 3,353,078
----------- ------------ ------------ ------------ ------------
Net cash provided by (used
in) operating
activities................ (4,628,687) (11,053,574) (1,587,940) (298,270) 3,107,363
Investing Activities
Cash paid for acquisitions............... (2,164,092) (5,310,930) (4,803,088) (895,000) --
Purchases of property and equipment,
net................................... (218,888) (569,494) (536,711) (464,593) (397,133)
Payment of organization costs............ (16,706) -- -- -- --
----------- ------------ ------------ ------------ ------------
Net cash used in investing
activities..................... (2,399,686) (5,880,424) (5,339,799) (1,359,593) (397,133)
Financing Activities
Proceeds from issuance of Series B and
Series C Preferred Stock, net......... 7,992,500 3,640,391 -- -- --
Proceeds from issuance of common stock... 70,000 13,657 2,250 2,250 500
Proceeds from issuance of Series B
Preferred Stock warrants.............. -- 3,000 -- -- --
Proceeds from issuance of common stock
warrants.............................. -- 891,104 181,073 181,073 --
Payments on debt......................... (24,680) (163,594) (40,049,717) (26,856,378) (63,560,410)
Proceeds from issuance of debt........... -- 10,608,896 46,567,921 27,828,005 60,626,019
Payment of debt issue costs.............. -- (76,217) -- -- --
----------- ------------ ------------ ------------ ------------
Net cash (used in) provided by
financing activities........... 8,037,820 14,917,237 6,701,527 1,154,950 (2,933,891)
----------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.............................. 1,009,447 (2,016,761) (226,212) (502,913) (223,661)
Cash and cash equivalents, beginning of
year..................................... 1,607,516 2,616,963 600,202 600,202 373,990
----------- ------------ ------------ ------------ ------------
Cash and cash equivalents, end of year..... $ 2,616,963 $ 600,202 $ 373,990 $ 97,289 $ 150,329
=========== ============ ============ ============ ============
Supplemental Cash Flow Information
Cash interest paid....................... $ 8,771 $ 480,349 $ 2,444,465 $ 1,810,118 $ 1,383,734
Equipment financed under capital
leases................................ $ 193,704 $ 642,216 $ 72,960 $ -- $ --
</TABLE>

See accompanying notes.

F-6
<PAGE> 94

ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND NINE MONTHS ENDED SEPTEMBER 30,
2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Odyssey HealthCare, Inc. and its subsidiaries (the Company) provide hospice
care, with a goal of improving the quality of life of terminally ill patients
and their families. Hospice services focus on palliative care for patients with
life-limiting illnesses, which is care directed at managing pain and other
discomforting symptoms and addressing the psychosocial and spiritual needs of
patients and their families. In providing these services, the Company manages
and assumes clinical and financial responsibility for all medical, psychosocial
care and certain other support services associated with the patient's terminal
illness, primarily through state-licensed and federally-certified hospice
programs.

The Company was incorporated on August 29, 1995 in the state of Delaware
and, as of September 30, 2000, had 29 locations serving patients and their
families in 17 states, with significant operations in Texas, California and
Arizona.

Principles of Consolidation

The consolidated financial statements include the accounts of Odyssey
HealthCare, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Interim Financial Information

The financial information as of September 30, 1999 and for the nine months
ended September 30, 1999 is unaudited and includes all adjustments, consisting
only of normal recurring adjustments, the Company's management considers
necessary for a fair presentation of the Company's operating results and cash
flows for such period.

The financial information as of September 30, 2000 and for the nine months
then ended includes all adjustments, consisting only of normal recurring
adjustments, the Company's management considers necessary for a fair
presentation of the Company's financial position, operating results and cash
flows for such period. The results of operations for the nine month period ended
September 30, 2000 are not necessarily indicative of the results for a full
year.

Cash and Cash Equivalents

Cash and cash equivalents include currency, checks on hand and overnight
repurchase agreements of government securities.

Accounts Receivable

Accounts receivable represents amounts due from patients, third-party
payors (principally the Medicare and Medicaid programs), and others for services
rendered. Approximately 89.1%, 90.0% and 87.0% of the accounts receivable at
December 31, 1998 and 1999 and September 30, 2000, respectively, represent
amounts due from the Medicare and Medicaid programs.

Goodwill

Goodwill represents the excess of cost over fair value of the net assets
acquired in acquisitions. Goodwill is amortized on a straight-line basis over
the period of benefit, which is estimated to be 20 years. During the Company's
1999 review of its intangible assets, it was determined that the useful life of
goodwill should be changed from 25 to 20 years. The amortization period was
adjusted accordingly, which resulted in an increase in amortization expense of
$170,000 for the year ended December 31, 1999.

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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accumulated amortization totaled $221,360, $824,516 and $1,731,901 as of
December 31, 1998 and 1999 and September 30, 2000, respectively.

On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall based on discounted
cash flows. As of September 30, 2000, the Company does not believe there is any
indication that the carrying value or the amortization period of its intangible
assets needs to be adjusted.

During March 1999, the Company closed a hospice facility in Minnesota and
wrote off the remaining goodwill related to the purchase of the facility of
approximately $242,000 during 1999.

Net Patient Service Revenue

Net patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payors (primarily Medicare, Medicaid,
commercial insurance and managed care), and others for services rendered. Payors
may determine that the services provided are not covered and do not qualify for
payment. Management has provided an estimate for such adjustments. Changes in
the estimate will be adjusted in future periods as the payments are determined.
The percentage of net patient service revenue derived under the Medicare and
Medicaid programs was 93.8%, 93.1%, 94.1% and 95.3% for the years ended December
31, 1997, 1998 and 1999 and for the nine months ended September 30, 2000,
respectively.

Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.

Charity Care

The Company has a policy of providing charity care to patients who are
unable to pay and maintains records to identify and monitor the level of charity
care it provides. These records include the amount of charges for services
provided, which are computed using established rates. Because the Company does
not pursue collection of amounts determined to qualify as charity care, they are
not reported as revenue.

Charity care amounted to $254,000, $492,000, $594,000 and $291,500 for the
years ended December 31, 1997, 1998 and 1999 and for the nine months ended
September 30, 2000, respectively.

Property and Equipment

Property and equipment, including improvements to existing facilities, are
recorded at cost. Depreciation and amortization are calculated principally using
the straight-line method over the estimated useful lives of the assets.
Estimated useful lives for major asset categories are three years for leasehold
improvements, three to five years for equipment and computer software, and five
years for office furniture. Leased assets are amortized over the shorter of the
lease term or their respective estimated useful life. Amortization of assets
under capital lease obligations is included in depreciation and amortization
expense.

F-8
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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock-Based Compensation

The Company has elected to follow the Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock options. As such, the
Company has adopted the disclosure-only provisions of Financial Accounting
Standards Board Statement No. 123, Accounting for Stock-Based Compensation (FAS
123). Under APB 25, compensation expense is measured as the excess of the deemed
fair value of the Company's stock at the date of the grant over the option
exercise price and is charged to operations over the vesting period using the
graded method.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing net income
(loss) less the annual Series A, Series B and Series C Convertible Preferred
Stock dividends by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per common share is computed by
dividing the net income (loss) by the weighted average number of common shares
outstanding during the period plus the effect of dilutive securities, giving
effect to the conversion of the convertible preferred stock, employee stock
options and outstanding warrants (using the if-converted method).

Income Taxes

The Company accounts for income taxes using the liability method as
required by Financial Accounting Standards Board Statement No. 109, Accounting
for Income Taxes (FAS 109). Under the liability method, deferred taxes are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax laws that will be
in effect when the differences are expected to reverse.

Professional Liability Insurance

The Company maintains professional liability insurance coverage on a
claims-made basis with limits of liability of $1,000,000 per occurrence and
$3,000,000 in the aggregate. The Company also maintains general liability and
umbrella coverage with a limit of $10,000,000. A liability for incurred but not
reported claims has not been recorded as management believes exposure to such
losses to be immaterial to the financial position and results of operations of
the Company.

Nursing Home Costs

For patients receiving nursing home care under a state Medicaid program who
elect hospice care under Medicare or Medicaid, the Company contracts with
nursing homes for the nursing homes' provision to patients of room and board
services. The state must pay the Company, in addition to the applicable Medicare
or Medicaid hospice daily or hourly rate, an amount equal to at least 95% of the
Medicaid daily nursing home rate for room and board furnished to the patient by
the nursing home. Under the Company's standard nursing home contracts, the
Company pays the nursing home for these room and board services at the Medicaid
daily nursing home rate. Nursing home costs are offset by nursing home revenue,
and the net amount is included in direct hospice care expenses. Nursing home
costs totaled $415,222, $3,519,281, $8,466,156 and $12,398,706 for the years
ended December 31, 1997, 1998 and 1999 and for the nine months ended September
30, 2000, respectively. Nursing home revenue totaled $354,229, $3,410,289,
$8,207,648 and $11,473,020 for the years ended December 31, 1997, 1998 and 1999
and for the nine months ended September 30, 2000, respectively.

F-9
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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Advertising Costs

The Company expenses all advertising costs as incurred, which totaled
approximately $76,000, $314,000, $179,000 and $146,000 for the years ended
December 31, 1997, 1998 and 1999 and for the nine months ended September 30,
2000, respectively.

Segment Information

The Company evaluates the performance and allocates resources of its
hospice locations based on current operations and market assessments on a
hospice-by-hospice basis. The Company does not have a concentration of
operations geographically.

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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (FAS 133),
which establishes accounting and reporting standards for derivative instruments
and hedging activities. FAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. This statement was amended deferring the
effective date to all fiscal quarters of fiscal years beginning after June 15,
2000. This pronouncement is not expected to have a material effect on the
Company's financial position or results of operations.

2. ACQUISITIONS

1997 Acquisitions

On February 12, 1997, the Company purchased all the common stock of HNT
Hospice of North Texas, Inc., a hospice in Dallas, Texas. The purchase price,
including transaction costs, was approximately $269,000. Assets acquired include
goodwill of approximately $169,000.

On October 28, 1997, the Company purchased all the assets and business,
excluding working capital, of two hospices of Safe Harbor Hospice, Inc., located
in Phoenix, Arizona and Las Vegas, Nevada. The purchase price, including
transaction costs, was approximately $1,850,000. Assets acquired include
goodwill of approximately $1,832,000.

1998 Acquisitions

On January 15, 1998, the Company purchased all the assets and business of
Conroe Hospice of the Pines in Texas, a hospice in Houston (Bellaire), Texas.
The purchase price, including transaction costs, totaled $255,501, all of which
was recorded as goodwill.

On January 30, 1998, the Company purchased all the assets and business of
American Hospice of Louisiana, Inc., a hospice in New Orleans (Metairie),
Louisiana. The purchase price, including transaction costs, totaled $872,076,
which includes a note payable of $350,000. Assets acquired include goodwill of
approximately $867,000.

On April 1, 1998, the Company purchased all the assets and business of two
hospices from Care United Hospice, Inc. in Minneapolis, Minnesota, and
Milwaukee, Wisconsin. The purchase price, including

F-10
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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transaction costs, totaled $734,682, which includes notes payable of $300,000.
Assets acquired include goodwill of approximately $530,000.

On June 1, 1998, the Company purchased all the assets and business of
Matched Caregivers, Inc., a hospice in San Jose, California. The purchase price,
including transaction costs, totaled approximately $92,000. Assets acquired
include goodwill of approximately $75,000 and property and equipment of
approximately $16,000.

On August 11, 1998, the Company purchased all the assets and business of
Fullife Hospice, L.L.C., a hospice in Oklahoma City, Oklahoma. The purchase
price, including transaction costs, totaled $177,410, which includes a note
payable of $75,000. Assets acquired include goodwill of approximately $167,000.

On September 1, 1998, the Company purchased all the assets and business of
Home Care Preferred Choice, Inc., a hospice in Irving, Texas. The purchase
price, including transaction costs, totaled $100,000. Assets acquired include
goodwill of approximately $94,000.

On September 30, 1998, the Company purchased all the assets and business of
four hospices from Hospice Associates of America in San Antonio, Texas, Denver,
Colorado, Nashville, Tennessee and New Orleans (Kenner), Louisiana. The purchase
price, including transaction costs, totaled $1,210,416, which includes notes
payable of $402,000. Assets acquired include goodwill of approximately
$1,197,000.

On September 30, 1998, the Company purchased all the assets and business of
two hospices from Grancare Nursing Services and Hospice, Inc. in Detroit (Novi),
Michigan, and Milwaukee, Wisconsin. The purchase price, including transaction
costs, totaled $2,128,767, which includes notes payable of $707,000. Assets
acquired include goodwill of approximately $2,119,000.

On September 30, 1998, the Company purchased all the assets and business of
Heart of America Hospice, L.L.C., a hospice in Kansas City, Missouri. The
purchase price, including transaction costs, totaled $1,376,020, which includes
a note payable of $457,000. Assets acquired include goodwill of approximately
$1,366,000.

On October 1, 1998, the Company purchased all the assets and business of
Hospice of Houston (see Note 3), a hospice in Houston (Baytown), Texas. The
purchase price, including transaction costs, totaled approximately $1,102,000,
which included a note payable of $366,000. Assets acquired include goodwill of
approximately $1,087,000.

1999 Acquisitions

On May 25, 1999, the Company purchased all the assets and business of
Quality Continuum Hospice (Westminster) and Quality Health Services Hospice
(Riverside), two hospices in Orange County (Garden Grove), California and
Riverside, California. The purchase price, including transaction costs, totaled
$895,000. Assets acquired include furniture and fixtures of $25,000 and goodwill
of $870,000.

On November 1, 1999 the Company purchased all the assets and business of
six hospices, including three inpatient facilities from Dignita Hospice Care,
LLC (Dignita), three located in Phoenix, Arizona, two located in Tucson,
Arizona, and one located in San Diego, California. The purchase price totaled
$7,250,000, which includes a note payable of $2,500,000, and an additional
payment of $750,000 due to the seller if the six facilities' net revenue and
earnings before interest, depreciation and amortization expense exceeded certain
thresholds as defined in the purchase agreement. Management expects to meet
these thresholds and the $750,000 liability is reflected in other accrued
expenses in the consolidated balance sheet at September 30, 2000. Of the
additional payment, $65,000 and $195,000 were recognized as compensation expense
in 1999 and 2000, respectively, because of an employment requirement with a
former owner of Dignita who was employed through June 30, 2000. Assets acquired
include property and equipment of $267,000 and goodwill of $6,697,000.
F-11
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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

All acquisitions were accounted for under the purchase method of
accounting. The results of operations have been included in the consolidated
financial statements of the Company from the dates of acquisition.

Unaudited pro forma consolidated results of operations of the Company for
the years ended December 31, 1997, 1998 and 1999 are presented below. Such pro
forma presentation has been prepared assuming that the acquisitions described
above have been made as of January 1 of the year of acquisition:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net patient service revenue......... $ 9,349,777 $37,886,406 $59,622,601
Pro forma net loss............................ (4,095,678) (6,141,212) (2,110,472)
Pro forma basic and diluted net loss per
common share................................ $ (1.36) $ (1.96) $ (0.88)
</TABLE>

3. HOSPICE OF HOUSTON

In connection with the Hospice of Houston acquisition, the Company entered
into an exchange agreement on September 30, 1998, whereby Hospice Management
Partners, Inc. (HMPI), and Hospice Associates of America, Inc. (HAOA) conveyed
their limited partnership (66%) and general partnership (1%) interests in
Hospice of Houston, L.P. (the Partnership), to the Company. The Partnership's
accounts receivable of approximately $1,575,000 were transferred to HMPI and
HAOA on the date of the exchange in satisfaction of their capital accounts. The
Company contributed all of its Houston operations to the Partnership, which
included the assignment of contracts and the existing office space lease. On
September 30, 1998, a management services agreement was executed between the
Partnership and the Company whereby the Company receives a management fee of 5%
of net revenue of the Partnership in exchange for assistance in the day-to-day
management, administration, and marketing of the Partnership. The Partnership
has been consolidated with the Company. San Jacinto Methodist Hospital (San
Jacinto) holds the remaining 33% interest in the Partnership, and the cumulative
net loss has been recorded in other assets ($43,504, $38,946 and $45,419 at
December 31, 1998 and 1999 and September 30, 2000, respectively) from San
Jacinto in accordance with the terms of the Partnership agreement. Minority
interest was $0, $50,892, $(4,558) and $(915) for the years ended December 31,
1997, 1998 and 1999 and for the nine months ended September 30, 2000, and is
included in general and administrative expense.

4. PREFERRED STOCK

On January 26, 1996, the Company issued 7,009,091 shares of Series A
Convertible Preferred Stock (Series A). The stock was issued at a price of $0.50
per share for 6,100,000 shares and $0.55 per share for 909,091 shares, with cash
proceeds totaling $3,333,500. Notes totaling $216,500, payable in four years at
an interest rate of 7%, were accepted from certain employees of the Company as
payment for the purchase of 433,000 shares. In May 2000, a former employee
forfeited 91,000 shares in exchange for forgiveness of a shareholder note
totaling $45,400 and accumulated dividends of $14,774, which reduced unpaid
dividends accrued in 2000.

On February 12, 1997, the Company issued 6,400,000 shares of Series B
Convertible Preferred Stock (Series B). The stock was issued at a price of $1.25
per share, with cash proceeds totaling $8,000,000, less costs of $7,500.

On July 1, 1998, the Company issued 2,857,137 shares of Series C
Convertible Preferred Stock (Series C). The stock was issued at a price of $1.75
per share, with cash proceeds totaling $3,499,990 less costs of $6,597 and the
conversion of a convertible promissory note totaling $1,500,000 entered into in
1998.

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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The holders of the Series A, Series B, and Series C Convertible Preferred
Stock shall be entitled to receive, when and if declared by the Board of
Directors, quarterly dividends at the rate of $.04 per share per annum, $.10 per
share per annum, and $.14 per share per annum, respectively. All dividends
accrue, whether or not earned or declared, and are cumulative. Dividends are not
payable in the event of a mandatory conversion. Upon liquidation, the Series A,
Series B, and Series C Preferred Stockholders receive a preferential
distribution (Liquidation Preference Payments) equal to the issuance price
($3,550,000 for Series A, $8,000,000 for Series B, and $4,999,990 for Series C)
plus undistributed dividends. At the option of a two-third majority vote of the
preferred stockholders, the shares of Series A, Series B, and Series C
Convertible Preferred Stock are redeemable as follows: 33.3% of the shares on
September 30, 2005, 66.6% of the shares on September 30, 2006, and 100% of the
shares on September 30, 2007, at a redemption price equal to the Liquidation
Preference Payments.

The Series A, Series B, and Series C Convertible Preferred Stock is
convertible, at the option of the holder, to Common Stock at any time, subject
to certain conditions. The Series A, Series B, and Series C Convertible
Preferred Stock also is subject to mandatory conversion into Common Stock upon
certain conditions, including the issuance of Common Stock in an initial public
offering where the aggregate price paid for such shares by the public is equal
to or greater than $20,000,000 at a per share price of at least $3.00 and, in
the case of a liquidation, dissolution or winding up of the Company, the amounts
to be received by the holders of the Series A, Series B, and Series C
Convertible Preferred Stock are in excess of the Liquidation Preference
Payments. Upon conversion, one share of each of the Series A, Series B and
Series C Convertible Preferred Stock would be exchanged for one share of common
stock. As of December 31, 1999, the Series A, Series B, and Series C Convertible
Preferred Stock balances included cumulative dividends of $875,970, $1,838,856
and $595,043, respectively. As of September 30, 2000, the Series A, Series B and
Series C Convertible Preferred Stock balances included cumulative dividends of
$1,068,739, $2,318,856 and $895,042, respectively.

Each share of the Series A, Series B, and Series C Convertible Preferred
Stock entitles the holder to the number of votes per share of common stock into
which the Series A, Series B, and Series C Convertible Preferred Stock is then
convertible.

5. WARRANTS

Common Stock

In conjunction with the senior subordinated notes issued on July 1, 1998,
the Company issued stock warrants to purchase 1,782,208 shares of common stock.
On January 1, 1999, the Company issued additional stock warrants to purchase
161,312 shares of common stock in connection with the senior subordinated notes.
The exercise price of the stock warrants is $.01 per share and is adjusted from
time to time as provided in the respective stock warrant agreement. The warrants
were valued at fair value, as determined by the Company, at $891,104 on July 1,
1998 and $181,073 on January 1, 1999. This has been recorded as a discount on
the senior subordinated notes, which is being amortized over the term of the
debt. The warrants may be exercised at any time before their expiration on March
31, 2005, or at such time as all principal and interest on the senior
subordinated notes is paid in full. The holder may also elect to receive,
without payment of any additional consideration, shares equal to the value of
the warrant with a net issue election notice. In the case of merger,
consolidation, dissolution, or reorganization, the holder of the warrants is
entitled to receive the stock, and other securities and property to which the
holder would have been entitled if the holder had exercised the warrant prior to
the merger, consolidation, dissolution, or reorganization.

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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Series B Convertible Preferred Stock

In connection with the issuance of the $1,500,000 convertible promissory
notes as of May 22, 1998, the Company issued Series B warrants to the lenders to
purchase 119,993 shares of Series B Convertible Preferred Stock at $.025 per
share. The warrants were valued at fair value, as determined by the Company, at
$150,000. This was recorded as a discount on the convertible promissory notes as
of December 31, 1998. The exercise price of the stock warrants is $1.25 and is
adjusted from time to time as provided in the warrant purchase agreement. The
warrants may be exercised at any time before their expiration on May 21, 2008,
or at such time as the closing of the Company's sale or transfer of all or
substantially all of its assets. On the date of such event, the warrants shall
become null and void. The holder may elect to receive, without the payment by
the holder of any additional consideration, shares of preferred stock equal to
the value of the warrant with a net issue election notice.

6. STOCK OPTIONS

The Odyssey HealthCare, Inc. Stock Option Plan (Stock Option Plan)
authorizes the grant of options to employees and directors for up to 2,278,000
shares of the Company's common stock at prices of $.05 to $1.55 per share. All
options granted have five to ten-year terms and vest over a five-year period.

A summary of stock option activity follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS
---------------- ---------
<S> <C> <C>
Options outstanding at January 1, 1997.................... $0.05 920,000
Granted................................................. 0.45 795,000
Canceled................................................ 0.13 (256,667)
Exercised............................................... 0.05 (20,000)
---------
Options outstanding at December 31, 1997.................. 0.27 1,438,333
Granted................................................. 0.50 535,000
Canceled................................................ 0.29 (718,184)
Exercised............................................... 0.06 (210,149)
---------
Options outstanding at December 31, 1998.................. 0.40 1,045,000
Granted................................................. 0.50 577,127
Canceled................................................ 0.50 (278,400)
Exercised............................................... 0.13 (18,000)
---------
Options outstanding at December 31, 1999.................. 0.42 1,325,727
Granted................................................. 0.68 663,500
Canceled................................................ 0.47 (158,600)
Exercised............................................... 0.50 (1,000)
---------
Options outstanding at September 30, 2000................. 0.51 1,829,627
=========
</TABLE>

At December 31, 1999 and September 30, 2000, 704,124 and 199,224 shares,
respectively, were available for issuance under the Stock Option Plan.

F-14
<PAGE> 102
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the stock options outstanding as of December
31, 1999:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING NUMBER NUMBER
EXERCISE NUMBER CONTRACTUAL LIFE VESTED AND UNVESTED AND
PRICE OUTSTANDING (YEARS) EXERCISABLE NOT EXERCISABLE
-------- ----------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
0$.05.. 236,000 6.69 152,425 83,575
0.50.. 1,089,727 8.55 125,600 964,127
--------- ------- ---------
1,325,727 8.22 278,025 1,047,702
========= ======= =========
</TABLE>

The following table summarizes the stock options outstanding as of
September 30, 2000:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING NUMBER NUMBER
EXERCISE NUMBER CONTRACTUAL LIFE VESTED AND UNVESTED AND
PRICE OUTSTANDING (YEARS) EXERCISABLE NOT EXERCISABLE
-------- ----------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
0$.05.. 226,000 5.92 150,600 75,400
0.50.. 1,483,127 8.30 348,225 1,134,102
0.55.. 5,000 9.53 -- 5,000
1.55.. 115,500 9.87 -- 115,500
--------- ------- ---------
1,829,627 8.11 498,825 1,330,002
========= ======= =========
</TABLE>

During the nine months ended September 30, 2000, the Company recorded
aggregate deferred compensation for employees of $1,249,965 representing the
difference between the exercise prices of stock options granted in fiscal year
2000 under the Stock Option Plan and the then deemed fair value of the common
stock. These amounts are being amortized as charges to operations, using the
graded method. Under the graded method, approximately 46%, 26%, 15%, 9% and 4%,
respectively, of each options compensation expense is recognized in each of the
five years following the date of the grant. For the nine months ended September
30, 2000, the Company amortized $320,819 of deferred compensation.

Pro forma information regarding net income (loss) is required by FAS 123,
which requires that the information be determined as if the Company has
accounted for its employee stock options granted during the fiscal periods ended
December 31, 1997, 1998 and 1999, and September 30, 2000, under the fair value
method of FAS 123. The deemed fair value for these options was estimated at the
date of the grant using the minimum value option valuation model, which assumes
the stock price has no volatility since the common stock is not publicly traded.
The following assumptions were used to calculate the deemed fair value of the
option awards at the date of grant: no dividend payouts expected, expected
option life of six years, and a risk free interest rate averaging 6.1%. The
weighted average deemed fair value of the options granted was $0.46, $0.53,
$0.55 and $2.20 in the years ended December 31, 1997, 1998 and 1999 and the nine
months ended September 30, 2000, respectively.

The minimum value option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected life of the
option. Because, among other things, changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options. For purposes of pro forma disclosures, the deemed
fair value of the options is amortized to expense over the vesting periods.

F-15
<PAGE> 103
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

If compensation cost for the Company's stock-based compensation plan had
been determined based on the deemed fair value at the grant date for awards
under this plan consistent with the method provided for under FAS 123, then the
Company's net income (loss) would have been as indicated in the pro forma
amounts below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
--------------------------------------- SEPTEMBER 30,
1997 1998 1999 2000
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Net income (loss):
As reported................ $(4,143,339) $(6,522,584) $(2,199,943) $2,160,971
Pro forma.................. (4,153,694) (6,570,596) (2,263,424) 2,120,156
Basic net income per common
share:
As reported................ $ (1.37) $ (2.06) $ (0.91) $ 0.31
Pro forma.................. (1.37) (2.08) (0.92) 0.29
Diluted net income per common
share:
As reported................ $ (1.37) $ (2.06) $ (0.91) $ 0.09
Pro forma.................. (1.37) (2.08) (0.92) 0.09
</TABLE>

At December 31, 1999 and September 30, 2000, the Company has reserved
20,221,592 and 20,129,592 shares, respectively, of common stock for future
issuance under option agreements and upon conversion of the Series A, Series B,
and Series C Convertible Preferred Stock, the Series B Convertible Preferred
Stock warrants and the common stock warrants as detailed below:

<TABLE>
<CAPTION>
SHARES
----------------------------
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Options outstanding and available for grant under the Stock
Option Plan............................................... 1,891,851 1,890,851
Series A, B, and C Convertible Preferred Stock conversion... 16,266,228 16,175,228
Series B Convertible Preferred Stock warrants............... 119,993 119,993
Common stock warrants....................................... 1,943,520 1,943,520
---------- ----------
20,221,592 20,129,592
========== ==========
</TABLE>

F-16
<PAGE> 104
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. NET INCOME (LOSS) PER COMMON SHARE

The following table presents the calculation of basic and diluted net loss
per common share and pro forma basic and diluted net loss per common share:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator
Net income (loss).............. $(4,143,339) $(6,522,584) $(2,199,943) $(2,299,454) $ 2,160,971
Series A, B and C Preferred
Stock dividends............. (846,720) (1,122,007) (1,320,364) (990,272) (972,768)
----------- ----------- ----------- ----------- -----------
Numerator for basic earnings
per share -- income
available to common
stockholders................ (4,990,059) (7,644,591) (3,520,307) (3,289,726) 1,188,203
Effect of dilutive securities:
Series A, B and C Preferred
Stock dividends........... -- -- -- -- 972,768
----------- ----------- ----------- ----------- -----------
Numerator for diluted net
income (loss) per
share -- net income (loss)
available to common
stockholders after assumed
conversions................. $(4,990,059) $(7,644,591) $(3,520,307) $(3,289,726) $ 2,160,971
=========== =========== =========== =========== ===========
Denominator
Denominator for basic earnings
per share -- weighted
average
shares...................... 3,637,570 3,705,866 3,886,395 3,884,775 3,892,002
Effect of dilutive securities:
Employee stock options...... -- -- -- -- 1,752,745
Series A, B and C Preferred
Stock..................... -- -- -- -- 16,175,228
Series B Preferred Stock
Warrants convertible to
common stock.............. -- -- -- -- 81,402
Common stock warrants....... -- -- -- -- 1,938,520
----------- ----------- ----------- ----------- -----------
Denominator for diluted net
income (loss) per share --
adjusted weighted average
shares and assumed
conversions................. 3,637,570 3,705,866 3,886,395 3,884,775 23,839,897
=========== =========== =========== =========== ===========
Net income (loss) per common
share:
Basic.......................... $ (1.37) $ (2.06) $ (0.91) $ (0.85) $ 0.31
Diluted........................ $ (1.37) $ (2.06) $ (0.91) $ (0.85) $ 0.09
</TABLE>

F-17
<PAGE> 105
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

The allowance for uncollectible accounts for patient accounts receivable is
as follows:

<TABLE>
<CAPTION>
BALANCE AT PROVISION FOR
BEGINNING OF UNCOLLECTIBLE WRITE-OFFS, NET BALANCE AT
YEAR ACCOUNTS OF RECOVERIES END OF YEAR
------------ ------------- --------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997........ $ 18,368 $ 187,016 $ (799) $ 204,585
Year ended December 31, 1998........ 204,585 1,203,215 (485,121) 922,679
Year ended December 31, 1999........ 922,679 2,031,015 (1,868,694) 1,085,000
Nine months ended September 30,
2000.............................. $1,085,000 $2,024,234 $ (350,589) $2,758,645
</TABLE>

9. PROPERTY AND EQUIPMENT

Property and equipment is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1998 1999 2000
---------- ---------- -------------
<S> <C> <C> <C>
Office furniture................................ $ 611,121 $ 815,476 $ 817,324
Computer hardware............................... 971,651 1,124,198 1,368,789
Computer software............................... 43,349 326,608 428,935
Equipment....................................... -- 153,431 170,077
Motor vehicles.................................. -- 47,182 47,182
Leasehold improvements.......................... 294,732 350,364 381,431
---------- ---------- ----------
1,920,853 2,817,259 3,213,738
Less accumulated depreciation and
amortization.................................. 468,975 1,109,073 1,685,952
---------- ---------- ----------
$1,451,878 $1,708,186 $1,527,786
========== ========== ==========
</TABLE>

Assets under capital lease obligations are $835,920, $907,096 and $907,096
at December 31, 1998 and 1999 and September 30, 2000, respectively, and
accumulated amortization is $204,210, $498,752 and $700,764 at December 31, 1998
and 1999 and September 30, 2000, respectively. Depreciation and amortization
expense includes amortization expense on assets under capital lease obligations
totaling $35,738, $168,472, $294,542 and $202,012 for the years ended December
31, 1997, 1998 and 1999 and for the nine months ended September 30, 2000,
respectively.

F-18
<PAGE> 106
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Line of credit, long-term debt and capital lease obligations consists of
the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- -------------
<S> <C> <C> <C>
Revolving $10 million line of credit, bearing
interest at prime plus 1% (10.5% at
September 30, 2000); interest payable
monthly, secured by accounts receivable..... $ -- $ 6,455,194 $ 4,021,288
Senior subordinated notes with a limited
liability partnership dated July 1, 1998,
bearing interest at 12% payable quarterly;
principal payments of 6.25% of the aggregate
principal balance are due beginning June
2001 through March 2005; less unamortized
discount of $724,442 at September 30,
2000........................................ 9,174,903 11,154,817 11,275,558
Acquisition notes payable, due between 1999
and 2001; bearing interest at 7% to 8%, all
of which are unsecured...................... 2,725,000 3,775,000 3,500,000
Capital leases under a master lease agreement,
due between 1999 and 2003; interest rates
ranging from 9% to 14%, secured by
equipment................................... 593,687 -- --
Various capital leases covering equipment, due
between 1999 and 2003; interest rates
ranging from 7% to 15%; secured by
equipment................................... 106,652 467,112 237,760
----------- ----------- -----------
12,600,242 21,852,123 19,034,606
Less line of credit and current maturities.... 1,781,445 9,307,651 7,851,311
----------- ----------- -----------
$10,818,797 $12,544,472 $11,183,295
=========== =========== ===========
</TABLE>

The revolving $10 million line was amended October 2, 2000, and increased
to $20 million, bearing interest at prime, as defined in the agreement, plus 1%,
not to fall below 10%, and matures on October 2, 2003. The line of credit bears
a usage fee and a loan management fee, as defined in the agreement, of 0.04% and
0.03%, respectively. Advances made under the loan agreement are secured by a
substantial portion of the Company's accounts receivable.

The senior subordinated notes and the revolving line of credit require
certain financial and other covenants be met in order to maintain the existing
notes payable and obtain new debt fundings, and also restrict payment of
dividends. The Company obtained an amendment from the lender with respect to the
tangible net worth covenant as of December 31, 1999.

Debt issue costs in the amount of $76,217 (with accumulated amortization of
$12,513, $17,500 and $43,095 at December 31, 1998 and 1999 and September 30,
2000, respectively) were incurred in 1998 in connection with the senior
subordinated notes, and are being amortized over the term of the debt.

F-19
<PAGE> 107
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Scheduled principal repayments on debt and payments on capital lease
obligations for the next five years as of December 31, 1999 and September 30,
2000 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
---------------------- --------------------------
CAPITAL CAPITAL
DEBT LEASES DEBT LEASES
----------- -------- ----------- ------------
<S> <C> <C> <C> <C>
2001................................ $ 9,307,651 $327,457 $ 7,771,288 $ 80,023
2002................................ 3,172,543 150,254 4,250,000 150,254
2003................................ 3,000,000 14,066 3,000,000 14,066
2004................................ 3,000,000 13,776 3,000,000 13,776
2005................................ 3,750,000 -- 1,500,000 --
----------- -------- ----------- --------
22,230,194 505,553 19,521,288 258,119
Less amounts representing
interest.......................... -- 38,441 -- 20,359
----------- -------- ----------- --------
22,230,194 $467,112 19,521,308 $237,760
======== ========
Less unamortized discount........... 845,183 724,442
----------- -----------
$21,385,011 $18,796,846
=========== ===========
</TABLE>

11. INCOME TAXES

Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Accrual to cash/Section 481 adjustment...... $(2,697,268) $(1,584,410) $(1,217,655)
Amortizable/depreciable assets.............. 41,527 (29,826) (174,304)
Accounts receivable......................... -- 358,384 1,048,285
Accrued compensation........................ -- 149,421 337,963
Alternative minimum tax credit
carryforward............................. -- -- 119,633
Net operating loss carryforward............. 7,229,479 6,458,448 4,280,771
Other....................................... -- 1,151 1,970
----------- ----------- -----------
4,573,738 5,353,168 4,396,663
Valuation allowance......................... (4,573,738) (5,353,168) (4,396,663)
----------- ----------- -----------
Net deferred tax assets............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>

The components of the Company's tax expense are as follows:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------ SEPTEMBER 30,
1997 1998 1999 2000
----------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Current:
Federal........................... $ -- $ -- $ -- $119,633
State............................. -- -- $ -- 150,000
----------- -------- ----------- --------
-- -- -- 269,633
Deferred:
Federal........................... -- -- $ -- --
State............................. -- -- $ -- --
----------- -------- ----------- --------
$ -- $ -- $ -- $269,633
=========== ======== =========== ========
</TABLE>

F-20
<PAGE> 108
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The reconciliation of income tax expense (benefit) computed at the federal
statutory tax rate to income tax expense (benefit) is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------- NINE MONTHS ENDED
1997 1998 1999 SEPTEMBER 30, 2000
--------------------- --------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax at federal statutory
rate................... $(1,408,735) (34)% $(2,217,678) (34)% $(747,981) (34)% $ 826,405 34%
State income tax, net of
federal benefit........ (177,155) (4) (260,903) (4) (87,998) (4) 247,221 10
Stock-based compensation
charges................ -- -- -- -- -- -- 109,140 4
Non-deductible expenses
and other.............. 62,713 1 43,172 -- 42,298 3 43,368 2
Increase (decrease) in
valuation allowance.... 1,523,177 37 2,435,409 38 793,681 35 (956,501) (39)
----------- --- ----------- --- --------- --- --------- ---
$ -- --% $ -- --% $ -- --% $ 269,633 11%
=========== === =========== === ========= === ========= ===
</TABLE>

The decrease in the valuation allowance in fiscal 2000 was due in part to
the Company's ability to use approximately $5,982,000 of net operating loss
carryforwards. The Company has a federal net operating loss carryforward
totaling $16,687,998, $16,995,915 and $11,265,186 at December 31, 1998 and 1999
and September 30, 2000, respectively, which expires between 2011 and 2019. The
Company has an alternative minimum tax credit carryforward of $119,633 at
September 30, 2000.

The Company has recorded a full valuation allowance of $4,396,663 to reduce
the net deferred tax asset. While the Company believes the deferred tax asset
will be substantially realized by the generation of future taxable income, the
deferred tax asset does not currently meet the criteria for recognition under
FAS 109 due to the Company's history of operating losses prior to fiscal 2000.

No income taxes were paid in 1997, 1998 and 1999, and $269,633 was paid in
2000.

12. RETIREMENT PLAN

On April 1, 1997, the Company began sponsoring a 401(k) plan, which is
available to all regular employees after meeting certain eligibility
requirements. The plan provides for contributions by the employees based on a
percentage of their income. The Company at its discretion may make
contributions. The Company made no matching contributions in 1997, 1998 or 1999
and matching contributions totaled $22,299 for the nine months ended September
30, 2000.

13. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office space and equipment at its various locations.
Total rental expense was approximately $419,000, $1,452,000, $2,233,000 and
$2,332,000 for the years ended December 31, 1997, 1998 and 1999 and for the nine
months ended September 30, 2000, respectively.

F-21
<PAGE> 109
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum rental commitments under noncancelable operating leases for
the years subsequent to December 31, 1999 and September 30, 2000, are as
follows:

<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
2001................................................. $1,706,545 $2,737,990
2002................................................. 1,345,012 1,944,715
2003................................................. 588,253 1,493,326
2004................................................. 578,768 1,262,117
2005................................................. 504,118 790,223
Thereafter........................................... 358,773 1,079,809
---------- ----------
$5,081,469 $9,308,180
========== ==========
</TABLE>

Contingencies

The Company is involved in various legal proceedings arising in the
ordinary course of business. Although the results of litigation cannot be
predicted with certainty, management believes the outcome of pending litigation
will not have a material adverse effect, after considering the effect of the
Company's insurance coverage, on the Company's consolidated financial
statements.

14. RELATED PARTY TRANSACTIONS

A member of the Company's board of directors is a partner of the limited
liability partnership from which the Company has obtained the senior
subordinated notes. Interest paid on these notes was approximately $300,000,
$1,800,000 and $1,100,000 for the years ended December 31, 1998 and 1999 and for
the nine months ended September 30, 2000.

In January 1996, the Company accepted notes from executive management
totaling $216,500 for the purchase of Series A Convertible Preferred Stock.
During 2000, a former executive forfeited 91,000 shares of Series A Convertible
Preferred Stock in exchange for forgiveness of his note payable to the Company
totaling $45,400 and accumulated dividends of $14,774.

15. FAIR VALUES OF FINANCIAL INSTRUMENTS

Financial Accounting Standards Statement No. 107, Disclosures about Fair
Value of Financial Instruments (FAS 107), requires disclosures of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets, and in many cases,
could not be realized in immediate settlement of the instrument. FAS 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. The following methods and
assumptions used by the Company in estimating its fair value disclosures for
financial instruments:

Cash and cash equivalents

The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents approximates its fair value.

F-22
<PAGE> 110
ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Line of credit and long-term debt (including current maturities)

The carrying amounts of the Company's variable-rate borrowings under the
line of credit approximate their fair values. The fair values of the remaining
long-term debt are estimated using discounted cash flow analyses, based on the
Company's incremental borrowing rates for similar types of borrowing
arrangements.

The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1999 and September 30, 2000 are as follows:

<TABLE>
<CAPTION>
1998 1999 2000
------------------------- ------------------------- -------------------------
CARRYING CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents..... $ 600,202 $ 600,202 $ 373,990 $ 373,990 $ 150,329 $ 150,329
Line of credit................ -- -- 6,455,193 6,455,193 4,021,288 4,021,288
Senior subordinated notes and
acquisition notes payable
(including current
maturities)................. 11,899,903 11,899,903 14,929,817 14,422,802 14,775,558 14,507,701
</TABLE>

F-23
<PAGE> 111

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

Through and including , 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

[ODYSSEY HEALTHCARE 4/C LOGO]

COMMON STOCK

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

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

MERRILL LYNCH & CO.

CIBC WORLD MARKETS

SG COWEN

, 2001

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 112

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Odyssey HealthCare, Inc. in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.

<TABLE>
<S> <C>
SEC registration fee...................................... $15,180
NASD filing fee........................................... 6,250
Nasdaq National Market Listing Fee........................ *
Printing and engraving costs.............................. *
Legal fees and expenses................................... *
Accounting fees and expenses.............................. *
Transfer Agent and Registrar fees......................... *
Miscellaneous expenses.................................... *
-------
Total..................................................... $ *
=======
</TABLE>

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

* To be supplied by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees)), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.

The Company's Fifth Amended and Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permitted by
the DGCL. In addition, as permitted by the DGCL, the Fifth Amended and Restated
Certificate of Incorporation provides that directors of the company shall have
no personal liability to the company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except (1) for any breach of the
director's duty of loyalty to the

II-1
<PAGE> 113

company or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law, (3) under
Section 174 of the DGCL or (4) for any transaction from which a director derived
an improper personal benefit.

The Company's Second Amended and Restated By-laws provides for the
indemnification of all current and former directors and all current or former
officers to the fullest extent permitted by the DGCL.

Odyssey HealthCare, Inc. has entered into indemnification agreements with
its directors and executive officers and intends to enter into indemnification
agreements with any new directors and executive officers in the future.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following information relates to all securities issued or sold by
Odyssey HealthCare, Inc. in the last three years and not registered under the
Securities Act. Each of the transactions described below was conducted in
reliance upon the exemptions from registration provided in Sections 3(b) and
4(2) of the Securities Act and the rules and regulations promulgated thereunder.
Each of the certificates representing Odyssey HealthCare, Inc.'s securities
issued in connection with such transaction contains a restrictive legend.

Between January 30, 1997 and November 18, 1997, Odyssey HealthCare, Inc.
issued stock options to various employees to purchase 795,000 shares of common
stock of Odyssey HealthCare, Inc. (the "Common Stock") at exercise prices
ranging from $0.05 to $0.50 per share.

On January 30, 1997, Odyssey HealthCare, Inc. sold 138,000 shares of Common
Stock to Richard R. Burnham for a purchase price of $69,000.

On February 12, 1997, Odyssey HealthCare, Inc. sold 1,306,152 shares of
Series B Convertible Preferred Stock to Three Arch Partners, L.P. for a purchase
price of $1,632,690.

On February 12, 1997, Odyssey HealthCare, Inc. sold 293,848 shares of
Series B Convertible Preferred Stock to Three Arch Associates, L.P. for a
purchase price of $367,310.

On February 12, 1997, Odyssey HealthCare, Inc. sold 708,240 shares of
Series B Convertible Preferred Stock to Weiss, Peck & Greer Venture Associates
III, L.P. for a purchase price of $885,300.

On February 12, 1997, Odyssey HealthCare, Inc. sold 851,760 shares of
Series B Convertible Preferred Stock to WPG Enterprise Fund II, L.P. for a
purchase price of $1,064,700.

On February 12, 1997, Odyssey HealthCare, Inc. sold 1,563,520 shares of
Series B Convertible Preferred Stock to Oak Investment Partners VI, Limited
Partnership for a purchase price of $1,954,400.

On February 12, 1997, Odyssey HealthCare, Inc. sold 36,480 shares of Series
B Convertible Preferred Stock to Oak VI Affiliates Fund, Limited Partnership for
a purchase price of $45,600.

On February 12, 1997, Odyssey HealthCare, Inc. sold 1,536,000 shares of
Series B Convertible Preferred Stock to Highland Capital Partners III Limited
Partnership for a purchase price of $1,920,000.

On February 12, 1997, Odyssey HealthCare, Inc. sold 64,000 shares of Series
B Convertible Preferred Stock to Highland Entrepreneurs Fund Limited Partnership
for a purchase price of $80,000.

On February 12, 1997, Odyssey HealthCare, Inc. sold 40,000 shares of Series
B Convertible Preferred Stock to Life Science Entrepreneur Fund for a purchase
price of $50,000.

On September 23, 1997, Odyssey HealthCare, Inc. sold 20,000 shares of
Common Stock to Joseph D. Lingenfelter for a purchase price of $1,000 upon
exercise of outstanding stock options.

Between February 3, 1998 and October 28, 1998, Odyssey HealthCare, Inc.
issued stock options to various employees to purchase 535,000 shares of Common
Stock at an exercise price of $0.50 per share.

II-2
<PAGE> 114

On April 22, 1998, Odyssey HealthCare, Inc. sold 13,333 shares of Common
Stock to Joseph D. Lingenfelter for a purchase price of $666 upon exercise of
outstanding stock options.

On May 22, 1998, Odyssey HealthCare, Inc. issued to Three Arch Partners,
L.P. a warrant to purchase 25,512 shares of Series B Convertible Preferred Stock
at an exercise price of $1.25 per share for consideration of $638.

On May 22, 1998, Odyssey HealthCare, Inc. issued to Three Arch Associates,
L.P. a warrant to purchase 5,739 shares of Series B Convertible Preferred Stock
at an exercise price of $1.25 per share for consideration of $143.

On May 22, 1998, Odyssey HealthCare, Inc. issued to Weiss, Peck & Greer
Venture Associates III, L.P. a warrant to purchase 14,011 shares of Series B
Convertible Preferred Stock at an exercise price of $1.25 per share for
consideration of $350.

On May 22, 1998, Odyssey HealthCare, Inc. issued to WPG Enterprise Fund II,
L.P. a warrant to purchase 16,850 shares of Series B Convertible Preferred Stock
at an exercise price of $1.25 per share for consideration of $421.

On May 22, 1998, Odyssey HealthCare, Inc. issued to Oak Investment Partners
VI Limited Partnership a warrant to purchase 29,727 shares of Series B
Convertible Preferred Stock at an exercise price of $1.25 per share for
consideration of $743.

On May 22, 1998, Odyssey HealthCare, Inc. issued to Oak VI Affiliates Fund,
Limited Partnership a warrant to purchase 693 shares of Series B Convertible
Preferred Stock at an exercise price of $1.25 per share for consideration of
$17.

On May 22, 1998, Odyssey HealthCare, Inc. issued to Highland Capital
Partners III Limited Partnership a warrant to purchase 13,315 shares of Series B
Convertible Preferred Stock at an exercise price of $1.25 per share for
consideration of $333.

On May 22, 1998, Odyssey HealthCare, Inc. issued to Highland Entrepreneurs
Fund III Limited Partnership a warrant to purchase 554 shares of Series B
Convertible Preferred Stock at an exercise price of $1.25 per share for
consideration of $14.

On May 22, 1998, Odyssey HealthCare, Inc. issued to Collinson Home Venture
Partners, Inc. a warrant to purchase 866 shares of Series B Convertible
Preferred Stock at an exercise price of $1.25 per share for consideration of
$22.

On May 22, 1998, Odyssey HealthCare, Inc. issued to David L. Steffy a
warrant to purchase 12,726 shares of Series B Convertible Preferred Stock at an
exercise price of $1.25 per share for consideration of $318.

On June 30, 1998, Odyssey HealthCare, Inc. sold 1,140,000 shares of Series
C Convertible Preferred Stock to Capital Resource Lenders III, L.P. for a
purchase price of $1,995,000.

On June 30, 1998, Odyssey HealthCare, Inc. sold 2,857 shares of Series C
Convertible Preferred Stock to CRP Investment Partners III, L.L.C. for a
purchase price of $4,999.

On June 30, 1998, Odyssey HealthCare, Inc. sold 364,468 shares of Series C
Convertible Preferred Stock to Three Arch Partners, L.P. for a purchase price of
$318,908.

On June 30, 1998, Odyssey HealthCare, Inc. sold 81,995 shares of Series C
Convertible Preferred Stock to Three Arch Associates, L.P. for a purchase price
of $71,745.

On June 30, 1998, Odyssey HealthCare, Inc. sold 200,164 shares of Series C
Convertible Preferred Stock to Weiss, Peck & Greer Venture Associates III, L.P.
for a purchase price of $175,142.

On June 30, 1998, Odyssey HealthCare, Inc. sold 240,726 shares of Series C
Convertible Preferred Stock to WPG Enterprise Fund II, L.P. for a purchase price
of $210,634.

II-3
<PAGE> 115

On June 30, 1998, Odyssey HealthCare, Inc. sold 424,677 shares of Series C
Convertible Preferred Stock to Oak Investment Partners VI, L.P. for a purchase
price of $371,591.

On June 30, 1998, Odyssey HealthCare, Inc. sold 9,908 shares of Series C
Convertible Preferred Stock to Oak VI Affiliates, L.P. for a purchase price of
$8,669.

On June 30, 1998, Odyssey HealthCare, Inc. sold 190,227 shares of Series C
Convertible Preferred Stock to Highland Capital Partners III, L.P. for a
purchase price of $166,448.

On June 30, 1998, Odyssey HealthCare, Inc. sold 7,926 shares of Series C
Convertible Preferred Stock to Highland Entrepreneurs Fund III, L.P. for a
purchase price of $6,935.

On June 30, 1998, Odyssey HealthCare, Inc. sold 12,384 shares of Series C
Convertible Preferred Stock to Collinson Howe Venture Partners, Inc. for a
purchase price of $10,835.

On June 30, 1998, Odyssey HealthCare, Inc. sold 181,805 shares of Series C
Convertible Preferred Stock to David L. Steffy for a purchase price of $159,078.

On July 1, 1998, Odyssey HealthCare, Inc. sold to Capital Resource Lenders
III, L.P. a warrant to purchase 1,777,752 shares of Common Stock at an exercise
price of $0.01 per share for consideration of $888,876.

On July 1, 1998, Odyssey HealthCare, Inc. sold to CRP Investment Partners
III, L.L.C. a warrant to purchase 4,456 shares of Common Stock at an exercise
price of $0.01 per share for consideration of $2,228.

On July 1, 1998, Odyssey HealthCare, Inc. sold $9,975,000 aggregate
principal amount of 12.0% Senior Subordinated Notes due March 31, 2005, to
Capital Resource Lenders III, L.P. for consideration of $9,086,124.

On July 1, 1998, Odyssey HealthCare, Inc. sold $25,000 aggregate principal
amount of 12.0% Senior Subordinated Notes due March 31, 2005, to CRP Investment
Partners III, L.L.C. for consideration of $22,772.

On November 11, 1998, Odyssey HealthCare, Inc. sold 189,816 shares of
Common Stock to Bradley J. Velie for a purchase price of $9,490 upon exercise of
outstanding stock options.

On December 16, 1998, Odyssey HealthCare, Inc. sold 7,000 shares of Common
Stock to Lynn D. O'Shea for a purchase price of $3,500 upon exercise of
outstanding stock options.

On December 31, 1998, Odyssey HealthCare, Inc. sold to Capital Resource
Lenders III, L.P. a warrant to purchase 160,909 shares of Common Stock at an
exercise price of $0.01 per share for consideration of $180,218.

On December 31, 1998, Odyssey HealthCare, Inc. sold to CRP Investment
Partners III, L.L.C. a warrant to purchase 403 shares of Common Stock at an
exercise price of $0.01 per share for consideration of $451.

On December 31, 1998, Odyssey HealthCare, Inc. sold $1,995,000 aggregate
principal amount of 12.0% Senior Subordinated Notes due March 31, 2005, to
Capital Resource Lenders III, L.P. for consideration of $1,814,782.

On December 31, 1998, Odyssey HealthCare, Inc. sold $5,000 aggregate
principal amount of 12.0% Senior Subordinated Notes due March 31, 2005, to CRP
Investment Partners III, L.L.C. for consideration of $4,549.

Between January 28, 1999 and October 27, 1999, Odyssey HealthCare, Inc.
issued stock options to various employees to purchase 637,127 shares of Common
Stock at an exercise price of $0.50 per share.

On July 23, 1999, Odyssey HealthCare, Inc. sold 3,000 shares of Common
Stock to Laurie N. Foley for a purchase price of $1,500 upon exercise of
outstanding stock options.

II-4
<PAGE> 116

On July 23, 1999, Odyssey HealthCare, Inc. sold 15,000 shares of Common
Stock to Mike Gooden for a purchase price of $750 upon exercise of outstanding
stock options.

Between January 25, 2000 and November 30, 2000, Odyssey HealthCare, Inc.
issued stock options to various employees and directors to purchase 751,500
shares of Common Stock at exercise prices ranging from $0.50 to $1.55 per share.

On May 24, 2000, Odyssey HealthCare, Inc. sold 1,000 shares of Common Stock
to Dale Curry for a purchase price of $500 upon exercise of outstanding stock
options.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1+ -- Form of Purchase Agreement
3.1* -- Form of Fifth Amended and Restated Certificate of
Incorporation
3.2* -- Form of Second Amended and Restated Bylaws
4.1+ -- Form of Common Stock Certificate
4.2* -- Second Amended and Restated Stockholders' Agreement,
dated July 1, 1998, by and among Odyssey HealthCare, Inc.
and the security holders named therein
4.3* -- Second Amended and Restated Registration Rights
Agreement, dated July 1, 1998, by and among Odyssey
HealthCare, Inc. and the security holders named therein
4.4+ -- Form of Rights Agreement between Odyssey HealthCare, Inc.
and Rights Agent
4.5+ -- Form of Certificate of Designation of Series A Junior
Participating Preferred Stock
5.1+ -- Opinion of Vinson & Elkins L.L.P.
10.1.1* -- Amended and Restated Loan and Security Agreement, dated
October 2, 2000 (the "Credit Agreement"), by and among
Odyssey HealthCare, Inc. and subsidiaries and Heller
Healthcare Finance, Inc.
10.1.2+ -- First Amendment to the Credit Agreement, dated
, 2000
10.2* -- Employment Agreement, dated as of March 1, 1999, by and
between Odyssey HealthCare, Inc. and Richard R. Burnham
10.3* -- Employment Agreement, dated as of March 1, 1999, by and
between Odyssey HealthCare, Inc. and David C. Gasmire
10.4* -- Employment Agreement, dated as of March 1, 1999, by and
between Odyssey HealthCare, Inc. and Douglas B. Cannon
10.5* -- Odyssey HealthCare, Inc. Stock Option Plan
10.6+ -- 2000 Equity-Based Compensation Plan
10.7+ -- Employee Stock Purchase Plan
10.8* -- Form of Indemnification Agreement between Odyssey
HealthCare, Inc. and its directors and officers
10.9.1* -- Senior Subordinated Note and Warrant Purchase Agreement,
dated July 1, 1998, by and among Odyssey HealthCare, Inc.
and subsidiaries, Capital Resource Lenders III, L.P. and
CRP Investment Partners III, L.L.C.
10.9.2* -- Form of Warrant
10.9.3* -- Form of 12% Senior Subordinated Note due 2005
10.10.1* -- Promissory Note and Warrant Purchase Agreement, dated May
22, 1998, by and among Odyssey HealthCare, Inc. and the
other parties thereto
10.10.2* -- Form of Warrant, dated May 22, 1998
</TABLE>

II-5
<PAGE> 117

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.10.3+ -- First Amendment to Warrants, dated December 6, 2000
21.1* -- Subsidiaries of Odyssey HealthCare, Inc.
23.1* -- Consent of Ernst & Young LLP
23.2+ -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1)
24.1* -- Power of Attorney (included in signature page)
27.1* -- Financial Data Schedule
</TABLE>

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

* Filed herewith
+ To be filed by amendment

(b) Financial Statement Schedules

Not applicable

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes:

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 14, 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 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 Act and will
be governed by the final adjudication of such issue.

(b) To provide to the underwriter(s) at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter(s) to permit prompt delivery to each
purchaser.

(c) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the 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.

(d) For the purpose of determining any liability under the Securities Act
of 1933, 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 the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-6
<PAGE> 118

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 8th day of December, 2000

ODYSSEY HEALTHCARE, INC.

By: /s/ RICHARD R. BURNHAM
----------------------------------
Richard R. Burnham
President, Chief Executive Officer
and Chairman of the Board

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard R. Burnham and Douglas B. Cannon and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including pre- and post-
effective amendments) to this Registration Statement and any additional
registration statement pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same with all exhibits thereto, and other 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,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or
their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.

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:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD R. BURNHAM President, Chief Executive December 8, 2000
----------------------------------------------------- Officer and Chairman of
Richard R. Burnham the Board (Principal
Executive Officer)

/s/ DAVID C. GASMIRE Executive Vice President, December 8, 2000
----------------------------------------------------- Chief Operating Officer
David C. Gasmire and Assistant Secretary

/s/ DOUGLAS B. CANNON Vice President, Chief December 8, 2000
----------------------------------------------------- Financial Officer,
Douglas B. Cannon Secretary and Treasurer
(Principal Financial and
Accounting Officer)

/s/ DAVID W. CROSS Director December 8, 2000
-----------------------------------------------------
David W. Cross

/s/ ALEXANDER MCGRATH Director December 8, 2000
-----------------------------------------------------
Alexander McGrath
</TABLE>

II-7
<PAGE> 119

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARTIN S. RASH Director December 8, 2000
-----------------------------------------------------
Martin S. Rash

/s/ DAVID L. STEFFY Director December 8, 2000
-----------------------------------------------------
David L. Steffy

/s/ MARK A. WAN Director December 8, 2000
-----------------------------------------------------
Mark A. Wan
</TABLE>

II-8
<PAGE> 120

EXHIBIT INDEX

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

* Filed herewith
+ To be filed by amendment