BIRMAN MANAGED CARE INC, SB-2/A, 1997-02-03

BIRMAN MANAGED CARE INC
SB-2/A, 1997-02-03
MANAGEMENT CONSULTING SERVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1997

REGISTRATION NO. 333-11957
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 3

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BIRMAN MANAGED CARE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

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<S> <C> <C>
DELAWARE 6749 62-1584092
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION CODE IDENTIFICATION NO.)
NUMBER)
</TABLE>

502 GOULD DRIVE
COOKEVILLE, TENNESSEE 38506
(615) 432-6532
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)

DAVID N. BIRMAN, M.D.
PRESIDENT AND CEO
502 GOULD DRIVE
COOKEVILLE, TENNESSEE 38506
(615) 432-6532; (615) 432-6536 (TELECOPIER)
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
JOHN H. HEUBERGER, ESQ. ROBERT S. KANT, ESQ.
PETER B. ROSS, ESQ. JERE M. FRIEDMAN, ESQ.
RUDNICK & WOLFE O'CONNOR, CAVANAGH, ANDERSON, KILLINGSWORTH & BESHEARS, P.A.
203 NORTH LASALLE STREET, SUITE 1800 ONE EAST CAMELBACK ROAD, SUITE 1100
CHICAGO, ILLINOIS 60601 PHOENIX, ARIZONA 85012
(312) 368-4014 (602) 263-2400
(312) 984-2299 (TELECOPIER) (602) 263-2900 (TELECOPIER)
</TABLE>

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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the registration statement is declared effective.

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 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. [ ]

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

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

SUBJECT TO COMPLETION, DATED FEBRUARY 3, 1997

PROSPECTUS

[BIRMAN LOGO]

2,000,000 SHARES OF COMMON STOCK

All of the 2,000,000 shares of common stock (the "Common Stock") offered
hereby are being sold by Birman Managed Care, Inc. (the "Company"). Prior to
this offering, there has been no public market for the Common Stock and there
can be no assurance that such market will develop. It is currently anticipated
that the initial public offering price of the Common Stock will be $5.00 per
share. Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol "BMAN." See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.

THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND
"DILUTION."

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

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UNDERWRITING DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
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Per Share............... $ $ $
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Total(3)................ $ $ $
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</TABLE>

(1) Excludes (i) a non-accountable expense allowance to Royce Investment Group,
Inc., the representative of the Underwriters (the "Representative") and
Continental Broker-Dealer Corp. (together with the Representative, the
"Underwriters") equal to 3% of the total Price to Public, or $ per share
(an aggregate of $ , or $ if the over-allotment option is
exercised in full); (ii) a consulting fee equal to 1.5% of the total Price
to Public, or $ per share (an aggregate of $ , or $ if
the over-allotment option is exercised in full) to be paid to the
Representative; and (iii) warrants to purchase 200,000 shares of Common
Stock (the "Representative's Warrants") to be issued to the Representative.
The Company also has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."

(2) Before deducting expenses of the offering payable by the Company estimated
at $ , including the non-accountable expense allowance.

(3) Certain stockholders of the Company have granted the Underwriters a 45-day
option to purchase up to 300,000 additional shares of Common Stock at the
initial public offering price, solely to cover over-allotments, if any. The
Company will not receive any proceeds from the sale of any shares of Common
Stock pursuant to the over-allotment option. If this option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $ , $ , and $ ,
respectively and the total proceeds to the selling stockholders would be
$ . See "Principal Stockholders" and "Underwriting."

The shares of Common Stock are being offered by the Underwriters subject to
prior sale when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders, in whole or in part, and subject to
certain other conditions. It is expected that delivery of the certificates
representing the shares will be made against payment therefor at the offices of
Royce Investment Group, Inc., 199 Crossways Park Drive, Woodbury, New York 11799
on or about February , 1997.

ROYCE INVESTMENT GROUP, INC. CONTINENTAL BROKER-DEALER CORP.

The date of this Prospectus is , 1997
<PAGE> 3

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

The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, and quarterly
reports for the first three fiscal quarters of each year containing unaudited
summary consolidated financial information.
<PAGE> 4

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus assumes that (i) neither the
over-allotment option granted to the Underwriters nor the Representative's
Warrants will be exercised, and (ii) no other currently outstanding warrants or
options will be exercised.

THE COMPANY

The Company is a health care consulting and management company dedicated to
improving the quality, controlling the cost, and enhancing the efficiency of the
management and delivery of health care services by focusing on the physician as
the most important factor in the health care system. In pursuing these goals,
the Company currently provides its proprietary "Quality Management Program" to
hospitals to educate their medical staffs on patient management. As an expansion
of its business, the Company is developing and will operate various managed care
health programs ("health plans") in association with physician networks,
hospitals, and other health care providers based upon its belief that it can
apply its Quality Management Program experience to improve the management and
delivery of health care services in managed care systems. As part of its health
plan business, the Company will organize physicians into independent practice
associations, or networks, that will provide services to the Company's health
plans as well as independent health plans. In addition, the Company intends to
provide management services to its health plans as well as to independent health
plans. The Company concentrates its efforts on rural communities, particularly
in the south-central, southeast, and central United States, with an initial
focus for its health plans on Mississippi and Tennessee, where the development
of managed care programs has lagged behind other areas of the country.

Under its Quality Management Program, physicians employed by the Company
consult directly with attending physicians at hospitals regarding their overall
patient management program, as systematized in the medical record. The Quality
Management Program is designed to (i) improve patient care by encouraging the
use of the Company's proprietary methodology to assist physicians in the
identification of symptoms and conditions, to determine appropriate treatment,
and to prioritize the goals and objectives of the treatment plan, (ii) reduce
the cost to its hospital-clients of patient care as a result of the early
intervention in identified health problems, and (iii) more accurately describe
in the medical record the severity and complexity of the patient's illness and
the resources utilized to treat the patient. The benefits of the Quality
Management Program typically result in increased Medicare reimbursements for the
Company's hospital-clients.

The Company's strategy is to be an important provider of health care
consulting services and health plans. Key aspects of this strategy include (a)
concentrating the Company's Quality Management Program and health plan
operations in predominately rural areas in order to take advantage of the lack
of market penetration, the relative lack of competition, and the local
reputation and relationships it has developed; (b) focusing on the role of the
physician as the most important factor in the delivery of health care services
through co-ownership of the Company's health plans with physicians who provide
services to those health plans and through local physician participation in
developing and implementing treatment standards for their communities; (c)
increasing the number of clients for its Quality Management Program by offering
new services and expanding its marketing efforts in its existing market area and
by introducing its services into new market areas; and (d) applying the
experience it has gained through its Quality Management Program to the
development and operation of health plans.

3
<PAGE> 5

THE OFFERING

Common Stock offered by the
Company............................. 2,000,000 shares

Common Stock outstanding prior to
this offering....................... 6,931,082(1)

Common Stock to be outstanding after
this offering....................... 8,754,082 shares(1)(2)

Use of proceeds..................... The Company intends to apply the net
proceeds of this offering to develop,
establish, and expand its health plans
($2,500,000); establish reserves in
furtherance of its health plans
($3,000,000); complete an acquisition
($1,000,000); expand its Quality
Management Program ($500,000); and
provide working capital for general
corporate purposes ($1,190,000). See
"Use of Proceeds."(3)

Proposed Nasdaq National Market
Symbol.............................. BMAN

Risk Factors and Dilution........... A purchase of shares of Common Stock
involves a high degree of risk and
immediate and substantial dilution to
the purchasers in this offering. See
"Risk Factors" and "Dilution."
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(1) Does not include (a) 1,018,566 shares of Common Stock reserved for issuance
upon the exercise of outstanding stock options, or (b) 57,805 shares of
Common Stock reserved for issuance upon the exercise of outstanding
warrants. The outstanding stock options vest over a three-year period. The
outstanding options and warrants first become exercisable in January 1997.
See "Management -- Stock Option Plans" and "Description of
Securities -- Warrants."

(2) Upon completion of this offering, David M. Birman, M.D., Chairman of the
Board, President, and Chief Executive Officer of the Company, will tender to
the Company approximately 177,000 shares of Common Stock as payment in full
of his note payable to the Company of $775,000, plus accrued interest. See
"Certain Transactions." In connection with this offering, Dr. Birman also
has deposited 1,000,000 shares of Common Stock into escrow (the "Escrow
Shares"). The Escrow Shares are included in the number of shares of Common
Stock to be outstanding after this offering. The Escrow Shares are subject
to cancellation and will be contributed to the capital of the Company if the
Company does not attain certain earnings levels. If such earnings levels are
met, the Company will record a substantial non-cash charge to operations,
for financial reporting purposes, as compensation expense relating to the
value of the Escrow Shares released to Dr. Birman. See "Risk
Factors -- Charge to Earnings in the Event of Release of Escrow Shares" and
"Principal Stockholders -- Escrow Shares."

(3) At an assumed offering price of $5.00 per share of Common Stock, the net
proceeds to the Company from this offering are expected to be approximately
$8.2 million. The Company will not receive any proceeds from the sale of any
shares of Common Stock sold pursuant to the exercise of the Underwriters'
over-allotment option. See "Principal Stockholders" and "Underwriting."
---------------------

Unless the context otherwise requires, the term "Company" refers to Birman
Managed Care, Inc., a Delaware corporation, and its subsidiaries, including
Birman & Associates, Inc., BMC Health Plans, Inc., and Hughes & Associates, Inc.
The address of the Company is 502 Gould Drive, Cookeville, Tennessee 38506, and
its telephone number is (615) 432-6532. Except as otherwise indicated, the
information in this Prospectus has been adjusted to give effect to the change of
the state of incorporation of the Company from Tennessee to Delaware on
September 9, 1996 by means of a merger in which the shareholders of the
predecessor Tennessee corporation received 72.939 shares of the Company's Common
Stock for each 100 shares of common stock of the Tennessee corporation then
outstanding.

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SUMMARY FINANCIAL DATA

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<CAPTION>
HISTORICAL HISTORICAL
---------------------- PRO FORMA(3) ------------------------- PRO FORMA(3)
------------- -------------
FISCAL YEAR ENDED 12 MONTHS THREE MONTHS ENDED THREE MONTHS
JUNE 30, ENDED SEPTEMBER 30, ENDED
---------------------- JUNE 30, ------------------------- SEPTEMBER 30,
1995 1996 1996 1995 1996 1996
--------- --------- ------------- ----------- ----------- -------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS:
Revenue........................ $ 4,818 $ 8,417 $ 8,417 $ 1,417 $ 2,372 $ 2,372
Costs and expenses:
Cost of revenue.............. 2,381 2,279 2,279 431 889 889
Selling, general and
administrative............. 3,114 4,237 4,309 926 1,169 1,182
--------- --------- --------- --------- --------- ---------
Income (loss) from
operations................. (677) 1,901 1,829 60 314 301
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations................... (483) 1,172 1,130 35 241 244
--------- --------- --------- --------- --------- ---------
Net income (loss).............. $ (699) $ 1,172 $ 1,130 $ 35 $ 241 $ 244
========= ========= ========= ========= ========= =========
Net income (loss) per share:(2)
-- primary................... $ (.10) $ .17 $ .13 $ .01 $ .04 $ .03
========= ========= ========= ========= ========= =========
-- fully diluted............. $ (.10) $ .15 $ .12 $ .00 $ .03 $ .03
========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding:
-- primary................... 6,703,517 6,703,517 8,526,517 6,703,517 6,703,517 8,526,517
========= ========= ========= ========= ========= =========
-- fully diluted............. 6,703,517 7,703,517 9,526,517 7,703,517 7,703,517 9,526,517
========= ========= ========= ========= ========= =========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
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PRO FORMA,
ACTUAL PRO FORMA(1) AS ADJUSTED(3)
---------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $1,762,684 $ 866,771 $ 9,532,731
Total assets.............................................. $4,341,661 $5,388,490 $ 12,803,490
Total liabilities......................................... $ 911,491 $1,958,320 $ 1,958,320
Stockholders' equity...................................... $3,430,170 $3,430,170 $ 10,845,170
</TABLE>

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(1) Gives effect on a pro forma basis to the recent acquisition of the capital
stock of Canton Management Group, Inc. ("Canton"). See "The Company." The
pro forma combined statement of operations data and consolidated balance
sheet data for the year ended June 30, 1996, and the three month period
ended September 30, 1996 do not purport to represent what the Company's
results of operations or consolidated balance sheet data would have been if
such acquisition had been consummated on the first day of the respective
periods. See "Unaudited Pro Forma Financial Information."

(2) Earnings per share is based on the average number of shares of Common Stock
and Common Stock equivalents outstanding during the year. Shares of Common
Stock to be placed in escrow upon completion of this offering, which are
Common Stock equivalents, have been included in the calculation of fully
diluted earnings per share. Shares of Common Stock issued at amounts
substantially below the initial public offering price within the one-year
period prior to the initial filing of the registration statement relating to
this offering are considered outstanding for all periods presented. The pro
forma average number of shares of Common Stock and Common Stock equivalents
outstanding include the shares issuable upon the completion of this
offering, less 177,000 shares tendered by Dr. Birman in payment of a note
payable to the Company of $775,000, plus accrued interest. See "Principal
Stockholders -- Escrow Shares," "Certain Transactions" and Note 16 of the
Notes to Consolidated Financial Statements.

(3) Gives effect on a pro forma, as adjusted basis to (a) the recent acquisition
of Canton, and (b) the sale by the Company of the Common Stock offered
hereby at an assumed initial public offering price of $5.00 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."

5
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RISK FACTORS

The purchase of shares of Common Stock involves a high degree of risk. In
addition to the other information contained in this Prospectus, prospective
purchasers should consider carefully the factors listed below in evaluating a
purchase of shares of Common Stock.

EXPANSION INTO NEW BUSINESS

Since it began its business in 1991, the Company has derived substantially
all of its revenue from its Quality Management Program activities. The Company's
health plan business is in the start-up stage. There can be no assurance that
the Company will be successful in introducing its health plans or that the
health plans will achieve or maintain profitability in the future. Thus,
historic operating results may not be indicative of future operating results.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Growth Strategy."

GROWTH STRATEGY AND LIMITATIONS ON GROWTH

The Company's growth strategy involves the development and operation of
health plans, primarily in rural communities. The success of these health plans
will depend upon the Company's ability to obtain and maintain necessary state
licenses, organize physician networks, secure employers as subscribers to the
health plans, secure Medicare and Medicaid contracts for its health plans,
secure adequate numbers of enrollees to make its health plans economically
viable, and manage the health plans. Identifying and recruiting candidates to be
participating providers and obtaining the necessary licenses to offer and
operate health plans can be a lengthy, complex, and costly process. Although the
Company believes that its reputation and relationships with hospitals and
physicians in market areas in which it intends to establish health plans will
enable it to organize physician networks and enlist other providers for its
health plans, there can be no assurance that the Company will be able to do so,
that the Company will be able to obtain necessary licenses, or that the Company
will be able to operate profitably any health plan.

The Company has recently experienced rapid growth in its Quality Management
Program business. The continued rapid growth of that business may impair the
Company's ability to provide effectively its consulting services, particularly
if the Company is unable to recruit and train an adequate number of qualified
physicians and allied health specialists and adequately manage and supervise its
staff of physicians and allied health specialists. In addition, there can be no
assurance that the Company will manage its expanding operations effectively or
that it will be able to achieve its planned growth. See "Business -- Growth
Strategy."

POTENTIAL FLUCTUATION IN OPERATIONS AND OPERATING RESULTS

The Company's operating results could vary from period to period as a
result of seasonality in discharges of Medicare patients by Quality Management
Program hospital-clients, fluctuations in severity of illness, changes in the
Medicare prospective payment system, the expiration of contracts to provide
Quality Management Program services coupled with a failure to replace such
contracts with comparable engagements, underperforming contract engagements, and
changes in governmental regulations. The Company's operating results will also
vary from period to period as a result of the development, marketing, start-up,
and management of its health plan business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

RISK OF MEDICARE AUDITS ON QUALITY MANAGEMENT PROGRAM BUSINESS

Hospitals and physicians providing services under Medicare are subject to
regulatory responsibilities imposed by the Health Care Financing Administration
("HCFA"). Peer Review Organizations ("PROs") engaged by HCFA in each state
routinely review and audit reimbursement requests, including patient admissions,
quality of care, and appropriateness of diagnostic-related group ("DRG")
selections, among other things. The depth of review varies from hospital to
hospital. There is always a risk that PRO attention may focus with increased
scrutiny on reimbursement requests submitted by hospital-clients of the Company
that achieve increased reimbursements as a result of the Quality Management
Program. In addition, HCFA

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investigates allegations of fraud and abuse of Medicare and Medicaid and has
instituted a multi-state program called "Operation Restore Trust" to punish
persons engaged in fraud and abuse of Medicare and Medicaid, recover funds,
identify areas of vulnerability, and prevent fraud. Among the areas of
investigatory interest to HCFA are billing code fraud, billing schemes,
contingent fees, and kickbacks involving providers. Historically, the Quality
Management Program has not been the cause of a focused review or audit by a PRO
or a formal investigation by HCFA. However, there can be no assurance that
focused reviews, audits, or investigations will not occur in the future. A
denial of reimbursement requests submitted by a hospital-client as a result of
the implementation of the Quality Management Program may result in the Company
being required to reimburse all or a portion of its fees to the hospital-client,
could result in one or more hospital-clients seeking to withdraw from their
contracts, and could result in a formal investigation by HCFA. Such events could
have a material adverse effect on the Company.

PRINCIPAL CLIENTS

The Company has provided Quality Management Program services to various
hospitals operated by Quorum Health Care, Inc. ("Quorum") since 1991. Services
to hospitals operated by Quorum produced approximately 42% of the Company's
Quality Management Program revenue in fiscal 1996 and approximately 25% of the
Company's revenue for the first quarter of fiscal 1997. Historically, the
on-site management of each Quorum hospital has made its own decision regarding
the engagement of the Company, and the Company has entered into a separate
contract with each engaging Quorum facility. The Company is endeavoring to
expand its Quality Management Program client base to reduce its dependence on
Quorum hospitals.

NEED TO PREDICT AND CONTROL HEALTH CARE COSTS

The profitability of the Company's health plans will depend in large part
upon the ability of the Company to predict health care costs accurately and to
control those costs through the negotiation of favorable provider contracts and
the imposition of utilization management, case management, and quality assurance
programs. The demographic characteristics in the rural communities to be served
by the Company's health plans may contribute to health care costs that exceed
Company projections or increase more rapidly than anticipated. In this regard,
persons in the rural communities to be served by the Company's health plans may,
among other things, be older and have lower incomes than persons in other areas
of the country. Changes in health care practices, inflation, new technologies,
major epidemics, diseases and catastrophes, clusters of high-cost cases, and
numerous other factors affecting the delivery and costs of health care cannot be
predicted or controlled and may adversely affect the Company's ability to
predict and control health care costs and claims. In addition, there can be no
assurance that provider agreements negotiated in the future will not result in
substantially higher costs to the Company that cannot be passed through to
payors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

In addition to the challenge of controlling health care costs, the Company
will face pressure from payors under employer-sponsored and government-sponsored
programs to contain premium costs by renegotiation. Fiscal concerns regarding
the continued viability of programs such as Medicare and Medicaid may cause
decreasing reimbursement rates for government-sponsored programs. The Company's
financial condition or results of operations could be adversely affected by any
limitation on the Company's ability to increase or maintain its premium levels.

RISK OF LIMITED HEALTH PLANS

The Company intends to offer prospective payors three health plan
alternatives: a health maintenance organization ("HMO"), a preferred provider
organization ("PPO"), and a point-of-service option. Initially, it will offer
only HMOs to commercial and perhaps Medicaid enrollees. Because PPOs and the
point-of-service option require the additional component of indemnity insurance,
the availability of the PPOs and point-of-service option will require separate
licensure of an insurance company and agent and is not expected to be available
to payors and/or enrollees for at least six months following the launch of each
HMO plan. National Benefits Resources, Inc. ("NBR"), a managing general
underwriter of indemnity insurance products and a stockholder in the Company, is
assisting the Company in arranging the necessary insurance licenses. However,

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<PAGE> 9

there can be no assurance that the Company will be able to offer a PPO or a
point-of-service option at the time or times that it desires to do so or that
any of the Company's health plans that are launched will be successful in
offering its intended spectrum of plans.

HEALTH CARE REFORM

As a result of the escalation of health care costs and the inability of
many individuals and employers to obtain affordable health insurance, numerous
health care reform proposals have been, and may continue to be, introduced in
the United States Congress and state legislatures. Among the proposals under
consideration are price controls on hospitals, insurance market reforms to
increase the availability of group health insurance to small businesses,
requirements that all businesses offer health care coverage to their employees,
the creation of a government health insurance plan or plans that would cover all
citizens, mandated health plan benefits, mandated provider payment arrangements,
and other proposals involving various aspects of health plan operations. There
can be no assurance which, if any, of these proposals will be adopted or the
effect on the Company of any such proposals that are adopted. See
"Business -- Government Regulation."

GOVERNMENT REGULATION

The Company, its Quality Management Program hospital-clients, the health
plans to be organized by the Company, and health insurance companies are subject
to substantial regulation at both the federal and state levels. The Company is
subject to a number of laws governing issues as diverse as relationships between
health care providers and their referral sources, prohibitions against providers
referring patients to an entity with which the provider has a financial
relationship, licensure and other regulatory approvals, the corporate practice
of medicine, and regulation of unprofessional conduct by providers, including
fee-splitting arrangements. Although the Company believes that its current
operations comply, and its proposed operations will comply, with relevant
federal and state laws, many aspects of the relationships between the Company
and its hospital-clients and the Company's health plans have not been the
subject of judicial or administrative interpretation. An adverse review or
determination by any court or applicable administrative agency or changes in the
regulatory requirements could have a material adverse effect on the operations
and financial condition of the Company.

Regulatory matters affecting HMOs and health insurance companies in
particular include regulations relating to cash reserves, minimum net worth,
licensing requirements, approval of policy language and benefits, mandatory
products and benefits, provider compensation arrangements, premium rates, and
periodic examinations by federal and state agencies. The Company will be subject
to state insurance laws if and to the extent it assumes the risk for the
provision of health services. In addition, the Company is subject to federal and
state antitrust laws, which prohibit the Company from engaging in
anticompetitive activities, such as monopolization and price fixing. State
regulations may also restrict the ability of Company HMOs to distribute funds to
the Company. Changes also could be made in Medicare and Medicaid reimbursement
rates. Many states have adopted, or are considering, regulations relating to
mandatory benefits, provider compensation, "any willing provider" provisions,
and the composition of physician networks. Changes in federal and state laws
could increase health care costs and administrative expenses. There can be no
assurance that any future regulatory action by governmental agencies will not
have an adverse impact on the profitability or marketability of the Company's
health plans in their respective jurisdictions. See "Business -- Government
Regulation."

DEPENDENCE UPON REIMBURSEMENT BY THIRD-PARTY PAYORS

Clients for the Company's Quality Management Program derive, and the
Company through its health plans will derive, substantial revenue from
third-party payors. The health care industry is undergoing cost-containment
pressures as third-party payors seek to impose lower reimbursement and
utilization rates and to negotiate reduced rate payments with medical service
providers. The Company believes that this trend will continue. Reductions in
payments to hospitals or other changes in reimbursements for health care
services could have a direct or indirect material adverse effect on the Company.

8
<PAGE> 10

SUBSTANTIAL COMPETITION

The Company's Quality Management Program competes for hospitals as clients
in the revenue optimization sector of the health care consulting business. The
Company's health plans will compete in the managed care and insurance sectors of
the health care industry. Both sectors are highly competitive. Within each
sector, there are a large number of competitors, many of which have
substantially greater financial, technical, marketing, and management resources
than the Company. Although the Company believes the acceptance of its Quality
Management Program and its familiarity with and reputation in rural areas will
enable it to compete successfully, there can be no assurance that the Company
will be able to compete effectively against existing competitors or that
additional competitors will not enter the rural markets the Company plans to
serve. See "Business -- Competition."

RISKS ASSOCIATED WITH HEALTH PLAN CONTRACTS; CAPITATED FEE REVENUE

The Company's success will depend, in part, upon its ability to develop and
market its point-of-service options that offer enrollees the right to select
providers at the time services are sought from the HMO or the PPO or from
outside the system. The Company will offer its HMOs to payors on a prepaid
basis, pursuant to which the HMO will accept a capitated or prepaid per member
per month fee for providing all necessary covered services to a payor's
enrollees. Initially the Company will pay its providers in Mississippi on a
discounted fee-for-services basis. At such time that the HMO is fully
implemented in Mississippi, per member per month capitated fees will then be
paid by the HMO to the participating providers. HMO contracts shift much of the
financial risk of providing health care from the payor to the provider. The
proliferation of HMO elections by enrollees could result in greater
predictability of Company revenue and related expenses, while increased
elections for PPO and point of service options by enrollees could result in
greater unpredictability of expenses if enrollees that do not select the HMO
option require more frequent or extensive care than anticipated. As a result,
the Company may incur additional costs that would reduce or eliminate any
earnings under its contracts. The Company intends to reinsure catastrophic and
excess risks. There can be no assurance that the Company will be able to
negotiate satisfactory contracts with payors or with health care providers or
obtain or maintain catastrophic reinsurance.

PROVIDER RELATIONS

The Company will contract with physicians, hospitals, and other providers
in order to manage health care costs and utilization and monitor the quality of
care being delivered by its health plans. In some geographic markets, certain
providers, particularly hospitals and multi-specialty physician groups, may have
significant market positions or even monopolies that could make it difficult for
the Company's health plans to negotiate favorable contracts with those
providers. In addition, many of these providers may compete directly with the
Company's health plans. If such providers refuse to contract with the Company's
health plans or utilize their market position to negotiate contracts that are
not favorable to the Company's health plans or that place the Company's health
plans at a competitive disadvantage, the Company's ability to market health
plans that will be profitable in those geographic areas could be adversely
affected. Initially, the Company will rely upon its arrangements with MedSouth
and other providers to service its Mississippi health plan. Because certain
physicians in MedSouth will own equity interests in the MSO and Care3, Inc., the
Company currently believes it has a limited exposure to such provider relations
issues in that geographic region. In any particular market, however, providers
could refuse to contract with the Company, demand higher payments or take other
actions that could result in higher health care costs, less desirable products
for customers or enrollees, or difficulty meeting regulatory or accreditation
requirements.

LIABILITY AND INSURANCE

The physicians and allied health specialists employed by the Company in its
Quality Management Program do not treat patients, make any treatment or
diagnostic decisions, or provide any medical services. Although the Company
believes that the Quality Management Program activities of its physicians do not
constitute the practice of medicine or establish physician-patient relationships
for which the Company could incur liability, the Company may be exposed to the
risk that professional liability claims could be brought against the Company by
third parties.

9
<PAGE> 11

In its health plan business, the Company will provide only non-medical
services. It will not control or direct the practice of medicine by the
physicians or the compliance with certain regulatory and other requirements
directly applicable to physicians or physician groups. However, Company-managed
networks may become subject to claims, suits, or complaints relating to services
and products provided by the physicians in the network, and there can be no
assurance that such claims will not be asserted against the Company.

Although the Company maintains, and expects to continue to maintain,
insurance coverage for professional liability claims, such insurance, by its
nature, is limited in the scope of coverage and amount. Each of the Company's
health plans will maintain, and the Company will require each physician
participating in the Company's health plans to maintain, comprehensive
professional liability insurance. There can be no assurance that any claims
asserted against the Company will not be successful or, if successful, will not
exceed the limits of any insurance coverage maintained by or for the benefit of
the Company. Furthermore, there can be no assurance that insurance coverage will
continue to be available at acceptable rates. See "Business -- Potential
Liability and Insurance."

New forms of health care organizations have increasingly been subject to
liability for reasons such as failing to credential providers properly or
contributing to physician malpractice. In response, many health care
organizations obtain general liability, managed care, and professional liability
insurance coverage. In addition, medical directors have also faced professional
liability claims and state licensure challenges. The Health Care Quality
Improvement Act of 1986, however, provides immunity from damages for
professional review actions taken by professional review bodies, including
health plans, in good faith, provided that certain procedural standards are met.
The Company intends to comply with such procedures in its professional review
actions. However, no assurance can be given that the Company will satisfy the
indemnity requirements or that any insurance coverage the Company obtains will
be adequate to protect against all claims that may be asserted against the
Company.

Like HMOs and health insurers generally, the Company intends to exclude
certain health care services from coverage under its health plans. In the
ordinary course of its health plan business, the Company will be subject to
claims by its enrollees arising out of decisions made by its health plans to
restrict treatment or to restrict reimbursements for certain services. The loss
of any such claim, resulting in a significant punitive or other damage award or
a directive that the Company significantly change its operations, could have a
material adverse effect on the Company. In addition, the risk of potential
liability under punitive damage theories may increase significantly the
difficulty of obtaining reasonable settlements of coverage claims. There can be
no assurance that successful claims of enrollees will not have a material
adverse effect on the Company.

DEPENDENCE ON KEY PERSONNEL

The Company depends to a significant extent on the efforts and skills of
its key personnel, particularly David N. Birman, M.D. and D. Bradley Seitzinger,
M.D., with respect to its Quality Management Program business and Vincent W.
Wong and Mark C. Wade with respect to its health plan business. The Company has
entered into employment agreements with all four of these key employees. The
loss, incapacity, or unavailability of any of these individuals could adversely
affect the Company's operations. In addition, it may be necessary for the
Company to attract and retain additional individuals to support the growth of
its business or to replace key personnel in the event of the termination of
their employment with the Company. The Company intends to acquire a $1,000,000
key man insurance policy on the life of Dr. Birman. See
"Management -- Employment Agreements."

FUTURE CAPITAL NEEDS

Implementing the Company's growth strategy will require substantial
additional capital for the development of its health plans and for the marketing
and expansion of its Quality Management Program. In particular, development of
additional health plans will require significant capital for organization,
licensure, marketing and meeting capital reserve requirements imposed by various
states. To date, the Company has financed its growth primarily through operating
income, a bank term loan, and the proceeds of private offerings of shares of
Common Stock, the most recent offering being completed in June 1996. The

10
<PAGE> 12

Company believes that its existing cash resources, together with the net
proceeds from this offering, cash flow from operations, and available lines of
credit will be sufficient to meet the Company's working capital and expansion
needs for at least the next 12 months.

Since the rate of expansion of the Company's business will depend on the
availability of capital, the Company may be required to raise additional capital
in the future. The Company may obtain such capital through additional borrowings
or the issuance of additional equity or debt securities, either of which could
have an adverse effect on the value of the shares of Common Stock offered by
this Prospectus. There can be no assurance that the Company will be able to
secure such financing, if necessary, on favorable terms. If the Company is
unable to secure additional financing in the future, its ability to pursue its
growth strategy and meet capital reserve requirements imposed upon HMOs may be
delayed, perhaps indefinitely, and its results of operations for future periods
could be adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

VOTING CONTROL

Upon completion of this offering, David N. Birman, M.D., the Chairman of
the Board, President, and Chief Executive Officer of the Company, will have sole
beneficial ownership, together with his wife, Sue D. Birman, Executive Vice
President and a director of the Company, of approximately 56.02% (including the
Escrow Shares and assuming the tender of approximately 177,000 shares of Common
Stock by Dr. Birman in repayment of outstanding indebtedness to the Company) of
the outstanding shares of the Common Stock of the Company (approximately 53.25%
if the over-allotment option granted to the Underwriters is exercised).
Consequently, absent a further issuance of shares of Common Stock, Dr. Birman
will continue to be able to control the election of the Board of Directors of
the Company and thereby determine the Company's policies and the outcome of
corporate actions requiring stockholder approval.

CHARGE TO EARNINGS IN THE EVENT OF RELEASE OF ESCROW SHARES

Following completion of this offering, the Company will have outstanding
1,000,000 Escrow Shares. The Escrow Shares will be released from escrow if the
Company attains certain earnings levels over the next one to three years. The
Escrow Shares will not be deemed to be outstanding for the purpose of
calculating primary earnings per share until the Company determines that it is
probable that such conditions will be met. In the event that the Company
releases any shares from escrow to Dr. Birman, an officer and director of the
Company, the Company will be required to record a non-cash compensation expense
for financial reporting purposes. In the event of the release of the Escrow
Shares, the Company will recognize a substantial non-cash charge to operations,
equal to the then fair value of such shares, during the period in which the
earnings thresholds are probable of being met, which would have the effect of
significantly reducing or eliminating earnings, if any, at such time. In
addition, the non-cash compensation expense will not be deductible for income
tax purposes. The recognition of such compensation expense may have a depressive
effect on the market price of the Company's securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Principal Stockholders -- Escrow Shares." There can be no assurance that the
Company's earnings will attain the targets that would enable the Company to
release the Escrow Shares.

ABSENCE OF DIVIDENDS

The Company has paid no cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. Any future dividends will depend on the earnings, if
any, of the Company, its financial requirements, and other factors. See
"Dividend Policy."

IMMEDIATE AND SUBSTANTIAL DILUTION

The purchasers of Common Stock offered hereby will experience immediate and
substantial dilution of the pro forma net tangible book value of the shares of
Common Stock in the amount of $3.77 per share, assuming an initial public
offering price of $5.00 per share of Common Stock. In the event that the
Representative's Warrants or other warrants or options to purchase Common Stock
are exercised, or in the

11
<PAGE> 13

event that the Company issues additional shares of Common Stock in the future,
including shares that may be issued in connection with future acquisitions,
purchasers of Common Stock in this offering may experience further dilution in
the pro forma net tangible book value per share of Common Stock. See "Dilution."

NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF MARKET PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market will develop
or continue after this offering. If an active public market for the Common Stock
does not develop or is not sustained, it will be more difficult for an investor
desiring to liquidate his, her or its investment in the Common Stock to do so in
an orderly fashion and could result in a decline in the market price for the
Common Stock, perhaps below the price paid by the investor for such Common
Stock. The initial public offering price of the Common Stock offered hereby was
determined by negotiations between the Company and the Representative and may
not be indicative of the market price for the Common Stock after this offering.
See "Underwriting" for factors considered in determining the initial public
offering price. From time-to-time after this offering, there may be significant
volatility in the market price for the Common Stock. Quarterly operating results
of the Company, the timing of the launch of health plans, changes in general
conditions in the economy or the health care industry, legislative and
regulatory actions, or other developments affecting the Company or its
competitors could cause the market price of the Common Stock to fluctuate
substantially. On occasion, the equity markets have experienced significant
price and volume fluctuations that have affected the market prices for many
companies' securities, at times for reasons unrelated to the operating
performance of those companies. Concern about the potential effects of health
care reform measures has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of the Common Stock following this offering. Any such fluctuations that
occur following this offering may adversely affect the market price of the
Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

The sale of a substantial number of shares of Common Stock after this
offering, or the perception that such a sale could occur, could adversely affect
prevailing market prices for the Common Stock. In addition, any such sales or
perception of such sales could make it more difficult for the Company to sell
equity securities or equity-related securities in the future at a time and price
that the Company deems appropriate. After giving effect to the sale of the
Common Stock offered hereby and the tender of shares of Common Stock in
repayment of a note payable to the Company, the Company will have 8,754,082
shares of Common Stock outstanding, including the 2,000,000 shares offered
hereby and the Escrow Shares. The 2,000,000 shares offered hereby will be freely
tradeable without restriction or registration under the Securities Act of 1933,
as amended (the "Securities Act"). The remaining 6,754,082 shares are
"restricted securities" within the meaning of Rule 144 ("Rule 144") adopted
under the Securities Act. The restricted shares may be sold in the future in
compliance with Rule 144. Rule 144 generally provides that beneficial owners of
Common Stock who have held such common stock for two years may sell, within any
three-month period, a number of shares not exceeding the greater of 1% of the
total outstanding shares or the average weekly trading volume of the shares
during the four calendar weeks preceding such sale. The Company has agreed not
to sell any shares of its Common Stock, and its directors and officers have
agreed not to offer, sell, or otherwise dispose of any shares that they
currently own or that they may subsequently acquire upon exercise of options or
warrants for a period of 24 months after the date of this Prospectus, except as
otherwise permitted by the Representative. Substantially all of the Company's
other stockholders have agreed not to sell any shares of Common Stock that they
currently own or that they may subsequently acquire upon exercise of options or
warrants for a period of 22 months after the date of this Prospectus. The
Representative may consider permitting a sale of shares subject to so-called
"lock-up" agreements in private transactions, if the Representative reasonably
determines that the sale of such shares would not result in a material adverse
effect to the value of the securities.

The Securities and Exchange Commission (the "Commission") has proposed
reducing the initial Rule 144 holding period to one year. It is unclear whether
or when such rule change will be enacted. If enacted, such modification will
reduce the time when certain shares of the Common Stock become eligible for
resale, although such shares will continue to be subject to the lock-up
agreements described above.

12
<PAGE> 14

STOCK ISSUABLE PURSUANT TO REPRESENTATIVE'S WARRANTS, OPTIONS, AND OTHER
WARRANTS

The Company has agreed to issue to the Representative the Representative's
Warrants to purchase 200,000 shares of Common Stock. The holders of the
Representative's Warrants will have the right to require the Company to register
the Representative's Warrants or the shares of Common Stock issuable upon
exercise of the Representative's Warrants under the Securities Act. The
Representative's Warrants will be exercisable at a price equal to 120% of the
initial public offering price of the Common Stock during the four-year period
commencing one year after the date of this Prospectus. The Company has also
reserved 1,558,780 shares of Common Stock for issuance under the Company's stock
option plans (the "Stock Option Plans") and 57,805 shares of Common Stock for
issuance under warrants previously issued by the Company. The exercise price of
the previously granted options is $1.37 per share ($5.00 per share for options
granted to non-employee directors) and the weighted average exercise price of
the previously issued warrants is $1.39 per share. With the exception of one
option that is vested as to 20,058 shares, the previously granted options may be
exercised beginning February 1, 1997. The previously issued warrants are
exercisable at any time on or after January 1, 1997 and before December 31,
2001.

The holders of the Representative's Warrants, options granted or that may
be granted under the Company's Stock Option Plans, and outstanding warrants may
profit from a rise in the market price of the Common Stock. The existence of the
Representative's Warrants, options, and warrants may adversely affect the terms
on which the Company may obtain additional equity financing. Moreover, such
holders are likely to exercise their rights at a time when the Company would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise of such warrants and options.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and of the
Delaware General Corporation Law (the "Delaware GCL") could, together or
separately, discourage potential acquisition proposals, delay or prevent a
change in control of the Company, and limit the price that certain investors
might be willing to pay in the future for shares of Common Stock. Certain of
these provisions (i) permit the issuance, without further stockholder approval,
of preferred stock with rights and privileges that could be senior to the Common
Stock, and (ii) require a super-majority vote requirement in connection with the
adoption of certain corporate transactions not unanimously recommended to the
stockholders by the Board of Directors, including merger, sale of assets, and
securities acquisition transactions. Following this offering, the Company will
also be subject to Section 203 of the Delaware GCL which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder. See "Description of Securities." Because any person interested in
acquiring the Company or its business could be obligated to do so in a
transaction negotiated with management of the Company, the prospects of a
disposition of the Company through an auction process are reduced, thereby
reducing the potential that a significant premium over the market value of
shares of Common Stock would occur. However, because the directors of the
Company owe a fiduciary duty to the stockholders, if a decision to sell the
Company is made the directors could have an obligation to maximize the price
paid for the Company or the shares of its Common Stock.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information contained under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" concerning future, proposed, and intended activities
of the Company and the health care industry, and other statements contained
herein regarding matters that are not historical facts are forward-looking
statements (as such term is defined in the Securities Act). Forward-looking
statements, by their very nature, include risks and uncertainties. Accordingly,
actual results may differ, perhaps materially, from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include those discussed under "Risk Factors."

13
<PAGE> 15

THE COMPANY

The Company was incorporated in 1994 in Tennessee under the name BA Forum,
Inc. Its name was changed to Birman Managed Care, Inc. in October 1995. The
Company was reincorporated in Delaware in September 1996. The Company serves as
the holding company for Birman & Associates, Inc. and BMC Health Plans, Inc.
Birman & Associates, Inc. has been engaged in the business of providing the
Quality Management Program since 1991. As of June 30, 1995, Birman & Associates,
Inc. distributed all of the shares of capital stock of Birman Farms, Inc., a
livestock breeding operation, as a dividend to its then sole shareholder, David
N. Birman, M.D. In July 1995, Dr. Birman contributed all of the outstanding
common stock of Birman & Associates, Inc. to the Company. BMC Health Plans, Inc.
was formed in November 1994 to pursue the development of the Company's health
plan business with Dr. Birman as its sole shareholder. In January 1995, Dr.
Birman contributed all of the outstanding common stock of BMC Health Plans, Inc.
to the Company.

In furtherance of its health plan business, in June 1996 the Company
acquired substantially all of the assets of Hughes & Associates, Inc.
("Hughes"), a Jackson, Mississippi-based provider of utilization review services
to insurance companies and health care plans.

On January 15, 1997, the Company acquired substantially all of the issued
and outstanding shares of capital stock of Canton, an inactive holder of a
certificate of authority to operate a HMO in Mississippi. Canton will be renamed
Care3, Inc.. As a result of the issuance of shares of Care3, Inc. to certain of
the founders of Canton, Care3, Inc. currently is a 69% subsidiary of the
Company. The Company may reduce its ownership percentage of Care3, Inc. to 60%
by allowing selected physicians to acquire shares of Care3, Inc. common stock.
The Company anticipates that it will own not less than 60% of Care3, Inc.

Through another newly formed subsidiary, MMMC, Inc., the Company is
embarking into the management services organization ("MSO") business by entering
into an administrative services agreement with a network of private medical
practitioners in the Gulfport, Mississippi area, MedSouth, Inc. ("MedSouth").
The Company anticipates that it will hold a 90% interest in the MSO, with
MedSouth owning the balance of the capital stock.

The Company's executive offices are located at 502 Gould Drive, Cookeville,
Tennessee 38506; its telephone number is (615) 432-6532.

14
<PAGE> 16

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$5.00 per share, are estimated to be approximately $8,190,000, after deducting
estimated offering expenses of approximately $1,010,000 and underwriting
discounts and commissions of $800,000. The Company currently intends to use the
net proceeds of this offering for the following purposes:

<TABLE>
<CAPTION>
ESTIMATED
PURPOSE AMOUNT
------------------------------------------------------------------------- ----------
<S> <C>
HMO restricted cash reserves(1).......................................... $3,000,000
Development and implementation of health plans(2)........................ $2,500,000
Acquisition of Canton(3)................................................. $1,000,000
Expansion of Quality Management Program business(4)...................... $ 500,000
Working capital for general corporate purposes........................... $1,190,000
</TABLE>

- ---------------
(1) This amount represents the estimated sums required to be deposited in
restricted accounts to evidence the Company's solvency under the HMO
licensing regulations of Tennessee, Kentucky, and other states.

(2) This amount includes the estimated cost of developing and implementing a
health plan in Tennessee and the possible development and implementation of
similar plans in Kentucky and approximately two other states.

(3) This amount includes the estimated cost of completing the acquisition of
Canton, the holder of a certificate of authority to operate a HMO in
Mississippi, including the cash portion of the purchase price paid to the
shareholders of Canton and the start-up operation of the health plan in
Mississippi.

(4) This amount includes the estimated costs of developing computer software and
databases to enhance the Quality Management Program; the recruitment,
employment, and training of professional staff members, including
physicians; and Quality Management Program marketing and promotional costs
and expenses to be incurred through July 31, 1997.

Until applied as set forth above, the net proceeds will be invested in
short-term, investment-grade instruments or bank certificates of deposit.
Investment of the net proceeds in short-term securities rather than operations
could adversely affect the Company's overall return on its capital.

The foregoing represents the Company's current intentions with respect to
the allocation of the net proceeds of this offering based upon its present plans
and business conditions. There can be no assurance that unforeseen events or
changes in business conditions or federal or state or government regulations
will not result in the application of the proceeds of this offering in a manner
other than as described in this Prospectus. See "Risk Factors."

The Company will not receive any proceeds from the sale of Common Stock
offered by certain stockholders in connection with any exercise of the
Underwriters' over-allotment option. See "Principal Stockholders." Any funds
received by the Company upon exercise of the Representative's Warrant will be
added to working capital.

DIVIDEND POLICY

To date, the Company has not paid any cash dividends on its Common Stock.
The payment of dividends in the future will be within the discretion of the
Board of Directors and will depend on the Company's earnings, capital
requirements, financial condition, and other relevant factors. The Company does
not intend to declare any cash dividends in the foreseeable future, but instead
intends to retain earnings for use in the Company's business operations. See
"Risk Factors -- Absence of Dividends" and "Description of Securities."

15
<PAGE> 17

DILUTION

The difference between the public offering price per share of Common Stock
and the as adjusted pro forma net tangible book value per share of Common Stock
after this offering and giving effect to the recent acquisition of Canton
constitutes the dilution to investors in this offering. Pro forma net tangible
book value per share is determined by dividing the pro forma net tangible book
value (total pro forma assets less intangible assets and total liabilities) by
the number of outstanding shares of Common Stock (excluding escrow shares).

At September 30, 1996, the pro forma net tangible book value of the Company
was $1,654,845 (unaudited), or $0.28 per share of Common Stock. At September 30,
1996, after giving effect to the sale of the Common Stock offered hereby at an
assumed initial offering price of $5.00 per share (less underwriting discounts
and commissions and estimated expenses of this offering) and the tender of
shares of Common Stock in repayment of a note payable to the Company, the as
adjusted pro forma net tangible book value at that date would be $9,545,805, or
$1.23 per share. This represents an immediate increase in the adjusted pro forma
net tangible book value of $.95 per share to existing stockholders and an
immediate dilution of $3.77 per share to new investors, or approximately 75% of
the assumed offering price of $5.00 per share.

The following table illustrates the per share dilution to new investors
without giving effect to the results of operations of the Company subsequent to
September 30, 1996:

<TABLE>
<S> <C> <C>
Assumed public offering price........................................ $5.00
Pro forma net tangible book value at September 30, 1996............ $ .28
Increase attributable to new investors............................. $ .95
Net tangible book value after offering............................... $1.23
-----
Dilution to new investors............................................ $3.77
=====
</TABLE>

The following table summarizes the number and percentage of shares of
Common Stock purchased from the Company, the amount and percentage of
consideration paid, and the average price per share paid by existing
stockholders and by new investors in this offering.

<TABLE>
<CAPTION>
SHARES PURCHASED
---------------------------------------------------------- TOTAL CONSIDERATION AVERAGE
NON- ESCROW ESCROW SHARES --------------------- PRICE
SHARES SHARES TENDERED NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ----------- --------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Existing
stockholders..... 5,931,082 1,000,000 (177,000) 6,754,082 77.15% $ 2,010,000 16.74% $ .30
Public investors... 2,000,000 -- -- 2,000,000 22.85% $10,000,000 83.26% $5.00
--------- --------- ------- --------- ------ ----------- ------
Total..... 7,931,082 1,000,000 (177,000) 8,754,082 100.00% $12,010,000 100.00%
========= ========= ======= ========= ====== =========== ======
</TABLE>

The above table assumes no exercise of (i) the Underwriters' over-allotment
option, (ii) the Representative's Warrants, (iii) other outstanding warrants to
purchase 57,805 shares of Common Stock at a weighted average exercise price of
$1.39 per share, (iv) options to purchase 1,006,566 shares of Common Stock
granted to key employees at an exercise price of $1.37 per share, and (v)
options to purchase 12,000 shares of Common Stock granted to non-employee
directors at an exercise price of $5.00 per share. See "Risk
Factors -- Immediate and Substantial Dilution," "Management -- Compensation of
Directors," "Management -- Fiscal 1996 Option Grants," "Principal Stockholders,"
"Underwriting," and "Description of Securities." If the Underwriters'
over-allotment is exercised in full, the number of shares of Common Stock held
by existing stockholders will be reduced to 6,454,082 shares, or 73.73% of the
total number of shares to be outstanding after this offering, and the number of
shares of Common Stock held by new investors will be increased to 2,300,000, or
26.27% of the total number of shares of Common Stock to be outstanding after
this offering. See "Principal Stockholders."

16
<PAGE> 18

CAPITALIZATION

The following table sets forth (i) the capitalization of the Company as of
September 30, 1996, (ii) the pro forma capitalization as of September 30, 1996,
giving effect to the recent acquisition of Canton, as if such acquisition had
occurred on such date, and (iii) the pro forma capitalization as of September
30, 1996, as adjusted to give effect to the sale of the Common Stock offered
hereby (at an assumed initial public offering price of $5.00 per share), the
tender of 177,000 shares of Common Stock of Dr. Birman as payment in full of his
$775,000 note payable to the Company, plus accrued interest, and the application
of the net proceeds therefrom as described under "Use of Proceeds," as if all
such events had occurred on September 30, 1996.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
---------- ------------ --------------
<S> <C> <C> <C>
Long-term debt(1)(2)................................ $ 4,404 $ 604,404 $ 604,404
---------- ---------- ----------
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding... 0 0 0
Common Stock, $.001 par value, 25,000,000 shares
authorized; 6,931,082 shares issued and
outstanding actual and 8,754,082 shares issued
and outstanding pro forma as adjusted(3)(4).... 6,931 6,931 8,754
Additional paid-in capital.......................... 1,780,612 1,780,612 9,193,789
Retained earnings................................... 1,642,627 1,642,627 1,642,627
---------- ---------- ----------
Total stockholders' equity................ $3,430,170 $3,430,170 $ 10,845,170
========== ========== ==========
Total capitalization...................... $3,434,574 $4,034,574 $ 11,449,574
========== ========== ==========
</TABLE>

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

(1) The purchase price for Canton was $1,500,000, of which $700,000 was paid in
cash at the closing and $800,000 is payable in four equal annual
installments of $200,000 of principal plus interest at 2% per annum on the
unpaid principal balance commencing on the first anniversary of the
closing.

(2) The Company has a $1,000,000 maximum principal amount working capital
revolving line of credit facility with American National Bank and Trust
Company of Chicago. The facility has an initial maturity date of October
31, 1997. The facility provides for the accrual of interest on the unpaid
balance at an annual rate equal to the lender's prime rate, adjusted daily.
The facility is secured by the accounts receivable of the Quality
Management Program and of Hughes.

(3) Excludes (a) 1,006,566 shares of Common Stock subject to options pursuant to
the Company's 1995 Option Plan at an exercise price of $1.37 per share; (b)
12,000 shares of Common Stock subject to options pursuant to the Company's
1996 Non-Employee Directors' Non-Qualified Stock Option Plan at an exercise
price of $5.00 per share, (c) 57,805 shares of Common Stock issuable upon
exercise of outstanding Common Stock purchase warrants at a weighted
average exercise price of $1.39 per share, and (d) 200,000 shares of Common
Stock subject to the Representative's Warrants. See "Management -- Stock
Option Plans" and "Description of Securities."

(4) Includes 1,000,000 Escrow Shares. See "Principal Stockholders -- Escrow
Shares."

17
<PAGE> 19

SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

The following summary historical financial data have been derived from the
audited consolidated financial statements of the Company. The historical
consolidated statement of operations data set forth below with respect to the
fiscal years ended June 30, 1995 and June 30, 1996 are derived from, and are
qualified by reference to, the audited Consolidated Financial Statements
included elsewhere in this Prospectus and should be read in conjunction with
those financial statements and notes thereto. The selected financial data for
the three months ended September 30, 1995 and 1996 have been derived from
unaudited financial statements that are included elsewhere in this Prospectus.
In the opinion of management of the Company, the unaudited financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the three months ended
September 30, 1996, are not necessarily indicative of the results that may be
expected for the year ending June 30, 1997. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
--------------------- PRO FORMA(3) --------------------------- PRO FORMA(3)
------------- -------------
FISCAL YEAR ENDED 12 MONTHS THREE MONTHS ENDED THREE MONTHS
JUNE 30, ENDED SEPTEMBER 30, ENDED
--------------------- JUNE 30, --------------------------- SEPTEMBER 30,
1995 1996 1996 1995 1996 1996
--------- --------- ------------- ------------ ------------ -------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS:
Revenue.......................... $ 4,818 $ 8,417 $ 8,417 $ 1,417 $ 2,372 $ 2,372
Costs and expenses:
Cost of revenue................ 2,381 2,279 2,279 431 889 889
Selling, general and
administrative............... 3,114 4,237 4,309 926 1,169 1,182
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................... (677) 1,901 1,829 60 314 301
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations..................... (483) 1,172 1,130 35 241 244
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ (699) $ 1,172 $ 1,130 $ 35 $ 241 $ 244
========== ========== ========== ========== ========== ==========
Net income (loss) per share:(2)
-- primary..................... $ (.10) $ .17 $ .13 $ .01 $ .04 $ .03
========== ========== ========== ========== ========== ==========
-- fully diluted............... $ (.10) $ .15 $ .12 $ .00 $ .03 $ .03
========== ========== ========== ========== ========== ==========
Weighted average common shares
outstanding:
-- primary....................... 6,703,517 6,703,517 8,526,517 6,703,517 6,703,517 8,526,517
========== ========== ========== ========== ========== ==========
-- fully diluted................. 6,703,517 7,703,517 9,526,517 7,703,517 7,703,517 9,526,517
========== ========== ========== ========== ========== ==========
</TABLE>

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

(1) Gives effect on a pro forma basis to the recent acquisition of the capital
stock of Canton. The pro forma combined statement of operations data for the
year ended June 30, 1996, and the three-month period ended September 30,
1996 does not purport to represent what the Company's results of operations
would have been if such acquisition had been consummated on the first day of
the respective periods. Proforma condensed consolidated financial statements
(unaudited) of the Company are included in the "Financial Statements"
section of this Prospectus.

(2) Earnings per share is based on the average number of shares of Common Stock
and Common Stock equivalents outstanding during the year. Shares of Common
Stock to be placed in escrow upon

18
<PAGE> 20

completion of this offering, which are Common Stock equivalents, have been
included in the calculation of fully diluted earnings per share. Shares of
Common Stock issued at amounts substantially below the initial public
offering price within the one-year period prior to the initial filing of the
registration statement relating to this offering are considered outstanding
for all periods presented. The pro forma average number of shares of Common
Stock and Common Stock equivalents outstanding include the shares issuable
upon the completion of this offering, and excludes 177,000 shares tendered
by Dr. Birman as payment in full of his $775,000 note payable to the
Company, plus accrued interest. See "Principal Stockholders -- Escrow
Shares," "Certain Transactions" and Note 16 of the Notes to Consolidated
Financial Statements.

19
<PAGE> 21

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

BUSINESS AND ORGANIZATION

The Company is a health care consulting and management company dedicated to
improving the quality, controlling the cost, and enhancing the efficiency of the
management and delivery of health care services by focusing on the physician as
the most important factor in the health care system. The Company commenced
operations in 1991 as Birman & Associates, Inc. to provide its proprietary
Quality Management Program to hospitals to educate their medical staffs on
patient management. As an expansion of its business, the Company, through BMC
Health Plans, Inc., is developing and will operate various health plans in
association with physician networks and other health care providers based upon
its belief that it can apply its Quality Management Program experience to
improve the management and delivery of health care services in managed care
systems. As part of its health plan business, the Company will organize
physicians into independent practice associations, or networks, that will
provide services to health plans, including those operated by the Company. The
Company concentrates its efforts on rural communities, particularly in the
south-central, southeast, and central United States, with an initial focus for
its health plans in Mississippi and Tennessee, where the development of managed
care programs has lagged behind other areas of the country.

The Company has historically rendered its consulting services under
contracts with hospital-clients that typically provide for results oriented
compensation to the Company based upon increases in the hospital-clients'
revenue attributable to the Quality Management Program. The Company also has
fixed rate and combined fixed rate and results oriented engagements with certain
hospital-clients. Substantially all of the Company's revenue in its 1995 and
1996 fiscal years and the first quarter of fiscal 1997 was derived from
consulting fees from its Quality Management Program.

The Company intends to leverage the expertise and professional
relationships it has gained from providing its Quality Management Program and to
capitalize on the evolution from traditional fee-for-service to capitated
systems in rural communities. The Company currently is developing and will
operate a variety of community-based, physician-driven, comprehensive health
plans. To accelerate entry into the health plan business in Mississippi, the
Company has acquired Canton, an inactive holder of a certificate of authority to
operate an HMO in certain counties in northern Mississippi. Also, the Company
has arranged for MedSouth Inc. to provide health care services through its
provider network consisting of approximately 350 physicians, four hospitals, and
several ancillary health service providers in the Gulfport, Mississippi area.
The Company currently anticipates that the Mississippi HMO will commence
operations soon after it receives authority to operate in the six county
southern Mississippi region, which the Company expects to occur in the first
quarter of calendar 1997. In addition, the Company plans to apply to the State
of Tennessee for an HMO license to utilize a physician network the Company is
developing in that state.

To position itself for future expansion, in 1994 the Company was
incorporated as Birman Managed Care, Inc. in Tennessee to be the holding company
for Birman & Associates, BMC Health Plans Inc., and any other future
subsidiaries. In connection with the formation of the Company as a holding
company for its subsidiaries, in June 1995 Birman & Associates, Inc. distributed
to its then sole shareholder, David N. Birman, M.D., all of the shares of
capital stock of Birman Farms, Inc., a livestock breeding operation. In
September 1996, the Company was reincorporated as a Delaware corporation.

The following discussion of the results of the operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. Historical results and percentage relationships among accounts are
not necessarily an indication of trends in operating results for any future
period. The consolidated financial statements present the accounts of Birman
Managed Care, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company changed its fiscal year end for financial reporting purposes from
December 31 to June 30 beginning with the 1995 fiscal year.

20
<PAGE> 22

RESULTS OF OPERATIONS

The following table sets forth the percentage of revenue represented by
certain items reflected in the Company's Consolidated Statements of Operations
for the periods indicated.

<TABLE>
<CAPTION>
FISCAL YEAR
JUNE 30 THREE MONTHS ENDED
--------------- SEPTEMBER 30,
1995 1996 ---------------------------
----- ----- 1995
-----------
(UNAUDITED) 1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue..................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue............................. 49.4% 27.1% 30.4% 37.5%
Gross margin................................ 50.6% 72.9% 69.6% 62.5%
Selling, general and administrative
expenses.................................. 64.7% 50.3% 65.3% 49.3%
Income (loss) from operations............... (14.1)% 22.6% 4.3% 13.3%
Other income (expense):
Interest expense.......................... (1.2)% (.5)% (.7)% .0%
Interest income........................... .6% .5% .3% 1.6%
Loss on sale of assets.................... -- (.1)% -- --
Income (loss) before provision for income
taxes..................................... (14.7)% 22.5% 3.9% 14.9%
Provision for income tax (expense)
benefit................................... 4.7% (8.6)% (1.4)% (4.7)%
Income (loss) from continuing operations.... (10.0)% 13.9% 2.5% 10.2%
Loss from discontinued operations........... (4.5)% -- -- --
Net income (loss)........................... (14.5)% 13.9% 2.5% 10.2%
</TABLE>

THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1995

Revenue. Revenue from the Quality Management Program increased by 56%, to
approximately $2,216,000 in the three months ended September 30, 1996, from
approximately $1,417,000 in the comparable period of the prior year. Additional
revenue of $156,000 is attributable to the operations of Hughes. The growth in
revenue was attributable to management's action to initiate engagements by new
hospital-clients. The aggregate Medicare discharges of the hospital-clients
increased by 68.7% to 11,300 for the three months ended September 30, 1996, from
6,700 in the comparable period of the prior year and the number of hospital-
clients increased to 32 in September 1996 from 21 in September 1995.

Cost of Revenue. The cost of revenue includes all costs directly
associated with the operations of the Quality Management Program, including
compensation of physicians and allied medical specialists, consulting staff
travel and lodging, and other direct costs of the Quality Management Program.
The cost of revenue of the Quality Management Program increased by 89%, to
approximately $814,000 for the three months ended September 30, 1996, from
approximately $431,000 in the comparable period of the prior year due to an
increase in the number of hospital-clients. The Company's cost of revenue
increased to 37.5% for the three months ended September 30, 1996 from 30.4% for
the three months ended September 30, 1995, due primarily to (i) a one-time
charge for the development of an audit and compliance program for the Quality
Management Program, which resulted in a 3.6% increase in the cost of revenue;
(ii) an increase in training costs due to the hiring of additional physicians
and allied medical specialists for hospital engagements scheduled or anticipated
to start in the second quarter of fiscal 1997, which resulted in an increase in
cost of revenue of 2.0%; and (iii) an increase in other direct costs of the
Quality Management Program, which resulted in a 1.5% increase in cost of
revenue.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 26.3%, to approximately $1,169,000 for the
three months ended September 30, 1996, from approximately $926,000 in the
comparable period of the prior year. The increase in selling, general and
administrative expenses for the three months ended September 30, 1996 was
primarily attributable to (i) the expansion of the Company's management team and
(ii) selling, general and administrative expenses for Hughes & Associates, Inc.,
which was acquired in June 1996 and not consolidated with the financial
statements in the comparable period of the prior year. As a percentage of
revenue, selling, general and administrative expenses decreased to 49.3% for the
three months ended September 30, 1996 from 65.3% in the comparable period in the
prior year.

21
<PAGE> 23

Interest Income and Expense. Interest income increased to approximately
$38,000 for the three months ended September 30, 1996 from approximately $4,600
in the comparable period of the prior year. This increase was attributable to
interest on the increased balance of cash deposits held primarily in money
market accounts and also on the increased balance on loans made by the Company
to Dr. Birman in connection with the farm operations distributed to him in
fiscal 1995. See "Discontinued Operations" below. Interest expense decreased
approximately $10,000, an improvement of 97% for the three months ended
September 30, 1996 from the comparable period of the prior year, as a result of
the Company repaying substantially all the outstanding principal of its term
loan in June 1996.

FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1995

Revenue. For the fiscal year ended June 30, 1996, revenue from the Quality
Management Program increased by $3.6 million to $8.4 million, or 75%, over the
revenue for fiscal 1995. Approximately 75% of this increase was attributable to
an overall improvement in the Company's results from the Quality Management
Program as measured by increases in the hospital-clients' Medicare related
revenue and approximately 25% of this increase was attributed to management's
action to initiate engagements by new hospital-clients. Period to period changes
in the volume of the Quality Management Program business of the Company is
measured in aggregate annual Medicare discharges of the Company's
hospital-clients. Aggregate Medicare discharges is a factor of the size and
number of hospital-clients. The aggregate Medicare discharges of the
hospital-clients increased from 30,000 in fiscal 1995 to 36,000 in fiscal 1996
and the number of hospital-clients increased from 20 in June 1995 to 29 in June
1996.

Selling, General and Administrative Expenses. For fiscal 1996, selling,
general and administrative expenses increased to $4.2 million from $3.1 million
in fiscal 1995. Approximately 72% of this increase is a result of a full year of
costs of executive and administrative personnel hired in mid-fiscal 1994 to
position the Company to develop its health plan business and the expenditure of
funds to develop the health plan business. In addition, the Company increased
its Quality Management Program marketing efforts and incurred costs associated
with the exploration of acquisition opportunities. As a percentage of revenue,
selling, general and administrative expenses decreased from 64.7% to 50.3% in
fiscal 1996, a 14% improvement, as a result of an enhanced marketing plan that
increased revenues significantly. The enhanced marketing plan included the
addition of new sales personnel, the expansion into new markets, and the
utilization of a team approach to marketing, which included involving physicians
in the marketing effort. Management currently intends to continue to utilize the
new sales approach in the foreseeable future. During the first four months of
fiscal 1997, the Company recruited four new hospital-clients.

Interest Income and Expense. Interest income increased almost $20,000, or
64%, in fiscal 1996 over fiscal 1995 as a result of the accrual of interest on
loans made by the Company to Dr. Birman in connection with the farm operations
distributed to him in fiscal 1995. See "Discontinued Operations" below. Interest
expense decreased approximately $13,000, an improvement of 23% in fiscal 1996
over fiscal 1995, as a result of the Company repaying the $483,896 outstanding
principal balance of its term loan.

Discontinued Operations. The losses from discontinued operations for
fiscal 1995 related to a farm operated by the Company during the period that Dr.
Birman was the sole shareholder of Birman & Associates, Inc. All assets and
liabilities related to the farm operation were distributed by the Company to Dr.
Birman as of the close of fiscal 1995. During fiscal 1996, no expenses were
incurred by the Company in connection with

22
<PAGE> 24

this discontinued operation. However, the Company lent Dr. Birman approximately
$28,000 per month throughout fiscal 1996 to fund negative cash flow experienced
by the farm. The total amount lent to Dr. Birman during the period of July 1,
1995 through September 9, 1996 to defray the operating and ownership costs of
the farm was approximately $465,000. Accordingly, as of September 9, 1996, Dr.
Birman owed a total of $775,000 to the Company. See "Certain Transactions."

RECENT AND PROPOSED ACQUISITIONS

In furtherance of its health plan business, in June 1996 the Company
acquired substantially all of the assets of Hughes, a provider of utilization
review services to insurance companies and health plans. Hughes did not
contribute materially to the results of operations of the Company for fiscal
1996. The Company anticipates that Hughes will make a reasonable direct
contribution to the revenue and net operating income of the Company beginning in
fiscal 1997, particularly after the Company commences its health plan business.
In this regard, the utilization review and case management services of Hughes
are expected to enable the Company to market its physician networks and
management service organization services to large, self-funded employee groups.

As discussed under "Business and Organization," above, the recent
acquisition of Canton provides to the Company a certificate of authority to
operate an HMO in certain counties in northern Mississippi. The Company has made
application to the Department of Insurance of the State of Mississippi for
authority to operate an HMO in the six-county southern Mississippi region. The
Company expects to receive that authority in the first quarter of calender 1997,
at which time the Company's Mississippi HMO will commence operations. The effect
on the Company's operations of the Mississippi HMO will depend to a large extent
on the Company's ability to attract enrollees to its Mississippi health plan
which, in turn, will depend to a significant extent upon the Company's ability
to offer PPO and point-of-service options to its enrollees in addition to the
HMO option. Because the Company's health plan business will be in a "start-up"
phase for at least six months after the HMO commences operations in Mississippi,
the Company anticipates that the Canton acquisition will result in a net
operating loss during at least the first three quarters of calendar 1997.

SEASONALITY

Revenue and operating results historically have varied significantly from
period to period based upon seasonality. The Company typically realizes a
substantial portion of its revenue during the calendar quarters ending December
31, March 31, and June 30, with significantly lower revenue realization during
the calendar quarter ended September 30. Additionally, revenue fluctuates from
month-to-month based on the total number of Medicare discharges experienced by
hospital-clients and hospital-clients' average case mix index reflecting
severity of illness. The Company anticipates that this seasonality will diminish
with the introduction of health plan revenue.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital to market its Quality Management Program and
to develop and launch its health plan business including, among other costs, the
organization of the requisite management infrastructure necessary to implement
the Company's health plan business. During fiscal 1995, the Company financed its
operating and business development activities primarily through operating
revenue, net borrowings in excess of repayments of principal of $542,930 under a
term loan made available to the Company by First American National Bank of
Tennessee, net collections on notes receivable from Dr. Birman and short-term
borrowings from a director and unrelated third parties of $171,854, and proceeds
of $144,299 from the sale of assets.

During the three months ended September 30, 1995, the Company financed its
operating and business development activities primarily through operating
revenue and the net proceeds of $392,500 from the private placement of shares of
Common Stock. During the three months ended September 30, 1995, the Company
repaid $95,800 net principal of its term loan using proceeds from the private
placement of Company Stock. In addition, the Company advanced approximately
$143,000 against notes receivable from Dr. Birman and invested approximately
$11,000 in the purchase of property and equipment. See "Certain Transactions."

23
<PAGE> 25

During fiscal 1996, the Company financed its operations and business
development activities primarily through operating revenue and the net proceeds
of a $1,605,043 private placement of Common Stock. In fiscal 1996, the Company
repaid the entire principal balance of its term loan using proceeds from the
private placement of Common Stock. In addition, the Company repaid $175,000 of
short-term borrowings through the exchange of 127,645 shares of Common Stock.

During the three months ended September 30, 1996, the Company financed its
operating and business activities primarily through operating revenue. In the
three months ended September 30, 1996, the Company advanced approximately
$141,000 to Dr. Birman, invested approximately $142,000 in the purchase of
property and equipment, and repaid $1,607 of principal of its term loan. In
addition, the Company collected $9,000 in notes receivable from Dr. Birman. See
"Certain Transactions."

The Company recently acquired all of the outstanding capital stock of
Canton for $1,500,000, of which $700,000 was paid in cash and $800,000 was paid
by the issuance of promissory notes payable in four equal annual installments of
$200,000 each plus interest at the rate of 2% per annum on the unpaid principal
balance. Additional capital will be required to establish the reserves required
under Mississippi and Tennessee HMO regulations and to further develop and
market the Company's health plans.

The Company has a $1,000,000 maximum principal amount working capital line
of credit facility with American National Bank and Trust Company of Chicago. The
credit facility is secured by a pledge of the Company's Quality Management
Program and quality assurance/utilization review accounts receivable. These
receivables are obligations of the hospital-clients to the Company and of
insurance company and self-insured employer clients to Hughes, and are not
Medicare or Medicaid receivables.

The Company believes that the net proceeds of this offering, together with
its existing cash resources and available credit facilities, will be sufficient
to meet the Company's anticipated acquisition, expansion, and working capital
needs for the next 24 months. The Company, however, may raise capital through
the issuance of long-term or short-term debt or the issuance of securities in
private or public transactions to fund future expansion of its business either
before or after the end of the 24-month period. There can be no assurance that
acceptable financing for future transactions can be obtained.

IMPACT OF ACCOUNTING STANDARDS

Escrowed Shares

The Company contemplates that the release of the Escrow Shares to Dr.
Birman, who is an officer and director of the Company, should it occur, will
result in a substantial non-cash compensation charge to operations, based on the
then fair market value of the shares. Such charge could cause the Company to
report a net loss or reduce or eliminate the Company's net income, for financial
reporting purposes, for the period during which such shares are or become
probable of being released from escrow. Although the amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity, it may have a depressive effect on the market price of the
Company's securities. See "Principal Stockholders -- Escrow Shares."

Recent Pronouncements

During March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which requires the Company
to review for impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 will become
effective for the Company's fiscal year ending June 30, 1997. The Company has
studied the implications of SFAS 121 and, based on its initial evaluation, does
not expect it to have a material impact on the Company's financial condition or
results of operations.

During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
establishes a fair value-based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies that elect not to
adopt the new method of accounting. The Company will continue to account for
employee purchase rights

24
<PAGE> 26

and stock options under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123 disclosures will be effective for fiscal years beginning
after December 31, 1995.

Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FASB) is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications is not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.

25
<PAGE> 27

BUSINESS

OVERVIEW

The Company is a health care consulting and management company dedicated to
improving the quality, controlling the cost, and enhancing the efficiency of the
management and delivery of health care services by focusing on the physician as
the most important factor in the health care system. In pursuing these goals,
the Company currently provides its proprietary Quality Management Program to
hospitals to educate their medical staffs on patient management. As an expansion
of its business, the Company is developing and will operate various health plans
in association with physician networks, hospitals, and other health care
providers based upon its belief that it can apply its Quality Management Program
experience to improve the management and delivery of health care services in
managed care systems. As part of its health plan business, the Company will
organize physicians into independent practice associations, or networks, that
will provide services to the Company's health plans as well as to independent
health plans. In addition, the Company intends to provide management services to
its health plans as well as to independent health plans. The Company
concentrates its efforts on rural communities, particularly in the
south-central, southeast, and central United States, with an initial focus for
its health plans on Mississippi and Tennessee, where the development of health
care management systems and managed care programs has lagged behind other areas
of the country.

Under its Quality Management Program, physicians employed by the Company
consult directly with attending physicians at hospital-clients regarding their
overall patient management program, as systematized in the medical record. The
Quality Management Program is designed to (i) improve patient care by
encouraging the use of the Company's proprietary methodology to assist
physicians in the identification of symptoms and conditions, to determine
appropriate treatment, and to prioritize the goals and objectives of the
treatment plan, (ii) reduce the cost to its hospital-clients of patient care as
a result of the early intervention in identified health problems, and (iii) more
accurately describe in the medical record the severity and complexity of the
patient's illness and the resources utilized to treat the patient. The benefits
of the Quality Management Program typically result in increased Medicare
reimbursements for the Company's hospital-clients.

To leverage the expertise and professional relationships it has gained from
providing its Quality Management Program and to capitalize on the evolution from
traditional fee-for-service to capitated systems in rural communities, the
Company currently is developing and will operate a variety of community-based,
physician-driven, comprehensive health plans. The Company's health plans are
being designed to provide high-quality and cost-efficient health care by
aligning the interests of physicians and their patients by involving selected
community physicians in the development and implementation of treatment
standards, by including selected leaders in the physician community as owners of
the local health plans, and by providing participating physicians with the
opportunity to share in savings realized from their own practice management
through the return of a portion of the risk pools established to protect against
cost overruns. The Company's health plans will offer a number of programs,
including a point-of-service option that will enable patients to control their
health care costs while maintaining access to a broad range of providers. Under
the point-of-service option, patients will have the flexibility to select
physicians participating in the Company's HMO, PPO, or indemnity plan at the
time service is sought in order to control their health care costs while
maintaining access to a broad range of providers.

INDUSTRY BACKGROUND

General

In response to escalating health care costs over the past 20 years, federal
and state governmental authorities have increasingly emphasized stringent
cost-containment measures and employers, consumers, and other purchasers of
health care have sought cost-effective alternatives to traditional indemnity
insurance, under which providers generally receive payment on a fee-for-service
basis.

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Although traditional health insurance plans permit enrollees to select any
physician or hospital, enrollees are often responsible for significant
deductibles and provider charges in excess of reimbursement allowances.
Developed primarily as an alternative to traditional indemnity insurance, HMOs
arrange for the delivery of health care to enrollees through participating
health care providers for a fixed monthly premium with little or no deductibles
or copayments regardless of the frequency, value, or type of health care
services utilized. HMOs generally are able to arrange for health care delivery
at lower costs than those associated with traditional indemnity insurance plans
by managing the utilization of health care services, by imposing case management
procedures, by negotiating with providers for discounts from standard health
care provider rates, and through risk-sharing arrangements with the providers.

Since the mid-1980s, increased employer focus on health care costs,
employee choice, and flexibility in obtaining health care has led to the
development of additional managed health care options, some of which are
self-funded. These alternatives include PPOs and point-of-service options. In a
PPO, the enrollee obtains care from a network of preferred providers who provide
services on a discounted fee-for-service basis. A point-of-service option offers
a combination of HMO, PPO, and indemnity insurance. Option plans have gained
favor with some large employer groups because they allow consolidation of health
benefit programs and often permit the enrollee to choose providers within the
HMO or to select a PPO or unaffiliated provider at a higher out-of-pocket cost.
While increasingly popular as a means of expanding employee choice, these
alternatives also result in increased health care costs to employers to the
extent that employees select health care options without the managed care
features of HMOs.

Medicare and Medicaid

In 1965, Congress enacted the Medicare and Medicaid programs as a part of
the Social Security Amendments. Medicare is a national health insurance program
for disabled and aged Americans that separates coverage for inpatient hospital
services and physician services, compensates physicians on a "usual and
customary" charge basis, and pays hospitals on a reasonable cost basis. In
general, most Americans who either (i) are age 65 or older, (ii) receive
disability payments under Social Security, or (iii) need a kidney transplant or
renal dialysis are entitled to inpatient hospital services, commonly known as
Medicare Part A benefits. By paying a monthly fee, any person entitled to Part A
benefits also may choose to receive additional coverage for physician and
outpatient ambulatory service coverage, commonly known as Medicare Part B. The
Medicare program is administered by HCFA, a division of the Department of Health
and Human Services, although HCFA has assigned most of the day-to-day
administration of the Medicare program to private enterprises, such as insurance
companies, appointed as fiscal intermediaries.

In response to spiralling increases in Medicare expenditures, significant
amendments were made to the Medicare program in 1983, including a conversion of
the Part A program to the prospective payment system. Under Part A of the
Medicare program, the Medicare program currently pays a hospital a preset amount
on a per-case basis based upon a prospectively assigned reimbursement value. A
prospective payment is established by classifying each Medicare patient admitted
by the hospital into one of 495 diagnosis-related groups ("DRGs"). Each DRG is
cost-weighted based on an index of average costs set by HCFA. To determine the
reimbursement rate for the hospital, the relative cost weight for an assigned
DRG is then multiplied by a blended rate assigned to the hospital that takes
into account various factors, such as location, Medicare utilization, and
community economics.

The average value of all DRGs assigned to cases within a given time frame
is referred to as the case mix index ("CMI"). The CMI represents the average
severity of the cases treated by a hospital. The greater the severity of
illness, the higher the CMI; the greater the CMI, the higher the Medicare
reimbursement. A hospital must efficiently provide high-quality care and
accurately report its severity of illness through appropriate DRGs in order to
realize fair compensation under the Medicare system.

Medicaid is a federal/state program that provides medical assistance for
low income individuals who are aged, blind, disabled, or eligible for Aid to
Families with Dependent Children assistance. In general, each state administers
its own Medicaid program. The amount of federal payments contributed to each
state's Medicaid program is based upon the state's per-capita income level. To
qualify for federal Medicaid funds, a state

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Medicaid program must meet minimum requirements regarding coverage and services.
States also may elect to extend coverage to larger populations or offer a
broader range of services. Under Medicaid, hospitals are generally paid based on
their reasonable costs or variations on prospective payment systems and
physicians are paid using a charge-based system, fee schedules, or relative
value scales.

Managed Care

Managed care encompasses various arrangements among health care providers,
payors, and enrollees that apply utilization review, utilization of
authorization systems, case management, and allocation of risks and rewards to
increase the efficiency of delivery of health care services. Managed care
delivery systems may include coalitions of independent medical practices,
alliances between hospitals and individual medical practices or physician
networks, PPOs, and HMOs. The primary tools used to manage the allocation of
health care services are capitation and other prepayment arrangements that
transfer a portion of the financial risk of providing health care services to
the providers. Under capitation programs, health care providers receive payment
in advance in a fixed monthly amount per member per month or a fixed amount upon
the occurrence of a specific defined health problem. As a result, the provider
bears the economic risk that the actual cost of caring for plan enrollees
exceeds the capitation rate. Through contributions to and participation in risk
pool reserves, the health plans create economic incentives designed to encourage
providers to monitor enrollees, eliminate inefficiencies, and reduce unnecessary
utilization of services while maintaining and improving the quality of patient
care.

Managed care systems generally assign responsibility for a patient's
medical care to a primary care physician who monitors case history, coordinates
medical services, and typically authorizes, in advance, all specialty and
non-primary care services other than emergency care. Prepaid health plans are
designed to obligate providers to plan and coordinate the services administered
to enrollees, assure the continuity and appropriateness of care, and control the
use of medical resources through (i) utilization management, (ii) case
management, and (iii) associated quality assurance verifications (collectively,
"Treatment Standards"). Utilization management is a process occurring before
authorization of treatment that evaluates the need for and extent of treatment.
Case management is the process occurring after authorization of treatment to
monitor the actual administration of treatment. Quality assurance is the ongoing
evaluation of the level of care being provided to the patients. In many large
managed care organizations, Treatment Standards are set on a company-wide or
national basis by a panel of physicians, allied health professionals, and
business personnel employed by the health care company. The Company believes
that health plans that require local physicians to adhere strictly to
company-wide or national Treatment Standards often limit the physicians'
autonomy and thereby weaken the traditional physician-patient relationship.

Payors, including governmental entities and employers, increasingly expect
health care plans and providers to develop and maintain quality results through
utilization review and quality assurance programs and to accept an allocable
share of the risk of providing medical care. This focus on cost-containment and
financial risk sharing has placed independent providers and small and mid-sized
provider groups at a significant competitive disadvantage because of their
typically higher operating costs, limited purchasing power, and limited risk
management experience. Accordingly, many providers have sought to affiliate with
experienced organizations that manage the non-medical aspects of their
practices, such as office management and billing.

Company Position

Based upon its Quality Management Program experience, the Company believes
that providers in rural areas prefer management organizations that are local in
nature and permit physician ownership and involvement in setting Treatment
Standards. In both its Quality Management Program and its health plan business,
the Company recognizes the importance of the physician as the director of the
consumption of medical services for patients. In the Quality Management Program,
physicians employed by the Company work directly with a hospital-client's
attending physicians to improve their identification of symptoms and conditions,
diagnosis, utilization management, and case management. The Company's health
plan business will feature networks of community-based physicians who will
establish Treatment Standards at a local level

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and who will have a financial interest in the efficient delivery of appropriate
health care. Through the unique involvement by physicians, the Company believes
that its Quality Management Program and health care systems address industry
concerns and create attractive and distinctive products.

GROWTH STRATEGY

The Company's strategy is to build on the strong reputation, health care
and management experience, and market position of its Quality Management Program
to further expand that consulting business and to penetrate rapidly the managed
care segment of the industry. The Company plans to employ the following
strategies to reach these objectives:

- Focus on Rural Markets. The Company plans to focus its Quality
Management Program and health plan operations predominantly in rural areas
in order to take advantage of the lack of market penetration, less
competitive market conditions, and the local reputation and relationships
it has developed through its Quality Management Program. Large,
urban-based medical consulting and managed care providers historically
have not concentrated their efforts on rural areas. As a result, rural
areas are served by fewer health care organizations than larger
metropolitan areas and competitive factors are less intense. In addition,
the Company's experience in serving rural areas through its Quality
Management Program has resulted in the Company gaining a reputation and
relationships in these areas and enhancing its understanding of the
special characteristics of health care in these areas.

- Focus on the Role of the Physician. The Company focuses on the role of
the physician as the most important factor in the delivery of health care
services. The Company's health plans will be organized to align the
interests of the participating physicians with those of the patients, to
enhance the physician-patient relationship, and to reduce the influence of
third parties in the delivery of health care services in local
communities. Local physicians will participate in establishing Treatment
Standards, have an ownership interest in the Company's health plans
serving the physicians' community, and share in risk pools savings. The
Company believes that these factors will enable it to attract and retain
local physicians for its health plans and to utilize the reputation of
these local providers to attract payors and enrollees.

- Develop New Quality Management Program Clients and Services. The Company
plans to increase the number of its clients for its Quality Management
Program by expanding its marketing efforts in its existing market areas,
entering new market areas, and offering new services to existing and new
clients. The Company intends to develop and offer to its Quality
Management Program clients a comprehensive line of additional services
that will ultimately include utilization review of patient care services,
medical information management, access to proprietary computer database
information to evaluate trends in patient treatment, and development of
billing procedures for third-party payors under traditional indemnity,
managed care, and governmental plans.

- Launch Health Plans Applying the Quality Management Experience. The
Company plans to utilize the experience it has gained in its Quality
Management Program in the areas of patient case management, efficient
utilization of health care resources, and proper substantiation of
treatment to assist community physicians in participating in the
establishment of Treatment Standards for the Company's health plans. The
Company believes that this expertise will enable it to transition
providers in rural areas successfully from traditional fee-for-service
reimbursement to capitated health care plans.

QUALITY MANAGEMENT PROGRAM

Concept

Under its Quality Management Program, the Company's specially trained
physicians provide consultation to attending physicians regarding the overall
treatment of patients and the documentation of such treatment with a view
towards improving patient care, containing the cost of patient care, optimizing
the receipt of appropriate Medicare reimbursements, working to reduce
malpractice claims, and improving patient

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satisfaction. The central premises of the Quality Management Program are (i)
recognizing the physician as the primary director of medical services for the
patient and (ii) assisting the physician to develop a problem-oriented format
that produces a complete, consistent, and legible medical record that is
essential to quickly and accurately identify and prioritize disease conditions
and treatment plans in order to improve patient care and patient satisfaction,
reduce the cost of health care by controlling resource consumption, ensure
receipt of appropriate Medicare reimbursement, and reduce malpractice claims.

The attending physician is responsible for the initial patient contact, the
initial evaluation of symptoms and conditions, preliminary diagnosis, hospital
admissions, referrals to specialists, ordering of laboratory services, and
prescribing medication. This places the attending physician in the unique
position of influencing the hospital's reimbursement revenue, costs, and
liability. Since the writing of orders is the responsibility of the attending
physician, the attending physician in essence controls the process and usage of
almost all health care. As a result, a significant aspect of the Quality
Management Program involves consultation and training of the attending physician
at the hospital in facilitating efficient delivery of high-quality health care.

The medical record is the primary tool used by physicians to direct the
medical treatment of a patient, communicate instructions to other health care
service providers, evaluate the progress of the patient, support reimbursements
from third-party payors, including Medicare, and evidence compliance with
Treatment Standards and professional responsibilities. The Company believes that
complete, systemized, and legible medical records enable physicians to design
and record appropriate treatment plans, similar to a business plan, to address
symptoms and conditions that affect the patient from admission to discharge, and
to prioritize, in writing, goals and objectives for appropriate management.
Through the formulation of treatment plans and improved documentation, the
physician focuses on proper diagnosis and thereby becomes more effective in
measuring the patient's severity of illness and progress. The Quality Management
Program also typically results in a more accurate reporting of the hospital's
DRG elections, which results in increased Medicare reimbursement to the
hospital.

The treatment plans and documentation may be applied to clinical guidelines
and quality assessment procedures to increase the total quality of care and
evidence compliance with Treatment Standards. Recognition of the severity of
illness and well-documented records of treatment reduces the likelihood of
errors and omissions, thereby decreasing the liability exposure to the physician
and the hospital.

Operations

Following engagement, the Company assigns a team consisting of a physician
and an allied health specialist to each hospital-client. The team profiles the
client's Medicare patient medical records and identifies problem areas (such as
legibility, proper documentation of patients' histories and physical condition,
discharge summaries, and patient education) in order to identify the specific
hospital-client's needs. After an extended program introduction, the team
interacts on a weekly basis with attending physicians and allied health
professionals in the hospital, on a peer-to-peer level, to assist them in
adopting in their daily routines the practice management methods underlying the
Quality Management Program. A Company executive informs the hospital's chief
executive officer or chief financial officer of the status of the engagement
through a monthly report that summarizes net revenue from Medicare
reimbursements to the client, changes in CMI, and other operating information.

The Quality Management Program emphasizes a problem-solving approach.
Working with the hospital-client's medical records, the Company's physicians
conduct concurrent and retrospective reviews to train attending physicians to
present their findings of symptoms and conditions more thoroughly; to specify
clinical care; to prioritize treatment goals and objectives; to document
properly the process of patient management; and to work to use hospital-client
resources effectively. The Company's allied health specialists educate the
hospital-client's allied health staff regarding the reimbursement process,
encourage coding decisions recognizing legitimate resource expenditures, and
assure proper preparation and maintenance of supporting documentation. As a
result, this program supports the implementation of quality health care
services, while creating a medical record that supports the selection of coding
options that provide optimal and appropriate reimbursement.

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The Company knows of no principal competitor that features peer-to-peer
training of physicians. The Company believes that the use of physicians on its
consulting staff heightens the Company's professionalism and expertise, provides
greater flexibility in addressing client needs, and maximizes the Company's
impact and value for its clients. These factors distinguish the Company from
other firms offering competing services.

Fee Structures

A key feature of the Quality Management Program is the Company's fee
arrangements. The Company offers fee arrangements that are (i) results oriented,
(ii) fixed for the term of the contract, or (iii) a combination of fixed fee and
results oriented arrangements. Results oriented fees are measured by increases
in the hospital-client's revenue attributable to the Quality Management Program.
While the Company's revenue from each client varies depending on client size,
the Company receives an average monthly fee under all fee arrangements of
approximately $30,000 per client. The Company generally enters into two-year
agreements with each hospital-client, which are often renewed.

Client Benefits

The Company believes that its Quality Management Program provides
hospital-clients with improved quality of care and cost effectiveness, increased
patient satisfaction, better utilization of hospital resources, increased
compliance with Medicare coding and reimbursement requirements, increased net
revenue and realization of appropriate payment for services rendered, and
decreased liability exposure. While considerable variation in reimbursement
gains occur on a per-hospital basis as a result of factors such as hospital size
and patient population mix, Quality Management Program hospital-clients
typically experience increased Medicare reimbursements of between 10% and 25%
within the first year of the Company's engagement.

HEALTH PLANS

Concept

To leverage the expertise and professional relationships it has developed
through its Quality Management Program, the Company currently is developing a
variety of community-based, physician-driven, comprehensive health plans. To
align the interests of the participating physicians with those of the enrollees,
local physicians will participate in establishing Treatment Standards and will
share in cost savings in patient care through the return of a portion of risk
pools established to protect against cost overruns. In addition, selected
physicians will have an ownership interest in the local health plans and
management service organizations to be organized by the Company. The Company
anticipates that the Treatment Standards will encourage participating physicians
to apply the Company's Quality Management Program in their practices in order to
improve the efficiency of the delivery of health care services and thereby
maximize their returns from the risk pools.

Through health-care providers, the Company's health plans will offer
enrollees a comprehensive range of health care services, including ambulatory
and outpatient physician care, hospital care, and ancillary diagnostic and
therapeutic services. The Company also intends to provide vision, prescription
drug, and dental services on an indemnity basis through arrangements with
insurers.

The Company's health plans will include HMO, PPO, and point-of-service
options. The point-of-service option will allow enrollees to choose from among
participating and non-participating providers each time medical attention is
desired. The point-of-service option will be available for all types of
enrollees, including Medicare and Medicaid enrollees, if applicable. See "Risk
Factors -- Risk of Limited Health Plans." In order to provide the PPO and
point-of-service options, the Company has entered into an alliance with NBR
under which NBR will arrange licensing, product development, indemnity insurance
coverage, reinsurance coverage, provider excess insurance coverage,
underwriting, and insurance compliance services. The Company will pay NBR a fee
equal to 4.5% of the gross premium revenues derived from the health plans. The
Company and NBR are addressing a more comprehensive alliance agreement that
will, among other things, clarify and place time limits on the performance under
the strategic alliance.

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Because of the Company's presence in the rural south-central, southeast,
and central United States health care market, the initial market area for the
Company's health plans will be in Mississippi and Tennessee. Currently, the
Company is establishing provider networks for its health plan business and
initiating the licensure process to operate health plans in these states. The
Company currently anticipates that its first health plan will be operational in
Mississippi in the first quarter of calendar 1997.

Plan Management

The Company plans to organize separate community-based management service
organizations ("MSOs") to provide administrative services to each community
health plan and physician network. The Company will centralize each MSO's
management and administrative services. Each MSO will be owned by the Company
and selected participating physicians. These MSOs will afford providers with
access to the experience of the Company in the health care business and in the
Quality Management Program. The economies of scale inherent in a MSO will enable
the Company to reduce operating costs by centralizing certain clerical
functions, group purchasing, claims processing, and negotiation of health plan
contracts.

Once physician networks are established in a market, the Company will
administer capitated contracts by profiling costs of care based on patient
populations, analyzing physician treatment patterns, and monitoring specific
health plan contract requirements. The Company believes that its Quality
Management Program experience in the areas of information systems, utilization
management, physician relationships, reimbursement, and case management will
provide it with an advantage in providing these aspects of its health plan
business.

Unlike many large national organizations, each MSO will have its own
committee in which local physicians will participate. The committee will
implement a quality assurance program for the health plan, conduct peer reviews
to assure compliance with MSO rules and other Treatment Standards, and implement
and review other Treatment Standards. The Company will encourage providers to
apply the Quality Management Program methodology in their delivery of
cost-effective, quality care.

After formation of the MSOs, the Company intends to represent the physician
networks in arranging access by other health plans operating in the local
communities and to market the physician networks and MSO administrative services
to large, self-funded employer groups. Under self-funded plans, employers self-
insure their health care expenses and pay for health care claims as such claims
are incurred. The Company will offer utilization review, case management,
provider network discounts, and claims processing for these self-insured plans.
To provide utilization review and case management services to the health plans,
in June 1996 the Company acquired Hughes & Associates, Inc., a Jackson,
Mississippi-based company. Hughes acts as the health care authorization service
for a number of indemnity insurance companies and health plans and is certified
to provide utilization review services in Tennessee, Mississippi, and Louisiana.

Anticipated Sources of Revenue

The Company expects to generate health plan revenue from (i) premium
charges to employers and enrollees, (ii) Medicare and state welfare system
payments, and (iii) network access fees charged to self-funded employers and
other health care plans. The Company intends to structure its premium rates
primarily through community rating, based upon the aggregate costs of basic
benefit plans for the Company's entire membership population calculated on a
per-member/per-month basis and converted into premium rates based on coverage.
The Company intends to adjust the premium rates for various groups based upon
the average age, sex, claims experience, utilization experience, incurred but
not reported claims, inflationary factors, credibility, and reinsurance pooling
levels. The enrollees will pay copayments, coinsurance, or deductibles at the
time certain services are provided in order to encourage appropriate utilization
of health care services by enrollees.

The Company envisions that it will contract with Medicaid and state welfare
systems to provide its health care services. Mississippi has recently enacted
legislation that encourages state welfare participation in managed care
programs. Tennessee provides state welfare system access to HMOs and PPOs
through TennCare(TM).

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The Company's MSOs will receive a percentage of the premiums paid to the
Company's health plans as fees for its management services. Each of the
Company's health plans will contract with its applicable MSO for the provision
of management services.

The Company intends to represent its provider networks in negotiating with
self-insured employers and other health care systems for access to the provider
network. Access fees will vary depending upon the number of providers in the
network. The Company also may provide administrative, utilization review, case
management services, provider network discounts, and claims processing to
self-insured employers for a fee.

Provider Fees

The Company's health plans will compensate physicians, hospitals, and other
health care providers through capitation or discounted fee-for-service payments.
The Company intends to compensate its capitated providers at a flat
per-member/per-month rate, utilizing financial participation in risk pools to
encourage physicians to provide high-quality medical care through the
application of the Company's Quality Management Program. The PPO providers will
be compensated on a discounted fee-for-service basis, and the indemnity
providers will be paid on pre-established fee schedule rates, less deductibles
and coinsurance amounts paid by enrollees. Providers generally will be required
to obtain pre-authorization for certain treatments and will be obligated to
deliver health care according to the health plan's Treatment Standards in order
to assure proper treatment and prevent inappropriate charges. The Company will
obtain reinsurance of catastrophic and excess claims through NBR. Thus, the
health plans will allocate financial risk among the Company, participating
providers, insurers, and enrollees.

Recent Developments

Mississippi. The Company plans to launch its first health plan in
Mississippi during the first quarter of calendar 1997. To accelerate entry into
the health plan business in Mississippi, the Company acquired Canton, an
inactive holder of a certificate of authority to operate an HMO in certain
counties in northern Mississippi. Also, it has arranged for MedSouth to provide
health care services through its provider network consisting of approximately
350 physicians, four hospitals, and several ancillary health service providers
in the Gulfport, Mississippi area. The Company has also established a MSO to
provide administrative and management services to MedSouth. The Company is
proceeding to obtain necessary state health department and insurance department
authorizations to provide HMO health care services to enrollees in six counties
in southern Mississippi. The Company then intends to enlist other service
providers, primarily in the northern and the Delta regions of Mississippi, and
to apply for qualification to provide services to Medicaid beneficiaries in
Mississippi. Certain of the sellers of Canton and MedSouth will be minority
owners of the Mississippi health plan, and MedSouth will have an ownership
interest in the MSO that will provide administrative services to MedSouth. The
Company anticipates that it also soon will be in a position to offer
point-of-service options to enrollees in Mississippi and that it will be in a
position to offer PPO options to enrollees in Mississippi approximately six
months after the introduction of the HMO.

Tennessee. The Company, together with 35 local primary care
physician-shareholders, has organized a provider network for a health plan to
serve 16 counties in the Cumberland Valley region of Tennessee. The physician
network has contracted with over 285 primary care physicians and 650 specialty
physicians to provide services on a capitated fee and discounted fee for service
basis. The Company is in the process of contracting with hospitals and other
providers to complete this network. The Company plans to apply to the state of
Tennessee for an HMO license utilizing this network in the first quarter of
calendar 1997. The Company also has organized a MSO to provide administrative
services to the network and the health plan.

Kentucky. The Company has identified Kentucky as a natural extension of
its health plan business because of its proximity to Tennessee, a favorable
regulatory environment, and the Company's experience in Kentucky with its
Quality Management Program.

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SALES AND MARKETING

The Company markets its Quality Management Program through a direct sales
force consisting of three full-time sales professionals. The sales force employs
a team marketing approach utilizing Company physicians. The Company participates
in hospital trade shows and utilizes a proprietary database to identify
prospective hospital-clients on the basis of CMI and demographic information.
The Company has found that its most successful engagements have evolved from
acceptance of its Quality Management Program by each of the hospital-prospect's
administrative, attending physician, and medical records staff groups. Once the
Company has identified a prospective hospital-client, it provides introductory
information designed to demonstrate the effectiveness and potential benefits of
the program to the prospect's senior administrative and financial officers.
Thereafter, the Company follows a coordinated effort to include the hospital's
attending physicians and medical records specialists in the engagement decision
making process.

The Company currently plans to market its health plans through a small
full-time sales force that will include members of the Company's senior
management and local and national third-party brokers and agents. The Company
will market its health plans to local commercial employers, individuals, and
self-funded employers. In addition, the Company will contract with sponsors of
government programs such as state welfare agencies. Once a payor has selected
the Company to provide health plan services, the Company will shift its
marketing focus to prospective enrollees through newsletters, brochures,
enrollee education programs, seminars, direct mail advertising, and responses to
satisfaction surveys. The Company intends to develop print advertising directed
at payors and direct advertising to prospective enrollees through consumer media
campaigns. The Company's marketing programs will emphasize the local physician
ownership of the health plan, commitment to preventative care, access to quality
providers and services, understanding of the particular local market, variety of
products, and price stability. The Company believes that the local physician
ownership of its health plans will be advantageous to its marketing effort in
the Gulfport, Mississippi area where it will offer its first health plan.

The Company intends to apply for Medicaid approval of its health plans in
Mississippi and Tennessee. Once its plans are so approved, the welfare agency in
each state will assign Medicaid-qualified residents to the Company's health plan
after giving consideration to the patient's choice of physician and choice of
available health plans. The Company's physician network will provide services to
Medicaid recipients in return for capitated payments. The Company believes that
its name recognition and reputation as a locally owned health plan will be
significant factors in encouraging Medicaid recipients to select the Company's
health plan over competing plans. The Company intends to apply for Medicare risk
contracts after each health plan reaches minimum commercial membership
requirements.

CUSTOMERS

Since 1991, the Company has provided its Quality Management Program in
approximately 84 hospitals located in 15 states. Currently, the Company is
providing its Quality Management Program at approximately 32 hospitals in 13
states. The Company's clients are located principally in rural markets where
health care facilities frequently lack the resources to develop internal quality
training programs. The Company seeks two-year agreements with each Quality
Management Program client. The Company's engagement is often continued beyond
the initial two-year term on a fixed fee basis. Out of approximately 84
engagements, only four have been terminated prior to the end of the contract
term.

Services provided to hospitals operated by Quorum resulted in approximately
42% of the Company's revenue in fiscal 1996 and approximately 25% of the
Company's revenue for the first quarter of fiscal 1997. Quorum operates 249
acute care facilities in 41 states. Over the past five years, the Company has
provided its Quality Management Program at 33 Quorum-operated facilities.
Currently, the Company is providing Quality Management Program services at 12
Quorum-operated facilities. Historically, the on-site management of each Quorum
hospital has made its own decision regarding the engagement of the Company and
the Company has entered into a separate contract with each engaging Quorum
facility. The Company has no long-term contractual or other relationships with
Quorum.

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The Company recently contracted to provide Quality Management Program
services to Community Medical Center in Toms River, New Jersey, under an
agreement that provides for an initial fixed fee of $225,000 per month. The
monthly fee is subject to quarterly adjustment based upon the case mix index
experience of the hospital during the preceding quarterly period of the
agreement. The agreement with Community Medical Center has an initial term of 30
months commencing December 1, 1996, subject to early termination rights
beginning in April 1997, and is renewable annually.

The Company anticipates that the customers of its health plan business will
include employees and individuals located in its health plan market areas and
state welfare agencies servicing Medicaid recipients located in those areas.
Large employers offering self-funded health plans will be sought as customers of
the Company's MSOs. See "Business -- Sales and Marketing."

COMPETITION

Although its Quality Management Program services are significantly
different from those offered by other hospital consulting services, the Company
competes for consulting business primarily with revenue-optimization service
companies. Approximately 500 to 700 companies of varying size offer
revenue-optimization services that may be considered competitive with the
Company. Competitors include the health care consulting practice groups of
Andersen Consulting, the Gailer Review Group, Health Care Management Advisors,
Inc., Iameter, MC Strategies, Inc., National Coding Service, Inc., Quality
Medical Consultants, Inc., and J. A. Thomas & Associates, Inc., an Ernst & Young
preferred provider. Most of these firms have substantially greater financial,
technical, marketing, and management resources than the Company. The Company
does not believe that any single company commands significant market share.
Larger, more established consulting firms have an enhanced competitive position
due, in part, to established name recognition and direct access to
hospital-clients through the provision of other services. Smaller firms,
although not necessarily offering services comparable to those of the Company,
compete on the basis of price. There can be no assurance that the Company will
continue to be able to compete successfully. The Company competes for its
Quality Management Program clients by distinguishing its services from those
provided by revenue optimization service companies, which generally do not use a
physician-dominated consulting staff comparable to that of the Company or
embrace a peer-to-peer teaching approach.

The managed care industry is highly competitive. The Company's health plans
will compete with other providers of health care services, including regional
hospitals and physician practice groups. Competitors include large indemnity
insurers with established managed care operations, such as Aetna, Blue Cross &
Blue Shield, CIGNA, and Prudential; HMOs, such as U.S. Health Care, Humana,
Kaiser Permanente, and Quorum; physician management companies, such as
MedPartners/Mulliken; and physician sponsored organizations. Many competitors
offer a broader range of health care services than the Company's health plans
will offer, have extensive relationships with group specialty practices, and
have financial, managerial, marketing, and technical resources that are much
greater than those of the Company.

The managed health care industry has experienced significant changes in
recent years, primarily as a result of rising health care costs. Employer groups
have demanded a variety of health care options, such as traditional indemnity
insurance, HMOs, PPOs, and point-of-service options. The Company's proposed
operations ultimately will compete with providers of all of these products. The
Company will be required to respond to various competitive factors affecting the
health care industry generally, including new medical technologies that may be
introduced, general trends relating to demand for health care services,
regulatory, economic, and political factors, changes in patient demographics,
and competitive pricing strategies by HMOs and other health care plans. The
Company will be subject to competition in any new geographic area it may enter,
with respect to any products it may offer, and with respect to any commercial
and governmental health care programs developed. There can be no assurance that
the Company will be able to compete successfully.

The Company believes that health plans are in demand in rural communities
where the transition from traditional fee-for-service to capitation has lagged
other areas of the country. The Company believes that the principal competitive
factors in the health plan market include price, participation by practicing
physicians, reputation in the community and other rural markets, documented
performance, profitability, and quality.

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<PAGE> 37

Based upon these competitive factors, the Company believes that it will be able
to compete successfully in the rural markets by adhering to its business
strategy.

GOVERNMENT REGULATION

The Company is subject to various state and federal laws that regulate the
relationship between providers of health care services and payors as well as
laws and regulations relating to business corporations in general. Although many
aspects of the Company's Quality Management Program have not been the subject of
state or federal regulatory interpretation, the Company believes its current
operations are, and its proposed operations will be, in material compliance with
applicable laws. There can be no assurance, however, that a review of the
Company's current or proposed businesses by courts or regulatory authorities
will not result in a determination that could adversely affect the operations of
the Company or that the health care regulatory environment will not change so as
to restrict the Company's existing operations or their expansion.

In recent years, numerous legislative proposals have been introduced or
proposed in the United States Congress and in some state legislatures that would
effect major changes in the United States health care system at both the
national and state level. It is not clear at this time which proposals, if any,
will be adopted or, if adopted, what effect such proposals would have on the
Company's business. There can be no assurance that currently proposed or future
health care legislation or other changes in the administration or interpretation
of governmental health care programs will not have a material adverse effect on
the Company.

Licensure

All states impose licensing requirements on individual physicians and on
certain types of providers of health care services. While the performance of
consulting services to hospitals and management services on behalf of medical
practices does not currently require any regulatory approval on the part of the
Company, there can be no assurance that such activities will not be subject to
licensure in the future.

Corporate Practice of Medicine

Many states, including Mississippi, Tennessee, and Kentucky, maintain
prohibitions against physicians practicing medicine as a business corporation.
These laws vary from state to state and are enforced by the state courts and
regulatory authorities with broad discretion. The Company could incur liability
in the event it fails to enter into appropriate contractual arrangements with
physicians or other health care professionals in conjunction with its consulting
activities or health plans. The Company will not employ physicians to practice
medicine, will not represent to the public that it offers medical services, and
will not control or interfere with the practice of medicine by physicians.
Accordingly, the Company does not believe that its operations will violate
applicable state laws regulating the practice of medicine by a business
corporation. However, because the laws governing the corporate practice of
medicine vary from state to state, any expansion of the operations of the
Company to a state with strict corporate practice of medicine laws may require
the Company to modify its operations, resulting in increased financial risk to
the Company. In addition, there can be no assurance that the Company's
arrangements with health care providers will not be successfully challenged as
constituting the unauthorized practice of medicine. Also, there can be no
assurance that such laws will not be interpreted broadly or amended to be more
expansive.

State Fee-Splitting and Referral Prohibitions

A number of states have enacted laws that prohibit the payment for
referrals and other types of kickback arrangements and prohibit physicians from
splitting professional fees. These statutes are sometimes quite broad and, as a
result, prohibit otherwise legitimate business arrangements. A number of states,
for example, prohibit compensation arrangements that provide for the payment of
rent for furnishing space, facilities, equipment, or personnel services used by
a licensed physician based on a percentage of income from such physician's
practice. Penalties for violating these statutes may include revocation,
suspension, or probation of the physician's license or other disciplinary
action, as well as monetary penalties. Alleged violations also have been used to
declare a contract to be void as against public policy.

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<PAGE> 38

As described below, many states have enacted laws that prohibit physicians
and, in some cases, all health care workers, from splitting fees or referring
patients to entities with which such physician or health care worker has a
financial relationship, regardless of the patient's source of payment. Most
states provide exceptions that permit health care workers to provide health
services personally and as part of a group practice.

Tennessee prohibits a physician from referring patients to an entity in
which the physician has an investment interest. The definition of an investment
interest does not include an investment in a publicly traded entity. Penalties
for violation of this prohibition include licensing sanctions and civil
penalties up to $5,000 for each prohibited referral.

Kentucky prohibits a health care provider from knowingly soliciting,
receiving, or offering any remuneration in return for purchasing, leasing,
ordering, or arranging for any goods, service, or items for which payment may be
received, regardless of the source of payment. In addition, no provider may
knowingly make, offer, or receive a payment for referring a patient to another
provider for the furnishing of benefits regardless of the source of payment. The
penalties for a violation of this provision may be a fine, prohibition on
billing or collecting from patients or third-party payors, or repayment of
reimbursement for the services related to the referral. In addition, Kentucky
prohibits a physician from giving or receiving, directly or indirectly, any
compensation for referring a person to communicate with a licensed physician in
such physician's professional capacity or for any professional services not
actually and personally rendered. The penalties for a violation of this
provision may be a five-year probation or suspension or revocation of such
physician's license.

Pursuant to the terms of the Quality Management Program agreements and the
proposed management services agreements for the Company's health plans, the
Company will receive fees based upon receivables and a percentage of premiums.
The Company believes that its fee structures comply in all material respects
with the fee splitting laws of the states in which it currently operates or
proposes to operate in the future. However, there can be no assurance that such
laws will not be interpreted broadly or amended to be more expansive. Further,
expansion of the operations of the Company to certain jurisdictions may require
it to comply with such jurisdictions' regulations, which could require
structural and organizational modifications of the Company's business. Such
changes, if any, could have a material adverse effect on the Company. However,
since the Company believes that it meets many of the states' exceptions and
intends to structure its health plans to comply with such statutes, the Company
believes that the risk of state action taken against the Company or any of the
Company's contracted health care providers pursuant to the above-referenced
provisions is minimal.

State Regulation of Insurance Business and HMOs

Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. Many state insurance commissioners have interpreted their
insurance statutes to prohibit entities from entering into risk-based managed
care contracts unless there is an entity licensed to engage in the business of
insurance in the chain of contracts. An entity not licensed to provide insurance
that contracts directly with a self-insured employer in such a state may be
deemed to be engaged in the unlicensed business of insurance. The Company
intends to obtain all required or appropriate licenses for its health plan
business operations as an HMO or as a provider network. NBR has agreed to
arrange licensed insurers to provide indemnity coverage to enrollees in the
Company's health plans. The Company believes that it is and will be in
compliance with the laws that regulate the business of insurance in the states
in which it does business, but there can be no assurance that future
interpretations of insurance and health care network laws by regulatory
authorities in these states, or in the states into which the Company may expand,
will not require licensure or a restructuring of some or all of the Company's
operations.

Many states also require managed care organizations to contract with any
willing qualified provider that desires to contract with the organization. The
Company could incur liability in the event a managed care organization under the
Company's control fails so to contract.

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Federal Medicare and Medicaid Related Regulation

Since the Company's Quality Management Business focuses on Medicare
reimbursement and the Company's health plans will provide services to Medicare
and Medicaid patients, the Company is and will be subject to a number of federal
laws prohibiting certain activities and arrangements relating to services or
items, that are reimbursable by Medicare or Medicaid or other state-funded
programs.

The False Claims Act. The False Claims Act imposes civil liability on
persons or corporations that make false or fraudulent claims to the government
for payment. A violation of the False Claims Act may result in liability for
monetary penalties and exclusion from the Medicare and Medicaid programs. The
Company takes measures to ensure that hospital-clients of its Quality Management
Program do not submit false or fraudulent claims to the government, and the
Company intends to take similar protective measures with respect to its health
plan business. Because the Company's current revenue relates to Medicare
payments and the Company anticipates that the health plan business could, in the
future, receive significant revenue from Medicare and Medicaid, an exclusion
from the Medicaid and Medicare programs as a result of a violation of the False
Claims Act could have a material adverse effect on the Company. The Company, as
well as its hospital-clients, could incur liabilities for violations of the
False Claims Act.

Prohibition on Assignment. The Medicare and Medicaid laws prohibit the
assignment of Medicare and Medicaid receivables. As a result, the Company could
not obtain a pledge of Medicare and Medicaid receivables as security for payment
of remuneration owed to the Company by a health care provider if it so desired.
Similarly, the Company could not pledge or assign its Medicare and Medicaid
receivables as security for bank lines of credit or other lending arrangements.

Anti-kickback Statute. Certain provisions of the Social Security Act
prohibit the offer, payment, solicitation, or receipt of any form of
remuneration either (i) in return for the referral of Medicare or state health
program patients or patient care opportunities, or (ii) in return for the
recommendation, arrangement, purchase, lease, or order of items or services that
are covered by all federal health care programs, except the federal employees
health benefit plans (the "Anti-kickback Statute"). The Anti-kickback Statute is
broad in scope and has been broadly interpreted by courts in many jurisdictions,
potentially subjecting such arrangements to lengthy expensive investigations and
prosecutions initiated by federal and state governmental officials. In
particular, HCFA has expressed concern that physician ownership in entities in a
position to receive referrals from such physicians may violate the Anti-kickback
Statute.

In part to address concerns regarding the Anti-kickback Statute, since July
1991 the Department of Health and Human Services has promulgated regulations
that provide exceptions, or "safe harbors," for certain transactions that are
deemed not to violate the Anti-kickback Statute. The safe harbors include
protection for waivers or coinsurance and deductible amounts, negotiated
discounts by providers, risk-sharing arrangements with managed care plans,
management and personal services agreements, and investment interests. Since the
Company intends to offer physicians an ownership interest in its health plans,
the Company plans to structure such ownership so that payments made to
physician-investors in its health plans in the form of a return on an investment
interest, such as a dividend or interest income, meet the investment interest
safe harbor and therefore are not deemed to be prohibited "remuneration" under
the Anti-kickback Statute. Accordingly, the Company intends to structure its
health plan ownership so that (i) no more than 40% of the investment interests
will be held by investors who are in a position or make or influence referrals
to the health plan; (iii) no more than 40% of the gross revenue of the health
plan will come from referrals, items or services furnished or business otherwise
generated from investors; and (iii) the terms of the investment interests
offered to investors who are in a position to make or influence referrals to the
health plan will be the same as the terms offered to investors who are not in
such position. There can be no assurance, however, that more than 40% of the
gross revenue of any of the Company's health plans will consistently come from
referrals, items or services furnished or business otherwise generated from
persons or entities other than physician-investors.

Violation of the Anti-kickback Statute is a felony, punishable by fines up
to $25,000 per violation and imprisonment for up to five years. In addition, the
Department of Health and Human Services may impose civil penalties excluding
violators from participation in Medicare or state health programs. Although the
Company does not believe that its current operations violate or that its
proposed operations will violate the

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<PAGE> 40

Anti-kickback Statute, there can be no assurance that in the future regulatory
authorities will not determine that the Company's operations violate the
Anti-kickback Statute. Because the Company anticipates that its health plans
will receive significant revenue as a result of health care services provided to
Medicaid and Medicare enrollees, an exclusion from the Medicaid and Medicare
programs as a result of a violation of the Anti-kickback Statute could have a
material adverse effect on the Company.

Federal Self-Referral Prohibitions. Significant prohibitions against
physician self-referrals for services covered by Medicare and Medicaid programs,
commonly known as "Stark II," were enacted by Congress in the Omnibus Budget
Reconciliation Act of 1993. These prohibitions amended prior physician
self-referral legislation known as "Stark I," which applied only to clinical
laboratory referrals, by dramatically enlarging the list of services and
investment interests to which the referral prohibitions apply. Subject to
certain exemptions, Stark II prohibits a physician or a member of such
physician's immediate family 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, including the physician's own group practice, unless
such practice satisfies the "group practice" exception. The designated health
services include the provision of clinical laboratory services, radiology, and
other diagnostic services, including ultrasound services; radiation therapy
services; physical and occupational therapy services; durable medical equipment;
parenteral and enteral nutrients, equipment, and supplies; prosthetics;
orthotics; outpatient prescription drugs; home health services; and inpatient
and outpatient hospital services.

Although the definitions of ownership interests and compensation
arrangements are extremely broad, certain ownership interests and compensation
arrangements will not trigger the proscriptions of Stark II. In particular,
exceptions exist for prepaid health plans and personal services agreements. The
prepaid health plan exception covers a physician's ownership interest and
compensation arrangement in the case of services furnished by a prepaid health
plan. The personal services agreement exception covers compensation pursuant to
certain written agreements, such as management or independent contractor
agreements. Because the Company will use reasonable efforts to ensure that its
health plans meet the exceptions described above, the Company believes that the
risk that referrals of patients by physicians who have an interest in the health
plans or an agreement with the Company will be limited.

Interpretative regulations clarifying the provisions of Stark I were issued
on August 14, 1995, and Stark II regulations are scheduled to be proposed in
January 1997. Although the Company believes its proposed health plan operations
will be in compliance with the Stark legislation, future regulations could
require the Company to modify its health plan business. In addition, the
penalties for violating Stark II include a prohibition on Medicaid and Medicare
reimbursement and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme" and
exclusion from the Medicare and Medicaid programs. Because the Company
anticipates that its health plans will receive significant revenue as a result
of health care services provided to Medicaid and Medicare enrollees, an
exclusion from the Medicaid and Medicare programs as a result of a violation of
the self-referral prohibitions could have a material adverse effect on the
Company.

The Health Insurance Portability and Accountability Act of 1996. The
Health Insurance Portability and Accountability Act of 1996 (the "Portability
Act") expands the penalties for health care fraud. The Portability Act prohibits
a knowing and willful scheme, such as engaging in a pattern or practice of
upcoding or unnecessary care, in order to defraud any health care benefit
program, including Medicare and state health care programs. The penalties
include exclusion from the Medicare program and monetary penalties. The Company
takes measures to ensure that hospital-clients of its Quality Management Program
do not engage in schemes to defraud health care programs, and the Company takes
and intends to continue to take similar protective measures with respect to its
business. Because the Company's current revenue relates to Medicare patients and
the Company anticipates that the health plan business could, in the future,
receive significant revenue from Medicare, an exclusion from the Medicare
program as a result of a violation of the Portability Act could have a material
adverse effect on the Company.

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<PAGE> 41

POTENTIAL LIABILITY AND INSURANCE

The Company may be exposed to potential professional liability claims by
patients of hospital-clients and patients of providers that participate in the
Company's health plans as a result of the negligence or other acts of
physicians. The physicians employed by the Company as part of the Quality
Management Program do not treat patients, attend patient encounters, make any
treatment or diagnosis decisions, or provide any medical services in connection
with that program. However, any claims based on allegations that the Company's
physicians are engaged in the practice of medicine that ultimately are
successful could result in substantial damage awards to claimants, which may
exceed the limits of any applicable insurance coverage. The Company's health
plans will involve the delivery of health care services to the public.
Consequently, the health plans will be exposed to the risk of professional
liability claims and may become subject to claims, suits, or complaints relating
to services and products provided by such plans, and there can be no assurance
that such claims will not be asserted against the Company. In connection with
its Quality Management Program business, the Company currently maintains special
errors and omissions insurance of $1,000,000 per occurrence with a deductible of
$10,000 and general liability insurance of $2,000,000 in the aggregate and
$1,000,000 per occurrence. In its health plan business, the Company will
maintain an occurrence malpractice liability insurance policy with limits of
$5,000,000 in the aggregate and $1,000,000 per occurrence and will require
physicians to maintain malpractice liability insurance in amounts which it deems
adequate for the types of medical services provided. There can be no assurance,
however, that such insurance will be sufficient to cover potential claims or
that adequate levels of coverage will be available in the future at a reasonable
cost. In the event of a successful claim against the Company that is partially
or completely uninsured, the Company's financial condition and reputation could
be materially and adversely affected.

New forms of managed care organizations have increasingly been subject to
liability for reasons such as failure to credential providers properly or
contributing to physician malpractice. In response, many managed care
organizations and other health care entities are not only obtaining general
liability insurance but also managed care and professional liability insurance
coverage. Medical directors also have also faced professional liability claims
and state licensure challenges. The Health Care Quality Improvement Act of 1986,
however, provides immunity from damages for professional review actions taken by
professional review bodies, including health plans, in good faith, provided that
certain procedural standards are met. The Company intends to comply with such
procedures in its professional review actions. However, no assurances can be
given that the insurance coverages obtained by the Company, tort reform, or
immunity provisions will be adequate to insure against all claims that may be
asserted against the Company or that insurance coverage will continue to be
available at acceptable costs.

INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES

The Company regards certain features of its services and documentation as
proprietary and relies on a combination of contract, copyright, and trade secret
laws and other measures to protect its proprietary information. As part of its
confidentiality procedures, the Company generally obtains nondisclosure
agreements from its employees and hospital-clients and limits access to and
distribution of its software, documentation, and other proprietary information.
The Company believes that trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's employees and the timeliness and quality of the services it provides.
The Company has recently filed applications with the U.S. Patent and Trademark
Office to register the tradenames and marks Birman(TM), Care3(TM), and
WellFirst(TM) for use in the Company's businesses. Care3 will be the brand name
of the Company's health plans.

FACILITIES

The Company is headquartered in Cookeville, Tennessee, where it occupies
approximately 5,800 square feet of space on a month-to-month basis. In addition,
the Company rents offices in Phoenix, Arizona, Jackson, Mississippi, and
Gulfport, Mississippi. The Company recently entered into a lease for an
approximately 20,000 square foot building to be built to the Company's
specifications in Cookeville, Tennessee. The term of the lease will be ten years
commencing upon completion of the building, which is currently expected to occur
in or

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<PAGE> 42

before the fourth quarter of calendar year 1997. The Company will have an option
to purchase the new building. All office space occupied by the Company is leased
from unaffiliated third parties. Cookeville is approximately 80 miles east of
Nashville, Tennessee.

EMPLOYEES

At January 2, 1997, the Company employed 72 persons and has contractual
arrangements with 22 physicians and other health care professionals. A total of
43 employees are responsible for the administrative affairs of the Company; 22
employees are directly involved in the Quality Management Program business; and
11 employees are directly involved in developing the health plans. The Company
is not subject to any collective bargaining agreements, and it considers its
relations with employees to be good.

With respect to its Quality Management Program, the Company has a staff of
seven full-time employee-physicians and 16 part-time physician-consultants, all
of whom have at least six years of medical practice experience, specializing in
areas that include internal medicine, surgery, obstetrics, gynecology,
pediatrics, oncology, family practice, and emergency room medicine. The Company
also employs 13 full-time and four part-time allied health specialist employees.

LEGAL PROCEEDINGS

On November 2, 1995, Dallas Riley, Jr., a former employee of Birman &
Associates, Inc., filed a lawsuit against Birman & Associates, Inc., David N.
Birman, M.D., and Liberty Mutual Insurance Company in the Circuit Court of
Putnam County, Tennessee seeking permanent disability benefits under the
Tennessee Worker's Compensation statute or, alternatively, $500,000 in damages
for personal injury sustained through the alleged negligence of Birman &
Associates, Inc. Mr. Riley claims that he was permanently disabled as a result
of an injury that he suffered at a Company-sponsored event. The Company's
workers' compensation insurance carrier has recently advised the Company that it
intends to deny coverage of the claim on the basis that the plaintiff is an
independent contractor and not an employee. The Company's general liability
insurance carrier has agreed to defend the Company in the action under
reservation of rights to contest the timeliness of the Company's notice. The
Company believes Mr. Riley's claims are without merit and intends to defend this
action vigorously. There are no other material legal proceedings pending against
the Company.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information with respect to each
member of the Board of Directors and each executive officer of the Company.
Directors of the Company hold office until the next annual meeting of
shareholders or until their successors have been elected and qualified. Officers
are appointed by and serve at the discretion of the Board of Directors.

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- --------------------------------------------
<S> <C> <C>
David N. Birman, M.D. .................... 45 Chairman of the Board, President, and Chief
Executive Officer
Sue D. Birman............................. 38 Executive Vice President and Director
Robert D. Arkin........................... 42 Executive Vice President, Chief Operating
Officer, Secretary, General Counsel, and
Director
Douglas A. Lessard........................ 35 Vice President, Treasurer, and Chief
Financial Officer
Vincent W. Wong........................... 38 President and Chief Executive Officer - BMC
Health Plans, Inc.
Mark C. Wade.............................. 40 Executive Vice President-Sales and
Marketing - BMC Health Plans, Inc.
D. Bradley Seitzinger, M.D. .............. 41 Executive Vice President -- Physician
Services - Birman & Associates, Inc.
William F. Barenkamp, II.................. 41 Vice President and Chief Operating Officer -
Birman & Associates, Inc.
James J. Rhodes........................... 39 Director
Diedrich Von Soosten...................... 56 Director
</TABLE>

David N. Birman, M.D. has served as Chairman of the Board of Directors,
President, and Chief Executive Officer of the Company and its predecessor
corporations since May 1991. From February 1990 to mid-1991, Dr. Birman served
as Chairman of the Board of Birman, Mathes & Associates, Inc., a consulting
company providing quality management and Medicare reimbursement review services
to rural hospitals. From April 1989 until January 1990, Dr. Birman served as a
consultant, providing quality management and Medicare reimbursement review
services to five rural hospitals. Previously, Dr. Birman was employed by
Whitwell Medical Center, Whitwell, Tennessee where, as a physician assistant, he
performed certain clinical duties and developed patient care management
techniques and reporting strategies that formed the basis for development of the
Quality Management Program. Dr. Birman received his M.D. from the Universidad
Tecnologica de Santiago; his B.A., with honors in Biology from Occidental
College; and certification as a physician assistant in primary care and surgery
from the University of Southern California School of Medicine.

Sue D. Birman has served as Executive Vice President and a director of the
Company and its predecessor corporations since May 1991 and served as their
Chief Financial Officer from May 1991 until June 1996. From February 1990 to
mid-1991, Ms. Birman assisted Dr. Birman in the financial aspects and business
development of Birman, Mathes & Associates, Inc. From April 1989 until January
1990, Ms. Birman assisted Dr. Birman in the operation of his consulting firm.
Ms. Birman is the spouse of David N. Birman, M.D.

Robert D. Arkin has served as Chief Operating Officer of the Company since
June 1996, as a director since April 1996, and as Secretary and General Counsel
since March 1996. Prior to joining the Company, Mr. Arkin was engaged for 16
years in the private practice of law, concentrating in the areas of securities,
health, and intellectual property law, including from 1980 to 1984 as an
associate and from 1985 to 1986 as a partner with the Minneapolis, Minnesota law
firm of Leonard, Street and Deinard. Mr. Arkin is licensed to practice law in
the states of Minnesota and Georgia.

Douglas A. Lessard has served as Chief Financial Officer of the Company
since June 1996 and as Controller since January 1996. Mr. Lessard provided
accounting and consulting services to the Company from

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<PAGE> 44

April 1995 through December 1995. From March 1993 through March 1995, Mr.
Lessard served as the Chief Executive Officer and from September 1991 through
March 1993, as Chief Financial Officer of the American Institute of Professional
Careers, Inc., a private college in Phoenix, Arizona, which provides
post-secondary education in legal and other specialized career fields. From
March 1989 through September 1991, Mr. Lessard was employed as the Controller
for Arizona Building and Development, Inc., a real estate development and
management company. Mr. Lessard is a Certified Public Accountant in the State of
Arizona.

Vincent W. Wong has served as President, Chief Executive Officer, and as a
director of BMC Health Plans, Inc. since January 1996. For approximately five
years before joining BMC Health Plans, Inc., Mr. Wong was employed by Foundation
Health Corporation, a New York Stock Exchange listed managed care organization.
During such time, Mr. Wong served in positions of increasing responsibility
culminating in his service as Vice President of Operations. From 1984 to 1991,
Mr. Wong was employed in marketing by Blue Cross Blue Shield of Ohio.

Mark C. Wade has served as Executive Vice President -- Sales and Marketing
of BMC Health Plans, Inc. since July 1995 and has been employed by BMC Health
Plans, Inc. since March 1995. From November 1993 to March 1995, Mr. Wade served
as the founding director and president of Forum Health Care, Inc., a consulting
firm specializing in the development and management of integrated health care
delivery networks for both the private and public sectors. From February 1988 to
November 1993, Mr. Wade served in several positions at Health Management
Associates, Inc., an Arizona company that, commencing in 1982, developed and
managed four prepaid Medicaid plans that operated in 11 of Arizona's 15
counties, a prepaid Medicaid plan in Las Vegas, Nevada, and other managed care
programs. Mr. Wade's last position with Health Management Associates, Inc. was
as vice president for all private sector commercial sales and marketing activity
with particular emphasis on commercial provider networks, including marketing to
large insurance companies and self-funded payors, integrated delivery systems,
pharmacy networks, managed care benefit designs, and utilization management and
third-party administration services.

D. Bradley Seitzinger, M.D. currently serves as Executive Vice
President -- Physician Services of Birman & Associates, Inc. Since September
1991, Dr. Seitzinger has served in several other capacities at Birman &
Associates, Inc., including Regional Physician Manager, Vice President of
Quality Management, Vice President of Physician Operations, and Senior Vice
President of Physician Operations. From September 1989 to September 1991, Dr.
Seitzinger was assistant vice president of medical affairs for Peer Review
Systems, Inc., a private company that contracted with HCFA to perform Medicare
physician peer review for the State of Ohio. Prior to 1993, Dr. Seitzinger
worked in concurrent capacities, including, from 1986 to 1992, assistant
professor of internal medicine at The Ohio State University College of Medicine,
and from 1987 to 1992, private practice as an internal medicine specialist at
Medical Evaluation Services, Inc., Columbus, Ohio. He is certified by the
American Board of Internal Medicine. Dr. Seitzinger received his M.D. from The
Ohio State University. He is licensed to practice medicine in Arizona, Indiana,
Ohio, and Tennessee.

William F. Barenkamp, II has been employed by Birman & Associates, Inc.
since November 1993, currently as Vice President and Chief Operating Officer.
From January 1991 to November 1993, Mr. Barenkamp attended Dallas Theological
Seminary, receiving an M.A. in Theology in 1993. During such period, Mr.
Barenkamp served as associate pastor at East Grand Baptist Church, Dallas,
Texas. From November 1986 to December 1990, Mr. Barenkamp was the Director of
Marketing and Sales for CSS/Cooper Hotels, Inc. of Memphis, Tennessee.

Diedrich Von Soosten became a director of the Company in September 1996.
Since 1990, Mr. Von Soosten has been Managing Partner of Coloney Von Soosten &
Associates, Inc., a management consulting and financial advisory services firm
specializing in business turnarounds. Prior to 1990, Mr. Von Soosten was an
independent consultant providing restructuring and turnaround assistance to
underperforming businesses. Mr. Von Soosten is a former director and officer of
the Association of Certified Turnaround Professionals.

James J. Rhodes became a director of the Company in September 1996. Since
1986, Mr. Rhodes has served as a Regional Manager in the pension division of
ManuLife Financial (The Manufacturer's Life Insurance Company (USA)), a global
financial services company offering annuities, insurance, and investment
products.

43
<PAGE> 45

BOARD COMMITTEES

There are two committees of the Board of Directors: the Compensation
Committee and the Audit Committee. The Compensation Committee determines the
Company's executive compensation policies and practices and changes in
compensation and benefits for senior management. The Compensation Committee also
administers the Company's 1995 Stock Option Plan. The Audit Committee reviews
the internal accounting procedures of the Company, consults with the Company's
independent accountants, and reviews the services provided by such accountants.
Messrs, Rhodes and Von Soosten currently serve as the members of the
Compensation Committee and Audit Committee.

COMPENSATION OF DIRECTORS

All directors receive reimbursement for reasonable expenses incurred in
connection with their attendance at Board of Directors and committee meetings.
In addition, all non-employee directors receive $2,000 for each Board meeting
that they attend. All non-employee directors are also entitled to receive awards
and options to purchase shares of Common Stock under the 1996 Non-Employee
Directors' Non-Qualified Stock Option Plan. See "Management -- Stock Option
Plans -- 1996 Directors' Option Plan."

EXECUTIVE COMPENSATION

The following table provides certain information concerning the
compensation earned by the Company's Chief Executive Officer and the four next
highly compensated executive officers who received compensation in excess of
$100,000 for services rendered in all capacities to the Company for fiscal 1996
(the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
OTHER -----------------------------
ANNUAL ALL OTHER
SALARY BONUS COMPENSATION AWARDS/OPTIONS COMPENSATION
NAME AND THEN-PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- --------------------------------- ---- ------- ------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
David N. Birman, M.D. ........... 1996 350,000 60,000 69,025 -- --
Chairman of the Board, 1995 275,000 -- 52,922 -- --
President, and Chief Executive 1994 262,500 -- 48,223 -- --
Officer(1)
D. Bradley Seitzinger, M.D. ..... 1996 203,301 15,000 14,272 145,879 --
Executive Vice President -- 1995 174,325 -- 13,731 -- --
Physician Services(2) 1994 158,290 -- 13,344 -- --
Sue D. Birman.................... 1996 150,000 40,000 11,834 -- --
Executive Vice President, Chief 1995 118,617 -- 11,968 -- --
Financial Officer (until May 1994 63,643 -- 11,279 -- --
1996), and Director(3)
Richard M. Ross.................. 1996 202,500 -- 17,588 -- --
Vice Chairman (until August 1995 15,000 -- 49,713 -- --
1996) (4) 1994 -- -- 27,095 -- --
Robert D. Arkin.................. 1996 41,250 -- 247,885 291,758 --
Chief Operating Officer and 1995 -- -- -- -- --
Secretary(5) 1994 -- -- -- -- --
</TABLE>

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

(1) Other Annual Compensation for David N. Birman, M.D. for fiscal 1996 was
$5,484 in medical insurance premiums, $40,903 in officer's life insurance
premiums, $19,638 in auto allowance, and $3,000 in 401(k) matching
contributions; for fiscal 1995, $4,900 in medical insurance premiums,
$29,550 in officer's life insurance premiums, $16,000 in auto allowance,
and $2,472 in 401(k) matching contributions; and for fiscal 1994, $6,156 in
medical insurance premiums, $26,472 in officer's life insurance premiums,
and $15,595 in auto allowance.

44
<PAGE> 46

(2) Other Annual Compensation for D. Bradley Seitzinger, M.D. for fiscal 1996
was $5,484 in medical insurance premiums, $6,708 in auto allowance, and
$2,080 in 401(k) matching contributions; for fiscal 1995, $4,900 in medical
insurance premiums, $7,188 in auto allowance, and $1,643 in 401(k) matching
contributions; and for fiscal 1994, $6,156 in medical insurance premiums and
$7,188 in auto allowance.

(3) Other Annual Compensation for Sue D. Birman for fiscal 1996 was $9,834 in
auto allowance and $2,000 in 401(k) matching contributions; for fiscal 1995,
$11,000 in auto allowance and $968 in 401(k) matching contributions; and for
fiscal 1994, $11,279 in auto allowance.

(4) Mr. Ross served as Vice-Chairman and a director of the Company from February
1994 to August 1996. Effective September 1, 1996, Mr. Ross resigned as
Vice-Chairman and a director of the Company. Mr. Ross currently serves as a
consultant to the Company. See "Certain Transactions." Other Annual
Compensation for Richard M. Ross for fiscal 1996 was $4,783 in medical
insurance, and $12,805 in officer's life insurance premiums; for fiscal
1995, $2,039 in medical insurance and $47,674 in consulting fees paid to Mr.
Ross prior to being employed by the Company; and for fiscal 1994, $27,095 in
consulting fees paid to Mr. Ross prior to being employed by the Company.

(5) Other Annual Compensation for Robert D. Arkin for fiscal 1996 was $985 in
medical insurance premiums and $246,900 in legal fees paid to Mr. Arkin
prior to being employed by the Company.

EXECUTIVE BONUS PLAN

The Company has adopted an Executive Bonus Plan (the "Executive Bonus
Plan") pursuant to which officers of the Company are eligible to receive cash
bonuses after the close of each fiscal year of the Company. The Executive Bonus
Plan is administered by the Compensation Committee of the Board of Directors.
Bonuses are determined on the basis of (i) the operating profit of the Company,
(ii) net revenue growth of the Company achieved as a percentage of the goal
established by the Company at the beginning of the fiscal year, and (iii) the
officer's individual performance and contribution to the Company. An officer's
bonus for any fiscal year may not exceed such officer's annual base salary
multiplied by the Target Bonus Percentage as defined in the Executive Bonus Plan
in such fiscal year.

STOCK OPTION PLANS

1995 Stock Option Plan

The Company has adopted the 1995 Stock Option Plan (the "1995 Option Plan")
pursuant to which key employees, including officers and directors who are
employees, and consultants of the Company are eligible to receive incentive
stock options as well as non-qualified stock options and stock appreciation
rights ("SARs"). The Plan, which expires in October 2005, is administered by the
Compensation Committee of the Board of Directors. Incentive stock options
granted under the Plan are exercisable for a period of up to 10 years from the
date of grant at an exercise price which is not less than the fair market value
of the Common Stock on the date of the grant, except that the term of an
incentive stock option granted under the Plan to a stockholder owning more than
10% of the outstanding Common Stock may not exceed five years and the exercise
price of an incentive stock option granted to such a stockholder may not be less
than 110% of the fair market value of the Common Stock on the date of the grant.
Non-qualified stock options may be granted on terms determined by the
Compensation Committee of the Board of Directors. SARs, which give the holder
the privilege of surrendering such rights for an amount of stock equal to the
appreciation in the Common Stock between the time of grant and the surrender,
may be granted on any terms determined by the Compensation Committee of the
Board of Directors. The Plan also permits the grant of new stock options to
participants who tender shares of the Company's Common Stock as payment of the
exercise price of stock options or the payment of withholding tax ("Reload
Options"). The Reload Options will be granted at the fair market value of a
share of Common Stock on the date of the grant and will be exercisable six
months following the date of the grant. The Plan also includes limited option
valuation rights upon a change of control of the Company. As of June 30, 1996,
options for the exercise of 1,006,566 shares have been granted under the 1995
Option Plan at the exercise price of $1.37 per share. A total of 1,458,780
shares of Common Stock are reserved for issuance under the 1995 Option Plan.

45
<PAGE> 47

1996 Directors' Option Plan

On September 9, 1996, the Company adopted the 1996 Non-Employee Directors'
Non-Qualified Stock Option Plan (the "1996 Directors' Plan"). A total of 100,000
shares of Common Stock are reserved for issuance under the 1996 Directors' Plan.
Under this plan, upon initial election to the Board of Directors, non-employee
directors are awarded options to purchase 6,000 shares of Common Stock. Upon
each subsequent election to the Board of Directors, non-employee directors
receive option awards to purchase 3,000 shares of Common Stock. These options,
which have an exercise price equal to the fair market value of the shares of
Common Stock as of the date of grant, vest at the rate of 33.33% per year. All
options awarded under the 1996 Directors' Plan expire on the first to occur of
(i) 10 years after the date of grant, or (ii) 90 days after the date the
director is no longer serving in such capacity for reasons other than death or
disability. On September 9, 1996, each of Messrs. Rhodes and Von Soosten were
granted options to purchase 6,000 shares of Common Stock under this plan at an
exercise price of $5.00 per share.

FISCAL 1996 OPTION GRANTS

The following table sets forth certain information concerning individual
grants of incentive stock options to executive officers and directors during the
fiscal year ended June 30, 1996:

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED PRICE PER
NAME OF DIRECTOR OR OFFICER GRANTED UNDER PLAN SHARE EXPIRATION DATE
------------------------------------ --------- ------------- --------- ---------------
<S> <C> <C> <C> <C>
D. Bradley Seitzinger, M.D.......... 145,879 14.5% $1.37 2/1/06
William F. Barenkamp, II............ 72,940 7.2% $1.37 2/1/06
Douglas A. Lessard.................. 72,940 7.2% $1.37 2/1/06
Vincent W. Wong..................... 218,819 21.7% $1.37 1/29/06
Mark C. Wade........................ 145,879 14.5% $1.37 11/1/05
Robert D. Arkin..................... 291,757 29.0% $1.37 3/1/06
</TABLE>

At year end, June 30, 1996, none of the options granted by the Company were
exercisable and the value attributed to the shares of Common Stock of the
Company was equal to the $1.37 exercise price of the options. None of the
persons named in the Summary Compensation Table exercised options during the
fiscal year ended June 30, 1996.

EMPLOYMENT AGREEMENTS

The Company has employment agreements with each of its current executive
officers. The employment agreements provide for annual salaries that generally
are subject to annual adjustments for increases in the Consumer Price Index;
participation in employee deferred compensation plans, stock options and
retirement and insurance plans; and include customary noncompetition,
nondisclosure, and severance provisions. Set forth below is a summary of other
principal provisions of those employment agreements:

In March 1996, the Company entered into an employment agreement with David
N. Birman, M.D. for a term expiring June 30, 2001, pursuant to which Dr. Birman
serves as Chief Executive Officer of the Company. The employment agreement
provides for an initial base salary of $350,000 per annum, participation in the
Executive Bonus Plan, and other compensation not to exceed $60,000 per annum.
The employment agreement provides for severance benefits upon termination as a
result of death, for "cause," by mutual agreement, and as a result of
disability. If Dr. Birman's employment is terminated for reasons other than
death, "cause," mutual agreement, or disability, he shall be entitled to receive
his base salary (as most recently adjusted) for the remainder of the initial
term or the applicable renewal term and all unvested stock options granted to
him under 1995 Option Plan shall accelerate and become vested. If Dr. Birman's
employment is not renewed following expiration of the initial term or the
applicable renewal term, he shall be entitled to receive, as severance, his base
salary (as last adjusted) payable over the 12-month period following the
severance of his employment.

46
<PAGE> 48

In March 1996, the Company entered into an employment agreement with Sue D.
Birman for a term expiring June 30, 2001, pursuant to which Ms. Birman serves as
Executive Vice President of the Company. The employment agreement provides for
an initial base salary of $150,000 per annum, participation in the Executive
Bonus Plan, and other compensation not to exceed $10,000 per annum. The
employment agreement provides for severance benefits upon termination as a
result of death, for "cause," by mutual agreement, and as a result of
disability. If Ms. Birman's employment is terminated for reasons other than
death, "cause," mutual agreement, or disability, she shall be entitled to
receive her base salary (as most recently adjusted) for the remainder of the
initial term or the applicable renewal term and all unvested stock options
granted to her under 1995 Option Plan shall accelerate and become vested. If Ms.
Birman's employment is not renewed following expiration of the initial term or
the applicable renewal term, she shall be entitled to receive, as severance, her
base salary (as last adjusted) payable over the 12-month period following the
severance of her employment.

In March 1996, the Company entered into an employment agreement with Robert
D. Arkin for a term expiring June 30, 2001, pursuant to which Mr. Arkin serves
as Chief Operating Officer, Secretary, and General Counsel of the Company. The
employment agreement provides for an initial base salary of $206,250 per annum,
participation in the Executive Bonus Plan, and other compensation not to exceed
$9,000 per annum. The employment agreement provides for severance benefits upon
termination as a result of death, for "cause," by mutual agreement, and as a
result of disability. If Mr. Arkin's employment is terminated for reasons other
than death, "cause," mutual agreement, or disability, he shall be entitled to
receive his base salary (as most recently adjusted) for the remainder of the
initial term or the applicable renewal term and all unvested stock options
granted to him under 1995 Option Plan shall accelerate and become vested. If Mr.
Arkin's employment is not renewed following expiration of the initial term or
the applicable renewal term, he shall be entitled to receive, as severance, his
base salary (as last adjusted) payable over the 12-month period following the
severance of his employment.

In March 1996, the Company entered into an employment agreement with
Douglas A. Lessard for a term expiring June 30, 2001, pursuant to which Mr.
Lessard serves as Chief Financial Officer of the Company. The employment
agreement provides for an initial base salary of $120,000 per annum,
participation in the Executive Bonus Plan, and other compensation not to exceed
$9,000 per annum. The employment agreement provides for severance benefits upon
termination as a result of death, for "cause," by mutual agreement, and as a
result of disability. If Mr. Lessard's employment is terminated for reasons
other than death, "cause," mutual agreement or disability, he shall be entitled
to receive his base salary (as most recently adjusted) for the remainder of the
initial term or the applicable renewal term and all unvested stock options
granted under the 1995 Option Plan shall accelerate and become vested. If Mr.
Lessard's employment is not renewed following expiration of the initial term or
the applicable renewal term, he shall be entitled to receive, as severance, his
base salary (as last adjusted) payable over the 12-month period following his
severance of employment.

In March 1996, the Company entered into an employment agreement with
Vincent W. Wong for a term expiring on January 31, 1999, pursuant to which Mr.
Wong serves as President and Chief Executive Officer of BMC Health Plans, Inc.
The employment agreement provides for an initial base salary to Mr. Wong of
$180,000 per annum. The employment agreement also provides Mr. Wong with the
opportunity to earn up to an additional $180,000 per annum based upon the number
of enrollees in health plans developed, managed, or operated by the Company and
health plan net earnings. The employment agreement provides for severance
benefits upon termination as a result of death, for "cause," by mutual
agreement, and as a result of disability. If Mr. Wong's employment is terminated
for reasons other than death, "cause," mutual agreement, or disability, he shall
be entitled to receive his base monthly salary (as most recently adjusted)
payable over the six month period following the severance of his employment, and
all unvested stock options granted to him under the 1995 Option Plan shall
accelerate and become vested.

In July 1995, the Company entered into an employment agreement with Mark C.
Wade for a term expiring on September 1, 1998, pursuant to which Mr. Wade serves
as Executive Vice President -- Sales and Marketing of BMC Health Plans, Inc. The
employment agreement provides for a base salary of $165,000 per annum with the
opportunity for Mr. Wade to earn up to an additional $85,000 per annum based
upon the

47
<PAGE> 49

number of enrollees in health plans developed, managed, or operated by the
Company. Mr. Wade's employment agreement does not contain a severance provision.

The Company has entered into an employment agreement with D. Bradley
Seitzinger, M.D. pursuant to which Dr. Seitzinger provides supervisory and other
services to the Company on a full-time basis. The employment agreement is
terminable by either party upon 14 days' prior written notice. The employment
agreement provides for the review of Dr. Seitzinger's salary from time to time
and authorizes the payment of additional compensation, by way of salary, bonus,
or otherwise, at the discretion of the Company. Dr. Seitzinger currently
receives a base salary of $208,000 per annum. Dr. Seitzinger's employment
agreement does not contain a severance provision.

In November 1993, the Company entered into an employment agreement with
William F. Barenkamp, II pursuant to which Mr. Barenkamp provides supervisory
and other services to the Company on a full-time basis. The employment agreement
is terminable by either party without prior notice upon a material breach of the
terms thereof. The employment agreement provides for the review of Mr.
Barenkamp's salary from time to time and authorizes the payment of additional
compensation, by way of salary, bonus, or otherwise, at the discretion of the
Company. Pursuant to the employment agreement, Mr. Barenkamp currently receives
a base salary of $100,000 per annum. Mr. Barenkamp's employment agreement does
not contain a severance provision.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the Delaware GCL, the personal liability of directors for monetary
damages for breach of their fiduciary duties as directors other than for
liabilities arising from (i) any breach of the directors' duty of loyalty to the
Company and its stockholders; (ii) acts or omissions that involve intentional
misconduct, fraud, or knowing violations of law; (iii) the payment of
distributions in violation of the Delaware GLC; or (iv) transactions in which
the director received an improper personal benefit. The Company's Bylaws require
the Company to indemnify directors and officers for all costs reasonably
incurred in connection with any action, suit, or proceeding in which such
director or officer is made a party by virtue of his or her being a director or
officer of the Company except where such director or officer is finally adjudged
to have been derelict in the performance of his or her duties as such director
or officer.

The Company has entered into indemnification agreements with its directors
and executive officers, which contain provisions which are in some respects
broader than the specific indemnification provisions contained in the Company's
Certificate of Incorporation and Bylaws. The indemnification agreements require
the Company, among other things, to indemnify such directors and officers
against certain liabilities that may arise by reason of their status as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature), to advance expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to carry directors' and
officers' insurance, if available on reasonable terms. The Company believes
these indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. It is the opinion of the staff of the
Securities and Exchange Commission that indemnification provisions such as those
that are contained in these indemnification agreements have no effect on a
director's or officer's liability under the federal securities laws.

Except for the legal action described under "Business -- Legal
Proceedings," there is no pending litigation or proceeding involving any
director, officer, employee, or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or other proceeding that may result in a claim for such indemnification.

CERTAIN TRANSACTIONS

Prior to June 30, 1995, the Company operated, as a division, a livestock
breeding farm on property owned by David N. Birman, M.D. and Sue D. Birman, his
spouse. At that time, Dr. Birman was the sole stockholder, President, and a
director of the Company, and Mrs. Birman was an Executive Vice President, the
Chief

48
<PAGE> 50

Financial Officer, and a director of the Company. Prior to June 30, 1994, the
Company lent to Dr. and Mrs. Birman approximately $482,000, which was used
primarily to improve their farm property and residence. During fiscal 1995, Dr.
and Mrs. Birman repaid $442,000 of such loan and also received additional
advances of approximately $270,000, resulting in an outstanding principal
balance of $310,000 at June 30, 1995. As of June 30, 1995, the Company
contributed all of its farm assets, subject to the related liabilities, to a new
corporation, Birman Farms, Inc., and distributed all of the outstanding shares
of capital stock of Birman Farms, Inc. to Dr. Birman. This dividend distribution
of property was valued by the Company at $230,000. Subsequent to the
distribution, the Company authorized additional advances to Dr. Birman through
September 1996 of approximately $465,000 to defray the operating and ownership
costs of the farm. Accordingly, as of September 9, 1996, Dr. Birman owed a total
of $775,000 to the Company. The Company has made no further advances to Dr.
Birman to defray the operating and ownership costs of the farm. All amounts owed
to the Company by Dr. Birman accrued interest at a rate of 7% per annum through
August 31, 1996 and will accrue interest at the prime rate of American National
Bank and Trust Company of Chicago from and after September 1, 1996. Interest is
payable annually, in arrears. The outstanding principal balance of the loan plus
all unpaid accrued interest is due and payable in full on August 31, 1999. Dr.
Birman has the option to tender shares of Common Stock owned by him in repayment
of the loan at any time on or prior to January 31, 1997 at a per share price
equal to the initial offering price of the Common Stock or after January 31,
1997 at a price per share equal to 92% of the average closing bid price of the
Common Stock as reported over the previous 20 consecutive trading days. Dr.
Birman has agreed to tender approximately 177,000 shares of Common Stock valued
at $4.50 per share in repayment of approximately $796,500 of outstanding
principal and interest as of the date of this Prospectus which will repay in
full all outstanding advances to Dr. and Ms. Birman. The shares being tendered
to the Company by Dr. Birman were acquired by him in his capacity as the founder
of the Company for nominal consideration. The repayment of the indebtedness will
relieve Dr. Birman of his obligation to pay interest of approximately $65,700
per year (at the current prime rate of American National Bank and Trust Company
of Chicago) and will reduce the ownership of Common Stock by Dr. and Mrs. Birman
by approximately 3%. No additional loans will be made by the Company to any
member of management without the approval of the non-employee members of the
Board of Directors of the Company. Dr. Birman has granted the Underwriters a
45-day option to purchase up to 237,500 shares of Common Stock at the initial
public offering price, solely to cover over-allotments, if any.

Richard M. Ross served as Vice-Chairman and as a director of the Company
from February 1994 to August 1996. Effective September 1, 1996, Mr. Ross retired
as Vice-Chairman and a newly formed company controlled by Mr. Ross was engaged
as a consultant to the Company pursuant to a consulting agreement (the
"Consulting Agreement"). While serving as Vice-Chairman of the Company, Mr. Ross
was actively involved in policy-making matters relating to day-to-day operations
of the Company and corporate finance. As a consultant, Mr. Ross will undertake
special assignments designated by Dr. Birman and the Board of Directors
including, among other things, developing business plans for acquired companies
and evaluating acquisition candidates. The Consulting Agreement provides for Mr.
Ross to serve as the provider of consulting services thereunder, provides for a
fee to be paid to the consultant firm of $186,000 per annum payable in equal
monthly installments over the 12-month term of the agreement, and provides for
termination of the Consulting Agreement by mutual agreement, upon the occurrence
of an uncured material breach, upon the death of Mr. Ross, or 10 days after
receipt of notice of termination from the consultant. Except as otherwise
provided or as otherwise agreed to by the parties, the Consulting Agreement will
be renewed annually by the Company for up to an additional five consecutive
years. The Company also paid Mr. Ross a $26,000 severance fee and has
transferred to Mr. Ross personal computer equipment used by Mr. Ross in
rendering services to the Company and having a value of less than $1,000. In
addition, Dr. Birman has sold Mr. Ross 175,000 shares of Company Common Stock in
consideration for a $175,000 principal amount promissory note.

49
<PAGE> 51

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of December 31, 1996 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, based
on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person (or group of
affiliated persons) who is known by the Company to own beneficially more than 5%
of the Common Stock; (ii) each of the Named Executive Officers; (iii) each of
the directors; and (iv) all directors and executive officers of the Company as a
group.

<TABLE>
<CAPTION>
COMMON SHARES COMMON SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------ ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------ ------------ ------- --------- -------
<S> <C> <C> <C> <C>
David N. Birman, M.D.(1)........................ 5,081,408 75.84% 4,904,408 56.02%
Sue D. Birman(1)................................ 5,081,408 75.84% 4,904,408 56.02%
D. Bradley Seitzinger, M.D.(2).................. 85,096(3) 1.22% 85,096(3) *
Robert D. Arkin(2).............................. 97,252(3) 1.38% 97,252(3) 1.11%
Richard M. Ross................................. 175,000 2.52% 175,000 2.00%
James J. Rhodes(2).............................. 0 0 0 0
Diedrich Von Soosten(2)......................... 0 0 0 0
Directors and officers as a group (10
persons)...................................... 5,463,069(3) 76.93% 5,463,069(3) 62.41%
</TABLE>

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

* Less than 1%

(1) Includes 1,000,000 Escrow Shares but excludes 177,000 to be tendered upon
consummation of the offering. See "Principal Stockholders -- Escrow Shares"
and "Certain Transactions". David N. Birman, M.D. disclaims beneficial
ownership as to 547,047 shares beneficially owned by Sue D. Birman
individually. Sue D. Birman disclaims beneficial ownership as to 4,344,663
shares beneficially owned by David N. Birman, M.D. individually. The address
of Dr. and Mrs. Birman is c/o the Company at 502 Gould Drive, Cookesville,
Tennessee 38506.

(2) Does not include options to purchase shares of Common Stock scheduled to
first become exercisable more than 60 days after the date of this
Prospectus. See "Management -- Stock Option Plans" and "Management -- Fiscal
1996 Option Grants."

(3) Includes shares subject to options exercisable within 60 days after the date
of the Prospectus of 48,626 shares for Dr. Seitzinger, 97,252 shares for Mr.
Arkin, and 170,191 for all officers and directors as a group.

The following stockholders have granted to the Underwriters an option
exercisable within 45 days of the date of this Prospectus to purchase up to a
total of 300,000 shares of Common Stock at the initial public offering price,
less underwriting discounts and commissions set forth on the cover page of this
Prospectus, to cover over-allotments, if any. See "Underwriting."

50
<PAGE> 52

<TABLE>
<CAPTION>
COMMON
COMMON SHARES
SHARES NO. OF SHARES IN OWNED AFTER
SELLING STOCKHOLDER OWNED OVER-ALLOTMENT OPTION EXERCISE(1)
- ------------------------------------------------- ---------- --------------------- -----------
<S> <C> <C> <C>
David N. Birman.................................. 5,081,408 237,500 4,666,908(2)
Danny F. Cooke................................... 145,879 20,000 125,879
National Benefit Resources Inc. ................. 291,758 30,000 261,758
Sunyata International, Ltd. ..................... 36,470 5,000 31,470
SWRT Profit Sharing Plan......................... 36,470 5,000 31,470
Gary Klar........................................ 18,235 2,500 15,735
</TABLE>

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

(1) Amounts shown assume the Underwriters exercise the over-allotment option in
full. If the Underwriters exercise the over-allotment option in full, David
N. Birman, Danny F. Cooke, and National Benefit Resources Inc. will own
53.25%, 1.44%, and 2.99% shares, respectively upon completion of this
offering.

(2) Includes 1,000,000 Escrow Shares but excludes 177,000 to be tendered upon
consummation of the offering. See "Principal Stockholders -- Escrow Shares"
and "Certain Transactions."

ESCROW SHARES

In connection with this offering David N. Birman, M.D. has deposited
1,000,000 shares of Common Stock into escrow. The Escrow Shares are not
assignable or transferable. Of the Escrow Shares, (i) 333,333 will be released
from escrow if the Company's net after tax income per share (the "Minimum
After-Tax Income") for the fiscal year ending June 30, 1997 equals or exceeds
$0.17 per share of then issued and outstanding shares of Common Stock of the
Company; (ii) 333,333 Escrow Shares (or, if the condition set forth in (i) above
was not met, 666,666 Escrow Shares) will be released if the Minimum After-Tax
Income for the fiscal year ending June 30, 1998, equals or exceeds $0.26 per
share of then issued and outstanding shares of Common Stock of the Company; and
(iii) 333,334 Escrow Shares (or, if the conditions set forth in either (i) or
(ii) were not met, the remaining Escrow Shares) will be released if the Minimum
After-Tax Income for the fiscal year ending June 30, 1999, equals or exceeds
$0.39 per share of then issued and outstanding shares of Common Stock of the
Company.

The Minimum After-Tax Income amounts set forth above will be (a) calculated
based upon the actual shares outstanding and calculated on a weighed average
fully diluted basis in accordance with generally accepted accounting principles,
exclusive of any extraordinary earnings or charges (including any charges
incurred in connection with the release from escrow of the Escrow Shares and any
Escrow Property (as defined below) in respect thereof) and (b) audited by the
Company's independent public accountants. The Minimum After-Tax Income amounts
set forth above will be subject to adjustment in the event of any stock splits,
reverse stock splits, or other similar events.

Any money, securities, rights, or property distributed in respect of the
Escrow Shares shall be received by the escrow agent, including any property
distributed as dividends or pursuant to any stock split, merger,
recapitalization, dissolution, or total or partial liquidation of the Company
(the "Escrow Property"). If the applicable Minimum After-Tax Income levels set
forth above have not been met by July 1, 1999, the Escrow Shares, as well as any
dividends or other distributions made with respect thereto, will be canceled and
contributed to the capital of the Company. The Company expects that the release
of the Escrow Shares to Dr. Birman would be deemed compensatory and,
accordingly, would result in a substantial charge to operations, which would
equal the then fair market value of such shares. Such charge could substantially
increase the loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period during which such shares are, or become
probable of being, released from escrow. Although the amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity, it may have a negative effect on the market price of the
Company's securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 16 of the Notes to the Company's
Consolidated Financial Statements.

The Minimum After-Tax Income levels set forth above were determined by
negotiation between the Company and the Representative and should not be
construed to imply or predict any future earnings by the Company or any increase
in the market price of its securities.

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<PAGE> 53

DESCRIPTION OF SECURITIES

GENERAL

The Company is incorporated in the State of Delaware. The Company is
authorized to issue 25,000,000 shares of Common Stock, $.001 par value per
share, and 5,000,000 shares of Preferred Stock, $.001 par value per share.

PREFERRED STOCK

There are no shares of Preferred Stock issued and outstanding. The Board of
Directors is authorized, subject to any limitations prescribed by law, without
further action of the stockholders of the Company, to issue from time to time
such shares of Preferred Stock in one or more classes or series, to establish
the number of shares to be included in each such class or series, to fix or
alter the designations, preferences, limitations and relative, participating,
optional or other special rights and qualifications or restrictions of the
shares of each such class or series, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences, and the
number of shares constituting any class or series or the designations of such
class or series. The issuance of Preferred Stock could adversely affect, among
other things, the rights of existing stockholders or could delay or prevent a
change in control of the Company without further action by the stockholders. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock. In addition, any such
issuance could have the effect of delaying, deferring, or preventing a change in
control of the Company and could make the removal of the present management of
the Company more difficult.

COMMON STOCK

As of January 1, 1997, there were 6,931,082 shares of Common Stock issued
and outstanding, held of record by 38 stockholders. All of the issued and
outstanding shares of Common Stock are fully paid and non-assessable and all of
the shares of Common Stock issued in this Offering will be fully paid and
non-assessable. Holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders and are
entitled to receive such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available therefor, subject to
the dividend preferences of the Preferred Stock, if any. Upon the liquidation,
dissolution, or winding up of the affairs of the Company, whether voluntary or
involuntary, the holders of Common Stock are entitled to share ratably in all
assets of the Company available for distribution after payment of all
liabilities and liquidation preferences of the Preferred Stock, if any. Holders
of Common Stock have no preemptive rights, no cumulative voting rights, and no
rights to convert their Common Stock into any other securities.

SECTION 203 OF THE DELAWARE GCL AND CERTAIN CHARTER PROVISIONS

Upon the completion of this offering, the Company will be subject to
Section 203 of the Delaware GCL. Section 203 of the Delaware GCL prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owns at least 85% of the outstanding voting stock, or
(iii) on or after such date, the business combination is approved by the board
of directors and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder. A "business
combination" includes mergers, asset sales, and other transactions resulting in
a financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of the corporation's voting stock.

The Company's Certificate of Incorporation and By-Laws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "antitakeover"
effect in that such provisions may delay, defer, or prevent a change of control
of the

52
<PAGE> 54

Company. These provisions include (a) the requirement that not less than 60% of
the voting power present and entitled to vote approve any proposal for (1) the
merger of the Company with any other corporation, (2) the sale, lease, transfer,
or other disposition of all or any substantial part of the Company's assets, or
(3) the issuance of any of the Company's voting securities in exchange or
payment for any securities or other property of any corporation or other entity;
(b) the requirement that certain business combinations with a control person be
approved by the affirmative vote of not less than 66 2/3% of the votes entitled
to be cast generally by the outstanding Common Stock or be unanimously approved
by the Company's Board of Directors; and (c) the authority of the Board of
Directors to issue series of Preferred Stock with such voting rights and other
powers as the Board of Directors may determine.

REGISTRATION RIGHTS

If the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other holders
of Company securities, NBR, as the holder of 291,756 shares of Common Stock, and
its permitted transferees are entitled to notice of such registration and are
entitled to include their shares of Common Stock therein, provided, among other
conditions, that the underwriters of such offering will have the right to limit
the number of such shares of Common Stock included in the registration. The
foregoing "piggyback" registration rights do not apply to the registration of
securities for issuance in merger or acquisition transactions or pursuant to
employee compensation programs. The "piggyback" registration rights expire at
the time as NBR may resell its shares of Common Stock pursuant to Rule 144(k)
under the Securities Act. NBR has waived its rights with respect to this
offering. The number of shares held by NBR that are subject to the registration
rights will be reduced to the extent that any such shares are sold pursuant to
the exercise of the Underwriters' over-allotment option. See "Principal and
Selling Stockholders" and "Underwriting."

TRANSFER AGENT

The Company's Transfer Agent is American Stock Transfer and Trust Company,
40 Wall Street, New York, New York 10005.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
8,754,082 shares of Common Stock assuming no exercise of the Representative's
Warrants or other outstanding options and warrants. All shares acquired in this
offering, other than shares that may be acquired by "affiliates" of the Company
as defined by Rule 144 under the Securities Act, will be freely transferable
without restriction or further registration under the Securities Act.

The remaining 6,754,082 shares of Common Stock outstanding after this
offering are deemed "restricted securities," as that term is defined under Rule
144 promulgated under the Securities Act, in that such shares were issued and
sold by the Company in private transactions not involving a public offering. Of
the 6,754,082 shares of Common Stock outstanding, approximately 292,000 shares
will be eligible for sale pursuant to Rule 144 commencing 90 days from the date
of this Prospectus. NBR, as the holder of 291,756 shares of Common Stock, and
its permitted transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Securities -- Registration Rights." The number of outstanding shares of Common
Stock that are considered restricted securities and the number of shares of
Common Stock held by NBR subject to registration rights (if NBR is a selling
stockholder) will be reduced to the extent of sales of such shares pursuant to
the Underwriters' over-allotment option, but will continue to be subject to the
lock-up agreements. See "Principal Stockholders."

In general, under Rule 144 as currently in effect, subject to satisfaction
of certain other conditions, a person (or persons whose shares are required to
be aggregated), including any affiliate of the Company, who beneficially owns
"restricted shares" for a period of at least two years, is entitled to sell
within any three-month period, a number of shares that does not exceed the
greater of 1% (approximately 87,540 shares after this offering) of the
then-outstanding shares of Common Stock, or if the Common Stock is quoted on
Nasdaq, the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of the required notice of sale with the
Securities and Exchange Commission. The seller also must comply with the notice
and manner of sale requirements of Rule 144, and there must be current public
information available about the Company. In addition, any person (or persons
whose shares are aggregated) who has

53
<PAGE> 55

beneficially owned restricted shares for at least three years and is not an
affiliate of the Company can sell such shares under Rule 144 without regard to
any of the limitations described above.

The Company intends to file a registration statement under the Securities
Act to register 1,558,780 shares of Common Stock reserved for issuance upon the
exercise of options which have been or may be granted pursuant to the 1995
Option Plan and the 1996 Directors' Plan. See "Management -- Stock Option
Plans." Such registration statement is expected to be filed not earlier than one
year after the date of this Prospectus and is anticipated to become effective
upon its filing. After the effective date of such registration statement, shares
acquired upon the exercise of such options may generally be sold without
restriction in the public market, subject to Rule 144 notice requirements and
volume limitations for stockholders who are affiliates of the Company.

Each holder of Common Stock who is an officer, director, or key employee of
the Company has entered into a "lock-up" agreement providing that such persons
will not offer, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any shares of the Company's Common
Stock that they currently own or that they subsequently acquire upon exercise of
options or warrants for a period of 24 months after the date of this Prospectus
without the prior written consent of the Representative. In addition,
substantially all of the Company's other stockholders have agreed not to sell
their shares of Common Stock that they currently own or that they subsequently
acquire upon exercise of options or warrants for a period of 22 months after the
date of this Prospectus.

Prior to this offering, there has been no public market for the Common
Stock of the Company, and no predictions can be made regarding the effect, if
any, that future sales of restricted shares or the availability of restricted
shares for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the restricted shares of Common
Stock in the public market could adversely affect the then prevailing market
prices for the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities.

54
<PAGE> 56

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through the Representative, Royce Investment Group,
Inc., have severally agreed to purchase from the Company the number of shares of
Common Stock set forth opposite their names at the initial public offering price
less the underwriting discount and commissions set forth on the cover page of
this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Royce Investment Group, Inc...............................................
Continental Broker-Dealer Corp. ..........................................
Total........................................................... 2,000,000
========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below) if the
Underwriters purchase any of the shares offered hereby. The Representative has
advised the Company that the Underwriters propose to offer the Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus, and that they may allow to certain dealers that are members of the
National Association of Securities Dealers, Inc. (the "NASD") concessions not in
excess of $. per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to other dealers
who are members of the NASD. After the commencement of this offering, the public
offering price, the concession, and the reallowance may be changed by the
Underwriters.

The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to 3.0% of the gross proceeds derived from the sale of
the Common Stock offered hereby, including any Common Stock purchased from the
selling stockholders upon exercise of the Underwriters' over-allotment option,
of which $ has been paid to date. Any expenses in excess of such
expense allowance will be borne by the Underwriters. The Company also has agreed
to pay all expenses in connection with qualifying the shares of Common Stock
offered hereby for sale under the laws of such states as the Representative may
designate, including expenses of counsel retained for such purpose.

Certain stockholders of the Company have granted to the Underwriters an
option, exercisable during the 45-day period commencing on the date of this
Prospectus, to purchase up to 300,000 additional shares of Common Stock from
them at the public offering price set forth on the cover page of this
Prospectus, less underwriting discounts and commissions. The Underwriters may
purchase these shares solely to cover over-allotments, if any, in connection
with the sale of shares of Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each Underwriter will be committed, subject
to certain conditions, to purchase a number of additional shares proportionate
to such Underwriter's initial commitment.

The Company has agreed to sell to the Representative and its designees, for
nominal consideration, the Representative's Warrants to purchase up to 200,000
shares of Common Stock. The Representative's Warrants will be exercisable during
the four-year period commencing one year from the date of this Prospectus at an
exercise price of $7.50 per share (150% of the initial public offering price of
the Common Stock), subject to adjustment in certain events. The Representative's
Warrants will not be transferable for a period of one year from the date of this
Prospectus except to officers of the Underwriters or members of the selling
group. The Company has agreed to register the Common Stock issuable upon
exercise of the Representative's Warrants under the Securities Act during the
four-year period commencing one year from the date of this Prospectus on two
separate occasions, the initial such registration to be at the Company's expense
and the second at the expense of the holders. The Company has also granted
certain "piggyback" registration rights to holders of the Representative's
Warrants during the seven-year period following the date of this Prospectus. The
Representative's Warrants include a provision permitting the holders to elect a
cashless exercise.

During the term of the Representative's Warrants, the holders will have the
opportunity to profit from a rise in the market price of the Company's Common
Stock with a resulting dilution in the interests of the Company's other
stockholders. Any profit realized by the holders of the Representative's
Warrants upon the sale of such warrants or the Common Stock issuable thereunder
may be deemed to be additional underwriting

55
<PAGE> 57

compensation. The holders of the Representative's Warrants may be expected to
exercise the Representative's Warrants at a time when the Company in all
likelihood would be able to obtain equity capital on terms more favorable than
those provided in the Representative's Warrants.

The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.

Prior to this offering, there has been no public market for any of the
Common Stock offered hereby. Accordingly, the offering price of the shares of
Common Stock offered hereby has been determined by negotiations between the
Company and the Representative and is not necessarily related to the Company's
asset value, net worth, or other established criteria of value. Factors
considered in determining such price and terms, in addition to prevailing market
conditions, include the history of and the prospects for the industry in which
the Company competes, the present state of the Company's development and its
future prospects, an assessment of the Company's management, the Company's
capital structure, the general condition of the securities markets, and such
other factors as were deemed relevant.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain liabilities in connection with the
Registration Statement, including liabilities under the Securities Act.

For a period of five years following the closing of this offering, the
Representative will have the right to nominate one member of the Company's Board
of Directors.

Upon completion of this offering, the Company will enter into a one-year
financial consulting agreement with the Representative. Under this agreement,
the Company will pay the Representative a fee equal to 1.5% of the gross
proceeds derived from the sale of Common Stock offered hereby, including any
Common Stock sold upon exercise of the over-allotment option, for financial
consulting services provided to the Company by the Representative. Also upon
completion of this offering, the Company and the Representative will enter into
an agreement that will provide that in the event the Representative arranges for
the sale of substantially all of the assets of the Company or for a merger,
consolidation, or acquisition during the five-year period commencing on the date
of this Prospectus, the Representative will receive a fee based on a sliding
scale ranging from 5% of the first $1.0 million of consideration, 4% of the
consideration between $1.0 million and $2.0 million, and 3% of the consideration
in excess of $2.0 million.

The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and does not purport to be a complete statement of its
terms and conditions. A copy of the Underwriting Agreement is on file with the
Securities and Exchange Commission as an exhibit to the Registration Statement
of which this Prospectus is a part. See "Available Information."

The Representative has indicated its intention to make a market in the
Company's Common Stock after the offering made hereby. In connection with that
activity, the Representative may but shall not be required to effect
transactions which stabilize or maintain the market price of the Common Stock at
a level above that which might otherwise prevail in the open market. Such
stabilizing, if commenced, may be discontinued at any time.

LEGAL OPINIONS

The validity of the shares of Common Stock will be passed upon for the
Company by Rudnick & Wolfe, 203 North LaSalle Street, Chicago, Illinois. Certain
legal matters related to health care law will be passed upon for the Company by
Schottenstein, Zox & Dunn, 41 South High Street, Columbus, Ohio. Certain legal
matters will be passed upon for the Underwriters by O'Connor, Cavanagh,
Anderson, Killingsworth & Beshears, a professional association, One East
Camelback Road, Phoenix, Arizona.

EXPERTS

The financial statements of the Company and of Canton for the fiscal year
ended June 30, 1996 included in this Prospectus have been audited by BDO
Seidman, LLP, independent certified public accountants. The financial statements
of the Company and Canton for the fiscal year ended June 30, 1995 included in
this Prospectus have been audited by Semple & Cooper, P.L.C., independent
certified public accountants, for the

56
<PAGE> 58

period indicated in their report thereof. Such financial statements have been
included herein in reliance upon the reports of such firms given upon their
authority as experts in accounting and auditing.

CHANGE IN ACCOUNTANTS

On July 24, 1996 the Company, with the approval of the Board of Directors,
advised Semple & Cooper, P.L.C. that it was dismissing such accounting firm and
was retaining the accounting firm of BDO Seidman, LLP as independent public
accountants for the Company and its subsidiaries for the fiscal year ended June
30, 1996. The decision to retain BDO Seidman, LLP was made because of that
firm's extensive experience in representing public companies and was not
motivated by any disagreements between the Company and Semple & Cooper, P.L.C.
concerning any accounting matter. Semple & Cooper, P.L.C. had been retained
since 1994 and during the entire period of their engagement with the Company
there were no disagreements on any matter relative to accounting principles or
practices, financial statement disclosure, or auditing scope or procedures
which, if not resolved to Semple & Cooper, P.L.C.'s satisfaction, would have
resulted in a reference to the subject matters of the disagreement in connection
with its report. The Semple & Cooper, P.L.C. reports on the Company's financial
statements have not contained an adverse opinion or a disclaimer of opinion, nor
were the opinions qualified or modified as to uncertainty, audit scope, or
accounting principles, nor were there any events of the type requiring
disclosure under Item 304(a)(1)(iv) of Regulation S-B promulgated under the
Securities Act. During the two-year period prior to July 24, 1996, the Company
did not consult BDO Seidman, LLP concerning any matter or the type of opinion
that might be rendered.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus constitutes a part of the Registration Statement and does not contain
all of the information set forth therein and in the exhibits thereto, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to such Registration
Statement and exhibits. Statements contained in this Prospectus as to the
contents of any document are not necessarily complete and in each instance are
qualified in their entirety by reference to the copy of the appropriate document
filed with the Commission. The Registration Statement, including the exhibits
thereto, may be examined without charge at the Commission's public reference
facility at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C.
20549. In addition, copies of all or any part of the Registration Statement,
including such exhibits thereto, may be obtained from the Commission at its
principal office in Washington, D.C., upon payment of the fees prescribed by the
Commission.

The Registration Statement and the reports and other information to be
filed by the Company following this offering in accordance with the Securities
Exchange Act of 1934, as amended, can be inspected and copied at the principal
office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549, and at the following regional offices of the Commission:
7 World Trade Center, New York, NY 10048, and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Il 60601. Copies of such material may
be obtained from the Public Reference Section of the Commission at its principal
office at 450 Fifth Street, N.W., Washington D.C. 20549, upon payment of the
fees prescribed by the Commission. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding registrants, such as the Company, that file
electronically with the Commission.

The Company intends to provide its stockholders with annual reports
containing financial statements audited by independent auditors and quarterly
reports for the first three fiscal quarters of each year containing unaudited
summary consolidated financial information.

57
<PAGE> 59

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES
Reports of Independent Certified Public Accountants............................ F-2 & F-3
Consolidated Balance Sheet as of June 30, 1996 and September 30, 1996
(Unaudited).................................................................. F-4
Consolidated Statements of Operations for the years ended June 30, 1995 and
1996 and the three months ended September 30, 1995 and 1996 (Unaudited)...... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
June 30, 1995 and 1996 and the three months ended September 30, 1996
(Unaudited).................................................................. F-6
Consolidated Statements of Cash Flows for the years ended June 30, 1995 and
1996 and the three months ended September 30, 1995 and 1996 (Unaudited)...... F-7
Notes to Consolidated Financial Statements..................................... F-8

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES PROFORMA FINANCIAL STATEMENTS
Introduction to Proforma Condensed Consolidated Financial Statements
(Unaudited).................................................................. F-18
Proforma Condensed Consolidated Balance Sheet as of September 30, 1996
(Unaudited).................................................................. F-19
Proforma Condensed Statement of Operations for the year ended June 30, 1996
(Unaudited).................................................................. F-20
Proforma Consolidated Statement of Operations for the three months ended
September 30, 1996 (Unaudited)............................................... F-21
Notes to Proforma Condensed Consolidated Financial Statements (Unaudited)...... F-22

CANTON MANAGEMENT GROUP, INC., (A DEVELOPMENT STAGE COMPANY)
Reports of Independent Certified Public Accountants............................ F-24 & F-25
Balance Sheet as of June 30, 1996 and September 30, 1996 (Unaudited)........... F-26
Statements of Operations for the years ended June 30, 1995 and 1996 and for the
period from October 3, 1993 (Inception) to June 30, 1996 and the three months
ended September 31, 1995 and 1996 (Unaudited)................................ F-27
Statements of Changes in Stockholder's Equity for the period from October 3,
1993 (Inception) to June 30, 1996 and the three months ended September 30,
1996 (Unaudited)............................................................. F-28
Statements of Cash Flows for the years ended June 30, 1995 and 1996 and for the
period from October 3, 1993 (Inception) to June 30, 1996 and the three months
ended September 30, 1995 and 1996 (Unaudited)................................ F-29
Notes to Financial Statements.................................................. F-30
</TABLE>

F-1
<PAGE> 60

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Birman Managed Care, Inc. and Subsidiaries
Cookeville, Tennessee

We have audited the accompanying consolidated balance sheet of Birman
Managed Care, Inc. and Subsidiaries (the "Company") as of June 30, 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Birman
Managed Care, Inc. and Subsidiaries at June 30, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

BDO Seidman, LLP

Los Angeles, California
August 2, 1996, except for
Notes 7 and 16, which are as
of September 9, 1996

F-2
<PAGE> 61

INDEPENDENT AUDITORS' REPORT

To The Stockholders and Board of Directors of
Birman Managed Care, Inc. and Subsidiaries

We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of Birman Managed Care, Inc. and
Subsidiaries for the year ended June 30, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations, changes in
stockholders' equity, and cash flows of Birman Managed Care, Inc. and
Subsidiaries for the year ended June 30, 1995, in conformity with generally
accepted accounting principles.

SEMPLE & COOPER, P.L.C.

Certified Public Accountants

Phoenix, Arizona
July 19, 1996

F-3
<PAGE> 62

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
JUNE 30, -------------
1996
---------- (UNAUDITED)
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents (Notes 1 and 2)................ $1,872,343 $ 1,449,652
Accounts receivable, net of allowance for doubtful
accounts of $44,159
(Notes 1, 2, and 16).................................. 1,043,771 992,903
Prepaid expenses and other............................... 9,903 48,245
Notes receivable......................................... 22,323 27,802
Deferred tax asset (Notes 1 and 8)....................... 95,549 95,549
---------- ----------
Total current assets............................. 3,043,889 2,614,151
---------- ----------
Property and equipment, net of accumulated depreciation
(Notes 1, 4, 5 and 6).................................... 293,684 413,303
Note receivable-related party (Note 3)..................... 631,173 775,000
Deferred offering costs (Note 1)........................... 25,000 475,960
Goodwill (Note 1).......................................... 16,145 15,741
Other assets............................................... -- 47,506
---------- ----------
Total assets..................................... $4,009,891 $ 4,341,661
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable (Note 5)................. $ 2,435 $ 2,496
Current portion of capital lease obligations (Note 6).... 1,540 2,505
Accounts payable......................................... 117,025 698,158
Accrued expenses......................................... 2,050 --
Income taxes payable (Notes 1 and 8)..................... 635,205 148,308
---------- ----------
Total current liabilities........................ 758,255 851,467
Note payable, less current portion (Note 5)................ 5,028 4,404
Capital lease obligations, less current portion (Note 6)... 2,009 --
Deferred income taxes payable (Notes 1 and 8).............. 55,620 55,620
---------- ----------
Total liabilities................................ 820,912 911,491
---------- ----------
Commitments and contingencies (Notes 3 and 7).............. -- --
Stockholders' equity: (Note 11)
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued or outstanding................ -- --
Common stock, $.001 par value, 25,000,000 shares
authorized, 6,931,082 issued and outstanding.......... 6,931 6,931
Additional paid-in capital............................... 1,780,612 1,780,612
Retained earnings........................................ 1,401,436 1,642,627
---------- ----------
Total stockholders' equity....................... 3,188,979 3,430,170
---------- ----------
Total liabilities and stockholders' equity....... $4,009,891 $ 4,341,661
========== ==========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

F-4
<PAGE> 63

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED
------------------------- THREE MONTHS ENDED
JUNE 30, JUNE 30, -------------------------------
1995 1996 SEPTEMBER 30, SEPTEMBER 30,
---------- ---------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................. $4,817,572 $8,416,946 $ 1,417,291 $ 2,372,137
Cost of revenue......................... 2,381,023 2,278,932 431,208 888,516
---------- ---------- ---------- ----------
Gross margin............................ 2,436,549 6,138,014 986,083 1,483,621
Selling, general and administrative
expenses.............................. 3,113,660 4,236,607 925,731 1,169,119
---------- ---------- ---------- ----------
Income (loss) from operations........... (677,111) 1,901,407 60,352 314,502
---------- ---------- ---------- ----------
Other income (expense):
Interest expense...................... (57,857) (44,835) (10,295) (247)
Interest income....................... 28,758 47,257 4,661 38,338
Loss on sale of assets................ (1,464) (5,065) -- --
---------- ---------- ---------- ----------
(30,563) (2,643) (5,634) 38,091
---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes.......................... (707,674) 1,898,764 54,718 352,593
Provision for income tax (expense)
benefit (Note 8)...................... 224,331 (726,983) (19,750) (111,402)
---------- ---------- ---------- ----------
Income (loss) from continuing
operations............................ (483,343) 1,171,781 34,968 241,191
Discontinued operations: (Note 10)
Loss from discontinued operations (net
of income tax benefit of $143,700
in 1995)........................... (215,550) -- -- --
---------- ---------- ---------- ----------
Net income (loss)....................... $ (698,893) $1,171,781 $ 34,968 $ 241,191
========== ========== ========== ==========
Primary income (loss) per common stock
share: (Note 1)
Income (loss) from continuing
operations......................... $ (.07) $ .17 $ .01 $ .04
Loss from discontinued operations..... (.03) -- -- --
---------- ---------- ---------- ----------
Net income (loss) per share........... $ (.10) $ .17 $ .01 $ .04
---------- ---------- ---------- ----------
Weighted average common shares
outstanding (Note 1).................. 6,703,517 6,703,517 6,703,517 6,703,517
========== ========== ========== ==========
Fully diluted income (loss) per common
stock share: (Note 1)
Income (loss) from continuing
operations......................... $ (.07) $ .15 $ .00 $ .03
Loss from discontinued operations..... (.03) -- -- --
---------- ---------- ---------- ----------
Net income (loss) per share........... $ (.10) $ .15 $ .00 $ .03
========== ========== ========== ==========
Weighted average common shares
outstanding (Note 1).................. 6,703,517 7,703,517 7,703,517 7,703,517
========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

F-5
<PAGE> 64

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND THE THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
PREFERRED ------------------ PAID-IN RETAINED STOCKHOLDERS'
STOCK SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- --------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994......... $ -- 5,470,467 $5,471 $ 2,029 $1,158,548 $ 1,166,048
Dividend distribution (Note
10)............................ -- -- -- -- (230,000) (230,000)
Net loss......................... -- -- -- -- (698,893) (698,893)
------- --------- ------ ---------- ---------- -----------
Balance at June 30, 1995......... -- 5,470,467 5,471 2,029 229,655 237,155
Stock sales (Note 11)............ -- 1,332,970 1,333 1,603,710 -- 1,605,043
Issuance of stock for debt....... -- 127,645 127 174,873 -- 175,000
Net income....................... -- -- -- -- 1,171,781 1,171,781
------- --------- ------ ---------- ---------- -----------
Balance at June 30, 1996......... -- 6,931,082 6,931 1,780,612 1,401,436 3,188,979
Net income (unaudited)........... -- -- -- -- 241,191 241,191
------- --------- ------ ---------- ---------- -----------
Balance at September 30, 1996
(unaudited).................... $ -- 6,931,082 $6,931 $1,780,612 $1,642,627 $ 3,430,170
======= ========= ====== ========== ========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

F-6
<PAGE> 65

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED
------------------------- THREE MONTHS ENDED
JUNE 30, JUNE 30, -----------------------------
1995 1996 SEPTEMBER 30, SEPTEMBER 30,
----------- ----------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents
Cash flows from operating activities:
Net income (loss) from continuing
operations................................ $ (483,343) $ 1,171,781 $ 34,968 $ 241,191
----------- ----------- -------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............. 83,981 73,814 17,995 22,865
Loss on sale of assets.................... 1,464 5,065 -- --
Interest income debited to note
receivable............................. (28,427) (28,011) (3,953) (17,074)
Receivable converted to note receivable... (5,500) -- -- --
Loss from discontinued operations......... (215,550) -- -- --
Interest expense credited to note
payable................................ 1,900 -- 1,900 --
Changes in operating assets and
liabilities:
Accounts receivable.................... 241,193 (547,706) (128,365) 50,868
Prepaid expenses and other............. -- (9,903) -- (38,342)
Deferred tax asset..................... (308,970) 27,372 18,892 --
Goodwill............................... -- (16,145) -- --
Other assets........................... -- -- -- (47,506)
Accounts payable -- trade.............. 8,439 (264,953) (57,061) 581,133
Accrued expenses....................... 8,771 (6,721) 228 (2,050)
Income taxes payable
-- current........................... (35,260) 596,138 (8,799) (486,897)
-- deferred.......................... (98,128) 213,421 678 --
----------- ----------- -------- -----------
(346,087) 42,371 (158,485) 62,997
----------- ----------- -------- -----------
Net cash provided by (used in) operating
activities................................ (829,430) 1,214,152 (123,517) 304,188
----------- ----------- -------- -----------
Cash flows from investing activities:
Purchase of property and equipment........ (65,527) (107,035) (10,605) (142,080)
Collection of notes receivable -- related
parties................................ 441,784 -- 107,187 9,000
Advances for notes receivable -- related
party.................................. (269,930) (343,579) (250,360) (141,232)
Proceeds from sale of assets.............. 144,299 2,325 -- --
----------- ----------- -------- -----------
Net cash provided by (used in)
investing activities................. 250,626 (448,289) (153,778) (274,312)
----------- ----------- -------- -----------
Cash flows from financing activities:
Deferred offering costs................... -- (25,000) (25,000) (450,960)
Proceeds from debt........................ 1,091,000 81,548 161,100 --
Payments on debt.......................... (548,070) (565,444) (256,900) (1,607)
Proceeds from sale of stock............... -- 1,605,043 392,500 --
----------- ----------- -------- -----------
Net cash provided (used in) by
financing activities................. 542,930 1,096,147 271,700 (452,567)
----------- ----------- -------- -----------
Net increase (decrease) in cash and cash
equivalents............................... (35,874) 1,862,010 (5,595) (422,691)
Cash and cash equivalents at beginning of
year...................................... 46,207 10,333 10,333 1,872,343
----------- ----------- -------- -----------
Cash and cash equivalents at end of year.... $ 10,333 $ 1,872,343 $ 4,738 $ 1,449,652
=========== =========== ======== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

F-7
<PAGE> 66

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS SUMMARY:

The Company is a health care consulting and management company dedicated to
improving the quality, controlling the cost and enhancing the efficiency of the
management and delivery of health care services by focusing on the physician as
the most important factor in the health care system. In pursuing these goals,
the Company currently provides its proprietary "Quality Management Program" to
hospitals and their attending physicians. In addition, the Company is developing
and will operate various health plans in association with physician networks,
hospitals, and other health care providers.

The Company was organized in 1994 and reincorporated in Delaware in 1996 to
serve as the holding company of Birman & Associates, Inc., and BMC Health Plans,
Inc. The Company acquired a third subsidiary on June 14, 1996, through an asset
purchase of Hughes & Associates, Inc. The operations of Hughes & Associates,
Inc. are immaterial. This represents a change in the legal entity, but not in
the operations of the Company. As such, the accompanying consolidated financial
statements are presented on a continuing basis. In addition, effective June 30,
1995, the Company adopted a June 30 fiscal year end. On September 9, 1996, the
Company was reincorporated in Delaware by means of a merger in which
shareholders of the Company received 72,939 shares of Common Stock for each 100
shares of Common Stock then outstanding.

Birman Farms -- Discontinued Operation:

The Company held and operated Birman Farms, a livestock breeding operation,
which utilizes farm land owned personally by David N. Birman, M.D. and Sue
Birman, the principal stockholders and officers and directors of the Company.
Effective June 30, 1995, the Company separately incorporated Birman Farms and
distributed the shares of stock as a dividend to David N. Birman, M.D.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of
Birman Managed Care, Inc. and its wholly owned subsidiaries: Birman &
Associates, Inc., BMC Health Plans, Inc. and Hughes & Associates, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Cash and Cash Equivalents:

Cash and cash equivalents include all highly liquid investments purchased
with an initial maturity of three months or less.

Accounts Receivable:

Accounts receivable represent amounts earned but not collected in
connection with consulting services performed by the Company.

The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable, based on a review of the individual accounts
outstanding and the Company's prior history of uncollectible accounts
receivable.

Property and Equipment:

Property and equipment are stated at cost. Depreciation is provided for on
the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs that neither materially add to the value of the

F-8
<PAGE> 67

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

property nor appreciably prolong its life are charged to expense as incurred.
Betterments or renewals are capitalized when incurred. The estimated useful
lives for asset classifications, are as follows:

<TABLE>
<S> <C>
Computer equipment................................................. 5 years
Office equipment and motor vehicles................................ 5 years
Furniture and fixtures............................................. 5 years
Leasehold improvements............................................. 10 years
</TABLE>

Deferred Offering Costs:

Deferred offering costs represent costs incurred in connection with the
Company's proposed initial public offering of common stock. Deferred offering
costs will be netted against the net proceeds from the proposed public offering,
or expensed should the offering not be completed.

Goodwill:

Goodwill represents the excess of the cost of acquiring the assets of
Hughes & Associates, Inc. over the fair value of their net assets at the date of
acquisition, June 14, 1996, and is being amortized on the straight-line method
over five years. No amortization expense was recorded for the year ended June
30, 1996. For the three-month period ended September 30, 1996 (unaudited),
amortization expense of $404 was recorded. The carrying value of goodwill will
be periodically reviewed by the Company and impairments, if any, will be
recognized when expected future operating cash flows derived from goodwill are
less than their carrying value.

Income Taxes:

For tax reporting purposes, the Company currently reports revenue and
expenses based on the accrual basis method of accounting for the fiscal year
ended June 30, 1996. Previously, the Company used the cash basis method for the
six-month period ended June 30, 1995.

The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis and the utilization of the net operating loss
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.

Accounting Estimates:

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

Earnings Per Share:

Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective years. All weighted average shares
outstanding give retroactive effect to the 1,000 for 1 stock split in October
1995 and the 72.939 for 100 exchange of shares of Common Stock in connection
with the reincorporation of the Company in Delaware in September 1996. The
Company is planning an initial public

F-9
<PAGE> 68

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

offering of its Common Stock. Pursuant to Securities and Exchange Commission
rules, shares of Common Stock issued for consideration below the anticipated
offering price per share during the 12-month period prior to filing of the
registration statement has been included in the calculation of common share
equivalent shares, using the treasury stock method, as if they had been
outstanding for all periods presented. In addition, shares of Common Stock that
are subject to options and warrants having exercise prices that are below the
anticipated offering price per share, whether or not exercisable, have been
included in the earnings per share calculation, using the treasury stock method.
One million shares of common stock to be placed in escrow upon completion of the
proposed public offering, which are common stock equivalents, have been included
in the calculation of fully diluted earnings per share, when they are not
anti-dilutive. See Note 16.

Interim Financial Information:

The interim financial statements for the three months ended September 30,
1995 and 1996 are unaudited. In the opinion of management, such statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the results of the interim period. The results of
operations for the three months ended September 30, 1996 are not necessarily
indicative of the results for the entire year.

New Accounting Pronouncements:

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board is effective
for financial statements for fiscal years beginning after December 15, 1995. The
new standard establishes new guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured. The Company does not expect adoption to have a material effect on its
financial position or results of operations.

Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board is effective for specific transactions entered into after
December 15, 1995, while the disclosures requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 31,
1995. The new standard establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from nonemployees in exchange for equity instruments. At the
present time, the Company has not determined if it will change its accounting
policy for stock-based compensation or only provide the required financial
statement disclosures. As such, the impact on the Company's financial position
and results of operations is currently unknown. The Company does not expect
adoption to have a material effect on its financial position or results of
operations.

2. CONCENTRATION OF CREDIT RISK:

The Company maintains cash and cash equivalents at three financial
institutions. Deposits not to exceed $100,000 at each financial institution are
insured by the Federal Deposit Insurance Corporation. At June 30, 1996, and
September 30, 1996 (unaudited), the Company has uninsured cash and cash
equivalents in the amount of $1,790,463 and $1,489,925, respectively.

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company's accounts receivable primarily result from its consulting services with
rural hospitals in the southeastern, central and south central portion of the
United States. The receivables are primarily billed monthly and are unsecured.
Ongoing credit evaluation and account monitoring procedures are utilized to
minimize the risk of loss.

F-10
<PAGE> 69

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

3. RELATED PARTY TRANSACTIONS:

Notes Receivable:

Included in notes receivable at June 30, 1996 and September 30, 1996
(unaudited) are the following related party notes and interest receivable:

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
7% notes receivable from David N. Birman, M.D., due on
demand...................................................... $556,586 $ --
Interest receivable -- David N. Birman, M.D................... 74,587 --
Note receivable from David N. Birman, M.D., Interest is the
prime rate at American National Bank and Trust of Chicago
and due in three annual installments beginning 8/31/97.
Principal due
8/31/99..................................................... -- 775,000
-------- --------
$631,173 $ 775,000
======== ========
</TABLE>

For the year ended June 30, 1996, the Company advanced approximately
$343,000 to David N. Birman, M.D. On September 1, 1996, the Company consolidated
the 7% note receivable and all accrued interest into the new note receivable.

4. PROPERTY AND EQUIPMENT:

At June 30, 1996, and September 30, 1996 (unaudited) property and equipment
consist of the following:

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
Computer and office equipment......................... $303,000 $ 441,994
Furniture and fixtures................................ 125,286 128,372
Motor vehicles........................................ 44,306 44,306
Leasehold improvements................................ 2,544 2,544
-------- --------
475,136 617,216
Less accumulated depreciation and amortization........ 181,452 203,913
-------- --------
$293,684 $ 413,303
======== ========
</TABLE>

For the years ended June 30, 1995 and 1996, depreciation expense was
$83,981 and $73,814, respectively. For the three months ended September 30, 1995
and 1996, depreciation expense was $17,995 and $22,461, respectively.

F-11
<PAGE> 70

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

5. NOTES PAYABLE:

At June 30, 1995 and 1996, and September 30, 1996 (unaudited) notes payable
consist of the following:

<TABLE>
<CAPTION>
JUNE
JUNE 30, 30, SEPTEMBER 30,
1995 1996 1996
--------- ------- -------------
<S> <C> <C> <C>
Line of credit with First American Bank. The line of
credit is due in September 1996, with an interest
rate of prime plus .75%; collateralized by accounts
receivable and was repaid in June 1996.............. $ 396,000 $ -- $ --
Note payable to First American Bank. The note is due
in July 1995, with an interest rate of 9.5%;
collateralized by accounts receivable............... 80,000 -- --
Notes payable due to unrelated parties, non-interest
bearing, due on demand; unsecured. The notes were
repaid through the issuance of common stock in July
1995................................................ 175,000 -- --
Note payable to Toyota Motor Credit Corp. The note is
due and payable in March 1999, with an interest rate
of 12.5%; collateralized by a vehicle............... -- 7,463 6,900
--------- ------- --------
651,000 7,463 6,900
Less current portion of long-term notes payable....... (651,000) (2,435) (2,496)
--------- ------- --------
$ -- $ 5,028 $ 4,404
========= ======= ========
</TABLE>

Line of Credit

In August 1996, the Company arranged a $1,000,000 maximum principal amount
working capital revolving line of credit facility ("facility") with American
National Bank and Trust Company of Chicago. The facility has an initial maturity
date of October 31, 1997. The facility provides for the accrual of interest at a
floating annual rate equal to the lender's prime rate on the unpaid principal
balance. The facility is secured by substantially all of the assets of the
Quality Management Program and Hughes & Associates, Inc. Under the terms of the
facility, the Company can borrow up to the lesser of: (i) $100,000, or (ii) the
maximum facility minus any letter of credit obligations, or (iii) the "Borrowing
Base", (i.e., up to 75% of the face amount of all then existing eligible
receivables), minus any letter of credit obligations. At September 30, 1996
there was a zero balance on the line of credit.

6. CAPITAL LEASE OBLIGATIONS:

The Company is the lessee of a telephone system, with an aggregate cost of
$4,410, under a capital lease agreement which expires in April 1998. As of June
30, 1996 and September 30, 1996 (unaudited), minimum future lease payments due
under the capital lease agreement for the next two years, are as follows:

<TABLE>
<CAPTION>
JUNE
30, SEPTEMBER 30,
1996 1996
------- -------------
<S> <C> <C>
1997................................................. $ 2,684 $ 3,172
1998................................................. 2,440 --
------- -------
Total minimum lease payments......................... 5,124 3,172
Less amount representing interest.................... (1,575) (667)
------- -------
Present value of net minimum lease payments.......... 3,549 2,505
Less current portion................................. (1,540) (2,505)
------- -------
Long-term maturities of capital lease obligations.... $ 2,009 $ 0
======= =======
</TABLE>

The interest rate is imputed based on the lessor's implicit rate of return
at the inception of the lease.

F-12
<PAGE> 71

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

7. COMMITMENTS AND CONTINGENCIES:

Operating Leases:

The Company is currently leasing vehicles and office space under various
non-cancellable operating lease agreements, expiring in April 1998. The terms of
the lease agreements provide for monthly payments ranging from $138 to $3,450.
At June 30, 1996 and September 30, 1996 (unaudited), a schedule of future
minimum lease payments due under the non-cancellable operating lease agreements
is as follows:

<TABLE>
<CAPTION>
JUNE
30, SEPTEMBER 30,
1996 1996
------- -------------
<S> <C> <C>
1997................................................... $34,604 $ 100,993
1998................................................... 12,745 76,284
1999................................................... -- 27,659
2000................................................... -- 1,558
------- ---------
$47,349 $ 206,494
======= =========
</TABLE>

Rent expense under the foregoing operating lease agreements for the years
ended June 30, 1995 and 1996 was $101,040 and $110,588, respectively. Rent
expense for the three months ended September 30, 1995 and 1996 (unaudited) was
$26,387 and $29,640, respectively. The Company occupies office premises in
Cookeville, Tennessee, Jackson, Mississippi, Gulfport, Mississippi, and Phoenix,
Arizona. Rent under these facility leases for the years ended June 30, 1995 and
1996 and three months ended September 30, 1995 and 1996 (unaudited) was $49,117,
$63,258, $13,950, and $20,307, respectively.

Employment Contracts:

The Company has entered into employment contracts with eight key employees,
including David N. Birman, M.D. and Sue D. Birman, through June 2001, which
provide for minimum annual salary, adjusted for cost-of-living changes, and
incentives based on the Company's attainment of specified levels of sales and
earnings. At June 30, 1996 and September 30, 1996 (unaudited), the total
commitment, excluding incentives, was approximately $5.1 million over the next
five years.

Other Commitments:

Effective September 1, 1996, the Company entered into a consulting
agreement with Richard M. Ross, a former officer and director. Under the terms
of the agreement the Company will pay a fee of $186,000 per annum, payable in
equal monthly installments. The contract is renewable annually for up to six
consecutive years.

8. INCOME TAXES AND DEFERRED INCOME TAXES:

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED
-------------------- THREE MONTHS ENDED
JUNE 30, JUNE 30, -----------------------------
1995 1996 SEPTEMBER 30, SEPTEMBER 30,
--------- -------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Federal............................... $(174,531) $565,183 $15,365 $ 86,647
State................................. (49,800) 161,800 4,385 24,755
--------- -------- ------------- -------------
$(224,331) $726,983 $19,750 $ 111,402
========= ======== ========== ==========
</TABLE>

F-13
<PAGE> 72

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

The provision (benefit) for income taxes based on income from continuing
operations differs from the amount obtained by applying the statutory federal
income tax rate to income before taxes primarily due to state income taxes.

The temporary differences that give rise to the deferred tax asset
(liability) at June 30, 1996 and September 30, 1996 (unaudited), are presented
below:

Deferred tax asset -- current:

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
Allowance for doubtful accounts........................... $ 18,990 $ 18,990
Adjustment due to change from the cash method of reporting
income for income taxes to the accrual method........... 76,559 $ 76,559
-------- --------
$ 95,549 $ 95,549
======== ========
Deferred tax liability -- long-term:
Excess of depreciation for income tax reporting
purposes over depreciation for financial reporting
purposes........................................... $(55,620) $ (55,620)
======== ========
</TABLE>

No valuation allowance has been recorded since it is more likely than not
that the net deferred tax asset will be realized.

9. STATEMENTS OF CASH FLOWS:

During the years ended June 30, 1995 and 1996 and for the three months
ended September 30, 1995 and 1996 (unaudited), the Company recognized investing
and financing activities that affected assets and liabilities but did not result
in cash receipts or payments.

For the year ended June 30, 1995, these non-cash activities are as follows:

The Company reclassified $5,500 from accounts receivable to a note
receivable.

The Company accrued and added $28,427 of interest to notes receivable
from David N. Birman M.D.

The Company declared and distributed as a dividend all of the farm
assets in the net amount of $230,000.

The Company made payments for interest in the amount of $555,957. Payments
were made for income taxes in the amount of $74,327.

For the year ended June 30, 1996, these non-cash activities are as follows:

The Company accrued and added $28,011 of interest to notes receivable
from David N. Birman, M.D.

The Company financed the purchase of an automobile in the amount of $8,007.

The Company retired debt in the amount of $175,000 through the issuance of
Common Stock.

The Company made payments for interest in the amount of $46,735. A refund
was received for income taxes in the amount of $76,530.

For the three months ended September 30, 1995 (unaudited), these non-cash
activities are as follows:

The Company accrued and added $3,953 of interest to notes receivable from
David N. Birman M.D.

The Company made payments for interest and taxes in the amount of $8,395,
and $8,979, respectively.

F-14
<PAGE> 73

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

For the three months ended September 30, 1996 (unaudited), these non-cash
activities are as follows:

The Company accrued and added $17,074 of interest to notes receivable from
David N. Birman M.D.

The Company made payments for interest and taxes in the amount of $247 and
$598,299, respectively.

10. DISCONTINUED OPERATIONS:

Birman & Associates, Inc. disposed of Birman Farms as of June 30, 1995. The
assets disposed of were primarily comprised of farm equipment and livestock. The
farm operation had previously been reported as an operating segment of Birman &
Associates, Inc. Birman Farms was placed under a separate corporation and shares
were distributed as a dividend in the amount of $230,000, which approximates
fair market value, to Dr. Birman.

Net revenues of Birman Farms for 1995 were $23,076. This amount is not
included in net sales in the accompanying consolidated statement of operations.

11. STOCKHOLDERS' EQUITY:

On October 31, 1995, the Company declared a 1,000-for-1 stock split of the
Company's Common Stock. On September 9, 1996, the Company was reincorporated in
Delaware by means of a merger in which shareholders received 72.939 shares of
Common Stock for each 100 shares of Common Stock then outstanding. The
accompanying consolidated financial statements give retroactive effect to the
aforementioned transactions.

During June 1996, the Company issued 1,332,970 shares of Common Stock in a
private placement. The shares of Common Stock were sold at $1.37 per share. The
net proceeds of $1,605,043 were net of offering expenses of $222,457.

12. STOCK OPTION PLAN:

On October 31, 1995, the Company approved the 1995 Stock Option Plan (the
"Plan"). The aggregate of Common Stock that may be issued pursuant to the Plan
will not exceed 1,458,780 shares. Pursuant to the Plan, the Company has issued
stock options to various key employees. The table below summarizes the Company's
stock option transactions:

<TABLE>
<CAPTION>
NUMBER EXERCISE AGGREGATE
OF SHARES PRICE VALUE
---------- -------- ----------
<S> <C> <C> <C>
Balance at June 30, 1995........................... -- $ -- $ --
Options granted.................................... 1,006,566 1.37 1,380,000
---------- ----------
Balance at June 30, 1996........................... 1,006,566 $1,380,000
======== =========
</TABLE>

The above options are granted at fair market value at the date of grant,
become exercisable over a three-year period, or as determined by the Board of
Directors, and expire over periods not exceeding five years.

As of June 30, 1996 and September 30, 1996 (unaudited), none of these
options have been exercised and there have been no options forfeited.

13. STOCK WARRANTS:

As of June 30, 1996 and September 30, 1996 (unaudited), the Company had
outstanding warrants to purchase 21,335 shares of Common Stock at $1.43 per
share and 36,470 shares of Common Stock at $1.37 per share. The warrants become
exercisable in January 1997 and expire at various dates through December 2001.

F-15
<PAGE> 74

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

14. EMPLOYEE BENEFIT PLAN:

Effective January 1, 1994, the Company implemented a profit sharing plan
covering all full-time employees. The plan is designed as a Code Section 401(k)
plan. Employees are permitted to make voluntary contributions to the plan, for
which the Company is required to make a matching contribution up to certain
limitations. For the years ended June 30, 1995 and 1996, the Company made
contributions to the plan in the amounts of $11,766 and $9,482, respectively.

15. SIGNIFICANT CUSTOMER:

The Company has provided Quality Management Program services to various
hospitals owned and managed by Quorum Health Care, Inc. ("Quorum") since 1991.
Hospitals owned and managed by Quorum represented approximately 53% and 42% of
the Company's Quality Management Program revenue in fiscal 1995 and 1996,
respectively. Hospitals owned and managed by Quorum represented approximately
50% and 25% of the Company's Quality Management Program Revenue for the three
months ended September 30, 1995 and 1996, respectively.

16. SUBSEQUENT EVENTS:

Pending Acquisition

On September 6, 1996, the Company entered into a definitive agreement to
acquire most of the issued and outstanding common stock of Canton Management
Group, Inc., a Mississippi corporation ("Canton").

Under the terms of the agreement, the Company will acquire 1,000,000 shares
of newly issued preferred stock of Canton for $1.00 per share, payable $700,000
in cash and $300,000 by a promissory note. The promissory note bears interest at
a rate of 2% per annum and is payable in varying annual installments over two
years. In addition, the Company will acquire approximately 33% of the
outstanding common stock of Canton for a $500,000 promissory note which bears
interest at a rate of 2% per annum and is payable in varying annual installments
over four years.

Canton will purchase and retire approximately 65% of the outstanding common
stock held by persons other than the Company for $1,000,000, payable $700,000 in
cash and $300,000 by a promissory note. The promissory note bears interest at a
rate of 2% per annum and is payable in varying annual installments over two
years.

Reincorporation

On September 9, 1996, the Company was reincorporated in Delaware by means
of a merger in which shareholders of the Company received 72.939 shares of
Common Stock for each 100 shares of Common Stock then outstanding.

Initial Public Offering

In September 1996, the Company filed a registration statement for an
initial public offering ("IPO"). As amended, the registration statement
contemplates the sale of 2,000,000 shares of Common Stock by the Company,
subject to the Prospectus relating to the IPO. The anticipated IPO price to the
public is expected to be $5.00 per share.

In connection with the IPO, Dr. Birman, the Company's principal
stockholder, has agreed to place 1,000,000 shares of Common Stock in escrow.
These shares will not be assignable or transferrable (but may be voted) until
such time as they are released from escrow. The release from escrow is based
upon the Company meeting certain annual earnings levels over the next three
years. All reserved shares remaining in escrow on

F-16
<PAGE> 75

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

June 30, 1999 will be forfeited and contributed to the Company's capital. In the
event the Company attains any of the earnings thresholds providing for the
release of the escrow shares to Dr. Birman, the Company will recognize
compensation expense at such time based on the fair market value of the shares.

In addition, it is contemplated that Dr. Birman will tender approximately
177,000 shares of his Common Stock, valued at $4.50 per share, as payment in
full of his note to the Company in the amount of $775,000 plus accrued interest,
at the time of closing the IPO.

Directors' Option Plan

On September 9, 1996, the Company adopted the 1996 Non-Employee Directors
Non-Qualified Stock Option Plan (the "1996 Directors' Plan"). A total of 100,000
shares of Common Stock are reserved for issuance under the 1996 Directors' Plan.
Under this plan, upon initial election to the Board of Directors, all
non-employee directors are awarded options to purchase 6,000 shares of Common
Stock. Upon each subsequent election to the Board of Directors, non-employee
Directors receive option awards to purchase 3,000 shares of Common Stock. These
options, which have an exercise price equal to the fair market value of the
shares of Common Stock as of the date of grant, vest at the rate of 33.33% per
year. All options awarded under the 1996 Directors' Plan expire on the first to
occur of (i) 10 years after the date of grant or (ii) 90 days after the date the
director is no longer serving in such capacity for reasons other than death or
disability.

Executive Bonus Plan

F-17
<PAGE> 76

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

INTRODUCTION TO
PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following unaudited Proforma Condensed Consolidated Balance Sheet as of
September 30, 1996, and the unaudited Proforma Condensed Consolidated Statement
of Operations for the year ended June 30, 1996 and the three month period ended
September 30, 1996 give effect to the acquisition by Birman Managed Care, Inc.
of Canton Management Group, Inc. pursuant to the Acquisition Agreement between
the parties, and are based on the estimates and assumptions set forth herein and
in the notes to such statements. This proforma information has been prepared
utilizing the historical financial statements and notes thereto, which are
incorporated by reference herein. The unaudited Proforma Condensed Consolidated
Financial Statements do not purport to be indicative of the results which
actually would have been obtained had the purchase been effected on the dates
indicated or of the results which may be obtained in the future.

The unaudited Proforma Condensed Consolidated Financial Statements is based
on the purchase method of accounting for the acquisition of Canton Management
Group, Inc. The proforma entries are described in the accompanying footnotes to
the unaudited Proforma Condensed Consolidated Financial Statements.

The unaudited Proforma Condensed Consolidated Balance Sheet and the
unaudited Proforma Condensed Consolidated Statement of Operations and the
related notes should be read in conjunction with Birman Managed Care, Inc.'s
audited consolidated financial statements contained elsewhere in this
Prospectus. In management's opinion, all adjustments necessary to reflect the
acquisition have been made.

F-18
<PAGE> 77

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
CANTON
MANAGEMENT
HISTORICAL GROUP, INC.
BIRMAN (A DEVELOPMENT PROFORMA
CONSOLIDATED STAGE COMPANY) PROFORMA ENTRIES CONSOLIDATED
------------ -------------- ---------------- ------------
<S> <C> <C> <C> <C>
Cash................................... $ 1,449,652 $ 9,984 $ (700,000)(1) $ 759,636
Accounts receivable.................... 992,903 727 993,630
Prepaid expenses....................... 48,245 -- 48,245
Notes receivable....................... 802,802 -- 802,802
Deferred tax asset..................... 95,549 -- 95,549
Property, plant and equipment.......... 413,303 -- 413,303
Deferred taxes, long-term.............. -- 24,000 (24,000)(2) --
License and goodwill................... 15,741 -- 1,103,693(1) 1,119,434
Other assets........................... 523,466 132,425 655,891
Restricted certificates of deposit..... -- 500,000 500,000
----------- -------- -----------
Total Assets................. $ 4,341,661 $667,136 $ 5,388,490
=========== ======== ===========
Current portion -- long-term debt...... 2,496 -- 200,000(1) 202,496
Current portion of capital lease....... 2,505 -- 2,505
Accounts payable....................... 698,158 6,624 704,782
Accrued expenses....................... -- -- --
Income taxes payable................... 148,308 -- 148,308
Long-term debt......................... 4,404 -- 600,000(1) 604,404
Deferred income taxes.................. 55,620 -- (24,000)(2) 31,620
Minority interest...................... -- -- 264,205(1) 264,205
Preferred stock........................ -- -- --
Common stock........................... 6,931 -- 6,931
Additional paid-in capital............. 1,780,612 713,673 (713,673)(1) 1,780,612
Retained earnings (deficit)............ 1,642,627 (53,161) 53,161(1) 1,642,627
----------- -------- -----------
$ 4,341,661 $667,136 $ 5,388,490
=========== ======== ===========
</TABLE>

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

(1) To record the purchase of Canton Management Group, Inc. pursuant to the
acquisition agreement between the parties, and record the minority
interest.

(2) To reclassify long-term deferred income taxes.

See accompanying notes to proforma condensed consolidated financial statements
(as adjusted).

F-19
<PAGE> 78

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
CANTON
MANAGEMENT
HISTORICAL GROUP, INC.
BIRMAN (A DEVELOPMENT PROFORMA PROFORMA
CONSOLIDATED STAGE COMPANY) ENTRIES CONSOLIDATED
------------ -------------- -------- ------------
<S> <C> <C> <C> <C>
Revenue......................................... $ 8,416,946 -- $ 8,416,946
Cost of revenues................................ 2,278,932 -- 2,278,932
----------- -------- -----------
Gross profit.................................... 6,138,014 -- 6,138,014
General and administrative expenses............. 4,236,607 71,961 (1) 4,308,568
----------- -------- -----------
Income from operations.......................... 1,901,407 (71,961) 1,829,446
Other income (expense).......................... (2,643) 12,211 (2) 9,568
----------- -------- -----------
Income before provision for income taxes........ 1,898,764 (59,750) 1,839,014
Income taxes.................................... (726,983) 17,900 (709,083)
----------- -------- -----------
Net income (loss)............................... $ 1,171,781 $(41,850) $ 1,129,931
=========== ======== ===========
Net income (loss) per share -- primary.......... $ .17 $ (.42) $ .17
Net income (loss) per share -- fully diluted.... $ .15 $ (.42) $ .15
=========== ======== ===========
Weighted average number of shares outstanding --
primary....................................... 6,703,517 100,000 6,703,517
Weighted average number of shares outstanding --
fully diluted................................. 7,703,517 100,000 7,703,517
=========== ======== ===========
</TABLE>

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

(1) Amortization of the licenses recorded in connection with the purchase of
Canton Management Group, Inc. will be reported on a straight-line basis over
35 years, commencing when operations begin.

(2) Does not include the effects of additional interest expense on notes payable
as amount is immaterial.

See accompanying notes to proforma condensed consolidated financial statements
(as adjusted).

F-20
<PAGE> 79

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
CANTON
MANAGEMENT
HISTORICAL GROUP, INC.
BIRMAN (A DEVELOPMENT PROFORMA PROFORMA
CONSOLIDATED STAGE COMPANY) ENTRIES CONSOLIDATED
------------ -------------- -------- ------------
<S> <C> <C> <C> <C>
Revenue......................................... $ 2,372,137 $ -- $ 2,372,137
Cost of revenues................................ 888,516 -- 888,516
----------- -------- -----------
Gross profit.................................... 1,483,621 -- 1,483,621
General and administrative expenses............. 1,169,119 13,339 (1) 1,182,458
----------- -------- -----------
Income from operations.......................... 314,502 (13,339) 301,163
Other income (expense).......................... 38,091 16,388 (2) 54,479
----------- -------- -----------
Income before provision for income taxes........ 352,593 3,049 355,642
Income taxes.................................... (111,402) -- (111,402)
----------- -------- -----------
Net income (loss)............................... $ 241,191 $ 3,049 $ 244,240
=========== ======== ===========
Net income (loss) per share -- primary.......... $ .04 $ .03 $ .04
Net income (loss) per share -- fully diluted.... $ .03 $ .03 $ .03
=========== ======== ===========
Weighted average number of shares outstanding --
primary....................................... 6,703,517 100,000 6,703,517
Weighted average number of shares outstanding --
fully diluted................................. 7,703,517 100,000 7,703,517
=========== ======== ===========
</TABLE>

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

(1) Amortization of the licenses recorded in connection with the purchase of
Canton Management Group, Inc. will be reported on a straight-line basis over
35 years, commencing when operations begin.

(2) Does not include the effects of additional interest expense on notes payable
as amount is immaterial.

See accompanying notes to proforma condensed consolidated financial statements
(as adjusted).

F-21
<PAGE> 80

BIRMAN MANAGED CARE, INC. AND SUBSIDIARIES

NOTES TO PROFORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (AS ADJUSTED)
(UNAUDITED)

1. PENDING ACQUISITION

Under the terms of the agreement, on January 15, 1997 the Company acquired
1,000,000 shares of newly issued preferred stock of Canton for $1 per share, for
which it paid $700,000 in cash and $300,000 by a promissory note. The promissory
note bears interest at a rate of 2% per annum and is payable in varying annual
installments over two years. In addition, the Company acquired approximately 33%
of the outstanding Common Stock of Canton for a $500,000 promissory note, which
bears interest at a rate of 2% per annum and is payable in varying annual
installments over four years. Canton purchased and retired approximately 65% of
the outstanding Common Stock held by persons other than the Company for
$1,000,000, payable $700,000 in cash and $300,000 by a promissory note. The
promissory note bears interest at a rate of 2% per annum and is payable in
varying annual installments over two years.

2. EFFECT OF PENDING ACQUISITION

The adjustments to the Proforma Condensed Consolidated Balance Sheet as of
September 30, 1996 reflect the pending acquisition as if it occurred on
September 30, 1996. The Proforma Condensed Consolidated Statement of Operations
for the year ended June 30, 1996 and the three month period ended September 30,
1996 reflects the pending acquisition as if it occurred on the first day of the
period presented.

F-22
<PAGE> 81

CANTON MANAGEMENT GROUP, INC.,
(A DEVELOPMENT STAGE COMPANY)

FINANCIAL STATEMENTS

JUNE 30, 1996 AND
SEPTEMBER 30, 1996 (UNAUDITED)

F-23
<PAGE> 82

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Canton Management Group, Inc.
(A Development Stage Company)
Jackson, Mississippi

We have audited the accompanying balance sheet of Canton Management, Inc.
(A Development Stage Company) (the "Company") as of June 30, 1996, and the
related statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of the
Company for the period from October 3, 1993 (Inception) to June 30, 1995 were
audited by other auditors whose report dated August 7, 1996, expressed an
unqualified opinion on those statements.

In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Canton Management Group, Inc. (A Development Stage
Company) at June 30, 1996, and the results of its operations and its cash flows
for the year then ended, and for the period from October 3, 1993 (Inception) to
June 30, 1996, in conformity with generally accepted accounting principles.

BDO Seidman, LLP
Los Angeles, California
August 7, 1996

F-24
<PAGE> 83

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Canton Management Group, Inc.
(A Development Stage Company)
Jackson, Mississippi

We have audited the accompanying statements of operations, changes in
stockholders' equity, and cash flows for the period from October 3, 1993
(Inception) to June 30, 1995 of Canton Management, Inc. (A Development Stage
Company) (the "Company"). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Canton
Management Group, Inc. (A Development Stage Company) for the period from October
3, 1993 (Inception) to June 30, 1995 in conformity with generally accepted
accounting principles.

Semple & Cooper, P.L.C.
Phoenix, Arizona
August 7, 1996

F-25
<PAGE> 84

CANTON MANAGEMENT GROUP, INC.

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
JUNE 30, -------------
1996
-------- (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 1).......................... $ 2,143 $ 9,984
Interest income receivable.................................. 998 727
-------- --------
Total current assets................................ 3,141 10,711
-------- --------
Office equipment, Net (Notes 1 and 4)......................... 2,641 --
-------- --------
Other assets:
Restricted certificates of deposit (Notes 1 and 2).......... 500,000 500,000
Organization and license costs (Note 1)..................... 132,425 132,425
Deferred tax asset (Notes 1 and 3).......................... 24,000 24,000
-------- --------
Total other assets.................................. 656,425 656,425
-------- --------
Total assets........................................ $662,207 $ 667,136
======== ========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................ $ 11,190 $ 6,624
-------- --------
Stockholder's equity: (Note 5)
Preferred stock, no par value, 1,000,000 shares authorized;
no shares issued or outstanding.......................... -- --
Class A voting common stock, no par value, 100,000 shares
authorized; 100,000 shares issued and outstanding........ -- --
Class B non-voting common stock, no par value, 100,000
shares authorized; no shares issued or outstanding....... -- --
Paid-in capital............................................. 100,000 100,000
Contributed capital......................................... 607,227 613,673
Accumulated deficit, during development stage............... (56,210) (53,161)
-------- --------
Total stockholder's equity.......................... 651,017 660,512
-------- --------
Total liabilities and stockholder's equity.......... $662,207 $ 667,136
======== ========
</TABLE>

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

F-26
<PAGE> 85

CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
YEAR ENDED OCTOBER 3,
-------------------- THREE MONTHS ENDED 1993 (INCEPTION)
JUNE 30, JUNE 30, ------------------------------ TO SEPT. 30,
1995 1996 SEPTEMBER 30, SEPTEMBER 30, 1996
-------- -------- 1995 1996 ----------------
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Donated services............. $ -- $ -- $ -- $ -- $132,425
Gain on sale of fixed
assets.................... -- -- -- 10,840 10,840
Interest income.............. 9,724 12,211 3,014 5,548 29,037
-------- -------- -------- ------- ---------
Total revenue........ 9,724 12,211 3,014 16,388 172,302
-------- -------- -------- ------- ---------
Expenses:
Advertising.................. 788 -- -- -- 2,395
Consulting................... 67,800 41,500 11,250 7,250 155,775
Depreciation................. 1,056 1,056 250 -- 2,641
Donations.................... -- 1,000 1,000 -- 1,000
Dues......................... 5,000 1,100 -- -- 11,354
Fees and licenses............ 25 25 -- 2,542 3,992
Legal and accounting......... 7,659 8,194 -- 1,168 11,897
Office....................... 3,554 3,021 974 291 15,805
Printing..................... 213 244 -- -- 1,027
Rent......................... 12,000 12,000 3,000 1,000 26,000
Telephone.................... 4,746 2,527 544 505 6,793
Travel and entertainment..... 5,587 1,294 294 583 10,784
-------- -------- -------- ------- ---------
Total expenses....... 108,428 71,961 17,312 13,339 249,463
-------- -------- -------- ------- ---------
Loss before income tax
benefit...................... (98,704) (59,750) (14,298) 3,049 (77,161)
Income tax benefit............. 29,600 17,900 -- -- 24,000
-------- -------- -------- ------- ---------
Net loss....................... $(69,104) $(41,850) $ (14,298) $ 3,049 $(53,161)
======== ======== ======== ======= =========
</TABLE>

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

F-27
<PAGE> 86

CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIODS FROM OCTOBER 3, 1993 (INCEPTION) THROUGH SEPTEMBER 30, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
CLASS CLASS
A B RETAINED
PREFERRED COMMON COMMON PAID-IN CONTRIBUTED EARNINGS
STOCK STOCK STOCK CAPITAL CAPITAL (DEFICIT)
--------- ------ ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 3, 1993
(Inception)........................ $-- $-- $-- $ -- $ -- $ --
Contributions........................ -- -- -- -- 322,359 --
Net Income........................... -- -- -- -- -- 54,744
--- --- --- -------- -------- --------
Balance at June 30, 1994............. -- -- -- -- 322,359 54,744
Contributions........................ -- -- -- -- 93,920 --
Net Loss............................. -- -- -- -- -- (69,104)
--- --- --- -------- -------- --------
Balance at June 30, 1995............. -- -- -- -- 416,279 (14,360)
Contributions........................ -- -- -- -- 190,948 --
Issuance of 100,000 shares of Class A
common stock, no par value, on June
27, 1996........................... -- -- -- 100,000 -- --
Net Loss............................. -- -- -- -- -- (41,850)
--- --- --- -------- -------- --------
Balance at June 30, 1996............. -- -- -- 100,000 607,227 (56,210)
Contributions........................ -- -- -- -- 6,446 --
Net income........................... -- -- -- -- -- 3,049
--- --- --- -------- -------- --------
Balance at September 30, 1996........ $-- $-- $-- $100,000 $ 613,673 $ (53,161)
=== === === ======== ======== ========
</TABLE>

F-28
<PAGE> 87

CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
OCTOBER 3,
YEAR ENDED 1993
------------------------- THREE MONTHS ENDED (INCEPTION)
JUNE 30, JUNE 30, ------------------------------- TO SEPT. 30,
1995 1996 SEPTEMBER 30, SEPTEMBER 30, 1996
---------- ---------- 1995 1996 ------------
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $ (69,104) $ (41,850) $ (14,298) $ 3,049 $ (53,161)
Reconciliation of net loss to
cash used by operating
activities:
Donated services........... -- -- -- -- (132,425)
Depreciation............... 1,056 1,056 250 -- 2,641
Gain on sale of fixed
assets.................. -- -- -- (10,840) (10,840)
Changes in operating assets
and liabilities:
Investment income
receivable.............. -- (998) -- 271 (727)
Deferred income taxes...... (29,600) (17,900) -- -- (24,000)
Accounts payable........... 2,663 4,566 -- (4,566) 6,624
---------- ---------- ---------- -------- ---------
Net cash used by
operating
activities............ (94,985) (55,126) (14,048) (12,086) (211,888)
---------- ---------- ---------- -------- ---------
Cash flows from investing
activities:
Proceeds from sale of
assets.................. -- -- -- 13,481 13,481
Purchase of office
equipment............... -- -- -- -- (5,282)
Purchase of restricted
certificate of
deposit................. (250,000) (250,000) -- -- (500,000)
---------- ---------- ---------- -------- ---------
Net cash (used in)
provided by investing
activities............ (250,000) (250,000) -- 13,481 (491,801)
---------- ---------- ---------- -------- ---------
Cash flows from financing
activities:
Paid-in capital............ -- 100,000 -- -- 100,000
Contributed capital........ 93,920 190,948 18,912 6,446 613,673
---------- ---------- ---------- -------- ---------
Net cash provided by
financing
activities............ 93,920 290,948 18,912 6,446 713,673
---------- ---------- ---------- -------- ---------
Net increase (decrease) in
cash and cash
equivalents................ (251,065) (14,178) 4,864 7,841 9,984
Cash and cash equivalents,
beginning of period........ 267,386 16,321 16,073 2,143 --
---------- ---------- ---------- -------- ---------
Cash and cash equivalents,
end of period.............. $ 16,321 $ 2,143 $ 20,937 $ 9,984 $ 9,984
========== ========== ========== ======== =========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-29
<PAGE> 88

CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization and Operations:

Progressive Health Management, Inc. was incorporated in Mississippi on
October 3, 1993 for the purpose of providing health care services to Mississippi
Medicaid enrollees on a capitated fee basis contracted with the State of
Mississippi. Progressive Health Management, Inc. was licensed by the State of
Mississippi as a Health Maintenance Organization (HMO) on February 15, 1994.

Progressive Health Management, Inc. was merged with and into Canton
Management Group, Inc. (the "Company") on May 6, 1994.

The Company has been approved by the Mississippi State Department of Health
to provide HMO coverage in the counties of Madison, Attala, Carroll, Grenada,
Holmes, Humphreys, Leaks, Leflore, Montgomery and Yazoo.

As of June 30, 1996, the Company had no contracts in effect with the State
of Mississippi to provide any services for enrollees. The Company expects these
contracts to be negotiated before March 31, 1997, at which time the Company will
officially commence operations as an HMO.

Accounting Estimates:

Cash and Cash Equivalents:

The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.

Minimum Net Worth Requirements:

The Company was required by the State of Mississippi to provide a minimum
cash insolvency reserve of $500,000 as of June 30, 1996 and September 30, 1996
(unaudited).

Office Equipment:

Office equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method based on the estimated
useful lives of the assets. The estimated useful lives are five years.

Organization and License Costs:

Costs associated with the organization of the Company and license costs
have been capitalized and will be amortized over a five year period and
thirty-five year period once operations commence.

Donated Services:

The Company has recognized services donated by physicians, attorneys and
consultants in the amount of $132,425. These services have been recorded as
donated services in the period received.

F-30
<PAGE> 89

CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED

Income Taxes:

The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes". Under SFAS No. 109 deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax basis
of assets and liabilities that will result in taxable or deductible amounts in
the future, based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period, plus or minus the changes during the period in
deferred tax assets and liabilities.

Interim Financial Information:

2. RESTRICTED CERTIFICATES OF DEPOSIT:

As of June 30, 1996, the Company held two $250,000 certificates of deposit
bearing interest rates of 4.8% and 3.8%, respectively, and having a maturity
date of September 20, 1996. The certificates of deposit are restricted for use
as insolvency reserves to meet the minimum net worth requirements of the State
of Mississippi.

3. INCOME TAXES:

Deferred tax assets as of June 30, 1996 and September 30, 1996 (unaudited)
consist solely of net operating loss carryforwards as follows:

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
Deferred tax asset-net operating loss................ $ 24,000 $24,000
Less: Valuation allowance............................ 0 0
$ 24,000 $24,000
</TABLE>

The Company has unused net operating losses available for carryforward to
offset future taxable income and tax liabilities for income tax reporting
purposes, which expire as follows:

<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
------------------------------------------------------------------- -------
<S> <C>
2009............................................................ $46,108
2010............................................................ 44,029
-------
$90,137
=======
</TABLE>

The Tax Reform Act of 1986 contains provisions which limit the federal net
operating loss carryforwards available that can be used in any given year in the
event of certain occurrences, which include significant ownership changes.

F-31
<PAGE> 90

CANTON MANAGEMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION WITH RESPECT TO SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED

4. OFFICE EQUIPMENT:

At June 30, 1996, office equipment consists of the following:

<TABLE>
<S> <C>
Office equipment................................................... $ 5,282
Less accumulated depreciation...................................... (2,641)
-------
Office equipment, net.............................................. $ 2,641
=======
</TABLE>

5. CONTRIBUTED CAPITAL:

The shareholders of the Company have made various unrestricted cash
contributions of $613,673 for the period from October 3, 1993 (inception)
through September 30, 1996 (unaudited).

6. STATEMENTS OF CASH FLOWS:

Non-Cash Investing and Financing Activities:

During the period from the date of inception, October 3, 1993 through
September 30, 1996 (unaudited), the Company recognized investing and financing
activities that affected its assets and liabilities, but did not result in cash
receipts or payments. These non-cash activities are as follows:

Organization costs in the amount of $132,425 were donated to the Company.

No payments were made for income taxes or interest.

7. PENDING LEGISLATIVE MATTERS:

In April 1996, the Mississippi legislature approved a pilot capitation
project for Medicaid recipients. The pilot capitation project was approved in
only three counties in which the Company is approved to provide HMO coverage.
Those counties are Humphreys, Leflore and Yazoo. Although not approved
presently, the Company may apply for approval to provide HMO coverage in other
counties included in the pilot project. The scope of the counties included in
the pilot project is not expected to change until the 1997 session of the
Mississippi legislature convenes. The Company has not negotiated any Medicaid
capitation contracts or enrolled any participants as of September 30, 1996
(unaudited).

F-32
<PAGE> 91

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Dilution.............................. 16
Capitalization........................ 17
Selected Historical and Pro Forma
Consolidated Financial Data......... 18
Management's Discussion and Analysis
of Financial Condition and
Results of Operations............... 20
Business.............................. 26
Management............................ 42
Certain Transactions.................. 48
Principal Stockholders................ 50
Description of Securities............. 52
Shares Eligible for Future Sale....... 53
Underwriting.......................... 55
Legal Opinions........................ 56
Experts............................... 56
Change in Accountants................. 57
Additional Information................ 57
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

[BIRMAN LOGO]

2,000,000 SHARES OF COMMON STOCK

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

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

ROYCE INVESTMENT
GROUP, INC.

CONTINENTAL BROKER-DEALER CORP.
, 1997

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 92

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses incurred in connection with the issuance and distribution of
the securities being registered hereby are as follows:

<TABLE>
<CAPTION>
AMOUNT*
-----------
<S> <C>
S.E.C. Registration Fee................................................. $ 10,448.33
NASD Filing Fee......................................................... 46,452.71
Qualification Under State Securities Laws (including legal fees)........ 8,035
Printing................................................................ 148,000
Legal Fees and Expenses................................................. 205,000
Accounting Fees......................................................... 125,000
Transfer Agent and Registrar Fees and Expenses.......................... 3,500
Miscellaneous........................................................... 13,563.96
----------
Total......................................................... $560,000.00
==========
</TABLE>

- ---------------
* All fees and expenses are estimates except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee. All fees and expenses of this offering are to be
paid by the Company.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

The Common Stock share numbers and per share purchase prices presented
below have been adjusted to take into account the exchange of 1.370998138 shares
of Birman Managed Care, Inc., a Tennessee corporation, for one share of the
Company in connection with the merger of the Tennessee corporation into the
Company on September 9, 1996, and a 1000-for-one stock split effected by the
Tennessee corporation on October 31, 1995. No registration was required under
the Securities Act of 1933, as amended (the "Securities Act") with respect to
either the exchange or the stock splits as they did not involve the "sale" of
securities within the meaning of the Securities Act. For purposes hereof, the
Company and the predecessor Tennessee corporation are hereinafter referred to as
the Company.

On January 1, 1995, the Company issued an aggregate of 3,500,000 shares of
Common Stock to its President and Chief Executive Officer in exchange for all of
the issued and outstanding capital stock of BMC Health Plans, Inc. The Common
Stock in this transaction was issued in reliance on the exemption provided by
Section 4(2) of the Securities Act.

On June 30, 1995, the Company issued an aggregate of 4,000,000 shares of
Common Stock to its President and Chief Executive Officer in exchange for all of
the issued and outstanding capital stock of Birman & Associates, Inc. The Common
Stock in this transaction was issued in reliance on the exemption provided by
Section 4(2) of the Securities Act. Dr. Birman represented to the Company that
he was a sophisticated (and accredited) investor, knowledgeable about the
Company.

Between July 2, 1995 and November 30, 1995, the Company sold a total of
359,227 shares of Common Stock to 14 investors for an aggregate consideration of
$492,500 or $1.37 per share. The Common Stock in this transaction was issued in
reliance on the exemption provided by Section 4(2) of the Securities Act. All 14
investors were close personal friends or family members of the President and
Chief Executive Officer or highly compensated employees of, or consultants to,
the Company. The offers and sales were made directly by the President and Chief
Executive Officer in separate, isolated transactions, not as part of a
coordinated offering of securities. Each of the investors represented to the
Company that he was a sophisticated investor, or relied upon the advice of a
financial advisor before making his investment.

II-1
<PAGE> 93

Between January 10, 1996 and June 30, 1996, the Company sold 1,101,398
shares of Common Stock to 23 investors for an aggregate consideration of
$1,510,000 or $1.37 per share. Each investor represented to the Company that he
was an accredited investor as such term is defined in Regulation D promulgated
under the Securities Act ("Regulation D"). The Common Stock in these
transactions was issued in reliance on Rule 505 of Regulation D.

During the three years ended June 30, 1996, the Company granted to eight of
its officers and key employees, in reliance upon the exemption provided by Rule
701 and Section 4(2) of the Securities Act, incentive stock options pursuant to
the Company's 1995 Stock Option Plan to purchase a total of 1,006,566 shares of
Common Stock at an exercise price of $1.37 per share.

On January 1, 1996, the Company issued to one person who is a consultant to
the Company a warrant to purchase 36,470 shares of Common Stock, at an exercise
price of $1.37 per share expiring December 31, 2001. The Company relied upon the
exemption provided by Section 4(2) of the Securities Act in issuing this
warrant.

On July 1, 1996, the Company issued to one person who acted as a finder of
prospective investors in the Company's Regulation D offering a warrant to
purchase 21,335 shares of Common Stock, at an exercise price of $1.43 per share
expiring June 30, 2001. The Company relied upon the exemption provided by
Section 4(2) of the Securities Act in issuing this warrant.

On September 9, 1996, the Company issued to two non-employee directors
options to purchase a total of 12,000 shares of Common Stock at an exercise
price of $6.25 per share in reliance upon Rule 701. The options were granted
under the Company's 1996 Non-Employee Directors' Non-Qualified Stock Option
Plan.

ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

A. EXHIBITS

<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Agreement Among Underwriters.
1.3 Form of Selected Dealer Agreement.
3.1 Certificate of Incorporation of Birman Managed Care, Inc.
3.2 By-laws of Birman Managed Care, Inc.
3.3 Certificate of Merger dated September 9, 1996 by and between Birman Managed Care,
Inc. -- Delaware and Birman Managed Care, Inc.
4.1 Reference is made to Exhibits 3.1 through 3.3.
4.2 Specimen Common Stock Certificate.
4.6 Form of Representative's Warrant.
5.1 Form of Opinion of Rudnick & Wolfe.
10.1 Employment Agreement by and between Birman Managed Care, Inc. and David N. Birman,
M.D. entered into on March 1, 1996.
10.2 Employment Agreement by and between Birman Managed Care, Inc. and Sue D. Birman
entered into on March 1, 1996.
10.3 Employment Agreement by and between Birman Managed Care, Inc. and Robert D. Arkin
entered into on March 1, 1996; Amendment No. 1 by and between Birman Managed Care,
Inc. and Robert D. Arkin entered into on March 1, 1996.
10.4 Employment Agreement by and between Birman Managed Care, Inc., BMC Health Plans,
Inc. and Vincent W. Wong entered into on March 1, 1996.
10.5 Employment Agreement by and between Birman Managed Care, Inc. and Douglas A. Lessard
entered into on March 1, 1996; Amendment No. 1 by and between Birman Managed Care,
Inc. and Douglas A. Lessard entered into on March 1, 1996; Amendment No. 2 by and
between Birman Managed Care, Inc. and Douglas A. Lessard entered into on September
1, 1996.
</TABLE>

II-2
<PAGE> 94

<TABLE>
<S> <C>
10.6 Employment Agreement by and between Birman Managed Care, Inc. and Mark C. Wade
entered into on July 1, 1995; Amendment No. 1 by and between Birman Managed Care,
Inc., BMC Health Plans, Inc. and Mark C. Wade entered into on October 30, 1995;
Amendment No. 2 by and between Birman Managed Care, Inc. and Mark C. Wade entered
into on September 1, 1996.
10.7 Employment Agreement by and between Birman Managed Care, Inc. and Brad Seitzinger,
M.D. entered into on August 26, 1991.
10.8 Employment Agreement by and between Birman Managed Care, Inc. and Bill Barenkamp
entered into on November 9, 1993.
10.9 Consulting Agreement by and between Richard M. Ross, RRCG, L.L.C., and Birman
Managed Care, Inc. entered into as of September 1, 1996.
10.10 1995 Stock Option Plan for Birman Managed Care, Inc. dated October 31, 1995.
10.11 1996 Non-Employee Directors' Non-Qualified Stock Option Plan of Birman Managed Care,
Inc.
10.12 Stock Purchase Agreement by and between Birman Managed Care, Inc., Canton Management
Group, Inc. and Wesley Prater, M.D., Larry Cooper, M.D., Kelvin Ramsey, M.D., L.C.
Tennin, M.D., Louis Saddler, M.D., James Goodman, Ph.D, Vic Caracci, Michael T.
Caracci, Robert T. Teague, M.S.W., Vincent Caracci, Charlie Hills, Harold Wheeler,
M.D., Stephanie Tucker, Winifred Fulgham and Joyce Johnson entered into on September
6, 1996.
10.13 Promissory Note by David N. Birman, M.D. and payable to the Company.
10.14 Loan and Security Agreement dated August 21, 1996 by and between American National
Bank
and Trust Company of Chicago and Birman & Associates, Inc.
10.15 Loan and Security Agreement dated August 21, 1996 by and between Hughes &
Associates, Inc.
10.16 Promissory Note (Secured) dated August 21, 1995 in the stated principal amount of
$1,000,000 payable to American National Bank & Trust Company of Chicago by Birman &
Associates and Hughes & Associates, Inc.
10.17 Form of Indemnification Agreement for Birman Managed Care, Inc.
10.18 Executive Bonus Plan.
10.19 Agreement by and between National Benefit Resources, Inc. and Birman Managed Care,
Inc. entered into on April 16, 1996.
10.20 Agreement dated September 17, 1996 by and between Birman Managed Care, Inc. and
Community Medical Center.
10.21 Form of Escrow Agreement.
10.22 Lease dated December 2, 1996 between Arc Builders, LLC and Birman Managed Care, Inc.
10.23 Form of Consulting Agreement between Birman Managed Care, Inc. and Royce Investment
Group, Inc.
10.24 Form of Merger and Acquisition Agreement between Birman Managed Care, Inc. and Royce
Investment Group, Inc.
11.1 Calculation of Income (Loss) Per Share.
16.1 Letter from Semple & Cooper, P.L.C. Re: Change of public accountants.
21.1 List of Subsidiaries.
*23.1 Consent of BDO Seidman, LLP. Re: Birman Managed Care, Inc.
*23.2 Consent of BDO Seidman, LLP Re: Canton Management Group, Inc.
*23.3 Consent of Semple & Cooper, P.L.C. Re: Birman Managed Care, Inc.
*23.4 Consent of Semple & Cooper, P.L.C. Re: Canton Management Group, Inc.
23.5 Consent of Rudnick & Wolfe (included in the Opinion filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney of Certain Officers and Directors.
27 Financial Data Schedule.
</TABLE>

- ---------------
* Filed with this amendment.

All other exhibits previously filed.

II-3
<PAGE> 95

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes the registration
statement to be signed on its behalf by the undersigned, in the City of
Cookeville, State of Tennessee, on January , 1997.

BIRMAN MANAGED CARE, INC.

By: /s/ DAVID N. BIRMAN

------------------------------------
David N. Birman, M.D., President

In accordance with 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 stated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------------------- -----------------

<C> <S> <C>
/s/ DAVID N. BIRMAN Chairman of the Board, President and January , 1997
- ----------------------------------- Chief Executive Officer
David N. Birman

/s/ SUE D. BIRMAN Executive Vice President, Director January , 1997
- -----------------------------------
Sue D. Birman

/s/ ROBERT D. ARKIN Executive Vice President, Chief January , 1997
- ----------------------------------- Operating Officer, Secretary, and
Robert D. Arkin Director

/s/ DOUGLAS A. LESSARD Vice President, Treasurer and Chief January , 1997
- ----------------------------------- Financial Officer
Douglas A. Lessard

Director January , 1997
- -----------------------------------
Diedrich Von Soosten

/s/ JAMES J. RHODES* Director January , 1997
- -----------------------------------
James J. Rhodes
</TABLE>

* By Power of Attorney

II-4
<PAGE> 96
APPENDIX A

Description of Graphic and Image Material

1. Location: Inside Front Cover Page of Prospectus
Caption: Birman Quality Management Program
Subcaption: 80 Client Hospital Implementations in 13 States
Description: This illustration depicts the implementation of the Company's
Quality Management Program using three pictures. At the top of
the page is a picture of two physicians conferring over a
medical record, captioned "Birman physicians consult with
attending physicians." An arrow leads to a second picture
depicting one of the physicians in the first picture attending
to a patient, captioned "Attending physicians apply Quality
Management Programs." An arrow leads from the second picture to
the third picture that depicts a hand writing on a medical
record, captioned "Client hospitals optimize reimbursements and
utilization." To depict the continuity of the flow of
information, an arrow leads from the third picture back to the
first picture. In the background of the illustration is a map
of the United States running from the east coast to the
Mississippi River depicting by state the locations of past and
present hospital-clients of the Company's Quality Management
Program.

2. Location: Inside Back Cover Page of Prospectus
Caption: Birman Health Plans Target Underserved Rural Markets
Description: This illustration depicts the Company's health plan strategy.
At the top of the page is a picture of a family, captioned
"Point of Service -- Patient Chooses Treatment Option At Each
Visit." An arrow points from the family to an arc having three
points of reference labelled HMO, PPO, and Traditional
Indemnity, respectively. Below the arc is a map of the
Southeastern and Southcentral United States showing, by state,
the penetration of HMOs based upon the 1995 HMO-PPO Digest
published by Hoechst Marion Roussel, Inc., captioned "Current
Penetration of HMO Patients by State." The percentages of the
population of the states that are enrollees in HMOs reflected
in the illustration are as follows:

Southeast Southcentral
- --------------------------- -------------------------------
State Percentage State Percentage
- ----- ---------- ----- ----------
<S> <C> <C> <C>
Delaware 25.6% Kentucky 12.4%
Maryland 29.7% Tennessee 9.0%
West Virginia 3.2% Arkansas 6.4%
Virginia 14.1% Mississippi 0.8%
North Carolina 8.7% Alabama 7.6%
South Carolina 5.4% Louisiana 7.4%
Georgia 10.9%
Florida 18.0%
</TABLE>

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Birman Managed Care, Inc. and Subsidiaries
Cookeville, Tennessee

We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated August 2, 1996, relating
to the consolidated financial statements of Birman Managed Care, Inc. and
Subsidiaries for the year ended June 30, 1996 which is contained in that
Prospectus.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

BDO Seidman, LLP

Los Angeles, California

January 31, 1997

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Canton Management Group, Inc.
(A Development Stage Company)
Jackson, Mississippi

We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated August 7, 1996, relating
to the financial statements of Canton Management Group, Inc. (A Development
Stage Company) for the year ended June 30, 1996 which is contained in that
Prospectus.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

BDO Seidman, LLP

Los Angeles, California

January 31, 1997

<PAGE> 1

EXHIBIT 23.3

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Birman Managed Care, Inc. and Subsidiaries
Cookeville, Tennessee

As independent certified public accountants, we hereby consent to the
inclusion of our report dated July 19, 1996, on the consolidated financial
statements of Birman Managed Care, Inc. and Subsidiaries for the year ended June
30, 1995, in the Company's Form SB-2 Registration Statement for the year then
ended, and to the reference to us under the caption "Experts" contained in the
Prospectus.

/s/ SEMPLE & COOPER, P.L.C.

--------------------------------------
Semple & Cooper, P.L.C.

Certified Public Accountants
Phoenix, Arizona

January 31, 1997

<PAGE> 1

EXHIBIT 23.4

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Canton Management Group, Inc.
(A Development Stage Company)
Jackson, Mississippi

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

Semple & Cooper, P.L.C.

Phoenix, Arizona

January 31, 1997