ATLANTIC INTEGRATED HEALTH INC, POS AM, 1998-06-24

ATLANTIC INTEGRATED HEALTH INC
POS AM, 1998-06-24
OFFICES & CLINICS OF DOCTORS OF MEDICINE

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As filed with the Securities and Exchange Commission on
June 24, 1998.

Registration No. 333-5826
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

POST-EFFECTIVE
AMENDMENT NO. 3

TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------------
ATLANTIC INTEGRATED HEALTH
INCORPORATED
(Name of small business issuer as specified in its charter)

NORTH CAROLINA 8011 56-1966823
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification No.)
organization)

1315 S. GLENBURNIE ROAD, SUITE A5
NEW BERN, NORTH CAROLINA 28562
(252) 514-0057
(Address and telephone number of principal executive offices)

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

J. PHILIP MAHANEY JR., M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1315 S. GLENBURNIE ROAD, SUITE A5
NEW BERN, NORTH CAROLINA 28562
(252) 514-0057
(Name, address and telephone number of agent for service)

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

COPIES TO:

MICHEL A. LAFOND, ESQ. DONALD R. REYNOLDS, ESQ.
OPPENHEIMER WOLFF & DONNELLY LLP WYRICK, ROBBINS, YATES & PONTON L.L.P.
3400 PLAZA VII, 45 SOUTH SEVENTH STREET THE SUMMIT
MINNEAPOLIS, MN 55402 4101 LAKE BOONE TRAIL, SUITE 300
(612) 607-7438 RALEIGH, NC 37607

---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.

-----------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box.[X]

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

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

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]

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

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

<PAGE>

Subject to Completion Dated June 24, 1998

700,000 PRIMARY CLASS COMMON SHARES
1,400,000 REFERRAL CLASS COMMON SHARES
150,000 NONPROFIT CLASS NONVOTING COMMON SHARES

---------------------------
ATLANTIC INTEGRATED HEALTH
INCORPORATED

Prior to this offering (the "Offering"), there has been no public market for the
Primary Class Common Shares, the Referral Class Common Shares, or the Nonprofit
Class Nonvoting Common Shares (the Primary Class Common Shares, the Referral
Class Common Shares and the Nonprofit Class Nonvoting Common Shares are
collectively referred to as the "Shares"). The offering of the Shares will be
restricted to qualified investors only. See "Description of Securities" and
"Plan of Distribution." In addition, all purchasers of the Shares offered hereby
will be required to enter into Subscription and Shareholder Buy/Sell Agreements,
which restrict the sale of the Shares to Eligible Persons (as defined in the
respective Shareholder Buy/Sell Agreements) and provide to the Company a right
to repurchase the Shares upon the occurrence of certain purchase events at fair
market value, as determined in the sole discretion of the Board of Directors,
thereby precluding the development of a trading market for the Shares. See "Plan
of Distribution - Subscription and Shareholder Buy/Sell Agreements."
Accordingly, upon completion of the Offering, there will continue to be no
public market for the Shares and no assurance can be given that a public market
for the Shares will ever develop after the Offering. The initial public offering
price per Share will be $1.00.

-------------------
THE SHARES OFFERED BY THIS PROSPECTUS ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER
"RISK FACTORS."

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

<TABLE>
<CAPTION>
===============================================================================================
Price to Underwriting Discounts Proceeds to
Public (1)(2) and Commissions (3) Company (4)(5)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Primary Class Common Share......... $1.00 None $1.00
Per Referral Class Common Share........ $1.00 None $1.00
Per Nonprofit Class Nonvoting
Common Share........................... $1.00 None $1.00
===============================================================================================

Total ................................. $2,250,000 None $2,250,000

===============================================================================================
</TABLE>

(1) The minimum and maximum investment is 2,000 Shares, or $2,000 per investor.
See "Plan of Distribution."

(2) The Shares will be offered only to qualified investors. See "Plan of
Distribution."

(3) The Shares will be offered on a "best efforts" basis by the officers and
directors of the Company. No selling commissions will be paid to any
officer or director of the Company in connection with the offering and sale
of the Shares, although any out-of-pocket expenses will be reimbursed by
the Company.

(4) Before deducting estimated Offering expenses payable of $105,000.

(5) The total number of Shares does not discriminate between the three
different classes of Shares.

The date of this Prospectus is _______, 1998

<PAGE>

ADDITIONAL INFORMATION

The Company has filed a Registration Statement on Form SB-2 (of which
this Prospectus is a part) under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission (the
"Commission") with respect to the Shares offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement, as
amended by Post-Effective Amendments 1 through 3, and the exhibits and schedules
thereto. For further information with respect to the Company and the securities
offered hereby, reference is made to the Registration Statement, as amended by
Post-Effective Amendments 1 through 3, including the exhibits and schedules
thereto, copies of which can be inspected and copied at the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60621 and Seven World Trade Center, New York, New York
10048. Copies of such documents may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission (http://www.sec.gov). The
Company is an electronic filer.

<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE IN
THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER THE HEADING "RISK FACTORS."

THE COMPANY

Atlantic Integrated Health Incorporated (the "Company" or "Atlantic")
was incorporated as a business corporation on December 5, 1994 under the name
"Atlantic Primary Care, Inc." Atlantic is in the process of integrating,
economically and clinically, physicians practicing primarily in single-specialty
medical practice groups into a larger multi-specialty network of physicians and
medical practice groups. Atlantic is organized as an independent,
physician-owned and governed integrated medical practice group network.
Physicians participating in Atlantic's network provide primary and referral
specialty health care services to managed care health plan enrollees and other
patients. Atlantic seeks to improve the clinical performance and efficiencies of
individual physician and medical practice group operations by centralizing
specific administrative and purchasing functions and introducing management
tools, such as clinical pathways, utilization review and outcomes measurement.

As of June 2, 1998, Atlantic had entered into Medical Services Provider
Agreements covering approximately 400 physicians with practices located in 19
counties of Eastern North Carolina. The Medical Services Provider Agreements
require participating physicians to comply with key operating policies and
procedures established by Atlantic's physician Board of Directors. Additionally,
as of June 2, 1998, Atlantic through its subsidiary, The Beacon Company
("Beacon"), had entered into Facility Participation Agreements with five
hospitals in Eastern North Carolina. The Facility Participation Agreements allow
Atlantic, through Beacon, to work with local hospitals on joint contracting
opportunities.

Atlantic derives its revenues from two main sources. The first is fees
paid by employers, managed care health plans such as HMOs, and other third-party
payors to access its integrated provider network and the other administrative
and consulting services. The second is fees generated from providing
administrative, group purchasing and other services to participating physicians.

Atlantic's strategy is to continue to develop a multi-specialty
Integrated Medical Group Network in Eastern North Carolina. In each targeted
community Atlantic plans to affiliate with local physicians who provide a
variety of medical specialty services. To implement its strategy, Atlantic
intends to pursue: (i) growth in its existing community markets; (ii) expansion
into new community markets through affiliation with physician medical practice
groups or existing provider networks; (iii) creation of contract relationships
with hospitals, HMOs, and other third-party payors in the community market
areas; (iv) use of management information systems and electronic data
interchange; and (v) management activities to increase the efficiency of and
reduce costs associated with the operation of Atlantic's regional network.

The Company was incorporated in North Carolina in December 1994 under
the name "Atlantic Primary Care, Inc." The Company's principal executive offices
are located at 1315 S. Glenburnie Road, Suite A5, New Bern, North Carolina
28562, and its telephone number at that location is (252) 514-0057.

<PAGE>

RISK FACTORS

An investment in the Shares offered hereby is speculative and involves a
high degree of risk. See "Risk Factors."

THE OFFERING

Securities offered by the Company.......700,000 Primary Class Common Shares

1,400,000 Referral Class Common Shares

150,000 Nonprofit Class Nonvoting Common
Shares

Securities to be outstanding
after the Offering...................856,500 Primary Class Common Shares if
maximum number is sold.

1,426,000 Referral Class Common Shares
if maximum number is sold.

152,500 Nonprofit Class Nonvoting Common
Shares if maximum number is sold.

Investor Qualifications.................Primary Class Common Shares will be
issued to only "Primary Care Physicians"
who have entered into, directly or
indirectly, Medical Services Provider
Agreements with Atlantic.

Referral Class Common Shares will be
issued to only physicians practicing
primarily in referral medical and
surgical specialties who have entered
into, directly or indirectly, Medical
Services Provider Agreements with
Atlantic.

Non-Profit Class Nonvoting Common Shares
will be issued to only nonprofit
entities or public corporations engaged
in the delivery of health care services,
which have contracted with the Company
to provide medical or other health care
services.

See "Description of Securities" and
"Plan of Distribution."

Restrictions on Resale of Shares........All purchasers of the Shares will be
required to enter into Subscription and
Shareholder Buy/Sell Agreements, which
restrict the sale of the Shares to
"Eligible Persons" only and give the
Company the right to repurchase the
Shares upon certain purchase events at
fair market value as determined in the
sole discretion of the Board of
Directors.

<PAGE>

Voting Rights...........................The Primary Class Common Shares and the
Referral Class Common Shares vote
together as a single class on most
matters, with each share entitling its
holder to one vote, except as otherwise
provided by law and the Company's
Amended and Restated Articles of
Incorporation. The Nonprofit Class
Nonvoting Common Shares are not entitled
to vote on any matters, except as
otherwise provided by law. See
"Description of Capital Stock."

Use of Proceeds.........................The net proceeds from the Offering will
be used for general working capital
purposes. See "Use of Proceeds" and
"Business -- Organization."

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31 March 31
--------------------------- ----------------------------
STATEMENT OF OPERATIONS DATA: 1996 1997 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues.................................... $58,927 $286,751 $116,190 $78,275
Total operating expenses.................... 202,631 458,620 125,793 117,304
--------- --------- ------- --------
Net loss.................................... $(143,704) $(171,869) $(9,603) $(39,029)
========= ========= ======= ========
Net loss per share.......................... $(1.31) $(.41) $(.05) $(.07)
========= ========= ======= ========
Weighted average number of
common shares outstanding................... 109,875 416,688 210,417 586,333
========= ========= ======= ========

OPERATING DATA:

Number of Affiliated Practice Sites......... 45 119 51 139
Number of Affiliated Physicians............. 108 312 126 376

</TABLE>

<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------
Actual As Adjusted (1)
------ ---------------
BALANCE SHEET DATA:
<S> <C> <C>

Working capital................................................. $114,857 $1,940,857
Total assets.................................................... 186,137 2,012,137
Total shareholders' equity...................................... 140,252 1,966,252
</TABLE>

(1) The balance sheet data is as adjusted to reflect the sale of the
maximum number of Shares offered hereby minus the 414,000 Shares issued
by the Company pursuant to this Offering prior to March 31, 1998.

<PAGE>

RISK FACTORS

AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND MAY NOT BE APPROPRIATE FOR INVESTORS WHO CANNOT AFFORD TO LOSE THEIR
ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY SHOULD BE
FULLY AWARE OF THE FOLLOWING RISK FACTORS, AMONG OTHERS, AND SHOULD CAREFULLY
REVIEW THE INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS
PROSPECTUS.

THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS
PURPOSE, ANY STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS,
INCLUDING THOSE DESCRIBED BELOW.

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT.

Atlantic was incorporated in December 1994 and has a limited operating
history. The business of Atlantic is subject to the risks inherent in the
establishment of a new business enterprise. Because Atlantic was recently formed
and has limited operations, it cannot provide prospective investors with the
type of information that would be available from an institution with a longer
history of operations. Atlantic's profitability will depend primarily upon the
efforts of the individual physicians and medical practice groups that are
participating providers of medical services pursuant to Medical Services
Provider Agreements with Atlantic. There is no assurance that Atlantic will ever
operate profitably. As a result of the substantial start-up expenditures that
have been and will continue to be incurred, Atlantic can be expected to continue
to incur operating losses during at least the next two years of operations.
Furthermore, any delays in commencing substantial business operations will
further increase start-up expenses and delay realization of potential revenues
and income. As of March 31, 1998, Atlantic had accumulated a deficit since its
inception in an amount equal to $384,898. As a result of Atlantic's accumulated
deficit, along with other matters, the report of Atlantic's independent public
accountants on Atlantic's financial statements contains an explanatory paragraph
concerning Atlantic's ability to continue as a going concern.

NEED FOR ADDITIONAL FINANCING

Shares sold in connection with Atlantic's current Offering have been
and will continue to be used for general working capital purposes until Atlantic
begins generating additional operating revenues. Atlantic desires that a portion
of the proceeds of the Offering be used to explore the desirability and
feasibility of organizing, licensing and operating an affiliate health
maintenance organization or other health plan. No assurance can be provided,
however, that the Board of Directors will determine to undertake any such study
or to proceed with any such organization or affiliate company organization and
operation. Management believes that if the anticipated fees are collected under
the Administrative Fee Assessment Program and if Atlantic achieves its expected
revenues and is able to manage its expenses at budgeted levels, it will not
require any significant additional capital. If Atlantic's revenues are not
sufficient to complete its initial business development activities, Atlantic may
adjust its medical services fee arrangements, collect fees under the
Administrative Fee Assessment Program and seek to raise additional capital.
There can be no assurance that Atlantic will be successful in executing its
business plan or that it will be able to increase the fees charged to buyers of
health care services or reduce the fees paid to participating providers if it is
unable to achieve profitable operations. Atlantic plans to conduct additional
offerings of shares of its capital stock as it adds additional physicians to the
Atlantic network. Such additional offerings may result in dilution of the equity
interests of Atlantic's shareholders. In any

<PAGE>

event, there can be no assurance that Atlantic will be able to sell additional
shares or obtain any necessary additional financing on satisfactory terms, or at
all.

DEPENDENCE ON PHYSICIANS, MEDICAL PRACTICE GROUPS AND OTHER HEALTH CARE
PROVIDERS

Atlantic's profitability and long-range business plans will be
dependent upon its attracting and retaining the services of qualified individual
physicians, medical practice groups and other health care providers, especially
primary care medical practice groups. Atlantic will continue to enter into
Medical Services Provider Agreements with selected credentialed providers.
Although Atlantic believes that it will be able to enter into and maintain such
agreements with a sufficient number of providers, there can be no assurance that
Atlantic will be able to do so on a timely basis or under favorable terms.

DEPENDENCE ON LONG-TERM RELATIONSHIPS WITH MANAGED CARE HEALTH PLANS, INSURANCE
CARRIERS, EMPLOYERS AND OTHER BUYERS OF HEALTH CARE SERVICES

Atlantic's profitability and long-range business plans will be
dependent upon its entering into contracts and long-term relationships between
Atlantic and managed care health plans, insurance carriers, employers and other
buyers of health care services. In January 1997, Atlantic entered into a
business development agreement with Kanawha Insurance Company ("Kanawha") to
develop a variety of health plans to be marketed to small and large employers in
Atlantic's target markets. In connection with these agreements, Atlantic and
Kanawha formed a joint venture corporation named The Beacon Company ("Beacon").
Atlantic and Kanawha intend to market the health plans under the name
"Lighthouse Health Plans." In February 1998, Kanawha HealthCare Solutions, Inc.,
a subsidiary of Kanawha Insurance Company, and Beacon entered into several
agreements, including a Master Contract, Managed Care Agreement and
Administrative Services Agreement. See "Business -- Business Strategy --
Developing Strategic Alliances" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview." The development of
Beacon and the relationship among Atlantic, Beacon and Kanawha has consumed a
significant amount of time and energy of Atlantic's management, and there can be
no assurance that such time and energy will be well spent or that Beacon or
Atlantic, through Beacon, will be successful in developing such health plans or
in securing new business opportunities for Atlantic. Although Atlantic, through
Beacon, entered into an agreement with Kanawha, Atlantic also continues to meet
with managed care health plans and insurance companies desiring to compete in
the Eastern North Carolina marketplace for enrollees. Additionally, Atlantic
continues to develop agreements with managed care organizations or third party
administrators, to facilitate the offering of services by Atlantic medical
practice groups to large partially and fully self-insured employers. Although
Atlantic believes that it will be able to enter into and maintain such
relationships with a sufficient number of buyers of health care services, there
can be no assurance that Atlantic will be able to do so on a timely basis or
under favorable terms.

COMPETITION

The health care industry is very competitive. Atlantic and its
affiliated physicians and medical practice groups compete with individual
physicians and medical practice groups, HMOs, preferred provider organizations
("PPOs"), physician-hospital organizations, integrated delivery systems and
physician practice management companies. Many of Atlantic's competitors are
significantly larger and have substantially greater capital resources than
Atlantic. There is no assurance that Atlantic will be able to compete
effectively against such competitors. Even though Atlantic's competitors will
include certain existing managed health care plans, such as HMOs, Atlantic
intends to market the services of its integrated, multi-specialty group network
to certain other managed health care plans with which Atlantic will not compete.
Atlantic's success and profitability will be dependent, in part, on its ability
to establish contract relationships with existing health plan organizations,
which will provide Atlantic access to

<PAGE>

employer buyer coalitions and other insured and self insured employer groups.
Currently, Atlantic has one existing preferred provider contract with an
insurance company and several other contracts with self-insured employers. See
"Business -- Business Strategy -- Developing Strategic Alliances" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." Atlantic does not have any long-term relationships with
any managed care health plans or other buyers of health care services.
Continuing consolidation of the participants in the health care industry could
limit Atlantic's opportunities to establish additional contracts and
relationships.

AFFILIATED SERVICE GROUP

Section 414(m) of the Internal Revenue Code of 1986, as amended,
requires that all employees who are employed by members of an "affiliated
service group" be treated as employed by a single employer for purposes of
discrimination testing and certain other requirements imposed on qualified
employee benefit plans. Although Atlantic is organized as a business
corporation, with its business limited to the provision of administrative
services, Atlantic and participating medical providers within the Atlantic
network may be deemed to be an "affiliated service group." In the event Atlantic
and the participating medical providers are found to be an "affiliated service
group," Atlantic's organizational structure and contractual arrangements may
have to be modified. Notwithstanding any such possible modifications, if
Atlantic's or the medical providers' qualified employee benefit plans become
disqualified as a result of the "affiliated service group" issue, participating
physicians may suffer adverse income tax consequences, including immediate
taxation of the employer's contributions to the pension and profit sharing plans
which they and their respective medical providers sponsor.

ANTITRUST LAW

Federal and state antitrust laws prohibit practices that unreasonably
restrain competition. Atlantic believes that its proposed organizational
structure, contemplated contractual arrangements and business operations will be
lawful and will not violate current antitrust laws, even though Atlantic may not
meet the requirements of identified federal antitrust policy statement safety
zones or exemptions. Atlantic is still in its early stages of development, and
certain structures, programs and business operations required for the economic
and clinical integration of participating physicians and medical practice groups
have not been implemented. Many of such structures, programs and business
operations must be implemented and continued to satisfy certain antitrust
requirements, and no assurance can be provided that the requisite structures,
programs and business operations will be implemented in a timely manner and
continued. Moreover, evolving interpretations of antitrust laws and
corresponding statements of enforcement policy could make it necessary for
Atlantic to modify its organizational structure and/or restructure its
contractual arrangements or business operations. If Atlantic is found to be in
violation of federal or state antitrust laws, Atlantic may be subject to fines
of up to $10,000,000 or other sanctions. Even the mere assertion of a violation
of the antitrust laws could have a material adverse effect on Atlantic.

INSURANCE, HMO, PPO AND URO REGULATION

All entities classified as an "insurance company" under North Carolina
law are subject to various state laws regulating the business of insurance which
are enforced by the North Carolina Department of Insurance ("DOI"). If
Atlantic's method for compensating physicians within the Atlantic network
includes the allocation to the medical practice groups of deficits that result
from Atlantic's payment arrangements with health plans and other purchasers,
Atlantic might be deemed an "insurance company" and, as a result, be subject to
North Carolina laws regulating insurance. Current North Carolina insurance law
requirements for insurance companies include, but are not limited to, the
payment of licensing fees, the filing of annual statements, and the maintaining
of certain capitalization and financial

<PAGE>

reserves. Failure to comply with these or other requirements could result in the
imposition of fines, penalties, and the disqualification from doing business in
North Carolina.

In addition to regulating traditional insurance companies, the DOI is
responsible for the regulation of HMOs, PPOs and utilization review
organizations ("UROs"). While there are no specific regulations governing
physician organizations, the DOI has taken the position that a physician network
organization could become subject to the HMO statute if the physician
organization enters into arrangements which involve the shifting or other
transfer of an "insurance risk." Although Atlantic currently does not have any
risk sharing contracts, nor does it plan to structure itself in such a fashion
as to be regulated by the DOI, Atlantic may enter into such contracts in the
future and at such time may become subject to these regulations. A physician
organization may also become subject to regulation as a PPO and a URO. Although
management of Atlantic believes that its current operations would not require it
to register as a PPO or a URO, no assurance can be given that the DOI would not
take a contrary position. Any challenge by the DOI and requirement that Atlantic
restructure its operations could have a material effect on Atlantic's
operations.

GOVERNMENT REGULATION

Federal and state laws regulate the relationships among providers of
health care services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid statutes, which prohibit
the soliciting or receiving, or the offering or payment of remuneration, either
directly or indirectly, in return for or to induce a referral of items or
services for Medicare and Medicaid patients. Federal and state statutes impose
restrictions on physician referrals for designated health services to entities
with which the physician has a financial relationship. These laws and applicable
regulations also regulate the submission of claims for the reimbursement of
physician services, or for services incident to those services, provided under
federal health care programs that are false or fraudulent. Violations of these
laws may result in substantial civil and criminal penalties, including civil
monetary penalties, exclusion from the participation in the Medicare and
Medicaid programs, loss of licensure to practice medicine and other penalties.
Such exclusion and penalties, if applied to Atlantic's affiliated medical
practice groups, could have a material adverse effect on Atlantic.

Recently adopted health insurance reform legislation includes important
changes in federal laws regulating fraud and abuse. Statutory provisions
establishing criminal penalties, both fines and imprisonment, for intentionally
fraudulent activity in the provision of health services are included. Claims for
reimbursement that are improperly processed and submitted to federal programs
that result in inappropriately obtained reimbursement can result in civil
penalties. Moreover, persons who have an ownership interest or serve as officers
or managing employees of entities that are convicted or excluded from
participation in such federal programs for filing false or fraudulent claims
would also be subject to exclusion and civil penalties for each day the
individual maintains that interest. Finally, remuneration between organizations
and entities, which provide services to Medicare or Medicaid beneficiaries and
have a written risk sharing agreement, are exempted under Medicare and Medicaid
statutes that prohibit the payment or remuneration to induce or obtain
referrals. These statutes, if applied to Atlantic and its affiliated medical
practice groups, could have a material adverse effect on Atlantic.

Moreover, the laws of many states prohibit physicians from splitting
fees with non-physicians and prohibit non-physician entities from practicing
medicine. Although Atlantic believes its operations as currently contemplated to
be conducted will be in material compliance with existing applicable federal and
state laws, there can be no assurance that Atlantic's existing Medical Services
Provider Agreements will not be successfully challenged as constituting the
unlicensed practice of medicine or that the enforceability of the provisions of
such agreements will not be limited.

<PAGE>

There can be no assurance that review of Atlantic's business or the
affiliated physicians' businesses by state or federal courts or regulatory
authorities will not result in a determination that could adversely affect the
operations of Atlantic, the affiliated physicians and medical practice groups or
that the health care regulatory environment will not change so as to restrict
Atlantic's or the affiliated physicians' existing medical practice groups'
operations or their expansion.

In addition to extensive existing governmental health care regulation,
there are numerous initiatives at the federal and state levels for comprehensive
reforms affecting the payment for and availability of health care services.
Certain aspects of these health care proposals, such as further reductions in
Medicare and Medicaid payments and additional prohibitions on physician
ownership, directly or indirectly, of facilities to which they refer patients,
if adopted, could adversely affect Atlantic.

POTENTIAL LEGAL LIABILITIES

Atlantic's health care services involve determinations regarding health
insurance coverage, utilization management and maintenance of patient records.
Although Atlantic does not intend to deliver medical services, it may be forced
to defend medical malpractice or other tort claims made by persons who receive
medical services from participating physicians or medical practice groups. The
legal theories upon which persons might attempt to assert liability against
Atlantic or other comparable companies in the managed health industry continue
to evolve. There is no assurance that Atlantic will not be subject to liability
from litigation which might adversely affect Atlantic's business. Atlantic
currently does not maintain any insurance for such potential liabilities.
Atlantic intends to obtain such insurance at the time it enters into its first
contract with a managed care health plan; however, no assurance can be given
that Atlantic will ever obtain and maintain such insurance.

DETERMINATION OF OFFERING PRICE

The initial public offering price set forth on the cover page of this
Prospectus was determined solely by Atlantic and is primarily based on the
projected capital requirements of Atlantic. The offering price bears no
relationship to Atlantic's assets, book value, earnings, net worth, or other
generally recognized criteria of value.

LACK OF PUBLIC TRADING MARKET; LIMITATIONS ON TRANSFER

As of March 31, 1998, Atlantic had issued and outstanding 296,500
Primary Class Common Shares, 300,000 Referral Class Common Shares and 2,500
Nonprofit Class Nonvoting Common Shares. All purchasers of such shares were
required to enter into a Subscription and Shareholder Buy/Sell Agreement and all
purchasers of the Shares offered hereby will be required to enter into a
Subscription and Shareholder Buy/Sell Agreement which restricts the sale of the
Shares and precludes the development of a trading market for the Shares (the
"Buy/Sell Agreement"). Accordingly, there is currently no public or private
trading market for the Shares offered hereby and so long as the Buy/Sell
Agreements are in effect, there will continue to be no public or private trading
market for the Shares. Pursuant to the Buy/Sell Agreements, Atlantic will have
the option to repurchase the Shares offered hereby in certain cases, including,
but not limited to, cases in which the purchaser is no longer a member of
Atlantic's network, or no longer practices medicine through a medical practice
group that is a participating provider in Atlantic's network, or the purchaser
desires to sell, assign, pledge, transfer or otherwise dispose of the Shares
offered hereby. Shares can be repurchased by Atlantic under the Buy/Sell
Agreements at a price equal to the fair market value thereof, as determined as
of the date that Atlantic exercises such option to repurchase the Shares. The
Board of Directors will determine the fair market value of the Shares annually
on or before March 1 of each year. See "Plan of Distribution." The Board of
Directors of Atlantic determined that, because Atlantic had not completed the
development of

<PAGE>

its corporate and operating structures and had little operating revenue, the
fair market value of one share of capital stock of Atlantic as of October 9,
1996 was equal to $.01. Such determination remains unchanged and the Board has
not made a new determination of the fair market value of the Shares as of the
date hereof.

EFFECT OF CERTAIN ARTICLES OF INCORPORATION AND BYLAWS PROVISIONS

Atlantic's Amended and Restated Articles of Incorporation and Bylaws,
as amended, contain certain provisions that could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of Atlantic. Such provisions could limit the
price that certain investors might pay in the future for shares of Atlantic's
capital stock.

<PAGE>

USE OF PROCEEDS

The net proceeds to be received by Atlantic from the sale of the Shares
offered hereby after deducting the estimated Offering expenses of $105,000, are
estimated to be approximately $2,145,000 if the maximum number of Shares is
sold. Atlantic anticipates that approximately $1,645,000 of the net proceeds
from the Offering will be used for general working capital purposes and that
approximately $500,000 of the net proceeds from the Offering will be used to
explore the desirability and feasibility of organizing, licensing and operating
an affiliate health maintenance organization or other health plan. No assurance
can be provided, however, that the Board of Directors will determine to
undertake any such study or to proceed with any such organization or affiliate
company organization and operation. The foregoing amounts represent Atlantic's
best estimate of its allocation of the net proceeds of the Offering, based upon
the current state of its business operations, its current plans and current
economic and industry conditions. These estimates are subject to change based
upon factors such as competition, government regulation and the availability of
alternative financing methods. Pending such uses, the net proceeds will be
invested in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

Atlantic has not declared or paid any cash dividends on its shares of
capital stock since its inception, and the Board of Directors presently intends
to retain all earnings for use in the business in the foreseeable future.

DILUTION

The net tangible book value of Atlantic as of March 31, 1998 was
approximately $140,252 or $.23 per share. Net tangible book value represents the
amount of the total tangible assets of Atlantic reduced by the amount of its
total liabilities. Without taking into account any other changes in net tangible
book value after March 31, 1998, other than to give effect to the sale by
Atlantic of the maximum number of Shares offered hereby (after deducting the
estimated Offering expenses of $105,000 payable by Atlantic) at $1.00 per share,
the pro forma net tangible book value of Atlantic at March 31, 1998, would have
been approximately $1,966,252, or $.81 per share. This represents an immediate
increase in net tangible book value of $.58 per share, and an immediate dilution
of $.19 per share to new investors. The following table illustrates this per
share dilution:

MAXIMUM (1)
-----------
Public offering price.................................... $1.00
Net tangible book value per share before Offering..... $.23
Increase attributable to new investors................ $.58
----
Pro forma net tangible book value after Offering......... $.81
----
Dilution to new investors................................ $.19
====

(1) The table reflects the per share dilution as adjusted to reflect the
sale of the maximum number of Shares offered hereby minus the 414,000
Shares issued by Atlantic pursuant to this Offering prior to March 31,
1998.

<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of Atlantic as of
March 31, 1998, on an as adjusted basis to reflect the receipt of the estimated
net proceeds from the sale of the 2,250,000 Shares offered hereby, at $1.00 per
share.

<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Shareholders' equity:

Primary Class Common Shares;
1,000,000 shares authorized;
296,500 shares issued and outstanding;
856,500 shares as adjusted......................................... $296,500 $856,500

Referral Class Common Shares;
1,800,000 shares authorized;
300,000 shares issued and outstanding;
1,426,000 shares as adjusted....................................... 300,000 1,426,000

Nonprofit Class Nonvoting Shares;
200,000 shares authorized;
2,500 shares issued and outstanding;
152,500 shares as adjusted......................................... 2,500 152,500

Additional paid-in capital......................................... 74,000 74,000

Syndication costs.................................................. (95,000) (105,000)

Stock subscription and shareholder notes receivable................ (52,850) (52,850)

Accumulated deficit................................................ (384,898) (384,898)
-------- --------

Total shareholders' equity......................................... $140,252 $1,966,252
======== ==========

</TABLE>

<PAGE>

SELECTED FINANCIAL DATA

The selected financial data presented below as of December 31, 1996 and
1997, and for the years ended December 31, 1996 and 1997, are derived from and
should be read in conjunction with the financial statements of the Company and
the related notes thereto audited by Arthur Andersen LLP, independent public
accountants, which are included elsewhere in this Prospectus. The selected
financial data presented below as of March 31, 1997 and 1998, and for the
three-month periods ended March 31, 1997 and 1998, are derived from the
unaudited financial statements of the Company which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information set
forth therein, and which are included elsewhere in this Prospectus. The results
of operations for the three-month period ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1998 or for any future period. The information presented below
under the caption "Operating Data" is unaudited. The selected financial data of
the Company set forth below are qualified by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and notes thereto
included elsewhere in this Prospectus.

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31 March 31
----------- --------
1996 1997 1997 1998
---- ---- ---- ----

STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues................................... $58,927 $286,751 $116,190 $78,275
--------- --------- ------- --------

Expenses
Consulting fees......................... 72,664 138,251 53,162 8,516
Salaries and wages...................... 85,799 251,803 58,099 78,897
Relocation expenses..................... 8,013 0 0 0
Recruiting and education................ 13,472 6,781 3,079 10,153
Office expense and other................ 17,210 44,907 8,757 16,667
Rent.................................... 4,000 4,420 970 1,038
Depreciation and amortization........... 1,473 7,458 1,726 2,033
Allowance for uncollectible accounts.... 0 5,000 0 0
--------- --------- ------- --------
Net loss................................... $(143,704) $(171,869) $(9,603) $(39,029)
========= ========= ======= ========
Net loss per share......................... $(1.31) $(.41) $(.05) $(.07)
========= ========= ======= ========
Weighted average number of
common shares outstanding.................. 109,875 416,688 210,417 586,333
========= ========= ======= ========

OPERATING DATA:

Number of Affiliated Practice Sites........ 45 119 51 139
Number of Affiliated Physicians............ 108 312 126 376

BALANCE SHEET DATA:

Working capital............................ $(27,045) $112,817 $(14,416) $114,857
Total assets............................... 75,878 165,007 143,327 186,137
Total shareholders' equity (deficit)....... $(2,375) $140,246 $ 15,897 $140,252

</TABLE>

<PAGE>

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

The following discussion of the results of the operations and financial
condition of Atlantic should be read in conjunction with Atlantic's Financial
Statements and the related notes thereto.

OVERVIEW

Atlantic is an independent, physician-owned and governed, integrated
medical practice group network. Since its inception, Atlantic has focused its
efforts on providing administrative services to participating physicians and
medical practice groups and on developing a community-based, integrated health
care delivery system to provide quality, cost-effective health care to the
citizens of Eastern North Carolina.

Atlantic is in the process of integrating, economically and clinically,
physicians practicing primarily in single-specialty medical practice groups into
a larger multi-specialty network of physicians and medical practice groups.
Physicians participating in Atlantic's network provide primary and referral
specialty heath care services to managed care health plan enrollees and other
patients. Atlantic continues to develop strategic alliances with payors of
health care services and other health care providers to achieve greater
coordination of the delivery of and payment of health care services.

As of June 2, 1998, Atlantic had entered into Medical Services Provider
Agreements covering approximately 400 physicians located in 19 counties of
Eastern North Carolina. The Medical Services Provider Agreements require
participating physicians to comply with key operating policies and procedures
established by Atlantic's physician Board of Directors. Additionally, as of June
2, 1998, Atlantic through its subsidiary, The Beacon Company, had entered into
Facility Participation Agreements with five hospitals in Eastern North Carolina.
The Facility Participation Agreements allow Atlantic to work with local
hospitals on joint contracting opportunities.

Atlantic derives its revenues from two main sources. The first is fees
paid by employers, managed care health plans such as HMOs, and other third-party
payors to access its integrated provider network and the other administrative
and consulting services. The second is from fees generated from providing
administrative, group purchasing and other services to participating physicians.

Atlantic plans to continue to provide administrative, group purchasing
and other services to participating physicians and to collect fees for
performing such services during 1998. Management, however, believes that
Atlantic's long term success will result from its continued ability to generate
revenues from managed care plans, HMOs, insurance carriers, employers and other
buyers of health care services for obtaining access to Atlantic's network and
health plan management services.

Atlantic continues to meet directly with the management of major
regional employers and their employee benefits consultants to discuss Atlantic's
network and health plan management services. Although no assurance can be given,
Atlantic believes that it will continue to generate income from access and
management fees paid by buyers of health care services in 1998. As of June 2,
1998, Atlantic had agreements with employers covering over 3,100 lives.

In January 1997, Atlantic entered into a business development agreement with
Kanawha Insurance Company ("Kanawha") to develop a variety of health plans to be
marketed to small and large employers in Atlantic's target markets. The parties
intend to market the health plans under the name, "Lighthouse Health Plans." In
connection with these agreements, Atlantic and Kanawha formed a joint venture
corporation named The Beacon Company ("Beacon"). In February 1998, Kanawha
HealthCare

<PAGE>

Solutions, Inc. ("Kanawha HealthCare"), a subsidiary of Kanawha Insurance
Company, and Beacon entered into several agreements, including a Master
Contract, Managed Care Agreement and Administrative Services Agreement. Under
the Master Contract, Kanawha HealthCare and Beacon have agreed to develop and
market health maintenance organization, preferred provider organization and
third party administrator health plan products. Beacon will function as a
general agent for the sale of the health plan products, and Beacon will be the
exclusive agent of Kanawha for the sale of fully insured Lighthouse Plans and
other fully insured managed care products. Beacon and Kanawha jointly are to use
their best efforts to offer and sell Lighthouse Plans and related services to
self-funded employers. Under the Managed Care Agreement, Beacon shall establish
and manage a regional preferred provider network of physicians, hospitals and
other providers. Under the Administrative Services Agreement, Kanawha is to
provide a management information system and provide administrative services
required for enrollees and providers. Beacon is to provide a Medical Director
and physicians for the Medical Management Committee that is to oversee the
delivery of health care services.

Initially, Atlantic and Kanawha each purchased 1,000 shares of common
stock, $1.00 par value, of Beacon. However, the parties have tentatively agreed
that Atlantic will repurchase all of the 1,000 shares purchased by Kanawha in
exchange for $1,000 cash and the issuance by Beacon of a debenture in the
principal amount of $90,000. The parties anticipate that the debenture will be
payable in 5 years, bear interest at 6% and will be convertible into 4% of
Beacon's outstanding common stock if Atlantic either defaults on the debenture
or completes a public offering of any of its capital stock. As of June 2, 1998,
a definitive written agreement among Atlantic, Kanawha and Beacon in connection
with the purchase by Atlantic of Beacon common stock held by Kanawha had not
been finalized.

Although the management of Atlantic finds it difficult to forecast when
exactly its operations will become profitable, management believes that
Atlantic's profitability is largely dependent upon several factors, including
(i) the number of physicians participating in Atlantic's network; and (ii) the
number of contracts and long-term relationships between Atlantic and managed
care health plans, insurance carriers, employers and other buyers of health care
services.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996

Net revenue increased from $58,927 for 1996 to $286,751 for 1997, an
increase of $227,824, or 387%. This increase is primarily due to an increase in
the revenue derived from network development and access fees and administrative
fees paid from participating physicians. In 1996, $49,500 of net revenue was
derived from a network development and access fee collected from an insurance
company, $6,000 from administrative fees paid from physicians and $3,400 from
purchasing contract revenues. In 1997, $71,000 of net revenue was derived from
network development and access fees, $185,000 from administrative fees paid from
physicians and $30,000 from group purchasing contracts.

Operating expenses increased from $202,631 in 1996 to $458,620 in 1997. This
increase is primarily due to the addition of new personnel and an increase in
consulting fees associated with Atlantic's increased contracting and financing
activities. Consulting fees increased from $72,664 in 1996 to $138,251 in 1997,
an increase of $65,587. The majority of these expenses were incurred in
connection with the negotiation of contracts associated with the Kanawha/Beacon
transaction, drafting and negotiation of facility contracts with hospitals and
exploring alternatives for capitalizing Beacon. Salaries and wages expense
increased from $85,799 in 1996 to $251,803 in 1997, an increase of $166,004.
This increase was primarily due to hiring Atlantic's Chief Operating Officer and
two support staff on a full-time basis at the end of 1996 and Atlantic's Chief
Financial Officer in April 1997. Approximately $78,000 of Atlantic's total
expenses in 1996 were incurred and subsequently reimbursed

<PAGE>

by several other Eastern North Carolina based health care providers in
connection with a Memorandum of Understanding between Atlantic and such
providers. Pursuant to the Memorandum of Understanding, Atlantic and several
health care providers prepared a feasibility study to determine whether Atlantic
and its affiliated physicians and medical practice groups, participating
hospitals and other regional health care providers could develop a mutually
acceptable joint venture business plan for the joint provision of administrative
services and coordination of the delivery of health care services. While a joint
venture business plan was developed, it was never adopted by the parties. The
Memorandum of Understanding was terminated during the fourth quarter of 1997.

Office and other expenses increased from $17,210 in 1996 to $44,907 in
1997, an increase of $27,697. This increase was primarily due to an increase in
telecommunications expenses, outside credentialing fees, and expenses for
directors and officers liability insurance. Atlantic's rent expense was
relatively stable for 1997 and Atlantic's depreciation and amortization expenses
increased due to the acquisition of a new computer and phone system and a full
year of amortization of organizational costs. Atlantic's recruiting and
educational expenses decreased from $13,472 in 1996 to $6,781 in 1997 due to a
reduction in programs funded by Atlantic.

Atlantic incurred a net loss of $171,869 in 1997 compared to a net loss
of $143,704 in 1996. Since inception, Atlantic has incurred an accumulated
deficit of $345,869. The increase in net loss in 1997 was primarily due to the
increase in operating expenses described above.

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

Net revenue decreased from $116,190 for 1997 to $78,275 for 1998, a
decrease of $37,915, or 33%. This decrease was primarily due to a $42,901
decrease in network development and access fees and a $14,998 decrease in
administrative fees paid from participating physicians. These decreases were
partially offset by a $12,914 increase in educational grants and a $10,636
increase in purchasing contract revenue.

Operating expenses decreased from $125,793 for 1997 to $117,304 for
1998. This decrease was primarily due to the discontinuance of the Company's
contract with Carolina Health Care Consultants and the hiring of the Company's
Chief Financial Officer to perform many of these services to the Company and its
shareholders. As a result, consulting fees decreased $44,646 from $53,162 in
1997 to $8,516 and salaries and wages increased from $58,099 in 1997 to $78,897
in 1998.

Office and other expenses increased from $8,757 in 1997 to $16,667 in
1998, an increase of $7,910. This increase was primarily due to the Company's
growth and related increases in communications expenses, office supply expenses,
credentialing fees and liability insurance expenses. Depreciation and
amortization expense was $1,726 in 1997 compared to $2,033 in 1998. This
increase was primarily due to the acquisition of communications equipment and
other depreciable office equipment.

Atlantic incurred a net loss of $9,603 in 1997 compared with a net loss
of $39,029 in 1998. This increase in net loss was primarily due to the decreases
in revenues mentioned above. Atlantic's management anticipates that its
operating losses may continue for the next two years.

LIQUIDITY AND CAPITAL RESOURCES

To date, Atlantic has financed its operations primarily through the
sale of equity securities and the collection of administrative, group purchasing
and network development and access fees.

<PAGE>

On October 19, 1996, Atlantic filed a Registration Statement on Form
SB-2 with the Securities and Exchange Commission (the "Commission"), pursuant to
which Atlantic registered for offer and sale under the federal securities laws
(i) 700,000 Primary Class Common Shares; (ii) 1,400000 Referral Class Common
Shares; and (iii) 150,000 Nonprofit Class Nonvoting Common Shares. The
Commission declared Atlantic's Registration Statement effective on December 30,
1996, and certain officers and directors of Atlantic commenced sale of
Atlantic's shares shortly thereafter. During the initial offering period which
closed on July 28, 1997, Atlantic sold 116,000 Primary Class Common Shares,
216,000 Referral Class Common Shares and no Nonprofit Class Nonvoting Common
Shares. On September 22, 1997, Atlantic filed a Post-Effective Amendment No. 2
to the Registration Statement. The Commission declared the Post-Effective
Amendment No. 2 effective on September 30, 1997. During the second offering
period which closed on April 28, 1998, Atlantic sold 26,000 Primary Class Common
Shares, 76,000 Referral Class Common Shares and no Nonprofit Class Nonvoting
Common Shares. Atlantic has sold an aggregate of 142,000 Primary Class Common
Shares, 292,000 Referral Class Common Shares and no Nonprofit Class Nonvoting
Common Shares since the Registration Statement was first declared effective on
December 30, 1996. Atlantic plans to conduct additional offerings of shares of
its capital stock as it adds additional physicians to the Atlantic network.

The net proceeds from Atlantic's Offering have been and will continue
to be used for working capital. Up to $500,000 of the net proceeds of the
Offering may be used, as determined at the sole discretion of the Board of
Directors, to explore the desirability and feasibility of organizing, licensing
and operating an affiliate health maintenance organization or other health plan.
No assurance can be provided, however, that the Board of Directors will
determine to undertake any such study or to proceed with any such organization
or affiliate company organization and operation.

Atlantic had $114,857 and $(14,416) in working capital at March 31,
1998 and 1997, respectively. Atlantic's cash and cash equivalents were $107,275
and $87,015 at March 31, 1998 and 1997, respectively. The increase in Atlantic's
working capital and cash balance is due to the increase in revenues described
above and Atlantic's stock offering. Depending upon the success of Atlantic's
current stock offering and the amount of future revenue derived from network
development and access fees, Atlantic believes that sufficient liquidity is
available to satisfy its working capital through December 1999. In the event
that the Company's future stock sales and revenues derived from network
development and access fees are lower than projected, the Company anticipates
that it may charge its shareholders assessments or decrease compensation paid to
its officers.

Atlantic did not have any material commitments for capital expenditures
as of March 31, 1998.

<PAGE>

BUSINESS

GENERAL

As of June 2, 1998, Atlantic had entered into Medical Services Provider
Agreements covering approximately 400 physicians located in 19 counties of
Eastern North Carolina. The Medical Services Provider Agreements require
participating physicians to comply with key operating policies and procedures
established by Atlantic's physician Board of Directors. Additionally, as of June
2, 1998, Atlantic through its subsidiary, The Beacon Company ("Beacon"), had
entered into Facility Participation Agreements with five hospitals in Eastern
North Carolina. The Facility Participation Agreements allow Atlantic, through
Beacon, to work with local hospitals on joint contracting opportunities.

In January 1997, Atlantic entered into a business development agreement
with Kanawha Insurance Co. ("Kanawha") to develop a variety of health plans to
be marketed to small and large employers in Atlantic's target markets. The
parties intend to market the health plans under the name, "Lighthouse Health
Plans." In connection with these agreements, Atlantic and Kanawha formed a joint
venture corporation named The Beacon Company ("Beacon"). In February 1998,
Kanawha HealthCare Solutions, Inc., a subsidiary of Kanawha Insurance Company
("Kanawha HealthCare"), and Beacon entered into several agreements, including a
Master Contract, Managed Care Agreement and Administrative Services Agreement.
Under the Master Contract, Kanawha HealthCare and Beacon agreed to develop and
market health maintenance organization, preferred provider organization and
third party administrator health plan products. Beacon will function as a
general agent for the sale of the health plan products, and Beacon will be the
exclusive agent of Kanawha for the sale of fully insured Lighthouse Plans and
other fully insured managed care products. Beacon and Kanawha jointly are to use
their best efforts to offer and sell Lighthouse Plans and related services to
self-funded employers. Under

<PAGE>

the Managed Care Agreement, Beacon shall establish and manage a regional
preferred provider network of physicians, hospitals and other providers. Under
the Administrative Services Agreement, Kanawha is to provide a management
information system and provide all administrative services required for
enrollees and providers. Beacon is to provide a Medical Director and physicians
for the Medical Management Committee that is to oversee the delivery of health
care services.

On October 19, 1996, Atlantic filed a Registration Statement on Form
SB-2 with the Securities and Exchange Commission (the "Commission"), pursuant to
which Atlantic registered for offer and sale under the federal securities laws
(i) 700,000 Primary Class Common Shares; (ii) 1,400000 Referral Class Common
Shares; and (iii) 150,000 Nonprofit Class Nonvoting Common Shares. The
Commission declared Atlantic's Registration Statement effective on December 30,
1996, and certain officers and directors of Atlantic commenced sale of
Atlantic's shares shortly thereafter. During the initial offering period which
closed on July 28, 1997, Atlantic sold 116,000 Primary Class Common Shares,
216,000 Referral Class Common Shares and no Nonprofit Class Nonvoting Common
Shares. On September 22, 1997, Atlantic filed a Post-Effective Amendment No. 2
to the Registration Statement. The Commission declared the Post-Effective
Amendment No. 2 effective on September 30, 1997. During the second offering
period which closed on April 28, 1998, Atlantic sold an aggregate of 26,000
Primary Class Common Shares, 76,000 Referral Class Common Shares and no
Nonprofit Class Nonvoting Common Shares. Atlantic has sold an aggregate of
142,000 Primary Class Common Shares, 292,000 Referral Class Common Shares and no
Nonprofit Class Nonvoting Common Shares since the Registration Statement was
first declared effective on December 30, 1996.

The net proceeds from Atlantic's Offering have been used for working
capital. Up to $500,000 of the net proceeds of the Offering may be used, as
determined in the sole discretion of the Board of Directors, to explore the
desirability and feasibility of organizing, licensing and operating an affiliate
health maintenance organization or other health plan. No assurance can be
provided, however, that the Board of Directors will determine to undertake any
such study or to proceed with any such organization or affiliate company
organization and operation.

MISSION

The shareholders of Atlantic share the common vision that Atlantic is
to be a physician-owned and governed network of medical practice groups.
Atlantic's mission is to integrate, economically and clinically, physicians now
practicing primarily in single-specialty medical practice groups into a larger
multi-specialty group Integrated Medical Group Network to:

* integrate and coordinate multi-specialty patient care
beginning at the local community level;

* improve the access, quality and cost effectiveness of health
care services delivered through the development of new health
care service delivery products that are

<PAGE>

competitive and responsive to the changing requirements and
opportunities of the marketplace;

* develop and implement network administrative, operating and
information systems required to improve the delivery of health
care services and patient outcomes;

* negotiate managed care (capitation, percentage of premium, and
other permitted risk sharing) health plan contracts and
contracts with other buyers of health care services; and

* develop the capability to provide additional ancillary
services and generate additional efficiencies in the delivery
of outpatient services.

To accomplish its mission, Atlantic is seeking well-defined, long-term
relationships with health plans and other buyers of health care services which
share its vision and commitment to influencing changes in the health care
delivery system that are positive for patients and helpful to health care
providers. Atlantic contemplates developing working relationships with hospitals
and other health care providers in its geographic service region of Eastern
North Carolina, providing physicians the maximum flexibility to provide patients
with the best possible care.

INDUSTRY

Concerns over the accelerating cost of health care have resulted in the
increasing prominence of managed care. As markets evolve from traditional
fee-for-service medicine to managed care, HMOs and health care providers
confront market pressures to provide high quality health care in a
cost-effective manner. Employer groups have begun to bargain collectively in an
effort to reduce premiums and to bring about greater accountability of HMOs and
providers with respect to accessibility, choice of provider, quality of care and
other indicators of consumer satisfaction. The focus on cost-containment has
placed small to mid-sized physician groups and solo practices at a disadvantage
because they typically have higher operating costs and little purchasing power
with suppliers; they often lack and do not have the capital to purchase new
technologies that can improve quality and reduce costs; and they do not have the
cost accounting and quality management systems necessary for entry into
sophisticated risk-sharing contracts with payors.

Industry experts expect the health care delivery system to evolve into
a system in which the primary care physician, often part of a multi-specialty
group or network, is a key leader in managing and directing health care
expenditures. As a result of these developments, primary care physicians have
increasingly become the conduit for the delivery of medical care by acting as
"case managers" and directing referrals to certain specialists, hospitals,
alternate-site facilities and diagnostic facilities. By contracting directly
with payors, organizations that have both primary care and referral physician
leadership are able to reduce the administrative overhead expenses incurred by
HMOs and insurers and thereby reduce the cost of delivering health care
services.

As a result of the trends toward increased HMO enrollment and physician
membership in medical practice groups, health care providers have sought to
reorganize themselves into integrated health care delivery systems that are
better suited to the managed care environment. Some physician groups and
networks are joining with hospitals and other institutional providers in various
ways to create vertically integrated delivery systems which provide medical and
hospital services ranging from community-based primary medical care to
specialized inpatient services. These health care delivery systems contract with
HMOs to provide hospital and medical services to enrollees under full risk

<PAGE>

contracts, through which providers assume the obligation of providing both the
professional and institutional components of covered health care services to the
HMO enrollees.

In order to compete effectively in this emerging environment,
physicians are concluding that they must have control over the delivery and
financial impact of a broader range of health care services through the
acceptance of a global capitation. Moreover, physicians are increasingly
abandoning traditional private practice in favor of affiliations with larger
organizations, such as physician practice management companies and networks like
Atlantic, which offer experienced, innovative management, management information
systems and capital resources.

Many payors and their intermediaries, including governmental entities
and HMOs, are increasingly looking to network providers of physician services to
develop and maintain quality outcomes, management programs and patient care
data. In addition, such payors and intermediaries seek to share the risk of
providing health care services through capitation arrangements which provide for
fixed payments for patient care over a specified period of time. While the
acceptance of greater responsibility and risk provides the opportunity to retain
and enhance market share and operate at a higher level of profitability, medical
practice groups and independent physicians have determined that the acceptance
of capitation carries with it significant requirements for infrastructure,
information systems, capital, network resources and financial and medical
management. Physicians increasingly are turning to organizations such as
Atlantic to provide the resources necessary to function effectively in a managed
care environment.

BUSINESS STRATEGY

Atlantic's strategy focuses on business activities in four principal
areas:

1. FORMING A REGIONAL PHYSICIAN NETWORK.

Management of Atlantic believes that the majority of health care
services will continue to be delivered at the local community level in the
future, particularly primary medical care in rural regions, such as Eastern
North Carolina. Based on its experience and discussions with buyers of health
care services, management of Atlantic believes that the purchase of health care
services by HMOs and other buyers of health care services will increasingly be
accomplished through contracts with regional networks of physicians and other
providers; and thus demand by HMOs and other buyers of health care services will
grow rapidly for a regional, high quality physician network in Eastern North
Carolina that is capable of sharing risk. Atlantic continues to meet this market
demand by selectively contracting with physicians in communities throughout
Eastern North Carolina. As of June 2, 1998, Atlantic had entered into Medical
Services Provider Agreements covering over 400 physicians located in 19 counties
of Eastern North Carolina. Each participating physician is credentialed through
an established process that meets and/or exceeds National Commission for Quality
Assurance ("NCQA") guidelines. The Medical Services Provider Agreement, entered
into by all medical practice groups participating in Atlantic, requires
participating physicians to follow specific administrative and clinical policies
and procedures adopted by Atlantic's Board of Directors.

2. DEVELOPING STRATEGIC ALLIANCES.

Atlantic believes that developing strategic relationships with
hospitals, other health care providers and insurance carriers, such as HMOs,
improves the delivery of health care services and patient care. Atlantic
continues to actively pursue the development of such relationships.

<PAGE>

Atlantic's current and proposed agreements with hospital and other
providers strive to enhance the quality and efficiency of care to patients and
provide an integrated and coordinated continuum of care. Consistent with this
goal, Atlantic's current agreements with hospitals and other providers feature
discounted fee for service formulas. As Atlantic attempts to position itself
within a managed care market, Atlantic's proposed agreements with hospitals and
other providers will feature reimbursement formulas that align financial and
clinical incentives between physicians, hospitals, and other providers to best
meet patient care needs. As Atlantic physicians share permitted financial risk,
hospitals and other providers will be placed at risk for those aspects of health
care delivery that they most directly influence or control. As of June 2, 1998,
Atlantic, through its subsidiary, Beacon, had entered into Facility
Participation Agreements with five hospitals in Eastern North Carolina.

Atlantic continues its efforts to negotiate provider agreements with
managed care health plans and insurance companies desiring to do business in
Eastern North Carolina. Also, Atlantic continues to develop agreements with
managed care organizations or third party administrators, to facilitate the
offering of services by Atlantic medical practice groups to large partially and
fully self-insured employers.

In January 1997, Atlantic entered into a business development agreement
with Kanawha Insurance Co. ("Kanawha") to develop a variety of health plans to
be marketed to small and large employers in Atlantic's target markets. The
parties intend to market the health plans under the name, "Lighthouse Health
Plans." In connection with these agreements, Atlantic and Kanawha formed a joint
venture corporation named The Beacon Company ("Beacon"). In February 1998,
Kanawha HealthCare Solutions, Inc. ("Kanawha HealthCare"), a subsidiary of
Kanawha Insurance Company, and Beacon entered into several agreements, including
a Master Contract, Managed Care Agreement and Administrative Services Agreement.
Under the Master Contract, Kanawha HealthCare and Beacon agreed to develop and
market health maintenance organization, preferred provider organization and
third party administrator health plan products. Beacon will function as a
general agent for the sale of the health plan products, and Beacon will be the
exclusive agent of Kanawha for the sale of fully insured Lighthouse Plans and
other fully insured managed care products. Beacon and Kanawha jointly are to use
their best efforts to offer and sell Lighthouse Plans and related services to
self-funded employers. Under the Managed Care Agreement, Beacon shall establish
and manage a regional preferred provider network of physicians, hospitals and
other providers. Under the Administrative Services Agreement, Kanawha is to
provide a management information system and provide administrative services
required for enrollees and providers. Beacon is to provide a Medical Director
and physicians for the Medical Management Committee that is to oversee the
delivery of health care services.

Affiliated physicians are required to honor the terms and conditions of
contracts entered into by Atlantic and approved by respective medical practice
groups of such physicians. However, Atlantic does not prejudice individual
participating physicians or medical practice groups from entering into direct
agreements with managed care health plans, insurance companies or other buyers
of health care services. The standard Medical Services Provider Agreement does
provide, however, that Atlantic shall have the exclusive right, for a period of
180 days to negotiate a new Network/Buyer Agreement with certain buyers of
health care services designated by Atlantic. In the event that Atlantic does not
enter into a Network/Buyer Agreement with a designated buyer of health care
services within 180 days, the affiliated physicians have the right to contract
with any buyer of health care services, regardless of whether or not Atlantic
has contracted with a particular plan.

The expectation is that through relationships with managed care health
plans and other buyers of health care services, Atlantic physicians will devote
greater resources to ensuring the wellness of patients, provide better quality
and cost-effective patient care and become more competitive in the health care
marketplace. As a result, it is anticipated that the overall cost of providing
care will be contained,

<PAGE>

rendering both Atlantic and the participating providers more appealing to
managed care health plans, other buyers of health care services, and medical
consumers.

3. SEEKING IMPROVEMENTS IN HEALTH CARE SERVICE DELIVERY AND OUTCOMES.

Atlantic is organized as a multi-specialty Integrated Medical Group
Network. The integration of the medical group practices and physicians creates
significant potential to enhance the quality and cost-effectiveness of care
provided to patients served by the network. One of Atlantic's goals is to
accomplish such integration through the systematic sharing of information,
coordination of care and such activities as the development and application of
clinical pathways and outcome measurements. Atlantic believes that information
technology is important to the growth of its integrated health care delivery
system and that the availability of detailed clinical data is fundamental to
quality control and cost containment.

Atlantic is monitoring the current developments in information and
telecommunications systems that will be able to link the central office of
Atlantic with the offices of certain participating physicians and medical
practice groups via the internet or other electronic means to facilitate the
collection and analysis of clinical and administrative data and the potential
development of a comprehensive health care database. The database is to combine
information about the cost and utilization of health care services rendered to
patients of the network. The information technology being monitored is designed
to permit immediate verification of the eligibility of patients for service
under various managed care health plans. The cost of linking Atlantic with the
offices of certain participating physicians and medical practice groups through
information and telecommunications systems will not result in any significant
charges to Atlantic and will likely cost participating physicians and medical
practice groups monthly fees; the exact amount of such fees will be dependent
upon the type of services desired by each physician and medical practice group.

Through analysis of data and appropriate sharing of pertinent
information with physicians, hospitals, patients, managed care plans and buyers
of health care services, Atlantic physicians should be able to reduce the risk
of providing unnecessary and inappropriate care. Equally important, these
systems and enhanced communications among providers, patients and purchasers,
will improve efforts to deliver quality service in a cost-effective manner and
document continuous improvements in health care service delivery and outcomes.
The information Atlantic desires to store in a database should allow
participating physicians systematically to develop and utilize clinical pathways
and outcome measurements and to address other quality-of-care issues. Although
management of Atlantic views this strategy as important, it realizes that this
strategy is a long-term goal and not one that management believes will be
achieved in the near future.

4. ENHANCING THE MANAGEMENT AND PERFORMANCE OF PARTICIPATING PRACTICES.

Atlantic continues to expand the number of shared management services
it offers to participating physicians. While Atlantic expects that participating
physicians will continue to employ and directly supervise the various clinical,
reception, medical records and other support personnel required at each office
site, Atlantic believes that many other administrative-management services may
be provided more efficiently and on a cost-effective basis through centralized
resources in the network office.

To this end, Atlantic has developed and formed group purchasing program whereby
groups may acquire frequently utilized goods and services. Atlantic's main
programs include professional liability insurance, medical supplies, reference
laboratory services, telecommunications services and compliance with
Occupational Safety and Health Administration ("OSHA") training. Atlantic
continues to issue requests-for-proposals for office supplies and other business
services and information systems. Atlantic

<PAGE>

also continues to expand its consulting services to medical practice groups and
physicians. These services include physician recruitment, establishment of cross
coverage arrangements and creating a medical practice, opening a new office, or
combining or merging practices.

In conjunction with its strategic planning efforts, Atlantic may
determine that it would be advantageous from a marketing and/or service
standpoint to sponsor the establishment of strategically located care centers or
physician offices in locations which would help attract new customers and
patients, or provide enhanced access to services for existing patients. As
appropriate, Atlantic will undertake to facilitate efforts by the affiliated
medical practices to recruit and hire physicians directly to staff such sites.

MEDICAL SERVICES PROVIDER AGREEMENTS, STRUCTURE AND OWNERSHIP AND MANAGEMENT

MEDICAL SERVICES PROVIDER AGREEMENTS: Affiliated medical practice
groups and physicians are linked to Atlantic and each other through Medical
Services Provider Agreements. Atlantic contracts with the physicians and the
affiliated medical practice groups for the provision of medical services and the
allocation of revenues and expenses and, in turn, contracts with managed care
health plans and insurance companies for marketing and enrollment services.
These agreements obligate Atlantic to allocate revenues among participating
physicians and medical practice groups in accordance with agreed upon formulae
and obligate the physicians and medical practice groups to provide medical
services and share certain risks of covering the costs of health care services
provided. In addition, the Medical Services Provider Agreements may require
participating physicians and medical practice groups to participate in an
administrative fee assessment program.

STRUCTURE AND OWNERSHIP: Atlantic is a North Carolina business
corporation organized to provide administrative services only and not to provide
medical services. Atlantic is owned by medical practice groups and physicians
who, directly or indirectly, enter into Medical Services Provider Agreements
with and become shareholders of Atlantic. A diagram of the structure and
ownership of Atlantic and its relationships with buyers of health care services
and participating physicians and medical practice groups is set forth below:

<PAGE>

[CHART]

MEDICAL PRACTICE GROUP/ HEALTH PLANS
PHYSICIAN SHAREHOLDERS OTHER BUYERS OF HEALTH CARE SERVICES
- Permitted Risk Sharing and
Non-Risk Sharing Provider Agreements

ATLANTIC INTEGRATED HEALTH INCORPORATED
- Physician Board of Directors
- Physician Officers
- Lay Chief Operating Officer
- Lay Chief Financial Officer
- Committees
- Administrative Staff
- Management Information System

Non-Exclusive Medical Services
Provider Agreement

MEDICAL GROUP/PHYSICIAN MEDICAL GROUP/PHYSICIAN
- - Own property and equipment
- - Employ Support Staff

- Employment Agreement

Physician

Atlantic is owned by participating medical practice groups and
physicians, as depicted in the upper left corner of the diagram, and such
shareholders have elected the members of the Board of Directors, all of whom are
physicians. As depicted in the center box of the diagram, the officers of the
corporation are physicians, although the Chief Operating Officer and Chief
Financial Officer of Atlantic are lay persons experienced in the operation of
medical practice groups and managed care systems.

The Board of Directors intends to establish a number of committees that
are to be advisory committees of the Board of Directors and oversee and
recommend policies and procedures concerning matters of general management,
finance, marketing, contracting, continuous quality improvement, utilization
management and management information systems. The members of such committees
will be primarily physicians who are participants in the Atlantic network,
although other physicians and lay persons may also be designated members of the
committees.

Atlantic will negotiate and enter into agreements on behalf of
participating physicians and medical practice groups with health plans and other
buyers of health care services, as depicted in the upper right corner of the
diagram. Such health care services will be provided by participating physicians

<PAGE>

and medical practice groups and their respective physicians and other licensed
professionals. The terms and provisions for the rendering of the health care
services, payment for such services, and the sharing, by the participating
physicians and medical practice groups, of the risk of covering the costs of
providing such health care services are included in the Medical Services
Provider Agreements, as depicted in the lower left corner of the diagram.
Physicians' employment relationships with their respective medical practice
groups will be maintained. The numbers of participating physicians, their
medical specialties and geographic locations, are determined by the Board of
Directors of Atlantic.

The structure and ownership of Atlantic have been designed to avoid
Atlantic and the participating medical practice groups being deemed an
"affiliated service group," as defined under the Internal Revenue Code. The
Board of Directors has structured Atlantic to avoid such "affiliated service
group" designation and to enable participating medical practice groups to
continue their existing qualified pension and profit sharing plans without any
adverse tax consequences. The Board of Directors believes that Atlantic and the
participating medical practice groups will not be an "affiliated service group"
because (a) Atlantic is organized as a business corporation; (b) Atlantic's
business is limited to providing administrative services (and will not
constitute practicing medicine); and (c) no individual physician is permitted to
own 5% or more of the outstanding capital stock of Atlantic. No assurance can be
provided, however, that the Internal Revenue Service or another regulatory
agency will not take the position that Atlantic, as it is structured, owned and
operated from time to time, will be an "affiliated service group."

MANAGEMENT: Because of the complex array of business activities that
Atlantic pursues, Atlantic has undertaken to retain qualified management
personnel and professional advisors to carry out the day-to-day work of managing
the network. The central network office is supervised by the Chief Operating
Officer and Chief Financial Officer who were selected by and are accountable to
the Board of Directors. Atlantic staff supports the Board of Directors and its
committees; facilitates strategic planning regarding the growth and development
of network services; manages shared practice management services provided or
available to affiliated physicians; assists the network in its efforts to obtain
and manage risk contracts with managed care health plans and other buyers of
health care services; and is responsible for developing management systems,
including pro forma financial schedules to facilitate the monitoring of revenues
and expenditures incurred by the network.

In addition to the Chief Operating Officer and Chief Financial Officer,
Atlantic, as its grows in size and function, will develop its own staff with
experience in such areas as finance, marketing, health services/provider
relations and management information systems. The number and type of staff
employed or retained will evolve based on the size of the network, number of
enrollees and patients served and complexity of planning or management
challenges.

Atlantic is still developing its business operations. As a result,
Atlantic contracts with consultants to assure that the array of experience and
expertise necessary to expand the network successfully is readily available.
Atlantic requires the on-going advice of attorneys, certified public accountants
and consulting actuaries.

PHYSICIAN SELECTION AND CREDENTIALING

To become a participating Atlantic physician, each physician must
complete the credentialing process which meets or exceeds guidelines promulgated
by the NCQA. Credentialing criteria have been developed to assure the inclusion
of desired numbers of physicians, as identified by specialty and geographic
location, within the network; the compilation of information concerning the cost
and quality of services rendered by respective physicians; and the confirmation
by applicants of their willingness to

<PAGE>

adhere to policies and procedures adopted by Atlantic's Board of Directors. Each
participating physician is required to complete successfully the credentialing
process of Atlantic.

Atlantic has contracted with National Provider Credentialing Service, a
Virginia corporation, to accomplish primary source verification and
electronically catalogue the information contained on each physician's
credentialing application. Atlantic commenced its credentialing program in July
1996.

PHYSICIAN REIMBURSEMENT, PHYSICIAN PAYMENTS, RISK MANAGEMENT

The Medical Services Provider Agreement entered into by each physician
and medical practice group participating in the Atlantic network is structured
to provide that: (i) participating physicians and medical practice groups render
required and appropriate medical services to designated patients; (ii) payment
for such medical services is to be made to participating physicians and medical
practice groups through programs determined by the Board of Directors; and (iii)
Atlantic coordinates and manages such provision of medical services, payment for
the medical services and the sharing of certain risk by the participating
physicians and medical practice groups related to the cost of providing the
required and appropriate medical services. Designation of primary care
physicians as "case managers" to coordinate patient care will vary depending on
the terms of the contracts entered into with buyers of health care services.

Atlantic has worked with and will continue to engage a professional
actuarial firm to work with the Board of Directors to develop common fee
schedules for the Atlantic network and to determine appropriate allocation of
capitation. In the event participating physicians and medical practice groups
are paid on a fee-for-service basis, Atlantic will endeavor to utilize a common
fee schedule and, as permitted and appropriate, will develop provisions for
holding back a portion of the fees paid to participating physicians and medical
practice groups in a contingency reserve fund. As determined by Atlantic's Board
of Directors and the terms and conditions of specific managed care health plan
contracts, a scheduled, periodic accounting of managed care health plan expenses
will be completed. The monetary amounts "held back" will be returned to the
participating physicians and medical practice groups to the extent that the
operating results permit. If a surplus still remains after all amounts held back
during the year from payments otherwise due physicians have been returned, such
surplus will be allocated among participating physicians in accordance with
criteria determined by the Board of Directors.

The allocation of administrative assessments, revenues, sharing of
risk, operating reserve deficits or other reimbursement/compensation limitations
described herein may vary among medical practice groups and individual providers
within a medical practice group.

THE ATLANTIC MEDICAL MANAGEMENT INFORMATION SYSTEM

Atlantic continues to evaluate information systems to provide
interactive health services and management information as described below.
Atlantic's management objective is to provide participating physicians with
access to appropriate data as patient care is rendered and evaluated. It is
contemplated that Atlantic and participating medical practice groups will be
linked electronically and that information will be delivered and shared through
electronic data interchange ("EDI"). No target date has been established for
implementation of an EDI system within the Atlantic network.

The functions of core information systems selected are to include
e-mail, accounting applications, on-line verification of eligibility, database
collection and reporting, management of contracts, claims processing and
payment, referral authorization and statistical reporting. Atlantic and/or

<PAGE>

medical practice groups will retain ownership of all data, information and
reports generated by and through the use of the information systems.

ADMINISTRATIVE FEE ASSESSMENT PROGRAM

The Medical Services Provider Agreement entered into by each
participating physician or medical practice group provides that Atlantic, in its
sole discretion and by determination of the Board of Directors, may require the
participating physicians and medical practice groups to provide financial
support to help defray Atlantic's operating expenses. Consistent with this
provision, Atlantic has the authority to bill the participating physicians and
medical practice groups or retain from revenues paid to Atlantic administrative
and management fees that are equal to 3% of the "net revenues" of Atlantic, as
defined in the Medical Services Providers Agreement. In addition, upon execution
of the Medical Services Provider Agreement, participating physicians and medical
practice groups who are referral specialists may be required to pay to Atlantic
an initial administrative and management fee up to $3,000 per referral
physician.

COMPETITION

The health care market is extremely competitive and undergoing rapid
change. Atlantic and its affiliated physicians and medical practice groups
compete with individual physicians and medical practice groups, HMOs, PPOs,
physician-hospital organizations, integrated delivery systems and physician
practice management companies. Many of Atlantic's competitors are significantly
larger and have substantially greater capital resources than Atlantic. Atlantic
believes that the principal competitive factors that will affect its ability to
contract with health plans and other buyers of health care services include
achievement of cost efficiencies through integrated operations, satisfaction of
the needs of target purchasers and achievement of superior customer/patient
satisfaction.

GOVERNMENT REGULATION

Various state and federal laws regulate the relationships among
providers for the provision of physician and other health care services, and as
a business in the health care industry, Atlantic is subject to these laws and
regulations. Management of Atlantic believes its operations are in material
compliance with applicable laws; however, Atlantic has not received any legal
opinion from counsel or any advisory opinions from regulators that its
operations are in material compliance with applicable laws. Many aspects of
Atlantic's business operations have not been the subject of state or federal
regulatory interpretation. Moreover, as a result of Atlantic's providing both
physician practice management services and medical support services, Atlantic
may be the subject of more stringent review by the regulatory authorities. There
can be no assurance that a review of Atlantic's or the affiliated physicians'
businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of Atlantic or the
affiliated physicians and medical practice groups. Moreover, no assurance can be
provided that new and more restrictive state or federal laws and regulations
will not be enacted or adopted.

The laws of many states prohibit business corporations such as Atlantic
from practicing medicine or employing physicians to practice medicine. Although
the State of North Carolina does not expressly prohibit the corporate practice
of medicine, it does require all persons practicing medicine to be licensed.
Atlantic performs only non-medical administrative services, does not represent
to the public or its clients that it offers medical services and does not
exercise influence or control over the practice of medicine by the physicians
with whom it contracts. Accordingly, Atlantic believes that it is not in
violation of applicable state laws relating to the corporate practice of
medicine. However, the laws in most states, including the State of North
Carolina, regarding the corporate practice of medicine have been subjected

<PAGE>

to limited judicial and regulatory interpretation; therefore, no assurances can
be given that Atlantic's activities will be found to be in compliance, if
challenged.

Federal and state laws regulate the relationships among providers of
health care services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid statutes, which prohibit
the soliciting or receiving, or the offering or payment of remuneration, either
directly or indirectly, in return for or to induce a referral of items or
services for Medicare and Medicaid patients. Federal and state statutes impose
restrictions on physician referrals of designated health services to entities
with which the physician has a financial relationship. These laws and applicable
regulations also regulate the submission of claims for the reimbursement of
physician services, or for services incident to those services, provided under
federal health care programs that are false or fraudulent. Violations of these
laws may result in substantial civil and criminal penalties, including civil
monetary penalties, exclusion from the participation in the Medicare and
Medicaid programs, loss of licensure to practice medicine and other penalties.
Such exclusion and penalties, if applied to Atlantic's affiliated medical
practice groups, could have an adverse effect on Atlantic.

Recently adopted health insurance reform legislation included important
changes in federal laws regulating fraud and abuse. Statutory provisions
establishing criminal penalties, both fines and imprisonment, for intentionally
fraudulent activity in the provision of health services was included. Claims for
reimbursement that are improperly processed and submitted to federal programs
that result in inappropriately obtained reimbursement can result in civil
penalties. Moreover, persons who have an ownership interest or serve as officers
or managing employees of entities that are convicted or excluded from
participation for filing false or fraudulent claims, would also be subject to
exclusion and civil penalties for each day the individual maintains that
interest. Finally, remuneration between organizations and entities, which
provide services to Medicare or Medicaid beneficiaries and have a written risk
sharing agreement are exempted under Medicare and Medicaid statutes that
prohibit the payment or remuneration to induce or obtain referrals. These
statutes, if applied to Atlantic and its affiliated medical practice groups,
could have a material adverse effect on Atlantic.

Certain provisions of state and federal statutes, commonly referred to
as the "Anti-kickback Laws," prohibit the offer, payment, solicitation or
receipt of any form of remuneration either in return for the referral of
patients, or in return for the recommendation, arrangement, purchase, lease or
order of items or services that are covered by Medicare or state health
programs. The Anti-kickback Laws are broad in scope and have been broadly
interpreted by courts in many jurisdictions. Read literally, the statutes place
at risk many otherwise legitimate business arrangements, potentially subjecting
such arrangements to lengthy, expensive investigations and prosecutions
initiated by federal and state governmental officials.

The federal government has published several final and proposed
regulations for the creation of certain "safe harbors" from prosecution under
the federal Anti-kickback Law, but some of Atlantic's operations do not satisfy
the requirements for any of the "safe harbor" exemptions. Management of Atlantic
believes, however, that in the conduct of its contemplated business operations
Atlantic will not be in a position to make or influence the referral of patients
for goods or services and that such business operations will not constitute or
generate any violation of state or federal Anti-kickback Laws. To the extent
Atlantic is deemed by state or federal authorities to be a separate provider of
health care services, making referrals to or receiving referrals from physicians
or medical practice groups through its Non-Exclusive Medical Provider
Agreements, the financial arrangement under such agreements could be subject to
scrutiny and prosecution under the anti-kickback laws. Violation of the
Anti-kickback Laws 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, including excluding

<PAGE>

violators from participation in Medicare or state health programs, and other
criminal and civil penalties may be imposed pursuant to applicable state laws.

Significant prohibitions against physician referrals were enacted,
subject to certain exemptions, by Congress in the Omnibus Budget Reconciliation
Act of 1993. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by dramatically enlarging
the field of physician-owned or physician-interested entities to which the
referral prohibitions apply. Effective January 1, 1995 and subject to certain
exemptions, Stark II prohibits a physician or a member of the physician's
immediate family from referring Medicare or Medicaid patients to an 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. The designated health services include the provision
of clinical laboratory services, radiology, radiation therapy services and
supplies, physical and occupational therapy services, durable medical equipment
and supplies, parenteral and enteral nutrients, equipment and supplies,
prosthetics, orthotics and prosthetic devices and supplies, outpatient
prescription drugs, home health services and inpatient and outpatient hospital
services. The penalties for violation of 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." Since Atlantic is to provide administrative services only and is not to
provide any "designated health services" or other health services, management of
Atlantic believes that its business operations will not generate any violations
of the Stark legislation. While Atlantic believes it will be in compliance with
the Stark legislation, future regulations could require Atlantic to modify the
form of its relationships with the affiliated physician groups. Moreover, the
violation of the Stark legislation by any of Atlantic's affiliated medical
practice groups could result in significant fines and loss of reimbursement
which would adversely affect Atlantic.

Many states have adopted similar prohibitions against payments intended
to induce referrals of Medicaid and other patients. The State of North Carolina
has enacted statutes which prohibit the payment of fees to induce referrals and
prohibit referrals of patients by health care providers for certain designated
health care services to entities in which the health care provider or group
practice or any member of the group practice has an investment interest.
Sanctions which may be imposed for violations of such statutes include
discipline by the applicable professional licensing board, suspension or
revocation of the offending provider's license and substantial civil money
penalties. While Atlantic believes it will be in compliance with such state
laws, the existing or future laws or regulations could require Atlantic to
modify the form of its relationships with the affiliated physician groups.

Laws in all states regulate the business of insurance and the operation
of HMOs. The laws and regulations of the State of North Carolina, as interpreted
by the state's Department of Insurance ("DOI"), permit physician organizations,
such as Atlantic, to enter into risk sharing contracts only with licensed
entities such as HMOs. Although Atlantic currently does not have any risk
sharing contracts, Atlantic may enter into such contracts in the future and at
such time may be subject to the HMO statute. A physician organization may also
become subject to regulation as a PPO or a URO. Although management of Atlantic
believes that its current operations fall outside of the oversight of the DOI,
no assurance can be provided, that the structure and operation of Atlantic and
its affiliated medical practice groups will not be challenged by the DOI or
other regulatory agencies. Any such challenge and any requirements that Atlantic
restructure its operations or qualify for an insurance license could have a
material effect on Atlantic's operations.

<PAGE>

EMPLOYEES

As of June 2, 1998, Atlantic had four employees, including the Chief
Operating Officer, Chief Financial Officer, Provider Relations Representative
and administrative assistant. Atlantic is not subject to any collective
bargaining agreements and believes that its employee relations are good.

FACILITIES

In May 1998, Atlantic moved its offices to 1315 S. Glenburnie Road,
Suite A5, New Bern, North Carolina 28562. Atlantic signed two one-year leases
for an aggregate of approximately 1,300 square feet at an aggregate monthly rent
of approximately $805 (including association fees). Prior to the recent move,
Atlantic's facilities were located at 825 Kennedy Avenue, New Bern, North
Carolina 28560, which Atlantic leased from New Bern Family Practice Center,
P.A., of which Dr. Mahaney, Atlantic's President and Chief Executive Officer, is
a shareholder and Treasurer.

LEGAL PROCEEDINGS

Atlantic is not involved in any legal proceedings considered by
management to be material.

<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of Atlantic as of June 2, 1998 are
as follows:

Name Age Position
---- --- --------

J. Philip Mahaney, Jr., M.D. 53 President and Chief Executive Officer
and Director*

W. James Stackhouse, M.D. 48 Chairman of the Board, Treasurer and
Director*

Robert H. Blake, III 39 Chief Operating Officer

Stephen W. Nuckolls 30 Chief Financial Officer

Michael L. Bramley, M.D. 51 Vice President and Director*

Joseph E. Agsten, M.D. 55 Director*

Stephen R. Ainsworth, M.D. 41 Director**

Charles J. Baio, M.D. 47 Director*

Graham A. Barden, III, M.D. 42 Director*

John P. Emerick, M.D. 48 Director**

A. Clark Gaither, M.D. 43 Director*

Frank L. Gay, M.D. 38 Director***

Robert A. Krause, M.D. 49 Director*

Robert S. Meyer, M.D. 50 Secretary and Director*

Alice P. Selden, M.D. 45 Director**

Leo E. Waivers, M.D. 45 Director*

Daniel Whitley, Jr., M.D. 46 Director**

James M. Williams, M.D. 44 Director*

John A. Williams, III, M.D. 41 Director**

Kerry A. Willis, M.D. 38 Director*

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

* Primary Director
** Referral Director
*** OB/GYN Director

<PAGE>

J. PHILIP MAHANEY, JR., M.D. has served as President and Chief
Executive Officer of Atlantic since March 1996 and has served as a director of
Atlantic since December 1994. He is a family practice physician with New Bern
Family Practice Center, P.A., a medical practice group located in New Bern,
North Carolina. Dr. Mahaney also serves as Treasurer of New Bern Family Practice
Center, P.A.

W. JAMES STACKHOUSE, M.D. was elected Chairman of the Board of
Directors of Atlantic in April 1998 and has served as a director of Atlantic
since October 1996. He continues to serve as Treasurer of Atlantic, a position
he has held since November 1996. He is a physician practicing internal medicine
with Goldsboro Medical Specialists, P.A., a medical practice group located in
Goldsboro, North Carolina. Dr. Stackhouse has been a physician with Goldsboro
Medical Specialists, P.A. since 1981.

ROBERT H. BLAKE, III has been the Chief Operating Officer of Atlantic
since June 1996. From February 1994 to June 1996, he served as Assistant Vice
President, Managed Care Services of Acordia National, Inc., a health insurance
services company in Charleston, West Virginia. In addition from July 1992 to
June 1996, he served as President of The Greenbrier Study Group, a health care
consulting firm in Charleston, West Virginia. From July 1993 to February 1994,
Mr. Blake served as a Managed Care Network and Provider Sponsored Health Plan
Developer for Newbridge, Inc./Health Economics Corporation.

STEPHEN W. NUCKOLLS has been the Chief Financial Officer of Atlantic
since April 1997. From September 1995 to July 1996, he served as Chief Financial
Officer of Blue Ridge Primary Care, Inc., an integrated medical group of over
120 physicians based in Roanoke, Virginia which subsequently merged with the
Carilion Health System. In August 1996, he founded Integration Strategies, a
health care consulting firm based in Galax, Virginia. From May 1990 to September
1995, Mr. Nuckolls was employed by McGladrey & Pullen, LLC, an international
accounting and consulting firm.

MICHAEL L. BRAMLEY, M.D. has served as Vice President of Atlantic since
November 1996 and as a director of Atlantic since October 1996. He is a
practicing pediatrician with Greenville Pediatrics, P.A., a medical practice
group located in Greenville, North Carolina. Dr. Bramley has been with
Greenville Pediatrics, P.A. since 1976 and serves as Secretary.

JOSEPH E. AGSTEN, M.D. has served as a director of Atlantic since
December 1994. He is a practicing family physician with Joseph E. Agsten, M.D.
and Laddie M. Crisp Jr., M.D. d/b/a Drs. Agsten and Crisp. Dr. Agsten has
practiced medicine for over twenty years.

STEPHEN R. AINSWORTH, M.D. has served as a director of Atlantic since
November 1997. He has practiced orthopedic surgery with Pamlico Orthopedic
Associates, P.A. in Washington, North Carolina since 1990.

CHARLES J. BAIO, M.D. has served as a director of Atlantic since April
1997. He practices internal medicine with Wilson Medical Associate, P.A., in
Wilson, North Carolina. Dr. Baio has practiced medicine for over fourteen years.

GRAHAM A. BARDEN, III, M.D. FAAP has served as a director of Atlantic
since April 1997. He is a practicing pediatrician with Coastal Childrens'
Clinic, Inc., a pediatric practice group located in New Bern, North Carolina.
Dr. Barden has been a pediatrician with Coastal Childrens' Clinic, Inc. for over
twelve years.

<PAGE>

JOHN P. EMERICK, M.D. has served as a director of Atlantic since August
1997. He is a self-employed psychiatrist in Morehead City, North Carolina where
he has worked since 1995. Dr. Emerick completed his psychiatric residency in
1979 and maintained a practice in Columbia, South Carolina prior to moving to
Morehead City. Dr. Emerick also serves as medical director of Companion Benefit
Alternatives, a division of Blue Cross and Blue Shield of South Carolina.

A. CLARK GAITHER, M.D. has served as a director of Atlantic since June
1995. He is a practicing physician with Goldsboro Family Physicians, P.A., a
medical practice group located in Goldsboro, North Carolina. He also serves as
President of Goldsboro Family Physicians, P.A. and has practiced medicine with
Goldsboro Family Physicians, P.A. for over five years.

FRANK L. GAY, M.D. has served as a director of Atlantic since June
1997. He has practiced obstetrics/gynecology with Greenville Obstetrics and
Gynecology, a division of Physicians East, P.A., a medical practice group
located in Greenville, North Carolina for over three years. Prior to joining
this group, Dr. Gay served as a staff Obstetrician/Gynecologist for the United
States Air Force for four years.

ROBERT A. KRAUSE, M.D. has served as a director of Atlantic since
December 1994. He is a self-employed family practitioner. He has served in such
a capacity for the last eight years.

ROBERT S. MEYER, M.D. has served as Secretary and as a director of
Atlantic since March 1996. Dr. Meyer is a self-employed family practice
physician. Dr. Meyer has practiced family medicine for over nineteen years. Dr.
Meyer is the Chairman of the Board and Medical Director for Home Health and
Hospice CARE, Inc., a non-profit home health agency headquartered in Goldsboro,
North Carolina.

ALICE P. SELDEN, M.D. has served as a director of Atlantic since
November 1997. She practices general surgery with Johnston Surgical Associates,
P.A., a medical practice located in Smithfield, North Carolina. Dr. Selden has
practiced general surgery in Smithfield since 1986.

LEO E. WAIVERS, M.D. has served as a director of Atlantic since October
1996. He practices general internal medicine with Greenville Internal Medicine,
P.A., a medical practice group located Greenville, North Carolina. He serves as
President of Greenville Internal Medicine, P.A. and has practiced internal
medicine with Greenville Internal Medicine, P.A. since 1991.

DANIEL WHITLEY, JR., M.D. has served as a director of Atlantic since
August 1997. He is a practicing otolaryngologist with Goldsboro ENT Associates,
P.A. where he has practiced since completing his residency in 1988.

JAMES M. WILLIAMS, M.D. has served as a director of Atlantic since June
1997. He is a practicing family physician with and a Medical Director of
Scotland Neck Family Medical Center, Inc. Dr. Williams has practiced medicine in
Scotland Neck, North Carolina for over fifteen years.

JOHN A. WILLIAMS, III, M.D. has served as a director of Atlantic since
August 1997. He is a practicing cardiologist with Heart Center Cardiology, a
medical practice group located in New Bern, North Carolina. Prior to founding
his practice in 1994, Dr. Williams served as a lieutenant commander for four
years in the United States Navy Reserve Medical Corps in the Cardiovascular
Disease Division at the National Naval Medical Center in Bethesda, Maryland.

KERRY A. WILLIS, M.D. has served as a director of Atlantic since
December 1994. He served as Chairman of the Board of Directors of Atlantic from
March 1996 to April 1998. Prior to becoming Chairman, he served as Vice
President of Atlantic. Dr. Willis is a physician practicing family medicine with
East Carteret Family Medicine, P.A., a medical practice group located in
Beaufort, North Carolina.

<PAGE>

In addition, Dr. Willis serves as Chairman of the Board of The Beacon Company
and President of East Carteret Family Medicine, P.A.

COMPOSITION OF THE BOARD OF DIRECTORS

Atlantic's Board of Directors currently consists of eighteen members,
twelve of whom are Primary Care Directors (as defined below), five of whom are
Referral Directors (as defined below), and one of whom is an OB/GYN Director (as
defined below). Pursuant to Atlantic's Bylaws, as amended, at least 62.5%, but
no more than 70% of the members of Atlantic's Board of Directors must be Primary
Care Physicians (the "Primary Care Directors"). Atlantic's Bylaws define Primary
Care Physicians as physicians who practice substantially (75% or more as
determined by gross practice revenues) in one or more of the primary care
specialties of family practice, general internal medicine, general pediatrics or
general practice ("Primary Care Specialties"); are generally not board certified
in any specialty other than a Primary Care Specialty; and, if board certified in
any other specialty other than a Primary Care Specialty, generally do not hold
themselves out as practicing in any specialty other than the Primary Care
Specialties. In addition, Atlantic's Bylaws, as amended, provide that at least
one (1) of every ten (10) members of the Board of Directors shall be a physician
practicing solely in the medical specialty of obstetrics and gynecology (the
"OB/GYN Director(s)"). The remainder of the board of directors must be
physicians who practice primarily in referral medical and surgical specialties
other than the Primary Care Specialties (the "Referral Directors").

CLASSIFIED BOARD OF DIRECTORS

Atlantic's Board of Directors consists of three classes as nearly equal
in number as possible with the directors in each class having terms of three
years. The staggered board was created in November 1997 and will be phased in as
follows: one class elected for a one-year term; the second class was elected for
a two-year term; and the third class will be elected for a three-year term. The
directors assigned to each class, and the division into classes were determined
by the majority vote of Atlantic's Board of Directors at a meeting of the Board
of Directors held in November 1997. At each annual meeting, all directors
filling seats of directors with expired terms (whether re-elected or replacing
another director) will be elected for three-year terms. In November 1997, the
following directors were elected to the following terms:

DIRECTORS ELECTED FOR ONE-YEAR TERMS EXPIRING IN 1998

Joseph E. Agsten, M.D.
Stephen R. Ainsworth, M.D.
J. Philip Mahaney, Jr., M.D.
Alice P. Seldon, M.D.
Leo E. Waivers, M.D.
James M. Williams, M.D.

<PAGE>

DIRECTORS ELECTED FOR TWO-YEAR TERMS EXPIRING IN 1999

Charles J. Baio, M.D.
Michael I. Bramley, M.D.
A. Clark Gaither, M.D.
Frank I. Gay, M.D.
W. James Stackhouse, M.D.
John A. Williams, M.D.

DIRECTORS ELECTED FOR THREE-YEAR TERMS EXPIRING IN 2000

Graham A. Barden, III, M.D.
John P. Emerick, M.D.
Robert A. Krause, M.D.
Robert S. Meyer, M.D.
Daniel Whitley, M.D.
Kerry A. Willis, M.D.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has established six committees: an Executive
Committee, a Nominating Committee, a Network Committee, a Medical Management
Committee, a Finance Committee and a Compensation Committee. The current members
of the Executive Committee are Drs. Michael L. Bramley, J. Philip Mahaney, Jr.,
Robert S. Meyer, M.D., W. James Stackhouse and Kerry A. Willis. The members of
the Executive Committee will also serve as members of the Nominating Committee.
The Network Committee is composed of Dr. A. Clark Gaither and Leo E. Waivers.
The Medical Management Committee is composed of Drs. Robert S. Meyer and Michael
L. Bramley, and the Finance Committee is composed of Drs. W. James Stackhouse,
Ronald A. Moore and Joseph W. Ponzi. The Compensation Committee is composed of
Drs. Joseph E. Agsten, W. James Stackhouse and Leo E. Waivers. The Board of
Directors is in the process of formally appointing new members to these
committees in order to obtain appropriate composition of Referral and Primary
Care physicians.

The Executive Committee reviews and discusses proposals and makes
recommendations to the Board of Directors and has the authority to take certain
actions on behalf of the Board of Directors between meetings of the Board of
Directors. The Network Committee has certain responsibilities and authority
concerning medical provider network development, and the Medical Management
Committee has certain responsibilities and authority concerning utilization
management and quality assurance matters. The Finance Committee has certain
responsibilities and authority concerning managed care contracts, reimbursement
schedules, financial risk sharing models and other financial matters. The
Compensation Committee makes recommendations to the Board concerning
compensation to be paid to the Company's officers and directors.

DIRECTOR COMPENSATION

W. James Stackhouse, M.D., who was elected Chairman of the Board in
April 1998, receives $2,000 per month for his services to Atlantic. The former
Chairman of the Board, Kerry A. Willis, M.D., received compensation of $6,000
for the three months ended March 31, 1998 and $24,000 for the year ended
December 31, 1997. No other members of the Board of Directors of Atlantic
currently receive compensation for their service on the Board. Directors may,
however, be reimbursed by Atlantic for any

<PAGE>

out-of-pocket expenses incurred in connection with their service on the Board.
At the Annual Meeting of Shareholders in November 1997, the shareholders of
Atlantic authorized the Board to design and implement a compensation plan for
shareholder physicians who devote time and effort toward the activities of the
Board and its committees. Such compensation may be in the form of non-voting
stock, cash or in-kind compensation. As of June 2, 1998, the Board had not
designed a definitive Compensation Plan.

EXECUTIVE COMPENSATION

The following table sets forth the cash and non-cash compensation for
the fiscal years ended December 31, 1996 and 1997 awarded to or earned by the
President and Chief Executive Officer of Atlantic. No executive officers of
Atlantic earned over $100,000 in the fiscal year ended December 31, 1997.

SUMMARY COMPENSATION TABLE

NAME AND ANNUAL COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($)
- ------------------ ---- ----------

J. Philip Mahaney, Jr., M.D. (1) 1997 $24,000
PRESIDENT AND CHIEF EXECUTIVE OFFICER 1996 None (2)

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

(1) Dr. Mahaney has served as President and Chief Executive Officer of
Atlantic since March 1996.

(2) Dr. Mahaney did not receive any compensation for the fiscal year ended
December 31, 1996. However, Dr. Mahaney was reimbursed by Atlantic for
out-of-pocket expenses incurred in connection with his position.

OPTIONS

No options have been granted to executive officers since Atlantic's
inception.

EMPLOYMENT AGREEMENT

On June 1, 1996, Atlantic entered into an employment agreement with
Robert H. Blake III under which Mr. Blake agreed to serve as the Chief Operating
Officer of Atlantic for a base salary of $96,000 per year (the "Employment
Agreement"). The initial term of the Employment Agreement expired on December
31, 1996. Atlantic and Mr. Blake orally extended the term of the Agreement
beyond December 31, 1996 for an indefinite period. The Employment Agreement
contains provisions providing for the maintenance of confidentiality of
proprietary information of Atlantic.

<PAGE>

CERTAIN TRANSACTIONS

All shareholders of the Primary Class Common Shares and the Referral
Class Common Shares of Atlantic are required to enter into, or practice medicine
through a medical practice group that has entered into, a Medical Services
Provider Agreement with Atlantic. Correspondingly, each member of the Board of
Directors has entered into or has agreed to enter into or practices medicine
through a medical practice group, of which he or she is a shareholder, which has
entered into or has agreed to enter into, a Medical Services Provider Agreement.
In addition, upon execution of the Medical Services Provider Agreement,
participating physicians and medical practice groups who are referral
specialists are required to pay to Atlantic an initial administrative and
management fee up to $3,000 per Referral Physician. As of the date hereof, it is
not possible to determine the amount which will be paid to the respective
physicians or medical practice groups pursuant to the terms of the Medical
Services Provider Agreement.

In January 1997, Atlantic entered into a written lease with New Bern
Family Practice Center, P.A., of which Dr. Mahaney, Atlantic's President and
Chief Executive Officer, is a shareholder and Treasurer. The initial lease
terminated on December 31, 1997 and was extended through April 1998. The rent
under this lease agreement was approximately $520.00 per month. Prior to this
arrangement, Atlantic occupied the space rent free pursuant to an oral lease
entered into in March 1996. In May 1998, Atlantic relocated its offices to 1315
S. Glenburnie Road, Suite A5, New Bern, North Carolina 28562.

In January 1997, Atlantic entered into a business development agreement
with Kanawha and formed a joint venture named The Beacon Company. In connection
with the business development agreement, Atlantic and Kanawha formed a joint
venture corporation named The Beacon Company. Atlantic and Kanawha each
purchased 1,000 shares of common stock, $1.00 par value, of Beacon. However, the
parties have tentatively agreed that Atlantic will repurchase all of the 1,000
shares purchased by Kanawha in exchange for $1,000 cash and the issuance by
Beacon of a debenture in the principal amount of $90,000. The parties anticipate
that the debenture will be payable in 5 years, bear interest at 6% and will be
convertible into 4% of Beacon's outstanding common stock if Beacon either
defaults on the debenture or completes a public offering of any of its capital
stock. As of June 2, 1998, a definitive written agreement among Atlantic,
Kanawha and Beacon in connection with the purchase by Atlantic of Beacon common
stock held by Kanawha had not been finalized.

In February 1998, Kanawha HealthCare Solutions, Inc. ("Kanawha
HealthCare"), a subsidiary of Kanawha Insurance Company, and Beacon entered into
several agreements, including a Master Contract, Managed Care Agreement and
Administrative Services Agreement. Under the Master Contract, Kanawha HealthCare
and Beacon agreed to develop and market health maintenance organization,
preferred provider organization and third party administrator health plan
products. Beacon will function as a general agent for the sale of the health
plan products, and Beacon will be the exclusive agent of Kanawha for the sale of
fully insured Lighthouse Plans and other fully insured managed care products.
Beacon and Kanawha jointly are to use their best efforts to offer and sell
Lighthouse Plans and related services to self-funded employers. Under the
Managed Care Agreement, Beacon shall establish and manage a regional preferred
provider network of physicians, hospitals and other providers. Under the
Administrative Services Agreement, Kanawha is to provide a management
information system and provide administrative services required for enrollees
and providers. Beacon is to provide a Medical Director and physicians for the
Medical Management Committee that is to oversee the delivery of health care
services. During the year ended December 31, 1997, approximately $70,000 of
Atlantic's net revenues was derived from network development and access fees
from Beacon.

<PAGE>

PRINCIPAL SHAREHOLDERS

The following tables set forth certain information regarding the
beneficial ownership of the Primary Class Common Shares, Referral Class Common
Shares and Nonprofit Class Nonvoting Common Shares of Atlantic, respectively, as
of June 2, 1998 for (i) each person known by Atlantic to beneficially own more
than 5% of any class of the shares of the capital stock of Atlantic, (ii) each
executive officer named in the Summary Compensation Table, (iii) each director
of Atlantic, and (iv) all directors and executive officers of Atlantic as a
group. Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual or group to acquire them within 60 days are treated as
outstanding only when determining the amount and percentage owned by such
individual or group. Unless otherwise noted, each person or group identified has
sole voting and investment power with respect to the shares of capital stock
shown.

PRIMARY CLASS COMMON SHARES

PRIMARY
CLASS COMMON SHARES
BENEFICIALLY OWNED (1)(2)
---------------------------------
NAME AMOUNT PERCENT OF CLASS (3)
- --------------------------------- ----------- --------------------

J. Philip Mahaney, Jr., M.D....... 8,000 (4) 2.7%
Joseph E. Agsten, M.D............. 4,000 (5) 1.3%
Stephen R. Ainsworth, M.D......... 0 *
Charles J. Baio, M.D.............. 8,000 (6) 2.7%
Graham A. Barden, III M.D......... 10,000 (7) 3.4%
Michael L. Bramley, M.D........... 10,000 (8) 3.4%
John P. Emerick, M.D.............. 0 *
A. Clark Gaither, M.D............. 4,000 (9) 1.3%
Frank L. Gay, M.D................. 0 *
Robert A. Krause, M.D............. 2,000 *
Robert S. Meyer, M.D.............. 2,000 *
Alice P. Selden, M.D.............. 0 *
W. James Stackhouse, M.D.......... 4,000 (10) 1.3%
Leo E. Waivers, M.D............... 4,000 (11) 1.3%
Daniel Whitley, M.D............... 0 *
James M. Williams, M.D............ 2,000 *
John A. Williams, M.D............. 0 *
Kerry A. Willis, M.D.............. 4,000 (12) 1.3%

All directors and executive
officers as a group............... 62,000 (13) 20.8%
(20 persons)

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

* Less than 1% of the issued and outstanding Primary Class Common Shares.

(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person or member of a group to acquire them within 60 days
are treated as outstanding only when determining the amount and percent
owned by such person or group.

<PAGE>

(2) Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to
such shares.

(3) Based on 298,500 Primary Class Common Shares outstanding as of June 2,
1998.

(4) Includes 8,000 Primary Class Common Shares beneficially owned by New
Bern Family Practice Center, P.A., of which Dr. Mahaney is a
shareholder and is Treasurer, and as to which shares Dr. Mahaney
disclaims any beneficial ownership except to the extent of his
pecuniary interest therein.

(5) Includes 4,000 Primary Class Common Shares beneficially owned by Dr.
Agsten and Laddie M. Crisp, Jr., M.D., and as to which shares Dr.
Agsten disclaims any beneficial ownership except to the extent of his
pecuniary interest therein.

(6) Includes 8,000 Primary Class Common Shares beneficially owned by Wilson
Medical Associates, P.A., of which Dr. Baio is a shareholder, and as to
which shares Dr. Baio disclaims any beneficial ownership except to the
extent of his pecuniary interest therein.

(7) Includes 10,000 Primary Class Common Shares beneficially owned by
Coastal Childrens Clinic, Inc., of which Dr. Barden is a shareholder
and is President, and as to which shares Dr. Barden disclaims any
beneficial ownership except to the extent of his pecuniary interest
therein.

(8) Includes 10,000 Primary Class Common Shares beneficially owned by
Greenville Pediatric Services, Inc., of which Dr. Bramley is a
shareholder and is Secretary, and as to which shares Dr. Bramley
disclaims any beneficial ownership except to the extent of his
pecuniary interest therein.

(9) Includes 4,000 Primary Class Common Shares beneficially owned by
Goldsboro Family Physicians, P.A., of which Dr. Gaither is a
shareholder and is President, and as to which shares Dr. Gaither
disclaims any beneficial ownership except to the extent of his
pecuniary interest therein.

(10) Includes 4,000 Primary Class Common Shares beneficially owned by
Goldsboro Medical Specialists, P.A., of which Dr. Stackhouse is a
shareholder, and as to which shares Dr. Stackhouse disclaims any
beneficial ownership except to the extent of his pecuniary interest
therein.

(11) Includes 4,000 Primary Class Common Shares beneficially owned by
Greenville Internal Medicine, P.A., of which Dr. Waivers is a
shareholder and is President, and as to which shares Dr. Waivers
disclaims any beneficial ownership except to the extent of his
pecuniary interest therein.

(12) Includes 4,000 Primary Class Common Shares beneficially owned by East
Carteret Family Medicine, P.A., of which Dr. Willis is a shareholder
and is President, and as to which shares Dr. Willis disclaims any
beneficial ownership except to the extent of his pecuniary interest
therein.

(13) Includes 56,000 Primary Class Common Shares beneficially owned by
affiliates of directors.

<PAGE>

REFERRAL CLASS COMMON SHARES
REFERRAL CLASS COMMON SHARES
BENEFICIALLY OWNED (1)(2)
-----------------------------------
NAME AMOUNT PERCENT OF CLASS (3)
- ------------------------------------- ---------- -------------------

J. Philip Mahaney, M.D............... 0 *
Joseph E. Agsten, M.D................ 0 *
Stephen R. Ainsworth, M.D............ 2,000 *
Charles J. Baio, M.D................. 0 *
Graham A. Barden, III, M.D........... 0 *
Michael L. Bramley, M.D.............. 0 *
John P. Emerick, M.D................. 2,000 *
A. Clark Gaither, M.D................ 0 *
Frank L. Gay, M.D.................... 2,000 *
Robert A. Krause, M.D................ 0 *
Robert S. Meyer, M.D................. 0 *
Alice P. Selden, M.D................. 2,000 *
W. James Stackhouse, M.D............. 0 *
Leo E. Waivers, M.D.................. 0 *
Daniel Whitley, Jr., M.D............. 2,000 *
James M. Williams, M.D............... 0 *
John A. Williams, III, M.D........... 2,000 *
Kerry A. Willis, M.D................. 0 *

All directors and executive
officers as a group.................. 12,000 3.8%
(20 persons)
- ---------------------------

* Less than 1% of the issued and outstanding Referral Class Common
Shares.

(2) Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to
such shares.

(3) Based on 318,000 Referral Class Common Shares outstanding as of June 2,
1998.

<PAGE>

NONPROFIT CLASS NONVOTING COMMON SHARES

NONPROFIT CLASS NONVOTING COMMON
SHARES BENEFICIALLY OWNED (1)(2)
--------------------------------
NAME AMOUNT PERCENT OF CLASS (3)
- ------------------------------------------ -------- --------------------

Rural Health Group, Inc. (4) 2,000 80.0%
Tri-County Health Services, Inc. (5)...... 500 20.0%
J. Philip Mahaney, M.D.................... 0 *
Joseph E. Agsten, M.D..................... 0 *
Stephen R. Ainsworth, M.D................. 0 *
Charles J. Baio, M.D...................... 0 *
Graham A. Barden, III, M.D................ 0 *
Michael L. Bramley, M.D................... 0 *
John P. Emerick, M.D...................... 0 *
A. Clark Gaither, M.D..................... 0 *
Frank L. Gay, M.D......................... 0 *
Robert A. Krause, M.D..................... 0 *
Robert S. Meyer, M.D...................... 0 *
Alice P. Selden, M.D...................... 0 *
W. James Stackhouse, M.D.................. 0 *
Leo E. Waivers, M.D....................... 0 *
Daniel Whitley, Jr., M.D.................. 0 *
James M. Williams, M.D.................... 0 *
John A. Williams, III, M.D................ 0 *
Kerry A. Willis, M.D...................... 0 *

All directors and executive
officers as a group....................... 0 *
(20 persons)

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

* Less than 1% of the issued and outstanding Nonprofit Class Nonvoting
Common Shares.

(2) Unless otherwise noted, all of the shares shown are held by individuals
or entities possessing sole voting and investment power with respect to
such shares.

(3) Based on 2,500 Nonprofit Class Nonvoting Common Shares outstanding as
of June 2, 1998.

(4) Rural Health Group, Inc.'s principal address is P.O. Box 644, Jackson,
North Carolina 27845.

(5) Tri-County Health Services, Inc.'s principal address is P.O. Box 40,
Aurora, North Carolina 27806.

<PAGE>

DESCRIPTION OF SECURITIES

The authorized capital stock of Atlantic consists of 1,000,000 Primary
Class Common Shares, par value $1.00 per share, 1,800,000 Referral Class Common
Shares, par value $1.00 per share and 200,000 Nonprofit Class Nonvoting Common
Shares, par value $1.00 per share. Prior to July 1996, the authorized capital
stock of Atlantic consisted of 100,000 shares of common stock, $1.00 par value
per share. In August 1996, after Atlantic amended and restated its Articles of
Incorporation to reflect its current capital structure, the shares of common
stock previously issued and outstanding were canceled and re-issued as either
Primary Class Common Shares, Referral Class Common Shares or Nonprofit Class
Nonvoting Common Shares, as the case may be, depending upon the qualifications
of the existing shareholders.

PRIMARY CLASS COMMON SHARES

As of June 2, 1998, there were 298,500 Primary Class Common Shares
issued and outstanding, held by 117 holders of record. All of the issued and
outstanding Primary Class Common Shares are fully paid and nonassessable.

Pursuant to Atlantic's Amended and Restated Articles of Incorporation,
Atlantic may issue Primary Class Common Shares only to Primary Care Physicians,
which are defined in Atlantic's Bylaws, as amended, as physicians who practice
substantially (75% or more as determined by gross practice revenues) in one or
more of the primary care specialties of family practice, general internal
medicine, general pediatrics or general practice ("Primary Care Specialties");
are generally not board certified in any specialty other than a Primary Care
Specialty; and, if board certified in any other specialty other than a Primary
Care Specialty, generally do not hold themselves out as practicing in any
specialty other than the Primary Care Specialties, and, until August 31, 1997,
to practice groups (partnerships, professional corporations or professional
limited liability companies) engaged primarily in the provision of services of
Primary Care Physicians, which physicians, either directly or through a practice
group, or practices, have contracted with Atlantic to provide medical and other
health care services through contracts negotiated by Atlantic.

The holders of the Primary Class Common Shares are entitled to one vote
for each share held of record on all matters submitted to a vote of the
shareholders. In addition, the holders of the Primary Class Common Shares are
entitled to vote as a group with special voting requirements on: (i) election of
all Primary Care Directors; (ii) amendments to Atlantic's Amended and Restated
Articles of Incorporation regarding classes of shares and the respective rights
of such classes; (iii) when a shareholder vote is required, approval of the sale
or transfer of all or substantially all of the assets of, or the dissolution of,
Atlantic; (iv) certain amendments to Atlantic's Bylaws, as amended; and (v) all
matters on which such vote is required by the North Carolina Business
Corporation Act.

The vote of 65% of all of the issued and outstanding Primary Class
Common Shares and 65% of all of the issued and outstanding Referral Class Common
Shares is required to adopt amendments to Atlantic's Amended and Restated
Articles of Incorporation regarding classes of shares and the respective rights
of such classes, and/or, if shareholder vote is required, to approve the sale or
transfer of all or substantially all of the assets of Atlantic.

The vote of 65% of all of the issued and outstanding Primary Class
Common Shares is required to elect Primary Care Directors, and the Primary Class
Common Shares are the only class of shares voting on the election of the Primary
Care Directors.

<PAGE>

Holders of the Primary Class Common Shares are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. Holders of the Primary Class Common Shares have no
preemptive rights and no right to convert their Primary Class Common Shares into
any other securities. Upon any liquidation or dissolution of Atlantic, the
holders of the Primary Class Common Shares are entitled to share, pro rata, in
any distribution of Atlantic's assets to shareholders.

REFERRAL CLASS COMMON SHARES

As of June 2, 1998, there were 318,000 Referral Class Common Shares
issued and outstanding, held by 151 holders of record. All of the issued and
outstanding Referral Class Common Shares are fully paid and nonassessable.

Pursuant to Atlantic's Amended and Restated Articles of Incorporation,
Referral Class Common Shares will be issued only to physicians practicing
primarily in referral medical and surgical specialties other than Primary Care
Specialties and, until August 31, 1997, to practice groups (partnerships,
professional corporations or professional limited liability companies) engaged
primarily in the provision of services of physicians practicing primarily in
such referral medical and surgical specialties other than Primary Care
Specialties, which physicians, either directly or through a practice group, or
practices, have contracted with Atlantic to provide medical and other health
care services through contracts negotiated by Atlantic.

The holders of the Referral Class Common Shares are entitled to one
vote for each share held of record on all matters submitted to a vote of the
shareholders. In addition, the holders of the Referral Class Common Shares are
entitled to vote as a group with special voting requirements on: (i) election of
all Referral Directors and all OB/GYN Directors; (ii) adoption of amendments to
Atlantic's Amended and Restated Articles of Incorporation regarding classes of
shares and the respective rights of such classes; (iii) when a shareholder vote
is required, approval of the sale or transfer of all or substantially all of the
assets of, or the dissolution of, Atlantic; (iv) amendment to certain provisions
of Atlantic's Bylaws, as amended; and (v) all matters on which such vote is
required by the North Carolina Business Corporation Act.

The vote of 65% of all of the issued and outstanding Referral Class
Common Shares, and 65% of all of the issued and outstanding Primary Class Common
Shares is required to adopt amendments to Atlantic's Amended and Restated
Articles of Incorporation regarding classes of shares and the respective rights
of such classes, and/or, when shareholder vote is required, to approve the sale
or transfer of all or substantially all of the assets of, or the dissolution of,
Atlantic. The vote of 65% of all of the issued and outstanding Referral Class
Common Shares are required to elect Referral Directors and OB/GYN Directors and
the holders of Referral Class Common Shares are the only shareholders allowed to
vote on the election of Referral Directors and OB/GYN Directors.

Holders of the Referral Class Common Shares are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. Holders of the Referral Class Common Shares have no
preemptive rights and no right to convert their Referral Class Common Shares
into any other securities. Upon any liquidation or dissolution of Atlantic, the
holders of the Referral Class Common Shares are entitled to share, pro rata, in
any distribution of Atlantic's assets to shareholders.

<PAGE>

NONPROFIT CLASS NONVOTING COMMON SHARES

As of June 2, 1998, there were 2,500 Nonprofit Class Nonvoting Common
Shares issued and outstanding, held by two holders of record. All of the issued
and outstanding Nonprofit Class Nonvoting Common Shares are fully paid and
nonassessable.

Pursuant to Atlantic's Amended and Restated Articles of Incorporation,
Nonprofit Class Nonvoting Common Shares will be issued only to nonprofit
entities or public (local, state or federal government) corporations engaged in
the delivery of health care services, which have contracted with Atlantic to
provide medical or other health care services through contracts negotiated by
Atlantic.

The holders of the Nonprofit Class Nonvoting Common Shares are not
entitled to vote on any matters submitted to Atlantic's shareholders. The
Nonprofit Class Nonvoting Common Shares otherwise have all rights of common
shares pursuant to the North Carolina Business Corporation Act. Holders of the
Nonprofit Class Nonvoting Common Shares are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Holders of the Nonprofit Class Nonvoting Common Shares have
no preemptive rights and no right to convert their Nonprofit Class Nonvoting
Common Shares into any other securities. Upon any liquidation or dissolution of
Atlantic, the holders of the Nonprofit Class Nonvoting Common Shares are
entitled to share, pro rata, in any distribution of Atlantic's assets to
shareholders.

LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION

Atlantic's Amended and Restated Articles of Incorporation provide
Atlantic's Board of Directors with the power and authority to limit the
liability of its directors to the fullest extent permitted by the North Carolina
Business Corporation Act. Directors of Atlantic will not be personally liable to
Atlantic or otherwise for monetary damages for breach of any duty as a director,
except for liability with respect to (i) acts or omissions that the director at
the time of such breach knew or believed were clearly in conflict with the best
interests of Atlantic; (ii) dividends or other distributions of corporate assets
that are in contravention of certain statutory or contractual restrictions; or
(iii) any transaction from which the director derived an improper personal
benefit.

The North Carolina Business Corporation Act requires that Atlantic
indemnify any director who was wholly successful, on the merits or otherwise, in
the defense of any proceeding to which the director was a party because he or
she was a director of Atlantic against reasonable expenses incurred by the
director in connection with the proceeding. "Proceeding" means a threatened,
pending, or contemplated action, suit, or proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal. Reference is
made to the detailed provisions of Sections 55-8-50 through 55-8-58 of the North
Carolina Business Corporation Act for a complete statement of such
indemnification rights. Atlantic's Bylaws, as amended, also require Atlantic to
provide indemnification to any person who at any time serves or has served as a
director or officer of Atlantic, or at the request of Atlantic is or was serving
as an officer, director, agent, partner, trustee, administrator, or employee for
any other foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, to the fullest extent permitted by
the North Carolina Business Corporation Act. Atlantic's Bylaws, as amended, also
permit Atlantic's Board of Directors, in its discretion, to provide such
indemnification to employees and agents of Atlantic.

Atlantic maintains a directors and officers and errors and omissions
insurance policy, the maximum coverage of which is $1,000,000 per claim.

<PAGE>

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of Atlantic pursuant to the foregoing provisions, or
otherwise, Atlantic has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.

CERTAIN ANTI-TAKEOVER PROVISIONS

The North Carolina Shareholder Protection Act, N.C. Gen. Stat. ss.
55-9-01 et seq. (the "Shareholder Protection Act"), which was enacted to provide
fair price protection for shareholders in two-tier takeovers, generally applies
to corporations that have a class of shares registered under Section 12 of the
Securities Exchange Act of 1934 and are organized under the laws of North
Carolina. The Shareholder Protection Act provides that any business combination
of a corporation with an entity owning more than 20% of the voting shares of the
corporation must be approved by 95% of the voting shares. A purchaser may avoid
the 95% voting requirement by complying with, among other things, (i) fair price
formula provisions of N.C. Gen. Stat. ss. 55-9-03; (ii) certain restrictions in
N.C. Gen. Stat. ss. 55-9-03 (pertaining to board representation and acquisition
of shares) on such purchaser's conduct between the time of acquisition of the
20% threshold voting interest in the corporation and the consummation of the
business combination, and (iii) the requirements set forth in N.C. Gen. Stat.
ss. 55-9-03 (relating to the solicitation of proxies).

The North Carolina Control Share Acquisition Act, N.C. Gen. Stat. ss.
55-9A-01 et seq. (the "Control Share Act"), the provisions of which are
generally applicable to corporations that have a class of shares registered
under Section 12 of the Securities Exchange Act of 1934 and are organized under
the laws of North Carolina, becomes operative when an acquiring person purchases
shares entitling such person to voting power equal to or greater than one-fifth,
one-third or one-half of all voting power of the issuing corporation ("Control
Shares"). A "Control Share Acquisition" means, with certain exceptions, the
acquisition by any person of Control Shares. Control Shares acquired in a
Control Share Acquisition shall not have voting rights unless such rights are
granted by resolution adopted by the shareholders of the corporation. To be
granted voting rights under an approved resolution, the resolution must
generally be adopted by the affirmative vote of at least a majority of all the
outstanding shares of the corporation (not including Interested Shares) entitled
to vote for the election of directors. "Interested Shares" means shares of the
corporation beneficially owned by (i) any person who has acquired or proposes to
acquire Control Shares in a Control Share Acquisition; (ii) any officer of the
corporation; or (iii) any employee of the corporation who is also a director of
the corporation. Before a vote on the resolution occurs, the shareholders must
be provided both with notice of and information about the Control Share
Acquisition, including a description of the right of redemption available to
shareholders. The right of redemption by shareholders of the corporation under
the Control Shares Act provides that if the Control Shares acquired in a Control
Share Acquisition are accorded voting rights and if the holders of the Control
Shares have a majority of all voting power for the election of directors, all
shareholders of the corporation (other than holders of Control Shares) have
rights to have their shares redeemed by the corporation at the fair value of the
shares. Fair value of the shares is determined as of the day prior to the date
on which the referenced shareholders meeting was held relating to the grant of
voting rights to the Control Shares, but in no event is it a value less than the
highest price paid per share by the acquiring person in the Control Share
Acquisition. This right of redemption is granted subject to the satisfaction of
certain requirements by the shareholder after receiving notice of the grant of
voting rights to the Control Shares.

Although Atlantic is governed by the North Carolina Business
Corporation Act, it is not subject to the anti-takeover provisions of the
Shareholder Protection Act and the Control Share Act. Atlantic has "opted-out"
of these provisions pursuant to an express provision in Atlantic's Amended and
Restated

<PAGE>

Articles of Incorporation. "Opting-out" of these anti-takeover provisions could
limit the price that certain investors might pay in the future for shares of
Atlantic's capital stock.

Sections 2(a) and 2(b) of Atlantic's Amended and Restated Articles of
Incorporation provide that the affirmative vote of 65% of all of the issued and
outstanding Primary Class Common Shares, voting as a separate group, and the
affirmative vote of 65% of all of the issued and outstanding Referral Class
Common Shares, voting as a separate group, are required for shareholder
approval, if necessary, of a transfer of all or substantially all of the assets
of Atlantic. Such a provision may impede a change of control. See "Risk
Factors--Effect of Certain Articles of Incorporation and Bylaw Provisions."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, Atlantic will have 856,500 Primary
Class Common Shares, 1,426,000 Referral Class Common Shares and 152,500
Nonprofit Class Nonvoting Common Shares issued and outstanding, if the maximum
number of Shares offered hereby is sold. All purchasers of shares of Atlantic's
capital stock already issued by Atlantic and all purchasers of the Shares
offered hereby have been and will be required to enter into Subscription and
Shareholder Buy/Sell Agreements, which restrict the sale of the shares of
capital stock of Atlantic and the Shares offered hereby and provide to Atlantic
the right to repurchase such shares upon certain purchase events at fair market
value, as determined in the sole discretion of the Board of Directors of
Atlantic. Accordingly, so long as the buy/sell provisions in the Subscription
and Shareholder Buy/Sell Agreement are in effect, development of a trading
market for any of the shares of Atlantic's capital stock, including the Shares
offered hereby is precluded. Consequently, there is currently no public or
private trading market for the Shares offered hereby and unless all of the
buy/sell provisions in the Subscription and Shareholder Buy/Sell Agreements are
terminated, there will continue to be no public or private trading market for
the Shares. See "Risk Factors -- Lack of Public Trading Market; Limitations on
Transfer."

In the event, the buy/sell provisions in the Subscription and
Shareholder Buy/Sell Agreements are terminated, then out of all of the issued
and outstanding shares of capital stock of Atlantic, all of the Shares sold in
this Offering will be freely tradable without restriction under the Securities
Act unless held by "affiliates" of the Company as that term is defined in Rule
144 under the Securities Act. The remaining 185,000 shares of capital stock of
Atlantic held by existing stockholders are "restricted securities" under the
Securities Act. The Shares, and any shares purchased by an affiliate of
Atlantic, may not be sold unless they are registered under the Securities Act or
unless an exemption from registration, such as an exemption provided by Rule 144
or 144(k) under the Securities Act is available.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of Atlantic, who has
beneficially owned "restricted securities" for at least one year is entitled to
sell in any three-month period a number of shares that does not exceed the
greater of (i) one percent of the number of shares of capital stock then
outstanding or (ii) the average weekly trading volume of the capital stock
during the four calendar weeks preceding the required filing of a Form 144 with
respect to such sale. Sales under Rule 144 are generally subject to certain
other requirements relating to manner of sale, notice of sale and availability
of current public information about Atlantic. Under Rule 144(k), a person who is
not deemed to have been an affiliate of Atlantic at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, is entitled to sell such shares without regard to the
limitations described above.

In addition, if the buy/sell provisions in the Subscription and
Shareholder Buy-Sell Agreements are terminated, then upon completion of this
Offering, 98,500 Primary Class Common Shares and 26,000 Referral Class Common
Shares will become eligible for sale in the public market pursuant to Rule

<PAGE>

144(k), and beginning 90 days after the date of this Prospectus, 58,000 Primary
Class Common Shares and 2,500 Nonprofit Class Nonvoting Common Shares will
become available for sale in the public market subject in certain cases, to
volume and manner of sale limitations.

PLAN OF DISTRIBUTION

The Shares offered hereby are offered by the officers and directors of
Atlantic on a "best efforts" basis. During the initial offering period from
December 30, 1996 through July 28, 1997, Atlantic sold 116,000 Primary Class
Common Shares, 216,000 Referral Class Common Shares and no Nonprofit Class
Nonvoting Common Shares. During the second offering period from September 30,
1997 through April 28, 1998, Atlantic sold 26,000 Primary Class Common Shares,
76,000 Referral Class Common Shares, and no Nonprofit Class Nonvoting Common
Shares. The Company will continue to offer Shares under this Prospectus for a
period of 210 days from the date of this Prospectus. No selling commissions will
be paid to any officer or director of Atlantic in connection with the offer and
sale of the Shares, although any out-of-pocket expenses will be reimbursed by
Atlantic.

PHYSICIAN INVESTORS

Atlantic is offering for sale only to selected physicians who have
completed Atlantic's credentialing process up to 700,000 Primary Class Common
Shares and up to 1,400,000 Referral Class Common Shares at the purchase price of
$1.00 per Share. Upon qualification, selected physicians will be permitted to
purchase 2,000 Primary Class Common Shares per primary care physician or 2,000
Referral Class Common Shares per referral physician. Ownership of the Primary
Class Common Shares and Referral Class Common Shares of Atlantic is restricted
and limited to assure that no physician shareholder owns 5% or more of the
outstanding shares of capital stock of Atlantic and that no collection of
physician shareholders who practice together in any participating medical
practice group own 10% or more of the outstanding shares of capital stock of
Atlantic. See "Risk Factors -- Affiliated Service Group," "Business -- Medical
Services Provider Agreements, Structure and Ownership and Management" and "Plan
of Distribution -- Subscription and Shareholder Buy/Sell Agreement".

PHYSICIAN QUALIFICATIONS

The offering of the Primary Class Common Shares and the Referral Class
Common Shares is being made only to physicians who (a) are licensed to practice
medicine in the State of North Carolina, (b) have been qualified by Atlantic to
become a member of Atlantic's network of health care providers and (c) have
agreed to enter into, or practice medicine through a medical practice group
which has agreed to enter into, a Medical Services Provider Agreement with
Atlantic.

In addition, the offering of the Primary Class Common Shares is being
made only to physicians practicing substantially (75% or more as determined by
gross practice revenues) in one or more of the Primary Care Specialties, is
generally not board certified in any other specialty other than a Primary Care
Specialty, and if board certified in any other specialty other than a Primary
Care Specialty, generally does not hold himself or herself out as practicing in
any specialty other than one or more of the Primary Care Specialties. The
offering of the Referral Class Common Shares is being made to only to physicians
practicing primarily in referral medical and surgical specialties other than the
Primary Care Specialties.

<PAGE>

NON-PROFIT/PUBLIC HEALTH CARE ENTITY INVESTORS

Atlantic is offering for sale only to selected non-profit or public
corporations engaged in the delivery of health care services through contracts
negotiated by Atlantic up to 150,000 Non-Profit Class Nonvoting Common Shares.
Upon qualification, selected non-profit or public corporations will be permitted
to purchase 2,000 Non-Profit Class Nonvoting Common Shares per non-profit or
public entity.

RESIDENCY REQUIREMENTS

Investment in the Primary Class Common Shares and Referral Class Common
Shares is limited to physicians who are bona fide residents of North Carolina or
such other state or jurisdiction in which the Offering is either registered or
exempt from registration. Investment in the Nonprofit Class Nonvoting Common
Shares is limited to entities whose principal place of business is in North
Carolina or such other state or jurisdiction in which the Offering is either
registered or exempt from registration.

SUBSCRIPTION AND SHAREHOLDER BUY/SELL AGREEMENTS

At the time of purchase, each investor will be required to execute and
deliver to Atlantic a Subscription and Shareholder Buy/Sell Agreement
("Subscription Agreement") and a check made payable to "Atlantic Integrated
Health Incorporated" for the aggregate purchase price of the Shares to be
purchased. Atlantic reserves the right to reject any Subscription Agreement for
any reason. The following summary of the Subscription Agreements are qualified
in their entirety to the forms of such agreements included as exhibits to the
Registration Statement, of which this Prospectus is a part. There are three
different forms of Subscription Agreements, one for each class of Shares. The
Subscription Agreements contain standard investment representations and specific
representations as to physician qualifications. In addition, the Subscription
Agreements provide that Atlantic has the option to repurchase the Shares offered
hereby at a price equal to the fair value thereof, as determined as of the date
that Atlantic exercises such option to repurchase the shares. Fair value of the
Shares will be determined annually on or before March 1 of each year by the
Board of Directors of Atlantic. Atlantic will have the right to exercise this
option upon (a) the appointment by a court of competent jurisdiction of a
receiver, trustee or assignee of the Shareholder; (b) the voluntary application
by the Shareholder under applicable laws for the relief of debtors; (c) the
expiration of 30 days after entry of a final judgment by a court of competent
jurisdiction against the Shareholder, provided such judgment remains
unsatisfied; (d) the institution of a levy, garnishment or attachment involving
the Shares; (e) the death of the Shareholder; (f) the termination for any reason
of the Medical Services Provider Agreement entered into by the Shareholder,
either, directly or indirectly; (g) any involuntary transfer of such Shares by
or from the Shareholder; (h) the expressed desire of the Shareholder to sell,
assign, pledge, transfer or otherwise dispose of or encumber such Shares; or (i)
Atlantic's determination of the need to redeem Shares to preclude individual
Shareholders from owning 5% or more of the outstanding shares of capital stock
of Atlantic or collections of physician shareholders who practice together in
any participating medical group practice from owning 10% or more of the
outstanding Shares of Atlantic. The Board of Directors of Atlantic determined
that, because Atlantic had not completed the development of its corporate and
operating structures and had little operating revenue, the fair market value of
one Share as of October 9, 1996 was equal to $.01. Such determination remains
unchanged and the Board has not made a new determination of the fair market
value of the Shares as of the date hereof.

<PAGE>

VALIDITY OF SHARES

The validity of the issuance of the Shares offered hereby will be
passed upon for Atlantic by Wyrick, Robbins, Yates & Ponton L.L.P., Raleigh,
North Carolina.

EXPERTS

The financial statements included in this prospectus have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.

<PAGE>

ATLANTIC INTEGRATED HEALTH INCORPORATED

FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Atlantic Integrated Health Incorporated:

We have audited the accompanying balance sheets of Atlantic Integrated Health
Incorporated (a North Carolina corporation) as of December 31, 1997 and 1996,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for the years 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 audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atlantic Integrated Health
Incorporated as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has yet to generate revenue in excess of
expenses and has an accumulated deficit at December 31, 1997, of $345,869, which
raises substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

/s/ Arthur Andersen LLP

Charlotte, North Carolina,
March 17, 1998.

<PAGE>

ATLANTIC INTEGRATED HEALTH INCORPORATED

BALANCE SHEETS

ASSETS DECEMBER 31,
------ -------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 51,208 $101,776 $107,275
Accounts receivable, less allowance for uncollectible
accounts of $5,000 in 1997 0 30,505 51,056
Prepaid expenses 0 5,297 2,411
-------- -------- -----------
Total current assets 51,208 137,578 160,742
INVESTMENT 0 1,000 1,000
OFFICE EQUIPMENT, net 3,001 9,322 8,429
DEFERRED COSTS 21,669 17,107 15,966
-------- -------- -----------
$ 75,878 $165,007 $186,137
======== ======== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES - Accounts payable $ 78,253 $ 24,761 $ 45,885
-------- -------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
STOCKHOLDERS' EQUITY:
Common stock - $1 par value-
Primary class, authorized 1,000,000 shares; 296,500,
292,500 and 140,000 shares issued and outstanding in
1998, 1997 and 1996, respectively $162,500 $292,500 $296,500
Referral class, authorized 1,800,000 shares; 300,000,
262,000 and 26,000 shares issued and outstanding in
1998, 1997 and 1996, respectively 26,000 262,000 300,000
Nonprofit class, nonvoting, authorized 200,000 shares;
2,500 shares issued and outstanding in 1998, 1997
and 1996, respectively 2,500 2,500 2,500
Additional paid-in capital 74,000 74,000 74,000
Syndication costs (75,000) (95,000) (95,000)
Stock subscription and stockholder notes receivable (18,375) (49,885) (52,850)
Accumulated deficit (174,000) (345,869) (384,898)
-------- -------- -----------
Total stockholders' equity (deficit) (2,375) 140,246 140,252
-------- -------- -----------

$ 75,878 $165,007 $186,137
======== ======== ==========

</TABLE>

The accompanying notes to financial statements
are an integral part of these balance sheets

<PAGE>

ATLANTIC INTEGRATED HEALTH INCORPORATED

STATEMENTS OF OPERATIONS

THREE MONTHS ENDED
YEARS ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
----------------------- -----------------------
1996 1997 1997 199
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUE $ 58,927 $ 286,751 $ 116,190 $ 78,275
---------- ---------- ---------- -----------
EXPENSES:
Consulting fees 72,664 138,251 53,162 8,516
Salaries and wages 85,799 251,803 58,099 78,897
Relocation expenses 8,013 0 0 0
Recruiting and education 13,472 6,781 3,079 10,153
Office expense and other 17,210 44,907 8,757 16,667
Rent 4,000 4,420 970 1,038
Depreciation and amortization 1,473 7,458 1,726 2,033
Provision for uncollectible accounts 0 5,000 0 0
---------- ---------- ---------- -----------
Total expenses 202,631 458,620 125,793 117,304
---------- ---------- ---------- -----------
NET LOSS $ (143,704) $(171,869) $ (9,603) $ (39,029)
========== ========== ========== ===========

Net loss per basic common share $ (1.31) $ (.41) $ (.05) $ (.07)
========== ========== ========== ===========
Basic average common shares outstanding 109,875 416,688 210,417 586,333
========== ========== ========== ===========

</TABLE>

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

<PAGE>

ATLANTIC INTEGRATED HEALTH INCORPORATED

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
STOCK
SUBSCRIPTION
ADDITIONAL AND SHAREHOLDER
COMMON STOCK PAID-IN SYNDICATION NOTES ACCUMULATED
SHARES AMOUNT CAPITAL COSTS RECEIVABLE DEFICIT TOTAL
------- --------- ---------- ----------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 91,000 $ 91,000 $ 24,000 $ 0 $ (64,500) $ (30,296) $ 20,204
Issuance of common stock for $1 per share 100,000 100,000 0 0 0 0 100,000
Collections of stock subscription receivable 0 0 0 0 46,125 0 46,125
Syndication costs 0 0 0 (75,000) 0 0 (75,000)
Net loss for the year ended December 31, 1996 0 0 0 0 0 (143,704) (143,704)
Capital contributions 0 0 50,000 0 0 0 50,000
------- --------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1996 191,000 191,000 74,000 (75,000) (18,375) (174,000) (2,375)
Issuance of common stock for $1 per share 372,000 372,000 0 0 (49,885) 0 322,115
Collections of stock subscription receivable 0 0 0 0 12,375 0 12,375
Write-off of stock subscription receivable (6,000) (6,000) 0 0 6,000 0 0
Syndication costs 0 0 0 (20,000) 0 0 (20,000)
Net loss for the year ended December 31, 1997 0 0 0 0 0 (171,869) (171,869)
------- --------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1997 557,000 557,000 74,000 (95,000) (49,885) (345,869) 140,246
Issuance of common stock for $1 per share
(unaudited) 42,000 42,000 0 0 (2,965) 0 39,035
Net loss for the three months ended March 31,
1998 (unaudited) 0 0 0 0 0 (39,029) (39,029)
------- --------- --------- --------- --------- --------- ---------
BALANCE, March 31, 1998 (unaudited) 599,000 $ 599,000 $ 74,000 $ (95,000) $ (52,850) $(384,898) $ 140,252
======= ========= ========= ========= ========= ========= =========
</TABLE>

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

<PAGE>

ATLANTIC INTEGRATED HEALTH INCORPORATED

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
----------------------- -----------------------
1996 1997 1997 1998
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(143,704) $(171,869) $ (9,603) $ (39,029)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 1,473 7,458 1,726 2,034
Provision for uncollectible accounts 0 5,000 0 0
Increase in accounts receivable 0 (35,505) (26,000) (20,551)
(Increase) decrease in prepaid expenses 0 (5,297) 0 2,886
Noncash contributions of capital 50,000 0 0 0
Increase (decrease) in accounts payable 1,906 (53,492) 29,176 21,124
------------ --------- ---------- -----------
Net cash used in operating activities (90,325) (253,705) (4,701) (33,536)
------------ --------- ---------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment (3,334) (9,217) (6,367) 0
Purchase of investment 0 (1,000) (1,000) 0
Payment of organization costs (5,044) 0 0 0
------------ --------- ---------- -----------
Net cash used in investing activities (8,378) (10,217) (7,367) 0
------------ --------- ---------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock 146,125 302,115 41,500 39,035
Collection of stock subscription receivable 0 12,375 6,375 0
------------ --------- ---------- -----------
Net cash provided by financing activities 146,125 314,490 47,875 39,035
------------ --------- ---------- -----------
NET INCREASE IN CASH 47,422 50,568 35,807 5,499
CASH, beginning of period 3,786 51,208 51,208 101,776
------------ --------- ---------- -----------
CASH, end of period $ 51,208 $ 101,776 87,015 107,275
============ ========= ========== ===========
SUPPLEMENTAL DISCLOSURE:
Syndication costs financed through accounts payable $ 75,000 $ 20,000 $ 20,000 $ 0
Write-off of subscriptions receivable 0 6,000 6,000 0
Common stock issued in exchange for notes 0 49,885 16,500 2,965
============ ========= ========== ===========
</TABLE>

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

<PAGE>

ATLANTIC INTEGRATED HEALTH INCORPORATED

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND MARCH 31, 1997 AND 1998 (UNAUDITED)

1. ORGANIZATION AND CONTINUITY OF OPERATIONS:

Atlantic Integrated Health Incorporated, a North Carolina corporation (the
Company), was organized on December 5, 1994. The Company is an independent,
physician-owned and governed medical practice group network, organized to
provide administrative services to participating physicians and medical practice
groups. Currently, the Company is in the process of integrating, economically
and clinically, physicians now practicing primarily in single specialty practice
groups into a larger multi-specialty network of medical practice groups.

The Company operated in the development stage until late in 1996 when it began
to generate operating revenue. Since inception, the Company has expended
significant funds on raising capital, developing a business plan, addressing
other organizational matters and resolving legal and administrative matters.
Operating losses have resulted in an accumulated deficit of $384,898 at March
31, 1998, (unaudited). If the Company does not realize additional revenue in the
near future, it will require additional capital which may not be available.

The success of the Company is dependent upon its ability to maintain and expand
its integrated network of physicians and to further its managed care contracting
efforts. As such, the Company's ability to continue as a going concern is
dependent upon many factors, the most significant of which include:

- Being able to compete against established competitors wit
substantially greater capital resources.

- Being able to maintain and expand its network of qualified physicians
and other health care providers.

- Being able to operate in an evolving regulatory environment,
particularly with respect to antitrust laws, fraud and abuse and other
anti-referral laws, insurance regulation and health care reform.

Management's plans to address the above matters include:

- Seeking improvements in the delivery of health care services in order
to enhance the quality and cost-effectiveness of care provided to
patients served by the participating physician network.

- Integrating and coordinating the delivery of health care services by
participating medical practice groups.

- Developing a flexible organizational structure that will meet the
requirements of an evolving regulatory environment.

In October 1996, the Company filed a Registration Statement on Form SB-2 with
the Securities and Exchange Commission registering for sale shares of common
stock under federal securities laws. The minimum offering requirements were met
and the offering was extended through July 28, 1997. On September 22, 1997, the
company filed Post-Effective Amendment No. 2 to the Company's Registration
Statement on Form SB-2 to update the prospectus and extend the offering period
through April 28, 1998. The Commission declared Post-Effective Amendment #2
effective on September 30, 1997. The

<PAGE>

Company is in the process of extending its offering again by filing
Post-Effective Amendment No. 3 to the Company's Registration Statement.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

OFFICE EQUIPMENT

Office equipment acquisitions are recorded at cost. Depreciation is provided for
each class of depreciable asset and is computed using accelerated methods over
the estimated economic useful lives. These live range from five to seven years.

DEFERRED COSTS

Deferred costs consist of costs incurred in connection with establishing the
legal structure of the Company. These costs are being amortized over a period
of five years.

SYNDICATION COSTS

Certain fees and expenses relating to the sale of common stock were charged
against stockholders' equity.

USE OF ESTIMATES

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

3. STOCK SUBSCRIPTION AND STOCKHOLDER NOTES RECEIVABLE:

The stock subscription and stockholder notes receivable consists of amounts due
from stockholders at December 31, 1997 and 1996, related to the issuance of
shares of the Company's $1 par value common stock at a price of $1.00 per share.

4. INVESTMENT:

In January 1997, the Company, in conjunction with Kanawha Insurance Company
(Kanawha), formed The Beacon Company (Beacon). The Company and Kanawha each
contributed $1,000 of capital to Beacon; and as a result, each owns 50% of
Beacon. Beacon plans to market and sell health care services and related
employee benefit products, primarily in Eastern North Carolina. Management
expects Beacon to emerge from the development stage by the end of the fourth
quarter of 1998. The Company is accounting for its investment on the equity
method.

In February 1998, the Company's Board of Directors approved plans to purchase
all of the Beacon Shares held by Kanawha. It is expected that the transaction
will be completed during the second quarter of 1998.

5. BUY/SELL AGREEMENTS:

Stockholders are required to enter into a buy/sell agreement pursuant to which
the Company will have the option to repurchase the holders' shares under certain
circumstances. Such circumstances will include those in which the holder ceases
to be unconditionally licensed to practice medicine in the State of North
Carolina, ceases to meet the credentialing standards of the Company, ceases to
be actively

<PAGE>

engaged in the practice of medicine or ceases to be affiliated with the Company
through a medical services provider agreement.

6. MEMORANDUM OF UNDERSTANDING:

On May 23, 1996, the Company entered into a Memorandum of Understanding (MOU)
with several other Eastern North Carolina based providers. The purpose of the
MOU was to provide a medium through which participating entities could work
jointly to develop a business plan for the development and operation of a
management services organization. Pursuant to the provisions of the MOU, the
Company contributed $15,000 in cash along with certain organizational materials
previously developed by the Company. Additionally, the Company performed certain
services on behalf of the project and incurred direct costs of approximately
$78,000. The Company was reimbursed for these expenses in accordance with the
terms specified in the MOU.

7. INCOME TAXES:

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." This
statement requires the use of the liability method of accounting for deferred
income taxes. Deferred income taxes reflect the net tax affects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax reporting purposes.

At December 31, 1997 and 1996, the Company had net operating loss carryforwards
of approximately $315,000 and $150,000, respectively, for income tax purposes.
No deferred tax asset has been recorded by the Company as the realization of
such an asset is uncertain at this time. The net operating loss carryforwards
begin expiring in 2010 for federal income tax purposes.

8. RELATED-PARTY TRANSACTIONS:

The Company's chief executive officer and chairman of the board have provided
management services and office space at no cost to the Company. The estimated
fair market value of these items has been accounted for as expenses (salaries
and wages and rent) and contributions of capital in the accompanying financial
statements. The estimated fair market value of services and office space
provided under these arrangements was $46,000 and $4,000, respectively, for the
year ended December 31, 1996. Effective January 1, 1997, the Company began
reimbursing the officers noted above for the estimated fair market value of
services and office space provided by them. The estimated fair market value of
services and office space provided under these arrangements was $48,000 and
$4,304, respectively, for the year ended December 31, 1997 and $12,000 and
$1,038, respectively, for the three months ended March 31, 1998 (unaudited).

The Company entered into an arrangement with Beacon to provide network
development services. Revenue under this arrangement was $70,000 for the year
ended December 31, 1997. In addition, the Company recognized $185,350 and
$46,738 in revenue from its referral class common shareholders from
administrative service fees related to group purchasing, contracting and other
services provided for the year ended December 31, 1997 and the three months
ended March 31, 1998 (unaudited), respectively.

<PAGE>

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

No dealer, salesperson or any other
person has been authorized to give
information to or make any representation
not contained in this Prospectus in
connection with the offer made by this
Prospectus, and, if given or made, such
information or representation must not be 700,000 PRIMARY CLASS
relied upon as having been authorized by COMMON SHARES
the Company. This Prospectus does not
constitute an offer to sell or a 1,400,000 REFERRAL
solicitation by anyone in any CLASS COMMON SHARES
jurisdiction in which the person making
Such offer or solicitation is not 150,000 NONPROFIT
qualified to do so or to anyone to whom CLASS NONVOTING COMMON SHARES
it is unlawful to make such offer or
solicitation. Neither the delivery of
this Prospectus nor any sale made
hereunder shall under any circumstances
create any implication that the affairs
of the Company since the date hereof or
the information herein is correct as of
any time subsequent to the date of this
Prospectus.

---------------------
TABLE OF CONTENTS

Page
----
Additional Information..................2
Prospectus Summary......................3
Risk Factors............................6 ATLANTIC INTEGRATED
Use of Proceeds........................12 HEALTH INCORPORATED
Dividend Policy........................12
Dilution...............................12
Capitalization.........................13
Selected Financial Data................14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..........................15
Business...............................19 -------------------
Management.............................33 PROSPECTUS
Certain Transactions...................39 -------------------
Principal Shareholders.................40
Description of Securities..............44
Shares Eligible for Future Sale........48
Plan of Distribution...................49
Validity of Shares.....................50
Experts................................51
Index to Financial Statements.........F-1
----------------------- __________, 1998

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

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The North Carolina Business Corporation Act requires that
Atlantic indemnify any director, who was wholly successful, on the merits or
otherwise, in the defense of any proceeding to which the director was a party
because he or she was a director of Atlantic, against reasonable expenses
incurred by the director in connection with the proceeding. "Proceeding" means a
threatened, pending, or contemplated action, suit, or proceeding, whether civil,
criminal, administrative, or investigative and whether formal or informal.
Reference is made to the detailed provisions of Sections 55-8-50 through 55-8-58
of the North Carolina Business Corporation Act for a complete statement of such
indemnification rights. Atlantic's Bylaws, as amended, also require Atlantic to
provide indemnification to any person who at any time serves or has served as a
director or officer of Atlantic, or at the request of Atlantic is or was serving
as an officer, director, agent, partner, trustee, administrator, or employee for
any other foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, to the fullest extent permitted by
the North Carolina Business Corporation Act. Atlantic's Bylaws, as amended, also
permit Atlantic's Board of Directors, in its discretion, to provide such
indemnification to employees and agents of Atlantic. Atlantic maintains a
directors and officers and errors and omissions insurance policy.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth estimated expenses incurred by Atlantic
in connection with the issuance and distribution of the Shares being registered.
All such expenses are estimated except for the SEC registration fee.

SEC registration fee............................. $ 681.81
Printing expenses................................ 12,000.00
Fees and expenses of counsel for Atlantic........ 80,000.00
Fees and expenses of accountants for Atlantic.... 7,000.00
Miscellaneous.................................... 5,000.00
---------

Total................................... $104,681.81

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

Since December 1994, Atlantic issued the following securities without
registration under the Securities Act:

1. In December 1994, Atlantic issued an aggregate of 19,000 shares of
common stock to 20 individual physicians and medical practice groups at a price
of $1.00 per share.

2. In February 1995, Atlantic issued 500 shares of common stock to one
physician for $1.00 per share.

3. From April 1995 through May 1995, Atlantic issued an aggregate of 4,000
shares of common stock to four physicians and medical practice groups for $1.00
per share.

<PAGE>

4. From June 1995 through July 1995, Atlantic issued an aggregate of 2,500
shares of common stock to five physicians and medical practice groups for $1.00
per share.

5. In September 1995, Atlantic issued 500 shares of common stock to one
medical practice group for $1.00 per share.

6. From February 1996 through April 1996, Atlantic issued an aggregate of
33,000 shares of common stock to 14 physicians and medical practice groups for
$1.00 per share.

7. In May 1996, Atlantic issued an aggregate of 39,500 shares of common
stock to six medical practice groups for $1.00 per share.

8. In July 1996, Atlantic issued an aggregate of 5,000 Primary Class
Common Shares to three physicians and medical practice groups for $1.00 per
share (1).

9. In September 1996, Atlantic issued an aggregate of 14,000 Primary Class
Common Shares and 6,000 Referral Class Common Shares to two medical practice
groups for $1.00 per share.

10. From October 1996 through November 1996, Atlantic issued an aggregate
of 26,500 Primary Class Common Shares and 12,000 Referral Class Common Shares to
four medical practice groups for $1.00 per share (2).

11. From January 1997 through April 1997, Atlantic issued an aggregate of
9,000 Primary Class Common Shares and 6,000 Referral Class Common Shares to
three medical practice groups for $1.00 per share (2).

12. From June 1997 through July 1997, Atlantic issued 7,500 Primary Class
Common Shares to two medical practice groups for $1.00 per share (2).

13. Since July 1997, Atlantic has not issued any shares of capital stock
without registration under the Securities Act.

No underwriting commissions or discounts were paid with respect to the
sales of the unregistered securities described above. In addition, all of the
above sales were made in reliance on Section 4(2) of the Securities Act for
transaction not involving a public offering. With regard to the reliance by
Atlantic upon the exemption from registration provided under Section 4(2) of the
Securities Act for the sales of securities disclosed above, certain inquiries
were made by Atlantic to establish that such sales qualified for such exemption
from the registration requirements. In particular, Atlantic confirmed that with
respect to the exemption claimed under Section 4(2) of the Securities Act (i)
all offers of sales and sales were made by personal contact from officers and
directors of Atlantic or other persons closely associated with Atlantic, (ii)
each investor made representations that he or she was sophisticated in relation
to the investment (and Atlantic has no reason to believe such representations
were incorrect), (iii) each purchaser gave assurance of investment intent and
the certificates for the shares bear a legend accordingly, and (iv) offers and
sales within any offering were made to a limited number of persons.

<PAGE>

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

(1) Prior to July 1996, the authorized capital stock of Atlantic consisted
of 100,000 shares of common stock, $1.00 par value per share. In July
1996, after Atlantic amended and restated its Articles of Incorporation
to reflect its current capital structure, the shares of common stock
previously issued and outstanding were canceled and re-issued as either
Primary Class Common Shares, Referral Class Common Shares or Nonprofit
Class Nonvoting Common Shares, as the case may be, depending upon the
qualifications of the existing shareholders.

(2) Atlantic offered and sold these shares prior to their issuance pursuant
to subscription agreements dated from December 1995 through August
1996. Atlantic does not issue any shares of capital stock to
subscribers until payment in full is received by Atlantic from such
subscribers.

ITEM 27. EXHIBITS.

EXHIBIT NO. DESCRIPTION
----------- -----------

3.1 Amended and Restated Articles of Incorporation of Atlantic
3.2 Bylaws of Atlantic, as amended
4.1 Specimen form of Atlantic's Primary Class Common Share Certificate
4.2 Specimen form of Atlantic's Referral Class Common Share Certificate
4.3 Specimen form of Atlantic's Nonprofit Class Nonvoting Common Share
Certificate
5.1 Opinion and Consent of Wyrick, Robbins, Yates & Ponton L.L.P.
10.1 Form of Subscription and Shareholder Buy/Sell Agreement (Primary
Class Common Shareholder)
10.2 Form of Subscription and Shareholder Buy/Sell Agreement (Referral
Class Common Shareholder)
10.3 Form of Subscription and Shareholder Buy/Sell Agreement (Nonprofit
Class Nonvoting Common Shareholder)
10.4 Form of Non-Exclusive Medical Services Provider Agreement (Primary
Physicians)
10.5 Form of Non-Exclusive Medical Services Provider Agreement (Referral
Physicians)
10.6 Employment Agreement between Atlantic and Robert H. Blake, III
effective as of June 1, 1996
10.7 Lease Agreement dated August 15, 1997 between Atlantic and New Bern
Family Practice, P.A.
10.8 Form of Facility Participation Agreement
10.9 Contract and Lease dated April 23, 1998 between Atlantic and
Joseph E. Thomas
10.10 Contract and Lease dated April 23, 1998 between Atlantic and
Village Cedars, Inc.
23.1 Consent of Wyrick, Robbins, Yates & Ponton L.L.P.(included in
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on page II-5 of Registration Statement
on Form SB-2, page II-5 of the Post-Effective Amendment No. 2 to
the Registration Statement on Form SB-2 and page II-7 of the
Post-Effective Amendment No. 3 to the Registration Statement on
Form SB-2)
27.1 Financial Data Schedule

<PAGE>

ITEM 28. UNDERTAKINGS.

1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the North Carolina Business
Corporation Act, the Articles of Incorporation or the Bylaws of the Registrant,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

2. The undersigned Registrant hereby undertakes that it will:

(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:

(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;

(iii) Include any additional or changed material information
on the plan of distribution.

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-Effective Amendment No. 3 to the Registration Statement on
Form SB-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New Bern and State of North Carolina, on June 23,
1998.
ATLANTIC INTEGRATED HEALTH
INCORPORATED

By /s/ J. Philip Mahaney, Jr., M.D.
-----------------------------------------------
J. Philip Mahaney, Jr., M.D.
President and Chief Executive Officer
(principal executive officer)

By /s/ Stephen W. Nuckolls
-----------------------------------------------
Stephen W. Nuckolls
Chief Financial Officer
(principal financial and accounting officer)

Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities and on the dates stated.

SIGNATURE AND TITLE
-------------------

J. Philip Mahaney, Jr., M.D.
Director

W. James Stackhouse, M.D.
Chairman of the Board, Treasurer and Director

Joseph E. Agsten, M.D.
Director

Charles J. Baio, M.D.
Director

Graham A. Barden, III, M.D.
Director

Michael L. Bramley, M.D.
Director

A. Clark Gaither, M.D. By /s/ J. Philip Mahaney, Jr., M.D.
Director ---------------------------------
J. Philip Mahaney, Jr., M.D.
PRO SE AND ATTORNEY-IN-FACT
Frank L. Gay, M.D. Dated June 23, 1998
Director

Robert A. Krause, M.D.
Director

Robert S. Meyer, M.D.
Director

Leo E. Waivers, M.D.
Director

<PAGE>

James M. Williams, M.D.
Director

Kerry A. Willis, M.D.
Director

POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Philip Mahaney, Jr., M.D. and Robert H. Blake
III, and each of them, as his or her true and lawful attorney-in-fact and agent,
each with full powers of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
(including additional post-effective amendments) to this Post Effective
Amendment No. 3 to the Registration Statement, and any additional Registration
Statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Post Effective
Amendment No. 3 to the Registration Statement on Form SB-2 has been signed by
the following persons in the capacities and on the dates stated.

/s/ Stephen R. Ainsworth, M.D.
--------------------------------------------
Stephen R. Ainsworth, M.D.
Director
June 23, 1998

/s/ John P. Emerick, M.D.
--------------------------------------------
John P. Emerick, M.D.
Director
June 23, 1998

<PAGE>

EXHIBIT INDEX
TO
POST-EFFECTIVE AMENDMENT NO. 3 TO REGISTRATION STATEMENT ON FORM SB-2

ITEM NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of Atlantic (1)
3.2 Bylaws of Atlantic, as amended (1)
4.1 Specimen form of Atlantic's Primary Class Common Share Certificate (1)
4.2 Specimen form of Atlantic's Referral Class Common Share Certificate (1)
4.3 Specimen form of Atlantic's Nonprofit Class Nonvoting Common Share Certificate (1)
5.1 Opinion and Consent of Wyrick, Robbins, Yates & Ponton L.L.P. (1)
10.1 Form of Subscription and Shareholder Buy/Sell Agreement (Primary Class Common (1)
Shareholder)
10.2 Form of Subscription and Shareholder Buy/Sell Agreement (Referral Class Common (1)
Shareholder)
10.3 Form of Subscription and Shareholder Buy/Sell Agreement (Nonprofit Class (1)
Nonvoting Common Shareholder)
10.4 Form of Non-Exclusive Medical Services Provider Agreement (Primary Physicians) (1)
10.5 Form of Non-Exclusive Medical Services Provider Agreement (Referral Physicians) (1)
10.6 Employment Agreement between Atlantic and Robert H. Blake III effective as of (1)
June 1, 1996
10.7 Lease Agreement dated August 15, 1997 between Atlantic and New Bern Family (2)
Practice, P.A.
10.8 Form of Facility Participation Agreement (3)
10.9 Contract and Lease dated April 23, 1998 between Atlantic and Joseph E. Thomas (4)
10.10 Contract and Lease dated April 23, 1998 between Atlantic and Village Cedars, Inc. (4)
23.1 Consent of Wyrick, Robbins, Yates & Ponton L.L.P. (included in Exhibit 5.1) (1)
23.2 Consent of Arthur Andersen LLP (4)
24.1 Power of Attorney (included on page II-5 of Registration Statement on Form SB-2,
page II-5 of the Post-Effective Amendment No. 2 to the Registration Statement
on Form SB-2 and page II-7 of the Post-Effective Amendment No. 3 to the
Registration Statement on Form SB-2)
27.1 Financial Data Schedule (4)

</TABLE>

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

(1) Incorporated by reference to exhibits contained in Atlantic's
Registration Statement on Form SB-2 (File No. 333-5826)

<PAGE>

(2) Incorporated by reference to exhibits contained in Atlantic's
Post-Effective Amendment No. 2 (File No. 333-5826)

(3) Incorporated by reference to exhibits contained in Atlantic's Annual
Report on Form 10-KSB for the year ended December 31, 1997 (File No.
333-5826)

(4) Filed herewith electronically

EXHIBIT 10.9

STATE OF NORTH CAROLINA
COUNTY OF CRAVEN

CONTRACT AND LEASE

THIS CONTRACT AND LEASE, made and entered into this the 23rd day of
April, 1998, by and between JOSEPH E. THOMAS (hereinafter referred to as
"Lessor"); and ATLANTIC INTEGRATED HEALTH, INC. (hereinafter referred to as
"Lessee");

W I T N E S S E T H

WHEREAS, Lessor and Lessee desire to establish the terms and conditions
of a Lease and execute this Contract and lease to so establish such terms.

NOW, THEREFORE, for and in consideration of the Premises, the mutual
promises, and the covenants and considerations contained herein, the parties
hereby do agree as follows:

1. PREMISES. Lessor hereby does let and demise to Lessee the following
Premises: Suite A-5 Thomas Square, 1315 S. Glenburnie Road, New Bern NC 28561.

2. TERM. The term of this Lease shall begin on the 1st day of May,
1998, and shall end (unless sooner terminated as hereinafter provided) at
midnight on the 30st day of April, 1999.

3. RENT. During the term of this lease, Lessee shall pay to Lessor as
rent the sum of $587.00 (Five-hundred eighty-seven and 00/100 dollars) each
month. Such rent is to be paid on or before the 1st day of each month to Lessor
at such place as Lessor may direct. Rent moneys received after the 7th day of
the month will be assessed a late fee of ten percent (10%).

4. USE OF PREMISES. During the term of this Lease and any extension or
extensions thereof, the Premises shall be used and occupied solely for the
purpose of Office Space and Lessee shall not permit the same to be used for any
other purpose without the prior written consent of Lessor.

5. PARKING. Lessee shall have a nonexclusive right to use the several
common areas provided by Lessor and appurtenant to the Premises, including
walks, ramps, driveways and parking areas. The public parking areas provided by
Lessor in and about the premises are acknowledged as being intended primarily
for use by customers on Lessee's Premises and other Premises in the same
building. Lessor shall have the authority to assign parking for Lessee and
Lessee's employees as deemed necessary by Lessor. It is provided, however, that
Lessor from time to time may construct improvements within the parking areas
currently existing for the Premises. Accordingly, the right of use grantee in
this paragraph is limited to those parking areas as from time to time located on
the Premises belonging to Lessor.

6. RESTRICTIVE COVENANTS AND HOMEOWNERS ASSOCIATION. The Premises being
leased are conveyed subject to restrictive covenants of record, if any, and
Lessor and Lessee hereby agree to abide by any and all restrictions, conditions,
easements and covenants contained in the aforesaid restrictive covenants. The
Premises also being leased are conveyed

<PAGE>

subject to the Homeowners Association Rules and Regulations. (Copy attached
which becomes part of this Lease.)

7. DAMAGE TO OTHERS. Lessee shall not permit, allow or cause any act or
deed to be performed or any practice to be adopted or followed in and about the
Premises which shall cause injury or damage to any person or to said Premises,
building, sidewalks, walkways and parking lots which adjoin the Premises. Lessee
shall comply with all rules and regulations governing the use of common areas in
and about the Premises which may from time to time be adopted by Lessor.

8. MAINTENANCE. Lessor, at its sole cost and expense, shall maintain
and keep in good repair the roof, exterior and supporting walls, electrical,
heat/air conditioning unit and plumbing fixtures (with the exclusion of general
maintenance such as changing of light bulbs and air filters), and common areas
such as parking and grassed areas of the Premises. Provided, however, that the
cost of any repairs required as a result of negligence or any willful act by
Lessees, its licensees, agents, servants, employees or invitees, shall be paid
solely by Lessee. Lessee shall be responsible for all glass repair.

9. UTILITIES. Lessee shall be responsible for paying for all utility
services to the Premises and for providing for such utility services in the name
of Lessee.

10. ASSOCIATION FEES. Lessee shall pay monthly Association Fees in the
amount of $45.00 (FORTY-FIVE AND 00/100 DOLLARS). The fees cover common area
cost including insurance, common area lighting, common area maintenance
including ground care. The fees are subject to yearly increases based on
previous years expenses.

11. STRUCTURAL CHANGES: Lessee shall not make any structural changes or
alterations in or to any part of the building in which the Premises are located
or in the Premises except upon the prior written consent of Lessor. All
furnishing, fixtures and equipment installed by Lessee on the Premises may be
removed from the Premises at any time during the term of this Lease. This right
of removal of Lessee shall be contingent upon the Lessee repairing and replacing
any and all damage to the Premises resulting from the removal of such furniture,
fixtures and equipment.

12. LESSEE'S PERSONAL PROPERTY. All of the personal property placed or
installed on the Premises by Lessee shall be at the risk of Lessee, and Lessor
shall not be liable for any damage to or for the destruction of said personal
property, or to the Lessee, however occurring, including, but not limited to,
the bursting or leaking of water or steam pipes or from any willful act or
negligence of any other Lessee on the Premises or occupant of the building in
which the Premises are located, or by any other person or cause whatsoever
unless due to Landlord's failure to properly maintain and repair plumbing
fixtures pursuant to paragraph 8.

13. TAXES. Lessee shall be responsible for the payment of all ad
valorem taxes assessed by any lawful taxing authority of the personal property
of Lessee located on the Premises.

14. SIGNS. Lessee shall arrange for sign announcing Lessee's services
on the exterior of Premises through Custom Signs, New Bern, NC. (Sign subject to
Lessor's approval.)

15. NO ASSIGNMENT OR SUBLETTING. Lessee shall not have the right to
assign this Lease or to sublet the Premises or any part thereof without the
prior written consent of Lessor.

<PAGE>

16. DAMAGE TO PREMISES. In the event the Premises are damaged by fire,
the elements, unavoidable accidents or other casualty, but are not thereby
rendered untenantable either in whole or in part, Lessor , at it's sole expense,
shall cause such damage to be repaired and the rent shall not be abated.

If by reason of any such occurrence the Premises shall be
rendered wholly or partly untenantable, Lessor, at it's option, shall have the
right to either (a) terminate this Lease as of the date of such destruction by
giving written notice to Lessee within thirty (30) days of such date, or (b)
repair and restore the Premises to as good a condition or a better condition as
that existing immediately prior to said occurrence and this Lease shall not
terminate, except that the rent shall abate for that period of time when
Premises are untenantable for the purpose of this Lease. In the event Lessor
elects to repair the Premises pursuant to Subparagraph (b) above, such repairs
shall be completed within ninety (90) days of the date of such occurrence. In
the event such repairs are not so completed, Lessee may terminate this Lease.

17. CONDEMNATION. If the whole or any part of the demised Premises
shall be appropriated and taken by virtue of any condemnation proceeding for any
public or quasi-public use of purpose so as to render the remaining portion
untenantable for the uses and purposes contemplated by the parties, then this
Lease immediately shall terminate on the date possession thereof shall be so
obtained. All or any part thereof, shall become the sole and absolute property
of Lessor, regardless of whether such damages are awarded as compensation for
the diminution in the value of the leasehold or the loss of the fee. The
provisions of this paragraph apply only to the actual Premises demised herein
and shall not be operative to terminate this Lease in the event that said
condemnation or eminent domain proceedings affects only common areas or other
portions of the building in which the Premises are located.

18. INSPECTION. Lessor or its authorized agents or representatives
shall have the right to enter the Premises during all reasonable hours in order
to examine the Premises and shall be allowed to exhibit the Premises to any
prospective lessee at any time with prior notification within one hundred eighty
(180) days prior to the expiration of this Lease as the same may be extended for
time to time.

19. SUBORDINATION. This Lease is subject to and subordinate to all
security liens, mortgages or deeds of trust which may now or hereinafter affect
the Premises or the building in which situated, or the real property upon which
said building is located, and to all renewals, modifications, consolidations,
replacements and extensions thereof. Lessee shall execute promptly any
certificate or any other instrument in confirmation of such subordination that
Lessor from time to time may request.

20. INSURANCE. Lessee shall be responsible at its sole cost and expense
of insuring all items of personal property belonging to Lessee kept on the
Premises against any casualty whatsoever.

Lessee, during the entire term of this Lease, shall keep in
full force and effect a policy of general liability insurance protecting Lessor
and Lessee against any claim or claims for damage arising by reason of injury,
death or damage occasioned in, upon or adjacent to the Premises, such insurance
to protect Lessor and Lessee jointly and severally to the combined single limit
of One Million and No/100 Dollars ($1,000,000.00) for injury to or death of any
one (1) or more persons by the same accident and or damage to property of other
persons. The policy shall name Lessor, any

<PAGE>

person, firm or corporation designated by Lessor and Lessee as the insured, and
shall contain a clause which provides that the insurer shall not cancel or
change the insurance without first giving the Lessor ten (10) days prior written
notice of such change or cancellation. Such insurance shall be with an insurance
company approved by Lessor and a copy of the policy shall be delivered to Lessor
together with evidence satisfactory to Lessor of the payment from time to time
of all required premiums.

21. INDEMNITY. Lessee shall indemnify and hold Lessor harmless from any
and all liability for any damage or injury to any occupant of the building in
which the Premises are contained or to any other person, or to any property,
occasioned by or resulting from the willful, negligent or improper conduct or
omission on the part of Lessee, its agents or employees, from or in or about the
Premises; provided, however, that Lessee shall not be required to indemnify and
hold harmless the Lessor from negligent or improper conduct, acts or omissions
of Lessor's agents, servants or employees.

22. DEFAULT. In the event of any failure of Lessee:

(a) to pay any rent reserved hereunder within fifteen (15)
days after the same shall be due; or

(b) to perform any other of the terms, covenants or conditions
contained in this Lease to be observed or performed by Lessee, and such default
shall continue for more than thirty (30) days after written notice thereof shall
have been mailed to Lessee; or

(c) if Lessee shall become bankrupt or insolvent, or file any
debtor proceeding, or have taken against Lessee in any court pursuant to any
statute either of the Untied States or of any State a petition in bankruptcy or
insolvency or for reorganization or for appointment to a receiver or trustee of
all or any portion of Lessee's property, or if Lessee makes an assignment for
the benefit of creditors, petitions for or enters into an arrangement, or if
Lessee shall abandon the Premises or suffer the Lease to be taken under any
right of execution, then Lessor, without excluding other rights and remedies
that it may have, shall have the immediate right of re-entry and may remove all
persons and property from the Premises and such property may be removed and
stored in a public warehouse or elsewhere at the cost of and for the account of
Lessee, all without resort to legal process and without being deemed guilty of
trespass, or becoming liable for any loss or damage which may be occasioned
thereby. If Lessor should elect to re-enter as herein provided, or should take
possession pursuant to legal proceedings, it may terminate this Lease or it may
from time to time without terminating this Lease make such alterations, and
repairs as may be necessary in order to relet the Premises, and relet said
Premises for such term and at such rentals as Lessor may deem advisable. In the
event of any such reletting, all rentals received by Lessor shall be applied
first to the payment of any indebtedness other than rent due hereunder from
Lessee to Lessor; second, to the payment of any costs and expenses of such
reletting, including the expense of alteration and repair; third, to the payment
of rent due and unpaid hereunder, and the residue, if any, shall be applied by
Lessor in payment of future rent due and unpaid hereunder. If such reletting
shall yield rentals insufficient for any month to pay the rent due by Lessee
hereunder for that month, Lessee shall be liable to Lessor for the deficiency
and the same shall be paid monthly. No such re-entry or taking possession of
Premises by Lessor shall be construed as an election to terminate this Lease
unless a written notice of such intention be given to Lessee by Lessor at the
time of such re-entry. Notwithstanding such re-entry and reletting without
termination, Lessor may at any time thereafter elect to terminate this Lease for
such previous breach, in which event it may recover from Lessee damages incurred
by reason of such breach, including the cost of recovering the Premises and the
difference in value

<PAGE>

between the rent reserved hereunder for the remainder of the term and the
reasonable rental value of the Premises for the remainder of the term.

23. HOLDOVER. In the event Lessee remains in possession of the Premises
after the expiration of the term of this Lease without the execution of a new
Lease or an extension as hereinabove provided, Lessee shall occupy the Premises
under a month-to-month tenancy, subject to all of the conditions of this Lease
insofar as same are consistent with such tenancy.

24. NO PARTNERS. The execution of this Lease or the performance of any
act pursuant to the provisions hereof shall not be deemed or construed to have
the effect of creating between the Lessor and the Lessee the relationship of
principal and agent, partnership, or joint venture.

25. NOTICE. Any notice required hereunder shall be deemed sufficient
notice and service thereof completed upon receipt of refusal of same if same
shall be in writing addressed to the addressee at his last known post office
address, mailed certified or registered, postage prepaid, with return receipt
requested.

26. OTHER TERMS. Lessee will return the unit to the original floor
plan. Lease is contingent upon Lessor's approval of restored floor plan.

27. ENTIRE AGREEMENT. Lessor and Lessee agree that no representations
or inducements have been made other than those expressed herein and that this
Agreement contains the entire agreement between all of the parties hereto.

28. ADDRESS. The address of Lessee to which all notices herein provided
shall be sent is:

Suite A-5 Thomas Square
1315 South Glenburnie Road
New Bern NC 28561

29. ADDRESS. The address of Lessor to which all notices herein provided
shall be sent is:

Joseph E. Thomas
P O Box 14165
New Bern NC 28561

30. REFERENCES / PARAGRAPH HEADINGS / NEGOTIATIONS. Throughout this
Contract and Lease, the masculine gender shall be deemed to include the neuter
and the feminine; the singular, the plural; the plural, the singular; the
corporate, the individual; and the individual, the corporate.

31. RENEWAL. This agreement may be renewed at the expiration of the
initial term by the Lessee, when written notice is given to the Lessor 60 days
before the end of each term, for three one-year term renewals with a rent
increase of three per cent (3%) for each renewal term if all lease terms and
conditions are satisfied by the Lessee.

<PAGE>

32. DUPLICATES. There are duplicate originals hereof.

TESTIMONY WHEREOF, Lessor is an individual and has hereunto
set his hand and adopted as his seal the typewritten word "SEAL" appearing
beside his name.

If Lessee is an individual, Lessee has hereunto set his hand
and adopted as his seal the typewritten word "SEAL" appearing beside his name.;

If Lessee is a corporation, Lessee has caused this instrument
to be executed in its corporate name by its ______ President, attested by its
_______ Secretary, and its corporate seal to be hereto affixed, all by order of
its Board of Directors first duly given;

And, if Lessee is a partnership, Lessee has caused this
instrument to be executed in its partnership name by a general partner who has
adopted as his seal and the seal of the partnership the typewritten word "SEAL"
appearing beside both names, all done this the day and year first above written.

INDIVIDUAL LESSOR: BY: /s/ Joseph E. Thomas (SEAL)
--------------------------------------------
Joseph E. Thomas

INDIVIDUAL LESSEE: (SEAL)
--------------------------------------------
(SEAL)
--------------------------------------------

CORPORATE LEASEE: ATLANTIC INTEGRATED HEALTH INCORPORATED

BY: /s/ J. Philip Mahaney, Jr.
--------------------------------------------
President
----------------
(CORPORATE SEAL)

Attest:

--------------------------------------------------
Secretary
----------------

PARTNERSHIP LESSEE: (SEAL)
--------------------------------------------

BY: (SEAL)
--------------------------------------------
A General Partner

EXHIBIT 10.10

STATE OF NORTH CAROLINA
COUNTY OF CRAVEN

CONTRACT AND LEASE

THIS CONTRACT AND LEASE, made and entered into this the 23rd day of
April, 1998, by and between VILLAGE CEDARS, INC. (hereinafter referred to as
"Lessor"); and ATLANTIC INTEGRATED HEALTH, INC. (hereinafter referred to as
"Lessee");

W I T N E S S E T H

WHEREAS, Lessor and Lessee desire to establish the terms and conditions
of a Lease and execute this Contract and lease to so establish such terms.

NOW, THEREFORE, for and in consideration of the Premises, the mutual
promises, and the covenants and considerations contained herein, the parties
hereby do agree as follows:

1. PREMISES. Lessor hereby does let and demise to Lessee the following
Premises: Suite A4-B Thomas Square, 1315 S. Glenburnie Road, New Bern NC 28561.

2. TERM. The term of this Lease shall begin on the 1st day of May,
1998, and shall end (unless sooner terminated as hereinafter provided) at
midnight on the 30th day of April, 1999.

3. RENT. During the term of this lease, Lessee shall pay to Lessor as
rent the sum of $150.00 (ONE-HUNDRED FIFTY AND 00/100 DOLLARS) each month. Such
rent is to be paid on or before the 1st day of each month to Lessor at such
place as Lessor may direct. Rent moneys received after the 7th day of the month
will be assessed a late fee of ten percent (10%).

<PAGE>

subject to the Homeowners Association Rules and Regulations. (Copy attached
which becomes part of this Lease.)

9. UTILITIES. Lessor shall be responsible for paying for all utility
services to the Premises.

10. ASSOCIATION FEES. Lessee shall pay monthly Association Fees in the
amount of $22.50 (TWENTY-TWO AND 50/100 DOLLARS). The fees cover common area
cost including insurance, common area lighting, common area maintenance
including ground care. The fees are subject to yearly increases based on
previous years expenses.

12. LESSEE'S PERSONAL PROPERTY. All of the personal property placed or
installed on the Premises by Lessee shall be at the risk of Lessee, and Lessor
shall not be liable for any damage to or for the destruction of said personal
property, or to the Lessee, however occurring, including, but not limited to,
the bursting or leaking of water or steam pipes or from any willful act or
negligence of any other Lessee on the Premises or occupant of the building in
which the Premises are located, or by any other person or cause whatsoever
unless due to landlord's failure to properly maintain and repair plumbing
fixtures pursuant to paragraph 8.

13. TAXES. Lessee shall be responsible for the payment of all ad
valorem taxes assessed by any lawful taxing authority of the personal property
of Lessee located on the Premises.

14. SIGNS. Lessee shall arrange for sign announcing Lessee's services
on the exterior of Premises through Custom Signs, New Bern, NC. (Sign subject to
Lessor's approval.)

15. NO ASSIGNMENT OR SUBLETTING. Lessee shall not have the right to
assign this Lease or to sublet the Premises or any part thereof without the
prior written consent of Lessor.

<PAGE>

16. DAMAGE TO PREMISES. In the event the Premises are damaged by fire,
the elements, unavoidable accidents or other casualty, but are not thereby
rendered untenantable either in whole or in part, Lessor , at it's sole expense
, shall cause such damage to be repaired and the rent shall not be abated.

20. INSURANCE. Lessee shall be responsible at its sole cost and expense
of insuring all items of personal property belonging to Lessee kept on the
Premises against any casualty whatsoever.

<PAGE>

22. DEFAULT. In the event of any failure of Lessee:

(a) to pay any rent reserved hereunder within fifteen (15)
days after the same shall be due; or

<PAGE>

between the rent reserved hereunder for the remainder of the term and the
reasonable rental value of the Premises for the remainder of the term.

26. OTHER TERMS. Lessee will return the unit to the original floor
plan. Lease is contingent upon Lessor's approval of restored floor plan.

28. ADDRESS. The address of Lessee to which all notices herein provided
shall be sent is:

Suite A-5 Thomas Square
1315 South Glenburnie Road
New Bern NC 28561

29. ADDRESS. The address of Lessor to which all notices herein provided
shall be sent is:

Village Cedars, Inc.
3305 Clarendon Blvd.
New Bern NC 28562

31. RENEWAL. This agreement may be renewed at the expiration of the
initial term by the Lessee, when written notice is given to the Lessor 60 days
before the end of each term. All conditions for the renewal of this lease shall
be negotiated at the expiration of the initial lease term.

32. DUPLICATES. There are duplicate originals hereof.

<PAGE>

TESTIMONY WHEREOF, Lessor is an individual and has hereunto
set his hand and adopted as his seal the typewritten word "SEAL" appearing
beside his name.

If Lessee is an individual, Lessee has hereunto set his hand
and adopted as his seal the typewritten word "SEAL" appearing beside his name.;

Village Cedars, Inc.

CORPORATE LESSOR: BY: /s/ (SEAL)
--------------------------------------------

INDIVIDUAL LESSEE: (SEAL)
--------------------------------------------
(SEAL)
--------------------------------------------

CORPORATE LEASEE: ATLANTIC INTEGRATED HEALTH INCORPORATED

BY: J. Philip Maheny, Jr.
--------------------------------------------------
President
----------------

(CORPORATE SEAL)

Attest:

--------------------------------------------------
Secretary
----------------

PARTNERSHIP LESSEE: (SEAL)
--------------------------------------------

BY: (SEAL)
--------------------------------------------
A General Partner

EXHIBIT 23.2

As independent public accountants, we hereby consent to the use of our report
(and all references to our firm) included in or made a part of this registration
statement.

/s/ Arthur Andersen LLP

Charlotte, North Carolina,
June 22, 1998.

<ARTICLE> 5

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