PHYSICIANS SPECIALTY CORP, 424B1, 1997-03-21

PHYSICIANS SPECIALTY CORP
424B1, 1997-03-21
OFFICES & CLINICS OF DOCTORS OF MEDICINE

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<PAGE> 1
Filed pursuant to rule 424(b)(1)
PROSPECTUS

(LOGO) PHYSICIANS' SPECIALTY CORP.
2,200,000 SHARES
PHYSICIANS' SPECIALTY CORP.

COMMON STOCK
---------------------

Physicians' Specialty Corp. (the "Company") hereby offers 2,200,000 shares
of Common Stock, par value $.001 per share (the "Common Stock"), of the Company.
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock. The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "ENTS." See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price.
---------------------

THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION. SEE "RISK
FACTORS" COMMENCING ON PAGE 11.
---------------------

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 PROCEEDS TO
PUBLIC UNDERWRITING DISCOUNTS COMPANY(2)
AND COMMISSIONS(1)
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $8.00 $.56 $7.44
- - -----------------------------------------------------------------------------------------------------
Total(3)........................ $17,600,000 $1,232,000 $16,368,000
=====================================================================================================
</TABLE>

(1) Does not include additional compensation to be received by Southcoast
Capital Corporation ("Southcoast") and/or Barington Capital Group, L.P.
("Barington"), the representatives (the "Representatives") of the several
underwriters (the "Underwriters"), including (i) a consulting fee of
$487,000 payable to Barington and (ii) warrants to purchase 220,000 shares
of Common Stock at an exercise price of $10.80 per share (the
"Representatives' Options"). The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company (including
the consulting fee referred to above) estimated at $1,387,000.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
330,000 additional shares of Common Stock on the same terms and conditions
as set forth herein, solely to cover over-allotments, if any (the
"Over-Allotment Option"). If the Over-Allotment Option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
and Proceeds to Company will be $20,240,000, $1,416,800 and $18,823,200,
respectively. See "Underwriting."
---------------------

THE SHARES OF COMMON STOCK OFFERED HEREBY ARE OFFERED, SUBJECT TO PRIOR
SALE, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS, AND SUBJECT
TO THE APPROVAL OF CERTAIN LEGAL MATTERS BY THEIR COUNSEL AND TO CERTAIN OTHER
CONDITIONS. THE UNDERWRITERS RESERVE THE RIGHT TO WITHDRAW, CANCEL OR MODIFY
THIS OFFERING AND TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT
DELIVERY OF THE CERTIFICATES REPRESENTING THE COMMON STOCK WILL BE MADE AT THE
OFFICES OF SOUTHCOAST CAPITAL CORPORATION, 277 PARK AVENUE, NEW YORK, NEW YORK
10172 ON OR ABOUT MARCH 26, 1997.
---------------------

SOUTHCOAST CAPITAL BARINGTON CAPITAL GROUP, L.P.
CORPORATION
The date of this Prospectus is March 20, 1997
<PAGE> 2

MAP OF METRO ATLANTA PHYSICIAN OFFICE LOCATION

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING TRANSACTIONS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information.

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<PAGE> 3

As used in this Prospectus, unless the context otherwise requires, the
"Company" refers to (i) Physicians' Specialty Corp., a Delaware corporation,
(ii) its wholly-owned subsidiaries, PSC Management Corp. ("PSC Management"), PSC
Acquisition Corp. ("PSC Acquisition") and PSC Alabama Corp. ("PSC Alabama"), and
(iii) the ENT Networks (as defined), which will become wholly-owned subsidiaries
in connection with the Reorganization (as defined). See "The Reorganization."
Unless otherwise indicated, the information in this Prospectus (i) assumes no
exercise of the Over-Allotment Option or the Representatives' Option, (ii) gives
effect to a .6875 for 1 reverse stock split effected in November 1996, and (iii)
gives effect to the completion of the Reorganization upon the closing of the
Offering. The consummation of the Offering is conditioned upon the simultaneous
closing of the Reorganization. Investors should carefully consider the
information set forth under the heading "Risk Factors."

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus and accordingly, should be read in conjunction with such
information, financial statements and notes thereto. Each prospective investor
is urged to read this Prospectus in its entirety.

THE COMPANY

Physicians' Specialty Corp. was recently organized to provide comprehensive
physician practice management services to physician practices and health care
providers specializing in the treatment and management of diseases and disorders
of the ear, nose and throat, head and neck ("ENT"). The Company's primary
objective is to develop, manage and integrate ENT physician and related
specialty practices which will provide high quality, cost effective medical and
surgical services to fee-for-service patients and capitated managed care
enrollees. The Company will provide financial and administrative management,
enhancement of clinical operations, network development and payor contracting
services, including the negotiation and administration of capitated
arrangements. Following the Reorganization, the Company will be affiliated with
23 physicians, one dentist and 26 allied health care professionals operating 19
clinical locations.

THE REORGANIZATION

Concurrently with the closing of the Offering, the Company will effect the
Reorganization in which the Company will acquire (i) substantially all of the
assets of Atlanta Ear, Nose & Throat Associates, P.C. ("Atlanta ENT"), which was
founded in 1979 and is today, the largest ENT group practice in the State of
Georgia, three additional ENT practices in the metropolitan Atlanta area (the
"Additional Atlanta Practices") and one ENT practice in Birmingham, Alabama
("Birmingham ENT") (collectively, the "Initial Practices"); and (ii) the common
stock of three corporations (collectively, the "ENT Networks") which hold,
manage and administer capitated ENT managed care contracts covering an aggregate
of approximately 361,000 enrollees of health maintenance organizations ("HMOs")
sponsored by United HealthCare of Georgia ("United HealthCare"), Aetna Health
Plans of Georgia ("Aetna") and Cigna HealthCare of Georgia ("Cigna"). In
connection with the Reorganization, the Company will enter into management
services agreements with the physician practices providing for the comprehensive
management of the practices by the Company, while enabling the practices to
retain authority over the provision of medical care.

INDUSTRY TRENDS

Increasing concern over the rising cost of health care in the United States
has led to the emergence and increasing prominence of managed care. Because many
fee-for-service arrangements for compensating health care providers fail to
create incentives for the efficient utilization of resources and are generally
believed to contribute to health care cost increases, many payors are selecting
alternative reimbursement methods, such as capitated arrangements, which shift
the financial risk of delivering health care from payors to providers. Under
capitated arrangements, the health care provider or other contracting party
(e.g. the ENT Networks) is typically paid by HMOs or other third-party payors a
fixed amount per enrollee per month. In return, the

3
<PAGE> 4

contracting party, directly or indirectly, is responsible for the provision of
substantially all medical services, as set forth in the agreement with the
third-party payor, required by the payor's enrollees.

While the acceptance of greater responsibility and risk under capitated
arrangements provides physicians with the opportunity to retain and enhance
market share and generate a more predictable level of revenues, the acceptance
of capitation carries with it significant requirements for infrastructure,
information systems, capital, network resources and management. Individual
physicians and small group practices tend to have limited administrative
capacity, limited capital to invest in new clinical equipment and technologies
and typically lack the information systems necessary to negotiate and manage
sophisticated risk-sharing contracts with payors. As a result, individual
physicians and small group practices are increasingly affiliating with large
group practices and physician practice management companies, such as the
Company, which offer physicians clinical information and practice management
systems, administrative support, network development and payor contracting
services.

Based upon a 1994 American Group Practice Association study, the Company
estimates that 1994 revenues generated by ENTs in the United States exceeded $6
billion. According to the American Academy of Otolaryngology-Head and Neck
Surgery, Inc. (the "Academy"), there were approximately 8,400 ENT specialists in
the United States as of December 31, 1995. The Company estimates that
approximately 70% of all ENT practices consist of individual practitioners or
small (less than four physician) group practices. Although the Company's
operations will be initially located in the Southeastern United States, the
Company intends to expand its physician practice management services to ENT and
related specialty physician practices throughout the United States. In general,
physician practice management companies have captured only a small percentage of
total medical service revenues, and there can be no assurance that the Company
will be able to capture a significant amount of the revenues generated by ENT
practices throughout the United States. The Company believes that upon
completion of the Offering, it will be the leading physician practice management
company focusing solely or substantially on acquiring assets of and managing ENT
physician practices.

STRATEGY

The Company's primary objective is to develop, manage and integrate ENT
physician and related specialty practices into comprehensive networks for the
provision of high quality, cost-effective ENT medical and surgical services to
capitated managed care enrollees and fee-for-service patients. The key elements
of the Company's implementation strategy are to:

Acquire and Affiliate with ENT and Related Specialty Practices. The
Company intends to associate with additional ENT physician practices and
health care providers specializing in the treatment and management of
diseases and disorders of the ear, nose and throat, head and neck,
including specialists practicing in the fields of allergy, audiology, oral
surgery, plastic surgery and sleep medicine (collectively the "Related
Specialties"), either by acquiring assets or equity of practices
("affiliated practices") of physicians or other health care providers and
entering into management service agreements with such practices, or by
contracting with physician practices and independent physicians to provide
network administration services.

Implement and Expand Information Systems. The Company intends to
implement on a Company-wide basis a comprehensive network administration
and utilization management system utilized by Atlanta ENT (the "Capitated
Network System").

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<PAGE> 5

believes that the experience of Atlanta ENT and the ENT Networks in
capitated managed care arrangements and the development of the Capitated
Network System, will enhance the Company's ability to market to managed
care payors the services of Atlanta ENT, as well as other practices
affiliating with the Company, and negotiate risk sharing arrangements with
additional managed care payors.

The Company believes that as a result of the experience of the physicians
at Atlanta ENT in (i) providing ENT medical and surgical services, (ii)
negotiating, managing and administering capitated managed care contracts and
(iii) developing and utilizing sophisticated information systems, including the
Capitated Network System, the Company is well-positioned to acquire and manage
additional ENT practices, to negotiate capitated managed care contracts and to
capture a growing market share of capitated arrangements. The Company is
evaluating and is in various stages of discussions with respect to the potential
acquisition of assets or equity of other ENT physician practices and Related
Specialty practices but, except as part of the Reorganization, has no agreements
or arrangements with respect to any particular additional acquisition and there
can be no assurance that any additional acquisitions will be completed.

The Company's revenues will initially be derived (i) under a management
services agreement with Atlanta ENT (including the Additional Atlanta
Practices), substantially all of the assets of which will be acquired by the
Company in the Reorganization; (ii) from patient services revenues generated by
the physicians of Birmingham ENT (who will be employed directly by a
wholly-owned subsidiary of the Company); and (iii) under capitated management
care contracts held by the ENT Networks (which will become wholly-owned
subsidiaries of the Company in connection with the Reorganization). Under the
management services agreements, all non-governmental accounts receivable and
proceeds of governmental accounts receivable relating to fee-for-service
revenues generated by the practice will be assigned to the Company, which will
(i) be responsible for payment of all operating and non-operating expenses of
the physician practice, (ii) retain a management fee based upon a percentage of
the revenues and (iii) remit to the physician practice the balance to pay
physician and physician assistant compensation and benefits. The Company's
revenues under the management services agreements will be derived from amounts
equal to the expenses paid by the Company plus a varying percentage of the
revenues of the affiliated physician practices. The affiliated physician
practices are responsible for the payment of compensation to physicians and
physician assistants. In states where the Company can employ physicians, such as
Alabama, the Company's revenues will equal all of the fee-for-service revenues
generated by the practice. Under the managed care contracts, the Company, as
owner of the ENT Networks, will be entitled to all of the capitated fees
received from the HMOs . The Company will bear the capitation risk under these
agreements, as it will compensate each participating physician providing ENT
medical and surgical services to the HMO's enrollees on a discounted
fee-for-service basis.

The Company was incorporated in Delaware in July 1996. The Company's
executive offices are located at The Medical Quarters, 5555 Peachtree Dunwoody
Road, Suite 235, Atlanta, Georgia 30342 and its telephone number is (404)
256-7535.

5
<PAGE> 6

THE OFFERING

Common Stock offered hereby......... 2,200,000 shares

Common Stock to be outstanding after
the Offering(1)..................... 5,904,768 shares

Use of Proceeds..................... For working capital, including future
acquisitions and expansion of the
Company's information systems; to repay
outstanding indebtedness of the Initial
Practices and the Company and to pay a
consulting fee. See "Use of Proceeds"
and "Certain Transactions."

Nasdaq National Market symbol....... ENTS

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

(1) Includes an aggregate of 3,104,875 shares of Common Stock to be issued in
connection with the Reorganization. Excludes (i) 550,000 shares of Common
Stock reserved for issuance under the Company's 1996 Stock Option Plan,
under which (a) options to purchase 247,460 shares of Common Stock have
been granted, of which 67,490 are currently exercisable, and (b) options to
purchase 179,980 shares of Common Stock have been granted, effective upon
the closing of the Offering, of which 44,995 will be exercisable upon the
closing of the Offering; (ii) 275,000 shares of Common Stock reserved for
issuance under the Company's 1996 Health Care Professionals Stock Option
Plan, under which options to purchase 25,000 shares of Common Stock have
been granted, effective upon the closing of the Offering, none of which
will be exercisable until the first anniversary of the closing of the
Offering; and (iii) 220,000 shares of Common Stock issuable upon exercise
of the Representatives' Options. The Company will incur charges to
operations in connection with the grant of options to certain non-
employees. See "Management -- Stock Option Plans," "Description of Capital
Stock," "Underwriting" and Note 8 to the Financial Statements of the
Company.

6
<PAGE> 7

SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

The Company was incorporated in July 1996 and commenced operations in
August 1996 through the acquisition of the computer hardware of the ENT Networks
and the utilization of the Capitated Network System. The following summary
unaudited pro forma combined financial data gives effect to the Reorganization
as a combination of promoter interests, at historical costs, under generally
accepted accounting principles, and should be read in conjunction with the
financial statements of the Company, Atlanta ENT, Birmingham ENT and the ENT
Networks and notes thereto included elsewhere herein, the unaudited pro forma
combined financial statements of the Company and notes thereto included
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The financial data set forth below reflect
the unaudited pro forma combined historical financial data of Atlanta ENT, the
Additional Atlanta Practices, Birmingham ENT and the ENT Networks as of and for
the periods indicated. Unless otherwise indicated, the unaudited pro forma
statement of operations data set forth below give effect to the Reorganization,
the reverse stock split and the implementation of the Company's management
services agreements with Atlanta ENT and Birmingham ENT as if such transactions
had occurred on January 1, 1996. The unaudited pro forma balance sheet data
gives effect to such transactions as if such transactions had been consummated
on the balance sheet date. The summary unaudited pro forma information does not
purport to represent what the Company's financial position or results of
operations actually would have been had the Reorganization in fact occurred on
the dates indicated, or to project the Company's financial position or results
of operations for any future date or period. The pro forma adjustments are based
on currently available information and certain assumptions that the Company
believes are reasonable under the circumstances.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
1996
-----------------
<S> <C>
SUMMARY STATEMENT OF OPERATIONS DATA:
Patient service revenues..................................................... $ 1,339
Capitation revenues.......................................................... 4,453
Management fees.............................................................. 12,682
------
Net revenues................................................................. 18,474
Expenses:
Physician compensation..................................................... 422
Salaries, wages and benefits............................................... 6,413
General and administrative................................................. 4,671
Bad debt expense........................................................... 200
Depreciation and amortization.............................................. 436
Provider claims............................................................ 3,217
------
Operating expenses........................................................... 15,359
------
Operating income............................................................. $ 3,115
======
Pro forma net income(1)...................................................... $ 1,903
Pro forma net income per share(1)............................................ $ .32
Weighted average shares outstanding.......................................... 5,959

PRO FORMA OPERATING DATA AT END OF PERIOD:
Number of affiliated physicians (including physicians employed by the
Company)................................................................... 24
Number of allied health care professionals................................... 26
Number of other employees.................................................... 115
Number of clinical locations................................................. 19
Number of capitated covered lives............................................ 360,537
</TABLE>

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<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
SUMMARY BALANCE SHEET DATA:
Working capital...................................................... $ 1,823 $ 15,856
Total assets......................................................... 7,593 20,800
Total debt........................................................... 1,774 0
Stockholders' equity................................................. 2,839 17,820
</TABLE>

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

(1) Atlanta ENT, two of the Additional Atlanta Practices and the ENT Networks
were S corporations for federal and state income tax purposes and,
accordingly, were not subject to corporate income taxes. The pro forma net
income and net income per share for the year ended December 31, 1996 have
been computed as if the Company were subject to federal and state corporate
income taxes based on the corporate income taxes in effect during the year
ended December 31, 1996 and the Reorganization had been completed prior to
such period.
(2) Adjusted to reflect the sale of the 2,200,000 shares of Common Stock offered
hereby, the receipt of the net proceeds therefrom, and the application of
such net proceeds to repay indebtedness of the Initial Practices and the
Company. See "Use of Proceeds" and "Certain Transactions."

8
<PAGE> 9

THE REORGANIZATION

Concurrently with the closing of the Offering, the Company will acquire (i)
substantially all of the assets of (a) Atlanta ENT, (b) Metropolitan Ear, Nose &
Throat, P.C., Atlanta Head and Neck Surgery, P.C. and Ear, Nose & Throat
Associates, P.C. (the "Additional Atlanta Practices") and (c) W.J. Cornay, III,
M.D., P.C. ("Birmingham ENT") from the respective practice and (ii) all of the
outstanding shares of common stock of ENT Center of Atlanta, Inc., Atlanta ENT
Center for Physicians, Inc. and Atlanta-AHP, Inc., the three corporations
comprising the ENT Networks, from Ramie A. Tritt, M.D., (the "Seller") the
Chairman of the Board and President of the Company (the "Reorganization"). All
references herein to any of the Initial Practices include the respective
predecessors of each practice.

The ENT Networks were formed by the Seller to enter into and administer the
capitated managed care contracts with United HealthCare, Aetna and Cigna. Upon
the closing of the Reorganization, the ENT Networks will become wholly-owned
subsidiaries of the Company. As a result, capitation fees paid by United
HealthCare, Aetna and Cigna under the capitated managed care contracts will be
received directly by the Company, through the ENT Networks. The ENT Networks are
expected to retain their participation agreements with physicians, including
physicians at Atlanta ENT, pursuant to which such physicians provide all of the
ENT medical and surgical services required by enrollees of these HMOs on a
discounted fee-for-service basis.

The aggregate purchase price payable to Atlanta ENT and the Seller in
connection with the Reorganization is $22,140,000, of which $14,390,000 is
payable to Atlanta ENT and $7,750,000 is payable to the Seller. The entire
purchase price is payable in shares of Common Stock. Accordingly, the Company
will issue an aggregate of 2,767,500 shares of Common Stock to Atlanta ENT and
to the Seller. The allocation of such shares between Atlanta ENT and the Seller
was based upon the initial public offering price of the Common Stock, with the
number of shares issuable to the Seller to equal $7,750,000 divided by the
initial public offering price and the remaining shares of Common Stock issuable
to Atlanta ENT. Accordingly, the Seller will receive 968,750 shares of Common
Stock and Atlanta ENT will receive 1,798,750 shares of Common Stock. Upon the
liquidation of the existing professional corporation constituting Atlanta ENT,
the shares of Common Stock issued to it will be distributed to its stockholders
and optionholders, 486,562 of which shares will be distributed to Dr. Tritt,
based on his percentage ownership of Atlanta ENT. As a result, upon completion
of the Reorganization and the Offering, Dr. Tritt will beneficially own
approximately 30% of the outstanding Common Stock of the Company.

In connection with the acquisition of substantially all of the assets of
Atlanta ENT, Atlanta ENT will transfer the medical assets not acquired by the
Company to a newly-formed professional corporation ("New Atlanta ENT"), which
will simultaneously enter into a management services agreement with the Company
and employment agreements with its physicians. Unless the context otherwise
requires, all references herein to Atlanta ENT include New Atlanta ENT. The
management services agreement provides for the assignment to the Company by
Atlanta ENT of all or substantially all of its non-governmental accounts
receivable and all of its rights and interest in the proceeds of its
governmental accounts receivable (or the revenue it receives) and grants to the
Company the right to collect and retain the proceeds of the accounts receivable
(or revenue) for the Company's account to be applied in accordance with the
agreement. The Company will be responsible for the payment of operating and
non-operating expenses of Atlanta ENT (excluding compensation to physicians and
physician assistants) and will pay for all such expenses directly out of the
proceeds of the accounts receivable (or revenues) assigned to the Company by
Atlanta ENT. In addition, the Company will retain a management fee equal to a
stipulated percentage of all revenues (after adjustment for contractual
allowances) generated by or on behalf of physicians practicing at Atlanta ENT,
subject to specified maximum annual amounts, as payment for the Company's
services and non-allocable costs incurred by the Company attributable to the
provision of management services under the management services agreement. In
addition, the Company will be entitled to incentive compensation under the
management services agreements upon the receipt by the Company of specified
maximum annual management fees. The remaining revenues will be remitted to
Atlanta ENT to pay physician and physician assistant compensation and benefits.

9
<PAGE> 10

The purchase price payable to Birmingham ENT and the Additional Atlanta
Practices is $979,000, subject to adjustment, and $1,720,000, respectively,
payable in shares of Common Stock. As a result, the Company will issue an
aggregate of 337,375 shares of Common Stock to such practices in connection with
the Reorganization. Upon liquidation of the existing professional corporations
constituting the Additional Atlanta Practices and Birmingham ENT, the shares of
Common Stock issued to each practice will be distributed to each practice's
respective stockholders based upon their percentage ownership of such practice.
The physicians at the Additional Atlanta Practices will enter into employment
agreements with Atlanta ENT and participation agreements with each of the ENT
Networks, and the revenues generated by such physicians will be governed by the
management services agreement between Atlanta ENT and the Company. In addition,
certain of the clinical offices of the Additional Atlanta Practices will be
consolidated into clinical offices of Atlanta ENT. Simultaneous with the
Reorganization, the physicians at Birmingham ENT will enter into employment
agreements with PSC Alabama, a wholly-owned subsidiary of the Company. The
revenues generated by such physicians will be governed by a management services
agreement between PSC Alabama and the Company which will be substantially
similar to the management services agreement between Atlanta ENT and the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Company Operations," "Management" and
"Certain Transactions."

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<PAGE> 11

RISK FACTORS

THE SHARES OFFERED HEREBY INVOLVE SUBSTANTIAL RISKS AND SHOULD BE PURCHASED
ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN THE LOSS OF THEIR INVESTMENT. THE
FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL DATA
SET FORTH ELSEWHERE IN THIS PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE MAKING AN INVESTMENT IN THE
SHARES. THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS ARE NOT
INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC RISKS INVOLVED, BUT
MERELY IDENTIFY CERTAIN RISKS THAT ARE NOW FORESEEN BY THE COMPANY. IT MUST BE
RECOGNIZED THAT OTHER RISKS, NOT NOW FORESEEN, MIGHT BECOME SIGNIFICANT IN THE
FUTURE AND THAT THE RISKS WHICH ARE NOW FORESEEN MIGHT AFFECT THE COMPANY TO A
GREATER EXTENT THAN IS NOW FORESEEN OR IN A MANNER NOT NOW CONTEMPLATED. EACH
PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER ALL INFORMATION CONTAINED IN THIS
PROSPECTUS AND SHOULD GIVE PARTICULAR CONSIDERATION TO THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO PURCHASE THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS INCLUDES FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING THOSE SET FORTH BELOW, AND ACTUAL RESULTS MAY VARY FROM
THOSE CURRENTLY ANTICIPATED.

LIMITED OPERATING HISTORY; NO PRIOR HISTORY OF AND RISKS ASSOCIATED WITH
COMBINED OPERATIONS

The Company was formed in July 1996 and commenced operations by acquiring
certain of the assets (primarily computer hardware) of, and entering into a
management services agreement with, the ENT Networks, which agreement will
terminate upon the consummation of the Reorganization, and negotiating the
agreements relating to the Reorganization. For the period from July 31, 1996
(inception) through December 31, 1996, the Company had revenues of $51,000 and
an operating loss of $355,000. The Company has a limited operating history, and
will not commence operation as a physician practice management company until
completion of the Offering. Atlanta ENT, each of the Additional Atlanta
Practices and Birmingham ENT have operated as separate independent medical
practices with separate independent management and there can be no assurance
that the Company will be able to manage and operate such medical practices
successfully or that the Company will be able to implement its business plans or
achieve profitable operations.

RISKS RELATING TO ACQUISITIONS AND MANAGING GROWTH; NEED FOR ADDITIONAL FUNDS;
POTENTIAL SUBSTANTIAL LEVERAGE

A key element of the Company's strategy is to expand through acquisitions
of assets or equity of practices of established specialty physicians or other
health care professionals. Although Atlanta ENT, the Additional Atlanta
Practices, Birmingham ENT and the ENT Networks have had substantial operations
in their respective geographic regions, the Company has no experience in
integrating and managing multiple or multi-state specialty physician practices.
As the Company expands through acquisitions, the Company will be required to
hire and retain additional management and administrative personnel and develop
and expand operational systems to support its growth. This growth will continue
to place significant demands on the Company's management, technical, financial
and other resources. The Company is evaluating and is in various stages of
discussions in connection with the potential acquisition of assets or equity of
several ENT physician practices and Related Specialty practices. However, the
Company has no agreements or arrangements with respect to the terms of any
particular acquisitions (other than the agreements with Atlanta ENT, the
Additional Atlanta Practices, Birmingham ENT and the ENT Networks). Accordingly,
there can be no assurance that the Company will be able to acquire the assets or
equity of or profitably provide management services to any other specialty
physician practices that may be acquired in the future. In addition, there can
be no assurance that the Company will be able to acquire additional specialty
physician practice assets on terms favorable to the Company, that the operations
of any such practices can be successfully integrated into the Company's
business, that any anticipated benefits of the practice asset acquisitions will
be realized, or that there will not be substantial unanticipated costs
associated with the acquisition. The failure to manage growth

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effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.

Although the Company intends to use a substantial portion of the proceeds
of the Offering for certain ENT physician practice and other Related Specialty
practice acquisitions including some which it is currently evaluating, it will
require significant additional funds for future acquisitions and integration and
management of affiliated practices. The Company also intends to issue its
securities in connection with acquisitions, which could result in the dilution
of existing equity positions. The Company may also incur indebtedness to fund
future acquisitions and has received a commitment letter for a $20,000,000
credit facility with NationsBank, N.A. (South) which will be effective
concurrently with the closing of the Offering (the "Credit Facility").
Borrowings available under the Credit Facility to provide financing for the
acquisition of assets of physician practices and for working capital will be
governed by, among other factors, the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA"). There can be no assurance that amounts
available under the Credit Agreement will be sufficient to fund future
acquisitions or, if such amounts are not sufficient, that the Company will be
able to obtain additional financing on terms acceptable to the Company or at
all. An inability to obtain such financing on favorable terms could limit the
Company's growth. As the Company acquires additional physician practice assets,
the Company may incur significant charges for depreciation and amortization and,
to the extent financed through borrowing, interest expense which could adversely
affect the Company's future results of operations and may result in net losses.
See "-- Broad Discretion In Use of Proceeds; Inability of Stockholders to
Evaluate Future Acquisitions," "-- Risks Relating to Credit Facility;
Consequences of Default and Covenants Expected Under Credit Facility,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Strategy."

BROAD DISCRETION IN USE OF PROCEEDS; INABILITY OF STOCKHOLDERS TO EVALUATE
FUTURE ACQUISITIONS

The Company has broad discretion with respect to the use of a substantial
portion of the net proceeds of the Offering which the Company intends to use to
acquire additional specialty practice assets. In addition to the practice assets
to be acquired in connection with the Reorganization, the Company is engaged in
discussions with several practices with ENT and Related Specialties; however,
except with respect to the Reorganization, the Company has no agreements or
arrangements with respect to any particular future acquisitions and,
accordingly, it will have significant flexibility in identifying and selecting
prospective acquisition candidates. The Company does not intend to seek
stockholder approval for any acquisition, including those currently being
evaluated, unless required to do so by applicable law or regulations.
Accordingly, stockholders will not have an opportunity to review financial or
other information relating to acquisition candidates prior to consummation of an
acquisition. See "Use of Proceeds" and "Business -- Strategy."

DEPENDENCE ON AFFILIATED PHYSICIANS

All of the Company's revenues will initially be derived (i) under a
management services agreement with Atlanta ENT (which will include the
physicians of the Additional Atlanta Practices practicing at Atlanta ENT), (ii)
from patient service revenues generated by the Company's wholly-owned
subsidiary, PSC Alabama, which will directly employ the physicians of Birmingham
ENT, and (iii) under capitated HMO contracts held by the ENT Networks, each of
which will become a wholly-owned subsidiary of the Company in connection with
the Reorganization. Revenues to be derived by the Company under management
services agreements will depend on the fees and revenues generated by physicians
employed by the physician practices, the assets or equity of which are acquired
by the Company, including physicians at Atlanta ENT, the Additional Atlanta
Practices and Birmingham ENT ("affiliated physicians") and, to a lesser extent,
independent physicians contracting with the Company to participate in provider
networks which may be developed by the Company ("independent physicians" and,
together with affiliated physicians, "associated physicians"). Revenues to be
derived by the Company under the capitated managed care contracts depend on the
continued participation of the physicians providing medical services to the
HMO's enrollees. Although affiliated physicians, including the stockholders of
Atlanta ENT, the Additional Atlanta Practices and Birmingham ENT, are expected
to enter into employment agreements with their respective practices, there can
be no assurance as to the continued services of any particular physician. In
particular, Dr. Tritt is expected

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to devote less time to his medical practice at Atlanta ENT as a result of his
responsibilities to the Company. Associated physicians can typically terminate
their agreements to provide medical services under managed care contracts by
providing notice of such termination to the payor. Termination of these
agreements by associated physicians may result in termination by the payor of a
managed care contract between the Company and the payor. Any material loss of
revenue by affiliated physicians and, to a lesser extent, independent
physicians, whether as a result of the loss of network physicians or the
termination of managed care contracts resulting from the loss of network
physicians or otherwise, could have a material adverse effect on the Company's
business, financial condition and operating results. All of the employment
agreements with affiliated physicians will contain restrictive covenant
provisions pursuant to which each physician will agree not to compete with or
solicit patients or personnel from any affiliated practice. However, under
Alabama law, certain types of restrictive covenants, including non-compete
covenants, are deemed to be unenforceable as against professionals (including
physicians), and under Georgia law, such provisions may be deemed to be
unenforceable if a court determines that the duration of the restriction, the
territory covered by such restriction or the activities restricted were
unreasonable. See "Business -- Company Operations."

RISKS ASSOCIATED WITH CAPITATED ARRANGEMENTS INCLUDING RISK OF OVER-UTILIZATION
BY HMO ENROLLEES, RISK OF REDUCTION OF CAPITATED RATES AND REGULATORY RISKS

During 1996, approximately 76% of the pro forma combined net revenues of
the Company were derived from payments made on a fee-for-service basis by
patients and third-party payors (including government programs) and
approximately 24% of the pro forma combined net revenues of the Company were
derived from capitated arrangements. Under capitated arrangements, the health
care provider typically accepts a pre-determined amount per patient per month
from the payor in exchange for providing all necessary covered services to the
patients covered under the agreement. Such contracts pass much of the financial
risk of providing care, such as over-utilization, from the payor to the
provider.

Pursuant to the managed care contracts held by the ENT Networks, which will
become wholly-owned subsidiaries of the Company in connection with the
Reorganization, the Company through the ENT Networks, will receive such
pre-determined capitation fees from the HMOs. However, the Company will
compensate associated physicians on a discounted fee-for-service basis for
providing ENT medical and surgical services to enrollees of the HMOs. Because
the Company will incur costs based on the frequency and extent of services
provided by such physicians, but will only receive a fixed fee for agreeing to
provide such services, to the extent that the enrollees covered by such HMO
contracts require more frequent or extensive care than is anticipated, the
Company's operating margins may be reduced and, in certain cases, the revenues
derived from such contracts may be insufficient to cover the costs of the
services provided. In either event, the Company's business, financial condition
and operating results may be materially adversely affected. As an increasing
percentage of patients enroll in managed care arrangements, the Company's future
success will depend, in part, upon its ability to negotiate, on behalf of
associated physicians, contracts with managed care payors on terms favorable to
the Company and upon the effective management of health care costs through
various methods, including utilization management and review and competitive
pricing for purchased services. The proliferation of capitated contracts in
markets served by the Company could result in increased predictability of
revenues, but decreased predictability of operating margins. There can be no
assurance that the Company will be able to negotiate, on behalf of associated
physicians, satisfactory arrangements on a capitated basis or that such
arrangements will be profitable to the Company in the future. In addition, in
certain jurisdictions, not including Georgia, capitated agreements in which the
provider bears the risk are regulated under insurance laws. As a result, the
Company may be limited in Alabama and other states in which it may seek to
operate in its attempt to enter into or arrange capitated agreements for its
associated physicians when those capitated arrangements involve the assumption
of risk. See "-- Dependence on Contracts with Managed Care Organizations."

DEPENDENCE ON CONTRACTS WITH MANAGED CARE ORGANIZATIONS

The Company's ability to expand is dependent in part on increasing the
number of managed care enrollees served by associated physicians, primarily
through negotiating additional and renewing existing contracts with managed care
organizations and contracting, on a favorable basis, with additional associated

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physicians to provide medical services to such enrollees. Obtaining new
contracts increasingly involves a competitive bidding process. The Company will
be required to accurately anticipate the costs associated physicians will incur
in providing services under such contracts so that the Company only undertakes
contracts under which it can expect to realize adequate profit margins or
otherwise meet its objectives. There can be no assurance that the Company will
be successful in contracting with sufficient numbers of associated physicians to
meet the requirements of managed care organizations or in negotiating contracts
with managed care organizations on terms favorable to the Company and associated
physicians. Three HMOs, United HealthCare, Aetna and Cigna, together accounted
for 24% of pro forma combined net revenues of the Company for the year ended
December 31, 1996. Prior to the Reorganization, the physicians of the Additional
Atlanta Practices and Birmingham ENT did not generate material revenues under
capitated managed care contracts. Agreements with the three HMOs are generally
subject to 90 to 120 day cancellation by either party, and are subject to annual
renegotiation of rates, covered benefits and other terms and conditions. In
conjunction with the recent acquisition of U.S. HealthCare by Aetna Inc.,
representatives of Aetna Inc. have indicated a desire to convert the Aetna
capitated ENT managed care contract to an expanded panel (non-capitated)
modified shared risk arrangement which may be expanded to include the facility
component (inpatient and ambulatory surgery center services) as well as the
professional component (physician services) of ENT care. Although the Company is
unable to predict if and when such modification will occur, the Company does not
believe that any such change will have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that any of these managed care agreements can be renewed or, if
renewed, that they will contain terms favorable to the Company and associated
physicians. The loss of any of these contracts or significant reductions in
capitated reimbursement rates under these contracts could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Risks Associated with Capitated Arrangements Including Risk
of Over-Utilization by HMO Enrollees, Risk of Reduction of Capitated Rates and
Regulatory Risks," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Managed Care Contracts."

POTENTIAL REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYORS

The health care industry is undergoing significant change as third-party
payors attempt to control the cost, utilization and delivery of health care
services. Substantially all of net revenues of Atlanta ENT, the Additional
Atlanta Practices, Birmingham ENT and the ENT Networks on a pro forma combined
basis have been, and are expected to continue to be, derived from HMOs,
commercial insurers, Medicare and other third-party payors. Both government and
private payment sources have instituted cost containment measures designed to
limit payments made to health care providers by reducing reimbursement rates,
limiting services covered, increasing utilization review of services,
negotiating prospective or discounted contract pricing, adopting capitation
strategies and seeking competitive bids. There can be no assurance that such
measures will not adversely affect the amounts or types of services that may be
reimbursable in the future, or the future reimbursement (including reductions in
capitated rates) for any service offered by associated physicians, either of
which could have a material adverse effect on the Company's business, financial
condition or operating results. The Company believes that these trends will
continue to result in a reduction from historical levels in per patient revenues
at Atlanta ENT, the Additional Atlanta Practices, Birmingham ENT and the ENT
Networks. Furthermore, government reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government restrictions, all of which could materially decrease the
range of services covered by such programs or the reimbursement rates paid for
the ENT medical and surgical services provided by associated physicians. Such
future reductions or changes would have a material adverse effect on the
Company's business, financial condition or operating results. Reimbursement
rates vary depending on the type of third-party payors. Changes in the
composition of third-party payors from higher reimbursement rate payors to lower
reimbursement rate payors could have an adverse effect on the Company's
operating results. See "-- Dependence on Contracts with Managed Care
Organizations."

CONTROL OF COMPANY BY RAMIE A. TRITT, M.D.; POTENTIAL ANTI-TAKEOVER PROVISIONS

Upon the completion of the Offering, Dr. Tritt, the Chairman of the Board
and President of the Company, will beneficially own approximately 30% of the
outstanding Common Stock of the Company and

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<PAGE> 15

the officers and directors of the Company in the aggregate will beneficially own
approximately 34.8% of the outstanding shares of Common Stock of the Company
(33.0% if the Over-Allotment Option is exercised in full). As a result, Dr.
Tritt will generally be able to influence significantly the election of
directors, outcome of corporate transactions or other matters submitted for
stockholder approval. Such influence by Dr. Tritt could preclude any unsolicited
acquisition of the Company and consequently adversely affect the market price of
the Common Stock. In addition, the Company's Board of Directors is authorized to
issue from time to time, without stockholder authorization, shares of preferred
stock with such terms and conditions as the Board of Directors may determine in
its sole discretion. The Company is also subject to a Delaware statute
regulating business combinations. Any of these provisions could discourage,
hinder or preclude an unsolicited acquisition of the Company and could make it
less likely that stockholders receive a premium for their shares as a result of
any such attempt, which may adversely affect the market price of the Common
Stock. In addition, upon the occurrence of certain events, including the merger
of the Company and a sale of all or substantially all of the assets of the
Company, all outstanding options under the Company's 1996 Stock Option Plan will
become immediately exercisable. The employment agreements with the Company's
executive officers allow for termination by the executives and the payment of
severance compensation to the executives upon a change of control of the
Company. See "Management," "Principal Stockholders" and "Description of Capital
Stock."

COMPETITION

The physician practice management and network administration industry in
the United States generally, and in the Southeastern United States specifically,
is highly competitive. The restructuring of the United States health care system
is leading to rapid consolidation of the health care delivery system into larger
and more organized groups and networks of health care providers. The Company
expects competition to increase as a result of this consolidation and ongoing
cost containment pressures, among other factors. The Company will compete with
management services organizations, for-profit and nonprofit hospitals, HMOs and
other competitors seeking to form strategic alliances with or provide management
services to physicians. The Company is unable to predict the extent of future
competition because of changing competitive conditions, changes in laws and
regulations, government budgeting, technological and economic developments and
other factors. In addition, certain companies, including hospitals and insurers,
that are expanding their presence in the physician services business, are
significantly larger, provide a wider variety of services, have greater
experience in providing physician practice management services, have longer
established relationships for these services and have access to substantially
greater financial resources than the Company. See "Business -- Competition."

The Company believes that competition for fee-for-service revenue is
dependent upon, among other things, the geographic coverage of affiliated
practices, the reputation and referral patterns of affiliated physicians, the
breadth of ENT medical and surgical services provided by physicians practicing
at affiliated practices and the composition of the physicians at such practices.
The Company's ability to compete successfully for specialty capitated managed
care contracts with managed care organizations may depend upon, among other
things, the Company's ability to increase the number of associated physicians
and other health care professionals included in its network provider panel,
through asset acquisitions of additional specialty practices and by entering
into network administration agreements with independent physicians. The Company
will compete with several substantially larger physician practice management and
related companies in identifying and acquiring or contracting with such
physician practices or physicians. There can be no assurance the Company will be
able to associate with a sufficient number of competent physicians and other
health care professionals to expand its business.

Associated physicians also compete in certain markets, including the
Atlanta market, with substantial numbers of other ENT specialists as well as
general practitioners. The success of the Company is dependent upon the ability
of the Company or practices managed by the Company to recruit, train and retain
qualified health care professionals in new and existing markets. The Company
faces competition for these personnel from other health care providers, research
and academic institutions, government entities and other organizations. The
availability of such personnel is limited, and the inability to recruit and
maintain

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relationships with these individuals in certain geographic areas could have a
material adverse effect on the Company's future growth and operations. There can
be no assurance that sufficient numbers of qualified health care professionals
can be hired and retained. The Company's inability to hire and retain such
healthcare professionals could have a material adverse effect on the Company's
operations. In addition, a shortage of skilled personnel or the delay resulting
from a need to train personnel could have a material adverse effect on the
Company's business, financial condition or operating results.

GOVERNMENT REGULATION

Various state and federal laws regulate the relationships between providers
of health care services, physicians and other clinicians. These laws, among
others, include the Medicare and Medicaid anti-kickback statute and the
so-called "Stark Law." The anti-kickback statute prohibits the offer, payment,
solicitation or receipt of any direct or indirect remuneration in return for the
referral of patients for items or services, or for the ordering or arranging for
the furnishing of items or services for which payment may be made under Medicare
or Medicaid or other federally-funded health care programs. The "Stark Law"
imposes restrictions on physicians' referrals for certain designated health
services to entities with which they have financial relationships. Violations of
these laws may result in substantial civil or criminal penalties, denial of
payment, and/or exclusion from participation in the Medicare, Medicaid and other
federally-funded health care programs. In addition, under separate statutes,
submission of claims for payment that are "not provided as claimed" may lead to
civil or criminal penalties or exclusion from participation in the Medicare,
Medicaid and other federally-funded programs. Such exclusion if applied to
Atlanta ENT (including the physicians of the Additional Atlanta Practices),
Birmingham ENT or any other physician practice acquired by the Company, could
result in a significant loss of reimbursement. A determination of liability
under any such laws could have a material adverse effect on the Company's
business, financial condition and operating results.

Several states, including Georgia and Alabama, have adopted laws similar to
the federal "anti-kickback" and "anti-referral" laws that cover patients in
private programs as well as government programs. The laws of many states also
prohibit physicians from splitting fees with non-physicians and the laws of some
states, including certain states in which the Company operates or may operate,
prohibit non-physician entities from practicing medicine or from exercising
control over the professional judgments or decisions of physicians concerning
the treatment and diagnosis of patients. In Georgia, there is case law which
could also be interpreted as prohibiting a corporation from employing
physicians, but the continued viability of such doctrine in Georgia is unclear.
In Alabama, recent interpretations by state authorities have indicated that a
corporation may employ physicians as long as the physicians exercise their
independent professional judgment in rendering medical decisions concerning the
treatment and diagnosis of patients. The two physicians at Birmingham ENT will
be employed by PSC Alabama, a wholly-owned subsidiary of the Company, pursuant
to employment agreements which contain a provision which requires that PSC
Alabama will not interfere with the physicians' ability to exercise independent
professional and ethical judgment in rendering medical decisions concerning the
treatment and diagnosis of patients. While the Company has structured its
arrangements to comply with applicable state laws, these laws and their
interpretation vary from state to state and are enforced by the courts and by
regulatory authorities with material discretion. A determination of liability
under any such laws could have a material adverse effect on the Company.

Although the Company believes that its operations will be in substantial
compliance with existing applicable laws, the Company's business operations have
not been the subject of judicial or regulatory interpretation. There can be no
assurance that upon review, the Company's business and its contractual
arrangements with the Initial Practices and any practices with which it has
arrangements with in the future will not be successfully challenged as
constituting the unlicensed practice of medicine. There can be no assurance that
review of the Company's business and its arrangements with affiliates by courts
or regulatory authorities will not result in determinations that could adversely
affect the operations of the Company or that the health care regulatory
environment will not change so as to restrict the Company's operations or their
expansion. In addition, the regulatory requirements of certain jurisdictions may
limit the Company's expansion into, or ability to continue operations within,
such jurisdictions if the Company is unable to modify its operational structure
to conform with such regulatory requirements. Any limitation on the Company's
ability

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to expand could have a material adverse effect on the Company's operations. See
"Business -- Government Regulation."

HEALTH CARE REFORM

Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Changes in the law,
new interpretations of existing laws, or changes in payment methodology or
amounts, may have a dramatic effect on the relative costs associated with doing
business and the amount of reimbursement provided by government and other third
party payors. In addition to specific health care legislation, both the
President and the Congress have expressed an interest in controlling the
escalation of health care expenditures and using health care reimbursement
policies to help control the federal deficit. In recent years, there have been
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The Company
believes that such initiatives will continue during the foreseeable future.
Aspects of certain of these reforms as proposed in the past, 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 the Company. In addition, some
states in which the Company operates or may operate in the future are also
considering various health care reform proposals. The Company anticipates that
federal and state governments will continue to review and assess alternative
health care delivery systems and payment methodologies, and that public debate
of these issues will likely continue in the future. Due to uncertainties
regarding the ultimate features of reform initiatives and their enactment and
implementation, the Company cannot predict which, if any, of such reform
proposals will be adopted, when they may be adopted or what impact they may have
on the Company, and there can be no assurance that the adoption of reform
proposals will not have a material adverse effect on the Company's business,
financial condition or operating results. In addition, the actual announcement
of reform proposals and the investment community's reaction to such proposals,
as well as announcements by competitors and third-party payors of their
strategies to respond to such initiatives, could produce volatility in the
trading and market price of the Common Stock of the Company. See "Business --
Government Regulation."

RISKS RELATING TO CREDIT FACILITY; CONSEQUENCES OF DEFAULT AND COVENANTS
EXPECTED UNDER CREDIT FACILITY

The Company has received a commitment letter for the Credit Facility,
effective upon satisfaction by the Company of certain conditions including
completion of the Offering and repayment of all indebtedness of the Company.
There can be no assurance that sufficient borrowings (which will be governed by,
among other factors, the Company's EBITDA) will be available to fund future
proposed acquisitions or for working capital. Advances under the Credit Facility
would bear interest at a variable rate. Accordingly, increases in interest rates
would increase the Company's interest expense and would adversely affect the
Company's cash flow and results of operations. The Company will grant to the
bank a security interest in the capital stock of the Company's subsidiaries,
including the ENT Networks, and all accounts receivable of the Company,
including the accounts receivable of affiliated practices assigned to the
Company under the management services agreements. In addition, the Company will
be required to maintain certain financial ratios, limit the amounts of
additional indebtedness, dividends, advances to officers, stockholders and
physicians, investments and advances to subsidiaries and restrict changes in
management and the Company's business. Therefore, in the event of a default
under the credit agreement or a bankruptcy, liquidation or reorganization of the
Company, such stock and assets would be available to the bank to satisfy the
Company's obligations to the bank before any payment could be made to the
Company's stockholders and, in such event, the Company's stockholders could lose
all or a substantial portion of their investment in the Company. The Company's
ability to generate sufficient cash flow to meet obligations incurred under the
Credit Facility will depend on the Company's future operations, which will in
turn, be subject to prevailing industry, economic, regulatory, and other
factors, many of which are beyond the Company's control. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL MANAGEMENT

The Company's success depends to a significant extent on Ramie A. Tritt,
M.D., the Company's Chairman of the Board and President, a principal stockholder
of the Company (and, immediately prior to the Reorganization, the sole
stockholder of the ENT Networks and a principal stockholder of Atlanta ENT) and
Richard D. Ballard, the Company's Chief Executive Officer. The loss of Dr. Tritt
or Mr. Ballard could have a material adverse effect on the development and
ultimate likelihood of success of the Company's business. Although the Company
has entered into a five year and a three year employment agreement with Dr.
Tritt and Mr. Ballard, respectively, there can be no assurance that the Company
will be able to retain their services. The Company intends to obtain "key-man"
insurance coverage on both Dr. Tritt and Mr. Ballard.

The Company believes that its future success will depend in part upon its
ability to attract and retain additional management personnel. The Company has
entered into an employment agreement with Robert A. DiProva who will become an
Executive Vice President and the Chief Financial Officer of the Company upon the
closing of the Offering. The Company anticipates recruiting additional executive
officers and management personnel following the closing of the Offering.
Competition for such personnel is intense and the Company will compete for
qualified personnel with numerous other employers, some of whom have greater
financial and other resources than the Company. There can be no assurance that
the Company will be successful in attracting or retaining such personnel. See
"Management."

BENEFITS OF THE OFFERING TO INSIDERS

The Company intends to use a portion of the net proceeds of the Offering to
repay the outstanding balance of loans made to the Company by Gerald R.
Benjamin, Vice Chairman of the Board and a principal stockholder of the Company,
Atlanta ENT, Dr. Tritt, and two entities whose principal stockholders were
former directors of the Company in the aggregate principal amount of $578,000 as
of February 28, 1997 (the "Founders' Loans") and to repay outstanding
indebtedness of the Initial Practices in the aggregate principal amount of
approximately $1,600,000 as of February 28, 1997. In connection with the
repayment of the outstanding indebtedness of Atlanta ENT, guarantees with
respect to such indebtedness made by stockholders of Atlanta ENT, including Dr.
Tritt, will be cancelled. The Company will also use $250,000 of the net proceeds
of the Offering to pay a consulting fee to an affiliate of Mr. Benjamin. In
connection with the Reorganization, Dr. Tritt will receive 1,455,312 shares of
Common Stock, with a value on the date of this Prospectus of $11,642,496.
However, such shares of Common Stock are subject to regulatory and contractual
restrictions on resale and their ultimate value will depend on the market price
of the Common Stock in the future. In addition, the Company has entered into
employment agreements with each of Mr. Ballard, Mr. Benjamin, Mr. Kraska and Mr.
DiProva providing for annual salaries of $150,000, $60,000, $130,000 and
$120,000, respectively, plus performance related bonuses and has entered into an
employment agreement with Dr. Tritt providing for an initial annual salary of
$350,000, subject to adjustment, plus a performance related bonus. Each of Dr.
Tritt and Mr. Benjamin will devote only a portion of their time as executive
officers of the Company. See "Use of Proceeds," "Management -- Employment
Agreements" and "Certain Transactions."

POTENTIAL CONFLICTS OF INTEREST

There have been and are currently agreements by and among the Company,
Atlanta ENT and the ENT Networks and each of their respective officers,
directors and affiliates, and entities controlled by such officers, directors
and affiliates. In addition, Dr. Tritt, the Company's Chairman of the Board and
President, will continue as a physician at Atlanta ENT and will be subject to
competing demands on his time. Any future transactions and agreements between
the Company and such individuals and entities are subject to approval by a
majority of the Board of Directors, including a majority of the independent
directors. See "Management -- Employment Agreements" and "Certain Transactions."

POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS

The provision of health care services entails the substantial risk of
potential claims of medical malpractice and similar claims. The Company does
not, itself, engage in the practice of medicine or assume responsibility

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for compliance with regulatory requirements directly applicable to physicians
and will require associated physicians to maintain medical malpractice
insurance. Nevertheless, there can be no assurance that claims will not be
asserted against the Company in the event that services provided by physicians
at Atlanta ENT (including the physicians at the Additional Atlanta Practices),
Birmingham ENT or any affiliated practice are alleged to have resulted in injury
or other adverse effects. Although the Company expects to obtain liability
insurance effective upon the closing of the Offering that it believes will be
adequate as to both risk and amounts, successful malpractice claims could exceed
the limits of the Company's insurance and could have a material adverse effect
on the Company's business, financial condition or operating results. Moreover,
there can be no assurance that the Company will be able to obtain such insurance
on commercially reasonable terms or that any such insurance will provide
adequate coverage against potential claims. In addition, a malpractice claim
asserted against the Company could be costly to defend, could consume management
resources and could adversely affect the Company's reputation and business,
regardless of the merit or eventual outcome of such claim. In addition, in
connection with the acquisition of assets of Atlanta ENT, the Additional Atlanta
Practices and Birmingham ENT, the Company is assuming certain of the stated
liabilities of such practices. Additionally, claims may be asserted against the
Company for events related to Atlanta ENT, the Additional Atlanta Practices or
Birmingham ENT that occurred prior to the Reorganization. The Company expects to
obtain insurance coverage effective upon the closing of the Offering related to
those risks that it believes is adequate as to the risks and amounts, although
there can be no assurance that any successful claims will not exceed applicable
policy limits or that the Company will be able to obtain such insurance on
commercially reasonable terms. In addition, the Company is negotiating liability
insurance, on behalf of Atlanta ENT (including the Additional Atlanta Practices)
and Birmingham ENT, that will become effective on the closing of the
Reorganization and the Offering and will name the Company as an additional
insured. See "Business -- Liability and Insurance" and "-- Legal Proceedings."

TECHNOLOGICAL CHANGE

The health care information industry is relatively new and is experiencing
rapid technological change, changes in physician and payor needs, frequent new
product introductions and evolving industry standards. As the computer and
software industries continue to experience rapid technological change, the
Company must be able to quickly and successfully adapt its clinical information
systems so that they continue to integrate well with the computer platforms and
other software employed by associated physicians. There can be no assurance that
the Company will not experience difficulties that could delay or prevent the
successful development and introduction of system enhancements or new systems in
response to technological changes. The Company's inability to respond to
technological changes in a timely and cost-effective manner could have a
material adverse effect on the Company's business, financial condition and
results of operations and on the price of the Common Stock by reducing the
Company's ability to efficiently and accurately analyze and anticipate the costs
incurred by associated physicians providing medical services pursuant to
capitated managed care contracts. See "Business -- Information Systems."

ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common
Stock, and there is no assurance that an active market for the Common Stock will
develop or be sustained after the Offering. The initial public offering price
will be determined by negotiation between the Company and the Underwriters and
may bear no relationship to the price at which the Common Stock will trade after
completion of the Offering. See "Underwriting" for factors to be considered in
determining such offering price. The market price of the Common Stock following
the Offering could be subject to significant fluctuations in response to a
number of factors, including variations in the Company's quarterly operating
results, changes in estimates of the Company's earnings, perceptions about
market conditions in the health care industry or the impact of various health
care reform proposals and general economic conditions, some of which are
unrelated to the Company's operating performance. In addition, the stock market
generally has experienced significant price and volume fluctuations. These
market fluctuations could have an adverse effect on the market price or
liquidity of the Common Stock.

19
<PAGE> 20

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Future sales of shares of Common Stock by existing stockholders pursuant to
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"),
through the exercise of outstanding registration rights or through the issuance
of shares of Common Stock upon exercise of options, warrants or otherwise, could
have an adverse effect on the price of the Company's Common Stock. The 2,200,000
shares of Common Stock offered hereby will be freely tradeable without
restriction under the Securities Act, except if any shares are purchased by
"affiliates" as defined under Rule 144. The remaining 3,704,768 shares
outstanding upon completion of the Offering (including the shares of Common
Stock issued in connection with the Reorganization) are "restricted securities"
as that term is defined under Rule 144 and may not be sold publicly unless they
are registered under the Securities Act or are sold pursuant to Rule 144 or
another exemption from registration. Of the restricted securities, 550,000,
11,225 and 38,668 shares issued in connection with the formation of the Company
will become eligible for sale pursuant to Rule 144 commencing August 1997,
November 1997 and December 1997, respectively. An additional 67,490 shares of
Common Stock issuable upon the exercise of vested options will also become
eligible for sale in the public market pursuant to Rule 701 and Rule 144 under
the Securities Act beginning 90 days from the date of this Prospectus. Holders
of all of such shares (including all individuals receiving Common Stock in the
Reorganization) have agreed not to sell, transfer or otherwise dispose of any of
their shares for a period of 12 months from the date of this Prospectus without
the prior written consent of Southcoast on behalf of the Underwriters. In
addition, the holders of the Representatives' Options have certain demand and
"piggyback" registration rights with respect to their securities and all
existing holders of the Common Stock (the "Existing Stockholders") and all
holders acquiring shares of Common Stock in connection with the Reorganization
(the "Acquisition Stockholders") will have "piggyback" registration rights with
respect to their shares of Common Stock. The sale of a substantial number of
shares of Common Stock in the public market, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
impair the Company's ability to raise additional capital in the future. See
"Management -- Stock Option Plans," "Shares Eligible for Future Sale" and
"Underwriting."

DILUTION; RECENT SALES OF COMMON STOCK AT PRICES SUBSTANTIALLY BELOW INITIAL
PUBLIC OFFERING PRICE

In connection with the formation of the Company in July 1996, Bock Benjamin
& Co., Partners, L.P., a partnership of which Gerald R. Benjamin, the Company's
Vice Chairman and Secretary, is a partner, and Ramie A. Tritt, M.D., the
Company's Chairman of the Board and President, were each issued, in August 1996,
275,000 shares of Common Stock, at a purchase price of approximately $.0018 per
share. In November and December 1996, Dr. Tritt and Bock Benjamin & Co.,
Partners, L.P. purchased an aggregate of 49,893 shares of Common Stock at an
average purchase price of approximately $.01 per share. In connection with the
Reorganization, the Company will issue an aggregate of 3,104,875 shares of
Common Stock, of which Dr. Tritt, as the owner of the ENT Networks and as a
shareholder of Atlanta ENT, will receive an aggregate of 1,455,312 shares of
Common Stock. See "The Reorganization." Investors purchasing shares of Common
Stock in the Offering will incur immediate and substantial net tangible book
value dilution of approximately $4.98 per share, or 62.3%. This dilution will be
increased to the extent that holders of outstanding options to purchase Common
Stock at prices below the initial public offering price exercise such options.
See "Dilution," "Principal Stockholders" and "Certain Transactions."

ABSENCE OF DIVIDENDS.

The Company has never paid any cash dividends on its Common Stock and does
not intend to pay cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for the development of its
business. The Credit Facility contemplates restrictions on the payment of
dividends. See "Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

20
<PAGE> 21

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby, and after deducting underwriting discounts and the
estimated expenses of the Offering payable by the Company, are estimated to be
approximately $14,981,000 ($17,436,200 if the Over-Allotment Option is exercised
in full).

<TABLE>
<CAPTION>
APPROXIMATE
EXPECTED APPLICATION AMOUNT
- - -------------------------------------------------------------------------------- -----------
<S> <C>
Working capital................................................................. $12,547,000
Repayment of indebtedness of the Initial Practices.............................. 1,559,000
Repayment of Company indebtedness............................................... 625,000
Consulting fee.................................................................. 250,000
-----------
$14,981,000
===========
</TABLE>

Working capital is expected to be used to fund future Company acquisitions
of physician practice assets, for capital equipment and information systems and
for general corporate purposes, including general and administrative expenses.
An integral part of the Company's business strategy is to grow through
acquisitions. Although the Company is evaluating and is engaged in discussions
in connection with the potential acquisitions of the assets or equity of
additional ENT physician practices and Related Specialty practices, except with
respect to the practice assets being acquired in connection with the
Reorganization, the Company has no agreements relating to any particular
additional acquisition and there can be no assurance that any such acquisitions
will be consummated. See "Risk Factors -- Risks Relating to Acquisitions and
Managing Growth; Need for Additional Funds; Potential Substantial Leverage,"
"Business -- Strategy" and "Certain Transactions."

The Company intends to repay outstanding indebtedness of (i) Atlanta ENT in
the principal amount of approximately $1,111,000, plus accrued interest ($7,000
at February 28, 1997), of which 45% is guaranteed by Dr. Tritt. This
indebtedness was incurred in connection with leasehold improvements, expansion
of offices and equipment purchases, matures on July 10, 2001 and accrues annual
interest at the prime rate less 0.25%, (ii) the Additional Atlanta Practices in
the aggregate principal amount of $330,000, plus accrued interest ($900 at
February 28, 1997), which was incurred in connection with working capital and
equipment loans, matures on varying dates and accrues annual interest based upon
an index above the prime rate and (iii) Birmingham ENT in the aggregate
principal amount of $110,000, with no accrued interest, which was incurred in
connection with working capital and the purchase of a vehicle, matures between
December 1998 and March 2000 and accrues annual interest at rates ranging from
7.25% to 8%. Certain of the indebtedness has been incurred since December 31,
1996.

The Company will also repay Company indebtedness in the principal amount of
$598,000, plus accrued interest ($26,780 at February 28, 1997), owed to Atlanta
ENT, officers and principal stockholders of the Company and two entities whose
principal stockholders were former directors of the Company, (i) $578,000 of
which was incurred to pay legal, accounting and other fees in connection with
the formation of the Company, the Reorganization and the Offering and is
evidenced by promissory notes maturing on the earlier of completion of the
Offering or June 30, 1997 and bearing simple interest at a prime rate as
announced by NationsBank of Georgia, N.A. ("NationsBank") and (ii) $20,000 of
which was incurred in connection with the acquisition of certain assets
(primarily computer hardware) of the ENT Networks and is evidenced by a
promissory note maturing on the earlier of completion of the Offering or June
30, 1997 and bearing simple interest at a prime rate as announced by
NationsBank. Certain of the indebtedness has been incurred since December 31,
1996. See "Certain Transactions."

The consulting fee is payable on the closing of the Offering to Premier
HealthCare, an affiliate of Gerald R. Benjamin, the Vice Chairman of the Board
and Secretary of the Company, in connection with the formation of the Company,
the Offering and the Reorganization.

Pending such uses, the Company intends to invest the net proceeds of this
Offering in short-term, investment grade, interest-bearing securities. The
foregoing represents the Company's best estimate of the allocation of the net
proceeds based upon currently contemplated operations, current legislation and
regulatory, economic and industry conditions. Accordingly, such allocation is
subject to reapportionment

21
<PAGE> 22

among the categories described above or to new categories in response to, among
other things, changes in the Company's plans and results of operations as well
as changes in regulatory, economic, industry and competitive conditions.

DIVIDEND POLICY

The Company expects that it will retain all earnings, if any, generated by
its operations for the development and growth of its business and does not
anticipate paying any cash dividends to its stockholders in the foreseeable
future. Any future determination as to dividend policy will be made by the Board
of Directors of the Company in its discretion, and will depend on a number of
factors, including the future earnings, if any, capital requirements, financial
condition and business prospectus of the Company and such other factors as the
Board of Directors may deem relevant. In addition, the Credit Facility restricts
the payment of cash dividends. See "Risk Factors -- Absence of Dividends" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

22
<PAGE> 23

CAPITALIZATION

The following table sets forth at December 31, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization giving effect
to the consummation of the Reorganization and the related issuance of an
aggregate of 3,104,875 shares of Common Stock and (iii) the pro forma
capitalization as adjusted to give effect to the sale of the 2,200,000 shares of
Common Stock offered hereby, the receipt of the estimated net proceeds therefrom
and the application of the net proceeds to repay outstanding indebtedness of the
Company and the Initial Practices. See "Use of Proceeds." This table should be
read in conjunction with the Financial Statements and the notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- -----------
<S> <C> <C> <C>
Total debt(1)........................................... $ 505,000 $1,774,289 $ 0
Stockholders' Equity:
Preferred Stock, $1.00 par value; 10,000 authorized;
no shares issued and outstanding................... -- -- --
Common Stock, $.001 par value; 50,000,000 shares
authorized; 599,893 shares issued and outstanding
actual; 3,704,768 shares issued and outstanding pro
forma and 5,904,768 shares issued and outstanding
pro forma as adjusted(2)........................... 600 3,705 5,905
Additional paid-in capital.............................. 343,711 2,697,447(3) 17,676,247(3)
Retained Earnings....................................... (354,601) 138,044 138,044
-------- ---------- -----------
Total stockholders' equity.................... (10,290) 2,839,196 17,820,196
-------- ---------- -----------
Total capitalization.......................... $ 494,710 $4,613,485 $17,820,196
======== ========== ===========
</TABLE>

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

(1) Excludes capital lease obligations. See Note 7 to Financial Statements of
Atlanta ENT and Note 4 to Financial Statements of Birmingham ENT.
(2) Includes an aggregate of 3,104,875 shares of Common Stock to be issued in
connection with the Reorganization. Excludes (i) 550,000 shares of Common
Stock reserved for issuance under the Company's 1996 Stock Option Plan,
under which (a) options to purchase 247,460 shares of Common Stock have
been granted, of which 67,490 are currently exercisable and (b) options to
purchase 179,980 shares of Common Stock have been granted, effective upon
the closing of the Offering, of which 44,995 will be exercisable upon the
closing of the Offering; (ii) 275,000 shares of Common Stock reserved for
issuance under the Company's 1996 Health Care Professionals Stock Option
Plan, under which options to purchase 25,000 shares of Common Stock have
been granted, effective upon the closing of the Offering, none of which
will be exercisable until the first anniversary of the closing of the
Offering and (iii) 220,000 shares of Common Stock issuable upon exercise of
the Representatives' Options. The Company will incur charges to operations
in connection with the grant of options to certain non-employees. See
"Management -- Stock Option Plans," "Description of Capital Stock,"
"Underwriting" and Note 8 to the Financial Statements of the Company.
(3) See Notes 9 and 10 to the Unaudited Pro Forma Combined Financial Statements
of the Company.

23
<PAGE> 24

DILUTION

The Company had a pro forma combined net tangible book value as of December
31, 1996 of approximately $(10,300), or approximately $(.02) per share. Net
tangible book value per share is equal to the Company's total tangible assets
less its total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the Reorganization the pro forma net
tangible book value at December 31, 1996 would have been approximately
$2,839,000 or $.77 per share. After giving further effect to the sale of the
2,200,000 shares of Common Stock in the Offering and receipt and application of
the estimated net proceeds therefrom to repay indebtedness, the pro forma net
tangible book value at December 31, 1996 would have been approximately
$17,820,000 or approximately $3.02 per share. This represents an immediate
increase in such net tangible book value of approximately $3.04 per share to
existing stockholders and an immediate dilution in net tangible book value of
approximately $4.98 per share to new investors purchasing shares in the
Offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share................................ $8.00
Net tangible book value before the Reorganization and the Offering... $(.02)
Increase per share attributable to the Reorganization................ .79
Increase per share attributable to the Offering...................... 2.25
-----
Pro forma net tangible book value per share after the Reorganization
and the Offering..................................................... 3.02
-----
Dilution of net tangible book value per share to new investors......... $4.98
=====
</TABLE>

The following table sets forth, giving effect to the completion of the
Reorganization and the Offering, the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by the Existing Stockholders, by the Acquisition Stockholders, and by new
investors in the Offering (before deducting the underwriting discount and
estimated offering expenses):

<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.............. 599,893 10.2% $ 1,311 0.0% $ .0022
Acquisition Stockholders........... 3,104,875 52.6 2,839,196(1) 13.9 .91
New Investors...................... 2,200,000 37.2 17,600,000 86.1 8.00
--------- ------- ----------- ------ -
Total.................... 5,904,768 100.0% 20,440,507 100.0%
========= ======= =========== =======
</TABLE>

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

(1) Represents the pro forma combined net tangible book value of the assets of
the Initial Practices and the ENT Networks acquired by the Company in
exchange for an aggregate of 3,104,875 shares of Common Stock in connection
with the Reorganization. See Notes 9 and 10 to the Unaudited Pro Forma
Combined Financial Statements of the Company.

The foregoing tables do not give effect to the exercise of options and the
Representatives' Options. To the extent that such options and warrants are
exercised, there will be additional dilution to new investors. See
"Management -- Stock Option Plans" and "Underwriting."

24
<PAGE> 25

PHYSICIANS' SPECIALTY CORP.

UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

The following unaudited pro forma combined financial statements give effect
to the Reorganization among Physicians' Specialty Corp., Atlanta ENT, the
Additional Atlanta Practices, Birmingham ENT and the ENT Networks as a
combination of promoter interests, at historical costs, and are based upon the
historical statements of each entity. The unaudited pro forma statement of
operations gives effect to the Reorganization and the management services
agreements between the Company and the physician practices as if such
transactions had occurred on January 1, 1996 and the unaudited pro forma balance
sheet gives effect as if such transactions had occurred on December 31, 1996.
The unaudited pro forma financial statements and related notes should be read in
conjunction with other financial information, including the audited financial
statements of Physicians' Specialty Corp., Atlanta ENT, the ENT Networks and
Birmingham ENT included elsewhere herein. The Company will not be acquiring
equity interests in the Initial Practices, but will be acquiring substantially
all of the assets of the Initial Practices and following the Reorganization will
directly employ the physicians of Birmingham ENT.

The pro forma combined financial statements are presented for illustrative
purposes only and are not necessarily indicative of the operating results or
financial position that would have been achieved if the Reorganization had been
consummated at the beginning of the period presented, nor are they necessarily
indicative of the future operating results of the Company. The pro forma
combined financial information does not give effect to any cost savings or
integration which may result from the Reorganization.

STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------------------------
PHYSICIANS' ADDITIONAL
SPECIALTY ENT ATLANTA ATLANTA BIRMINGHAM UNADJUSTED PRO-FORMA PRO-FORMA
CORP. NETWORKS ENT PRACTICES ENT COMBINED ADJUSTMENTS COMBINED
----------- -------- ------- ---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Patient service
revenues.......... $ 0 $ 0 $13,609 $3,773 $1,339 $ 18,721 $ (17,382)(1) $ 1,339
Capitation
revenues.......... 0 4,453 0 0 0 4,453 0 4,453
Management fees..... 51 0 0 0 0 51 12,631(1) 12,682
----- ------ ------ ----- ----- ------- -------- -------
Net
revenue... $ 51 $4,453 $13,609 $3,773 $1,339 $ 23,225 $ (4,751) $18,474
Expenses
Physician
compensation.... $ 0 $ 0 $ 5,006 $1,882 $ 589 $ 7,477 $ (7,055)(2) $ 422
Salaries, wages &
benefits........ 47 85 5,208 717 356 6,413 0 6,413
General and
administrative.. 357 166 2,841 1,104 360 4,828 (153)(4)
330(5)
(334)(3) 4,671
Bad debt
expense......... 0 0 197 0 3 200 0 200
Depreciation and
amortization.... 2 3 360 30 39 434 2(6) 436
Provider claims... 0 3,217 0 0 0 3,217 0 3,217
----- ------ ------ ----- ----- ------- -------- -------
Operating
expenses...... $ 406 $3,471 $13,612 $3,733 $1,347 $ 22,569 $ (7,210) $15,359
Operating income
(loss)............ (355) 982 (3) 40 (8) 656 2,459 3,115
Other (income)
expense, net...... 0 (23) (3) 13 9 (4) 0 (4)
Pretax income
(loss)............ (355) 1,005 0 27 (17) 660 2,459 3,119
Provision for income
taxes............. 0 0 0 0 2 2 1,214(7) 1,216
----- ------ ------ ----- ----- ------- -------- -------
Net income
(loss).... $(355) $1,005 $ 0 $ 27 $ (19) $ 658 $ 1,245 $ 1,903
===== ====== ====== ===== ===== ======= ======== =======
Pro forma earnings
per share......... 0.32
=======
Pro forma weighted
average shares
outstanding....... 5,959(8)(11)
-------
</TABLE>

See the accompanying notes to unaudited pro forma financial statements.

25
<PAGE> 26

PHYSICIANS' SPECIALTY CORP.

BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------------
PHYSICIANS' ADDITIONAL
SPECIALTY ENT ATLANTA ATLANTA BIRMINGHAM UNADJUSTED PRO-FORMA PRO-FORMA
CORP. NETWORKS ENT PRACTICES ENT COMBINED ADJUSTMENTS COMBINED
----------- -------- ------- ---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash
equivalents.......... $ 123 $828 $ 4 $ 31 $ 61 $1,047 $ 0 $ 1,047
Accounts receivable,
net.................. 27 0 3,277 637 224 4,165 0 4,165
Note receivable........ 0 0 171 0 0 171 0 171
Prepayments and
other................ 0 0 77 0 16 93 0 93
----- ---- ------ ---- ---- ------ ------- ------
150 828 3,529 668 301 5,476 0 5,476
PROPERTY AND EQUIPMENT
(net).................. 20 13 1,329 154 115 1,631 0 1,631
OTHER ASSETS............. 443 0 40 3 0 486 0 486
----- ---- ------ ---- ---- ------ ------- ------
Total assets..... $ 613 $841 $4,898 $825 $416 $7,593 $ 0 $ 7,593
===== ==== ====== ==== ==== ====== ======= ======
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Notes payable.......... $ 505 $ 0 $ 242 $ 37 $ 42 $ 826 $ 0 $ 826
Accrued compensation to
owners............... 0 0 2,553 42 0 2,595 (2,595)(9) 0
Accounts payable....... 97 346 240 70 41 794 0 794
Accrued expenses....... 21 0 776 104 60 961 0 961
Deferred Taxes......... 0 0 0 0 69 69 1,003(10) 1,072
----- ---- ------ ---- ---- ------ ------- ------
Current
Liabilities.... $ 623 $346 $3,811 $253 $212 $5,245 $(1,592) $ 3,653
LONG TERM LIABILITIES
Deferred Rent.......... 0 0 153 0 0 153 0 153
Long term debt......... 0 0 868 0 80 948 0 948
----- ---- ------ ---- ---- ------ ------- ------
Long Term
liabilities........ 0 0 1,021 0 80 1,101 0 1,101
OWNERS' EQUITY........... (10) 495 66 572 124 1,247 1,592(9)(10) 2,839
----- ---- ------ ---- ---- ------ ------- ------
Total liabilities
and
stockholders'
equity......... $ 613 $841 $4,898 $825 $416 $7,593 $ 0 $ 7,593
===== ==== ====== ==== ==== ====== ======= ======
</TABLE>

See the accompanying notes to unaudited pro forma financial statements.

26
<PAGE> 27

PHYSICIANS' SPECIALTY CORP.

NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is a summary of the adjustments reflected in the Unaudited
Pro Forma Financial Statements assuming the Reorganization of the ENT Networks
and the Initial Practices with Physicians' Specialty Corp. This Reorganization
will be accomplished as a combination of promotor interests at historical costs
under generally accepted accounting principles. The Company will not be
acquiring equity interests in the Initial Practices, but will be acquiring
substantially all of the assets of the Initial Practices and following the
Reorganization will directly employ the physicians of Birmingham ENT.

(1) Reflects the elimination of patient service revenue for all physician
practices with which the Company has a management services agreement, but will
not directly employ the physicians of such practices, except for the physicians
of Birmingham ENT. Pursuant to management service agreements, the Company,
through PSC Management, will act as the exclusive manager and administrator of
an affiliated practice. The management service agreements provide for the
affiliated practice to assign to the Company all or substantially all of its
rights and interests in the proceeds of its non-governmental accounts receivable
(or the revenue it receives) and grants to the Company the right to collect and
retain the proceeds of governmental accounts receivable (or revenue) for the
Company's account to be applied in accordance with the agreement. Although such
proceeds of the accounts receivable (or revenue) are collected by the Company on
behalf of the practice, the practice grants to the Company the right to grant a
security interest and factor such amounts and such receivables will secure
Company borrowings under its credit facility.

Management fees have been calculated based upon the management service
agreements. The Company will be responsible for the payment of operating
expenses of the affiliated practice, including salaries and benefits of
non-medical employees of the practice, lease obligations for office space and
equipment and medical and office supplies, and the non-operating expenses of the
affiliated physician practice, including depreciation, amortization, and
interest. For providing services pursuant to the management services agreements,
the Company will retain a varying percentage of all revenues generated by or on
behalf of physicians practicing at the practice (after adjusting for, among
other things, uncollectible accounts and contractual allowances), subject to
specified maximum annual amounts, as payment for the Company's services under
the management services agreements. In addition, the Company will be entitled to
incentive compensation under the management service agreements upon the receipt
of the specified maximum annual amounts.

Management fees under the management services agreement with Atlanta ENT
are calculated as follows:

12.5% of Atlanta ENT and the Additional Atlanta Practices patient
service revenue (12.5% X $17,381,525 = $2,172,691)

Operating expenses of Atlanta ENT and the Additional Atlanta
Practices, excluding physicians compensation equals $10,457,709

Management fees are $2,172,691 + $10,457,691 = $12,630,400

Under the management services agreements, the Company will retain, on an
annual basis, 12.5% of affiliated physician practice revenue until such revenue
equals 150% of such practice's annual revenue in the year prior to its
affiliation with the Company (the "Threshold Amount")). In the event the
affiliated practice's revenue exceeds the Threshold Amount in any fiscal year,
the Company will be entitled to incentive compensation (in lieu of the 12.5%
amount) for the remainder of such fiscal year in amounts ranging from 20% to 25%
of the affiliated practice's income (net practice revenues less practice
expenses), prior to the payment of physician compensation and benefits.

There is no management fee adjustment for Birmingham ENT because physicians
at Birmingham ENT will be directly employed by the Company. See Note 2 below.

27
<PAGE> 28

(2) Reflects the elimination of physician compensation at the practices in
which the Company does not have an equity ownership. After the Company collects
its management fees pursuant to the management service agreements, the remaining
revenues will be remitted to the affiliated practice to pay physician
compensation and benefits pursuant to employment agreements between the practice
and each individual physician and to pay physician assistant compensation and
benefits. The reduction of physician's compensation for physicians at Birmingham
ENT is a result of a contractual agreement with the Company.

(3) Reflects the elimination of a one time compensation expense related to
purchases of Common Stock of the Company.

(4) Reflects the contractual elimination of management fees paid to certain
stockholders related to the ENT Networks.

(5) Reflects the net cost of additional employment contracts entered into
by the Company for certain management positions. The adjustments do not include
bonuses due to their subjective nature and requisite board approval for the
granting of bonuses based upon meeting certain profitability and non-financial
goals.

(6) Reflects a full year of amortization of deferred organization costs of
the Company.

(7) Reflects the establishment of a provision for income taxes at an
estimated 39% effective tax rate, which consists of a 34% statutory federal tax
rate and an average state statutory tax rate of 5%. Atlanta ENT, the ENT
Networks and two of the Additional Atlanta Practices, before the Reorganization,
are S corporations with such corporations owing no federal or state taxes and
the shareholders of each such entity being responsible for their payment.

(8) Reflects weighted average shares outstanding for common stock and
common stock equivalents (which have been calculated using the treasury stock
method).

(9) As discussed in Note 1 above, physician compensation will be paid to
the physician practices after collection of the Company's management fee. This
adjustment reflects the contribution of the physicians to the Reorganization.
Physicians are paid based upon cash collections and the amount of payment owed
to the physicians on outstanding accounts receivable at the time of the
Reorganization will be contributed to the Company as capital by the physicians.
On a going-forward basis, these physician groups will be compensated based on
the ultimate collection of accounts receivable.

(10) Reflects the establishment of deferred taxes for the Company after the
Reorganization.

(11) Approximately 180,000 stock options have been granted by the Company
to be effective upon the closing of the Offering. Stock options granted at fair
market value to employees are accounted for under APB No. 25 and do not require
compensation cost to be recognized. Stock options granted below fair market
value to employees do require compensation costs to be recognized. The Company
will recognize approximately $30,000 in 1997 as compensation expense for this
type of stock option. Stock options granted to nonemployees are accounted for
under SFAS No. 123. This accounting pronouncement requires options to be
recorded at fair value, which normally entails compensation costs. The Company
will record a one-time charge after the initial public offering of approximately
$18,000 for this type of stock option.

28
<PAGE> 29

SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

The following information for the Company, Atlanta ENT, the ENT Networks
and Birmingham ENT has been derived from the financial statements of the
respective entities. The information for the years ended December 31, 1992, 1993
and 1994 for Birmingham ENT and for the years ended December 31, 1992 and 1993
for Atlanta ENT and the ENT Networks has been derived from the unaudited
financial statements which, in the opinion of management, include all normal
recurring adjustments necessary for a fair statement of the results of
operations for unaudited statements. The Company was incorporated in July 1996
and commenced operations in August 1996 through the acquisition of the computer
hardware of the ENT Networks and utilization of the Capitated Network System.
The selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited financial statements of the Company, Atlanta ENT,
the ENT Networks and Birmingham ENT and notes thereto included elsewhere in this
Prospectus. The selected financial data of each of the entities other than the
Company are presented below because (i) the ENT Networks are the Company's
predecessor in the capitated managed care business, (ii) the assets of Atlanta
ENT will be acquired by the Company in connection with the Reorganization and
Atlanta ENT will enter into a management services agreement with the Company and
(iii) the assets of Birmingham ENT will be acquired by the Company in connection
with the Reorganization and the Company will employ the two physicians at
Birmingham ENT.

PHYSICIANS' SPECIALTY CORP.

<TABLE>
<CAPTION>
FROM INCEPTION
(JULY 31, 1996)
THROUGH
DECEMBER 31, 1996
------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................................................. $ 51
Expenses:
Salaries, wages and benefits.............................................. 47
Depreciation and amortization............................................. 2
Other expenses............................................................ 357
------
Total expenses.............................................................. 406
------
Operating loss.............................................................. $355
==============
</TABLE>

<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1996
------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $124
Total assets................................................................ 613
Total debt.................................................................. 505
Stockholders' equity........................................................ (10)
</TABLE>

29
<PAGE> 30

ATLANTA EAR, NOSE & THROAT ASSOCIATES, P.C.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient service revenue......................... $5,505 $7,195 $8,124 $10,291 $13,609
Expenses:
Physician owners' compensation.................... 2,887 3,170 3,344 3,961 5,005
Salaries, wages and benefits...................... 1,253 2,277 2,929 3,922 5,209
General and administrative........................ 1,151 1,386 1,474 1,885 2,841
Bad debt expense.................................. 51 61 110 233 197
Depreciation and amortization..................... 148 262 259 275 360
Other expense (income), net....................... 15 39 8 15 (3)
------ ------ ------ ------- -------
Total expenses...................................... 5,505 7,195 8,124 10,291 13,609
------ ------ ------ ------- -------
Operating income.................................... $ 0 $ 0 $ 0 $ 0 $ 0
====== ====== ====== ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER
31, 1996
-----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 4
Total assets................................................................. 4,898
Total debt................................................................... 1,111
Owners' equity............................................................... 66
</TABLE>

ENT NETWORKS

<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $828
Total assets.................................................................... 841
Owner's equity.................................................................. 495
</TABLE>

30
<PAGE> 31

W.J. CORNAY, III, M.D., P.C.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient service revenue........................... $ 622 $ 719 $1,004 $1,323 $1,339
Expenses:
Physician owners' compensation...................... 188 202 330 470 576
Salaries, wages and benefits........................ 165 206 315 568 356
General and administrative.......................... 224 246 238 293 373
Bad debt expense.................................... 2 3 12 (4) 3
Depreciation and amortization....................... 33 27 26 39 39
Other expense (income), net......................... 5 3 (11) (3) 9
------ ------ ------ ------ ------
Total expenses........................................ 617 687 910 1,363 1,356
------ ------ ------ ------ ------
Operating income (loss)............................... $ 5 $ 32 $ 94 $ (40) $ (17)
====== ====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 61
Total assets.................................................................... 416
Total debt...................................................................... 121
Stockholders' equity............................................................ 125
</TABLE>

31
<PAGE> 32

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

The following discussion has been divided into two sections, the first
relating to the historical and pro forma combined operations of the Company, the
entity whose Common Stock is being issued in connection with the Reorganization
and the Offering, and the second relating to the historical operations of
Atlanta ENT, the ENT Networks and Birmingham ENT. The following discussion of
the pro forma combined results of operations and financial position of the
Company and the historical results of operations and financial position of
Atlanta ENT, the ENT Networks, Birmingham ENT, and the Company should be read in
conjunction with the Company's unaudited pro forma combined financial statements
and the audited financial statements of Atlanta ENT, the ENT Networks,
Birmingham ENT, and the Company, and the notes thereto, appearing elsewhere in
this Prospectus.

OVERVIEW

Physicians' Specialty Corp. is a physician practice management company
recently organized to provide comprehensive management services to physician
practices specializing in the treatment and management of diseases and disorders
of the ear, nose and throat, head and neck, including specialists practicing in
the fields of allergy, audiology, oral surgery, plastic surgery and sleep
medicine. Concurrently with the closing of this Offering, the Company will
effect the Reorganization in which the Company will acquire all of the common
stock of the ENT Networks and substantially all of the assets of Atlanta ENT,
the Additional Atlanta Practices and Birmingham ENT. See "The Reorganization."
The Company's revenues will initially be derived (i) under management services
agreements with the physician practices in Atlanta whose assets are being
acquired by the Company in connection with the Reorganization, (ii) from patient
service revenues generated by the Company's wholly-owned subsidiary, PSC
Alabama, which will directly employ the Birmingham ENT physicians, and (iii)
under capitated managed care contracts held by the ENT Networks, which will
become wholly-owned subsidiaries of the Company upon the consummation of the
Reorganization.

Under management services agreements, all of the accounts receivables
relating to non-governmental revenue generated by the practices and the proceeds
of the accounts receivables relating to governmental revenue will be assigned to
the Company, which will (i) be responsible for payment of all operating and non-
operating expenses; (ii) retain a management fee, and (iii) remit to the
physician practices the balance. Under the capitated managed care contracts, the
Company, as owner of the ENT Networks, will be entitled to all of the capitated
fees paid by United HealthCare, Aetna and Cigna and will remit, on a discounted
fee-for-service basis, amounts to each physician practice providing ENT medical
and surgical services to the HMO's enrollees.

Management Service Agreements

The management services agreements, which are generally expected to have a
term of 40 years, delineate the responsibilities and obligations of the
physician practice and the Company. In connection with the Reorganization, the
Company will enter into management services agreements with Atlanta ENT (which
will include the physicians of the Additional Atlanta Practices) and the
stockholder physicians at Atlanta ENT and the Additional Atlanta Practices, and
with PSC Alabama (which will directly employ the physicians of Birmingham ENT).
These management services agreements provide for the affiliated practice to
assign to the Company all of its non-governmental accounts receivable and all of
its right and interest in the proceeds of its governmental accounts receivable
and grant to the Company the right to collect and retain the proceeds of the
accounts receivable for the Company's account to be applied in accordance with
the agreement. Although such proceeds of the accounts receivable are collected
by the Company on behalf of the practice, the practice grants to the Company the
right to grant a security interest and factor such accounts receivable and such
receivables will secure Company borrowings under the Credit Facility.

32
<PAGE> 33

directly out of the proceeds of the accounts receivable assigned to the Company
by the affiliated physician practice. In addition, under the management services
agreements with Atlanta ENT and Birmingham ENT, the Company will retain as a
part of its management fee, a stipulated percentage (12.5%) of all revenues
(after adjustment for contractual allowances) generated by or on behalf of
physicians practicing at such practice, as payment for the Company's management
services and non-allocable costs incurred by the Company attributable to the
provision of management services. Contractual allowances are the differences
between the amounts customarily charged by physicians practicing at such
practice and the amounts received pursuant to negotiated fee schedules from
payors under capitated managed care contracts and preferred provider
organizations. The Company believes that such contractual allowances are not
currently expected to materially adversely affect the Company's revenues. Under
the management services agreements with Atlanta ENT and Birmingham ENT, the
Company will retain, on an annual basis, 12.5% of affiliated physician practice
revenue until such revenue equals 150% of such practice's annual revenue in the
year prior to its affiliation with the Company (the "Threshold Amount")). In the
event the affiliated practice's revenue exceeds the Threshold Amount in any
fiscal year, the Company will be entitled to incentive compensation (in lieu of
the 12.5% amount) for the remainder of such fiscal year in amounts ranging from
20% to 25% of the affiliated practice's income (net practice revenues less
practice expenses), prior to the payment of physician compensation and benefits.
The Company will remit the remaining revenues to the affiliated practice to pay
compensation and benefits to physicians pursuant to employment agreements
between the practice and each physician, and to physician assistants. The
percentage components of the management fee to be retained by the Company under
future management services agreements will be determined based upon negotiations
between the Company and future affiliating practices and may vary significantly
in the future.

In the event that revenues of the affiliated physician practice decrease,
accounts receivable of the affiliated physician practice are not collected or
third-party payors reduce reimbursement rates, the management fees to be
retained by the Company will decrease and as a result, the Company's financial
condition and operating results will be adversely affected. Although the Company
is unable to control the variability of revenues generated by affiliated
practices, the Company will rely on the experience of its management to control
the operating costs at affiliated practices.

Capitated Managed Care Contracts

The ENT Networks hold capitated managed care contracts with Cigna, Aetna,
and United HealthCare which require the ENT Networks to contract for the
provision of substantially all of the ENT medical and surgical services required
by the enrollees of these HMOs in the Atlanta region. The ENT Networks have
contracted with participating physicians, including those of Atlanta ENT, and
will contract with the physicians at the Additional Atlanta Practices upon
consummation of the Reorganization, to provide substantially all of such medical
services in exchange for compensation on a discounted fee-for-service basis.

Capitation fees under the contracts with Cigna and Aetna are renegotiated
annually. Under the contract with United HealthCare, capitation rates are
increased annually based upon the percentage change, in the Atlanta region, of a
consumer index identified in the contract. Representatives of Aetna Inc. have
indicated a desire to convert the contract with Aetna from a capitated ENT
managed care contract to an expanded panel (non-capitated) modified shared risk
arrangement. Although the Company is unable to determine if and when such
modification will occur, the Company does not believe that it should have a
material adverse effect on the Company's business, financial condition or
results of operations.

Because the Company will incur costs based on medical services provided by
the participating physicians to the HMO's enrollees, if capitation amounts to be
received by the Company are reduced by the managed care payors or if enrollees
covered by capitated contracts require more frequent or more extensive care than
is anticipated, operating margins may be reduced or the revenues derived from
such contracts may be insufficient to cover the costs of the services provided
by participating physicians to enrollees under the contracts, requiring the
Company to adjust its discounted fee-for-service rates paid to participating
physicians. As a result, the Company's financial condition and operating results
may be adversely affected, particularly if the

33
<PAGE> 34

Company is unable to renegotiate compensation levels paid to participating
physicians under the participation agreements on a timely or favorable basis or
negotiate capitated managed care contracts on terms favorable to the Company.

Prior to entering into a capitated managed care contract, the Company
intends to analyze the costs of managing such contract including a study of the
number of lives to be covered, the geographic region to be covered and the
historical utilization patterns of enrollees. The Company will then determine
the capitation fee (generally, a fixed amount per enrollee per month), necessary
to generate acceptable returns under the contract and will negotiate the
capitation rate with the HMO. The Company expects the capitated managed care
contracts to provide for annual renegotiation of the capitation fees and
adjustments in such capitation fees based upon changes in the number of
enrollees under the contracts, changes in the types of services to be provided
under the contracts and changes in the geographic areas to be covered under the
contracts.

In order to monitor and control expenses under capitated managed care
contracts held by the Company, the Company will utilize the Capitated Network
System, a comprehensive capitation administration and utilization management
system utilized by the ENT Networks to administer and manage its contracts. The
Company believes the Capitated Network System will enable it to effectively
analyze clinical and cost data necessary to monitor and control expenses and
manage profitability under capitated arrangements, and to accurately anticipate
the costs participating physicians will incur in providing services under such
contracts so that the Company undertakes contracts under which it can expect to
realize adequate profit margins or otherwise meet its objectives.

PHYSICIANS' SPECIALTY CORP.

Physicians' Specialty Corp. was incorporated in July 1996 and has conducted
only limited activities to date, primarily consisting of acquiring computer
hardware of the ENT Networks and negotiating the agreements relating to the
Reorganization, and will not conduct significant operations until the closing of
the Reorganization and the Offering. The Company has incurred and will continue
to incur various legal, accounting and auditing costs in connection with the
Reorganization and the Offering. As of December 31, 1996, $485,000 of such
expenses had been funded by loans provided by Atlanta ENT, officers of the
Company and affiliates of former directors of the Company. In February 1997, the
ENT Networks and Bock, Benjamin & Co., Partners, L.P. loaned the Company an
additional aggregate of $170,000 and the Company repaid approximately $77,000 of
the loans made by affiliates of the former directors. The outstanding balance of
all such loans will be repaid from the proceeds of the Offering. See "Use of
Proceeds" and "Certain Transactions." The Company incurred approximately
$334,000 of non-cash compensation expense related to certain stock purchases by
executive officers of the Company in November and December 1996.

The Company has recorded a full valuation allowance against its deferred
tax assets because of the Company's current financial condition, its limited
operating history, and its operating losses recorded to date. Additionally, the
Company has not yet been able to develop a sufficient level of management fees
to cover its operating costs. If the Company does achieve profitability in the
future, the valuation allowance will be reduced by a credit to income.

The pro forma combined results of operations reflect the operations of the
Company as if the Reorganization had occurred on January 1, 1996. The ENT
Networks and PSC Alabama will be wholly-owned subsidiaries of the Company.
Atlanta ENT and the Additional Atlanta Practices will be affiliated with the
Company through a management services agreement. Therefore, the Company, on a
pro forma combined basis, has three sources of revenue: (1) patient service
revenue generated by Birmingham ENT (whose physicians will be employed directly
by PSC Alabama), (2) capitated revenue received by the ENT Networks, and (3)
management fees earned from Atlanta ENT (including the physicians at the
Additional Atlanta Practices who will be employed by Atlanta ENT following the
consummation of the Reorganization). Management fees are calculated pursuant to
the management service agreements. Under the management service agreements, the
Company will act as exclusive manager and administrator of an affiliated
practice and will assume substantially all operating expenses of affiliated
practices. In exchange for assuming these expenses and providing management
services, the Company will receive management fees in amounts equal to

34
<PAGE> 35

these expenses plus a varying percentage of the revenues of the affiliated
physician practices. The affiliated physician practices are solely responsible
for the payment of compensation to physicians and physician assistants.

The Company generated revenues of approximately $18.5 million on a pro
forma combined basis for the year ended December 31, 1996, consisting of $12.7
million of management fees, $1.3 million of patient service revenues and $4.5
million of capitated revenue. The number of covered lives under capitated plans
was approximately 361,000 at December 31, 1996.

The Company incurred approximately $15.4 million of operating expenses on a
pro forma combined basis for the year ended December 31, 1996, consisting
largely of salaries and wages, general and administrative expenses and provider
claims. Both salaries and wages and general and administrative expenses will
vary with the opening of new clinic locations by the Company. The Company had
136 employees and operated 19 clinical locations on a pro forma combined basis
as of December 31, 1996.

Provider claims are amounts paid to participating physician practices,
including Atlanta ENT, on a discounted fee for service basis. Provider claims
amounted to approximately $3.2 million on a pro forma combined basis for the
year ended December 31, 1996. Because the ENT Networks will be wholly-owned
subsidiaries of the Company, the Company will have the ownership and the
ultimate risk related to these contracts. The Company will monitor claims
expense incurred to provide services under these contracts, as has been the
historical practice of the ENT Networks.

Income tax expense of approximately $1.2 million, on a pro forma combined
basis for the year ended December 31, 1996, has been calculated at an effective
tax rate of 39%.

ATLANTA EAR, NOSE & THROAT ASSOCIATES, P.C.

Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995

Patient service revenues increased by $3,318,000 or 32.2% to $13,609,000
for the year ended December 31, 1996 from $10,291,000 for the year ended
December 31, 1995 attributable to the opening of three additional clinic office
locations and the addition of three affiliated physicians.

Physician owners' compensation of $5,006,000 and $3,961,000 for the years
ended December 31, 1996 and 1995, respectively, includes all compensation and
benefits paid or payable to physician owners during the period. The physician
owners determined such payments based on cash earnings available for
distribution, including cash to be realized from the collection of accounts
receivable.

Salaries, wages and benefits increased by $1,287,000 or 32.8% to $5,209,000
for the year ended December 31, 1996 from $3,922,000 for the year ended December
31, 1995. This increase resulted primarily from the addition of three employee
physicians and 30 support staff during the year ended December 31, 1996 in
conjunction with the opening of three additional clinic office locations.

General and administrative expenses increased by $956,000 or 50.7% to
$2,841,000 for the year ended December 31, 1996 from $1,885,000 for the year
ended December 31, 1995. The increase related to the opening of additional
clinic office locations and the expansion of administrative infrastructure
required to support anticipated practice growth. The Company typically incurs
expenses related to the opening of new facilities prior to generating revenues.

Bad debt expense decreased by $36,000 or 15.5% to $197,000 for the year
ended December 31, 1996 from $233,000 for the year ended December 31, 1995. This
decrease was attributable largely to improved collection of patient self-pay and
per visit co-payment amounts.

Depreciation and amortization expense increased by $86,000 or 31.3% to
$361,000 for the year ended December 31, 1996 from $275,000 for the year ended
December 31, 1995 reflecting no material changes in the composition of the
Company's fixed assets or depreciation methods.

35
<PAGE> 36

Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994

Patient service revenues increased by $2,167,000 or 26.7% to $10,291,000
for the year ended December 31, 1995 from $8,124,000 for the year ended December
31, 1994 attributable to the opening of three additional clinic office locations
and the addition of six affiliated physicians.

Physician owners' compensation of $3,961,000 and $3,344,000 for the years
ended December 31, 1995 and 1994 respectively, includes all compensation and
benefits paid or payable to physician owners during the period. The physician
owners determined such payments based on cash earnings available for
distribution, including cash realized from the collection of accounts
receivable.

Salaries, wages and benefits increased by $993,000 or 33.9% to $3,922,000
for the year ended December 31, 1995 from $2,929,000 for the year ended December
31, 1994. This increase resulted primarily from the addition of six employee
physicians and 17 support staff in 1995 in conjunction with the opening of three
additional clinic office locations.

General and administrative expenses increased by $411,000 or 27.9% to
$1,885,000 for the year ended December 31, 1995 from $1,474,000 for the year
ended December 31, 1994. The increase related to the opening of three clinic
office locations and the expansion of administrative infrastructure required to
support anticipated practice growth.

Bad debt expense increased by $123,000 or 111.8% to $233,000 for the year
ended December 31, 1995 from $110,000 for the year ended December 31, 1994. This
increase was attributable largely to uncollectible patient self-pay and per
visit co-payment amounts.

Depreciation and amortization expense increased by $16,000 or 6.2% to
$275,000 for the year ended December 31, 1995 from $259,000 for the year ended
December 31, 1994, reflecting no material changes in the composition of the
Company's fixed assets or depreciation methods.

THE ENT NETWORKS

Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995

Capitated revenues increased by $285,000 or 6.8% to $4,453,000 for the year
ended December 31, 1996 from $4,168,000 for the year ended December 31, 1995 due
to a 16.5% increase in the number of lives under capitated plans, which was
offset in part by an 8.4% decrease in capitation rates resulting from a
renegotiation of a managed care contract.

Salaries, wages and benefits increased by $20,000 or 30.8% to $85,000 for
the year ended December 31, 1996 from $65,000 for the year ended December 31,
1995.

General and administrative expenses decreased by $4,000 or 2.3% to $167,000
for the year ended December 31, 1996 from $171,000 for the year ended December
31, 1995. General and administrative expenses consisted largely of amounts paid
to the Company's sole stockholder and an associated physician related to Medical
Director stipends.

Provider claims increased by $324,000 or 11.2% to $3,217,000 for the year
ended December 31, 1996 from $2,893,000 for the year ended December 31, 1995 due
largely to the aforementioned increase in covered lives under capitated plans.
Provider claims represented 72.2% and 69.4% of capitated revenues for the years
ended December 31, 1996 and 1995, respectively.

Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994

Capitated revenues increased by $657,000 or 18.7% to $4,168,000 for the
year ended December 31, 1995 from $3,511,000 for the year ended December 31,
1994 due to a 13.2% increase in the number of lives under capitated plans which
was offset in part by an 11.2% decrease in capitation rates resulting from a
renegotiation of a managed care contract.

36
<PAGE> 37

Salaries, wages and benefits increased by $36,000 or 124.1% to $65,000 for
the year ended December 31, 1995 from $29,000 for the year ended December 31,
1994.

General and administrative expenses increased by $34,000 or 24.8% to
$171,000 for the year ended December 31, 1995 from $137,000 for the year ended
December 31, 1994. General and administrative expenses consisted largely of
amounts paid to the Company's sole stockholder and an associated physician
related to Medical Director stipends.

Provider claims increased by $437,000 or 17.8% to $2,893,000 for the year
ended December 31, 1995 from $2,456,000 for the year ended December 31, 1994 due
largely to the aforementioned increase in covered lives under capitated plans.
Provider claims represented 69.4% and 69.9% of capitated revenues for the years
ended December 31, 1995 and 1994, respectively.

W.J. CORNAY III, M.D. , P.C.

Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995

Patient services revenues increased by $16,000 or 1.2% to $1,339,000 for
the year ended December 31, 1996 from $1,323,000 for the year ended December 31,
1995.

Salaries, wages and benefits decreased by $212,000 or 37.3% to $356,000 for
the year ended December 31, 1996 from $568,000 for the year ended December 31,
1995. This decrease was largely attributable to a physician employee becoming a
stockholder of the practice in 1996.

Compensation to physician owners increased by $106,000 or 22.5% to $576,000
for the year ended December 31, 1996 from $470,000 for the year ended December
31, 1995 relating to the increase in the number of stockholders of the practice.

General and administrative expenses increased by $69,000 or 23.7% to
$360,000 for the year ended December 31, 1996 from $291,000 for the year ended
December 31, 1995. The majority of the increase related to professional fees
incurred.

Depreciation and amortization expenses remained unchanged for the year
ended December 31, 1996 compared to the year ended December 31, 1995 reflecting
no change in the composition of the Company's fixed assets or depreciation
methods.

Deferred tax expense was recorded to provide for the temporary differences
between financial statement and income tax reporting of various items,
principally revenue recognition.

37
<PAGE> 38

LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth a summary of the significant components of
historical cash flows for Atlanta ENT, the ENT Networks and Birmingham ENT for
the periods indicated:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
-------------------------
1994 1995 1996
------- ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flow from Operating Activities
Atlanta ENT............................................... $ 378 $ 455 $ 346
The ENT Networks.......................................... 1,190 960 918
Birmingham ENT............................................ * 66 37
Cash Flow (Deficit) from Investing Activities
Atlanta ENT............................................... $ (162) $ (541) $ (875)
The ENT Networks.......................................... (11) (6) (12)
Birmingham ENT............................................ * (69) (23)
Cash Flow (Deficit) from Financing Activities
Atlanta ENT............................................... $ (242) $ 464 $ 132
The ENT Networks.......................................... (1,000) (943) (380)
Birmingham ENT............................................ * 81 (38)
</TABLE>

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

* Birmingham ENT data not available for the year ended December 31, 1994.

Net cash provided by operating activities of Atlanta ENT, the ENT Networks
and Birmingham ENT for the year ended December 31, 1996 was $346,000, $918,000,
and $37,000, respectively. Cash utilized for investing activities by Atlanta
ENT, the ENT Networks and Birmingham ENT for the year ended December 31, 1996
was $875,000, $12,000 and $23,000, respectively, in each case consisting
entirely of capital expenditures. Borrowings, net of repayments, by Atlanta ENT
and Birmingham ENT for the year ended December 31, 1996 were $132,000 and
$(38,000), respectively. Cash distributions by the ENT Networks to the owner in
the year ended December 31, 1996 were $380,000.

Net cash provided by operating activities of Atlanta ENT, the ENT Networks
and Birmingham ENT for the year ended December 31, 1995 was $455,000, $960,000
and $66,000, respectively. Cash utilized for investing activities by Atlanta
ENT, the ENT Networks and Birmingham ENT for the year ended December 31, 1995
was $541,000, $6,000 and $69,000, respectively, in each case, consisting
entirely of capital expenditures. Borrowings, net of repayments, by Atlanta ENT
and Birmingham ENT for the year ended December 31, 1995 were $464,000 and
$81,000, respectively. Cash distributions by the ENT Networks to the owner for
the year ended December 31, 1995 were $943,000.

Net cash provided by operating activities of Atlanta ENT and the ENT
Networks for the year ended December 31, 1994 was $378,000 and $1,190,000,
respectively. Cash utilized for investing activities by Atlanta ENT and the ENT
Networks for the year ended December 31, 1994 was $162,000 and $11,000,
respectively, in each case, consisting entirely of capital expenditures. Net
repayments of borrowings by Atlanta ENT for the year ended December 31, 1994 was
$242,000. Cash distributions by the ENT Networks to the owner for the year ended
December 31, 1994 was $1,000,000.

Upon consummation of the Reorganization, the operating cash flows generated
by Atlanta ENT and Birmingham ENT will no longer be suppressed by the payment of
bonus compensation to physician owners in amounts sufficient to eliminate
operating income as has historically been the practice of Atlanta ENT and
Birmingham ENT. In addition, the payment of S corporation distributions to the
stockholder of the ENT Networks will cease upon consummation of the
Reorganization.

The Company has received a commitment letter for a credit facility of
$20,000,000 with NationsBank, N.A. (South) primarily to provide financing for
the acquisition of assets of physician practices and for working capital
purposes. The closing of the Credit Facility is conditioned upon the completion
of the Offering and the repayment of all indebtedness of the Company. Borrowings
under the Credit Facility will (i) be secured by the assignment to the bank of
the Company's stock in all of its subsidiaries, including the ENT Networks upon

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consummation of the Reorganization, and the Company's accounts receivable,
including the accounts receivable assigned to the Company by affiliated
practices pursuant to management services agreements, (ii) be guaranteed by all
subsidiaries (including future subsidiaries) and (iii) restrict the Company from
pledging its assets to any other party. Advances for working capital will be
governed by a borrowing base related primarily to the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA"). Based on the
borrowing base at December 31, 1996 after giving effect to the Offering and the
Reorganization, the maximum availability under the Credit Facility would have
been $8,700,000. Advances will bear interest at the Company's option of either a
prime-based rate or a LIBOR-based rate and interest-only payments will be
required for the first two years from the date of the closing of the Credit
Facility, with maturity in five years from the advance date.

The Credit Facility will contain affirmative and negative covenants which
will, among other things, require the Company to maintain certain financial
ratios (including maximum indebtedness to pro forma EBITDA ratio, maximum
indebtedness to capital ratio, minimum net worth, minimum current ratio, and
minimum fixed charges coverage), limit the amounts of additional indebtedness,
dividends, advances to officers, shareholders and physicians, investments and
advances to subsidiaries, and restrict changes in management and the Company's
business.

The Company intends to acquire the assets of additional ENT physician
practices and Related Specialty practices and to fund this growth in part with
the net proceeds of this Offering and borrowings under the Credit Facility, as
well as through equity issuances. The Company is currently evaluating and is in
various stages of discussions in connection with the potential acquisition of
assets or equity of additional ENT physician practices and Related Specialty
practices. However, the Company has no agreements or arrangements with respect
to the terms of any other specific acquisitions (other than agreements with
Atlanta ENT, the ENT Networks, the Additional Atlanta Practices and Birmingham
ENT) and, accordingly, there can be no assurance that any of the acquisitions
under evaluation will be completed, as to the terms of any such acquisition or
as to the Company's ability to complete future acquisitions. See "Risk
Factors -- Risks Related to Acquisitions and Managing Growth; Need for
Additional Funds; Potential Substantial Leverage."

The Company believes that the net proceeds of the Offering and borrowings
under the Credit Facility, if obtained, together with cash flow expected to be
generated from operations, will be sufficient to fund the Company's anticipated
acquisition, expansion and working capital needs for approximately the next 18-
24 months. There can be no assurance that borrowings under the Proposed Credit
Facility will be available or that alternative financing will be available for
future acquisitions or expansion of the Company's business.

Upon completion of the Offering, the Company will be a party to employment
agreements with five executive officers providing for initial aggregate
anticipated annual salaries of $810,000 plus performance related bonuses. See
"Management -- Employment Agreements."

SEASONALITY

The Company's business is subject to seasonal patient visits to affiliated
physicians. Fee-for-service revenues are typically lower during the third
quarter of the Company's fiscal year. This lower level of patient visits is
attributable to physician vacations, patients returning to school and seasonal
illness patterns. Capitated revenues, however, are not susceptible to seasonal
influences. Quarterly results also may be materially affected by the timing of
acquisitions and the timing and magnitude of costs related to acquisitions.
Results for any quarter, therefore, may not necessarily be indicative of the
results that the Company may achieve for any subsequent fiscal quarter or for a
full fiscal year.

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<PAGE> 40

BUSINESS

GENERAL

The Company was recently organized to provide comprehensive physician
practice management services to physician practices and health care providers
specializing in the treatment and management of diseases and disorders of the
ear, nose and throat, head and neck. The Company's primary objective is to
develop, manage and integrate ENT physician and Related Specialty practices
which will provide high quality, cost effective medical and surgical services to
fee-for-service patients and capitated managed care enrollees. The Company will
provide financial and administrative management, enhancement of clinical
operations, network development and payor contracting services, including the
negotiation and administration of capitated arrangements. Following the
Reorganization, the Company will be affiliated with 23 physicians, one dentist
and 26 allied health care professionals operating 19 clinical locations.

Concurrently with the closing of the Offering, the Company will effect the
Reorganization in which the Company will acquire (i) substantially all of the
assets of Atlanta ENT, which was founded in 1979 and is today, the largest ENT
group practice in the State of Georgia, three additional ENT practices in the
metropolitan Atlanta area and one ENT practice in Birmingham, Alabama; and (ii)
the common stock of the ENT Networks which hold, manage and administer capitated
ENT managed care contracts covering an aggregate of approximately 361,000
enrollees of HMOs sponsored by United HealthCare, Aetna and Cigna. In connection
with the Reorganization, the Company will enter into management services
agreements with the physician practices providing for the comprehensive
management of the practices by the Company, while enabling the practices to
retain authority over the provision of medical care.

The Company's revenues will initially be derived (i) under a management
services agreement with Atlanta ENT (including the Additional Atlanta
Practices), substantially all of the assets of which will be acquired by the
Company in the Reorganization; (ii) from patient services revenues generated by
the physicians of Birmingham ENT (who will be employed directly by a
wholly-owned subsidiary of the Company); and (iii) under capitated management
care contracts held by the ENT Networks (which will become wholly-owned
subsidiaries of the Company in connection with the Reorganization). Under the
management services agreement, all non-governmental accounts receivables and
proceeds of governmental accounts receivables relating to fee-for-service
revenues generated by the practice will be assigned to the Company, which will
(i) be responsible for payment of all operating and non-operating expenses of
the physician practice, (ii) retain a management fee based upon a percentage of
the revenues and (iii) remit to the physician practice the balance to pay
physician and physician assistant compensation and benefits. The Company's
revenues under the management services agreements will be derived from amounts
equal to these expenses paid by the Company plus a varying percentage of the
revenues of the affiliated physician practices. The affiliated physician
practices are solely responsible for the payment of compensation to physicians
and physician assistants. In states where the Company can employ physicians,
such as Alabama, the Company's revenues will equal all of the fee-for-service
revenues generated by the practice. Under the managed care contracts, the
Company, as owner of the ENT Networks, will be entitled to all of the capitated
fees received from the HMOs. The Company will bear the capitation risk under
these agreements, as it will compensate each participating physician providing
ENT medical and surgical services to the HMO's enrollees on a discounted
fee-for-service basis.

HEALTH CARE INDUSTRY OVERVIEW

General

Health care is one of the largest industries in the United States,
representing total expenditures exceeding $900 billion in 1994, with
approximately $180 billion directly attributable to physician services,
according to the Federal Health Care Financing Administration. Health care in
the United States historically has been delivered by a fragmented system of
health care providers, including hospitals, individual physicians and small
groups of specialist and primary care physicians. A 1996 American Medical
Association study estimates that there are over 110,000 physicians practicing in
4,300 multi-specialty group practices of three or more

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<PAGE> 41

physicians and over 86,000 physicians practicing in 13,600 single specialty
group practices in the United States.

According to the Academy, there were approximately 8,400 ENT specialists in
the United States as of December 31, 1995. The Company estimates that
approximately 70% of all ENT practices consist of individual practitioners or
small (less than four physician) group practices. Although the Company's initial
operations will be located in the Southeastern United States, the Company
intends to expand its physician practice management services to ENT physician
practices and Related Specialty practices throughout the United States. The
Company believes that, upon completion of the Offering, it will be the leading
physician practice management company focusing solely or substantially on
acquiring assets of and managing ENT physician practices.

Trends in the Health Care Industry

Increasing concern over the rising cost of health care in the United States
has led to the emergence and increasing prominence of managed care. Because many
fee-for-service arrangements for compensating health care providers fail to
create incentives for the efficient utilization of resources and are therefore
generally believed to contribute to health care cost increases at rates
significantly higher than inflation, many payors are rapidly moving to replace
fee-for-service reimbursement with alternative reimbursement methods, including
capitated and other fixed-fee arrangements. The growth in enrollment in programs
provided by payors using these new reimbursement methods is shifting the
financial risk of delivering health care from payors to providers.

Health care cost containment pressures have increased physician management
responsibilities while lowering reimbursement rates to physicians. While the
acceptance of greater responsibility and risk under capitated arrangements
provides physicians with the opportunity to retain and enhance market share and
operate at a more predictable level of profitability, the acceptance of
capitation also carries with it significant requirements for infrastructure,
information systems, capital, network resources and financial and medical
management. Because most physicians practice individually or in two-person
groups, their negotiating leverage with payors and access to economies of scale
are limited. Individual physicians and small group practices also tend to have
limited administrative capacity, limited ties to other health care providers
(restricting their ability to coordinate care across a variety of specialties),
limited capital to invest in new clinical equipment and technologies and limited
purchasing power with vendors of medical supplies. In addition, individual
physicians and small group practices typically lack the information systems
necessary to manage sophisticated risk-sharing contracts with payors and to
efficiently implement disease management programs.

In response to the foregoing factors, individual physicians and small group
practices are increasingly affiliating with larger group practices and physician
practice management companies. Physician practice management companies offer
physicians access to information and management systems, leverage with vendors
and payors and capital resources. In addition, many payors and their
intermediaries, including governmental entities and HMOs, are increasingly
looking to outside providers of physician services to develop and maintain
quality outcomes, management programs and patient care data. 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.

Otolaryngology

Otolaryngology, the management of diseases of the ear, nose, nasal
passages, sinuses, larynx, mouth and throat, as well as structures of the neck
and face, is the oldest medical specialty in the United States. An
otolaryngologist, a physician trained in the medical and surgical fields of ear,
nose and throat, head and neck disorders, is commonly referred to as an Ear,
Nose and Throat Specialist. According to the Academy, more than 50% of all U.S.
physician office visits are directly related to ENT problems frequently treated
by primary care physicians, pediatricians, allergists and otolaryngologists.
Based upon a 1994 American Group Practice Association study, the Company
estimates that 1994 revenues generated by ENTs in the United States exceeded $6
billion. ENT services in the United States are delivered largely through
individual and small

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single specialty group practices and multi-specialty clinics. In the early
1900s, ENT and eye care specialists generally practiced jointly in group
practices. While a select number of large, combined eye, ear, nose and throat
practices exist, most ENT and eye care professionals migrated toward single
specialty group practices as specialization occurred. The Academy reports that
there were approximately 8,400 ENT specialists in the United States as of
December 31, 1995 and, based upon membership in the Academy, the Company
estimates that approximately 70% of all ENT practices consist of individual
practitioners or small (less than four physician) group practices. In general,
physician practice management companies have captured only a small percentage of
total medical service revenues. The Company's operations will initially be
located in the Southeastern United States, and, accordingly, there can be no
assurance that the Company will be able to capture a significant amount of the
revenues generated by ENT practices throughout the United States.

Otolaryngology subspecialties include the following:

Pediatric Otolaryngology which includes the medical and surgical
treatment of diseases of the ear, nose and throat in children.

Head and Neck Surgery which includes the surgical and medical
treatment of cancerous and noncancerous tumors in the head and neck,
including thyroid and parathyroid surgery.

Rhinology which includes the medical and surgical treatment of
disorders of the nose and sinuses.

Allergy which includes the medical treatment of inhalant allergies
affecting the upper respiratory system.

Facial Plastics and Reconstructive Surgery which includes the
treatment of cosmetic, functional and reconstructive abnormalities of the
face and neck.

Otology/Neurotology which includes the medical and surgical treatment
of diseases of the ear, including traumatic and cancerous disorders of the
external, middle and inner ear, as well as the nerve pathways which affect
hearing and balance.

Laryngology which includes medical and surgical treatment of disorders
of the throat, including the voice.

STRATEGY

The Company's primary objective is to develop, manage and integrate ENT
physician and Related Specialty practices into comprehensive networks for the
provision of high quality, cost-effective ENT medical and surgical services to
capitated managed care enrollees and fee-for-service patients. The key elements
of the Company's implementation strategy are to:

Acquire and Affiliate with ENT and Related Specialty Practices. The
Company intends to develop significant market presence by acquiring assets
or equity of practices of, or contracting with, established specialty
physicians or other health care providers with established reputations in
select markets for providing quality medical care in ENT and the Related
Specialties. The Company believes this will increase its market share in
target regions while ensuring appropriate quality treatment and maintaining
patient satisfaction. As the Company acquires the practices of, and
affiliates with, additional ENT and Related Specialties, the Company will
be able to provide a wide range of management, support and ancillary
services frequently unavailable to independent specialty practitioners.

Develop Provider Networks. The Company intends to integrate
associated physicians into multi-site ENT and related specialty provider
networks. In addition to physicians employed by practices whose assets are
acquired by the Company, the Company intends to enter into network
administration agreements with independent ENT and other specialty
physicians providing for their inclusion in managed care provider panels in
targeted geographic markets. By employing demographic, utilization and
economic analysis tools, the Company believes it can effectively develop
specialty provider networks responsive to the demands and desires of
managed care payors seeking capitated provider relationships. In addition,
the Company believes that the managed care arrangements in place at Atlanta
ENT or at

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future practices managed by the Company will be attractive to
newly-affiliating physicians joining the provider panels developed by the
Company.

Implement and Expand Information Systems. The Company believes that
access to clinical patient data is critical to cost containment and quality
outcomes, which are fundamental to negotiating appropriate capitation
contracts. Since clinical decisions made by physicians impact overall
health care expenditures, the Company believes that opportunities exist to
reduce practice costs by providing physician practices with data from
information systems designed to assist in managing the clinical aspects of
ENT and Related Specialty practices. The Company intends to use the
management information systems developed and maintained by Atlanta ENT and
intends to expand these systems so as to effectively manage capitated
contracts for additional ENT physicians and physicians and other health
care providers practicing in the Related Specialties. These systems collect
and analyze clinical and administrative data, facilitating automation of
many routine clinical functions, and provide access to the clinical and
financial data necessary to perform outcome studies, cost analyses,
utilization management and utilization reviews. The Company believes that
the Capitated Network System will enable it to effectively manage the
utilization of medical services provided by affiliated practices to managed
care enrollees.

Shift to Shared-Risk Capitated Payment Arrangements. The Company
believes that a key success factor in the management of ENT specialty
practices lies in the development and management of capitated payor
arrangements which address the administrative demands of managed care. The
Company believes that the current ENT market presence of Atlanta ENT and
the ENT Networks, as well as their experience in capitated managed care
arrangements and the development of the Capitated Network System, will
enhance the Company's ability to market to managed care payors the services
of Atlanta ENT, as well as other practices affiliating with the Company,
and negotiate risk sharing arrangements with additional managed care
payors. In addition, the Company intends to expand and diversify network
provider panels by affiliating with additional ENT physicians and
specialists practicing in the Related Specialties, thereby enhancing the
marketability of the such network provider panels to managed care payors.

ATLANTA ENT AND THE ENT NETWORKS

Atlanta ENT is the largest otolaryngology group practice in the State of
Georgia. Founded in 1979, the practice has grown to include 16 physicians, one
dentist, 15 audiologists, seven physician assistants and one clinical
esthetician. The practice offers a wide range of ENT subspecialty services,
including pediatric otolaryngology, head and neck surgery, rhinology, facial
plastics, otology and neurotology and laryngology. Additionally, the practice
provides audiology services, hearing aid sales, TMJ diagnostics and laser
snoring and sleep apnea surgical services. Serving infants, children and adults,
the practice has 14 clinical locations and its affiliated physicians maintain
privileges at 18 hospitals and two ambulatory surgical centers throughout
metropolitan Atlanta. Ramie A. Tritt, M.D., Chairman of the Board and President
and a principal stockholder of the Company, is the President and a principal
stockholder of Atlanta ENT. See "Certain Transactions."

Atlanta ENT began providing ENT medical and surgical services under a
capitated managed care contract in 1982 covering approximately 50,000 enrollees.
At December 31, 1996, Atlanta ENT served as the primary ENT provider panel for
three capitated managed care contracts covering an aggregate of approximately
361,000 enrollees. Each managed care contract is administered by separate
corporations owned by Dr. Tritt and formed solely for the purpose of holding,
managing and administering such contract. These three corporations together
comprise the ENT Networks and will become wholly-owned subsidiaries of the
Company upon the consummation of the Reorganization. The ENT Networks have
agreed to provide, on a capitated basis, substantially all of the ENT medical
and surgical services required by enrollees of HMOs sponsored by United
HealthCare, Cigna and Aetna in the greater Atlanta market. In turn, the ENT
Networks have contracted with Atlanta ENT and independent physicians to provide
such services to these enrollees. The

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three capitated managed care contracts administered by the ENT Networks covered
the following respective number of enrollees, or covered lives, at December 31,
1996:

<TABLE>
<CAPTION>
CAPITATED COVERED LIVES
-----------------------
<S> <C>
United HealthCare of Georgia..................................... 154,997
Cigna HealthCare of Georgia...................................... 163,755
Aetna Health Plans of Georgia.................................... 41,785
-------
360,537
=======
</TABLE>

The following chart illustrates the increase from December 31, 1991 to
December 31, 1996 in the number of enrollees covered under capitated managed
care contracts pursuant to which Atlanta ENT provided ENT medical and surgical
services:

BAR GRAPH

In conjunction with the recent acquisition of U.S. HealthCare by Aetna
Inc., representatives of Aetna Inc. have indicated a desire to convert the Aetna
capitated ENT managed care contract to an expanded panel (non-capitated)
modified shared risk arrangement which may be expanded to include the facility
component (inpatient and ambulatory surgery center services) as well as the
professional component (physician services) of ENT care. Although the Company is
unable to determine if and when such modification will occur, the Company does
not believe that it would have a material adverse effect on the Company's
business, financial condition or results of operations.

Affiliated physicians at Atlanta ENT and independent physicians provide ENT
medical and surgical services to enrollees under the capitated managed care
contracts held by the ENT Networks pursuant to a participation agreement with
each of the ENT Networks. Pursuant to the participation agreements, each of the
ENT Networks compensate the physicians on a discounted fee-for-service basis.
For the years ended December 31, 1994, 1995 and 1996, approximately 22%, 25% and
22%, respectively, of the net revenues of Atlanta ENT were attributable to ENT
services rendered pursuant to the managed care contracts of the ENT Networks.
The participating physicians must follow established administrative procedures,
such as referring enrollees to participating providers and obtaining prior
authorization for certain medical procedures, and must participate in
utilization management and quality management programs. Under the participation
agreements, the physicians are required to procure and maintain medical
malpractice and general liability insurance. The participation agreements may be
terminated (i) by the respective ENT Network without cause upon 60 days notice
or with cause upon 30 days notice and (ii) by a physician, with or without
cause, upon 60 days notice. In addition, the participation agreements
automatically terminate upon the termination of the relevant capitated managed
care contract.

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Based on its experience in providing ENT services to enrollees under the
capitated contracts of the ENT Networks, Atlanta ENT, in conjunction with an
independent software vendor, developed the Capitated Network System, a
comprehensive capitated administration and utilization management system which
the Company believes will enable it to effectively analyze clinical and cost
data necessary to manage capitated arrangements and assist associated physicians
in improving quality outcomes. See "-- Information Systems."

THE ADDITIONAL ATLANTA PRACTICES

In connection with the Reorganization, the Company will acquire
substantially all the assets of the Additional Atlanta Practices, which are
comprised of three practices with an aggregate of five physicians at seven
clinical locations in the metropolitan Atlanta area. The Additional Atlanta
Practices provide a wide range of ENT subspecialty services including head and
neck surgery, rhinology, facial plastics, otology and laryngology to infants,
children and adults. Metropolitan Ear, Nose & Throat, P.C., founded in 1976, is
comprised of two ENT physicians operating four clinical offices; Atlanta Head
and Neck Surgery, P.C., founded in 1977, is comprised of one ENT physician
operating two clinical offices; and Ear, Nose & Throat Associates, P.C., founded
in 1976, is comprised of two ENT physicians operating two clinical offices. In
connection with the Reorganization, the Additional Atlanta Practices will become
parties to the management services agreement between the Company and Atlanta
ENT. The physicians at the Additional Atlanta Practices will enter into
employment agreements with Atlanta ENT and participation agreements with each of
the ENT Networks. Certain of the clinical offices of the Additional Atlanta
Practices are expected to be consolidated with clinical offices of Atlanta ENT.
See "The Reorganization."

BIRMINGHAM ENT

In connection with the Reorganization, the Company will acquire all of the
assets of Birmingham ENT, which was founded in 1988 and is comprised of two ENT
physicians operating one clinical office. Birmingham ENT provides a wide range
of ENT subspecialty services, including allergy testing, head and neck surgery,
rhinology, facial plastics, otology and neurotology and laryngology to adults
and children in the metropolitan Birmingham area. The physicians of Birmingham
ENT are trained in and the practice is equipped for all aspects of ENT related
laser surgery. In connection with the Reorganization, Birmingham ENT will enter
into a management services agreement with the Company which will be
substantially similar to the management services agreement between the Company
and Atlanta ENT. The physicians at Birmingham ENT will enter into employment
agreements with PSC Alabama, a wholly-owned subsidiary of the Company. See "The
Reorganization."

MANAGED CARE CONTRACTS

The ENT Networks entered into capitated managed care contracts with United
HealthCare, Cigna and Aetna in 1991, 1992 and 1994, respectively. The current
contract with United HealthCare is a renewal of an earlier contract and expires
in May 1998. The current contracts with Cigna and Aetna are the original
contracts and provide for automatic annual renewals. Pursuant to its capitated
managed care agreements, the ENT Networks, which will become wholly-owned
subsidiaries of the Company upon consummation of the Offering and the
Reorganization, receive a pre-determined capitation fee per enrollee per month
from the respective payors in exchange for agreeing to provide ENT medical
services required by enrollees. These medical services are provided by
physicians pursuant to participation agreements with the ENT Networks under
which the ENT Networks are responsible for compensating the physicians on a
discounted fee-for-service basis. Therefore, if the revenues derived by the
Company from capitated managed care contracts are insufficient to cover the
costs of the services provided by associated physicians, the Company's business,
financial condition and operating results may be materially adversely affected.

The contracts with Cigna and Aetna provide for an annual renegotiation of
the capitation fees. Under the contract with United HealthCare capitation fees
are automatically increased annually based upon the percentage change, in the
Atlanta region, of a consumer index identified in the contract. In addition,
under the Cigna and Aetna managed care contracts the ENT Networks are reimbursed
for providing certain non-capitated services. In conjunction with the recent
acquisition of U.S. HealthCare by Aetna Inc.,

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<PAGE> 46

representatives of Aetna Inc. have indicated a desire to convert the contract
with Aetna from a capitated ENT managed care contract to an expanded panel
(non-capitated) modified shared risk arrangement which may be expanded to
include the facility component (inpatient and ambulatory surgery center
services) as well as the professional component (physician services) of ENT
care. Although the Company is unable to predict if and when such modification
will occur, the Company does not believe that it would have a material adverse
effect on the Company's business, financial condition or results of operations.

Under the managed care agreements, the ENT Networks and the participating
affiliated physicians and independent physicians are obligated, except under
certain circumstances, to refer enrollees to physicians and hospitals that have
a contractual arrangement with the payor under each contract. In addition, the
ENT Networks, the participating Founding Practice physicians and the independent
physicians are required to participate in quality management and utilization
management programs established by each payor. Quality management is the process
established by the payor to improve the quality of covered services and
utilization management is the process established to review whether certain
health care services provided to enrollees are in accordance with the
requirements established by each payor.

The managed care contracts may be terminated by either party (i) for cause,
including a material breach of the contract, generally upon 30 to 60 days notice
by the terminating party or (ii) without cause generally upon 90 to 120 days
notice by the terminating party.

NETWORK DEVELOPMENT AND MANAGEMENT

In addition to expanding through ENT and Related Specialty practice asset
acquisitions, the Company intends to develop ENT specialty provider networks
designed to enter into or provide greater access to capitated managed care
contracts with payors. These networks are expected to be comprised of ENT
physicians and specialists practicing in the Related Specialties, as well as
other health care providers. The networks are expected to include practices
managed by the Company and, eventually, independent physicians and other health
care providers engaged in ENT and the Related Specialties and contracting with
the Company under network administration agreements. These agreements are
generally expected to provide for management of the provider panel, negotiation
of managed care agreements and performance of utilization management functions.
The Company anticipates working with specialty group practices in developing
capitated contract proposals, evaluating and assembling provider panels,
negotiating contract rate schedules and exclusions, managing utilization, and
developing provider compensation methodologies.

In order to provide ENT medical and surgical services under its capitated
managed care contracts with United HealthCare, Aetna and Cigna, the ENT Networks
developed an ENT specialty provider network consisting of Atlanta ENT and 20
independent physicians. Upon completion of the Offering and the Reorganization,
the Company will hold, manage and administer these capitated managed care
contracts through its wholly-owned subsidiaries, the ENT Networks, and will
manage the existing provider panel and perform utilization management under each
contract. In addition, the Company intends to expand the provider panel
currently providing ENT medical and surgical services under each contract by
entering into network administration agreements with additional independent
physicians and other health care providers.

While the Company anticipates deriving revenue from its network development
and management activities, the Company believes the principal benefits from
including affiliated as well as independent physicians in provider networks will
be the expansion and diversification of provider panels available to HMO
enrollees, as increasingly required by HMOs, and the ability of the Company to
more effectively evaluate a specialty practice prior to committing to an
acquisition of the assets of such practice.

INFORMATION SYSTEMS

The Company will support the free-standing practice management systems
utilized by Atlanta ENT to facilitate patient scheduling, billing and
collection, accounts receivable, management, provider productivity analysis and
select cash disbursement functions. Rather than superseding systems utilized by
future affiliated practices, the Company intends to develop software to bridge
(or interface) an affiliated practice's systems with the Company's system in
order to streamline consolidated financial reporting, accounts receivable

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management and productivity analysis functions. Additionally, the Company
anticipates providing and is evaluating the individual patient electronic
medical record system utilized by Atlanta ENT for possible implementation at
future affiliated physician practices. The Company believes that the use of this
system may enhance operating efficiency through automation of many routine
functions, as well as the capacity to link "procedure specific" treatment
protocols, thereby enhancing the physician's ability to provide cost-effective
patient care.

The Company believes that effective and efficient access to key clinical
patient data is critical in controlling costs and improving quality outcomes as
the Company and the ENT Networks renew and enter into additional capitated
managed care contracts. The Company currently utilizes the Capitated Network
System, developed and enhanced by Atlanta ENT in collaboration with an
unaffiliated software vendor. The Company is currently negotiating a license to
any rights held by the vendor. The Capitated Network System integrates the
following five functions:

- Tracking referrals from primary care physicians
- Issuing and managing authorization for surgeries and tracking diagnoses,
procedures and admissions
- Processing claims for physician payment
- Providing extensive customized management reports (including diagnosis
and procedure utilization data)
- Maintaining support files

The emergence of managed care has increased the need for specific and
extensive information collection, analysis and management so that providers can
better demonstrate outcomes and quantify the revenues and expenses associated
with managed care contracts. The Company believes that the Capitated Network
System will allow physicians, at the point of care and on a real-time basis, to
(i) access patient-specific medical and payor information, (ii) provide
extensive customized management reports and utilization reviews, (iii) issue and
manage authorization for surgeries and (iv) track diagnoses, procedures and
admissions. As a result, the Company believes that the Capitated Network System
will provide the Company with a competitive advantage in procuring and
administering specialty capitated managed care contracts.

COMPANY OPERATIONS

The Company intends to provide management and administrative services to
associated physicians, including access to integrated management information
systems, lower cost professional liability insurance, employee benefit programs,
and capital equipment, as well as access to marketing resources and the
Capitated Network System. The Company believes its services can provide
physicians relief from administrative burdens, access to economies of scale, and
access to capital, while allowing them to focus on providing high quality and
cost-effective medical care. The Company further believes that it can enhance
growth in ENT and Related Specialty practices affiliating with the Company
pursuant to management services agreements by expanding managed care
arrangements, assisting in the recruiting of new physicians and expanding and
adding services that have historically been performed outside of such practices.

Affiliated Physicians

The relationship between the Company and its affiliated physicians will be
set forth in asset or stock acquisition agreements, management services
agreements and employment agreements. Through an asset or stock acquisition
agreement, the Company will, depending on regulatory and other factors, either
(i) acquire substantially all of the assets utilized in the practice and assume
certain liabilities, leases and other contracts of such practice or (ii) acquire
the equity of the practice. The medical practice will enter into a management
services agreement with the Company, generally having an initial term of 40
years, and providing for the Company to manage the affiliated practice while
enabling the affiliated physicians to retain their autonomy through their
professional corporations, thereby maintaining governance of physician-specific
clinical issues. Typically, the physicians in a medical practice, the assets or
equity of which are acquired by the Company, will sign employment agreements
with the medical group providing for an initial term of five years and
containing noncompetition covenants and other terms acceptable to the Company.

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<PAGE> 48

Acquisition Agreements

Pursuant to acquisition agreements, including the Company's acquisition
agreements with Atlanta ENT, each of the Additional Atlanta Practices and
Birmingham ENT (the "Acquisition Agreements"), the Company, generally through
PSC Management, will either (i) acquire substantially all of the assets utilized
in a practice (other than certain excluded assets such as employment agreements
and patient charts, records and files) and assume certain liabilities, leases
and other contracts of the practice group or (ii) acquire the equity of the
practice. The practice will remain liable for the payment of excluded
liabilities under the acquisition agreement. The Acquisition Agreements provide
that the medical practice and the stockholders of such practice, if any, will
not, for a period of time following the closing of the acquisition, compete with
the Company within a specified geographic area, will not solicit patients of the
Company within such geographic area and will not solicit employees of the
Company. The Acquisition Agreements also contain representations and warranties
and indemnification provisions by each of the parties to the agreement. In
addition, the closing of the acquisition will be conditioned upon, among other
things, the execution and delivery of (i) an employment agreement between select
physicians affiliated with the practice whose equity or assets are to be
acquired and such practice and (ii) a management services agreement between the
Company, such practice and, in some cases, certain of the practices' shareholder
physicians. See "Certain Transactions."

Management Services Agreements

Pursuant to management services agreements, the Company, through PSC
Management, will act as the exclusive manager and administrator of an affiliated
practice. Upon the closing of the Offering, the Company will enter into a
management services agreement with Atlanta ENT (which will include the
physicians practicing at the Additional Atlanta Practices) and the stockholder
physicians at Atlanta ENT and the Additional Atlanta Practices, and will enter
into a separate management services agreement with Birmingham ENT (collectively,
the "Management Services Agreements"). The Management Services Agreements
provide for the affiliated practice to assign to the Company all or
substantially all of its non-governmental accounts receivable and all of its
rights and interest in the proceeds of its governmental accounts receivable (or
the revenue it receives)and grants to the Company the right to collect and
retain the proceeds of the accounts receivable (or revenue) for the Company's
account to be applied in accordance with the agreement. Although such proceeds
of the accounts receivable (or revenue) are collected by the Company on behalf
of the practice, the practice grants to the Company the right to grant a
security interest and factor such accounts receivable and such receivables will
secure Company borrowings under the Credit Facility.

The Company will be responsible for the payment of operating expenses of
the affiliated physician practice, including salaries and benefits of
non-medical employees of the practice, lease obligations for office space and
equipment and medical and office supplies, and the non-operating expenses of the
affiliated physician practice, including depreciation, amortization and
interest. The Company will pay for all such expenses directly out of the
proceeds of the accounts receivable (or revenues) assigned to the Company by the
affiliated physician practice. For providing services pursuant to the Management
Services Agreements, the Company will retain a management fee equal to a
stipulated percentage of all revenues generated by or on behalf of physicians
practicing at the practice (after adjustment for contractual allowances),
subject to specified maximum annual amounts, as payment for the Company's
services and non-allocable costs incurred by the Company attributable to the
provision of management services under the Management Services Agreement. In
addition, the Company will be entitled to incentive compensation under the
Management Services Agreements upon the receipt of the specified maximum annual
amounts. The remaining revenues will be remitted to the affiliated practice to
pay compensation and benefits to (i) physicians pursuant to employment
agreements between the practice and each physician and (ii) physician
assistants. See "Certain Transactions."

Under the Management Services Agreements, the Company, among other things,
will (i) act as the exclusive manager and administrator relating to all
(non-clinical) operations of the affiliated practice, (ii) bill patients,
insurance companies and other third-party payors and collect on behalf of the
affiliated practice the fees for professional medical services and other
services and products rendered or sold by the affiliated practice, (iii)
provide, as necessary, clerical, accounting, purchasing, payroll, legal,
bookkeeping and computer

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<PAGE> 49

services and personnel and information management services to the affiliated
practice, (iv) supervise and maintain custody of all files and records of the
affiliated practice, (v) provide facilities, furniture and equipment for the
affiliated practice, (vi) prepare all annual and capital operating budgets of
the affiliated practice, (vii) order and purchase inventory and supplies as
reasonably required by the affiliated practice, (viii) market the services
provided by the affiliated practice, (ix) provide financial and business
assistance to the affiliated practice, in the negotiation, establishment,
evaluation and administration of contracts and relationships with managed care
and other similar providers and payors and (x) perform administrative services
relating to the recruitment of physicians for the affiliated practice.

The affiliated practice will retain the responsibility for, among other
things, (i) compensating physician employees and physician assistants, (ii)
paying insurance premiums and deductibles for professional liability insurance
policies, (iii) ensuring that affiliated physicians have the required licenses,
credentials, approvals and other certifications needed to perform their duties
and (iv) complying with certain federal and state laws and regulations
applicable to the practice of medicine. In addition, the affiliated practice
will retain exclusive control over all aspects of the practice of medicine and
the delivery of medical services.

The Company will establish an advisory board at each affiliated practice
comprised of physicians at the affiliated practice and Company management
personnel whose responsibilities will be advisory in nature. The advisory board
will review, evaluate and make recommendations to the officers of the affiliated
practice and the officers of the Company with respect to strategic and
operational planning, physician employment and recruitment, patient fees and
collection policies, quality review and the establishment and maintenance of
relationships with managed care and other similar providers and payors.
Notwithstanding recommendations of the advisory board, the Company will have
ultimate control over all decisions relating to the non-clinical operations of
the affiliated practice, and the affiliated practice will have ultimate control
over all decisions relating to the practice of medicine.

The Management Services Agreements will be for an initial term of 40 years,
which may be extended for separate and successive five-year terms. The
Management Services Agreements may be terminated by either party if the other
party (i) files a petition in bankruptcy or other similar events occur or (ii)
defaults on the performance of a material duty or obligation, which default
continues without cure for a specified term after notice.

During the term of the Management Services Agreements, the affiliated
practice will agree, with respect to management services, not to compete with
the Company and the other practices for which the Company provides management
services within a specified geographic area. In addition, during the term of the
Management Services Agreements and for a period following the termination of
such agreement, the affiliated practice will agree not to solicit any employee
of the Company or persons affiliated with the Company and for a period following
the termination of such agreement the affiliated practice will not contract with
any entity for the provision of comprehensive management services substantially
of the kind contemplated by the management services agreement. The affiliated
practice will also agree not to disclose certain confidential and proprietary
information relating to the Company and the affiliated practice.

Physician Employment Agreements

Physicians in medical practices which enter into management services
agreements with the Company, including physicians at Atlanta ENT and the
Additional Atlanta Practices, will typically enter into employment agreements
with the affiliated medical practice or, in the case of Birmingham ENT,
employment agreements with a wholly-owned subsidiary of the Company. Physician
employment agreements will generally provide, and the employment agreements with
the physicians at Atlanta ENT and the Additional Atlanta Practices provide, for
an initial term of five years, which will be automatically renewed for
successive one year terms unless an affiliated physician or the medical practice
elects not to renew the term by providing at least 90 days written notice of
such election or such agreement is otherwise terminated for cause or the death
or disability of an affiliated physician. The employment agreements to be
entered into between the physicians of Birmingham ENT and PSC Alabama, a
wholly-owned subsidiary of the Company, provide for an initial term of six years
and six months, which will be automatically renewed for successive one year
terms unless the physician or PSC Alabama elects not to renew. Affiliated
physicians will be paid based upon either

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<PAGE> 50

productivity or other negotiated formulas agreed upon between the affiliated
physician and the medical practice, and the medical practice will provide the
affiliated physicians with health, death and disability insurance and other
benefits. Affiliated physicians will be obligated to obtain and maintain
professional liability insurance coverage which may be procured on behalf of the
affiliated physicians by the Company. Pursuant to the employment agreements,
affiliated physicians will agree not to compete with the medical practice, not
to solicit patients of the medical practice and not to interfere with employees
of the medical practice for a certain period following the termination of such
employment agreement unless the agreement is terminated by the affiliated
physician for cause. In addition, affiliated physicians will agree not to
disclose any confidential and proprietary information of the medical practice
during the term of the agreement and for a certain period following the
termination of the agreement. Furthermore, under the employment agreements,
affiliated physicians will assign to the medical practice all contracts with
HMOs or other managed care arrangements and will grant an irrevocable power of
attorney to the medical practice to enter into such contracts on behalf of the
physician. The employment agreements also provide that the affiliated physicians
exercise independent professional and ethical judgment in all patient care
responsibilities.

COMPETITION

The physician practice management industry in the United States generally,
and in the Southeastern United States specifically, is highly competitive. The
restructuring of the United States health care system is leading to rapid
consolidation of the existing highly-fragmented health care delivery system into
larger and more organized groups and networks of health care providers. The
Company expects competition to increase as a result of this consolidation and
ongoing cost containment pressures among other factors. The Company will compete
with management services organizations, for-profit and nonprofit hospitals, HMOs
and other competitors seeking to form strategic alliances with physicians or
provide management services to physicians. The Company believes that the quality
of its management services, experience in developing, managing and administering
capitated managed care contracts, the breadth of the ENT medical and surgical
services provided by physicians practicing at affiliated practices and the
utility of the Capitated Network System positions it to compete favorably for
affiliation with additional ENT and complementary group practices.

The Company is unable to predict the extent of future competition because
of changing competitive conditions, changes in laws and regulations, government
budgeting, technological and economic developments and other factors. However,
there are certain companies, including hospitals and insurers, that are
expanding their presence in the health care industry and are significantly
larger, provide a wider variety of services, have greater experience in
providing health care management services, have longer established relationships
with customers for these services and have access to substantially greater
financial resources than the Company.

The Company believes that competition for fee-for-service revenue is
dependent upon, among other things, the geographic coverage of affiliated
practices, the reputation and referral patterns of affiliated physicians, the
breadth of ENT medical and surgical services provided by physicians practicing
at affiliated practices and the composition of the physicians at such practices.
The Company's ability to compete successfully for specialty capitated managed
care contracts may depend upon, among other things, the Company's ability to
increase the number of associated physicians and other health care professionals
included in its network provider panel through asset or equity acquisitions of
additional specialty practices and by entering into network agreements with
independent physicians. There can be no assurance that suitable acquisitions can
be accomplished on terms favorable to the Company or that financing, if
necessary, can be obtained for such acquisitions. In addition, there can be no
assurance that the Company would be able to operate profitably any facilities,
businesses or other assets it may acquire, effectively integrate the operations
of such acquisition or otherwise achieve the intended benefits of such
acquisition.

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<PAGE> 51

Company's future growth and operations. There can be no assurance that
sufficient numbers of qualified health care professionals can be hired and
retained. The inability to hire and retain such health care professionals could
have a material adverse effect on the Company's operations. In addition, a
shortage of skilled personnel or the delay resulting from a need to train
personnel could have a material adverse effect on the Company's business,
financial condition or operating results.

The health care industry as a whole, is facing the challenge of continuing
to provide quality patient care while dealing with rising costs, strong
competition for patients and a general reduction of reimbursement rates by both
private and government payors. As both private and government payors are
reducing the scope of what may be reimbursed and reducing reimbursement levels
for covered services, national and state efforts to reform the United States
health care system may further impact reimbursement rates. Changes in medical
technology, existing and future legislation, regulations and interpretations and
competitive contracting for provider services by private and government payors
may require changes in the Company's facilities, equipment, personnel, rates
and/or services in the future.

GOVERNMENT REGULATION

The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates and intends to
operate will not change significantly and adversely in the future. In general,
regulation of the health care industry, including scrutiny of the methods and
levels of payment to health care providers is increasing. The Company believes
that health care legislation, regulations and interpretations will continue to
change and, as a result, plans to routinely monitor developments in health care
law. The Company expects to modify its agreements and operations from time to
time as the business and regulatory environments change. While the Company
believes it will be able to structure all of its agreements and operations in
accordance with applicable law, the lack of definitive interpretations of many
statutory and regulatory provisions means that there can be no assurance that
the Company's arrangements are in compliance with such provisions or will not be
successfully challenged. See "Risk Factors -- Government Regulation."

Government Reimbursement Programs

Under the federal Medicare program, payment for physician services (other
than under Medicare risk contracts) is based on an annually adjusted fixed fee
schedule known as the Resource-Based Relative Value Scale ("RBRVS"). This
payment system, derived from historically customary and prevailing charge data,
is intended to reflect the relative resources required to provide a given
service as compared to another service. Fee schedule amounts are also based upon
a geographic adjustment factor and certain national conversion factors. The
RBRVS system is undergoing continual modifications and the Company anticipates
that the RBRVS fee schedule will continue to result in reductions from
historical levels in the per patient payment from the Medicare program. Because
the Company anticipates that approximately 10% of its revenues will be derived
from government-funded health care programs (principally, Medicare and
Medicaid), the Company does not believe that such reductions will result in a
material adverse change in the results of operations of the Company. The
Medicaid program is a partially federal-funded state administered program for
the indigent. Payment to physicians under state Medicaid programs is generally
based upon fee schedules. Both the Medicare and Medicaid programs are subject to
statutory and regulatory changes, retroactive and prospective rate adjustments,
administrative rulings, interpretations of policy, intermediary/carrier
determinations and government funding restrictions, all of which may materially
increase or decrease the rate of program payments to physicians and other health
care practitioners.

Stark Legislation and Fraud and Abuse Laws

The Company is subject to a variety of laws and regulations governing the
referral of patients to facilities with which the referring physician has a
financial relationship. Significant prohibitions against physician referrals
were enacted 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, Stark II prohibits, subject to
certain exceptions, a physician (or a member of the physician's immediate
family) from referring Medicare or Medicaid patients for "designated

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<PAGE> 52

health services" to an entity with which the physician has a financial
relationship. Financial arrangements include both ownership arrangements and
compensation arrangements, including such an arrangement with the physician's
own group practice. The designated health services include clinical laboratory
services, radiology services, radiation therapy services, physical and
occupational therapy services, durable medical equipment, parenteral and enteral
nutrients, equipment and supplies, prosthetics, orthotics, outpatient
prescription drugs, home health services and inpatient and outpatient hospital
services. The penalties for violating Stark II include a prohibition on payment
by Medicare or Medicaid for services resulting from prohibited referrals, and
civil penalties of as much as $15,000 for each violative referral and $100,000
for participation in a "circumvention scheme." The Company believes that its
activities are not in violation of Stark I or Stark II. However, the Stark
legislation is broad and ambiguous. Interpretative regulations clarifying the
provisions have only been issued with respect to Stark I (clinical laboratory
services), and have not yet been issued with respect to Stark II (the other
designated health services). In addition, a number of states have enacted
similar laws which apply to referrals made for services reimbursed by all
payors, and not simply Medicare or Medicaid. Future regulations could require
the Company to modify the form of its relationships with physician
organizations. Moreover, the violation of Stark I or II by the Company's
affiliated physician organizations could result in significant fines and loss of
reimbursement which could materially adversely affect the Company.

The Company is also subject to federal and state fraud and abuse laws.
These laws include the Medicare and Medicaid anti-kickback statute, which
prohibits, among other things, the offer, payment, solicitation or receipt of
any remuneration, directly or indirectly in return for the referral of patients,
or arranging for the furnishing of items and services that are paid for in whole
or in part by Medicare, Medicaid or other federally-funded programs. The courts
and the Office of Inspector General of The Department of Health and Human
Services have stated that the anti-kickback statute is violated if one purpose,
as opposed to a primary or sole purpose, of the arrangement is to induce
referrals. Violations of the anti-kickback statute are punishable by criminal or
civil penalties, and/or exclusion of the provider from future participation in
the Medicare, Medicaid and other federally-funded programs. The federal
government has published exemptions, or "safe harbors," for business
transactions that will be deemed not to violate the anti-kickback statute.
Although satisfaction of the requirements of these safe harbors provides
protection from enforcement action under the anti-kickback legislation, failure
to meet the safe harbors does not necessarily mean that the activity violates
the statutory prohibitions. Rather, the legality of a particular business
arrangement will be assessed by comparing the particular facts of the
transaction to the proscriptions of the statute. In addition, a number of states
have enacted similar laws, which vary from state to state, prohibiting
remuneration or fee-splitting arrangements between health care providers for the
referral of patients to a particular provider, regardless of the payor source.
Also, under separate statutes, submission of claims for payment that are "not
provided as claimed" may lead to civil money penalties, criminal fines and
imprisonment and/or exclusion from participation in the Medicare, Medicaid and
other federally-funded health care programs. These false claims statutes include
the Federal False Claims Act, which allows any person to bring suit alleging
false or fraudulent Medicare or Medicaid claims or other violations of the
statute and to share in any amounts paid by the entity to the government in
fines or settlement. Such qui tam actions have increased significantly in recent
years and have increased the risk that a health care company will have to defend
a false claims action, pay fines or be excluded from participation in the
Medicare and/or Medicaid programs as a result of an investigation arising out of
such an action. Recently, Congress enacted the Health Insurance Portability and
Accounting Act of 1996, which includes an expansion of certain fraud and abuse
provisions to other federal health care programs. Due to the breadth of the
statutory provisions of the Fraud and Abuse Laws and the absence of definitive
regulations or court decisions addressing the type of arrangements by which the
Company and its affiliated entities conduct and will conduct their business,
from time to time certain of their practices may be subject to challenge under
these laws.

The Company has attempted to structure its business relations to comply
with the Stark Legislation, the Fraud and Abuse Laws and all other applicable
health care laws and regulations. However, there can be no assurance that such
laws will be interpreted in a manner consistent with the Company's practices.
There can be no assurance that challenges under such laws or regulations or new
laws or regulations will not require the Company or its affiliated entities to
change their practices or will not have a material adverse effect on the

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Company's business, financial condition or operating results. In addition, state
legislatures and other governmental entities are considering additional measures
restricting or regulating referrals, and there can be no assurance that new laws
or regulations will not be enacted which will require restructuring of the
Company's operations or otherwise have a material adverse effect on the
Company's business, financial conditions or operating results.

Health Care Reform

Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Changes in the law,
new interpretations of existing laws, or changes in payment methodology or
amounts, may have a dramatic effect on the relative costs associated with doing
business and the amount of reimbursement by government and other third party
payors. In addition to specific health care legislation, both the President and
the Congress have expressed an interest in controlling the escalation of health
care expenditures and using health care reimbursement policies to help control
the federal deficit. In recent years, there have been numerous initiatives on
the federal and state levels for comprehensive reforms affecting the payment for
and availability of health care services. For example, in 1995, Congress passed
legislation to reduce significantly Medicare and Medicaid expenditures over
seven years, which would have cut payments to health care providers
participating in the Medicare and Medicaid programs. Although President Clinton
vetoed this legislation, the administration's counterproposal would have
included similar, although less drastic, Medicare and Medicaid payment
reductions. The Company anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems and
payment methodologies, and public debate of these issues will likely continue in
the future. Due to uncertainties regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, of such reform proposals will be adopted, when they may be
adopted or what impact they may have on the Company, and there can be no
assurance that the adoption of reform proposals will not have a material adverse
effect on the Company's business, operating results or financial conditions. In
addition, the actual announcement of reform proposals and the investment
community's reaction to such proposals, as well as announcements by competitors
and third-party payors of their strategies to respond to such initiatives, could
produce volatility in the trading and market price of the Common Stock. In
addition, some states in which the Company may operate in the future are
considering various health care reform proposals.

Other Licensing Requirements

Every state imposes licensing requirements on individual physicians, and
some regulate facilities and services operated by physicians. In addition, many
states require physicians to obtain regulatory approval, including certificates
of need, before establishing certain types of health care facilities, offering
certain services, or making certain capital expenditures in excess of statutory
thresholds for health care equipment, facilities or services. To date, none of
the Company or the Initial Practices have been required to obtain certificates
of need or similar approvals for their activities. In connection with the
expansion of its operations into new markets and contracting with managed care
companies, the Company and its affiliated practices may become subject to
compliance with additional regulations. In addition, the Company and its
affiliated practices are subject to federal, state and local laws dealing with
issues such as occupational safety, employment, medical leave, insurance
regulation, civil rights and discrimination, medical waste and other
environmental issues. Increasingly, federal, state and local governments are
expanding the regulatory requirements for businesses, including medical
practices. The imposition of these regulatory requirements may have the effect
of increasing operating costs and reducing the profitability of the Company's
operations.

Restrictions on Corporate Practice of Medicine

The laws of certain states in which the Company operates or may operate in
the future prohibit non-physician entities from practicing medicine or from
exercising control over the professional judgments or decisions of physicians
concerning the treatment and diagnosis of patients or engaging in certain
practices such as fee-splitting with physicians. In Georgia, there is also case
law which could be interpreted as prohibiting a

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corporation from employing physicians, but the continued viability of such
doctrine in Georgia is unclear. In Alabama, recent interpretations by state
authorities have indicated that a corporation may employ physicians as long as
the physicians exercise their independent professional judgment in rendering
medical decisions concerning the treatment and diagnosis of patients. Although
the Company has structured its affiliations with physician groups so that the
associated physicians maintain exclusive authority regarding the delivery of
medical care and exercise their independent professional judgment in rendering
medical decisions, there can be no assurance that these laws will be interpreted
in a manner consistent with the Company's practices or that other laws or
regulations will not be enacted in the future that could have a material adverse
effect on the Company's business. If a corporate practice of medicine law is
interpreted in a manner that is inconsistent with the Company's practices, the
Company would be required to restructure or terminate its relationship with the
applicable physician group in order to bring its activities into compliance with
such law. The termination of, or failure of the Company to successfully
restructure, any such relationship could result in fines or a loss of revenue
that could have a material adverse effect on the Company's business, financial
condition or operating results.

LIABILITY AND INSURANCE

The provision of health care services entails the risk of potential claims
of medical malpractice and similar claims. The Company does not, itself, engage
in the practice of medicine or have responsibility for compliance with
regulatory requirements directly applicable to physicians and requires
affiliated physicians performing medical services at its facilities to maintain
medical malpractice insurance. Nevertheless, there can be no assurance that
malpractice will not be asserted against the Company directly in the event that
services or procedures performed at one of the Company's facilities are alleged
to have resulted in injury or other adverse effects. In addition, in connection
with the acquisition of assets of Atlanta ENT, the Additional Atlanta Practices
and Birmingham ENT, the Company is assuming certain of the stated liabilities of
such practices. Additionally, claims may be asserted against the Company for
events related to Atlanta ENT, the Additional Atlanta Practices or Birmingham
ENT that occurred prior to the Reorganization. Although the Company intends,
upon consummation of the Reorganization, to obtain liability insurance that it
believes will be adequate as to both risk and amounts, successful malpractice
claims could exceed the limits of the Company's insurance and could have a
material adverse effect on the Company's business, financial condition or
operating results. Moreover, a malpractice claim asserted against the Company
could be costly to defend, could consume management resources and could
adversely affect the Company's reputation and business, regardless of the merit
or eventual outcome of such claim. In addition, there can be no assurance that
the Company will be able to obtain such insurance on commercially reasonable
terms in the future or that any such insurance will provide adequate coverage
against potential claims.

The Company will require each associated physician or group to obtain and
maintain professional liability insurance coverage. Such insurance would provide
coverage, subject to policy limits in the event the Company were held liable as
a co-defendant in a lawsuit for professional malpractice against a physician. In
addition, the Company generally is indemnified under the management agreements
by the affiliated physician groups for liabilities resulting from the
performance of medical services.

EMPLOYEES

Upon the closing of the Offering and the consummation of the
Reorganization, the Company will have approximately 136 full-time employees,
including two physicians and 19 allied health care professionals. The Company
intends to hire additional management and administration personnel. None of the
Company's employees is represented by a labor union and the Company believes its
relations with its employees are satisfactory.

PROPERTIES

The Company currently shares office space with Atlanta ENT pursuant to an
oral agreement under which the Company does not pay rent. The Company
anticipates leasing approximately 2,500 square feet of office space for its
executive office in Atlanta, Georgia. The lease will provide for annual rent of
approximately

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$50,000 during 1997, subject to specified annual increases. Upon closing of the
Offering and consummation of the Reorganization, the Company will assume the
leases for the 13 facilities currently used by Atlanta ENT which have varying
remaining terms ranging from one month to 13 years and three months and
aggregate annual rent of approximately $830,000. In addition, Atlanta ENT has
entered into a five-year lease for an additional facility, the construction of
which is expected to be completed by July 1997. The lease provides for annual
rent of approximately $55,000 and will be assumed by the Company upon closing of
the Offering and the Reorganization. Upon the closing of the Offering and
consummation of the Reorganization, the Company will also assume the leases of
six facilities operated in the aggregate by the Additional Atlanta Practices and
Birmingham ENT, which have varying remaining terms ranging from one month to
three years and six months and aggregate annual rent of approximately $152,688.
The Company believes that the shared office space, together with the office
space it anticipates leasing and the assumed leases will be suitable for the
current and anticipated needs of the Company.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings. See
"-- Liability and Insurance."

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<PAGE> 56

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth the names, ages and positions of the
executive officers and directors of the Company and the persons expected to
become executive officers or directors of the Company upon completion of the
Offering:

<TABLE>
<CAPTION>
NAME AGE POSITION
- - ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Ramie A. Tritt, M.D........................ 47 Chairman of the Board and President
Gerald R. Benjamin(2)...................... 39 Vice Chairman of the Board, Secretary and
Director
Richard D. Ballard(1)...................... 48 Chief Executive Officer and Director
Lawrence P. Kraska......................... 32 Vice President -- Operations(3)
Robert A. DiProva.......................... 49 Executive Vice President and Chief
Financial Officer(3)
Edward R. Casas, M.D.(1)(2)................ 37 Director
Sidney Kirschner(2)........................ 62 Director(3)
Steven L. Posar, M.D.(1)(2)................ 47 Director(3)
</TABLE>

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

(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Effective upon completion of the Offering

Ramie A. Tritt, M.D. has served as the Chairman of the Board and President
of the Company since its inception in July 1996. Dr. Tritt serves as President
of Atlanta ENT, a multi-site otolaryngology group practice which is a successor
to a practice founded by Dr. Tritt in 1979. Dr. Tritt also serves as President
and Medical Director of the ENT Center of Atlanta, Inc., Atlanta ENT Center for
Physicians, Inc., and Atlanta AHP, Inc., three otolaryngology provider networks
(comprising the ENT Networks) established to contract with HMOs in greater
Atlanta. Dr. Tritt was a founding Member and currently serves as President of
Georgia Multi-Specialty Group, L.L.C., a consortium of 15 specialty group
practices, encompassing approximately 650 physicians, which contracts with
payors for specialty medical services throughout metropolitan Atlanta. Dr. Tritt
has served on the Medical Advisory Board of Healthsource of Georgia since June
1996 and the ENT Physician Advisory Board of the Ambulatory Surgery Division of
Columbia HCA since January 1997. Dr. Tritt received his M.D. degree from McGill
University.

Gerald R. Benjamin has served as Vice Chairman and Secretary of the Company
since its inception in July 1996. Mr. Benjamin serves as Chief Executive Officer
of Premier HealthCare, a division of Bock, Benjamin & Co., a boutique health
care investment banking concern which Mr. Benjamin co-founded in 1993. Prior to
founding Bock, Benjamin & Co., Mr. Benjamin served as Chief Executive Officer of
Premier HealthCare, Inc., a health care venture development and management firm
which Mr. Benjamin co-founded in 1991. Prior to co-founding Premier HealthCare,
Inc., Mr. Benjamin served for ten years as Managing Partner and Director of
Corporate Finance Services for Williams, Benjamin, Benator & Libby, an Atlanta,
Georgia-based Certified Public Accounting firm. Prior to forming Williams,
Benjamin, Benator & Libby in 1982, Mr. Benjamin was a member of the Atlanta
office of Ernst & Young. Mr. Benjamin received his Bachelor of Science degree in
accounting from the University of Kentucky, where he was named a Coopers &
Lybrand scholar.

Richard D. Ballard has served as the Chief Executive Officer and a director
of the Company since November 1996. Prior to joining the Company, Mr. Ballard
served as Vice President of Recruiting for Physicians' Online, Inc., founding an
intranet physician recruiting service. Prior to joining Physicians' Online in
September 1995, Mr. Ballard served as Executive Vice President, President and
Chief Executive Officer of Allegiant Physician Services, Inc. (formerly Premier
Anesthesia, Inc.), an anesthesia contracting and physician practice management
company. Prior to joining Premier Anesthesia in 1988, Mr. Ballard served for

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<PAGE> 57

six years as Executive Vice President of Jackson & Coker Inc., a national
physician recruiting firm and for seven years as director of national recruiting
for Spectrum Emergency Care Inc.

Lawrence P. Kraska will become the Vice President-Operations of the Company
concurrently with the completion of the Offering. Mr. Kraska has served as the
Administrator of Atlanta ENT, since June 1994. Prior to joining Atlanta ENT, Mr.
Kraska provided hospital administration, physician recruiting and practice
management services as the Regional Director of Professional Relations for the
Atlanta division of National Medical Enterprises from July 1993 to May 1994, for
Charter Medical Corporation -- Charter Peachford Hospital from September 1992 to
June 1993 and as the Administrator for The Center For Psychiatry, a large
multi-specialty mental health group practice, from March 1990 to August 1992.
Mr. Kraska received his Masters in Business Administration from Kennesaw State
University.

Robert A. DiProva will become an Executive Vice President and the Chief
Financial Officer of the Company concurrently with the completion of the
Offering. Mr. DiProva served as Vice President-Administration, Chief Financial
Officer, Secretary and Treasurer of A.D.A.M. Software, Inc., a publicly traded
medical software company, from September 1995 to February 1997. Prior to joining
A.D.A.M. Software in 1995, Mr. DiProva served for six years as Vice President,
Chief Financial Officer and Treasurer of DATEQ Information Network, Inc., a
publicly traded data management company. Mr. DiProva is a Certified Public
Accountant and received his Masters in Business Administration from Emory
University.

Edward R. Casas, M.D. has served as a director of the Company since
November 1996. Dr. Casas is President of PrimeCare International, Inc., a
California-based multi-site primary care physician practice management concern.
Prior to joining PrimeCare in September of 1996, Dr. Casas served as Vice
President of Mergers and Acquisitions for the Physician Practice Management
Division of Caremark International Inc. Prior to joining Caremark International
in December 1992, Dr. Casas completed his active duty service as a designated
Flight Surgeon in support of Marine special operations and as a clinical
Departmental Head in Aerospace Medicine in the United States Navy. Prior to
completing his medical training, Dr. Casas was Executive Vice President of CES
Corporation, an investment banking concern. Dr. Casas is a graduate of
Northwestern University's Medical School and Kellogg Graduate School of
Management where he concurrently earned a Medical Doctorate, a Masters of
Management and a Masters in Public Health.

Sidney Kirschner will become a director of the Company concurrently with
the completion of the Offering. Since 1992, Mr. Kirschner has served as the
President and Chief Executive Officer of Northside Hospital, a 455 bed tertiary
care facility located in Atlanta, Georgia. Prior to joining Northside Hospital,
Mr. Kirschner served in numerous executive capacities, including President,
Chief Executive Officer and Chairman of the Board, of National Service
Industries, Inc. a publicly listed diversified manufacturing and industrial
services concern. Mr. Kirschner currently serves as a member of the Board of
Directors of two public companies: American Brands, Inc. and Superior Surgical
Manufacturing Company, Inc.

Steven L. Posar, M.D. will become a director of the Company concurrently
with the completion of the Offering. Dr. Posar currently serves as Senior Vice
President, Operations Group of AHI HealthCare Systems, Inc., a publicly traded
independent physician management company. Prior to joining AHI in 1991, Dr.
Posar served as Medical Director of Blue Cross of California, a managed care
payor with approximately 2.5 million enrollees in sponsored HMO and preferred
provider organization plans. Prior to joining Blue Cross of California, Dr.
Posar spent three years as Chief of Cigna Medical Center, and staff medical
director of Cigna Healthplan of Los Angeles, a staff model HMO with
approximately 450,000 enrollees. Dr. Posar received his M.D. degree from
Michigan State University.

Dr. Tritt and Mr. Benjamin were elected as directors of the Company
pursuant to an agreement entered into in connection with the formation of the
Company. See "Certain Transactions."

All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualified; vacancies and any additional
positions created by board action are filled by action of the existing Board of
Directors. Officers are elected to serve, subject to the discretion of the Board
of Directors, until their successors are appointed.

The Board of Directors has established a Compensation Committee and an
Audit Committee. Upon completion of the Offering, the Compensation Committee
will consist of three directors. The Compensation

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Committee reviews and recommends to the Board of Directors the compensation and
benefits of all officers of the Company, reviews general policy matters relating
to compensation and benefits of employees of the Company and administers the
Company's stock option plans.

Upon completion of the Offering, the Audit Committee will consist of four
directors. The Audit Committee is authorized to review, with the Company's
independent accountants, the scope and timing of audit services and any other
services that the accountants are asked to perform, their report on the
Company's financial statements following completion of their audit and the
Company's policies and procedures with respect to internal accounting and
financial controls. In addition, the Audit Committee makes annual
recommendations to the Board of Directors for the appointment of independent
public accountants for the ensuing year.

DIRECTOR COMPENSATION

Directors who are not officers or employees of the Company ("Independent
Directors") are entitled to compensation of $1,500 for each Board of Directors
meeting attended and are reimbursed for expenses actually incurred in connection
with attending such meetings. Independent Directors are also awarded initial
grants of non-qualified stock options to purchase 7,500 shares of Common Stock
upon joining the Board of Directors and annual grants of non-qualified stock
options to purchase 2,500 shares of Common Stock. All options are granted at the
then fair market value. See "-- Stock Option Plans" and "Certain Transactions."

LIMITATION ON LIABILITY; INDEMNIFICATION AGREEMENTS

The General Corporation Law of the State of Delaware permits a corporation
through its Certificate of Incorporation to eliminate the personal liability of
its directors to the corporation or its stockholders for monetary damages for
breach of fiduciary duty of loyalty and care as a director, with certain
exceptions. The exceptions include a breach of the director's duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, improper declarations of dividends, and transactions
from which the directors derived an improper personal benefit. The Company's
Certificate of Incorporation exonerates its directors from monetary liability to
the fullest extent permitted by this statutory provision but does not restrict
the availability of non-monetary and other equitable relief. The Company's By-
Laws provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by Delaware Law. See "Description of Capital Stock."

The Company also intends to enter into Indemnification Agreements with each
of its directors and executive officers. Each such Indemnification Agreement
will provide that the Company will indemnify the indemnitee against expenses,
including reasonable attorney's fees, judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any civil or criminal action or administrative proceeding arising out of the
performance of his duties as an officer, director, employee or agent of the
Company. Such indemnification will be available if the acts of the indemnitee
were in good faith, if the indemnitee acted in a manner he reasonably believed
to be in or not opposed to the best interests of the Company and, with respect
to any criminal proceeding, the indemnitee had no reasonable cause to believe
his conduct was unlawful.

EXECUTIVE COMPENSATION

The following Summary Compensation Table sets forth the compensation paid
or accrued by the Company for services rendered by Richard D. Ballard, the
Company's Chief Executive Officer and Ramie A.

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<PAGE> 59

Tritt, M.D., the Company's Chairman of the Board and President, for the fiscal
year ended December 31, 1996 (the "named executive officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
NAME AND ------------------ OTHER ANNUAL SECURITIES ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION($) UNDERLYING OPTIONS(#) COMPENSATION
- - ---------------------- ----- ------- ----- --------------- ---------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Ballard.... 1996 $10,385(1) -- -- 179,968 --
Chief Executive
Officer
Ramie A. Tritt,
M.D................. 1996 $ 0(2) -- $ 210,268(3) -- --
Chairman of the Board
and President
</TABLE>

- - ---------------
(1) Mr. Ballard's employment commenced as of November 26, 1996, and accordingly,
represents amounts accrued from November 26, 1996 to December 31, 1996, all
of which was paid in 1996. Pursuant to an Employment Agreement effective
November 26, 1996 between the Company and Mr. Ballard, Mr. Ballard is
entitled to an annual salary of $150,000, plus a performance related bonus.
See "- Employment Agreements."

(2) No compensation was paid or accrued by the Company during 1996 to Dr. Tritt,
who received compensation in the form of distributions from the ENT Networks
and Atlanta ENT. Pursuant to an Employment Agreement effective as of the
closing of the Offering between the Company and Dr. Tritt, Dr. Tritt will be
entitled to an initial annual salary from the Company of $350,000, subject
to adjustments, plus a performance related bonus. See "- Employment
Agreements." In addition, Dr. Tritt will receive compensation from Atlanta
ENT pursuant to a formula based upon medical services provided by Dr. Tritt
as a physician at Atlanta ENT.

(3) Represents the fair market value, on the date acquired, of an aggregate of
30,945 shares of Common Stock purchased by Dr. Tritt in November and
December 1996, less the actual purchase price paid by Dr. Tritt for such
shares.

OPTION GRANTS IN THE LAST FISCAL YEAR

The following table contains information concerning the stock option grants
made to the named executive officers during the fiscal year ended December 31,
1996. No stock appreciation rights were granted to these individuals during such
year.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM (2)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- - ------------------------------- ---------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Ballard............. 165,000 66.7% $6.80 11/25/06 $681,450 $1,720,950
14,968 6.0% $6.80 12/31/06 $ 27,422 $ 69,433
Ramie A. Tritt, M.D............ -- -- -- -- -- --
</TABLE>

- - ---------------
(1) 25% of the options listed in the table are immediately exercisable. The
remaining 75% vest over three years from the date of grant in equal yearly
installments on a cumulative basis.

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<PAGE> 60

(2) Calculated by multiplying the exercise price by the annual appreciation rate
shown (as prescribed by the Securities and Exchange Commission rules) and
compounded for the term of the options, subtracting the exercise price per
share and multiplying the gain per share by the number of shares covered by
the options. These amounts are not intended to forecast possible future
appreciation, if any, of the price of the Company's Common Stock. The actual
value realized upon exercise of the options will depend on the fair market
value of the Company's Common Stock on the date of exercise.

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

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
SHARES VALUE (#) (#)
ACQUIRED REALIZED --------------------------- ---------------------------
NAME ON EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - --------------------------- -------------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Ballard......... -- -- 44,992 134,976 -- --
Ramie A. Tritt, M.D........ -- -- -- -- -- --
</TABLE>

EMPLOYMENT AGREEMENTS

On November 26, 1996, the Company entered into employment agreements with
Ramie A. Tritt, M.D., Richard D. Ballard and Gerald R. Benjamin (effective as of
the date of this Prospectus with respect to each of Dr. Tritt and Mr. Benjamin).
Pursuant to the employment agreements, Dr. Tritt, Mr. Ballard and Mr. Benjamin
have agreed to serve as the Company's President, Chief Executive Officer and
Vice-Chairman, respectively. The employment agreements with Dr. Tritt, Mr.
Ballard and Mr. Benjamin, provide for an initial term of five, three and three
years, respectively, with automatic renewals for successive one year terms
unless terminated by either party.

The employment agreement with Dr. Tritt provides for an initial annual base
salary of $350,000 plus an annual performance related bonus of up to 50% of his
base salary, to be approved by the Board of Directors, in consideration of his
devoting approximately 50% of his business time each week to serving as the
President of the Company. The employment agreement with Dr. Tritt provides for
increases in Dr. Tritt's annual base salary, subject to approval of the Board of
Directors, if the amount of time he devotes as President of the Company is
greater than anticipated. The agreement acknowledges that the remaining 50% of
Dr. Tritt's business time each week will be spent performing ENT medical and
surgical services at Atlanta ENT and upon the consummation of the
Reorganization, Dr. Tritt will also enter into an employment agreement with
Atlanta ENT. Pursuant to this employment agreement, Dr. Tritt will receive
compensation from Atlanta ENT pursuant to a formula based upon medical services
provided by Dr. Tritt as a physician at Atlanta ENT; provided, however, that Dr.
Tritt will not continue to receive compensation for providing services as a
Medical Director under the capitated managed care contracts held by the ENT
Networks. In February 1997, the Company and Dr. Tritt entered into an amended
and restated employment agreement which provides that Dr. Tritt's annual base
salary to be received from the Company in any year will be reduced, dollar for
dollar, if, in such year, his annual compensation from Atlanta ENT exceeds
$970,000.

The employment agreement with Mr. Ballard provides for an annual base
salary of $150,000 plus an annual performance related bonus of up to 50% of his
base salary, to be approved by the Board of Directors. The employment agreement
with Mr. Benjamin provides that he will work part-time for the Company and will
receive an annual base salary of $60,000 plus an annual performance related
bonus of up to 50% of his base salary, to be approved by the Board of Directors.

Each employment agreement provides for termination of the executive's
employment by the Company prior to the expiration of its term in the event of
the executive's death or disability or for cause. Each employment agreement also
provides that either party may terminate the employment agreement, effective at
the end of the term or any renewal term, upon 60 days notice of termination. The
Company may terminate each employment agreement without cause and the executive
may terminate the agreement upon a change of

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<PAGE> 61

control of the Company by providing at least 30 days notice of termination and,
upon termination in either case, the executive will be entitled to receive his
base salary for a period of one year following the date of termination (subject
to a 100% offset for salary received from subsequent employment during such one
year period (subject to certain exclusion in the case of Dr. Tritt and Mr.
Benjamin)). In addition, each employment agreement provides that upon
termination of the employment agreement by the Company or its successor
following a change of control, the executive will be entitled to severance
compensation in the amount of two times his taxable compensation for the most
recently concluded fiscal year.

In January 1997, the Company entered into an employment agreement with
Robert A. DiProva, effective upon the closing of the Offering. The employment
agreement provides for an initial term of three years from the effective date,
with automatic renewals for successive one year terms unless terminated by
either party, and provides for an annual base salary of $120,000 plus an annual
performance related bonus of up to 50% of Mr. DiProva's base salary, to be
approved by the Board of Directors. In addition to the terms contained in the
agreements with Dr. Tritt, Mr. Ballard and Mr. Benjamin, Mr. DiProva's agreement
permits termination by Mr. DiProva if his responsibilities are materially
diminished or if his base salary is reduced by 10% or more. If the agreement is
terminated for either of these reasons, Mr. DiProva will be entitled to receive
his base salary for a period of one year following the date of termination
(subject to 100% offset for salary received from subsequent employment during
such one year period).

In February 1997, the Company entered into an employment agreement with
Lawrence P. Kraska, effective upon the closing of the Offering. The employment
agreement provides for an initial term of three years from the effective date,
with automatic renewals for successive one year terms unless terminated by
either party, and provides for an annual base salary of $130,000 plus an annual
performance related bonus of up to 50% of Mr. Kraska's base salary, to be
approved by the Board of Directors. The employment agreement provides for
termination of Mr. Kraska's employment by the Company prior to the expiration of
its term in the event of Mr. Kraska's death or disability or for cause. The
employment agreement also provides that either party may terminate the
employment agreement, effective at the end of the term or any renewal term, upon
60 days notice of termination. The Company may terminate the employment
agreement without cause and, upon termination, Mr. Kraska will be entitled to
receive his base salary for a period of one year following the date of
termination (subject to a 100% offset for salary received from subsequent
employment during such one year period). In addition, the employment agreement
provides that upon termination of the employment agreement by the Company or its
successor following a change of control, Mr. Kraska will be entitled to
severance compensation in the amount of two times his taxable compensation for
the most recently concluded fiscal year.

Pursuant to the employment agreements, each of the executives has agreed
not to compete with the Company, solicit any of the Company's customers or
employees or disclose any confidential information or trade secrets during the
term of their employment agreement and for certain periods of time following the
termination of such employment agreement.

STOCK OPTION PLANS

1996 STOCK OPTION PLAN

GENERAL

In November 1996, the Board of Directors adopted and the Company's
stockholders approved the 1996 Stock Option Plan (the "1996 Plan"), under which
550,000 shares of the Company's authorized but unissued Common Stock are
authorized for issuance pursuant to the grant by the Company of options to
officers, directors, employees, consultants and independent contractors of the
Company. The purposes of the 1996 Plan are to ensure the retention of existing
executive personnel, key employees, directors and consultants of the Company, to
attract and retain competent new executive personnel, key employees, directors
and consultants and to provide additional incentive to all such persons by
permitting them to participate in the ownership of the Company. The 1996 Plan
terminates in November 2006.

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<PAGE> 62

The 1996 Plan will be administered by the Board of Directors or a committee
of the Board of Directors. The 1996 Plan provides for automatic grants of
options to certain directors in the manner set forth below under "Directors'
Options."

Options granted under the 1996 Plan may be either incentive options or
non-qualified options. Incentive options granted under the 1996 Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Common Stock on the
date of the grant, except that the term of an incentive option granted under the
Plan to a stockholder owning more than 10% of the outstanding voting power of
the Company may not exceed five years and its exercise price may not be less
than 110% of the fair market value of the Common Stock on the date of the grant.
To the extent that the aggregate fair market value, as of the date of grant, of
the shares for which incentive options become exercisable for the first time by
an optionee during the calendar year exceeds $100,000, the portion of such
option which is in excess of the $100,000 limitation will be treated as a
non-qualified option. Only employees of the Company or a subsidiary of the
Company shall be eligible to receive incentive options. Additionally, the
aggregate number of shares of Common Stock that may be subject to options
granted to any person in a calendar year shall not exceed 35% of the maximum
number of shares of Common Stock which may be issued from time to time under the
1996 Plan. Options granted under the 1996 Plan to officers, directors or
employees of the Company may be exercised only while the optionee is employed or
retained by the Company or within 90 days of the date of termination of the
employment relationship or directorship. However, options which are exercisable
at the time of termination by reason of death or permanent disability of the
optionee may be exercised within 12 months of the date of termination of the
employment relationship or directorship. Upon the exercise of an option, payment
may be made by cash or by any other means that the Board of Directors or the
committee determines.

As of January 31, 1996, the number of employees, officers and directors of
the Company eligible to receive grants under the 1996 Plan was approximately
eight persons. The number of consultants and advisors to the Company eligible to
receive grants under the 1996 Plan is not determinable. An optionee may be
granted more than one option under the 1996 Plan. The Board of Directors or the
committee will, in its discretion, determine (subject to the terms of the 1996
Plan) who will be granted options, the time or times at which options shall be
granted, the number of shares subject to each option and whether the options are
incentive options or non-qualified options. In making such determination,
consideration may be given to the value of the services rendered by the
respective individuals, their present and potential contributions to the success
of the Company and its subsidiaries and such other factors deemed relevant in
accomplishing the purpose of the 1996 Plan.

Under the 1996 Plan, the optionee has none of the rights of a stockholder
with respect to the shares until such shares are issued upon the exercise of the
option. No adjustment shall be made for dividends or distributions or other
rights for which the record date is prior to the date of exercise, except as
provided in the 1996 Plan. During the lifetime of the optionee, an option shall
be exercisable only by the optionee. No option may be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of decent and distribution.

The Board of Directors may amend or terminate the 1996 Plan except that
stockholder approval is required for certain amendments to the 1996 Plan. No
action taken by the Board may materially and adversely affect any outstanding
option grant without the consent of the optionee.

Under current tax law, there are no Federal income tax consequences to
either the employee or the Company on the grant of non-qualified options if
granted under the terms set forth in the 1996 Plan. Upon exercise of a
non-qualified option, the excess of the fair market value of the shares subject
to the option over the option price (the "Spread") at the date of exercise is
taxable as ordinary income to the optionee in the year it is exercised and is
deductible by the Company as compensation for Federal income tax purposes, if
Federal income tax is withheld on the Spread. However, if the shares are subject
to vesting restrictions conditioned on future employment or the holder is
subject to the short-swing profits liability restrictions of Section 16(b) of
the Securities and Exchange Act of 1934 (the "Exchange Act") of (i.e., is an
executive officer, director or 10% stockholder of the Company) then taxation and
measurement of the Spread is deferred

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<PAGE> 63

until such restrictions lapse, unless a special election is made under Section
83(b) of the Code to report such income currently without regard to such
restrictions. The optionee's basis in the shares will be equal to the fair
market value on the date taxation is imposed and the holding period commences on
such date.

Incentive option holders incur no regular Federal income tax liability at
the time of grant or upon exercise of such option, assuming that the optionee
was an employee of the Company from the date the option was granted until 90
days before such exercise. However, upon exercise, the Spread must be added to
regular Federal taxable income in computing the optionee's "alternative minimum
tax" liability. An optionee's basis in the shares received upon exercise of an
incentive stock option will be the option price of such shares for regular
income tax purposes. No deduction is allowable to the Company for Federal income
tax purposes in connection with the grant or exercise of such option.

If the holder of shares acquired through exercise of an incentive option
sells such shares within two years of the date of grant of such option or within
one year from the date of exercise of such option (a "Disqualifying
Disposition"), the optionee will realize income taxable at ordinary rates.
Ordinary income is reportable during the year of such sale equal to the
difference between the option price and the fair market value of the shares at
the date the option is exercised, but the amount includable as ordinary income
shall not exceed the excess, if any, of the proceeds of such sale over the
option price. In addition to ordinary income, a Disqualifying Disposition may
result in taxable income subject to capital gains treatment if the sales
proceeds exceed the optionee's basis in the shares (i.e., the option price plus
the amount includable as ordinary income). The amount of the optionee's taxable
ordinary income will be deductible by the Company in the year of the
Disqualifying Disposition.

At the time of sale of shares received upon exercise of an option (other
than a Disqualifying Disposition of shares received upon the exercise of an
incentive option), any gain or loss is deemed long-term or short-term capital
gain or loss, depending upon the holding period. The holding period for
long-term capital gain or loss treatment is more than one year.

The foregoing is not intended to be an exhaustive analysis of the tax
consequences relating to stock options issued under the 1996 Plan. For instance,
the treatment of options under state and local tax laws, which is not described
above, may differ from the treatment for Federal income tax purposes.

As of December 31, 1996, 247,460 options have been granted under the 1996
Plan at an exercise price of $6.80 per share, of which 179,968, 59,992 and 7,500
options were granted to Mr. Ballard, Mr. Kraska and Dr. Casas, respectively. As
of December 31, 1996, 44,992 and 14,998 of the options granted to Mr. Ballard
and Mr. Kraska, respectively, were immediately exercisable and all of the
options granted to Dr. Casas were immediately exercisable. 7,500 options have
been granted to each of Dr. Posar and Mr. Kirschner, effective upon the closing
of the Offering, at an exercise price equal to the initial public offering
price, all of which will become immediately exercisable and 119,980 options have
been granted to Mr. DiProva, effective upon the closing of the Offering, at an
exercise price of $6.80 per share, 29,995 of which will be immediately
exercisable. In addition, 45,000 options have been granted to non-medical
employees of Atlanta ENT, effective upon the closing of the Offering, at an
exercise price equal to the initial public offering price, none of which will
become exercisable until the first anniversary of the closing of the Offering.

DIRECTORS' OPTIONS

The 1996 Plan provides for the automatic grant of non-qualified stock
options to purchase shares of Common Stock ("Director Options") to directors of
the Company who are not employees or principal stockholders of the Company
("Eligible Directors"). Eligible Directors of the Company elected after the date
hereof will be granted Director Options to purchase 7,500 shares of Common Stock
on the date they are first elected or appointed a director (an "Initial Director
Option"). Further, commencing on the day immediately following the date of the
annual meeting of stockholders for the Company's fiscal year ending December 31,
1997, each Eligible Director, other than directors who received an Initial
Director Option since the last annual meeting, will be granted Director Options
to purchase 2,500 shares of Common Stock ("Automatic Grant") on the day
immediately following the date of each annual meeting of stockholders, as long
as such director is a member of the Board of Directors. The exercise price for
each share subject to a Director Option shall be

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equal to the fair market value of the Common Stock on the date of grant.
Director Options will expire the earlier of 10 years after the date of grant or
90 days after the termination of the director's service on the Board of
Directors.

1996 HEALTH CARE PROFESSIONALS STOCK OPTION PLAN.

In November 1996, the Company adopted the 1996 Health Care Professionals
Stock Option Plan (the "1996 Professionals Plan"), under which 275,000 shares of
the Company's authorized but unissued Common Stock are authorized for issuance
pursuant to the grant by the Company of options to physicians or dentists who
are employed by the Company's affiliated practices or who provide medical and
surgical services to enrollees of managed care contracts held by the Company.
The purposes of the 1996 Professionals Plan are to ensure the retention of
existing physicians and dentists, to attract and retain competent new physicians
and to provide additional incentive to all such persons by permitting them to
participate in the ownership of the Company. The 1996 Professionals Plan
terminates in November 2006.

The 1996 Professionals Plan will be administered by the Board of Directors
or a committee of the Board of Directors. Options granted under the 1996
Professionals Plan will be non-qualified options and will vest over a period of
five years. Generally, such options will expire upon the termination of
employment or the advisory or consultant relationship with the Company or on the
day prior to the 10th anniversary of the date of grant, whichever occurs first.
The options granted under the 1996 Professionals Plan will be exercisable at an
exercise price which is not less than the fair market value of the Common Stock
on the date of grant.

The Company has granted options to purchase 25,000 shares of Common Stock
under the 1996 Professionals Plan to a physician at one of the Additional
Atlanta Practices, effective upon the closing of the Offering, at an exercise
price equal to the initial public offering price, none of which will become
exercisable until the first anniversary of the closing of the Offering.

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<PAGE> 65

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the ownership
of Common Stock for (i) each person known by the Company to own beneficially
more than five percent of the outstanding voting stock, (ii) each director,
director nominee and named executive officer of the Company and (iii) all
executive officers, directors and director nominees of the Company as a group,
prior to the Offering and as adjusted to give effect to the sale of the Common
Stock offered hereby and the issuance of the Common Stock in connection with the
Reorganization.

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
NUMBER OF SHARES BENEFICIALLY
BENEFICIALLY OWNED(2) OWNED(2)
---------------------- -------------------
NAME AND ADDRESS OF BEFORE AFTER BEFORE AFTER
BENEFICIAL OWNER(1) OFFERING OFFERING OFFERING OFFERING
- - ------------------------------------------------------ -------- --------- -------- --------
<S> <C> <C> <C> <C>
Ramie A. Tritt, M.D.(3)............................... 305,945 1,761,257 51.0% 29.8%
Bock, Benjamin & Co., Partners, L.P.(4)............... 293,948 293,948 49.0 5.0
3414 Peachtree Road
Suite 238
Atlanta, Georgia 30326
Gerald R. Benjamin(4)................................. 293,948 293,948 49.0 5.0
Richard D. Ballard(5)................................. 44,992 44,992 7.5 *
Lawrence P. Kraska(6)................................. 14,998 14,998 2.4 *
Robert A. DiProva(7).................................. -- 29,995 -- *
Edward R. Casas, M.D.(8).............................. 7,500 7,500 1.2 *
Steven L. Posar, M.D.(9).............................. -- 7,500 -- *
Sidney Kirschner(9)................................... -- 7,500 -- *
All executive officers, directors and director
nominees of the Company as a group (8
persons)(10)........................................ 667,383 2,167,690 100.0% 36.7%
</TABLE>

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

* Less than 1%
(1) Unless otherwise indicated, the address is c/o Physicians' Specialty Corp.,
The Medical Quarters, 5555 Peachtree Dunwoody Road, Suite 235, Atlanta,
Georgia 30342. Except as otherwise indicated, each of the parties listed
above has sole voting and investment power over the shares owned.
(2) In computing the number and percentage ownership of shares beneficially
owned by a person, shares of Common Stock subject to options held by that
person that are exercisable within 60 days of the date of this Prospectus
are deemed outstanding. Such shares, however, are not deemed outstanding
for purposes of computing the percentage ownership of stockholders other
than such person.
(3) Includes 1,455,312 shares to be issued or distributed to Dr. Tritt, the
Chairman of the Board and President of the Company, in connection with the
Reorganization. See "The Reorganization" and "Certain Transactions."
(4) Mr. Benjamin, the Vice Chairman of the Board and Secretary of the Company,
is a partner in Bock, Benjamin & Co., Partners, L.P. Mr. Benjamin may be
deemed to own beneficially the shares of Common Stock owned by Bock,
Benjamin & Co., Partners, L.P.
(5) Represents shares of Common Stock issuable upon exercise of options that
are immediately exercisable. Excludes 134,976 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days
of the date of this Prospectus.
(6) Represents shares of Common Stock issuable upon exercise of options that
are immediately exercisable. Excludes 44,994 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days
of the date of this Prospectus.

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<PAGE> 66

(7) Represents shares of Common Stock issuable upon exercise of options that
are immediately exercisable. Excludes 89,985 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days
of the date of this Prospectus.
(8) Represents shares of Common Stock issuable upon exercise of options that
are immediately exercisable.
(9) Represents shares of Common Stock issuable upon exercise of options which
have been granted, effective upon the closing of the Offering, that are
immediately exercisable.
(10) Includes 67,490 shares of Common Stock issuable upon exercise of options
that are currently exercisable and an aggregate of 44,995 shares of Common
Stock issuable upon exercise of options granted to Mr. DiProva, Dr. Posar
and Mr. Kirschner effective on the closing of the Offering that are
immediately exercisable. Excludes 269,955 shares of Common Stock issuable
upon exercise of options which are not exercisable within 60 days of the
date of this Prospectus.

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<PAGE> 67

CERTAIN TRANSACTIONS

FORMATION TRANSACTIONS

In connection with the formation of the Company in July 1996, Ramie A.
Tritt, M.D. and Bock, Benjamin & Co., Partners, L.P., a partnership in which
Gerald R. Benjamin, the Company's Vice Chairman and Secretary, is a partner,
each purchased 275,000 shares of Common Stock at a purchase price of
approximately $.0018 per share. In November 1996, Dr. Tritt purchased an
additional 11,225 shares of Common Stock at a purchase price of approximately
$.0042 per share. In December 1996, Dr. Tritt and Bock, Benjamin & Co.,
Partners, L.P. purchased an additional 19,720 and 18,948 shares of Common Stock,
respectively, at purchase prices of approximately $.0056 and $.0081,
respectively, per share. Dr. Tritt and Bock, Benjamin & Co., Partners have
"piggyback" registration rights with respect to the shares of Common Stock held
by them.

In July 1996, Atlanta ENT, Dr. Tritt, Mr. Benjamin and two entities whose
principal stockholders were former directors of the Company (the "Former
Directors") loaned $170,500, $33,500, $33,500 and an aggregate of $247,500,
respectively, to the Company for legal, accounting and other fees in connection
with the formation of the Company, the Offering and the Reorganization. The
loans are evidenced by promissory notes bearing interest at a prime rate as
announced by NationsBank, and payable on the closing of the Offering. In
February 1997, the Company entered into a termination agreement pursuant to
which approximately $77,000 of the loans made by affiliates of the Former
Directors were repaid and the outstanding balance of such loans is payable at
the closing of the Offering. In addition, in February 1997, the ENT Networks and
Bock, Benjamin & Co., Partners, L.P., loaned the Company approximately $168,108
and $1,892, respectively, evidenced by promissory notes bearing interest at the
NationsBank prime rate and payable on the closing of the Offering. In addition,
at the closing of the Offering, the Company will pay $250,000 to Premier
HealthCare, a corporation of which Mr. Benjamin is a principal, for consulting
services in connection with the formation of the Company, the Offering and the
Reorganization. See "Use of Proceeds."

Each of Dr. Tritt, Gerald R. Benjamin, Bock, Benjamin & Co., Partners,
L.P., Atlanta ENT and the ENT Networks may be deemed to be a "promoter" or
"founder" of the Company, as defined under the Securities Act.

THE REORGANIZATION

Concurrently with the closing of the Offering, the Company will acquire
substantially all of the assets of Atlanta ENT and will acquire all of the
outstanding shares of common stock of ENT Networks from Dr. Tritt (the
"Seller"). The aggregate purchase price payable to Atlanta ENT and the Seller in
connection with the Reorganization is $22,140,000, of which $14,390,000 is
payable to Atlanta ENT and $7,750,000 is payable to the Seller. The entire
purchase price is payable in shares of Common Stock. Accordingly, the Company
will issue an aggregate of 2,767,500 shares of Common Stock to Atlanta ENT and
to the Seller. The allocation of such shares between Atlanta ENT and the Seller
was based upon the initial public offering price of the Common Stock, with the
number of shares of Common Stock issuable to the Seller to equal $7,750,000
divided by the initial public offering price and the remainder issuable to
Atlanta ENT. Accordingly, the Seller will receive 968,750 shares of Common Stock
and Atlanta ENT will receive 1,798,750 shares of Common Stock (of which 486,562
will be distributed to Dr. Tritt, based on his percentage ownership of Atlanta
ENT).

The assets of Atlanta ENT will be acquired pursuant to an Asset Acquisition
Agreement, dated as of November 25, 1996 (the "Atlanta ENT Asset Acquisition
Agreement"), by and among PSC Management, the Company, Atlanta ENT and the
stockholders of Atlanta ENT (the "Atlanta ENT Stockholders"). The Atlanta ENT
Asset Acquisition Agreement provides for the Company, through PSC Management, to
acquire, on the closing date of the Offering, substantially all of the assets
(other than certain excluded assets such as employment agreements and patient
charts, records and files) and liabilities (other than certain excluded
liabilities) of Atlanta ENT. Atlanta ENT will remain liable for the payment of
excluded liabilities, if any,

67
<PAGE> 68

under the Atlanta ENT Asset Acquisition Agreement. The Atlanta ENT Asset
Acquisition Agreement provides that, other than physicians and physician
assistants, all employees of Atlanta ENT will be offered employment with PSC
Management upon the closing of the acquisition. Under the Atlanta ENT Asset
Acquisition Agreement, Atlanta ENT and the Atlanta ENT Stockholders have agreed
that for a period of five years following the closing of the acquisition they
will not compete with the Company within an eight mile radius of any of the
primary offices of Atlanta ENT (the "Geographic Territory"), will not solicit
customers of the Company within the Geographic Territory and will not solicit
employees of the Company to leave the employ of the Company.

The Atlanta ENT Asset Acquisition Agreement contains representations and
warranties and indemnification by each of the parties to the agreement. The
closing of the acquisition is conditioned upon, among other things, the
execution and delivery of (i) an employment agreement between each of the
Atlanta ENT Stockholders and Atlanta ENT, (ii) a management services agreement
between PSC Management, the Company and Atlanta ENT and (iii) a registration
rights agreement between the Company and each of Atlanta ENT Stockholders,
pursuant to which the Atlanta ENT Stockholders will have "piggyback"
registration rights with respect to their shares of Common Stock.

In addition, pursuant to the Acquisition Agreement, dated as of November
25, 1996, by and among PSC Acquisition, the Company, the Seller and the ENT
Networks (the "Stock Acquisition Agreement"), the Company, through PSC
Acquisition, will acquire, on the closing date of the Offering, all of the
outstanding shares of common stock of the corporations comprising the ENT
Networks. The Stock Acquisition Agreement contains representations and
warranties and indemnification by each of the parties to the agreement. The
closing of the Stock Acquisition Agreement is conditioned upon, among other
things, the execution of a registration rights agreement between the Company and
the Seller pursuant to which the Seller will have "piggyback" registration
rights with respect to the shares of Common Stock received by him pursuant to
such agreement. In August 1996, the Company, through PSC Management, acquired
certain assets (primarily computer hardware) of and entered into a management
agreement with the ENT Networks, which agreement will terminate upon the
consummation of the Reorganization, and began utilizing the Capitated Network
System. In connection with the acquisition of these assets, the Company executed
a promissory note payable to the ENT Networks in the principal amount of
$20,000, and bearing interest at a prime rate as announced by NationsBank which
note will be paid, and the proceeds distributed to Dr. Tritt upon consummation
of the Reorganization. See "The Reorganization," "Business -- Atlanta ENT and
The ENT Networks" and "-- Company Operations -- Management Services Agreements."

The Company intends to use a portion of the net proceeds of this Offering
to repay outstanding indebtedness, including accrued interest, of Atlanta ENT
which at December 31, 1996 aggregated approximately $1,111,000. In connection
with the repayment of this indebtedness a guarantee made by Dr. Tritt, for 45%
of such indebtedness will be cancelled. See "Risk Factors -- Benefits of the
Offering to Insiders" and "Use of Proceeds."

The purchase prices for the ENT Networks and Atlanta ENT were negotiated
between Mr. Benjamin, representing the Company, and Dr. Tritt representing the
ENT Networks and Atlanta ENT. While the Company believes that such purchase
prices reflect fair market value, such purchase prices may be deemed not to have
resulted from arm's-length negotiation because of Dr. Tritt's affiliation with
the Company. However, the Company believes such purchase prices represent
multiples of the revenues, operating income and cash flow from operations of the
ENT Networks and Atlanta ENT that are comparable with multiples paid for similar
entities with similar size and geographic coverage.

Concurrently with the closing of the Offering, the Company will also
acquire substantially all of the assets of the Additional Atlanta Practices in
exchange for an aggregate of 215,000 shares of Common Stock and substantially
all of the assets of Birmingham ENT in exchange for 122,375 shares of Common
Stock.

The assets of each of the Additional Atlanta Practices will be acquired
pursuant to Asset Acquisition Agreements, each dated as of February 13, 1997
(the "Additional Atlanta Acquisition Agreements"), by and among PSC Management,
the Company, the respective practice and the stockholders of each of the

68
<PAGE> 69

Additional Atlanta Practices (the "Additional Atlanta Stockholders"). The
Additional Atlanta Acquisition Agreements provide for the Company, through PSC
Management, to acquire, on the closing date of the Offering, substantially all
of the assets (other than certain excluded assets such as employment agreements
and patient charts, records and files) and liabilities (other than certain
excluded liabilities) of each of the Additional Atlanta Practices. The
Additional Atlanta Practices will remain liable for the payment of excluded
liabilities, if any, under the Additional Atlanta Practice Acquisition
Agreements. The Additional Atlanta Acquisition Agreements provide that all of
the non-physician employees of each of the Additional Atlanta Practices will be
offered employment with PSC Management upon the closing of the acquisition.
Under each of the Additional Atlanta Acquisition Agreements, the respective
Additional Atlanta Practice and each of the respective Additional Atlanta
Stockholders have agreed that for a period of five years following the closing
of the acquisition they will not compete with the Company within an eight mile
radius of any of the primary offices of the Additional Atlanta Practices and
Atlanta ENT (the "Additional Geographic Territory"), will not solicit customers
of the Company within the Additional Geographic Territory and will not solicit
employees of the Company to leave the employ of the Company.

The Additional Atlanta Acquisition Agreements contain representations and
warranties and indemnification by each of the parties to the agreement. The
closing of the acquisitions is conditioned upon, among other things, the
execution and delivery of (i) an employment agreement between each of the
Additional Atlanta Stockholders and Atlanta ENT, (ii) a management services
agreement between PSC management, the Company and Atlanta ENT and (iii) a
registration rights agreement between the Company and each of the Additional
Atlanta Stockholders, pursuant to which the Additional Atlanta Stockholders will
have "piggyback" registration rights with respect to their shares of Common
Stock.

The assets of Birmingham ENT will be acquired pursuant to an Asset
Acquisition Agreement, dated as of February 20, 1997 (the "Birmingham
Acquisition Agreement"), by and among PSC Alabama, a wholly-owned subsidiary of
the Company, the Company, Birmingham ENT and the stockholders of Birmingham ENT
(the "Birmingham Stockholders"). The Birmingham Acquisition Agreement provides
for the Company, through PSC Alabama, to acquire, on the closing date of the
Offering, all of the assets and liabilities (other than certain excluded
liabilities) of Birmingham ENT. Birmingham ENT will remain liable for the
payment of excluded liabilities, if any, under the Birmingham Acquisition
Agreement. The Birmingham Acquisition Agreement provides that, other than
physicians and physician assistants, all employees of Birmingham ENT will be
offered employment with PSC Management upon the closing of the acquisition.
Under the Birmingham Acquisition Agreement, Birmingham ENT and each of the
Birmingham Stockholders have agreed that for a period of five years following
the closing of the acquisition they will not compete with the Company within a
certain defined radius of the office of Birmingham ENT, (the "Birmingham
Geographic Territory"), will not solicit customers of the Company within the
Birmingham Geographic Territory and will not solicit employees of the Company to
leave the employ of the Company.

The Birmingham Acquisition Agreement contains representations and
warranties and indemnification by each of the parties to the agreement. The
closing of the acquisition is conditioned upon, among other things, the
execution and delivery of (i) an employment agreement between each of the
Birmingham Stockholders and PSC Alabama, (ii) a management services agreement
between PSC Management, the Company and PSC Alabama and (iii) a registration
rights agreement between the Company and each of the Birmingham Stockholders,
pursuant to which the Birmingham Stockholders will have "piggyback" registration
rights with respect to their shares of Common Stock. See "The Reorganization,"
"Business -- The Additional Atlanta Practices," " -- Birmingham ENT" and
" -- Company Operations -- Management Services Agreements."

LEASES

Atlanta ENT leases its administrative offices and one clinical location
from Dr. Tritt. The lease is for approximately 19,700 square feet and provides
for monthly rental payments of approximately $40,500, subject to annual
increases. Upon consummation of the Reorganization, the Company will assume
Atlanta ENT's obligations under this lease.

69
<PAGE> 70

Atlanta ENT leases one clinical location from Eastside Physicians Center,
L.P., a Georgia limited partnership, of which Dr. Tritt is a limited partner.
The lease is for approximately 3,500 square feet and provides for monthly rental
payments of approximately $5,750, subject to annual increases. Upon consummation
of the Reorganization, the Company will assume Atlanta ENT's obligations under
this lease.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be subject to approval by a majority of the Board of Directors,
including a majority of the independent and disinterested outside directors of
the Board of Directors.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of its
executive officers and has granted options to certain of its executive officers.
See "Management -- Employment Agreements."

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<PAGE> 71

DESCRIPTION OF CAPITAL STOCK

Set forth below is a summary of the terms of the capital stock of the
Company. Such summary is qualified in its entirety by reference to the Company's
Certificate of Incorporation (the "Charter"), attached as an exhibit hereto and
to the applicable provisions of the General Corporation Law of the State of
Delaware (the "DGCL").

The Company's authorized capital stock currently consists of 50,000,000
shares of Common Stock, $.001 par value, and 10,000 shares of Preferred Stock,
$1.00 par value.

COMMON STOCK

Immediately prior to the date hereof, there were 599,893 shares of Common
Stock outstanding held by two stockholders of record. Holders of shares of
Common Stock are entitled to one vote at all meetings of stockholders for each
share held by them and are not entitled to cumulative voting. Holders of Common
Stock have no preemptive rights, no other rights to subscribe for additional
shares of the Company, and no conversion rights or rights of redemption. Subject
to preferences that may be applicable to any outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." Upon liquidation, all holders of Common Stock are entitled to
participate pro rata in the assets of the Company available for distribution,
subject to the rights of any class of preferred stock then outstanding. All of
the outstanding shares of Common Stock are, and the shares to be issued pursuant
to the Offering will be, when issued, fully paid and nonassessable.

PREFERRED STOCK

None of the 10,000 shares of Preferred Stock authorized by the Company's
Charter will be issued or outstanding upon completion of the Offering. The Board
of Directors has the authority to issue Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series of the designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of Common Stock, including the loss of
voting control to others.

REPRESENTATIVES' OPTIONS

The Company has agreed to grant to the Representatives, upon the closing of
the Offering, the Representatives' Options to purchase up to 220,000 shares of
Common Stock. The Representatives' Options cannot be transferred, sold, assigned
or hypothecated for one year, except to any successor, officer or partner of
each of the Representatives. The Representatives' Options are exercisable during
the four-year period commencing one year from the date of this Prospectus at an
exercise price of $10.80 per share of Common Stock (135% of the initial public
offering price) subject to adjustment in certain events to protect against
dilution. The Representatives' Options include a provision permitting the holder
to elect a cashless exercise. The holders of the Representatives' Options have
certain demand and piggyback registration rights. See "Underwriting."

ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CHARTER, BY-LAWS AND CERTAIN OTHER
AGREEMENTS

Stockholders' rights and related matters are governed by the DGCL, the
Charter and the By-Laws. Certain provisions of the DGCL, the Charter and the
By-Laws, which are summarized below, may discourage or make more difficult a
takeover attempt that a stockholder might consider in its best interest. Such
provisions may also adversely affect prevailing market prices for the Common
Stock.

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<PAGE> 72

Advance Notice Requirements for Stockholder Proposals and Director Nominations

The By-Laws contain advance notice procedures with regard to stockholder
proposals and the nomination, other than by or at the direction of the Board of
Directors or a committee thereof, of candidates for election as directors of the
Company. These procedures provide that notice of stockholder proposals and
stockholder nominations for the election of directors at an annual meeting must
be in writing and received by the Secretary of the Company no later than 60 days
nor more than 90 days prior to such annual meeting (or if less than 70 days'
notice of a meeting of stockholders is given, stockholder proposals and
nominations must be delivered to the Secretary of the Company no later than the
close of business on the tenth day following the day notice was mailed). The
notice of stockholder nominations must set forth certain information with
respect to each nominee who is not an incumbent director.

Business Combination Provisions

The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under such statute a corporation
may not engage in any business combination with any interested stockholder for a
period of three years after the date such person became an interested
stockholder unless certain conditions are satisfied. The statute contains
provisions enabling a corporation to avoid the statute's restrictions.

The Company has not sought to "elect out" of the statute, and, therefore,
upon closing of the Offering and the registration of its shares of Common Stock
under the Exchange Act, the restrictions imposed by such statute will apply to
the Company.

LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS

The Charter provides that a director or officer of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director or officer, except for liability (i) for
any breach of the director's or officer's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL which concerns unlawful payment of dividends, stock purchases or
redemptions or (iv) for any transaction from which the director or officer
derived an improper personal benefit.

While the Charter provides directors and officers with protection from
awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Charter will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
a director's or officer's breach of his duty of care.

The Company intends to enter into Indemnification Agreements with each of
its directors and executive officers. Each such Indemnification Agreement will
provide that the Company will indemnify the indemnitee against expenses,
including reasonable attorney's fees, judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any civil or criminal action or administrative proceeding arising out of the
performance of his duties as an officer, director, employee or agent of the
Company. Such indemnification will be available if the acts of the indemnitee
were in good faith, if the indemnitee acted in a manner he reasonably believed
to be in or not opposed to the best interests of the Company and, with respect
to any criminal proceeding, the indemnitee had no reasonable cause to believe
his conduct was unlawful. See "Management -- Limitation on Liability;
Indemnification Agreements."

TRANSFER AGENT AND REGISTRAR

SunTrust Corp. will act as transfer agent and registrar for the Common
Stock.

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<PAGE> 73

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 5,904,768 shares of
Common Stock outstanding, assuming that the Underwriters' over-allotment option
is not exercised. Of these shares, the 2,200,000 shares offered hereby will be
freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act ("Rule 144") described below. The
remaining 3,704,768 shares outstanding upon completion of the Offering
(including the shares of Common Stock issued in connection with the
Reorganization) are "restricted securities" as that term is defined under Rule
144 (the "Restricted Shares") and may not be sold publicly unless they are
registered under the Securities Act or are sold pursuant to Rule 144 or another
exemption from registration. 550,000, 11,225 and 38,668 Restricted Shares issued
in connection with the formation of the Company will become eligible for sale
pursuant to Rule 144 commencing August 1997, November 1997 and December 1997,
respectively.

Beginning 90 days after the date of this Prospectus, certain shares
issuable upon exercise of options granted by the Company prior to the date of
this Prospectus will also be eligible for sale in the public market pursuant to
Rule 701 under the Securities Act. In general, Rule 701 permits resales of
shares issued pursuant to certain compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144. If all the requirements of
Rule 701 are met, an aggregate of approximately 67,490 shares of Common Stock
issuable upon exercise of outstanding options will be eligible for sale pursuant
to Rule 701 and Rule 144 beginning 90 days after the date of this Prospectus.

Notwithstanding the foregoing, all stockholders of the Company prior to the
Offering (including all individuals receiving Common Stock in the
Reorganization), have agreed not to sell, transfer or otherwise dispose of any
shares of the Company's Common Stock without the prior written consent of
Southcoast, on behalf of the Underwriters for a period of 12 months after the
date of this Prospectus. See "Underwriting."

In general under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least two years,
including persons who may be deemed to be "affiliates" of the Company, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) one percent of the then outstanding shares of Common
Stock or (ii) the average weekly trading volume in the Common Stock during the
four calendar weeks preceding such sale. Sales under Rule 144 are also subject
to certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned for at least three years the
shares proposed to be sold, would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above.

The Commission has adopted certain amendments to Rule 144 effective April
1, 1997 that will reduce to one year the holding period required prior to
restricted securities becoming eligible for resale in the public market under
Rule 144 and will reduce to two years the holding period required prior to a
person becoming eligible to effect sales under Rule 144(k). This amendment will
result in a substantial number of shares of Common Stock becoming eligible for
resale in the public markets significantly sooner than would otherwise be the
case, which could adversely affect the market price for the Common Stock.

Holders of the Representatives' Options have certain demand and piggyback
registration rights. In addition, all of the stockholders of the Company prior
to the Offering (including all individuals receiving Common Stock in the
Reorganization) have "piggyback" registration rights with respect to their
shares of Common Stock. See "Certain Transactions," "Description of Capital
Stock -- Representatives' Options" and "Underwriting."

Prior to the Offering, there has been no market for the Common Stock of the
Company, and the Company cannot predict what effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and the ability of the Company to
raise equity capital in the future.

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<PAGE> 74

UNDERWRITING

Subject to the terms and conditions contained in the Underwriting Agreement
each of the Underwriters named below has severally agreed to purchase from the
Company, and the Company has agreed to sell to such Underwriter, the respective
number of shares of Common Stock set forth opposite the name of such
Underwriter:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- - ---------------------------------------------------------------------------------- ---------
<S> <C>
Southcoast Capital Corporation.................................................... 817,500
Barington Capital Group, L.P...................................................... 817,500
Oppenheimer & Co., Inc............................................................ 90,000
Equitable Securities Corporation.................................................. 50,000
Gruntal & Co., Incorporated....................................................... 50,000
Morgan Keegan & Company, Inc...................................................... 50,000
The Robinson-Humphrey Company, Inc................................................ 50,000
Brean Murray, Foster Securities Inc............................................... 25,000
Hampshire Securities Corporation.................................................. 25,000
Interstate/Johnson Lane Corporation............................................... 25,000
Joseph Charles & Associates, Inc.................................................. 25,000
Scott & Stringfellow, Inc......................................................... 25,000
Shields & Company................................................................. 25,000
Southeast Research Partners, Inc.................................................. 25,000
Southwest Securities, Inc......................................................... 25,000
Sterne, Agee & Leach, Inc......................................................... 25,000
Stifel, Nicolaus & Co. Inc........................................................ 25,000
Stuart, Coleman & Co., Inc........................................................ 25,000
---------
Total................................................................... 2,200,000
=========
</TABLE>

The several Underwriters have agreed to purchase all of the shares of
Common Stock offered hereby (other than shares that may be purchased under the
Over-Allotment Option) if any are purchased. The Underwriters propose initially
to offer the shares to the public at the price set forth on the cover page of
this Prospectus. The Underwriters may allow a selling concession not exceeding
$.32 per share of Common Stock to certain dealers. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $.10 per share to
other dealers. The public offering price and concessions may be changed by the
Underwriters after the initial public offering.

The Company has granted an option to the Underwriters during the 45-day
period after the date of this Prospectus, to purchase up to an aggregate of
330,000 additional shares of Common Stock at the public offering price, less the
underwriting discounts and commissions. The Underwriters may exercise the option
only for the purpose of covering over-allotments made in connection with the
sale of the Common Stock offered hereby. To the extent that the Underwriters
exercise their option, each Underwriter will be committed, subject to certain
conditions, to purchase a number of such additional shares proportionate to such
Underwriter's initial commitment.

74
<PAGE> 75

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. In addition,
pursuant to a Consulting Agreement between Barington and the Company, the
Company has retained Barington to perform consulting services relating to
corporate finance and other financial service matters for a consulting fee of
$487,000, of which $35,000 has been paid to date and the remainder shall be
payable on the closing of the Offering.

The Company has also agreed to sell to the Representatives, upon the
closing of the Offering for nominal consideration, the Representatives' Options
to purchase up to 220,000 shares of Common Stock, which will be shared equally
between the Representatives. The Representatives' Options cannot be transferred,
sold, assigned or hypothecated for one year, except to any successor, officer or
partner of each of the Representatives. The Representatives' Options are
exercisable during the four-year period commencing one year from the date of
this Prospectus at an exercise price of $10.80 per share of Common Stock (135%
of the initial public offering price) subject to adjustment in certain events to
protect against dilution. The Representatives' Options include a provision
permitting the holder to elect a cashless exercise. The Company has agreed to
register during the four-year period commencing one year after the date of this
Prospectus, on two separate occasions, the securities issuable upon exercise
thereof under the Securities Act, the initial such registration to be at the
Company's expense and the second at the expense of the holders. The Company has
also granted certain piggyback registration rights to the holders of the
Representatives' Options.

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

The Company, its directors and officers and the holders of all of the
Company's outstanding Common Stock (including all individuals receiving Common
Stock in the Reorganization) have agreed with the Underwriters not to sell,
contract to sell or otherwise dispose of any of the Company's securities held by
them for a period of 12 months following the date of this Prospectus without the
prior written consent of Southcoast, on behalf of the Underwriters, except for
certain exceptions and under certain circumstances.

Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the public offering price has been determined by
arms-length negotiation between the Company and the Underwriters and does not
necessarily bear any relationship to the Company's book value, assets, past
operating results, financial condition, or other established criteria of value.
Factors considered in determining such price included an assessment of the
Company's recent financial results and current financial condition, future
prospects of the Company, the qualifications of the Company's management, the
general condition of the securities markets and other relevant factors.

The Underwriters may engage in certain transactions which may stabilize,
maintain or otherwise affect the price of the Common Stock. Such transactions
may include over-allotments of Common Stock and purchases of Common Stock.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Bachner, Tally, Polevoy & Misher LLP, New York, New
York. The statements in the Prospectus under "Risk Factors -- Government
Regulation," "-- Health Care Reform" and "Business -- Government Regulation"
will be passed on by Reed Smith Shaw & McClay, Washington, D.C., regulatory
counsel to the Company. Certain legal matters will be passed upon for the
Underwriters by Kramer, Levin, Naftalis & Frankel, New York, New York.

EXPERTS

The audited financial statements of Atlanta Ear, Nose & Throat Associates,
P.C., the ENT Networks and Physicians' Specialty Corp. included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP,

75
<PAGE> 76

independent public accountants, and are included herein in reliance upon the
authority of said firm as experts giving said reports.

The audited financial statements of W.J. Cornay, III, M.D., P.C. included
in this Prospectus and elsewhere in the Registration Statement, to the extent
and for periods indicated in their reports, have been audited by Cade &
Associates, P.C., independent public accountants, and are included herein in
reliance upon the authority of said firm as experts giving said reports.

ADDITIONAL INFORMATION

The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Securities and Exchange Commission (the "Commission") in
Washington, D.C. with respect to the shares of Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules, which may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Reports and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at the following addresses: New York Regional Office, Seven World
Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.

76
<PAGE> 77

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
I. PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
Report of Independent Public Accountants.......................................... F-2
Consolidated Balance Sheet at December 31, 1996................................... F-3
Consolidated Statement of Operations for the Period from Inception (July 31, 1996)
to December 31, 1996............................................................ F-4
Consolidated Statement of Stockholders' Equity for the Period from Inception (July
31, 1996) to December 31, 1996.................................................. F-5
Consolidated Statement of Cash Flows for the Period from Inception (July 31, 1996)
to December 31, 1996............................................................ F-6
Notes to Consolidated Financial Statements........................................ F-7

II. ATLANTA EAR, NOSE & THROAT ASSOCIATES, P.C.
Report of Independent Public Accountants.......................................... F-10
Balance Sheets at December 31, 1996 and 1995...................................... F-11
Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994..... F-12
Statements of Owners' Equity for the Years Ended December 31, 1996, 1995 and
1994............................................................................ F-13
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994..... F-14
Notes to Financial Statements..................................................... F-15

III. THE ENT NETWORKS
Report of Independent Public Accountants.......................................... F-19
Combined Balance Sheets at December 31, 1996 and 1995............................. F-20
Combined Statements of Operations for the Years Ended December 31, 1996, 1995 and
1994............................................................................ F-21
Combined Statements of Owner's Equity for the Years Ended December 31, 1996, 1995
and 1994........................................................................ F-22
Combined Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and
1994............................................................................ F-23
Notes to Combined Financial Statements............................................ F-24

IV. W.J. CORNAY, III, M.D., P.C.
Report of Independent Public Accountants.......................................... F-26
Balance Sheets at December 31, 1996 and 1995...................................... F-27
Statements of Operations for the Years ended December 31, 1996 and 1995........... F-28
Statements of Cash Flows for the Years ended December 31, 1996 and 1995........... F-29
Notes to Financial Statements..................................................... F-30
</TABLE>

F-1
<PAGE> 78

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Physicians' Specialty Corp. and Subsidiaries:

We have audited the accompanying consolidated balance sheet of PHYSICIANS'
SPECIALTY CORP. AND SUBSIDIARIES (Delaware corporations) as of December 31, 1996
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the period from inception (July 31, 1996) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physicians' Specialty Corp.
and Subsidiaries as of December 31, 1996 and the results of their operations and
their cash flows for the period from inception (July 31, 1996) to December 31,
1996 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
January 17, 1997

F-2
<PAGE> 79

PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $123,540
Accounts receivable due from related party (Note 7)........................... 26,976
--------
150,516
--------
EQUIPMENT, net (Notes 2 and 3).................................................. 19,897
DEFERRED OFFERING COSTS AND OTHER, net (Note 2)................................. 442,567
--------
Total assets.......................................................... $612,980
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued interest......................................... $108,828
Accrued interest due to related party (Note 4)................................ 9,442
Short-term debt due to related party (Note 4)................................. 257,500
Short-term debt (Note 4)...................................................... 247,500
--------
623,270
--------
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock, $1.00 par value; 10,000 shares authorized; no shares issued
and outstanding............................................................ 0
Common stock, $0.001 par value; 50,000,000 shares authorized; 599,893 shares
issued and outstanding..................................................... 600
Additional paid-in capital.................................................... 343,711
Accumulated deficit........................................................... (354,601)
--------
Total stockholders' equity............................................ (10,290)
--------
Total liabilities and stockholders' equity............................ $612,980
========
</TABLE>

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

F-3
<PAGE> 80

PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(JULY 31,
1996) TO
DECEMBER 31,
1996
------------
<S> <C>
RELATED PARTY MANAGEMENT FEE REVENUES........................................... $ 51,240
---------
OPERATING EXPENSES:
Salaries, wages, and benefits................................................. 46,582
General and administrative expenses........................................... 357,340
Depreciation and amortization................................................. 1,919
---------
405,841
---------
NET LOSS........................................................................ ($ 354,601)
=========
</TABLE>

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

F-4
<PAGE> 81

PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 31, 1996)
TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, inception (July 31, 1996)............ 0 $ 0 $ 0 $ 0 $ 0
Issuance of common stock and stock
options.................................. 599,893 600 343,711 0 344,311
Net loss.................................... 0 0 0 (354,601) (354,601)
------- ---- ------- --------- --------
BALANCE, December 31, 1996.................... 599,893 $600 $ 343,711 $(354,601) $(10,290)
======= ==== ======= ========= ========
</TABLE>

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

F-5
<PAGE> 82

PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JULY 31, 1996)
TO DECEMBER 31, 1996
--------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $ (354,601)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization......................................... 1,919
Compensation expense.................................................. 343,000
Increase in accounts receivable due from related party................ (26,976)
Increase in accounts payable and accrued interest..................... 108,828
Increase in accrued interest due to related party..................... 9,442
Increase in other assets.............................................. (1,100)
---------
Total adjustments................................................ 435,113
---------
Net cash provided by operating activities........................ 80,512
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (21,706)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under short-term debt......................................... 505,000
Issuance of common stock................................................. 1,311
Deferred offering costs.................................................. (441,577)
---------
Net cash provided by financing activities........................ 64,734
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................. 123,540
CASH AND CASH EQUIVALENTS, inception (July 31, 1996)....................... 0
---------
CASH AND CASH EQUIVALENTS, December 31, 1996............................... $ 123,540
=========
</TABLE>

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

F-6
<PAGE> 83

PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996

1. ORGANIZATION

Physicians' Specialty Corp. was organized in July of 1996 to provide
physician practice management services to medical groups specializing in
disorders and diseases of the ear, nose and throat.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Physicians' Specialty Corp. and its subsidiaries, all of which are wholly owned
(collectively, the "Company"). Intercompany balances and transactions have been
eliminated in consolidation.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and in checking and money
market accounts.

EQUIPMENT

Equipment is recorded at cost. Depreciation is computed on the
straight-line method over the estimated service lives of depreciable assets
(five years). Maintenance and repairs are charged to expense as incurred. The
cost of renewals and betterments is capitalized and depreciated over the
applicable estimated useful lives. The cost and accumulated depreciation of
assets sold, retired, or otherwise disposed of are removed from the accounts,
and the related gain or loss is credited or charged to income.

DEFERRED OFFERING COSTS

The Company has capitalized legal and consulting expenses incurred through
December 31, 1996 related to a stock offering. These costs will be offset
against the proceeds upon completion of the stock offering.

ORGANIZATION COSTS

The Company has capitalized legal expenses incurred prior to July 31, 1996
related to the organization and start-up of the Company. These costs are
included in other assets on the balance sheet and are being amortized over a
five-year period.

REVENUE RECOGNITION

The Company recognizes revenue at the date management services are
provided.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company estimates that the carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, and
short-term debt approximated their fair values as of December 31, 1996 due to
the relatively short maturity of these instruments.

F-7
<PAGE> 84

PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. EQUIPMENT

Equipment at December 31, 1996 consisted of the following:

<TABLE>
<S> <C>
Equipment.................................................................. $21,706
Less accumulated depreciation.............................................. (1,809)
-------
$19,897
=======
</TABLE>

4. SHORT-TERM DEBT

The Company's short-term debt at December 31, 1996 consisted of promissory
notes in principal amounts ranging from $20,000 to $170,500 and bearing simple
interest at a bank prime rate (8.25% at December 31, 1996). Amounts are payable
to various related party organizations and individuals. The short-term debt
matures at the earlier of the completion of a stock offering or June 30, 1997.
Management has the capacity to fund requisite cash operating needs.

5. INCOME TAXES

Deferred income tax assets and liabilities arise from differences between
the tax basis of an asset or liability and its reported amount in the financial
statements. Deferred tax balances are calculated by applying the provisions of
enacted tax law to determine the amount of taxes payable or refundable currently
or in future years.

The components of the net deferred tax asset are:

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward....................................... $ 6,500
Deferred tax liability:
Accruals.............................................................. (480)
Valuation allowance..................................................... (6,020)
Net deferred tax asset.................................................. $ 0
==========
</TABLE>

The Company has recorded a full valuation allowance against its deferred
tax asset because of the Company's current financial condition, its limited
operating history, and its operating losses recorded to date. Additionally, the
Company has not yet been able to develop a sufficient level of management fees
to cover its operating costs. If the Company does achieve profitability in the
future, the valuation allowance will be reduced by a credit to income.

6. STOCKHOLDERS' EQUITY

Stockholders' equity includes the respective capital stock, additional
paid-in capital and accumulated deficit of the Company. During the period ended
December 31, 1996, the Company declared a .6875 to 1 reverse stock split. All
financial information has been restated to reflect for the stock split. In
connection with certain stock issuances in November and December of 1996, the
Company recorded a charge to compensation of approximately $334,000.

7. RELATED-PARTY TRANSACTIONS

The Company is currently providing management services to the ENT Networks,
a related party. This three-year agreement provides for monthly reimbursement of
cost plus management fees.

The Company utilizes office space of a related party for which no rent or
other consideration is charged.

F-8
<PAGE> 85

PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

An affiliate of one of the shareholders has a consulting arrangement with
the Company whereby the affiliate will receive $250,000 in conjunction with a
successful initial public offering of the Company's common stock.

8. STOCK OPTION PLANS

During 1995, the FASB issued SFAS 123 which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
APB 25. Entities electing to remain with the accounting in APB 25 must make pro
forma disclosures of net income, as if the fair value-based method of accounting
defined in the statement had been applied.

In November 1996, the Company adopted two stock option plans, the 1996
Stock Option Plan (the "1996 Plan") and the 1996 Health Care Professionals Stock
Option Plan (the "Health Care Professionals Plan"). The Company primarily
accounts for these plans under APB Opinion No. 25, under which no compensation
cost has been recognized. The Company recognized compensation expense of
approximately $9,000 related to stock options granted to a non-employee
director. Had compensation cost for these plans been determined consistent with
FASB Statement No. 123, the Company's net loss would have been increased to
$634,924 for the pro forma amount instead of the reported amount of $354,601.

The Company may grant options for up to 825,000 shares under two plans, the
1996 Plan and the Health Care Professionals Plan. The Company has granted
options for up to 247,460 shares through December 31, 1996 under the 1996 Plan
and no options under the Health Care Professionals Plan through December 31,
1996. The plans' options vest over periods ranging from three to five years and
all expire after ten years. A summary of the status of the Company's two stock
option plans at December 31, 1996 and changes during the period from inception
(July 31, 1996) during the period then ended is presented in the table below:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at beginning at inception (July 31,
1996)................................................ 0 $ 0
Granted................................................ 247,460 6.80
Exercised.............................................. 0
Forefeited............................................. 0
Expired................................................ 0
------- --------
Outstanding at end of period........................... 247,460 6.80
------- --------
Exercisable at end of period........................... 67,490 6.80
Weighted average fair value of options granted......... $ 6.80
</TABLE>

The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with expected volatility of 65
percent.

F-9
<PAGE> 86

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Atlanta Ear, Nose, and Throat Associates, P.C.:

We have audited the accompanying balance sheets of ATLANTA EAR, NOSE, AND
THROAT ASSOCIATES, P.C. (a Georgia corporation) as of December 31, 1996 and 1995
and the related statements of operations, owners' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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 Atlanta Ear, Nose, and
Throat Associates, P.C. as of December 31, 1996 and 1995 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
January 17, 1997

F-10
<PAGE> 87

ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2).................................. $ 4,409 $ 401,517
Accounts receivable, less estimated allowances for uncollectible
accounts of $56,014 and $66,317, in 1996 and 1995, respectively
(Note 2)......................................................... 2,967,772 1,615,556
Account receivable due from related party (Notes 2 and 9)........... 309,222 388,078
Note receivable due from related party (Note 9)..................... 170,500 0
Prepayments and other............................................... 76,851 23,180
---------- ----------
3,528,754 2,428,331
PROPERTY AND EQUIPMENT, net (Notes 2 and 3)........................... 1,329,915 986,094
OTHER ASSETS.......................................................... 39,649 21,735
---------- ----------
Total assets................................................ $4,898,318 $3,436,160
========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable (Note 4)........................... $ 242,496 $ 178,000
Accounts payable.................................................... 240,012 112,473
Accrued compensation to owners...................................... 2,553,194 1,564,396
Other accrued liabilities........................................... 775,422 713,769
---------- ----------
3,811,124 2,568,638
---------- ----------
NONCURRENT LIABILITIES:
Deferred rent....................................................... 152,708 0
Notes payable, net of current portion (Note 4)...................... 868,964 802,000
---------- ----------
1,021,672 802,000
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
OWNERS' EQUITY (Note 2):
Common stock, $1 par value; 10,000 shares authorized; 1,000 shares
issued and outstanding........................................... 1,000 1,000
Additional paid-in capital.......................................... 64,522 64,522
Retained earnings................................................... 0 0
---------- ----------
Total owners' equity........................................ 65,522 65,522
---------- ----------
Total liabilities and owners' equity........................ $4,898,318 $3,436,160
========== ==========
</TABLE>

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

F-11
<PAGE> 88

ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
NET PATIENT SERVICE REVENUES (Note 2):
Related party (Note 9)................................. $ 2,969,202 $ 2,619,165 $1,823,651
Other.................................................. 10,639,910 7,671,384 6,300,002
----------- ----------- ----------
13,609,112 10,290,549 8,123,653
----------- ----------- ----------
OPERATING EXPENSES:
Salaries, wages, and benefits.......................... 5,208,972 3,922,240 2,928,834
Compensation to owner-physicians....................... 5,005,696 3,961,310 3,343,812
Bad debt expense....................................... 196,567 233,069 109,694
General and administrative expenses:
Related party....................................... 519,830 276,235 219,023
Other............................................... 2,320,777 1,608,378 1,254,782
Depreciation and amortization.......................... 360,594 275,072 258,818
----------- ----------- ----------
13,612,436 10,276,304 8,114,963
----------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS............................ (3,324) 14,245 8,690
OTHER (INCOME) EXPENSE, net (Note 10).................... (3,324) 14,245 8,690
----------- ----------- ----------
NET INCOME............................................... $ 0 $ 0 $ 0
=========== =========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-12
<PAGE> 89

ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.

STATEMENTS OF OWNERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.......................... 1,000 $1,000 $ 64,522 $0 $65,522
Net income.......................................... 0 0 0 0 0
--
----- ------ ------- -------
BALANCE, December 31, 1995.......................... 1,000 1,000 64,522 0 65,522
Net income.......................................... 0 0 0 0 0
--
----- ------ ------- -------
BALANCE, December 31, 1996.......................... 1,000 $1,000 $ 64,522 $0 $65,522
===== ====== ======= == =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-13
<PAGE> 90

ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 0 $ 0 $ 0
----------- ---------- ----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 360,594 275,072 258,818
(Increase) decrease in assets:
Accounts receivable................................ (1,273,360) (410,896) (266,738)
Prepayments and other assets....................... (71,585) (17,371) (1,650)
Increase (decrease) in liabilities:
Accounts payable................................... 127,539 (58,853) (98,659)
Accrued liabilities and deferred rent.............. 1,203,159 667,066 486,267
----------- ---------- ----------
Total adjustments............................... 346,347 455,018 378,038
----------- ---------- ----------
Net cash provided by operating activities....... 346,347 455,018 378,038
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable due from related party................. (170,500) 0 0
Capital expenditures.................................... (704,415) (541,143) (162,435)
----------- ---------- ----------
Net cash provided by (used in) investing activities..... (874,915) (541,143) (162,435)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable..................... (368,540) (286,000) (241,810)
Borrowings under notes payable.......................... 500,000 749,810 0
----------- ---------- ----------
Net cash provided by (used in) financing
activities.................................... 131,460 463,810 (241,810)
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (397,108) 377,685 (26,207)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............ 401,517 23,832 50,039
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................. $ 4,409 $ 401,517 $ 23,832
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................. $ 87,641 $ 33,666 $ 40,379
=========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-14
<PAGE> 91

ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994

1. THE COMPANY AND BASIS OF PRESENTATION

Atlanta Ear, Nose, and Throat Associates, P.C. (the "Company") was
organized in 1988. The Company currently has seventeen physicians, fifteen
audiologists, seven physician assistants, and over one hundred total employees.
The physicians within the group deal with a wide variety of ear, nose, and
throat specialties, including general otolaryngology, pediatric otolaryngology,
head and neck surgery, neuro-otology, and facial plastic surgery. The group also
provides comprehensive audiology services. There are currently fourteen office
locations throughout the metropolitan Atlanta area.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and in checking and money
market accounts.

ACCOUNTS RECEIVABLE

Accounts receivable principally represent receivables from patients and
third-party payers for medical services provided by physician owners and
employees. Such amounts are recorded net of estimated contractual allowances.
Contractual adjustments result from the differences between the rates charged by
the physicians for services performed and the amounts allowed by the Medicare
and Medicaid programs and other public and private insurers. An allowance for
uncollectible accounts has been established to provide for losses on
uncollectible accounts based on management's estimates and historical
collection.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using
accelerated methods over the estimated service lives of depreciable assets (life
of the lease for leasehold improvements, five to seven years for equipment, and
seven years for furniture and fixtures). Maintenance and repairs are charged to
expense as incurred. The cost of renewals and betterments is capitalized and
depreciated over the applicable estimated useful lives. The cost and accumulated
depreciation of assets sold, retired, or otherwise disposed of are removed from
the accounts, and the related gain or loss is credited or charged to income.

OWNERS' EQUITY

Owners' equity includes the respective common stock, additional paid-in
capital and retained earnings of the Company. Various types of agreements exist
among the owners which call for the transfer of a physician's ownership interest
by the continuing owners in the case of certain events such as the owner's
retirement or death.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company estimates that the carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
debt, approximated their fair values as of each balance sheet date because of
the relatively short maturity of these instruments.

F-15
<PAGE> 92

ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NET PATIENT SERVICE REVENUES

Patient service revenues are reported at the estimated realizable amounts
from patients, third-party payers (which include managed care providers,
commercial insurance carriers, and health maintenance organizations), and others
for services rendered. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated rates.

CONCENTRATION OF CREDIT RISK

The Company extends credit to patients covered by insurance programs such
as governmental programs like Medicare and Medicaid and private insurers. The
Company manages credit risk with the various public and private insurance
providers, as appropriate. Allowances for doubtful accounts have been made for
potential losses, where appropriate.

3. PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1996 and 1995 consisted of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Leasehold improvements............................. $ 321,870 $ 152,905
Equipment.......................................... 2,000,194 1,588,376
Furniture and fixtures............................. 346,708 225,519
---------- ----------
2,668,772 1,966,800
Less accumulated depreciation...................... (1,338,857) (980,706)
---------- ----------
$ 1,329,915 $ 986,094
========== ==========
</TABLE>

4. NOTES PAYABLE

The Company's notes payable at December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Note payable to bank dated December 23, 1993; principal of
$848,000 and interest (at Prime) due monthly through June
22, 1998; secured by all property and equipment............ $ 0 $230,000
Note payable to bank dated December 26, 1995; principal of
$750,000 and interest (at Prime less 0.25%) due monthly
beginning December 26, 1995 through March 25, 1996 based on
terms of refinancing; secured by all property and
equipment.................................................. 0 750,000
Note payable to bank dated July 11, 1996; principal of
$1,212,500 and interest (at Prime less 0.25%) due monthly
through July 10, 2001; secured by accounts receivable and
property and equipment..................................... 1,111,460 0
-------- --------
1,111,460 980,000
Less current portion......................................... 242,496 178,000
-------- --------
Notes payable due after one year............................. $ 868,964 $802,000
======== ========
</TABLE>

F-16
<PAGE> 93

ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate maturities of notes payable at December 31, 1996 are as
follows:

<TABLE>
<S> <C>
1997..................................................................... $ 242,496
1998..................................................................... 242,496
1999..................................................................... 242,496
2000..................................................................... 242,496
2001 and thereafter...................................................... 141,476
--------
$1,111,460
========
</TABLE>

5. INCOME TAXES

The Company has elected to be taxed as an S corporation as permitted by the
Internal Revenue Code. As an S corporation, the Company is not a taxable entity,
and separately stated items of income, loss, deduction, and credit are passed
through to and taken into account by the individual owners in computing their
federal and state individual income tax liabilities.

6. EMPLOYEE BENEFIT PLAN

The Company sponsors a defined contribution plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees. The plan
requires that the Company provide a 25% matching contribution for up to 6% of an
employee's contribution base up to specified limitations. The total cost of the
Company's plan was $15,767, $9,755, and $5,991 in 1996, 1995, and 1994,
respectively.

7. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases facilities under operating leases which expire at
various dates through December 2010. Future minimum lease payments under these
leases as of December 31, 1996 are as follows:

<TABLE>
<S> <C>
1997..................................................................... $ 925,382
1998..................................................................... 866,591
1999..................................................................... 722,956
2000..................................................................... 652,659
2001 and thereafter...................................................... 4,599,171
</TABLE>

Lease expense for the years ended December 31, 1996, 1995, and 1994,
totaled approximately $1,004,000 and $597,000, and $471,000, respectively.

INSURANCE

The Company is insured with respect to medical malpractice risks on a
claims made basis. Accordingly, coverage relates only to claims made during the
policy term. Historically, any claims paid have been within the insurance policy
limits. Management is not aware of any claims against it or its affiliated
medical practices which might have a material impact on the Company's financial
position or results of operations.

F-17
<PAGE> 94

ATLANTA EAR, NOSE, AND THROAT ASSOCIATES, P.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

EMPLOYMENT AGREEMENTS

Certain management personnel and physician employees are covered by
employment agreements that vary in length from one to five years, which include,
among other terms, salary and benefits provisions. Future minimum payments under
these agreements as of December 31, 1996 are approximately:

<TABLE>
<S> <C>
1997...................................................................... $950,000
1998...................................................................... 540,000
1999...................................................................... 140,000
2000 and thereafter....................................................... 0
</TABLE>

8. LEGAL PROCEEDINGS

The Company is subject to legal proceedings and third party claims which
arise in the ordinary course of business. In the opinion of management, the
amount of potential liability with respect to these actions will not materially
affect the Company's financial position or results of operations.

9. RELATED PARTY TRANSACTIONS

For the years ended December 31, 1996, 1995, and 1994, the Company expensed
approximately $430,000, $215,000, and $199,000, respectively, in annual rent for
its location at the Medical Quarters to a certain stockholder who owns this
location.

For the years ended December 31, 1996 and 1995, the Company expensed
approximately $68,000 and $39,000, respectively, in rent for its Snellville
location to a partnership in which certain stockholders are partners.

For the years ended December 31, 1996, 1995, and 1994, the Company expensed
approximately $22,000, $22,000, and $20,000, respectively, in annual rent for
its Duluth location to a partnership in which a certain stockholder is partner.

For the years ended December 31, 1996, 1995, and 1994, the Company recorded
revenue of approximately $2,969,000 $2,619,000 and $1,824,000, respectively, in
discounted fee-for-service payments from three companies which are solely owned
by a certain stockholder of the Company. In addition for the years ended
December 31, 1996, 1995, and 1994 the Company recorded approximately $48,000,
$65,000, and $29,000, respectively, in salary and expense reimbursements from
these three companies for work performed by two employees of the Company.

During 1996, the Company loaned $170,500 to a related party organization.
This unsecured note receivable is due the earlier of the closing of a stock
offering or June 30, 1997, bearing interest at prime.

10. OTHER INCOME AND EXPENSE

Other (income) expense, net for the years ended December 31, 1996, 1995 and
1994 is as follows:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Recruiting fee revenue............................. $(72,223) $ 0 $ 0
Interest expense................................... 87,641 33,666 40,379
Interest income.................................... (10,619) (8,863) (7,661)
Miscellaneous income............................... (8,123) (10,558) (24,028)
-------- -------- --------
$ (3,324) $ 14,245 $ 8,690
======== ======== ========
</TABLE>

F-18
<PAGE> 95

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Atlanta-AHP, Inc.,
ENT Center of Atlanta, Inc., and
Atlanta ENT Center, Inc.:

We have audited the accompanying combined balance sheets of ATLANTA-AHP,
INC., ENT CENTER OF ATLANTA, INC., AND ATLANTA ENT CENTER, INC. (Georgia
corporations) (collectively, the "ENT Networks") as of December 31, 1996 and
1995 and the related combined statements of operations, owner's equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the ENT Networks' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

ARTHUR ANDERSEN LLP

Atlanta, Georgia
January 17, 1997

F-19
<PAGE> 96

ENT NETWORKS

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................. $827,649 $302,054
EQUIPMENT, net........................................................... 13,084 4,041
-------- --------
Total assets................................................... $840,733 $306,095
======== ========
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES:
Claims payable......................................................... $ 36,866 $ 47,965
Claims payable due to related party.................................... 309,222 388,078
-------- --------
346,088 436,043

COMMITMENTS AND CONTINGENCIES (Note 5)
OWNER'S EQUITY:
Common stock, no par value; 210,000 shares authorized; 2,000 shares
issued and outstanding.............................................. -- --
Additional paid-in capital............................................. 2,000 2,000
Retained earnings...................................................... 492,645 (131,948)
-------- --------
Total owner's equity........................................... 494,645 (129,948)
-------- --------
Total liabilities and owner's equity........................... $840,733 $306,095
======== ========
</TABLE>

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

F-20
<PAGE> 97

ENT NETWORKS

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CAPITATION REVENUE (Note 2)................................ $4,452,995 $4,168,279 $3,510,747
---------- ---------- ----------
OPERATING EXPENSES:
Salaries, wages, and benefits:
Related party......................................... 48,379 64,600 28,802
Other................................................. 36,121 0 0
General and administrative expenses:
Related party......................................... 167,397 170,792 124,289
Other................................................. 0 0 12,468
Depreciation............................................. 2,672 6,395 7,795
Provider claims:
Related party......................................... 2,969,202 2,619,165 1,823,651
Other................................................. 247,751 273,481 632,263
---------- ---------- ----------
3,471,522 3,134,433 2,629,268
---------- ---------- ----------
INCOME FROM OPERATIONS..................................... 981,473 1,033,846 881,479
OTHER INCOME, net.......................................... 23,470 33,476 25,388
---------- ---------- ----------
NET INCOME................................................. $1,004,943 $1,067,322 $ 906,867
========== ========== ==========
</TABLE>

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

F-21
<PAGE> 98

ENT NETWORKS

COMBINED STATEMENTS OF OWNER'S EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994................... 2,000 $0 $2,000 $ (255,930) $ (253,930)
Distributions.............................. 0 0 0 (943,340) (943,340)
Net income................................. 0 0 0 1,067,322 1,067,322
--
----- ------ ----------- -----------
BALANCE, December 31, 1995................... 2,000 0 2,000 (131,948) (129,948)
Distributions.............................. 0 0 0 (380,350) (380,350)
Net income................................. 0 0 0 1,004,943 1,004,943
--
----- ------ ----------- -----------
BALANCE, December 31, 1996................... 2,000 $0 $2,000 $ 492,645 $ 494,645
===== == ====== =========== ===========
</TABLE>

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

F-22
<PAGE> 99

ENT NETWORKS

COMBINED STATEMENTS OF CASH FLOWS

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

F-23
<PAGE> 100

ENT NETWORKS

NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994

1. ORGANIZATION

Atlanta-AHP, Inc. ("AHP"), ENT Center of Atlanta, Inc. ("ENT Center"), and
Atlanta ENT Center, Inc. ("Atlanta ENT") (collectively "ENT Networks" or the
"Company") were organized as Georgia S corporations. The ENT Networks have
contracts to administer capitated specialty services in the greater Atlanta area
through affiliated physicians and other independent physicians.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying combined financial statements include the accounts of AHP,
ENT Center, and Atlanta ENT and have been combined because of common control and
ownership. All significant intercompany accounts and transactions have been
eliminated.

USE OF ESTIMATES

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and in checking and money
market accounts.

EQUIPMENT

Equipment is recorded at cost. Depreciation is computed using accelerated
methods over the estimated service lives of depreciable assets (five to seven
years). Maintenance and repairs are charged to expense as incurred. The cost of
renewals and betterments is capitalized and depreciated over the applicable
estimated useful lives. The cost and accumulated depreciation of assets sold,
retired, or otherwise disposed of are removed from the accounts, and the related
gain or loss is credited or charged to income.

PROVIDER CLAIMS

The cost of providing healthcare services is accrued for in the period in
which it is provided to a member based in part on estimates, including an
accrual for medical services provided but not reported to the ENT Networks.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company estimates that the carrying amounts of financial instruments,
including cash and cash equivalents and accounts payable, approximated their
fair values as of each balance sheet date because of the relatively short
maturity of these instruments.

CAPITATION REVENUE

Membership contracts are on a yearly basis and are subject to cancellation.
Premiums are due monthly and are recognized as revenue during the period in
which the ENT Networks is obligated to provide services to members.

F-24
<PAGE> 101

ENT NETWORKS

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

3. EQUIPMENT

Equipment at December 31, 1996 and 1995 consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Equipment........................................................ $ 31,363 $ 19,648
Less accumulated depreciation.................................... (18,279) (15,607)
-------- --------
$ 13,084 $ 4,041
======== ========
</TABLE>

4. INCOME TAXES

The ENT Networks have elected to be taxed as S corporations as permitted by
the Internal Revenue Code. As an S corporation, ENT Networks is not a taxable
entity, and separately stated items of income, loss, deduction, and credit are
passed through to and taken into account by the individual owners in computing
their federal and state individual income tax liabilities.

5. COMMITMENTS AND CONTINGENCIES

The Company is subject to legal proceedings and third party claims which
arise in the ordinary course of business. In the opinion of management, the
amount of potential liability with respect to these actions will not materially
affect ENT Networks' financial position or results of operations.

6. RELATED-PARTY TRANSACTIONS

For the years ended December 31, 1996, 1995, and 1994, the ENT Networks
expensed approximately $2,969,000, $2,619,000, and $1,824,000, respectively, in
discounted fee-for-service payments to a company in which an owner is the
shareholder. In addition, for the years ended December 31, 1996, 1995, and 1994,
the ENT Networks recorded approximately $48,000, $65,000, and $29,000,
respectively, in salary and expense reimbursements to this related company for
work performed by two of its employees.

For the years ended December 31, 1996, 1995, and 1994, the ENT Networks
expensed approximately $167,000, $171,000, and $124,000, respectively, to its
owner and a related physician in administrative and management fees.

F-25
<PAGE> 102

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
W.J. Cornay, III, M.D., P.C.

We have audited the accompanying balance sheets of W.J. Cornay, III, M.D.,
P.C. as of December 31, 1996 and 1995, and the related statements of operations
and cash flows for the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of W.J. Cornay, III, M.D., P.C.
as of December 31, 1996 and 1995, the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995 in conformity with
generally accepted accounting principles.

CADE & ASSOCIATES, P.C.

Birmingham, Alabama
January 17, 1997

F-26
<PAGE> 103

W. J. CORNAY, III, M.D., P.C.

BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................... $ 60,960 $ 99,928
Accounts Receivable, less Estimated Allowances for Doubtful Accounts of
$10,864 and $7,576 in 1996 and 1995, Respectively................... 223,860 188,088
Prepaid Expenses....................................................... 15,650 28,376
-------- --------
Total Current Assets........................................... 300,470 316,392
PROPERTY AND EQUIPMENT, NET.............................................. 115,266 130,710
-------- --------
TOTAL ASSETS................................................... $415,736 $447,102
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of Long-Term Debt...................................... $ 36,911 $ 53,460
Current Portion of Capital Lease Obligations........................... 4,562 4,153
Bank Overdraft......................................................... -- 14,203
Accounts Payable....................................................... 41,330 23,782
Accrued Expenses....................................................... 59,463 38,896
Deferred Taxes......................................................... 67,066 65,510
-------- --------
Total Current Liabilities...................................... 209,332 200,004
LONG-TERM DEBT, less current portion..................................... 76,220 93,821
CAPITAL LEASE OBLIGATIONS, less current portion.......................... 3,288 7,851
DEFERRED TAXES -- LONG-TERM.............................................. 2,000 1,850
-------- --------
TOTAL LIABILITIES.............................................. 290,840 303,526
======== ========
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $10 per Share; 1,000 Shares Authorized; 100
Shares Issued and Outstanding....................................... 1,000 1,000
Additional Paid-In Capital............................................. 50,206 50,206
Retained Earnings...................................................... 73,690 92,370
-------- --------
Total Stockholders' Equity..................................... 124,896 143,576
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $415,736 $447,102
======== ========
</TABLE>

The accompanying notes and independent auditor's report
are an integral part of these financial statements.

F-27
<PAGE> 104

W. J. CORNAY, III, M.D., P.C.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
NET PATIENT SERVICE REVENUES.......................................... $1,338,981 $1,322,788
---------- ----------
OPERATING EXPENSES:
Salaries, Wages and Benefits........................................ 355,723 567,534
Compensation to Owner-Physicians.................................... 576,280 470,259
Owner-Physician Expenses............................................ 13,113 2,262
General and Administrative Expenses................................. 359,558 290,683
Bad Debt Expense.................................................... 3,288 (3,929)
Depreciation........................................................ 38,846 38,862
---------- ----------
Total Operating Expenses.................................... 1,346,808 1,365,671
---------- ----------
INCOME (LOSS) FROM OPERATIONS......................................... (7,827) (42,883)
OTHER INCOME (EXPENSE), NET........................................... (9,147) 3,286
DEFERRED TAX EXPENSE.................................................. 1,706 (13,140)
---------- ----------
NET INCOME (LOSS)..................................................... (18,680) (26,457)
BEGINNING RETAINED EARNINGS........................................... 92,370 118,827
---------- ----------
ENDING RETAINED EARNINGS.............................................. $ 73,690 $ 92,370
========== ==========
</TABLE>

The accompanying notes and independent auditor's report
are an integral part of these financial statements.

F-28
<PAGE> 105

W. J. CORNAY, III, M.D., P.C.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash Received from Patients and Third Party Payors................ $ 1,300,622 $ 1,365,806
Cash Paid to Suppliers and Employees.............................. (1,253,833) (1,296,550)
Interest Received................................................. 2,233 3,631
Interest Paid..................................................... (12,080) (7,287)
----------- -----------
Net Cash from Operating Activities........................ 36,942 65,600
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment............................. (23,403) (69,065)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Activity in Line of Credit.................................... -- (45,000)
Proceeds from Long-Term Debt...................................... -- 134,107
Repayment of Long-Term Debt....................................... (34,151) (20,038)
Proceeds from Capitalized Lease................................... -- 15,785
Repayment of Capitalized Lease.................................... (4,153) (3,781)
----------- -----------
Net Cash from Financing Activities........................ (38,304) 81,073
----------- -----------
NET CHANGE IN CASH.................................................. (24,765) 77,608
CASH -- BEGINNING OF YEAR........................................... 85,725 8,117
----------- -----------
CASH -- END OF YEAR................................................. $ 60,960 $ 85,725
=========== ===========
RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES:
Net Income (Loss)................................................. $ (18,680) $ (26,457)
Adjustments:
Depreciation................................................... 38,846 38,862
Deferred Tax Expense........................................... 1,706 (13,140)
(Increase) Decrease in Assets:
Accounts Receivable, Net....................................... (35,772) 31,566
Prepaid Expenses............................................... 12,726 (1,942)
Other.......................................................... -- 581
Increase (Decrease) in Liabilities:
Accounts Payable............................................... 17,549 8,581
Accrued Expenses............................................... 20,567 27,549
----------- -----------
NET CASH FROM OPERATING ACTIVITIES.................................. $ 36,942 $ 65,600
=========== ===========
</TABLE>

The accompanying notes and independent auditor's report
are an integral part of these financial statements.

F-29
<PAGE> 106

W.J. CORNAY, III, M.D., P.C.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

W.J. Cornay, III, M.D., P.C. (the Company) was incorporated in 1988 in the
state of Alabama. The Company is a medical practice which specializes in
treatment of the ear, nose, and throat.

Patient Service Revenue. Patient service revenue is reported at the
estimated net realizable amounts from patients, third-party payors, and others
for services rendered.

Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party settlements are
provided in the period the related services are rendered. Differences between
the estimated amounts accrued and interim and final settlements are reported in
the year of settlement.

Property and Equipment. The cost of property and equipment is depreciated
over the estimated lives of the related assets. Depreciation is computed on the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes.

The useful lives of property and equipment for purposes of computing
depreciation are:

<TABLE>
<S> <C>
Leasehold Improvements................................................... 31 Years
Equipment................................................................ 5-7 Years
Vehicles................................................................. 5 Years
Furniture & Fixtures..................................................... 5-7 Years
Computer System.......................................................... 5 Years
Software................................................................. 3-5 Years
</TABLE>

Maintenance and repairs are charged to operations when incurred.
Betterments and renewals are capitalized. When property and equipment are sold
or otherwise disposed of, the asset account and related accumulated depreciation
account are relieved, and any gain or loss is included in operations.

Income Taxes. The provision for income taxes are based on net income
reported for financial reporting purposes. Deferred income taxes arise from
temporary differences between financial and income tax reporting of various
items (principally revenue recognition).

NOTE 2 -- PROPERTY AND EQUIPMENT

The following is a summary of property and equipment (stated at cost), less
accumulated depreciation:

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Equipment (Including Medical Equipment)...................... $ 214,752 $ 203,209
Computer System (See Note 4)................................. 56,153 46,371
Vehicle...................................................... 52,180 52,180
Furniture and Fixtures....................................... 48,304 47,159
Software..................................................... 3,634 2,702
Leasehold Improvements....................................... 689 689
--------- ---------
375,712 352,310
Accumulated Depreciation..................................... (260,446) (221,600)
--------- ---------
Property and Equipment, net.................................. $ 115,266 $ 130,710
========= =========
</TABLE>

Depreciation expense charged to operations was $38,846 and $38,862 in 1996
and 1995, respectively.

A vehicle with a cost of $52,180 is pledged as collateral on a bank loan
(See Note 3).

F-30
<PAGE> 107

W.J. CORNAY, III, M.D., P.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- LONG-TERM DEBT

Long-term debt as of December 31, 1996 and 1995 is as follows:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note payable to bank due December, 1998, payable in equal
monthly installments at a fixed rate of 7.25%, secured by a
vehicle...................................................... $ 13,581 $ 22,939
Note payable to stockholder due March, 2000, payable in equal
monthly installments at a fixed rate of 8%, unsecured........ 99,550 124,342
-------- --------
113,131 147,281
Less: Current portion.......................................... 36,911 53,460
-------- --------
$ 76,220 $ 93,821
======== ========
</TABLE>

Scheduled annual principal maturities for each of the next 4 years are as
follows:

<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------
<S> <C>
1997.................................................................... $ 36,911
1998.................................................................... 32,596
1999.................................................................... 31,491
2000.................................................................... 12,133
--------
$113,131
========
</TABLE>

The Company maintains a $25,000 revolving line of credit with a Bank which
expires in February 1997. Any funds drawn under the credit facility accrue
interest at the Bank's prime rate. At December 31, 1996 and 1995 there was $0
outstanding under the line of credit.

NOTE 4 -- LEASES

Capital Lease -- The Company is the lessee of a computer system under a
capital lease expiring in 1998. The asset and related liability were recorded at
fair market value as of the inception date of the lease. The computer system is
being depreciated over its estimated economic life of five years.

Minimum future lease payments under the capital lease as of December 31,
1996 for each of the next two years and in the aggregate are:

<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Year Ended December 31, 1996:
1997...................................................................... $5,109
1998...................................................................... 3,405
------
Total Minimum Lease Payments................................................ 8,514
Less: Amount Representing Interest.......................................... 664
------
Present Value of Net Minimum Lease Payments................................. $7,850
======
</TABLE>

The interest rate on the capital lease is 9.43% imputed based on the
lessor's implicit rate of return. Upon expiration of the lease, the lessee has
the option to purchase the computer system for a nominal amount.

Operating Leases -- The company leases its office location and a vehicle
under operating leases expiring during 1997. Total rent expense under these
leases was $52,600 and $46,613 in 1996 and 1995, respectively.

F-31
<PAGE> 108

W.J. CORNAY, III, M.D., P.C.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- PENSION PLAN

The Company sponsors a defined contribution pension plan under Code Section
401(k) that covers all employees who have been employed for at least one year
and are at least 21 years of age. Annual matching contributions to the plan are
set at a 14 to 1 ratio based on each employee's elective deferral percentage not
to exceed 1% of eligible salary. Each employee's right to their respective
matching contribution is subject to a vesting percentage schedule as designated
by management. Under the current schedule, employees become 100% vested after
six years of service. Total pension expense was $49,942 and $38,988 in 1996 and
1995, respectively.

NOTE 6 -- CONTINGENCIES

The Company is currently in negotiations with a third party regarding the
possibility of a merger. As of January 17, 1997, the parties were conducting due
diligence and no further actions had yet been taken. Thus, no estimation can be
made as to the effects, if any, of the negotiations on the financial statements.

F-32
<PAGE> 109

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
The Reorganization..................... 9
Risk Factors........................... 11
Use of Proceeds........................ 21
Dividend Policy........................ 22
Capitalization......................... 23
Dilution............................... 24
Unaudited Pro Forma Combined Financial
Data................................. 25
Selected Financial Data................ 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 32
Business............................... 40
Management............................. 56
Principal Stockholders................. 65
Certain Transactions................... 67
Description of Capital Stock........... 71
Shares Eligible for Future Sale........ 73
Underwriting........................... 74
Legal Matters.......................... 75
Experts................................ 75
Additional Information................. 76
Index to Financial Statements.......... F-1
</TABLE>

---------------------
UNTIL APRIL 14, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

2,200,000 SHARES

(LOGO) PHYSICIANS' SPECIALTY CORP.

PHYSICIANS'
SPECIALTY CORP.

COMMON STOCK
--------------------

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

SOUTHCOAST CAPITAL
CORPORATION

BARINGTON CAPITAL GROUP, L.P.

MARCH 20, 1997

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