PHYSICIAN HEALTH CORP, S-1/A, 1998-02-13

PHYSICIAN HEALTH CORP
S-1/A, 1998-02-13
SPECIALTY OUTPATIENT FACILITIES, NEC

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998
REGISTRATION NO. 333-40073

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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PHYSICIAN HEALTH CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8099 58-2199947
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

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PHYSICIAN HEALTH CORPORATION
ONE LAKESIDE COMMONS
990 HAMMOND DRIVE, SUITE 300
ATLANTA, GEORGIA 30328
(770) 673-1964
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

SARAH C. GARVIN
ONE LAKESIDE COMMONS
990 HAMMOND DRIVE, SUITE 300
ATLANTA, GEORGIA 30328
(770) 673-1964
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)

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COPIES TO:
JAMES S. RYAN, III J. VAUGHAN CURTIS
JACKSON WALKER L.L.P. DOUGLAS B. CHAPPELL
901 MAIN STREET ALSTON & BIRD LLP
SUITE 6000 ONE ATLANTIC CENTER
DALLAS, TEXAS 75287 1201 WEST PEACHTREE
(214) 953-6000 STREET ATLANTA, GEORGIA
30309
(404) 881-7000

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

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

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

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

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

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

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<PAGE>

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

SUBJECT TO COMPLETION, DATED FEBRUARY 13, 1998

PHYSICIAN HEALTH CORPORATION

3,000,000 SHARES

COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by Physician
Health Corporation (the "Company" or "PHC"). Prior to this offering (the
"Offering"), there has been no public market for the Common Stock. It is
currently estimated that the initial public offering price will be between
$13.50 and $15.50 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Company
has applied to have the Common Stock approved for quotation on the Nasdaq
National Market under the symbol "PHCO."

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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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<S> <C> <C> <C>
Per Share.............. $ $ $
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Total(2)............... $ $ $
</TABLE>
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(1) Before deducting expenses payable by the Company estimated at $2,500,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock, solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ , and $ , respectively.

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The Common Stock is offered by the Underwriters, as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1998.

BANCAMERICA ROBERTSON STEPHENS

NATIONSBANC MONTGOMERY SECURITIES LLC

A.G. EDWARDS & SONS, INC.

THE ROBINSON-HUMPHREY COMPANY

The date of this Prospectus is , 1998

<PAGE>

[LOGO OF PHYSICIAN HEALTH CORPORATION APPEARS HERE]
[Map and explanatory legend showing locations of PHC Practices and Payor
Contracting Activities, and numbers of physicians, contracts and covered lives]

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF
THE COMMON STOCK INCLUDING STABILIZING BIDS, SYNDICATE COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."

<PAGE>

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY,
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN
OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE 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 THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Unaudited Pro Forma Balance Sheet........................................ 21
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 35
Management............................................................... 55
Certain Transactions..................................................... 63
Description of Capital Stock............................................. 66
Principal Stockholders................................................... 70
Shares Eligible for Future Sale.......................................... 72
Underwriting............................................................. 74
Legal Matters............................................................ 75
Experts.................................................................. 75
Additional Information................................................... 76
Index to Financial Statements............................................ F-1
</TABLE>

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The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements examined by its
independent public accountants. The Company also intends to furnish such other
reports as it may determine or as may be required by applicable law.

3
<PAGE>

SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. See "Risk Factors" for information that should be
carefully considered by prospective investors. Unless otherwise indicated, all
information in this Prospectus assumes: (i) a 0.314-for-1 stock split with
respect to the Common Stock and Non-Voting Common Stock (the "Reverse Stock
Split"), which will be effective prior to consummation of the Offering; (ii) no
exercise of the Underwriter's over-allotment option; and (iii) conversion of
all of the issued and outstanding shares of the Company's Class A Stock (Series
1 and Series 2), Series B Redeemable Convertible Preferred Stock, Series B Non-
Voting Redeemable Convertible Preferred Stock and Prime Common Stock into
3,685,918 shares of Common Stock and 288,194 shares of Non-Voting Common Stock
upon consummation of the Offering.

THE COMPANY

Physician Health Corporation is a physician management company focusing on
the value-added integration of practice management, ancillary health care
services, network development and administration, and payor contracting in
selected markets. As of December 31, 1997, the Company provided payor contract
administration and related services to 24 physician networks, one of which is
owned by the Company, one of which is a nonprofit corporation of which the
Company is the sole member (together, the "PHC Networks") and the remainder of
which are independent entities that receive services from the Company (the
"Affiliated
Networks"). The PHC Networks and Affiliated Networks included approximately
3,300 physicians and 2.3 million covered lives under 29 managed care contracts
including specialty capitated and global risk contracts. As of December 31,
1997, the Company was a party to practice management agreements with 25
physician practices ("Managed Practices") that employed 122 physicians
("Managed Physicians"). In addition, the Company directly owned and operated
nine physician practices ("Owned Practices") through which it directly employed
50 physicians ("Employed Physicians"). Managed Practices and Owned Practices
are collectively referred to as "PHC Practices," and Managed Physicians and
Employed Physicians are collectively referred to as "PHC Physicians." As of
December 31, 1997, there were an aggregate of 34 PHC Practices and 172 PHC
Physicians. As of December 31, 1997, the Company also had interests in two
businesses delivering ancillary health care services.

The Company's objective is to continue building comprehensive and integrated
networks of physicians in selected regional markets in order to: (i) establish
a significant market presence enabling it to negotiate favorable payor
contracts and (ii) provide a broad range of physicians and ancillary health
care services to payors. To achieve these objectives, the Company seeks to: (a)
leverage contracting expertise to enhance its strategic position in its
markets; (b) selectively acquire key practices to strengthen market presence;
(c) provide management expertise and capital for development of ancillary
health care services; (d) negotiate and administer beneficial payor contracts;
and (e) utilize information technology to improve practice performance and meet
payor requirements. The Company believes that the expertise of its management
team in network development, payor contracting and ancillary health care
services, as well as PHC's flexible approach to entering new markets and
structuring its operations, differentiate PHC from traditional physician
practice management companies ("PPMs") and enhance its ability to attract
physicians and to negotiate favorable payor contracts. PHC's acquisition of key
practices is a part of its overall strategy of strengthening its networks and
market presence and enhancing the Company's ability to contract with managed
care payors and providers.

4
<PAGE>

constituted approximately 64% of net revenue, patient service revenues
generated by Owned Practices constituted approximately 14% of net revenues,
management fees from management of Affiliated Networks and administering
managed care contracts constituted approximately 22% of net revenue, and
revenues from the operation of ancillary health care services constituted
approximately 0% of net revenues. During the nine months ended September 30,
1997, the Company believes that the PHC Practices derived approximately 30% of
their revenues from Medicare and Medicaid, approximately 10% of revenues from
capitated contracts with managed care payors and approximately 60% of revenues
under traditional fee-for-service arrangements.

The Company commenced operations in 1994 as a wholly-owned subsidiary (the
"Predecessor") of Surgical Health Corporation. PHC was incorporated in Delaware
in August 1995 and acquired the Predecessor in November 1995. Prior to the
acquisition of the assets and entry into a long-term practice management
agreement with the first PHC Practice in November 1996, the Company principally
engaged in network development and administration, payor contracting, practice
administration, and development activities related to potential acquisitions.
The Predecessor principally engaged in network development and administration,
payor contracting and practice administration and derived its revenues from
these activities.

During October and November 1997, the Company acquired the assets of and
entered into long-term practice management agreements with 17 Managed Practices
with 83 Managed Physicians, acquired the assets of four Owned Practices and
entered into employment agreements with 37 Employed Physicians associated with
those Owned Practices, and acquired a sleep laboratory and a 51% interest in an
ambulatory surgery center. The approximate aggregate consideration paid in
connection with these acquisitions consisted of $27.2 million in stock value,
$1.2 million in promissory notes and $9.3 million in cash.

The Company's current regional markets are centered in Atlanta, Georgia;
Cincinnati, Ohio; Dallas/Ft. Worth, Texas; Memphis, Tennessee; Orlando,
Florida; and St. Louis, Missouri. The Company will continue to evaluate
expansion into additional regional markets. The principal executive offices of
the Company are located at One Lakeside Commons, Suite 300, 990 Hammond Drive,
Atlanta, Georgia 30328 and its telephone number is (770) 673-1964.

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered hereby........................ 3,000,000 shares
Common Stock to be outstanding after the Offering.. 10,390,401 shares(1)
Use of proceeds.................................... To repay certain
indebtedness and for
working capital and
general corporate
purposes, including future
acquisitions of physician
practices, acquisitions
and development of
ancillary health care
services, and development
of physician networks and
payor contracts. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol............. PHCO
</TABLE>
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(1) Includes 288,194 shares of Non-Voting Common that will be immediately
convertible into Common Stock. Excludes: (i) an aggregate of 1,076,578
shares of Common Stock issuable upon exercise of warrants outstanding at a
weighted average exercise price of $3.10 per share; (ii) an aggregate of
1,664,265 shares of Common Stock issuable upon exercise of options
outstanding at a weighted average exercise price of $13.70 per share under
the Company's Amended and Restated 1995 Stock Option Plan (the "1995 Stock
Option Plan"); (iii) 1,475,421 shares of Common Stock reserved for issuance
under the 1995 Stock Option Plan following consummation of the Offering;
and (iv) 693,612 shares of Common Stock issuable upon conversion of certain
interests in subsidiaries of PHC. See "Management--1995 Stock Option Plan."

<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------ ----------------------------------------------------
PERIOD FROM
PERIOD FROM INCEPTION NINE MONTHS
JANUARY 1, (AUGUST 29, YEAR ENDED ENDED
YEAR ENDED 1995 TO 1995) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, OCTOBER 31, DECEMBER 31, ------------ -----------------
1994 1995(1) 1995(1) 1996 1996 1997
------------ ----------- ------------ ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue................................ $812 $1,949 $ 456 $ 4,036 $ 2,720 $ 16,459
Operating expenses:
Salaries and benefits..................... 531 1,533 662 2,915 2,123 4,880
Contract and professional services........ 38 125 70 194 370 746
Provision for bad debts................... -- -- 40 660 104 938
General and administrative................ 225 463 131 2,748 1,242 11,875
Depreciation and amortization............. 58 106 14 161 81 732
Write down of assets(2)................... -- -- -- 195 -- 715
Purchased research and development(3)..... -- -- -- -- -- 13,252
---- ------ ------ ------- ------- --------
Total operating expenses.................. 851 2,227 917 6,873 3,920 33,138
---- ------ ------ ------- ------- --------
Income (loss) from operations.............. (39) (278) (461) (2,837) (1,200) (16,679)
Interest expense, net...................... 24 86 7 30 9 2,236
---- ------ ------ ------- ------- --------
Income (loss) before minority interest and
income taxes.............................. (63) (364) (468) (2,867) (1,209) (18,915)
Minority interest.......................... -- -- (1) -- -- (2,081)
---- ------ ------ ------- ------- --------
Income (loss) before income taxes.......... (63) (364) (467) (2,867) (1,209) (16,834)
Income tax expense......................... -- -- -- 17 -- 14
---- ------ ------ ------- ------- --------
Net income (loss).......................... $(63) $ (364) (467) $(2,884) $(1,209) $(16,848)
==== ====== ====== ======= ======= ========
Net income (loss) per share................ N/A N/A $(0.50) $ (1.34) $ (0.56) $ (5.82)
==== ====== ====== ======= ======= ========
Weighted average outstanding shares........ N/A N/A 941 2,156 2,143 2,894
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==== ====== ====== ======= ======= ========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $(5,047) $ 1,613 $ 18,568
Total assets.............................. 41,265 100,502 117,457
Long-term debt............................ 14,049 29,288 8,288
Total stockholders' equity (deficit)...... (9,344) 45,800 83,755
</TABLE>
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(1) The Company commenced operations in 1994 as a wholly-owned subsidiary of
Surgical Health Corporation. PHC was incorporated in Delaware in August
1995 and acquired the Predecessor in November 1995.
(2) The $195,000 charge in 1996 is related to the write off of operating assets
related to certain contracts that were entered into by the Predecessor and
did not conform to the Company's business plan. The $715,000 charge in 1997
is related to the write off of deferred financing fees related to a credit
arrangement with NationsCredit Commercial Corporation ("NationsCredit")
that was terminated and the write off of operating assets related to
contracts that were entered into by the Predecessor and did not conform to
the Company's business plan.
(3) The $13.3 million charge in 1997 is related to the write off of certain
purchased research and development in association with the Arlington Cancer
Center acquisition.
(4) The pro forma Balance Sheet Data give effect to the asset acquisitions as
if each had occurred on September 30, 1997. See "Unaudited Pro Forma
Combined Balance Sheet."
(5) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."

6
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing any of the shares of the Common Stock offered
hereby. This Prospectus contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those discussed
in the forward-looking statements as a result of certain factors, including
those set forth below and elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; LOSSES

The Company's predecessor commenced operations in 1994 and the Company
acquired its first physician practice in November 1996. To date, the Company
has not achieved profitability. For the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997, the Company incurred net losses
of approximately $831,000, $2.9 million and $16.8 million, respectively. There
can be no assurance that the Company will be able to generate sufficient
revenue to achieve profitability on a quarterly or annual basis or to sustain
or increase its revenue growth or profitability in future periods. See
"Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

RISKS RELATED TO GROWTH STRATEGY; INTEGRATION AND MANAGEMENT OF OPERATIONS

The Company intends to pursue growth primarily through the acquisition of
physician practices, growth of PHC Practices, the acquisition and development
of ancillary health care services, and the development of physician networks
and managed care contracts. As of December 31, 1997, the Company had acquired
the assets of 34 PHC Practices, 25 of which are Managed Practices that are
parties to long-term practice management agreements with PHC and nine of which
are Owned Practices, had interests in two businesses delivering ancillary
health care services and was providing services to 22 Affiliated Networks and
two PHC Networks. There can be no assurance that the Company will be able to:
(i) identify appropriate acquisition candidates; (ii) acquire and profitably
provide management services to additional practices; (iii) integrate such
practices successfully; (iv) develop or acquire, and operate profitably,
ancillary health care services; (v) affiliate with or develop physician
networks; and (vi) negotiate and administer additional managed care contracts.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview" and "Business--Strategy."

A significant part of the Company's growth has been and continues to be
generated by practice acquisitions. PHC's physician practice and ancillary
health care services acquisitions have all occurred since November 1996. Since
October 1, 1997, the Company has acquired the assets of 21 PHC Practices, 17
of which were Managed Practices that are parties to long-term practice
management agreements with PHC and four of which were Owned Practices, and two
businesses providing ancillary health care services. It has also entered into
an agreement to acquire all of the assets of a radiation oncology center. The
Company's acquisition strategy focuses on increasing the Company's presence in
selected regional markets, thereby enhancing the Company's ability to
integrate practice management, ancillary health care services, network
development and administration, and payor contracting in its markets. Prior to
their acquisition by the Company, two practices in Orlando, Florida, Internal
Medicine Specialists, Inc. ("IMS") and Primary Care Specialists, Inc. ("PCS"),
one practice in St. Louis, Missouri, Metropolitan Plastic and Reconstructive
Surgery, Ltd. ("Metropolitan Plastic"), and an ambulatory surgery center in
Orlando, Florida were managed by persons affiliated with the Company. The
remaining practices and sleep center acquired by the Company were, at the time
of the acquisitions, managed by persons unaffiliated with the Company. The
principal benefits that PHC hopes to derive from its acquisitions are
increased revenues and profitability as well as network stability. If PHC is
to realize the anticipated benefits of its acquisitions, the operations of the
acquired practices must be efficiently integrated and, where appropriate,
combined. The process of integrating management services, administrative
organizations, facilities, management information systems and other aspects of
operations, while managing a larger and geographically expanded entity,
presents a significant management challenge. In particular, the Company must
implement an integrated financial management system that includes financial
controls and the ability to coordinate disparate financial systems. In
addition, the Company must coordinate geographically separated organizations
and integrate personnel with dissimilar business backgrounds. The dedication
of management resources to such integration

7
<PAGE>

efforts may detract management attention from acquisition and development
efforts or from the day-to-day operations of the Company. The Company first
began integrating practice operations immediately following its first practice
acquisition in November 1996 and has continued to focus on integrating
practice operations as additional practices were acquired during 1997. There
can be no assurance that the integration process will be successful, that
there will not be substantial costs associated with such activities or that
such integration efforts will not have a material adverse effect on the
Company's business, financial condition or results of operations.

DEPENDENCE ON THE PHC PRACTICES AND PRACTICE MANAGEMENT AGREEMENTS

The Company's revenues are dependent on its affiliation with, and the
success of, PHC Practices and PHC Physicians, and on PHC's long-term
management contracts (the "Practice Management Agreements") with the Managed
Practices. A substantial portion of the Company's total revenues are derived
from management fees payable to the Company under the Practice Management
Agreements and patient service revenues generated by Owned Practices. The
management fees generally consist of combinations of the following: (i)
percentages of the earnings of the Managed Practices; (ii) operating and non-
operating expenses of the Managed Practices paid by the Company pursuant to
the Practice Management Agreements; and (iii) certain negotiated performance
and other adjustments. Certain of the PHC Practices in Florida and Missouri
are Owned Practices, where PHC employs physicians under long-term employment
agreements and earns patient services revenues. PHC's management fees and
patient services revenue are dependent on the productivity of the PHC
Physicians. Some of the PHC Practices derive a significant portion of their
revenues from a limited number of physicians. Although the Practice Management
Agreements are generally for terms of 40 years and generally may be terminated
only for cause, and the employment agreements pursuant to which the Company
directly employs physicians in states in which it is permitted to do so (the
"Direct Employment Agreements") also may be terminated by the Employed
Physicians under limited circumstances, any termination or significant
deterioration of the Company's relationship with any of the PHC Practices or
PHC Physicians could have a material adverse effect upon the Company's
business, financial condition or results of operations. There can be no
assurance that the Company or the PHC Practices will maintain cooperative
relationships with key physicians. In addition, such physicians could retire,
become disabled or otherwise become unable or unwilling to continue generating
revenues at their current level or practicing medicine with such PHC Practice.
The loss by a PHC Practice of one or more key physicians could have a material
adverse effect on the revenue of such PHC Practice and on the Company.
Additionally, although each Managed Practice and the PHC Physicians are
subject to noncompete agreements, there can be no assurance that the
noncompete agreements can be enforced. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" and
"Business--Contractual Agreements with PHC Practices."

CONCENTRATION OF REVENUE

A substantial portion of the Company's net revenue is derived from Metroplex
Hematology/Oncology Associates, L.L.P. (the "Arlington Cancer Center") in
Dallas/Fort Worth, Texas. Giving effect to acquisitions consummated during
1997, it appears that over half of the Company's net revenues currently are
derived from a total of six PHC Practices, including the Arlington Cancer
Center. See "--Dependence on the PHC Practices and Practice Management
Agreements." In addition, most of the PHC Practices operate within limited
geographic areas, and a deterioration of economic or other conditions within
any such area could have a material adverse effect on one or more PHC
Practices and, in turn, the Company and its business, financial condition or
results of operations.

In connection with a practice management agreement with the Arlington Cancer
Center, the Company is entitled to a management fee equal to 12% of the
practice's net revenues, plus 55% of the practice's net income after physician
compensation. Pursuant to a management services agreement with Southern
Dependacare, Inc. and its affiliates ("Southern Dependacare"), the Company is
entitled to a fee equal to the sum of: (i) 20% of the practice's income from
its Mississippi operations before physician compensation; (ii) 20% of the
practice's income from its Virginia operations before physician compensation;
and (iii) a flat fee related to its Illinois operations, which currently is
$1.6 million per year. In connection with employment agreements between 12
physicians and IMS, a practice owned by the Company, the Company is entitled
to fees during the first

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five years aggregating $595,000 a year plus 15% of the income attributable to
each physician in excess of a calculated amount, and during the remainder of
each agreement a fee equal to 15% of the income attributable to each
physician. Pursuant to three management services agreements assumed by the
Company in connection with its acquisition of MidSouth Practice Management,
Inc. ("MidSouth"), a physician practice management company, the Company is
entitled to management fees equal to 12% of the income from three practices.
Pursuant to a management services agreement with P.S.A. Medical Group, Inc., a
corporation formed by the former shareholders of Parkcrest Surgical
Associates, Inc. ("Parkcrest"), the Company is entitled to a management fee
equal to a percentage of physician income attributed to each of the 14
physicians affiliated with the practice. In connection with a management
services agreement with GCGA Physicians, Inc., a corporation formed by the
former shareholders of Greater Cincinnati Gastroenterology Associates, Inc.
("Greater Cincinnati Gastro"), the Company is entitled to: (i) a management
fee equal to 20% of the practice's income before physician compensation up to
a predetermined cap; (ii) a practice development fee equal to the product of
20% of the amount by which adjusted net income exceeds a predetermined amount
multiplied by five; and (iii) a managed care development fee equal to 0.5% of
the collected revenue of the practice generated from contracts with new
managed care payors. The Company's management fee also generally includes all
direct operating expenses incurred in connection with the management of each
practice not owned by the Company.

DIRECT CAPITATION AND OTHER RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS

Under some managed care contracts, Affiliated Networks receive a
predetermined payment per covered member per month in exchange for providing a
potentially unlimited quantity of specified services to covered members. Such
contracts transfer much of the economic risk of providing care from the payor
to the providers, who are compensated out of a finite pool of available funds.
To the extent that covered members require more frequent or extensive care
than is anticipated, increased claims by providers for such funds may result
in reduced reimbursement to network providers. Reductions in reimbursement to
providers could adversely affect on the providers' willingness to provide
services to the Affiliated Networks or the Affiliated Networks' relationships
with contracted payors. For the nine months ending September 30, 1997, the
Company received 22% of its revenues from the administration of managed care
agreements for Affiliated Networks. Physician dissatisfaction or defection
from the Affiliated Networks, whether due to reduced reimbursement or
otherwise, or payor contract termination could have a material adverse effect
on the Company's business, financial condition or results of operations.

In some cases, the Company enters into capitated or financial risk-sharing
managed care contracts directly with a payor. In these cases, the Company
receives the managed care payments and retains financial risk for the
provision of medical care, including responsibility for paying contracted
providers for medical services. If the Company underestimates the amount of
services that will be required, it would experience reduced profitability or
operating losses, which may not be recoverable through reductions in
reimbursements to providers. Certain PHC Practices have also directly entered
into capitated or financial risk-sharing managed care contracts with payors.
In the case of Owned Practices, the Company is directly at risk for excess
utilization of medical services. In the case of Managed Practices, to the
extent that management fees are calculated as a percentage of practice income,
excess utilization would result in reduced management fees. For the nine
months ending September 30, 1997, the Company received approximately 10% of
its revenues from PHC Network and PHC Practice contracts with managed care
payors, and believes that the PHC Practices also received approximately 10% of
their total revenues from capitated contracts with managed care payors.

As an increasing percentage of individuals participate in managed care
plans, the Company believes that its success will be, in part, dependent on
its ability to obtain, retain and successfully manage favorable capitated or
financial risk-sharing contracts with HMOs, employer groups, other private
third-party payors and Medicare and Medicaid. There can be no assurance that
the Company will be able to establish or maintain satisfactory relationships
with third-party payors on terms acceptable to the Company and contracted
providers. Many payors already have existing provider structures in place and
may not desire the services of the Company or the PHC Networks, and payors may
also elect to contract directly with providers on a fee-for-service, capitated
or other basis. In addition, many managed care contracts are terminable upon
short notice.

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INTENSE COMPETITION

The Company, PHC Physicians, PHC Networks and Affiliated Networks face
intense competition in all aspects of their businesses. The Company believes
that changes in governmental and private reimbursement policies, among other
factors, have resulted in increased competition among providers of medical
services and among networks for payor contracts. The Company itself faces
intense competition to acquire or provide management services to physician
practices; to acquire or develop and operate ancillary health care services;
and to provide management services, including payor contracting services, to
physician networks. A number of hospitals, clinics, health care companies,
HMOs, insurance companies and physician practice management companies, both
publicly and privately held, some of which have established operating
histories and greater resources than the Company, engage in activities similar
to those of the Company. There can be no assurance that the Company will be
able to compete effectively with its competitors, that additional competitors
will not enter its markets, or that the Company will be able to acquire or
manage physician practices, acquire or develop ancillary health care services,
affiliate with or develop networks, or negotiate payor contracts on terms
beneficial to the Company. Any such failure could have a material adverse
effect on the Company's business, financial condition or results of
operations.

INSURANCE COVERAGE; PROFESSIONAL LIABILITY CLAIMS

All of the PHC Physicians, PHC Practices, PHC Networks, Affiliated Networks
and the Company are involved in the delivery of health care services and,
therefore, are exposed to the risk of professional or other liability claims.
Claims of this nature, if successful, could result in substantial damage
awards which may exceed the limits of any applicable insurance coverage.
Insurance against losses related to claims of this type can be expensive and
varies widely in costs and coverage. Liability claims successfully asserted
against a PHC Physician, PHC Practice, PHC Network, Affiliated Network or the
Company could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business--Corporate
Liability and Insurance."

NEED FOR ADDITIONAL FINANCINGS

The Company's plans to acquire and expand practices and to acquire and
develop ancillary health care services require substantial capital resources.
The Company expects that its capital needs over the next several years will
exceed capital generated from operations. In the past, the Company has funded
acquisitions of physician practices through the issuance of debt and equity
securities to sellers, the sale of equity to venture capital and other
investors and the incurrence of indebtedness. Management believes that the
Company will incur indebtedness and issue, from time to time, additional debt
or equity securities in connection with its future acquisition and development
activities, including acquisitions of physician practices, and to raise
working capital. There can be no assurance that sufficient financing will be
available on terms satisfactory to the Company. The inability to obtain
additional financing could have a material adverse effect on the Company's
business, financial condition or results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

INTEGRATION OF MANAGEMENT INFORMATION SYSTEMS; RELIANCE ON THIRD-PARTY VENDOR

The Company's success is dependent in part on its access to sophisticated
information systems and its ability to integrate these systems into the
existing operational, financial and clinical information systems of the PHC
Practices, PHC Networks and Affiliated Networks. Management information
systems are critical to negotiating, pricing and managing payor contracts.
These systems help PHC and the PHC Practices, PHC Networks and Affiliated
Networks realize operating efficiencies and enable them to capture, maintain,
monitor and analyze cost, quality and utilization data. In addition, PHC
Practices utilize different billing and collection systems requiring the
Company to collect manually and assimilate financial and operating data. The
Company will need to continue to invest in and administer sophisticated
management information systems to support these activities. The Company may
experience unanticipated delays, complications and expenses in implementing,
integrating and operating such systems. Furthermore, such systems may require
modifications, improvements or

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<PAGE>

replacements as the Company expands or if new technologies become available.
Such modifications, improvements or replacements may require substantial
expenditures and may require interruptions in operations during
implementation. The failure to implement successfully and maintain
operational, financial and clinical information systems could have a material
adverse effect on the Company's business, financial condition or results of
operations.

PHC's current clinical information system requires software and support from
one third-party vendor to process submitted claims. Termination by such vendor
of its relationship with PHC, or a default in the performance of such vendor's
contractual obligations to PHC, could have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that such vendor's systems or support could be replaced by the
Company in a reasonable time or at a reasonable cost.

RISK RELATED TO INTANGIBLE ASSETS

As a result of the Company's various acquisition transactions, the Company
has recorded approximately $59.6 million in intangible assets, net of
accumulated amortization, on a pro forma basis as of September 30, 1997 giving
effect to acquisitions consummated after September 30, 1997 as if they had
occurred as of September 30, 1997. Substantially all of such intangible assets
are being amortized over 25-year periods. The Company expects the amount
allocable to intangible assets on its balance sheet to increase in the future
in connection with additional acquisition transactions, which will increase
the Company's amortization expense. In the event of any sale or liquidation of
the Company or a portion of its assets, there can be no assurance that the
value of the Company's intangible assets will be realized. In addition, the
Company regularly evaluates whether events and circumstances have occurred
indicating that any portion of the remaining balance of amounts allocable to
the Company's intangible assets may not be recoverable. When factors indicate
that the carrying value of the Company's intangible assets may be impaired,
the Company may be required to reduce the carrying value of such assets. Any
future determination requiring the write off of a significant portion of
unamortized intangible assets could have a material adverse effect on the
Company's business, financial condition and results of operations. See Note 1
of Notes to Consolidated Financial Statements.

GOVERNMENT REGULATION

General; Federal and State Regulation

The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. The Company believes that health care regulations
will continue to change. The Company expects to modify its agreements and
operations from time to time as the business and regulatory environment
changes. While the Company believes it will be able to structure its
agreements and operations in accordance with applicable law, there can be no
assurance that its business or such agreements or operations will not be
successfully challenged.

Every state imposes licensing requirements on individual physicians and on
facilities and services operated by physicians. In addition, federal and state
laws regulate HMOs and other managed care organizations ("MCOs") with which
the Company, PHC Physicians, PHC Practices, PHC Networks and Affiliated
Networks may have contracts. Many states require regulatory approval,
including certificates of need, before establishing or expanding certain types
of health care facilities, offering certain services or making expenditures in
excess of statutory thresholds for health care equipment, facilities or
programs. In connection with the expansion of existing operations and the
entry into new markets, the Company, PHC Physicians, PHC Practices, PHC
Networks and Affiliated Networks may become subject to compliance with
additional regulation.

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<PAGE>

activities include: (i) federal legislation requiring a health plan to
continue coverage for individuals who are no longer eligible for group health
benefits and prohibiting the use of "pre-existing condition" exclusions that
limit the scope of coverage; (ii) a Health Care Financing Administration
("HCFA") policy prohibiting restrictions by Medicare HMOs on physicians
recommending to patients other health plans and treatment options; and
(iii) regulations imposing restrictions on physician incentive provisions in
physician provider agreements. There can be no assurance that such
legislation, programs and other regulatory changes will not have a material
adverse effect on the Company's business, financial condition or results of
operations.

The ability of the Company to operate profitably will depend in part upon
the ability of the Company, PHC Physicians, PHC Practices, PHC Networks and
Affiliated Networks to obtain and maintain all necessary licenses,
certificates of need and other approvals and to operate in compliance with
applicable health care regulations.

Fee-Splitting; Corporate Practice of Medicine

The laws of many states prohibit physicians from splitting fees with non-
physicians (or other physicians) and prohibit non-physician entities from
practicing medicine. These laws vary from state to state and are enforced by
the courts and by regulatory authorities with broad discretion. The Company's
business operations have not been the subject of judicial or regulatory
interpretation; thus, there can be no assurance that review of the Company's
business 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
existing operations or their expansion. In addition, the regulatory framework
of certain jurisdictions may limit the Company's expansion into such
jurisdictions if the Company is unable to modify its operational structure to
conform with such regulatory framework.

In particular, at least one Texas court has held that control by a
management company over certain medical related business aspects of a medical
practice effectively is the prohibited corporate practice of medicine by the
management company. PHC has structured the management services agreement
related to the Managed Practice located in Texas to comply with Texas law,
although no assurance can be given that a party could not successfully assert
that such management services agreement violates Texas law. Illinois courts
have indicated that employment of physicians by for-profit corporations that
are not hospitals violates Illinois law related to the corporate practice of
medicine and that management fees based on a percentage of revenue or income
violate Illinois' prohibitions on fee-splitting. Accordingly, in Illinois PHC
does not employ physicians and the management fee charged under its Practice
Management Agreement is a flat fee. The Florida Board of Medicine recently
entered a final order in a case titled In Re: The Petition For Declaratory
Statement of Magan L. Bakarania, M.D. stating that a management fee based on a
specified percentage of net income without direct relation to the services
provided violates Florida law related to fee-splitting. That case has been
stayed pending appeal. The Company cannot predict the ultimate outcome of this
case. If the Florida Board of Medicine order is affirmed by a Florida court,
the Company will seek to restructure certain of the practice management
agreements to which it is a party in Florida, although there can be no
assurance that the Company will be successful in doing so. Three of the four
agreements that the Company may seek to restructure in Florida require the
parties to negotiate in good faith to reform the agreements to comply with
applicable law and for the matter to be referred to arbitration in the event
that agreement with respect to restructured terms cannot be reached. If
necessary, the Company also intends to negotiate with the fourth practice to
reform the agreements to comply with applicable law, although neither the
Company nor the practice is contractually required to do so. These four
Florida practices were acquired by the Company in November 1997. Accordingly,
the Company derived no revenues from these practices during the nine months
ended September 30, 1997. The Company anticipates that it will derive less
than 5% of its revenues from these practices in 1998.

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<PAGE>

modification, which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that regulatory authorities or other parties will not assert that
the Company or a Managed Practice is engaged in the corporate practice of
medicine in such states or that the management fees paid to the Company by the
Managed Practices constitute unlawful fee-splitting or the corporate practice
of medicine. If such a claim were asserted successfully, the Company could be
subject to civil and criminal penalties, Managed Physicians could have
restrictions imposed upon their licenses to practice medicine and the Company
or the Managed Practices could be required to restructure their contractual
arrangements. Such results or the inability of the Company or the Managed
Practices to restructure their relationships to comply with such prohibitions
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Government Regulation."

Changes in Payment for Medical Services

The Company believes that trends in cost containment in the health care
industry will continue to result in a reduction from historical levels in per-
patient revenue for PHC Practices. The federal government has implemented,
through the Medicare program, the resource-based relative value scale
("RBRVS") payment methodology for physician services. The RBRVS is a fee
schedule that, except for certain geographical and other adjustments, pays
similarly situated physicians the same amount for the same services. The RBRVS
is adjusted each year and is subject to increases or decreases at the
discretion of Congress. To date, the implementation of RBRVS has reduced
payment rates for certain of the procedures historically performed by PHC
Physicians. There can be no assurance that any reduced operating margins could
be recouped by the Company through cost reductions, increased volume,
introduction of additional procedures or otherwise.

Rates paid by nongovernmental insurers, including those that provide
Medicare supplemental insurance, are based on established physician,
ambulatory surgery center and hospital charges, and are generally higher than
Medicare payment rates. A change in the makeup of the patient mix of the
medical practices under Company management that results in a decrease in
patients covered by private insurance or a shift by private payors to RBRVS or
similar payment structures could adversely affect the Company's business,
financial condition or results of operations.

Medicare and Medicaid Fraud and Abuse

Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce: (i) the referral of
a person; (ii) the furnishing or arranging for the furnishing of items or
services reimbursable under Medicare or Medicaid programs; or (iii) the
purchase, lease or order or arranging or recommending purchasing, leasing or
ordering of any item or service reimbursable under Medicare or Medicaid (the
"Anti-Kickback Law"). Pursuant to the Anti-Kickback Law, the federal
government has announced a policy of increased scrutiny of joint ventures and
other transactions among health care providers in an effort to reduce
potential fraud and abuse relating to Medicare costs. The applicability of
these provisions to many business transactions in the health care industry has
not yet been subject to judicial and regulatory interpretation. Noncompliance
with the Anti-Kickback Law can result in exclusion from Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that the PHC
Practices collectively derive approximately 30% of their revenues from
Medicare or Medicaid payments.

Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by substantially
enlarging the field of physician-owned or physician-interested entities to
which the referral prohibitions apply. Stark II prohibits a physician from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment
interest, or with which the physician has entered into a compensation
arrangement, unless a statutory exemption applies. The designated health
services include, for example, prosthetic devices, clinical laboratory
services, radiology (such as ultrasound, MRI and CT), home health, physical
and occupational therapy, prescription drugs and inpatient and outpatient
hospital services. The penalties for violating Stark II include a prohibition
on payment by these government programs and civil penalties of as much as
$15,000 for each referral violation and $100,000 for participation in a
"circumvention scheme." To the extent that the Company or any PHC Practice is
deemed to

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<PAGE>

be subject to the prohibitions contained in Stark II, the Company believes its
activities fall within the permissible activities defined in Stark II,
including, but not limited to, the provision of in-office ancillary services.

The Company believes that although it will receive service fees under its
agreements for management and administrative services, it is not generally in
a position to make or receive referrals of patients for services reimbursed
under the Medicare or Medicaid programs. Such service fees are intended by the
Company to be consistent with fair market value in arm's-length transactions
for the nature and amount of management services rendered and, therefore,
would not constitute unlawful remuneration under Anti-Kickback Law and
regulations. For these reasons, the Company does not believe that fees payable
to it would be viewed as remuneration for referring or influencing referrals
of patients or services covered by such programs as prohibited by statute. If
the Company is deemed to be in a position to make, influence or receive
referrals from or to physicians, the operations of the Company could be
subject to scrutiny under federal and state anti-kickback and anti-referral
laws.

In certain jurisdictions that do not prohibit the corporate practice of
medicine, the Company owns practices and employs physicians. Thus, with
respect to such practices, the Company is a provider of services and would be
capable of receiving referrals from other physicians affiliated with PHC in
those markets. In these circumstances, PHC Practices either will not accept
referrals involving designated health services from other physicians
affiliated with PHC or will form group practices comprised of PHC Practices in
that market.

In addition, the Company also believes that the methods used to acquire the
assets of existing practices do not violate anti-kickback and anti-referral
laws and regulations. Specifically, the Company believes the consideration
paid by the Company to physicians to acquire assets in their practices is
consistent with fair market value in arm's-length transactions and not
intended to induce the referral of patients. Should this or any other Company
practice be deemed to constitute an arrangement designed to induce the
referral of Medicare or Medicaid patients, then such could be viewed as
possibly violating anti-kickback and anti-referral laws and regulations. A
determination of liability under any such laws could have a material adverse
effect on the Company's business, financial condition or results of
operations.

Antitrust Issues

Federal and state antitrust statutes prohibit conduct such as price fixing,
market allocation and other anti-competitive activities by groups of
competitors. The federal and state antitrust enforcement agencies have not
hesitated to bring civil and criminal enforcement actions against the joint
activities of physician organizations that violate the antitrust laws.
Collaboration regarding the pricing of services, market allocation and certain
other types of joint action, however, may be permissible in the context of an
integrated joint venture if those activities are ancillary to otherwise
legitimate purposes of the joint venture. The federal antitrust agencies, the
Federal Trade Commission and the United States Department of Justice, have
established "antitrust safety zones" for physician networks that meet certain
criteria. The antitrust safety zones are for networks in which providers share
substantial financial risk (e.g., capitation or substantial withholding) or
are engaged in designing or implementing clinical pathways with a view to
improving medical outcomes, and in which the providers constitute less than
specified percentages (20% for exclusive networks and 30% for non-exclusive
networks) of total providers in a specialty or subspecialty in the market.
Conduct outside the safety zones is not necessarily unlawful, but antitrust
regulatory authorities will give greater scrutiny to the potential impact on
overall competition. State antitrust agencies may or may not rely on antitrust
analysis similar to that of the federal agencies.

The two PHC Networks are non-exclusive networks that operate in the greater
Atlanta and greater Orlando metropolitan areas, respectively. Except for one
fee-for-service contract in Orlando, all of their contracts are capitated or
global risk contracts in which the providers share substantial financial risk.
The Atlanta PHC Network is comprised of primary care physicians constituting
less than 30% of the market practitioners of family/general, internal and
pediatric medicine. The Company believes that the Atlanta PHC Network is
within the antitrust safety zone for non-exclusive networks. The Orlando PHC
Network is a multi-specialty network including physicians of many specialties.
The Company believes that physician representation in the Orlando PHC Network
may exceed the non-exclusive safety zone in several non-primary care
specialties. The antitrust agencies emphasize, however, that even if a
physician network does not come within a safety zone, it is not necessarily
unlawful under the antitrust laws. For the following reasons, the Company
believes that its activities

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<PAGE>

in the greater Orlando metropolitan area are pro-competitive and have the
potential to benefit purchasers of the physician services offered by its
providers. First, physician participation in the network is non-exclusive, and
physician members do in fact contract with other networks and health plans.
Second, physician members share inherent substantial financial risk by
providing services for global risk contracts and have the incentive to provide
high quality, cost-effective care in an environment of increasing managed care
penetration. Third, there are competing physician networks in the greater
Orlando area. Fourth, the specialties in which the Orlando PHC Network may
exceed the safety zone are generally ones characterized by a limited number of
practices and physicians within the market.

Insurance Regulatory Risks

An important element of the Company's business and strategy includes acting
as an agent for PHC Physicians, PHC Networks and Affiliated Networks to
negotiate with insurance companies, HMOs, employer self-funded plans, health
plans and other MCOs for the provision of health care services to the
subscribers or beneficiaries of the health plans operated by such parties.
Under some of these contracts, the Company receives capitated payments on
behalf of a network and reimburses participating physicians on a fee-for-
service basis. Under the laws of some states, this contracting arrangement
could be determined to involve an insurance risk. Therefore, to the extent the
Company is deemed to be in the business of insurance in a particular state,
the Company, PHC Physicians and PHC Networks could be subject to insurance
regulatory scrutiny; regulators could require restructuring of a specific
arrangement; and the Company's operations could be restricted, its expansion
limited, or certain of its operations prohibited.

Medicare Developments

The recently adopted Balanced Budget Act of 1997 ("BBA") enacted a Medicare
Plus/Medicare Choice Program for Medicare enrollees. The program would broaden
the coverage options available to Medicare recipients, would authorize broader
use of medical savings accounts, and would allow physicians and patients to
contract for health care services at rates beyond what is paid by Medicare.
Such changes potentially could increase the services utilized by Medicare
recipients. In addition, the BBA allows provider-sponsored organizations
("PSOs") to contract directly with Medicare, instead of contracting through an
HMO. If the PHC Practices, PHC Networks and Affiliated Networks participate in
such PSOs, they could increase the percentage of Medicare-related business,
which would also increase the exposure for losses if Medicare revenues fall
short of the cost of services actually utilized by Medicare beneficiaries. If
PHC does not participate in such PSOs, whether by choice or because it does
not obtain a required license to act as a PSO, PHC's ability to participate in
Medicare programs could be limited. The BBA also amends the fraud and abuse
laws to require permanent exclusion from Medicare of anyone convicted of three
Medicare program-related crimes and to impose new civil monetary penalties to
anyone contracting with an excluded health care provider. These changes
increase the regulatory and other risks encountered by the Company. See "--
Direct Capitation and Other Risks Associated With Managed Care Contracts." On
January 9, 1998, HCFA published a Notice of Proposed Rulemaking implementing
Stark II. The proposed regulations, when they become final, will reduce some
of the uncertainty surrounding HCFA's interpretation of Stark II and will
assist the Company in better structuring its operations to comply with the
law. In some cases, however, the strict nature of the new rules will make
compliance more onerous, and achieving such compliance may have a material
adverse effect on the Company's business in certain markets.

Legislative Developments

In addition, proposed legislation regarding health care reform has been
introduced before many state legislatures. Any such reform at the federal or
state level could significantly alter patient-provider relationships. State
and federal agency rule-making addressing these issues is also expected. No
predictions can be made as to whether future health care reform legislation,
similar legislation or rule-making will be enacted or, if enacted, its effect
on the Company. Any federal or state legislation prohibiting investment
interests in, or contracting with, the Company by health care providers for
which there is no statutory exception would have a material adverse effect on
the Company's business, financial condition or results of operations.

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DEPENDENCE ON KEY PERSONNEL

The development of the Company's business and its operations have been
materially dependent upon the active participation of the Company's executive
officers and key employees. The loss of the services of one or more of these
persons could have a material adverse effect on the business, financial
condition or results of operations of the Company. The Company maintains a key
person life insurance policy in the amount of $3.0 million on the life of its
Chief Executive Officer and President, Sarah C. Garvin. See "Management."

CONTROL BY EXISTING STOCKHOLDERS

Upon completion of this Offering, the executive officers, directors and key
employees of the Company, together with their affiliates, will own
beneficially approximately 24% of the outstanding shares of Common Stock
(approximately 23% if the Underwriters' over-allotment option is exercised in
full). Such persons acting together could have a significant influence on
matters requiring stockholder approval, including the election of directors,
mergers and other extraordinary corporate events. See "Management" and
"Principal Stockholders."

SHARES ELIGIBLE FOR FUTURE SALE

The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market following the Offering. The shares being sold in the Offering will be
freely tradable unless acquired by affiliates of the Company. Certain
stockholders of the Company hold, in the aggregate, 7,102,207 shares of Common
Stock and 288,194 shares of Non-Voting Common Stock, none of which were
acquired in transactions registered under the Securities Act. Accordingly,
such shares may not be sold except in transactions registered under the
Securities Act or pursuant to an exemption from registration. The Company and
its directors and executive officers and stockholders holding substantially
all of the shares of Common Stock have agreed not to offer or sell any shares
of Common Stock for a period of 180 days (the "180-Day Lockup Period")
following the date of this Prospectus without the prior written consent of
BancAmerica Robertson Stephens, except that the Company may, subject to
certain conditions, issue Common Stock in connection with acquisitions and
with awards under the 1995 Stock Option Plan. After the expiration of the 180-
Day Lockup Period, such shares may be sold in accordance with Rule 144 under
the Securities Act, subject to the applicable volume limitations, holding
period and other requirements of Rule 144.

The Company intends to register an additional 1,500,000 shares of its Common
Stock under the Securities Act subsequent to completion of the Offering for
use by the Company as all or a portion of the consideration to be paid in
future acquisitions. Those shares, if issued, will be freely tradable by
nonaffiliates after their issuance, unless the resale thereof is contractually
restricted, and resales of any such shares during the 180-Day Lockup Period
would require the prior written consent of BancAmerica Robertson Stephens.

The Company anticipates that, prior to the consummation of the Offering, the
Company will have outstanding under the 1995 Stock Option Plan options to
purchase approximately 1,664,265 shares of Common Stock. The Company intends
to register the shares issuable upon exercise of options granted under the
1995 Stock Option Plan. See "Management--1995 Stock Option Plan" and "Shares
Eligible for Future Sale."

NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or,
if a trading market does develop, that it will continue after the Offering.
The initial public offering price of the Common Stock will be determined
through negotiations between the Company and the Underwriters and may not be
indicative of the price at which the Common Stock will trade after the
Offering. See "Underwriting" for a description of the factors to be considered
in determining the initial public offering price. The securities markets have,
from time to time, experienced significant price and volume fluctuations that
may be unrelated to the operating performance of particular companies. These
fluctuations often substantially affect the market price of a company's stock.
The market prices for securities of health care practice management companies
have been and continue to be particularly volatile. The market price of the
Common

16
<PAGE>

Stock could be subject to significant fluctuations in response to numerous
factors, including variations in financial results or announcements of
material events by the Company or its competitors. Regulatory changes,
developments in the health care industry or changes in general conditions in
the economy or the financial markets could also adversely affect the market
price of the Common Stock.

POTENTIAL ANTI-TAKEOVER EFFECTS OF CHARTER AND BYLAW PROVISIONS; POSSIBLE
ISSUANCES OF PREFERRED STOCK

Certain provisions of the Company's Certificate of Incorporation and Bylaws
and Delaware law could, together or separately, discourage potential
acquisition proposals, delay or prevent a change in control of the Company or
limit the price that certain investors may be willing to pay in the future for
shares of the Common Stock. The Certificate of Incorporation also permits the
Board of Directors to determine the rights, preferences and restrictions of
unissued series of the Company's authorized Preferred Stock and to fix the
number of shares and the designation of and to nominate directors, to submit
proposals to be considered at stockholders' meetings and to adopt amendments
to the Bylaws. Such provisions of the Certificate of Incorporation and Bylaws:
(i) divide the Company's Board of Directors into three classes, each of which
will serve for different three-year periods and (ii) restrict the right of
stockholders to call a special meeting of stockholders. The Company also is
subject to Section 203 of the Delaware General Corporation Law ("DGCL"),
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any of a broad range of business acquisitions with an "interested
stockholder" for a period of three years following the date such stockholder
became an interested stockholder. See "Description of Capital Stock."

RISKS ASSOCIATED WITH UNSPECIFIED USE OF PROCEEDS

A significant portion of the net proceeds of the Offering will be available
for working capital and general corporate purposes, including the acquisition
of physician practices, the acquisition and development of ancillary health
care services and development of physician networks and payor contracts. The
Company's management, subject to approval by the Board of Directors, will have
broad discretion with respect to the use of such proceeds of the Offering. See
"Use of Proceeds."

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of shares of Common Stock offered hereby will experience
immediate and substantial dilution in the pro forma net tangible book value of
their shares in the amount of $12.18 per share. In the event the Company
issues additional Common Stock in the future, including shares that may be
issued in connection with future acquisitions, purchasers of Common Stock in
the Offering may experience further dilution in the net tangible book value
per share of Common Stock. See "Dilution."

ABSENCE OF DIVIDENDS

The Company has never paid any cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. See "Dividend
Policy."

17
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (after deducting the underwriting discounts and commissions and
estimated Offering expenses) are estimated to be approximately $38.0 million
(approximately $44.0 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $14.50 per
share (the midpoint of the estimated initial public offering price range). Of
such net proceeds: (i) approximately $21.0 million will be used to repay
certain of the Company's indebtedness immediately following the Offering; (ii)
$6.2 million will be used to repay certain indebtedness of the Company in
April 1998; (iii) $300,000 will be used to pay accrued but unpaid dividends on
the Class A Stock; and (iv) the remainder will be available for working
capital and general corporate purposes, including the acquisition of physician
practices, the acquisition and development of ancillary health care services
and the development of physician networks and payor contracts. The Company has
no present agreements for the acquisition of physician practices. The Company
has entered into an agreement to purchase the assets of a radiation oncology
center in southern Illinois for $1.7 million in cash. This transaction is
expected to close shortly following consummation of the Offering. The Company
has no other agreements for the purchase of ancillary health care services.
Pending such uses, the net proceeds will be invested in short-term, interest
bearing, investment grade securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

The indebtedness to be retired with the proceeds of the Offering is
comprised of approximately $12.0 million outstanding under the Company's
senior credit facility (the "Senior Debt") and approximately $9.0 million in
senior subordinated debt (the "Subordinated Debt"). The Company is required to
retire the Subordinated Debt with the proceeds of this Offering. The Company
is required to use net proceeds to the Company from this Offering in excess of
$40.0 million to retire the Senior Debt. The Senior Debt was incurred in
November and December 1997 to finance acquisitions, pay transaction expenses
and for general corporate purposes, bears interest at a floating rate equal
to, at the Company's option, prime plus 1.75% or LIBOR (the London InterBank
Offered Rate) plus 3.0%, and is payable in quarterly installments until
maturity in April 2002.

The Subordinated Debt bears interest at the rate of 12.0% per annum and is
payable in full in November 2004. The proceeds of the Subordinated Debt, which
were obtained by the Company in November 1997, were used by the Company to
refinance certain prior acquisitions, finance acquisitions and pay transaction
costs. In April 1998, the Company also will use the proceeds of the Offering
to retire a $6.2 million unsecured non-interest bearing note that matures at
that time and constituted a portion of the consideration paid in the
acquisition of the Arlington Cancer Center. The proceeds of the Senior Debt
and Subordinated Debt were used to finance the acquisitions of Physicians
Strategic Alliance, Inc., Southern Dependacare, Healthcare Strategic
Initiatives LLP, Pulmonary Sleep Consultants, Inc., Diagnostic Internists,
Inc., Parkcrest, IMS, PCS, Larach, Williamson & Ferrara, Inc., MidSouth,
National Sleep Dynamics, Inc., Home Care for Sleep Disorders, Inc., Greater
Cincinnati Gastro, Northside Ob-Gyn, P.C., Eagles Landing Ob-Gyn Associates,
P.C. and Louisville Cardiology Medical Group, PSC.

DIVIDEND POLICY

It is the Company's current intention to retain earnings for the foreseeable
future to support operations and finance expansion. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and
will depend upon, among other things, the Company's earnings, financial
condition, cash flow from operations, capital requirements, expansion plans,
the income tax laws then in effect, the requirements of Delaware law and
restrictions that may be imposed in the Company's future financing
arrangements. In addition, the Company's senior credit facility prohibits the
payment of dividends.

18
<PAGE>

CAPITALIZATION

The following table sets forth the short-term debt and the capitalization of
the Company: (i) at September 30, 1997; (ii) on a pro forma basis to reflect
the acquisitions of PHC Practices since September 30, 1997, the issuance of
capital stock of PHC since September 30, 1997 and the conversion of the
Company's Prime Common Stock, Class A Stock (Series 1 and Series 2), Series B
Redeemable Convertible Preferred Stock (the "Series B Voting Preferred Stock")
and Series B Non-Voting Redeemable Convertible Preferred Stock (the "Series B
Non-Voting Preferred Stock"); and (iii) on a pro forma basis as adjusted to
give effect to the receipt and application of the net proceeds of the
Offering. See "Use of Proceeds." The Series B Voting Preferred Stock and the
Series B Non-Voting Preferred Stock are collectively referred to as the
"Series B Preferred Stock." This table should be read in conjunction with
"Unaudited Pro Forma Combined Balance Sheet," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company and Notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt(3)......................... $12,988 $14,197 $14,197
======= ======= =======
Long-term debt, net of current portion..... 14,049 29,288 8,288
Redeemable Preferred Stock:
Class A Stock, par value $0.01 per share,
500,000 shares authorized; 200,000 shares
issued and outstanding (actual); and no
shares issued and outstanding (pro forma
and pro forma as adjusted)................ 2,772 -- --
Series B Redeemable Convertible Preferred
Stock, par value $0.01 per share,
15,000,000 shares authorized; 3,824,493
shares issued and outstanding (actual);
and no shares issued and outstanding (pro
forma and pro forma as adjusted).......... 13,675 -- --
Stockholders' equity (deficit):
Preferred Stock, par value $0.01 per
share, 18,000,000 shares authorized;
none issued (actual, pro forma and pro
forma as adjusted)...................... -- -- --
Common Stock, par value $0.0025 per
share, 140,000,000 shares authorized;
1,414,244 shares issued and outstanding
(actual); and shares issued and
7,390,401 outstanding (pro forma) and
10,390,401 shares issued and outstanding
(pro forma as adjusted)(4).............. 4 18 26
Prime Common Stock, par value $0.0025 per
share, 20,000,000 shares authorized;
4,039,666 shares issued and outstanding
(actual); and no shares issued and
outstanding (pro forma and pro forma as
adjusted)............................... 10 -- --
Additional paid-in capital................. 11,284 66,424 104,371
Accumulated deficit........................ (20,199) (20,199) (20,199)
Notes receivable from stockholder.......... (443) (443) (443)
------- ------- -------
Total stockholders' equity (deficit)....... (9,344) 45,800 83,755
------- ------- -------
Total capitalization....................... $21,152 $75,088 $92,043
======= ======= =======
</TABLE>
- --------
(1) Gives effect to acquisitions of PHC Practices since September 30, 1997 and
the mandatory conversion of the Prime Common Stock, the Class A Stock and
the Series B Preferred Stock, upon completion of the Offering.
(2) Gives effect to completion of the Offering and the receipt and application
of the net proceeds therefrom. See "Use of Proceeds."
(3) Short-term debt includes current maturities of long-term debt. See Note 4
to Notes to Consolidated Financial Statements for a description of the
Company's indebtedness.

(4) Excludes: (i) an aggregate of 502,498 (actual) and 1,076,578 (pro forma)
shares of Common Stock issuable upon exercise of warrants outstanding at a
weighted average exercise price of $1.20 (actual) and $3.10 (pro forma)
per share; (ii) an aggregate of 1,035,407 (actual) and 1,664,265 (pro
forma) shares of Common Stock issuable upon exercise of stock options
outstanding at a weighted average exercise price of $11.33 (actual) and
$13.70 (pro forma) per share under the Company's Amended and Restated 1995
Stock Option Plan (the "1995 Stock Option"); (iii) 1,038,517 (actual) and
1,475,421 (pro forma) shares of Common Stock reserved for issuance under
the 1995 Stock Option Plan following consummation of the Offering; and
(iv) 693,612 shares of Common Stock issuable upon conversion of certain
interests in subsidiaries of PHC. See "Management--1995 Stock Option
Plan."

19
<PAGE>

DILUTION

The net tangible book value (deficit) of the Company as of September 30,
1997 was approximately $(29.0) million, or approximately $(10.82) per share.
The pro forma net tangible book value of the Company as of September 30, 1997
was approximately $(13.8) million, or approximately $(1.88) per share. Pro
forma net tangible book value (deficit) per share is determined by dividing
the net tangible book value of the Company (tangible assets less total
liabilities) by the number of shares of Common Stock outstanding, giving pro
forma effect to the conversion of all outstanding shares of Prime Common
Stock, Class A Stock, Series B Preferred Stock into 3,685,918 shares of Common
Stock and 288,194 shares of Non-Voting Common Stock. After giving effect to
the sale by the Company of 3,000,000 shares of Common Stock offered at a price
of $14.50 per share (the midpoint of the estimated initial public offering
price range) and the application of the estimated net proceeds therefrom as
set forth under "Use of Proceeds," the pro forma net tangible book value of
the Company as of September 30, 1997 would have been $2.32 per share. This
represents an immediate increase in the net tangible book value of
approximately $38.0 million, or approximately $4.20 per share to existing
stockholders and an immediate dilution to new investors purchasing Common
Stock in the Offering of approximately $12.18 per share. The following table
illustrates the per share dilution to new investors purchasing Common Stock in
the Offering:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $14.50
Historical net tangible book value (deficit)........... $(10.82)
Increase per share attributable to the additional asset
acquisitions and conversion of shares into Common
Stock................................................. 8.94
Increase per share attributable to the Offering........ 4.20
-------
Pro forma net tangible book value per share after the
Offering.............................................. 2.32
------
Dilution per share to initial public offering investors.. $12.18
======
</TABLE>

The following table sets forth, on a pro forma basis to give effect to the
Offering as of September 30, 1997, the number of shares of Common Stock and
Non-Voting Common Stock purchased from the Company, the total consideration to
the Company and the average price per share paid to the Company by existing
stockholders and the new investors purchasing shares from the Company in the
Offering (before deducting underwriting discounts and commissions and
estimated offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 7,390,401 71.1% $ 58,690,951 57.4% $ 7.95
New investors........... 3,000,000 28.9 43,500,000 42.6 14.50
---------- ----- ------------ -----
Total................. 10,390,401 100.0% $102,190,951 100.0%
========== ===== ============ =====
</TABLE>

All of the calculations above exclude: (i) an aggregate of shares 1,076,578
of Common Stock issuable upon exercise of warrants outstanding at a weighted
average exercise price of $3.10 per share; (ii) an aggregate of 1,664,265
shares of Common Stock issuable upon exercise of stock options outstanding at
a weighted average exercise price of $13.70 per share under the Company's
Amended and Restated 1995 Stock Option Plan (the "1995 Stock Option"); (iii)
1,475,421 shares of Common Stock reserved for future issuance under the 1995
Stock Option Plan following consummation of the Offering and (iv) 693,612
shares of Common Stock issuable upon conversion of certain interests in
subsidiaries of PHC. See "Management--1995 Stock Option Plan."

20
<PAGE>

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

The accompanying unaudited pro forma balance sheet gives effect to the
following pro forma adjustments (collectively, the "Transactions"): (i) the
asset acquisitions of the PHC Practices at fair market value and related
purchase accounting adjustments; (ii) the entering into of a $62.5 million
credit agreement with a syndicate of banks led by Banque Paribas; (iii) the
entering into of a $15.0 million subordinated credit agreement with an
affiliate of Banque Paribas; (iv) the issuance of equity securities to an
affiliate of Banque Paribas; and (v) the consummation of the Offering.

The asset acquisitions of physician practices have been accounted for under
the purchase method of accounting, and pro forma adjustments include: (i) the
payment of cash and the issuance of Common Stock and notes to the former
practice owners; and (ii) the allocation of purchase price in excess of net
assets to intangibles.

The accompanying unaudited pro forma combined balance sheet gives effect to
the Transactions occurring after September 30, 1997 as if they had occurred on
September 30, 1997.

The unaudited pro forma combined balance sheet is not necessarily indicative
of the Company's financial condition if the Transactions had occurred as of
September 30, 1997. See "Risk Factors."

The unaudited pro forma combined balance sheet should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the historical financial statements and notes of the
Company, Arlington Cancer Center, Greater Cincinnati Gastro, IMS, Parkcrest,
and Southern Dependacare, all of which are included elsewhere in this
Prospectus. The historical operating results of these physician practices
should not be considered indicative of the Company's future operating results.

Pro forma statements of operations have not been presented because the
Company has managed these physician practices less than one year. The Company
has acquired several physician practices as Owned Practices, but no pro forma
statements of operations have been presented because these Owned Practices are
immaterial when compared to the significance of the Managed Practices.

21
<PAGE>

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(in thousands)

<TABLE>
<CAPTION>
PHYSICIAN GREATER OTHER PRO FORMA
HEALTH CINCINNATI ACQUIRED PRO FORMA PRO FORMA COMBINED
CORPORATION GASTRO IMS PARKCREST ENTITIES(3) COMBINED ADJUSTMENTS(4) COMBINED ADJUSTMENTS(5)
----------- ---------- ------ --------- ----------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $ 5,219 $ 311 $ 337 $ 3 $ 2,391 $ 8,261 $ 18,400 (e) $ 7,204 $16,955 (h)
(17,300)(e)
(2,157)(a)
Accounts
receivable,
net............ 8,113 1,266 989 1,662 8,150 20,180 (2,086)(a) 18,094 --
Inventory....... 430 -- -- -- 24 454 52 (a) 506 --
Prepaid expenses
and other
current
assets......... 1,304 23 41 208 279 1,855 (535)(a) 1,320 --
-------- ------ ------ ------ ------- ------- -------- -------- -------
Total current 15,066 1,600 1,367 1,873 10,844 30,750 (3,626) 27,124 16,955
assets.........
Property and
equipment, net.. 6,499 112 219 561 2,452 9,843 590 (a) 10,433 --
Intangible 19,111 -- -- -- 8,183 27,294 (8,183)(b) 59,077 --
assets, net.....
39,966 (b)
Other long-term 589 -- 37 156 378 1,160 (560)(a) 3,400 --
assets..........
2,800 (e)
-------- ------ ------ ------ ------- ------- -------- -------- -------
Total assets.... $41,265 $1,712 $1,623 $2,590 $21,857 $69,047 $ 30,987 $100,034 $16,955
======== ====== ====== ====== ======= ======= ======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabili-
ties:
Accounts $ 1,845 $ 179 $ 67 $ 689 $ 2,834 $ 5,614 $ (511)(a) $ 5,103 $ --
payable........
Accrued 5,280 639 378 721 478 7,496 (1,381)(a) 6,115 --
expenses.......
Current portion
of long-term
debt........... 12,988 -- 730 63 2,014 15,795 (1,681)(a) 14,114 --
-------- ------ ------ ------ ------- ------- -------- -------- -------
Total current
liabilities.... 20,113 818 1,175 1,473 5,326 28,905 (3,573) 25,332 --
Long-term debt.. 30,496 -- 38 205 3,927 34,666 11,470 (c) 28,902 (21,000)(h)
1,700 (c)
(900)(f)
(18,034)(g)
-------- ------ ------ ------ ------- ------- -------- -------- -------
Total
liabilities and
redeemable
preferred
stock.......... 50,609 818 1,213 1,678 9,253 63,571 (9,337) 54,234 (21,000)
Stockholders' eq-
uity:
Preferred
Stock.......... -- -- -- -- 2,505 2,505 (2,505)(d) -- --
Common Stock.... 14 3 3 1 96 117 (102)(d) 18 8 (h)
3 (g)
Additional paid-
in-capital..... 10,841 7 (18) 53 6,508 17,391 27,459 (d) 65,981 37,947 (h)
2,200 (e)
900 (f)
18,031 (g)
Retained
earnings
(deficit)...... (20,199) 884 425 858 3,495 (14,537) (5,662)(d) (20,199) --
-------- ------ ------ ------ ------- ------- -------- -------- -------
Total
stockholders'
equity
(deficit)...... (9,344) 894 410 912 12,604 5,476 40,324 45,800 37,955
-------- ------ ------ ------ ------- ------- -------- -------- -------
Total
liabilities and
stockholders'
equity......... $ 41,265 $1,712 $1,623 $2,590 $21,857 $69,047 $ 30,987 $100,034 $16,955
======== ====== ====== ====== ======= ======= ======== ======== =======
<CAPTION>
ADJUSTED
PRO FORMA
COMBINED
----------
<S> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $ 24,159
Accounts 18,094
receivable,
net............
Inventory....... 506
Prepaid expenses
and other
current
assets......... 1,320
----------
Total current 44,079
assets.........
Property and
equipment, net.. 10,433
Intangible 59,077
assets, net.....
Other long-term 3,400
assets..........
----------
Total assets.... $116,989
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabili-
ties:
Accounts $ 5,103
payable........
Accrued 6,115
expenses.......
Current portion
of long-term
debt........... 14,114
----------
Total current
liabilities.... 25,332
Long-term debt.. 7,902
----------
Total
liabilities and
redeemable
preferred
stock.......... 33,234
Stockholders' eq-
uity:
Preferred
Stock.......... --
Common Stock.... 26
Additional paid-
in-capital..... 103,928
Retained
earnings
(deficit)...... (20,199)
----------
Total
stockholders'
equity
(deficit)...... 83,755
----------
Total
liabilities and
stockholders'
equity......... $116,989
==========
</TABLE>

See Notes to Unaudited Pro Forma Combined Balance Sheet.

22
<PAGE>

NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET

1. BACKGROUND

Physician Health Corporation is a physician management company focusing on
the value-added integration of practice management, ancillary health care
services, network development and administration, and payor contracting in
selected markets. As of December 31, 1997, the Company provided payor contract
administration and related services to 24 physician networks, one of which is
owned by the Company, one of which is a nonprofit corporation of which the
Company is the sole member (together, the "PHC Networks") and the remainder of
which are independent entities that receive services from the Company (the
"Affiliated Networks"). The PHC Networks and Affiliated Networks included
approximately 3,300 physicians and 2.3 million covered lives under 29 managed
care contracts including specialty capitated and global risk contracts. As of
December 31, 1997, the Company was a party to practice management agreements
with 25 physician practices ("Managed Practices") that employed 122 physicians
("Managed Physicians"). In addition, the Company directly owned and operated
nine physician practices ("Owned Practices") through which it directly
employed 50 physicians ("Employed Physicians"). Managed Practices and Owned
Practices are collectively referred to as "PHC Practices," and Managed
Physicians and Employed Physicians are collectively referred to as "PHC
Physicians." As of December 31, 1997, there were an aggregate of 34 PHC
Practices and 172 PHC Physicians. As of December 31, 1997, the Company had an
interest in a wholly-owned sleep laboratory located in Atlanta, Georgia and a
51% interest in an ambulatory surgery center located in Orlando, Florida.

2. HISTORICAL BALANCE SHEET

The historical balance sheet represents the financial position of the
Company and physician practices and was derived from the respective financial
statements where indicated. The audited historical financial statements
included elsewhere in this Prospectus have been included in accordance with
applicable Securities and Exchange Commission rules and regulations. The
Company will continue to have a December 31 year end.

3. PHYSICIAN PRACTICE ASSET ACQUISITIONS

The Company has acquired substantially all of the net assets of the
physician practices. See "Business-- Operations." These asset acquisitions
will be accounted for using the purchase method of accounting.

The Company had acquired 13 physician practices through asset acquisitions
as of September 30, 1997, eight of which are Managed Practices that are
parties to Practice Management Agreements with PHC and five of which are Owned
Practices. See Note 2 to the Notes to the Consolidated Financial Statements of
the Company. The Company acquired 21 additional physician practices through
asset acquisitions after October 1, 1997, 17 of which are Managed Practices
that are parties to Practice Management Agreements with PHC and four of which
are Owned Practices.

The following practices are directly owned by the Company:

<TABLE>
<CAPTION>
ORLANDO, FLORIDA ST. LOUIS, MISSOURI
------------------------------------------- -------------------------------------------
<C> <S>
Internal Medicine Specialists (IMS) Eye Care Services of Missouri, Inc. (Jones
Eye Center)
Larach, Williamson & Ferrara, Inc. (Larach) G.H. Kursar Eye Care Services, Inc.
(Kursar)
Primary Care Specialists, Inc. (PCS) InternaCare, Inc.
PHC--West Plains, Inc. (Ream Optometry
Ltd.) Surgical Group South
Tri County Eye Center, Inc.
</TABLE>

23
<PAGE>

NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET--(CONTINUED)

The following table sets forth the estimated consideration paid and to be
paid for the asset acquisitions occurring after September 30, 1997 (in
thousands), subject to certain purchase price adjustments and final purchase
price allocations.

<TABLE>
<CAPTION>
STOCK TOTAL
CASH NOTES VALUE CONSIDERATION
------ ------ ------- -------------
<S> <C> <C> <C> <C>
Atlanta practices........................... $1,575 $ 497 $ 1,990 $ 4,062
Greater Cincinnati Gastro................... 4,468 -- 4,876 9,344
MidSouth.................................... -- -- 4,278 4,278
IMS......................................... -- -- 3,928 3,928
Other Orlando practices..................... 1,755 -- 3,643 5,398
Parkcrest................................... -- -- 5,669 5,669
Other St. Louis practices................... 1,471 667 2,861 4,999
------ ------ ------- -------
Total..................................... $9,269 $1,164 $27,245 $37,678
====== ====== ======= =======
</TABLE>

The holders of most shares of PHC stock issued as consideration in the asset
acquisitions since mid-October 1997 have contractually agreed with the Company
not to offer, sell, or otherwise dispose of any of those shares for a holding
period ranging from 14 months to 42 months after the respective asset
acquisitions. The fair value of these shares reflects this restriction.

The estimated total purchase price (based on the fair value of the shares to
be issued) of the asset acquisitions since September 30, 1997 is allocated as
follows (in thousands):

<TABLE>
<S> <C>
Adjusted net assets from the asset acquisitions, at book value..... $ 7,088
Intangibles, primarily service agreements.......................... 30,590
-------
Total purchase price............................................. $37,678
=======
</TABLE>

Based on management's preliminary analysis, it is anticipated that the
historical carrying value of the acquisitions' assets and liabilities will
approximate fair value. Management of the Company has not identified any other
material tangible or identifiable intangible assets of the acquisitions to
which a portion of the purchase price could reasonably be allocated. This
preliminary allocation is not expected to differ materially from the final
allocation.

The following is a summary of the adjustments reflected in the Unaudited Pro
Forma Combined Balance Sheet giving effect to the completion of the asset
acquisitions of the PHC Practices. The Company has not acquired equity
interests in most of the PHC Practices, but has acquired substantially all of
the non-medical assets of the PHC Practices and, in most cases, will have a
40-year Practice Management Agreement with each practice.

4. PRO FORMA BALANCE SHEET ADJUSTMENTS

(a) Reflects the adjusted net assets acquired, at fair-market value, from
the asset acquisitions since September 30, 1997. See Note 3.

(b) Reflects the adjusted intangible amount associated with the asset
acquisitions since September 30, 1997. The ending intangibles amount of
$59.6 million as of September 30, 1997 also includes estimated
capitalized costs associated with the asset acquisitions of $1.2
million.

(d) Reflects the adjusted total stockholders' equity associated with the
asset acquisitions since September 30, 1997. See Note 3.

24
<PAGE>

NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET--(CONTINUED)

The Company has entered into an agreement with Banque Paribas for a $20.0
million term loan facility, a $32.5 million acquisition line facility, a $10.0
million working capital revolving loan facility, and an approximately $15.0
million subordinated debt loan facility. All the facilities will bear interest
at a floating rate of prime plus 1.75% or, at the Company's option, LIBOR plus
3.0%, with the exception of the subordinated debt which bears interest at
12.0%. Additionally, an affiliate of Banque Paribas purchased approximately
553,683 shares of Series B Voting Preferred Stock of the Company for
approximately $2.2 million. In connection with this investment and the
subordinated debt, the Company issued Banque Paribas affiliates warrants
exercisable for 376,800 shares of Non-Voting Common Stock and 57,953 shares of
Common Stock. If the Company completes an initial public offering by February
28, 1998 or April 27, 1998, respectively, the Banque Paribas affiliates will
forfeit warrants exercisable for 226,080 or 188,400 shares of Non-Voting
Common Stock, respectively, retaining warrants exercisable for 150,720 or
188,400 shares of Non-Voting Common Stock, respectively, as well as retaining
the warrants exercisable for 57,953 shares of Common Stock.

The Company used $12.0 million of the $20.0 million term loan and $9.0
million of the subordinated debt to pay or refinance the cash component of the
acquisitions consummated since September 30, 1997 and to pay transaction
costs. See Note 3. The remaining $8.0 million under the term loan and $6.0
million under the subordinated loan is available only to pay certain other
outstanding indebtedness of the Company. Approximately $2.1 million of the
acquisition line facility has been drawn to pay the cash component of
acquisition consummated following September 30, 1997, and the remaining $30.4
million is available for future acquisitions. The $2.2 million equity infusion
will be used for general corporate purposes, including working capital.

The following pro forma adjustments are made to reflect properly the Banque
Paribas agreements (in thousands):

(e)
<TABLE>
<S> <C>
Gross proceeds of initial borrowings and equity infusion.......... $21,200
Less:
Commitment fee.................................................. 2,200
Estimated legal costs........................................... 600
Cash portion of acquisitions.................................... 17,300
-------
Net proceeds...................................................... $ 1,100
=======
</TABLE>
(f) The Company has allocated $900,000 as the fair market value of the
warrants issued in connection with the subordinated debt described
above.

(g) Reflects the conversion of Class A Stock, Series B Preferred Stock and
Prime Common Stock into Common Stock, all of which are subject to
mandatory conversion upon consummation of the Offering.

5. POST COMBINATION ADJUSTMENTS

(h) The proceeds from the issuance of 3.0 million shares of the Company's
Common Stock, net of estimated offering costs (based on an assumed
initial public offering price of $14.50 per share) will be applied as
follows (in thousands).

<TABLE>
<S> <C>
Gross proceeds of the Offering.................................... $43,500
Less:
Underwriting discount........................................... (3,045)
Estimated expenses.............................................. (2,500)
Payment of certain debt obligations............................. (21,000)
-------
Net cash received in Offering..................................... $16,955
=======
</TABLE>

Estimated expenses primarily consist of accounting fees, legal fees,
and printing expenses.

25
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

The following table sets forth selected consolidated financial data of the
Company. The selected consolidated financial data for the period from
inception to December 31, 1995, the year ended December 31, 1996 and the nine
month period ended September 30, 1997 are derived from the audited
consolidated financial statements of the Company, and the selected
consolidated financial data for the year ended December 31, 1994 and for the
period from January 1, 1995 to October 31, 1995 are derived from the audited
financial statements of the Predecessor. The selected consolidated financial
data for the nine month period ended September 30, 1996 are derived from the
unaudited financial statements of the Company. As a result of acquisitions
occurring in 1997, the Company's historical financial statements are not
representative of the financial results expected for future periods. This
information should be read in conjunction with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and the Notes thereto included elsewhere in
the Prospectus.

<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------ --------------------------------------------
PERIOD FROM
PERIOD FROM INCEPTION
JANUARY 1, (AUGUST 29, NINE MONTHS ENDED
YEAR ENDED 1995 TO 1995) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, ------------------
1994(1) 1995(1) 1995(1) 1996 1996 1997
------------ ----------- ------------ ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............ $812 $1,949 $ 456 $ 4,036 $ 2,720 $ 16,459
Operating expenses:
Salaries and benefits.. 531 1,533 662 2,915 2,123 4,880
Contract and profes-
sional services....... 38 125 70 194 370 746
Provision for bad
debts................. -- -- 40 660 104 938
General and administra-
tive.................. 225 463 131 2,748 1,242 11,875
Depreciation and amor-
tization.............. 58 106 14 161 81 732
Write down of as-
sets(2)............... -- -- -- 195 -- 715
Purchased research and
development(3)........ -- -- -- -- -- 13,252
---- ------ ------ ------- ------- ---------
Total operating ex-
penses................ 851 2,227 917 6,873 3,920 33,138
---- ------ ------ ------- ------- ---------
Income (loss) from oper-
ations................. (39) (278) (461) (2,837) (1,200) (16,679)
Interest expense, net... 24 86 7 30 9 2,236
---- ------ ------ ------- ------- ---------
Loss before minority
interest and income
taxes.................. (63) (364) (468) (2,867) (1,209) (18,915)
Minority interest....... -- -- (1) -- -- (2,081)
---- ------ ------ ------- ------- ---------
Loss before income tax-
es..................... (63) (364) (467) (2,867) (1,209) (16,834)
Income tax expense...... -- -- -- 17 -- 14
---- ------ ------ ------- ------- ---------
Net loss................ $(63) $ (364) (467) $(2,884) $(1,209) $(16,848)
==== ====== ====== ======= ======= =========
Net loss per share...... N/A N/A $(0.50) $ (1.34) $ (0.56) $ (5.82)
---- ------ ------ ------- ------- ---------
Weighted average shares
outstanding............ N/A N/A 941 2,156 2,143 2,894
==== ====== ====== ======= ======= =========

DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------ ------- ------------------
BALANCE SHEET DATA:
Working capital................................... $2,415 $ 146 $(5,047)
Total assets...................................... 4,870 4,143 41,265
Long-term debt.................................... 10 500 14,049
Total shareholders' equity (deficit).............. 1,292 (405) (9,344)
</TABLE>
- --------
(1) The Company commenced operations in 1994 as a wholly-owned subsidiary of
Surgical Health Corporation. PHC was incorporated in Delaware in August
1995 and acquired the Predecessor in November 1995.
(2) The $195,000 charge in 1996 is related to the write off of operating
assets related to certain contracts that were entered into by the
Predecessor and did not conform to the Company's business plan. The
$715,000 charge in 1997 is related to the write off of deferred financing
fees related to a credit arrangement with NationsCredit Commercial
Corporation that was terminated and the write off of operating assets
related to certain contracts that were entered into by the Predecessor and
did not conform to the Company's business plan.
(3) The $13.3 million charge in 1997 is related to the write off of certain
purchased research and development expenses in association with the
Arlington Cancer Center acquisition.

26
<PAGE>

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

The following discussion and analysis contains certain forward-looking
statements relating to future events or the future financial performance of
the Company. Such statements are only predictions and the actual events or
results may differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors," as well as
those discussed elsewhere in this Prospectus. As a result of the substantial
number of recent acquisitions, the historical results set forth in this
discussion and analysis are not indicative of trends with respect to any
actual or projected future financial performance of the Company. This
discussion and analysis should be read in conjunction with the Unaudited Pro
Forma Combined Financial Statements and the Financial Statements and related
Notes thereto included elsewhere in this Prospectus.

OVERVIEW

The Company commenced operations in 1994 as a wholly-owned subsidiary of
Surgical Health Corporation. PHC was incorporated in Delaware in August 1995
and acquired the Predecessor in November 1995. The Company's current regional
markets are centered in Atlanta, Georgia; Cincinnati, Ohio; Dallas/Ft. Worth,
Texas; Memphis, Tennessee; Orlando, Florida; and St. Louis, Missouri. The
Company also provides services in Alabama, Arizona, Illinois, Kentucky,
Mississippi and Virginia.

The Company derives its revenues from four primary sources: (i) management
fees from management of Managed Practices, including reimbursements of
clinical operating expenses paid by PHC on behalf of the Managed Practices;
(ii) patient service revenues generated by Owned Practices; (iii) management
fees from management of Affiliated Networks and administering managed care
contracts; and (iv) revenues from the operation of ancillary health care
services. The practice management fees payable to PHC by the Managed Practices
vary based on the nature and amount of services provided. The practice
management fees are payable monthly and generally consist of percentages of
revenues or the income of the Managed Practices. For the nine months ended
September 30, 1997 the Company's management fee revenue from management of the
Managed Practices, including reimbursement of clinical operating expenses,
constituted approximately 64% of net revenue, patient service revenues
generated by Owned Practices constituted approximately 14% of net revenues,
management fees from management of Affiliated Networks and administering
managed care contracts constituted approximately 22% of net revenue, and
revenues from operation of ancillary health care services constituted
approximately 0% of net revenues. As the result of its recent acquisitions and
entries into Practice Management Agreements, the Company believes that
practice management revenues and patient service revenues generated by Owned
Practices as a percentage of total revenues have increased. These acquisitions
represent implementation of a portion of the Company's overall strategy of
building comprehensive and integrated networks of physicians in selected
regional markets. PHC anticipates that consummation of these acquisitions will
enhance PHC's ability to increase revenues from contracting activities and
operation of ancillary services. See "Business--Strategy."

<PAGE>

Management fees payable to the Company under the Practice Management
Agreements are determined in arm's-length negotiations based on the nature and
amount of services provided. Such fees generally consist of combinations of
the following: (i) percentages (generally ranging from 10% to 25%) of the
earnings of the Managed Practices; (ii) operating and non-operating expenses
of the Managed Practices paid by the Company pursuant to the Practice
Management Agreements; and (iii) certain negotiated performance and other
adjustments. In negotiating performance and other adjustments, the principal
factor considered by the Company and the Managed Practice is the potential for
growth in the revenue or profitability of the Managed Practice and whether
adjustments to the base fee are appropriate as any such growth occurs. In the
case of the Arlington Cancer Center, the Company's management fee is 12% of
revenues plus 55% of the practice's income after physician compensation. In
Illinois where fees based on percentages of revenues or income are not
permissible, PHC charges a flat fee. In many instances, for the first five
years of the term of a Practice Management Agreement the service fee is the
greater of the fee determined by the applicable formula or a fixed minimum
amount. The base minimum amounts typically are determined by multiplying the
percentage of earnings that has been agreed upon as the base management fee by
the historical earnings of the Managed Practice for a recent period. Base
minimum management fees range from $10,000 to $1.8 million annually. Payment
of this minimum fee is, in many instances, guaranteed by the physicians and
the practice. For a description of the terms of the Practice Management
Agreements and Direct Employment Agreements, see "Business--Contractual
Agreements with PHC Practices."

Operating expenses include the expenses incurred by the Company in
fulfilling its obligations under the Practice Management Agreements. These
expenses are the same as the operating costs and expenses that would have been
incurred by the Managed Practices, including salaries, employee benefits,
medical supplies, building rent, equipment leases, malpractice insurance
premiums, management information systems, and other expenses related to
practice operations. In addition to the practice expenses discussed above, the
Company also incurs personnel and administrative expenses in connection with
maintaining a corporate office that provides management, administrative,
marketing and acquisition services to the PHC Practices, organizes networks
and negotiates and administers payor contracts, and manages and develops
ancillary health care services. The Company can only indirectly manage the
profitability of the Managed Practices. To the extent that a Managed Practice,
with the assistance of the Company pursuant to the Practice Management
Agreement, increases its revenues or decreases its operating expenses, the
practice management fee payable to the Company may increase.

The Company earns management fees from management of networks and managed
care contracts under agreements between the Company and the PHC Networks or
Affiliated Networks. These agreements generally provide that the Company is
entitled to receive a percentage of the payments made by payors to the
network, ranging from 4.5% to 10.0%. The agreements with the networks
generally have terms of from one to five years, with provisions for automatic
renewal at the end of the term. See "Business--Operations."

In some cases, the Company enters into capitated or financial risk-sharing
managed care contracts directly with the payors. In these cases, the Company
receives the managed care payments and retains financial risk for care,
including responsibility for paying contracted providers for medical services.
To the extent that the cost of services falls below expectations, the Company
retains a larger portion of the managed dollar. Excess services, on the other
hand, would result in reduced profitability or operating losses to the
Company. See "Business--Operations."

The structure of the financial interest held by the Company in ancillary
health care services delivered by the Company or the PHC Practices will differ
based on the Company's evaluation of the requirements of state laws
prohibiting the corporate practice of medicine, as well as federal and state
anti-kickback and self-referral laws. Where legally permissible, the Company
may own all or part of an ancillary health care service provider. In other
instances the Company may manage the delivery of ancillary health care
services through a PHC Practice in exchange for a management fee. Currently,
the Company has an interest in a wholly-owned sleep laboratory located in
Atlanta, Georgia and a 51% partnership interest in an ambulatory surgery
center located in Orlando, Florida. The Company derives revenue from the sleep
laboratory through the conduct of sleep studies and the sale of durable
medical equipment related to sleep disorders. Revenues from the ambulatory
surgery center are

28
<PAGE>

derived from facility fees charged by the center. The Company also manages
this ambulatory surgery center for a fee of 6% of the center's revenues. The
Company has options, commencing in June 1998, to purchase a 51% interest in
two other ambulatory surgery centers located in Orlando, Florida. The Company
also has entered into an agreement to purchase the assets of a radiation
center in southern Illinois for $1.7 million in cash. It is anticipated that
this transaction will be closed shortly following consummation of the
Offering.

Since November 1996, the Company has acquired nine Owned Practices and has
acquired the assets of and entered into long-term Practice Management
Agreements with 25 Managed Practices. As of December 31, 1997 the nine Owned
Practices employed 50 Employed Physicians and the 25 Managed Practices
employed 122 Managed Physicians. Aggregate consideration paid in connection
with these acquisitions was approximately $88.5 million, consisting of
approximately $29.2 million in cash, approximately $14.8 million in promissory
notes, approximately $44.6 million in Company stock and 20% interests in three
Company subsidiaries that are convertible into a total of approximately
694,000 shares of Common Stock. In connection with these acquisitions, PHC has
recognized or will recognize approximately $63.6 million in intangibles.

On June 16, 1997, the Company acquired substantially all of the assets of
the Arlington Cancer Center for approximately $11.8 million in cash, $12.6
million in promissory notes and a 20% membership interest in MHOA Texas I,
LLC, the subsidiary of the Company that purchased such assets and manages the
Arlington Cancer Center. On September 12, 1997, the Company acquired
substantially all of the assets of Southern Dependacare for approximately $4.5
million in cash, $1.8 million in promissory notes and 540,000 shares of Prime
Common Stock. On November 10, 1997, pursuant to an Agreement and Plan of
Merger, a wholly-owned subsidiary of the Company was merged with and into
Greater Cincinnati Gastro, all of the shares of capital stock of Greater
Cincinnati Gastro were converted into the right to receive, in the aggregate,
approximately $3.5 million in cash and approximately 410,000 shares of Common
Stock, and Greater Cincinnati Gastro became a wholly-owned subsidiary of the
Company. On November 12, 1997 pursuant to an Agreement and Plan of Merger,
Parkcrest was merged with and into a wholly-owned subsidiary of the Company,
all of the outstanding shares of capital stock of Parkcrest were converted
into the right to receive, in the aggregate, $348,148 in cash and 1,294,000
shares of Prime Common Stock, and Parkcrest became a wholly-owned subsidiary
of the Company. On November 12, 1997, pursuant to an Agreement and Plan of
Merger, a wholly-owned subsidiary of the Company was merged with and into IMS,
all of the outstanding capital stock of IMS converted into the right to
receive, in the aggregate, approximately $3.7 million in cash and
approximately 352,000 shares of Common Stock, and IMS became a wholly-owned
subsidiary of the Company. On November 12, 1997, pursuant to an Agreement and
Plan of Merger, MidSouth merged with and into a wholly-owned subsidiary of the
Company, all of the outstanding shares of capital stock of MidSouth were
converted into the right to receive, in the aggregate, approximately $2.5
million in cash and approximately 273,000 shares of Common Stock and MidSouth
became a wholly-owned subsidiary of the Company.

RESULTS OF OPERATIONS

As a result of the Company's recent acquisitions and limited period of
affiliation with PHC Practices, the Company believes that the period-to-period
comparisons and percentage relationships within the periods set forth below
are not meaningful. The Company acquired its first PHC Practice in November
1996. The Company acquired five Owned Practices and acquired the assets of and
entered into Practice Management Agreements with seven Managed Practices
during the first nine months of 1997. Changes in results of operations for the
year ended December 31, 1996 as compared to the year ended December 31, 1995
and for the nine months ended September 30, 1997 as compared to the nine
months ended September 30, 1996 were caused primarily by these acquisitions.

<PAGE>

The following table shows the percentage of net revenue represented by
various expense categories reflected in the Company's Consolidated Statements
of Operations:

<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
--------------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -----------------
1994 1995 1996 1996 1997
---- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues....................... 100% 100% 100% 100% 100%
Operating expenses:
Salaries and benefits............ 65 91 72 78 30
Contract and professional servic-
es.............................. 5 8 5 14 5
Provision for bad debts.......... -- 2 16 4 6
General and administrative....... 28 25 68 45 72
Depreciation and amortization.... 7 5 4 3 4
Write down of assets............. -- -- 5 -- 4
Purchased research and develop-
ment............................ -- -- -- -- 81
--- --- --- ------ -------
Total operating expenses....... 105 131 170 144 202
--- --- --- ------ -------
Loss from operations............... (5%) (31%) (70%) (44%) (102%)
</TABLE>

Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996

Net revenue increased to $16.5 million for the nine months ended September
30, 1997 from $2.7 million for the same period in 1996, an increase of $13.8
million or 505%. This increase was primarily due to approximately $12.1
million in additional revenues from the five Owned Practices acquired during
the first quarter of 1997, as well as the eight Managed Practices with which
the Company entered into Practice Management Agreements between November 1996
and September 30, 1997. This additional revenue was comprised of approximately
$1.8 in management fee revenue from Managed Practices, approximately $8.4
million in reimbursement of clinical operating expenses from Managed Practices
and approximately $1.9 million in net patient revenues related to Employed
Physicians at the Owned Practices. The remaining increase of approximately
$1.7 million was due primarily to the start-up of global risk contracting in
September 1996, increased capitation contract revenues and revenues generated
by five new employee physicians in the Orlando market. Net revenue for the
nine months ended September 30, 1997 and the nine months ended September 30,
1996 consisted of the following: management fee revenue including
reimbursement of clinical operating expenses was 64% of net revenue in 1997
versus 49% in 1996; contracting revenue was 22% of net revenue in 1997 versus
38% in 1996; and net patient revenue related to employed physicians was 14% of
net revenue versus 15% in 1996.

Salaries and benefits increased to $4.9 million for the nine months ended
September 30, 1997 from $2.1 million for the same period in 1996, an increase
of $2.8 million or 130%. The addition of staff related to the addition of 13
PHC Practices constituted approximately $4.0 million of this increase.
Approximately $370,000 of this increase related to the addition of five
physician employees in the Orlando market. Additional amounts of approximately
$376,000 related to the addition of staff in support of growth in revenues. As
a percentage of net revenues, salaries and benefits expense decreased to 30%
for the nine months ended September 30, 1997 from 78% for the same period in
1996.

Contract and professional services expense increased to $746,000 for the
nine months ended September 30, 1997 from $370,000 for the same period in
1996, an increase of $376,000 or 102%. This increase was primarily due to the
addition of PHC Practices as well as increased legal fees associated with new
capitated contracts. As a percentage of net revenues, contract and
professional services expense decreased to 5% for the nine months ended
September 30, 1997 from 14% for the same period in 1996.

Provision for bad debts increased to $938,000 for the nine months ended
September 30, 1997 from $104,000 for the same period in 1996, an increase of
$834,000 or 797%. This increase primarily related to reserves

30
<PAGE>

established based on historical collection experience for accounts receivable
generated by PHC Practices. As a percentage of net revenues, provision for bad
debts increased to 6% for the nine months ended September 30, 1997 from 4% for
the same period in 1996.

General and administrative expenses increased to $11.9 million for the nine
months ended September 30, 1997 from $1.2 for the same period in 1996, an
increase of $10.7 million or 857%. This increase was due to the asset
acquisitions of PHC Practices, the addition of four physician employees in the
Orlando market, as well as other increases in staffing levels. As a percentage
of net revenues, general and administrative expenses increased to 72% for the
nine months ended September 30, 1997 from 45% for the same period in 1996.

Depreciation and amortization expense increased to $732,000 for the nine
months ended September 30, 1997 from $81,000 for the same period in 1996, an
increase of $651,000 or 804%. This increase was directly related to fixed
assets and goodwill acquired in the asset acquisitions of PHC Practices. As a
percentage of net revenues, depreciation and amortization expense increased to
4% for the nine months ended September 30, 1997 from 3% for the same period in
1996.

The write down of assets for the nine months ended September 30, 1997
relates to the expense of certain loan issuance costs related to a terminated
credit arrangement.

Purchased research and development expense for the nine months ended
September 30, 1997 relates to a non-recurring expense of writing off an
intangible asset of a Managed Practice the assets of which were acquired in
June 1997 based on management's assessment that such asset had no future
alternative benefit for the Company.

Interest expense increased to $2.2 million for the nine months ended
September 30, 1997 from $1,000 for the same period in 1996. The increase was
due to the debt incurred in connection with asset acquisitions and working
capital borrowings.

As a result of the foregoing, net loss increased to $16.8 million for the
nine months ended September 30, 1997 from $1.2 million for the same period in
1996.

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

On November 3, 1995, the Company acquired the Predecessor by merger. Prior
to such acquisition, the Company did not have significant operations. The
Predecessor commenced operations in 1994. The operations for 1995 for the
Predecessor and the Company have been combined for presentation purposes. The
combined presentation is not in accordance with generally accepted accounting
principles.

Net revenue increased to $4.0 million in 1996 from $2.4 million in 1995, an
increase of $1.6 million or 66%. This increase was due primarily to an
increase in single specialty contracting as well as the commencement of global
risk contracting in September 1996. Additionally, a portion of the increase
relates to the acquisition of the assets of Metropolitan Plastic, a Managed
Practice, in November 1996.

Salaries and benefits increased to $2.9 million in 1996 from $2.2 million in
1995, an increase of $0.7 million or 32%. This increase was due to additional
staffing added to support the growth in revenues as well as the hiring of
employees of Metropolitan Plastic in November 1996. As a percentage of net
revenues, salaries and benefits expenses decreased to 72% for 1996 compared to
91% for 1995.

Contract and professional services expense was $194,000 in 1996 compared to
$195,000 in 1995. As a percentage of net revenues, contract and professional
services expense decreased to 5% in 1996 from 8% in 1995.

Provision for bad debts increased to $660,000 in 1996 from $40,000 in 1995,
an increase of $620,000 or 1550%. This amount primarily related to reserves
established for contracts that were entered into by the predecessor and did
not conform to the Company's business plan.

General and administrative expenses increased to $2.7 million in 1996 from
$594,000 in 1995 an increase of $2.1 million or 355%. This increase was
related to increased staffing levels for anticipated growth in 1997 as well as
the acquisition of the assets of Metropolitan Plastic. As a percentage of net
revenues, general and administrative expenses increased to 68% for 1996
compared to 25% for 1995.

31
<PAGE>

Depreciation and amortization expenses increased to $161,000 in 1996 from
$120,000 in 1995, an increase of $41,000 or 34%. This increase was directly
related to fixed assets and goodwill acquired in connection with an
acquisition of the assets of Metropolitan Plastic. As a percentage of net
revenues, depreciation and amortization expenses decreased to 4% for 1996 from
5% in 1995.

The write down of assets in 1996 relates to the write off of operating
assets related to certain terminated physician arrangements.

Interest expense decreased to $30,000 in 1996 from $93,000 in 1995, a
decrease of $63,000. The decrease was due to the reduction of certain above-
market rate debt.

As a result of the foregoing, net loss increased to $2.9 million in 1996
from $831,000 in 1995.

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

Net revenue increased to $2.4 million in 1995 from $812,000 in 1994, an
increase of $1.6 million or 197%. The increase was due to an increase in the
number of payor contracts administered in 1995.

Salaries and benefits increased to $2.2 million in 1995 from $531,000 in
1994, an increase of $1.7 million or 314%. The increase was due to an increase
in the number of employees to administer payor contracts. As a percentage of
revenues, salary and benefits expenses increased to 91% in 1995 from 65% in
1994.

Contract and professional services expense increased to $195,000 in 1995
from $37,000 in 1994, an increase of $158,000 or 427%. As a percentage of
revenues, contract and professional services expense increased to 8% in 1995
from 5% in 1994.

Provision for bad debts increased to $40,000 in 1995 from $0 in 1994.

General and administrative expenses increased to $594,000 in 1995 from
$225,000 in 1994, an increase of $369,000 or 164%. As a percentage of
revenues, general and administrative expenses decreased to 25% in 1995 from
28% in 1994.

Depreciation and amortization expenses increased to $120,000 in 1995 from
$58,000 in 1994, an increase of $62,000 or 107%. As a percentage of revenues,
depreciation and amortization expenses decreased to 5% in 1995 from 7% in
1994.

Interest expense increased to $93,000 in 1995 from $24,000 in 1994, an
increase of $69,000 or 288%. The increase was due to the acquisition debt
incurred to purchase the Predecessor.

As a result of the foregoing, net loss increased to $831,000 in 1995 from
$63,000 in 1994.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1997, working capital was $(5.0) million, a decrease of
$5.2 million during the first nine months of 1997, and cash and cash
equivalents were $5.2 million. At September 30, 1997, net accounts receivable
increased to approximately $8.1 million compared to approximately $465,000 at
December 31, 1996. The increase is attributable to growth in revenues and
acquired assets due to the asset acquisitions of PHC Practices.

Capital expenditures during the first nine months of 1997 totaled
approximately $341,000. The Company is committed to make specified levels of
capital expenditures under certain of its Practice Management Agreements.

During June 1997, the Company completed a private placement of its Series B
Preferred Stock (the "Series B Offering"). Pursuant to the Series B Offering,
the Company received net proceeds of approximately

32
<PAGE>

$9.8 million at the initial closing in June 1997 (substantially all of which
was used in connection with the acquisition of the assets of the Arlington
Cancer Center by the Company). At the second closing in July 1997,
approximately $5.5 million was deposited into an escrow account which was
accessed by the Company in connection with its acquisition of the assets of
practices meeting certain agreed upon criteria. Although the Company expects
to retire approximately $6.2 million in indebtedness incurred in connection
with the Arlington Cancer Center acquisition with the proceeds of the
Offering, the Company has the ability instead to require the holders of its
Series B Preferred Stock to purchase shares of Common Stock at $12.74 per
share sufficient to retire this indebtedness in April 1998, pursuant to an
equity call agreement.

In October 1997, the Company entered into a credit agreement with a group of
banks led by Banque Paribas (the "Bank Group") under which agreement, as
amended and restated in December 1997, the Bank Group agreed to provide the
Company with up to $62.5 million in senior debt (the "Senior Facility"). The
Senior Facility is comprised of a term loan in an amount up to $20.0 million
(the "Term Loan"), a revolving loan in an amount up to $10.0 million (the
"Revolving Loan") and an acquisition loan in an amount up to $32.5 million
(the "Acquisition Loan"). The Senior Facility is secured by substantially all
of the Company's assets. At December 31, 1997, approximately $12.0 million was
outstanding under the Term Loan, approximately $1.5 million was outstanding
under the Revolving Loan and approximately $1.1 million was outstanding under
the Acquisition Loan. In connection with the Senior Facility, the Company sold
to Paribas Principal Incorporated ("PPI"), an affiliate of Banque Paribas, for
approximately $2.2 million, 553,683 shares of Series B Preferred Stock and
warrants exercisable for 57,953 shares of Common Stock at a nominal exercise
price. Further, in October 1997, the Company obtained from Paribas Capital
Funding LLC ("PCF"), an affiliate of Banque Paribas, a senior subordinated
loan (the "Subordinated Loan") in the amount of $15.0 million (of which $9.0
million was advanced), and sold to PCF warrants exercisable for 376,800 shares
of the Company's Non-Voting Common Stock. If the Company completes an initial
public offering by February 27, 1998 or April 27, 1998, respectively, PCF will
forfeit warrants exercisable for 226,080 or 188,400 shares of Non-Voting
Common Stock, respectively, retaining warrants exercisable for 150,720 or
188,400 shares of Non-Voting Common Stock, respectively. The Company will
repay the Subordinated Debt with the net proceeds of the Offering and will use
$12.0 million of such net proceeds to repay indebtedness under the Term Loan.
Commitments under the Term Loan will be extinguished upon repayment. Following
such required repayments, such financing must be paid down with excess cash
flow. Following repayment of the indebtedness, neither the Bank Group nor the
Company's subordinated lenders will have any obligation to advance additional
funds to the Company.

The Company historically has funded its acquisitions and operations through
cash flow from operations, borrowings and sales of equity securities. In
addition to the proceeds from the offering, funds available under its bank
borrowings, cash reserves and cash flow from operations, the Company expects
to incur, from time to time, short-term and long-term bank indebtedness and to
issue equity and debt securities, the availability and terms of which will
depend upon market and other conditions, to meet the Company's current planned
acquisition, capital expenditure and working capital needs for the next 12
months and to provide the funds necessary for the continued pursuit of the
Company's long-term expansion strategy. There can be no assurance that such
additional financing will be available on terms acceptable to the Company.

The Company anticipates that it will fund up to approximately $2.0 million
in research and development expenses at the Arlington Cancer Center over the
next two years. The Company plans to obtain such funds from cash flow from
operations and, to the extent necessary, bank borrowings.

RECENT PRONOUNCEMENTS

New Accounting Pronouncements

33
<PAGE>

periods ending December 31, 1997. As of September 30, 1997, the disclosure
requirements of SFAS No. 128 would not require a different presentation of
earnings per share than currently presented due to the antidilutive effect of
all common stock equivalents.

In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information About Capital Structure." SFAS No. 129
requires companies to disclose descriptive information about an entity's
capital structure. It also requires disclosure of information about the
liquidation preference of preferred stock and redeemable stock. SFAS No. 129
is effective for the Company's fiscal year ending December 31, 1998. The
Company does not expect that SFAS No. 129 will require significant revision of
prior disclosures.

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." SFAS No. 130 is designed to improve the
reporting of changes in equity from period to period. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company will
adopt SFAS No. 130 for fiscal 1998. Management does not expect SFAS No. 130 to
have a significant impact on the Company's financial statements.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 requires that an enterprise disclose certain information about
operating segments. SFAS No. 131 is effective for financial statements for the
Company's fiscal year ending December 31, 1998. The Company does not expect
that SFAS No. 131 will require significant revision of prior disclosures.

The Emerging Issues Task Force of the FASB has recently issued its Consensus
Opinion 97-2 ("EITF 97-2"). EITF 97-2 addresses certain specific matters
pertaining to the physician practice management industry. EITF 97-2 would be
effective for the Company for its year ending December 31, 1998. EITF 97-2
addresses the ability of physician practice management companies to
consolidate the results of physician practices with which it has an existing
contractual relationship. The Company is still in the process of analyzing the
effect on all of its contractual relationships, but currently believes that
substantially all of its contracts would not meet the criteria of EITF 97-2
for consolidating their results of operations. EITF 97-2 also has addressed
the accounting method for future combinations with individual physician
practices. The Company believes that, based upon the criteria set forth in
EITF 97-2, virtually all of its future acquisitions of individual physician
practices will continue to be accounted for under the purchase method of
accounting.

34
<PAGE>

BUSINESS

OVERVIEW

The Company's objective is to continue building comprehensive and integrated
networks of physicians in selected regional markets in order to: (i) establish
a significant market presence enabling it to negotiate favorable payor
contracts and (ii) provide a broad range of physicians and ancillary health
care services to payors. To achieve these objectives, the Company seeks to:
(a) leverage contracting expertise to enhance its strategic position in its
markets; (b) selectively acquire or affiliate with key practices to strengthen
market presence; (c) provide management expertise and capital for development
of ancillary health care services; (d) negotiate and administer beneficial
payor contracts; and (e) utilize information technology to improve practice
performance and meet payor requirements. The Company believes that the
expertise of its management team in network development, payor contracting and
ancillary health care services, as well as PHC's flexible approach to entering
new markets and structuring its operations, differentiates it from traditional
physician practice management companies ("PPMs") and enhance its ability to
attract physicians and to negotiate favorable payor contracts. PHC's
acquisition of key practices is a part of its overall strategy of
strengthening its networks and market presence and enhancing the Company's
ability to contract with managed care payors and providers.

The Company commenced operations in 1994 as a wholly-owned subsidiary of
Surgical Health Corporation. PHC was incorporated in Delaware in August 1995
and acquired the Predecessor in November 1995. Prior to the acquisition of the
assets of and entry into a Practice Management Agreement with the first PHC
Practice in November 1996, the Company principally engaged in network
development and administration, payor contracting, practice administration,
and development activities related to potential acquisitions. The Predecessor
principally engaged in network development and administration, payor
contracting, and practice administration and derived its revenues from these
activities. The Company's current regional markets are centered in Atlanta,
Georgia; Cincinnati, Ohio; Dallas/Ft. Worth, Texas; Memphis, Tennessee;
Orlando, Florida; and St. Louis, Missouri. The Company also provides services
in Alabama, Arizona, Illinois, Kentucky, Mississippi and Virginia.

INDUSTRY BACKGROUND

The Health Care Financing Administration has estimated that national health
care spending increased to approximately $1.0 trillion, or approximately 14%
of GDP, in 1995 from $247 billion, or approximately 9% of GDP, in 1980. HCFA
projects that annual health care spending will increase at a compounded annual
growth rate of over 8% to $1.5 trillion and approximately 16% of the GDP by
the year 2000. HCFA also has estimated that approximately $200 billion, or
approximately 20%, of total health care expenditures, in 1995 were directly
attributable to physician services, and an additional amount of approximately
$515 billion or 52% of such expenditures were under physician direction.

As a result of escalating health care expenditures, governmental and other
payors have adopted cost containment initiatives in an effort to control
spending. These initiatives have resulted in a shift from traditional fee-for-
service provider reimbursement to an evolving array of managed care
arrangements, varying from discounted fee-for-service to fully capitated plans
in which providers assume the financial risks related to service

35
<PAGE>

utilization for a defined group of covered members and services. The industry
has also experienced a decrease in inpatient occupancies as payors have
implemented incentives for providing care in a more cost-effective setting,
which is often an outpatient surgery center, in-office laboratory or similar
outpatient location.

Cost-containment initiatives, including reduced reimbursement, have hindered
physician practice profitability while demands for increased clinical
documentation, cost, quality and utilization data have increased physicians'
administrative duties. Small and mid-sized practices generally do not have the
market presence, expertise or sophisticated cost accounting and quality
management systems required, and may not have the time necessary, to evaluate
and enter into informed capitated risk-sharing arrangements or to continue
practicing profitably under reduced reimbursement. In addition, these
practices often lack the capital required to purchase new medical equipment
and information systems to enhance the efficiency and quality of their
practices. As a result, individual physicians and small group practices are
increasingly consolidating, either by affiliating with larger group practices
and PPMs or by forming networks or independent practice associations. By
consolidating into larger organizations, physicians can achieve lower
administrative costs, gain leverage in negotiating with managed care
organizations and position themselves to attract needed capital resources.

Although the larger organizations resulting from these consolidations have
often improved practice profitability through reductions in overhead and
centralization of certain administrative functions, the Company believes that
many such organizations lack the expertise and market presence to negotiate
successful managed care contracts. In addition, the Company believes that many
PPMs do not offer opportunities for practices and physicians to integrate
complementary ancillary health care services and share in the resulting
income.

THE PHC PHILOSOPHY

The Company seeks to affiliate with physicians who are leaders in the
delivery of medical care and who apply sound business principles to the
operation of their practices. The Company believes that physicians are best
qualified to develop appropriate treatment protocols, and as a result, the
Company provides PHC Physicians, PHC Networks and Affiliated Networks with the
resources necessary to enhance their decision making. The Company also
believes that health care is essentially a regional or local business.
Therefore, PHC aims to integrate practice management, ancillary health care
services, network development and administration and payor contracting at a
regional level. Through such integration and by supporting physicians with
strong, experienced local management teams, the Company believes it provides
physicians with the tools necessary to compete in a changing and increasingly
competitive health care environment.

STRATEGY

Leverage Contracting Expertise to Enhance its Strategic Position in its
Markets. The Company enters markets both by providing network development and
contracting services and, in certain cases, by acquiring or affiliating with
practices that the Company believes can serve as foundations for future
networks. As it enters markets, the Company seeks to form comprehensive
provider panels and provide managed care contracting services to physician
practices and networks in order to gain negotiating leverage with payors and
to achieve economies of scale. The Company believes its network development
and contracting services model enables it to establish a significant market
platform with less initial management time and capital than PPM models based
solely on acquisitions. In addition, the Company believes its network
development and contracting expertise enhances its credibility with market
participants and enables it to identify new markets in which managed care
contracting is likely to grow and the key practices in these markets. Where
appropriate, the Company enters a new market through selective acquisitions of
such key practices.

Selectively Acquire Key Practices to Strengthen Market Presence. The Company
selectively acquires or affiliates with key physician practices from its
networks and from the suburban and rural communities surrounding these markets
to solidify its market position, to strengthen its existing networks and to
establish, organize and support new networks. Through network development and
contracting services, the Company

36
<PAGE>

establishes relationships with physicians and identifies leading physicians
and practices who apply sound business principles and are attractive to
patients and payors. By acquiring or affiliating with physician practices from
within its networks or existing markets, the Company believes it makes
informed decisions about practice acquisitions and affiliations and the
allocation of capital resources. The Company also may acquire or affiliate
with non-network practices that it believes will serve as foundations for
building new networks. PHC's acquisition of or affiliation with key practices
is a part of its overall strategy of strengthening its networks and market
presence and enhancing the Company's ability to contract with managed care
payors and providers.

Provide Management Expertise and Capital for Development of Ancillary Health
Care Services. The Company intends to acquire and develop ancillary health
care services in order to improve the revenues and operating margins of the
Company and the PHC Practices. The Company believes that the availability of
ancillary health care services provides physicians with scheduling flexibility
and greater practice efficiency. Additionally, ancillary health care services
provided in an outpatient setting are attractive to payors because they
generally are less expensive than similar inpatient services. By providing
ancillary health care services, the Company also increases its flexibility in
negotiating global risk contracts. The Company's management team has
experience in the successful development of outpatient surgery centers and
other ancillary health care services.

Negotiate and Administer Beneficial Payor Contracts. The Company focuses on
negotiating and administering payor contracts on behalf of the PHC Practices,
Affiliated Networks and PHC Networks. The Company believes that its
contracting expertise helps it develop and improve relationships with
physicians and payors, and that its contracting services can result in
increased revenues and profits for PHC, the PHC Physicians, PHC Practices, PHC
Networks and Affiliated Networks. The Company believes that its strategy of
providing network development and administration services and specialty and
other contracting services also enables it to establish: (i) a strong market
position; (ii) stable networks of high quality providers; (iii) strong payor
relationships; (iv) integration of ancillary health care services; and (v)
access to cost, quality and utilization data, all of which are essential to
entering into profitable partial and global risk contracts.

Utilize Information Technology to Improve Practice Performance and Meet
Payor Requirements. The Company intends to provide its physicians access to
information and technologies that will enhance their ability to deliver care
more efficiently and profitably in a managed care environment. The Company's
clinical information system collects network data that enable it to price and
manage specialty capitation contracts as well as partial and global risk
contracts. The system also provides a broad range of statistical data to
support utilization analysis, to identify physician outliers and to develop
practice protocols. With the data it collects, the Company can also meet
various requirements of payors, including supplying information to support
accreditation of providers and networks by health care industry organizations
such as the National Committee for Quality Assurance ("NCQA") and the
Utilization Review Accreditation Committee ("URAC").

OPERATIONS

PHC acquires and manages practices, acquires or develops and manages
ancillary health care services, develops and administers networks, and
negotiates and administers payor contracts in its selected markets. In
choosing new markets, the Company analyzes the population, demographics,
market potential, competitive environment, supply of physicians, needs of
managed care plans or other large payors and general economic conditions. The
Company seeks markets in which it believes it can achieve a significant market
share and, in particular, in which there is evidence of risk shifting from
payors to providers. PHC enters new markets where it has identified an
opportunity or where payors or providers have requested its services.

The Company's revenues for the nine months ended September 30, 1997 were
derived from the following sources: (i) management revenue, including
reimbursement of clinical operating expense, constituted approximately 64% of
net revenue; (ii) contracting revenue constituted approximately 22% of net
revenue; and (iii) net patient revenue related to Employed Physicians
constituted approximately 14% of net revenue. During the nine months ended
September 30, 1997, the Company believes that the PHC Practices derived
approximately 30% of their revenues from Medicare and Medicaid, approximately
10% of revenues from capitated contracts with managed care payors and
approximately 60% of revenues under traditional fee-for-service arrangements.

<PAGE>

The following table sets forth certain information regarding the PHC
Networks, Affiliated Networks, PHC Physicians and the managed care contracts
administered by the Company as of December 31, 1997. Markets identified as
integrated regional markets are those in which the Company has affiliated with
a network and has acquired selected PHC Practices affiliated with the
contracting networks. Developing regional markets are those in which the
Company owns or manages one or more PHC Practices but does not yet manage a
corresponding network. Contracting markets are those in which PHC is
administering active managed care contracts and has not yet determined whether
to seek physician practice acquisitions.

<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF NUMBER OF
NETWORK NUMBER OF PHC PHC NUMBER OF
PHYSICIANS PRACTICES PHYSICIANS MANAGED
-------------- ------------- ---------------- PHC PHYSICIAN CARE
REGIONAL MARKET PHC AFFILIATED NETWORK SPECIALTIES(2) OWNED MANAGED EMPLOYED MANAGED SPECIALTIES CONTRACTS
- ----------------- --- ---------- ------------------------ ----- ------- -------- ------- --------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEGRATED
REGIONAL MARKETS
Atlanta, GA..... 130 1,070 Primary Care; Multi- -- 4 -- 18 Primary Care; 14
Specialty; Neuroscience; OB/Gyn
OB/Gyn;
Orthopaedics; Urology
Dallas/Fort -- 130 Gastroenterology; -- 1 -- 10 Oncology 4
Worth, TX...... Mental Health;
Oncology;
Urology
Memphis, TN..... -- 800 Primary Care/Multi- -- 3 -- 32 Family Practice --
Specialty
Orlando, FL..... 500 50 Primary Care/Multi- 3 4 41 11 Primary Care; 4
Specialty; OB/Gyn; Allergy; Colorectal;
Ophthalmology Gastroenterology;
Nephrology; OB/Gyn;
Orthopaedics; Surgery
St. Louis, MO... -- 260 Primary Care/ 6 9 9 32 Primary Care; --
Multi-Specialty Multi-Specialty
Surgery; Cardiology;
Ophthalmology;
Optometry;
Orthopaedics;
Pulmonary
Payson, AZ...... -- 25 Primary Care/Multi- -- 1 -- 3 Primary Care 1
Specialty; Nephrology
DEVELOPING
REGIONAL MARKET
Cincinnati, OH.. -- -- -- -- 2 -- 12 Cardiology; --
Gastroenterology
CONTRACTING MARKETS
Birmingham, AL.. -- 250 Cardiology; Cardiac -- -- -- -- -- 5
Surgery;
Gastroenterology;
Orthopaedics;
Urology
Chattanooga, TN -- 45 Multi-Specialty Surgery -- -- -- -- -- 1
...............
Houston, TX..... -- 60 Gastroenterology -- -- -- -- -- --
OTHER
Outreach
Oncology
Practices
(IL, MS, VA)... n/a n/a n/a -- 1 -- 4 Oncology n/a
--- ----- --- --- --- --- ---
TOTALS: 630 2,690 9 25 50 122 29
--- ----- --- --- --- --- ---
COMBINED TOTALS: 3,320 34 172
----
--
--
----
--
--
<CAPTION>
APPROXIMATE
NUMBER OF
COVERED
REGIONAL MARKET LIVES
- -------------------- -----------
<S> <C>
INTEGRATED
REGIONAL MARKETS
Atlanta, GA..... 1,375,000
Dallas/Fort 400,000
Worth, TX......
Memphis, TN..... --
Orlando, FL..... 85,000
St. Louis, MO... --
Payson, AZ...... 60
DEVELOPING
REGIONAL MARKET
Cincinnati, OH.. --
CONTRACTING MARKETS
Birmingham, AL.. 400,000
Chattanooga, TN 30,000
...............
Houston, TX..... --
OTHER
Outreach
Oncology
Practices
(IL, MS, VA)... n/a
-----------
TOTALS: 2,290,060
-----------
COMBINED TOTALS:
----
--
--
----
--
--
</TABLE>

38
<PAGE>

The following table identifies, as of December 31, 1997, each Affiliated
Network, PHC Network and PHC Practice, as well as the date on which the
Company began providing services to the network or acquired or began managing
the PHC Practice. The table also indicates the number of physicians in each
PHC Practice. Those physicians practicing with Owned Practices are Company
employees. Physicians practicing with Managed Practices are not employed by
the Company.

<TABLE>
<CAPTION>
NETWORKS (AFFILIATED
UNLESS INDICATED AS PHC) PHC PRACTICES
- ------------------------------- --------------------------------------------------------------
SERVED SPECIALTY OWNED/ SERVED
NAME SINCE NAME (NO. PHYSICIANS) MANAGED SINCE
- ------------------------ ------ ------------------------ ----------------- ----------- ------
<S> <C> <C> <C> <C> <C>
ATLANTA REGIONAL MARKET
Resurgeons and 1-95 Atlanta Center for Internal Medicine Managed 9-97
Affiliated Medicine II, P.C. (8)
Orthopaedists, Inc.
Georgia Multi-Specialty 4-96 NSOB II, P.C. OB/GYN (1) Managed 11-97
Group
Georgia Neuroscience 6-94 SCWH II, P.C. OB/GYN (5) Managed 10-97
Associates
Georgia Urology 8-94 SRL OB-GYN, P.C. OB/GYN (4) Managed 10-97
Associates
OBNet Women's 7-96
HealthCare
Network, LLC
Primary Care 7-96
Specialists of
Georgia, Inc. (a PHC
Network)
DALLAS/FT. WORTH
REGIONAL MARKET
ABS Healthcare Company 3-97 Arlington Cancer Center Oncology (6); Managed 6-97
Arlington Cancer Center 6-97 Radiology (2);
North Texas Urologists 11-94 Radiation
Oncology (2)
Texas G.I. Associates, 11-96
P.C.
MEMPHIS REGIONAL MARKET
MidSouth Physician Bryant Medical Services, Family Practice
12-97 P.C. (5) Managed 11-97
Alliance I.P.A. Foundation Medical Internal Medicine Managed 11-97
Group, PLLC (10)
Memphis Childrens Pediatrics (17) Managed 11-97
Clinic, PLLC
ORLANDO REGIONAL MARKET
AOI Network, Inc. 2-96 Alberto S. Bustamante OB/GYN (1) Managed 11-97
Jr. P.A.
PHC-Physician Network 9-94 Allergy Immunology Allergy (2) Managed 11-97
of Orlando, Specialists, P.A.
Inc. (a PHC Network) Gastroenterology GI (2) Managed 11-97
Associates of Osceola,
P.A.
Mid-Florida Women's Gilmer, Cox and Bott, GI (2); Managed 11-97
Health Services P.A. Orthopaedics (4)
Internal Medicine GI (8); Owned 11-97
Specialists, Inc. Nephrology (7)
Larach, Williamson & Colonrectal Owned 11-97
Ferrara, Inc. Surgery (4)
Primary Care Primary Care (22) Owned 11-97
Specialists, Inc.
ST. LOUIS REGIONAL
MARKET
Bi-State Multispecialty 2-97 GMB Medical Center, Ltd. Opthalmology (1) Managed 10-97
Physicians
Network, L.L.C. D.I. Medical Group, Inc. Internal Medicine Managed 11-97
(3)
Eye Care Services of Opthalmology (1) Owned (80%) 5-97
Missouri, Inc.
G.H. Kursar Eye Care Opthalmology (1) Owned 10-97
Services, Inc.
Hanish Eye Institute Opthalmology (1) Managed 3-97
P.C.
Heart Health Medical Cardiology (5) Managed 4-97
Group, P.C.
InternaCare, Inc. Primary Care (1) Owned 9-97
John W. Daake, Inc. Surgery (3) Owned 1-97
Metropolitan Plastic & Plastic Surgery Managed 10-96
Reconstructive Surgery, (1)
Ltd.
PSA Medical Group, Inc. Surgery (10); Managed 11-97
Orthopaedics (2);
Podiatry (1);
Physiatry (1)
Pulmonary Sleep
Consultants, Inc. Internal Medicine Managed 11-97
(5)
Rames Medical Center, Orthopaedics (1) Managed 11-97
Inc.
Ream Optometry, Ltd. Optometry (2) Owned 8-97
Tri-County Eye Center, Opthalmology (1) Owned 8-97
Inc.
Michael G. Vranich, General Surgery Managed 9-97
D.O., P.C. (1)
</TABLE>

39
<PAGE>

Practice Acquisition and Management

A part of the Company's strategy is to acquire or affiliate with leading
medical practices in markets in which the Company believes it can establish a
significant market presence and in which it provides significant contracting
services and has significant local management relationships. The Company
selectively acquires or affiliates with key physician practices from its
networks and from the suburban and rural communities surrounding these markets
in order to solidify its market position and strengthen its networks.
Additionally, in markets where the Company has identified an attractive
opportunity, the Company will acquire or affiliate with selected physician
practices. PHC's acquisition of or affiliation with key practices is a part of
its overall strategy of strengthening its networks and market presence and
enhancing the Company's ability to contract with managed care providers.

The Company seeks to acquire or affiliate with practices of physicians who:
(i) are viewed by the Company as important to the long-term success of its
networks; (ii) apply sound business principles in the operation of their
practices and are high growth oriented; (iii) have reputations in the market
as leaders in the delivery of medical care; and (iv) embrace new medical
technologies and procedures. As part of this process, the Company often
targets a particular type of practice or specialty that the Company believes
contains physician leaders in the specific market.

The Company believes that the following characteristics differentiate it
from other alternatives available to physicians and physician networks and
position it to succeed in acquiring or affiliating with physicians and
practices: (i) its contracting expertise; (ii) the quality, experience and
credibility of its local management teams and its knowledge of the markets in
which it operates; (iii) its ancillary health care services expertise; (iv)
its governance structure, which fosters physician autonomy while promoting
physician participation; and (v) its flexible approach to entering new markets
and structuring its operations.

Acquisition Process. The Company's business development team identifies,
pursues and negotiates practice acquisitions. After identifying a practice or
physician, the Company meets with the physicians to determine whether they
meet the Company's criteria and have an interest in affiliating with PHC. The
Company's

40
<PAGE>

business, financial and legal due diligence includes site visits, analysis of
financial and other data and analysis of the group's operations, leadership,
clinical practices and commitment to long-term growth. Additionally, the
Company reviews the medical professionals' training, licensure and experience
and the practice's Medicare and Medicaid compliance, billing practices and
operating history. Upon successful completion of due diligence, the Company
structures and negotiates the acquisition terms, including the type and amount
of consideration as well as noncompete agreements. The consideration paid in
the Company's acquisitions is designed to align its interests with those of
the physicians and includes a combination of Company stock, cash and,
sometimes, notes. The consideration for each practice varies on a case-by-case
basis, depending on a variety of factors including historical operating
results, the future prospects of the practice and the ability of the practice
to complement the services offered by other PHC Practices. When the Company
acquires the non-medical assets of a physician practice that it will not
directly own, it generally purchases all of the tangible and intangible assets
of the practice with the exception of patient medical records and real estate.
Patient medical records are retained by the selling practice or a new entity
formed by the practice's physicians, and the practice or new entity enters
into a Practice Management Agreement in connection with the acquisition. When
the Company acquires a physician practice that the Company will own, the
Company generally purchases all of the tangible and intangible assets of the
practice, including medical records, and employs the practice's physicians.

Practice Management Services. Pursuant to its Practice Management
Agreements, the Company provides a range of services including among other
things: (i) acting as manager and administrator of non-medical services
relating to the operation of the Managed Practice; (ii) billing patients,
insurance companies and other third-party payors and collecting the fees for
professional medical services and other services rendered and products sold by
the Managed Practice; (iii) providing, as necessary or requested, clerical,
accounting, purchasing, payroll, legal, bookkeeping and computer services and
personnel, information management, preparation of certain tax returns,
printing, postage and duplication services and medical transcribing services;
(iv) supervising and maintaining custody of substantially all files and
records; (v) providing facilities for the Managed Practice; (vi) preparing, in
consultation with a joint policy board and the Managed Practice, all capital
expenditure and operating budgets; (vii) ordering and purchasing inventory and
supplies as reasonably requested by the Managed Practice; and (viii) providing
financial and business assistance in the negotiation, establishment,
supervision and maintenance of contracts and relationships with managed care
and similar payors. Management fees payable to the Company under the Practice
Management Agreement are determined in arm's-length negotiations based on the
nature and amount of services provided. Many of the Company's services are
designed to reduce the amount of time physicians must spend on administrative
matters, thereby enabling the physicians to focus on the delivery of health
care. The Company also assists in the development of ancillary health care
services by conducting feasibility studies and providing project development
services and capital resources.

The Company employs most of the PHC Practices' non-physician personnel.
These non-physician personnel, along with additional personnel at the local
management level, manage the day-to-day non-medical operations of each of the
Managed Practices, including, among other things, secretarial, bookkeeping,
scheduling and other business services. In Florida, Missouri and other states
that permit the corporate practice of medicine, the Company may employ
physicians as well as non-physician personnel. The Employed Physicians in the
Owned Practices continue to control the medical aspects of the practice and
have input with respect to strategic planning and budgeting. PHC has direct
responsibility for all non-medical aspects of the operation of the Owned
Practices.

Ancillary Health Care Services

In evaluating a market, the Company analyzes opportunities to develop or
acquire ancillary health care services. Where appropriate, PHC intends to
acquire and to develop ancillary health care services to complement its local
PHC Practices, PHC Networks and Affiliated Networks. Ancillary health care
services include those that are: (i) part of a practice such as a single-
purpose, office-based surgery suite; (ii) connected with a group practice,
which may consist of several otherwise independent practices, such as a
birthing center; or (iii) affiliated with a coherent specialty network such as
a lithotripter with a urologist network or a sleep lab with a network of
otolaryngology (ENT) physicians. The Company encourages physician
participation in these ancillary health care

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services, either through an ownership interest in a joint venture established
to own and operate a facility or through clinical participation. The Company
believes that ancillary health care services provide physicians with
scheduling flexibility and greater practice efficiency. Additionally,
ancillary health care services provided in an outpatient setting are
attractive to payors because they generally are less expensive than similar
inpatient services. By providing ancillary health care services, the Company
also increases its flexibility in negotiating global risk contracts. The
Company's management team has experience in the successful development of
outpatient surgery centers and other ancillary health care services.

The structure of the financial interest held by the Company in ancillary
services delivered by the Company or the PHC Practices will differ based on
the Company's evaluation of the requirements of state laws prohibiting the
corporate practice of medicine, as well as federal and state anti-kickback and
self-referral laws. Where legally permissible, the Company may own all or part
of an ancillary health care service provider. In other instances the Company
may manage the delivery of ancillary health care services through a PHC
Practice in exchange for a management fee. The Company encourages physician
participation in existing ancillary health care services by providing the
physicians with convenient, well-managed facilities that enhance physicians'
ability to optimize use of time. In addition, the Company may offer physicians
the opportunity to purchase interests in a joint venture or other entity that
owns the ancillary health care facility.

Currently, the Company owns a sleep laboratory located in Atlanta, Georgia
and has a 51% partnership interest in an ambulatory surgery center located in
Orlando, Florida that was purchased from physicians practicing in the Orlando,
Florida area. Those physicians own the remaining 49% interest in the
ambulatory surgery center. The Company derives revenue from the sleep
laboratory through the conduct of sleep studies and the sale of durable
medical equipment related to sleep disorders. Revenues from the ambulatory
surgery center are derived from facility fees charged by the center. The
Company also manages this ambulatory surgery center for a fee of 6% of the
revenues of the ambulatory surgery center. The Company has options, commencing
in June 1998, to purchase a 51% interest in two other ambulatory surgery
centers located in Orlando, Florida. The Company has entered into an agreement
to purchase the assets of a radiation oncology center in southern Illinois for
$1.7 million in cash. It is anticipated that this transaction will close
shortly following consummation of the Offering.

Network Services

Network Formation and Development. In forming networks, the Company focuses
on developing networks of sufficient size and specialties to respond
successfully to payors' geographic, service and utilization management needs.
The Company contacts physicians that it believes offer the medical expertise
and quality of care that are attractive to payors. In both network formation
and network development, the Company assists physicians in determining the
number and types of specialists, subspecialists and hospitals required for a
network to be attractive to payors and to meet the needs of a particular
payor's contract. The Company then aids in selecting and credentialing the
panel of physicians. After the panel of physicians is selected, the Company
assists in forming protocol, finance, utilization, credentialing and quality
assurance (peer review) committees composed of network physicians. In
addition, the Company assists physicians in developing or revising protocols,
although physicians in each network retain ultimate responsibility for
selecting and adopting appropriate protocols for their market. In the PHC
Network model, network physicians contract directly with the PHC Network to
provide medical services. The physicians do not contract among themselves,
except where they may have formed their own group practices. In the PHC
Network model, each physician must elect to participate in any new managed
care agreement, although the Company is attempting to shift its model to one
in which the network is permitted to commit its providers to providing
services under managed care contracts. For the Affiliated Networks, the
Company contracts with the network to provide services to the network. No
contracts are executed between the Company and the Affiliated Network
physicians.

Network Services Agreements. The Company provides a variety of services to
physician networks under its network services agreements. Networks can elect
to receive all or only a selection of the available services, which include
network formation and development, contract marketing, negotiation and
pricing, contract

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administration and other custom services, as further described below. Some
networks request the Company's assistance with the earliest stages of building
the network and others already have executed managed care agreements prior to
hiring the Company for administrative and claims processing services. Fees
paid to the Company under the network services agreements are generally
structured as a percentage of payments made by the payor to the network. The
precise percentage depends on the nature and extent of services provided, and
currently ranges from 4.5% to 10.0%. For capitated and other financial risk-
sharing contracts that are directly held by the Company, the service fee is in
addition to amounts that may be earned by the Company through management of
utilization resulting in an excess of payments from the payor over provider
claims. PHC has not generally paid any consideration to networks to induce
them to enter into network service agreements with PHC. In one case, however,
PHC granted a fully developed multi-specialty network a warrant to purchase
31,400 shares of Common Stock at an exercise price of $12.74 per share.

Contract Marketing, Negotiation and Pricing. An integral element of the
Company's network services is its contracting expertise. The Company also can
provide marketing services such as conducting payor surveys to determine payor
interest in managed care contracting in the market, preparing descriptive
materials and marketing the networks to payors. Once interest is established,
the Company's contracting team, on behalf of the network, works closely with
physicians to prepare contract proposals, analyze contract pricing and
negotiate with payors. The Company has developed a database of managed care
cost and utilization information collected from its networks that it can
utilize to predict the type and quantity of services that will be required by
many different types of contracts. Based upon this information, the Company is
able to formulate different service offerings and pricing models for use in
contract negotiations.

Contract Administration Services. After a network executes a contract, the
Company implements and administers the contract on behalf of the network and
serves as the interface between the network physicians and the payor. The
Company prepares an administrative manual for each managed care contract for
use by the providers, provides claims processing and utilization reporting
services, administers and distributes funds, and assists in designing
compensation methods and schedules for the network providers consistent with
the managed care environment. Claims processing services generally include
verification of claim eligibility, matching claims to pre-certification
approvals, reviewing claims for completeness, providing coordination of
benefits services, submitting claims to payors, acting as an interface among
the network, providers and payors with respect to claims issues, maintaining
an accounting of amounts due from and paid by payors, calculating amounts due
to providers, preparing explanations of benefits ("EOBs") and, if requested by
the network, distributing EOBs and payments to network participants.

The Company believes that managed care contracts are most successful when
the economic interests of the providers and payors are aligned. Therefore, the
Company works with both the network and the payor to develop payment
structures and protocols that encourage optimization of facility usage through
the use of the most appropriate type of facility for each procedure, often
reducing overall facility costs. The Company's standard form of reports
relating to incidence rates, utilization, flow of funds and treatment outcomes
are included in most packages, with custom reports available for an additional
fee. Such information is used by both the network and the payors in developing
or refining protocols, identifying physician outliers, ensuring that standards
of care are met, determining cost-effective treatment plans and meeting NCQA
and Health Employer Data Information System requirements. Additional custom
services may include conducting adverse outcome and patient and provider
satisfaction surveys, as well as conducting site surveys, record reviews and
education and consulting services to meet NCQA level compliance. The Company
is URAC certified, which enables the Company to manage the pre-admission
certification process for major procedures and hospital stays under the
supervision of the network's physician medical director.

Managed Care Contracts. As of December 31, 1997, the Company administered 29
managed care contracts on behalf of physician networks. All of the 26
capitated and other financial risk-sharing contracts managed by the Company
for Affiliated Networks were directly between the Affiliated Network and the
payor. Under this structure, the affiliated network and the providers directly
benefit if decreased utilization of medical services results in a surplus of
funds available to pay providers, and have the risk that increased utilization
will

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result in funding deficiencies that could result in decreased reimbursement to
the providers. Payments by payors under the managed care agreements are made
either directly to the network, or to the Company on behalf of the network,
and the Company is paid its percentage management fee out of such funds. The
percentage management fee, which is determined based on negotiations and the
amount of services requested, ranges from 4.5% to 10%. As of December 31,
1997, the Company, through a 51% owned subsidiary, directly held three global
risk contracts for which services are provided largely by agreement with the
non-profit PHC Network. The PHC Network providers are paid by the Company on a
fee-for-service basis. Thus, the Company both receives the financial benefit
of decreased utilization and takes the primary risk of increased utilization.
In these three cases, the Company both manages the contract on its own behalf
from a risk perspective and provides administrative services to the network
for claims processing, utilization reporting and other services (see "--
Contract Administration Services").

The Company is experienced in negotiating and implementing a variety of
managed care contracts, including single- and multi-specialty capitated
contracts, partial risk contracts and global risk contracts. Single-specialty
capitated contracts are contracts that carve out treatment by physicians of a
single medical specialty. Multi-specialty capitated contracts usually involve
a range of specialists required to provide a defined spectrum of care. The
network is usually paid on a capitated per member per month basis for both
single- and multi- specialty capitated contracts, and in some cases the
contracts also have a facility/total cost share component. Partial risk
contracts are contracts for most professional services of most physician
specialties to be rendered to the plan members but do not include the
provision of facility-based care. If the network lacks specialties it must
expand or subcontract with a single- or multi-specialty network to provide
such services. Global risk contracts are contracts for all professional,
technical and facilities services, supporting a spectrum of health care needs
for plan members. The network may be paid on either a capitated per member per
month basis or on a percentage of premium basis for both partial risk and
global risk contracts and the contracts have a facility/total cost share
component.

In addition to the types of managed care contracts discussed above, the
Company administered one disease state management contract covering 60 lives
and two access fee contracts as of December 31, 1997. Disease state management
contracts are contracts for professional services and facilities necessary to
provide the full spectrum of services required to treat a chronic disease. The
network is paid either on a capitated per member per month basis or on a case
rate basis. Access fee contracts are contracts pursuant to which the Company
makes available physicians in one of its networks to a payor on a fee-for-
service basis. A physician invoices the payor if and when services are
provided. The Company receives a percentage of the physician's reimbursement
as an access fee.

The Company began administering its first specialty capitated contract in
June 1994 and its first global risk contract in September 1996. Company
employees have expertise in managed care contracting. The Company's Executive
Vice President of Networking and Contracting has been negotiating and managing
capitated and risk-sharing managed care contracts since 1982. The Company's
Senior Vice President of Specialty Contracting has negotiated and managed at
least 50 single specialty capitated contracts since 1990 with the assistance
of one of the contracting division's vice presidents, who specializes in
utilization data management and reporting. Additional team members include a
divisional Vice President with ten years of managed care experience, including
network and contract administration, operations and claims and a recently
hired divisional Assistant Vice President with four years of experience in
network management and managed care contract administration, including
management of at least five global contracts. As of December 31, 1997, the
Company had 29 managed care contracts with approximately 2.3 million covered
lives. For the nine months ended September 30, 1997, the Company received
approximately 10% of its revenues from PHC Network and PHC Practice contracts
with managed care payors, and believes that the PHC Practices also received
approximately 10% of their total revenues from contracts with managed care
payors.

Research and Development

The Arlington Cancer Center conducts research and development activities
related to bone marrow transplant procedures and radio-immune therapy ("RIT")
procedures. Under the terms of the Arlington Purchase Agreement, the Company
purchased intellectual property rights in these procedures. The bone marrow
transplant procedures are intended to enhance the body's ability to produce
new blood cells following administration of

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<PAGE>

radiation therapy and chemotherapy. The RIT procedures involve injection into
the bloodstream of radioactive isotopes attached to cancer seeking proteins
that attach themselves to tumors allowing for the diagnosis and therapy of
cancer through a focused, concentrated delivery of radiation at the cancer
site.

The Company anticipates that it will derive revenues from the use or
licensing of bone marrow procedures during 1998. A substantial amount of
additional research and development time and expense must be devoted to the
development of the RIT procedures before the Company will be able to derive
significant revenue from the use or licensing of its intellectual property
rights in the RIT procedures. Further, no assurance can be provided that the
Company ever will be able to derive significant revenue from the use or
licensing of its intellectual property rights in the RIT procedures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

MANAGEMENT INFORMATION SYSTEMS

Upon the acquisition of a practice, the Company maintains the clinical
medical records and financial systems in place at the PHC Practice. Clinical
and financial data collected at the practice are sent to the Company's
corporate headquarters on a monthly basis through network interfaces,
electronic data interchange or manually. The Company intends to maintain local
systems in an effort to minimize the disruption that can occur when local
systems are replaced with corporate-mandated systems. The Company uses its
management information systems to generate information that will assist the
PHC Practices in the maintenance and selection of appropriate practice
protocols, and in the management of quality improvement procedures and
utilization. The Company currently collects cost and utilization data from the
PHC Networks and Affiliated Networks for managed care contract pricing and
administration, and intends to collect such data at the PHC Practices. The
Company intends also to use this information to improve operating efficiency
and to encourage the development and implementation of best clinical
practices.

GOVERNANCE AND QUALITY ASSURANCE

The Company's current governance structure promotes physician participation
in the management of the Company. Certain physicians who are or have been
associated with PHC Practices serve on the Board of Directors. Each PHC
Practice has a Joint Policy Board whose membership includes physician
representatives from the Company and the PHC Practice. The Joint Policy Boards
have responsibilities that include developing long-term strategic objectives,
developing practice expansion and payor contracting guidelines, promoting
practice efficiencies, recommending significant capital expenditures and
facilitating communication and information exchange between the Company and
each of the PHC Practices.

The Company has established a Compliance Committee of the Board of Directors
that consists of physician and management members of the Board. The Compliance
Committee is responsible for approving the Company's health care compliance
objectives and developing and implementing the Company's health care
compliance programs at the practice and Company level. To facilitate this
process, the Company is establishing compliance committees at the PHC Practice
level comprised of representatives of the PHC Practice and the Company to
oversee development and implementation of compliance programs at the PHC
Practice level. Through counsel, the Company has retained outside consultants
to assist with practice and Company assessments that will assist the
Compliance Committee of the Board of Directors, the local compliance
committees and management in developing the Company's compliance programs.

CONTRACTUAL AGREEMENTS WITH PHC PRACTICES

The Company's practice acquisition structure is designed to align the
interests of the Company with those of PHC Physicians. When a physician group
has agreed to enter into a practice management or employment relationship with
the Company, the Company purchases the group's operating assets typically in
exchange for a combination of Company stock, cash and notes. The Company
intends to continue to use Common Stock as a significant portion of its
consideration in future practice acquisitions. Typically, upon the acquisition
of a

<PAGE>

Managed Practice, the Company enters into a Practice Management Agreement with
a professional corporation or other entity that will employ the physicians
associated with the Managed Practice.

The following summary is intended to be a brief summary of the typical terms
of Practice Management Agreements, Physician Employment Agreements and Direct
Employment Agreements to which the Company or a PHC Practice is a party and
intends to enter in the future. The actual terms of these agreements vary on a
case by case basis, depending on the negotiations with the individual
practices and physicians.

Service Fees. Management fees payable to the Company under the Practice
Management Agreements are determined in arm's-length negotiations and based on
the nature and amount of services provided. Such fees generally consist of
combinations of the following: (i) percentages (generally ranging from 10% to
25%) of the earnings of the Managed Practices; (ii) operating and non-
operating expenses of the Managed Practices paid by the Company pursuant to
the Practice Management Agreements; and (iii) certain negotiated performance
and other adjustments. In the case of the Arlington Cancer Center, the
Company's management fee is 12% of the practice's revenues plus 55% of the
practice's income after physician compensation. Some of these services result
in operating expenses that are directly reimbursed to the Company. In
Illinois, where fees based on percentages of revenue or income are not
permissible, the Company charges a flat management fee. In many instances, for
the first five years of the Practice Management Agreement the service fee is
the greater of the fee determined by the applicable formula or a fixed minimum
amount. This minimum fee ranges from $10,000 to $1.8 million annually, and in
most instances, payment of such minimum is guaranteed by the physicians and
the practice for five years.

Services Provided. Pursuant to the various Practice Management Agreements,
the Company provides a range of services in consultation with the Managed
Practice including, among other things: (i) acting as manager and
administrator of non-medical services relating to the operation of the Managed
Practice; (ii) billing patients, insurance companies and other third-party
payors and collecting the fees for professional medical services and other
services and products rendered or sold by the Managed Practice; (iii)
providing, as necessary or requested, clerical, accounting, purchasing,
payroll, legal, bookkeeping and computer services and personnel, information
management, preparation of certain tax returns, printing, postage and
duplication services and medical transcribing services; (iv) supervising and
maintaining custody of substantially all files and records; (v) providing
facilities for the Managed Practice; (vi) preparing, in consultation with the
Joint Policy Board and the Managed Practice, all capital expenditure and
operating budgets; (vii) ordering and purchasing inventory and supplies as
reasonably requested by the Managed Practice; and (viii) providing financial
and business assistance in the negotiation, establishment, supervision and
maintenance of contracts and relationships with managed care and other payors.

Managed Practice Responsibilities. Under the Practice Management Agreements,
the Managed Practices retain the responsibility for, among other things: (i)
hiring and compensating physician employees and other medical professionals;
(ii) ensuring that physicians and other medical professionals have the
required licenses, credentials, approvals and other certifications needed to
perform their duties; and (iii) complying with certain federal and state laws
and regulations applicable to the practice of medicine. In addition, the
Managed Practices retain exclusive control of all aspects of the practice of
medicine and the delivery of medical services.

Term and Termination. The Practice Management Agreements are generally for
initial terms of 40 years. Practice Management 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 in the performance of a material
financial obligation, which default continues for a specified term after
notice. In addition, certain Practice Management Agreements may also be
terminated by the Company if the Managed Practice or a Managed Physician
engages in conduct or is formally accused of conduct for which the Managed
Physician's license to practice medicine reasonably would be expected to be
subject to revocation or suspension or is otherwise disciplined by any
licensing, regulatory or professional entity or institution, the result of any
of which does or reasonably would be expected to materially adversely affect
the Managed Practice. Certain Managed Practices may terminate their respective
Practice Management Agreements, subject to repurchase of their respective
practice assets, after the expiration of 66

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months from the dates of such agreements, for the original purchase price
(including goodwill) with appropriate adjustments.

Breach. The Company includes in all standard Practice Management Agreements
breach provisions that it believes to be stronger than those used by other
PPMs. The Company believes that these provisions discourage frivolous claims
that the Company has breached its obligations as a means of causing the
Practice Management Agreement to terminate early. In the event of a non-
financial breach by either party to the Practice Management Agreement, the
non-breaching party typically must, prior to termination, submit to an
arbitrator the question of whether: (i) a material breach has occurred and, if
so, (ii) the amount of lost income, exclusive of punitive or consequential
damages (the "Lost Income Amount"), suffered by the non-breaching party as the
result of the breach. Typically, the non-breaching party may terminate the
Practice Management Agreement only if the arbitrator determines a Lost Income
Amount and the breaching party fails to pay the Lost Income Amount within a
specified time following determination of the Lost Income Amount. Generally,
upon termination of the Practice Management Agreement, the Managed Practice is
required to repurchase the assets used in the operation of the Managed
Practice, including assets such as goodwill.

Physician Employment Agreements. The Practice Management Agreements require
the Managed Practice to enforce restrictive covenants contained in the
employment agreements (the "Physician Employment Agreements") between the
Managed Practice and the physicians associated with the Managed Practice.
Typically, the Physician Employment Agreements provide for an initial term of
five years, require the Managed Practice to compensate the Managed Physician
on the basis negotiated between the Managed Practice and the Managed Physician
and require that the physician not compete with the Managed Practice or the
Company within a specified geographic area during the term of the Physician
Employment Agreement and for a period of up to two years thereafter. In
addition, certain Physician Employment Agreements provide that if such
physician's employment is terminated during the initial five-year term for any
reason other than the physician's death or disability or the occurrence of
certain events outside the physician's control, the physician will be required
to pay liquidated damages to the Managed Practice which the Managed Practice
in turn is obligated to remit to the Company. In most instances, the Company
is named as a third-party beneficiary of the Physician Employment Agreements,
with the right to enforce provisions of the Physician Employment Agreements.
Managed Physicians assign their revenues to the Managed Practices, which in
turn assign all non-governmental revenues to PHC.

Owned Practices; Direct Employment. In states that permit such structures,
the Company directly employs physicians associated with the Owned Practice
pursuant to employment agreements (the "Direct Employment Agreements").
Florida and Missouri are currently the only states in which PHC does business
that permit such employment arrangements. Employed Physician compensation is
generally a combination of salary and bonus that is frequently adjusted based
on the net profits generated by the physician. Revenues generated by the
Employed Physicians are the property of the Owned Practices, which are
subsidiaries of PHC. The physicians continue to control the medical aspects of
the practice and have input with respect to budgeting and strategic planning
for the Owned Practice. The Company has direct responsibility for all non-
medical aspects of the operation of the Owned Practices. Typically, the
Company is entitled to terminate the Direct Employment Agreement for cause as
defined in the relevant agreement. In addition, the Company may terminate the
Direct Employment Agreement if the physician materially breaches the Direct
Employment Agreement (as determined by an arbitrator) and either: (i) fails to
pay the Lost Income Amount suffered by PHC (as determined by an arbitrator) as
a result of the breach or (ii) continues to breach the Direct Employment
Agreement, despite having paid the Lost Income Amount.

Under a Direct Employment Agreement, the physician may voluntarily terminate
the physician's employment thereunder, at any time during the five-year term,
by delivering to the Company written notice of such intention not less than
one year prior to the effective date of termination. The physician may also
terminate the Direct Employment Agreement if: (i) the Company materially
breaches, and does not cure within the specified period, any of its financial
obligations under the Direct Employment Agreement or (ii) upon the occurrence
of an event of bankruptcy by PHC. Additionally, the physician, in conjunction
with the other physicians who sold the practice to PHC, may terminate the
Direct Employment Agreement if the Company

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<PAGE>

materially breaches a non-financial obligation (as determined by an
arbitrator) and either: (a) fails to pay the Lost Income Amount suffered by
the physician (as determined by an arbitrator) as a result of the breach or
(b) continues to breach the Direct Employment Agreement, despite having paid
the Lost Income Amount. However, if the physician terminates the physician's
employment for any reason, other than upon scheduled retirement, death or
disability, or if the Company terminates the physician's employment for cause
within the first five years, then the physician is required to pay to the
Company liquidated damages. Two Owned Practices in the Orlando area may be
repurchased by their former physician shareholders in the event all such
physicians' employment agreements simultaneously terminate as a result of a
material breach by the Company. The Company believes that these limitations on
the physician's ability to terminate his or her Direct Employment Agreement
discourage frivolous claims that the Company has breached its obligations
thereunder as a means of causing the early termination of a Direct Employment
Agreement.

Restrictive Covenants. The Direct Employment Agreements include several
restrictive covenants, including a covenant not to compete which prohibits the
physician from practicing the same type of medicine the physician practices
for the Company for two years following the date of cessation of employment by
PHC within a specified radius of the medical offices of the Company in which
the physician practiced. The Direct Employment Agreements also generally
include restrictions on the physician's right to solicit employees or patients
of the Company for a period of two years following the termination of
physician's employment with the Company. Certain physicians in the Orlando
area have the option of returning a portion of the acquisition consideration
in lieu of refraining from competition with the Company upon the expiration of
their Direct Employment Agreements. Finally, the Direct Employment Agreements
typically prohibit the disclosure of trade secrets and other confidential
information regarding the Company. The Practice Management Agreements require
the Managed Practices, and in many cases permit PHC, to enforce restrictive
covenants contained in the Physician Employment Agreements.

COMPETITION

The Company, PHC Physicians, PHC Networks and Affiliated Networks face
intense competition in all aspects of their businesses. The Company believes
that changes in governmental and private reimbursement policies, among other
factors, have resulted in increased competition among providers of medical
services and among networks for managed care contracts. The Company itself
faces intense competition to acquire or provide management services to
physician practices; to acquire or develop and operate ancillary health care
service facilities; and to provide management services, including contracting
services, to physician networks. A number of hospitals, clinics, health care
companies, HMOs, insurance companies and physician practice management
companies, both publicly and privately held, some of which have established
operating histories and greater resources that the Company, engage in
activities similar to those of the Company. There can be no assurance that the
Company will be able to compete effectively with its competitors, that
additional competitors will not enter the market, or that the Company will be
able to acquire or manage physician practices, acquire or develop ancillary
health care services, affiliate with or develop networks, or negotiate payor
contracts on terms beneficial to the Company. Any such failure could have a
material adverse effect on the Company's business, financial condition or
results of operations.

GOVERNMENT REGULATION

General

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Every state imposes licensing requirements on individual physicians and on
facilities and services operated by physicians. In addition, federal and state
laws regulate HMOs and other MCOs with which the Company, PHC Physicians, PHC
Practices, PHC Networks and Affiliated Networks may have contracts. Many
states require regulatory approval, including certificates of need, before
establishing or expanding certain types of health care facilities, offering
certain services or making expenditures in excess of statutory thresholds for
health care equipment, facilities or programs. In connection with the
expansion of existing operations and the entry into new markets, the Company,
PHC Physicians, PHC Practices, PHC Networks and Affiliated Networks may become
subject to compliance with additional regulation.

The United States Congress and many state legislatures routinely consider
proposals to reform or modify the health care system, including measures that
would control health care spending, convert all or a portion of government
reimbursement programs to managed care arrangements, and balance the federal
budget by reducing spending for Medicare and state health programs. These
measures can affect a health care company's cost of doing business and
contractual relationships. For example, recent developments that affect the
Company's activities include: (i) federal legislation requiring a health plan
to continue coverage for individuals who are no longer eligible for group
health benefits and prohibiting the use of "pre-existing condition" exclusions
that limit the scope of coverage; (ii) a HCFA policy prohibiting restrictions
by Medicare HMOs on physicians recommending to patients other health plans and
treatment options; and (iii) regulations imposing restrictions on physician
incentive provisions in physician provider agreements. There can be no
assurance that such legislation, programs and other regulatory changes will
not have a material adverse effect on the Company's business, financial
condition or results of operations.

The ability of the Company to operate profitably will depend in part upon
the ability of the Company, PHC Physicians, PHC Practices, PHC Networks and
Affiliated Networks obtaining and maintaining all necessary licenses,
certificates of need and other approvals and to operate in compliance with
applicable health care regulations.

Fee-Splitting; Corporate Practice of Medicine

The laws of many states prohibit physicians from splitting fees with non-
physicians (or other physicians) and prohibit non-physician entities from
practicing medicine. These laws vary from state to state and are enforced by
the courts and by regulatory authorities with broad discretion. Although the
Company believes its operations are in material compliance with existing
applicable laws, the Company's business operations have not been the subject
of judicial or regulatory interpretation; thus, there can be no assurance that
review of the Company's business 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 existing operations or their expansion. In addition,
the regulatory framework of certain jurisdictions may limit the Company's
expansion into such jurisdictions if the Company is unable to modify its
operational structure to conform with such regulatory framework.

In particular, at least one Texas court has taken the position that control
by a management company over certain medical related business aspects of a
medical practice effectively is the prohibited corporate practice of medicine
by the management company. PHC has structured the management services
agreement related to the Managed Practice located in Texas to comply with
Texas law, although no assurance can be provided that a party could not
successfully assert that the management services agreement violates Texas law.
Illinois courts have indicated that employment of physicians by for profit
corporations that are not hospitals violates Illinois law related to the
corporate practice of medicine and that management fees based on a percentage
of revenue or income violate Illinois' prohibitions on fee-splitting.
Accordingly, in Illinois PHC does not employ physicians and the management fee
charged under its practice management agreement is a flat fee. The Florida
Board of Medicine recently entered a final order in a case titled In Re: The
Petition For Declaratory Statement of Magan L. Bakarania, M.D., supported by a
prior Florida Board of Medicine Order, stating that a management fee based on
a specified percentage of net income without direct relation to the services
provided violates Florida law related to fee-splitting. That case has been
stayed pending appeal. The Company cannot predict the ultimate

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outcome of this case. If the Florida Board of Medicine order is affirmed by
the Florida Court, the Company will seek to restructure certain of the
practice management agreements to which it is a party in Florida, although
there can be no assurance that the Company will be successful in doing so.
Three of the four agreements that the Company may seek to restructure in
Florida require the parties to negotiate in good faith to reform the
agreements to comply with applicable law and for the matter to be referred to
arbitration in the event that agreement with respect to restructured terms
cannot be reached. If necessary, the Company also intends to negotiate with
the fourth practice to reform the agreements to comply with applicable law,
although neither the Company nor the practice is contractually required to do
so. These four Florida practices were acquired by the Company in November
1997. Accordingly, the Company derived no revenues from these practices during
the nine months ended September 30, 1997. The Company anticipates that it will
derive less than 5% of its revenue from these practices in 1998.

Except as indicated in this Prospectus, the Company is not aware of
significant litigation related to the corporate practice of medicine or state
laws prohibiting or limiting fee-splitting that the Company anticipates will
materially affect its business. A determination in any state that the Company
is engaged in the corporate practice of medicine or any unlawful fee-splitting
arrangement could render any Practice Management Agreement between the Company
and a Managed Practice located in such state unenforceable or subject to
modification, which could have a material adverse effect on the Company. There
can be no assurance that regulatory authorities or other parties will not
assert that the Company or a Managed Practice is engaged in the corporate
practice of medicine in such states or that the management fees paid to the
Company by the Managed Practices constitute unlawful fee-splitting or the
corporate practice of medicine. If such a claim were asserted successfully,
the Company could be subject to civil and criminal penalties, Managed
Physicians could have restrictions imposed upon their licenses to practice
medicine, and the Company or the Managed Practices could be required to
restructure their contractual arrangements. Such results or the inability of
the Company or the Managed Practices to restructure their relationships to
comply with such prohibitions could have a material adverse effect on the
Company's financial condition and results of operations. See "Business--
Government Regulation."

Changes in Payment for Medical Services

The Company believes that trends in cost containment in the health care
industry will continue to result in a reduction from historical levels in per-
patient revenue for PHC Practices. The federal government has implemented,
through the Medicare program, the RBRVS payment methodology for physician
services. The RBRVS is a fee schedule that, except for certain geographical
and other adjustments, pays similarly situated physicians the same amount for
the same services. The RBRVS is adjusted each year and is subject to increases
or decreases at the discretion of Congress. To date, the implementation of
RBRVS has reduced payment rates for certain of the procedures historically
performed by PHC Physicians. There can be no assurance that any reduced
operating margins could be recouped by the Company through cost reductions,
increased volume, introduction of additional procedures or otherwise.

Medicare and Medicaid Fraud and Abuse

The Anti-Kickback Law prohibits the offer, payment, solicitation or receipt
of any form of remuneration in return for, or in order to induce: (i) the
referral of a person; (ii) the furnishing or arranging for the furnishing of
items or services reimbursable under Medicare or Medicaid programs; or (iii)
the purchase, lease or order or arranging or recommending purchasing, leasing
or ordering of any item or service reimbursable under Medicare

50
<PAGE>

or Medicaid. Pursuant to the Anti-Kickback Law, the federal government has
announced a policy of increased scrutiny of joint ventures and other
transactions among health care providers in an effort to reduce potential
fraud and abuse relating to Medicare costs. The applicability of these
provisions to many business transactions in the health care industry has not
yet been subject to judicial and regulatory interpretation. Noncompliance with
the Anti-Kickback Law can result in exclusion from Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that PHC
Practices collectively derive approximately 30% of their revenues from
Medicare or Medicaid payments.

The Company believes that although it will receive service fees under its
agreements for management and administrative services, it is not generally in
a position to make or receive referrals of patients or services reimbursed
under the Medicare or Medicaid programs. Such service fees are intended by the
Company to be consistent with fair market value in arm's-length transactions
for the nature and amount of management services rendered and, therefore,
would not constitute unlawful remuneration under Anti-Kickback Law and
regulations. For these reasons, the Company does not believe that fees payable
to it would be viewed as remuneration for referring or influencing referrals
of patients or services covered by such programs as prohibited by statute. If
the Company is deemed to be in a position to make, influence or receive
referrals from or to physicians, the operations of the Company could be
subject to scrutiny under federal and state anti-kickback and anti-referral
laws.

In some jurisdictions that do not prohibit the corporate practice of
medicine, the Company owns practices and employs physicians. Thus, with
respect to such practices, the Company is a provider of services and would be
capable of receiving referrals from other physicians affiliated with PHC in
those markets. In these circumstances, PHC Practices either will not accept
referrals involving designated health services from other physicians
affiliated with PHC or will form group practices comprised of PHC Practices in
that market.

Antitrust Issues

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that allegedly violate the antitrust laws. Collaboration regarding the pricing
of services, market allocation and certain other types of joint action,
however, may be permissible in the context of an integrated joint venture if
those activities are ancillary to the otherwise legitimate purposes of the
joint venture. The federal antitrust enforcement agencies, the FTC and the
DOJ, have established "antitrust safety zones" for physician networks that
meet certain criteria. To the extent physician providers in a network
constitute less than 20% of the total physicians in a specialty or sub-
specialty which compete in the market and such providers are either integrated
in terms of sharing substantial financial risk in their joint activities or
are engaged in designing or implementing clinical pathways with a view to
improving medical outcomes, the network should fall within one of the DOJ/FTC
antitrust safety zones. To the extent that the physician network is non-
exclusive, i. e., physicians may provide services outside the confines of the
network, individually or as part of other groups or networks, the federal
antitrust enforcement authorities have indicated that they will not challenge
joint pricing or market allocation actions of an integrated network of up to
30% of the physicians in a particular specialty or sub-specialty. Conduct
outside the antitrust safety zones is not necessarily unlawful, but greater
scrutiny will be given to the potential impact on overall competition by
regulatory authorities. State antitrust agencies may or may not rely on
antitrust analysis similar to that of the federal agencies.

While the federal antitrust enforcement authorities generally view
"substantial risk" as capitation or substantial withholding with respect to
the specific contracts or negotiations by the physician network, the antitrust
enforcement agencies have indicated that networks engaging in other forms of
financial risk-sharing may also be considered "integrated joint ventures" for
purposes of antitrust analysis. As yet, it is unclear whether the agencies or
the courts will consider arrangements in which providers have an investment
risk with actual capital contributed to the entity to be sufficient financial
integration. Nevertheless, to the extent that the physician members will be at
financial risk in terms of compensation under proposed joint contracting under
capitation or substantial withhold arrangements, the agencies have indicated
that these forms of risk-sharing are sufficient to show the existence of an
integrated joint venture. In addition, demonstration of actual "clinical
integration" by a physician network is sufficient to avoid per se violations,
according to the FTC and the DOJ.

The two PHC Networks are non-exclusive networks that operate in the greater
Atlanta and greater Orlando metropolitan areas, respectively. As of December
31, 1997, except for one fee-for-service contract in Orlando, all of their
contracts are capitated or global risk contracts in which the providers share
substantial financial risk. The Atlanta PHC Network is comprised of primary
care physicians constituting less than 30% of the market practitioners of
family/general, internal and pediatric medicine. The Company believes that the
Atlanta PHC Network is within the antitrust safety zone for non-exclusive
networks. The Orlando PHC Network is a multi-specialty network including
physicians of many specialties. The Company believes that physician
representation in the Orlando PHC Network may exceed the non-exclusive safety
zone in several non-primary care specialties. The antitrust agencies
emphasize, however, that even if a physician network does not come within a
safety zone, it is not necessarily unlawful under the antitrust laws. For the
following reasons, the Company believes that its activities in the greater
Orlando metropolitan areas are pro-competitive and have the potential to
benefit purchasers of the physician services offered by its providers. First,
physician participation in the network is non-exclusive, and physician members
do in fact contract with other networks and health plans. Second, physician
members share inherent substantial financial risk by providing services for
global risk contracts and have the incentive to provide high quality, cost-
effective care in an environment of increasing managed care penetration.
Third, there are competing physician networks in the greater Orlando area.
Fourth, the specialties with respect to which the Orlando PHC Network may
exceed the safety zone are generally ones characterized by a limited number of
practices and physicians within the market.

Insurance Regulatory Risks

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<PAGE>

Under the laws of some states, this contracting arrangement could be
determined to involve an insurance risk. Therefore, to the extent the Company
is deemed to be in the business of insurance in a particular state, the
Company, PHC Physicians and PHC Networks could be subject to insurance
regulatory scrutiny; regulators could require restructuring of a specific
arrangement; and the Company's operations could be restricted, its expansion
limited, or certain of its operations prohibited.

Medicare Developments

The recently adopted Balanced Budget Act of 1997 (the "BBA") enacted a
Medicare Plus/Medicare Choice Program for Medicare enrollees. The program
would broaden the coverage options available to Medicare recipients, would
authorize broader use of medical savings accounts, and would allow physicians
and patients to contract for health care services at rates beyond what is paid
by Medicare. Such changes potentially could increase the services utilized by
Medicare recipients. In addition, the BBA allows provider sponsored
organizations ("PSOs") to contract directly with Medicare, instead of
contracting through an HMO. If the PHC Practices, PHC Networks and Affiliated
Networks participate in such PSOs, they could increase the percentage of
Medicare-related business, which would also increase the exposure for losses
if Medicare revenues fall short of the cost of services actually utilized by
Medicare beneficiaries. If PHC does not participate in such PSOs, whether by
choice or because it does not obtain a required license to act as a PSO, PHC's
ability to participate in Medicare programs could be limited. The BBA also
amends the fraud and abuse laws to require permanent exclusion from Medicare
of anyone convicted of three Medicare program-related crimes and to impose new
civil monetary penalties to anyone contracting with an excluded health care
provider. These changes increase the regulatory and other risks encountered by
the Company. See "Risk Factors--Direct Capitation; Risks Associated With
Managed Care Contracts." On January 9, 1998, HCFA published a Notice of
Proposed Rulemaking implementing Stark II. The proposed regulations, when they
become final, will reduce some of the uncertainty surrounding HCFA's
interpretation of Stark II and will assist the Company in better structuring
its operations to comply with the law. In some cases, however, the strict
nature of the new rules will make compliance more onerous, and achieving such
compliance may have a material adverse effect on the Company's business in
certain markets.

Legislative Developments

EMPLOYEES

As of December 31, 1997 the Company had approximately 477 employees, of
which approximately 52 were employed at the corporate or regional
administrative offices.

PROPERTIES

The Company leases office space and practice facilities for the PHC
Practices. The Company also leases its headquarters under lease agreements for
approximately 8,849 square feet expiring in March 31, 1999 and approximately
6,500 square expiring in January, 2000.

LEGAL PROCEEDINGS

Certain PHC Physicians and PHC Practices are named defendants in malpractice
cases. By virtue of acquisition of certain of these practices by merger or
stock purchase transactions, certain Company subsidiaries

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are or are expected to be defendants in these cases. Although there can be no
assurance regarding the eventual outcome of any particular malpractice case,
the Company believes that it has commercially reasonable malpractice insurance
and limits in place with respect to these subsidiaries. PHC, the parent
company, is not a party to any claims, suits or complaints relating to
services and products provided by the Company, the PHC Physicians or PHC
Practices or the networks. There can be no assurance, however, that such
claims will not be asserted against the Company in the future or that the
Company will not become subject to certain claims as the result of successor
liability in connection with the acquisition of any practice or network.

The Company has filed a declaratory judgment action (the "Declaratory
Action") in the Federal District Court for Northern District of Georgia (the
"Court") against a former director of the Company. The Declaratory Action was
filed in response to threats made by the former director to bring litigation
against the Company related to breach of contract, tort and securities fraud
claims. In the Declaratory Action, the Company has asked the Court to find
that all disputes between the Company and the former director must be
submitted to arbitration, and, alternatively, if the disputes are not to be
submitted to arbitration, that the Company has not breached any contractual
obligations to the former director, has not committed any tort against the
former director and has not committed securities fraud in its dealings with
the former director. The Company intends to pursue the Declaratory Action
vigorously and does not anticipate that the Declaratory Action will have a
material adverse effect on the Company's business, financial condition or
results of operations.

CORPORATE LIABILITY AND INSURANCE

The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. The Company does not influence or
control the practice of medicine by physicians or the compliance with certain
regulatory and other requirements directly applicable to physicians and
physician groups. There can be no assurance that claims, suits or complaints
relating to services and products provided by physicians or networks will not
be asserted against the Company in the future. The Company currently maintains
insurance coverage that it believes will be adequate both as to risks and
amounts. Such insurance currently extends to professional liability claims
that may be asserted against PHC Physicians or against employees of the
Company that work locally at the PHC Practices or at the networks. In
addition, pursuant to the network service agreements and Practice Management
Agreements, the physicians and networks are required to maintain comprehensive
professional liability insurance. The availability and cost of such insurance
has been affected by various factors, many of which are beyond the control of
the Company, the physicians and the networks. The cost of such insurance to
the Company, PHC Physicians and PHC Networks may have a material adverse
effect on the Company's business, financial condition or results of
operations. In addition, successful malpractice or other claims asserted
against PHC Physicians, PHC Networks or the Company that exceed applicable
policy limits could have a material adverse effect on the Company's business,
financial condition or results of operations.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS, FOUNDERS AND KEY EMPLOYEES OF THE COMPANY

The following table sets forth certain information concerning the executive
officers, directors, founders and key employees of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- -------------------------------------------------------------
<S> <C> <C>
Sarah C. 51 Founder, Chairman of the Board, President and Chief
Garvin(1)(2)(3)........ Executive Officer
Thomas M. 54
Rodgers(1)(2)(3)....... Director, Chief Financial Officer, Secretary and Treasurer
J. Michael Ribaudo, 55
M.D.(1)................ Director, President/Ancillary Division
Richard Sanchez, M.D., 50 Executive Vice President/Network Development and
M.P.H.................. Contracting
James G. Burkhart, 34
C.P.A.................. Senior Vice President/Operations and Finance
Josh J. Coughlin........ 34 Senior Vice President/Corporate Development
Howard E. Fagin, Ph.D... 55 Founder, Senior Vice President/Specialty Contracting
Shamus M. Holt.......... 44 Founder, Chief Operating Officer/Orlando Operations
Lane Hooton............. 48 President/Arlington Cancer Center Operations
Julie Rawls Moore, 46
M.S.N.................. Founder, Senior Vice President/Strategic Planning
H. Thomas Scott, 37
C.P.A.................. Founder, Senior Vice President/Atlanta Operations
Murali 40
Anantharaman(1)(4)..... Director
Michael F. 45
Cronin(1)(2)(4)........ Director
Alfred DiStefano, 51 Director, Chief Executive Officer/Arlington Cancer
M.D.(3)................ Center Operations
Carl J. Schramm, Ph.D., 51
J.D.................... Director; Employee/Contracting Division
William C. Stewart, 36
M.D.................... Chief Executive Officer/Memphis Operations, Director Designee
</TABLE>
- --------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3)Member of the Compliance Committee.
(4) Member of the Audit Committee.

Sarah C. Garvin is a founder of the Company and has served as President,
Chief Executive Officer and Chairman of the Board since its organization in
October 1995. She also served as President and a Director of the Company's
predecessor, a subsidiary of Surgical Health Corporation, from 1993 until its
purchase in a management buyout by Ms. Garvin and others (the "Founders") in
1995. Ms. Garvin was a co-founder and served as Senior Vice
President/Corporate Development of Surgical Health Corporation from 1991 to
1993. Prior to joining Surgical Health Corporation, Ms. Garvin served in
executive positions with HEALTHSOUTH Corporation and Medical Care
International.

Thomas M. Rodgers has been the Company's Chief Financial Officer since
November 1996 and has served as a Director of the Company since June 1997.
From August 1995 until January 1997, Mr. Rodgers provided financial consulting
services to the Company. In January 1997, Mr. Rodgers became a Company
employee and ceased providing consulting services to the Company. Mr. Rodgers
has served since 1980 as Chairman of Continental Film Laboratories, Inc., a
privately-held movie film processing company with approximately 30 employees.
From January 1993 to December 1995, Mr. Rodgers served as Chairman of Private
Biologicals Corp., a privately-held company.

J. Michael Ribaudo, M.D., has served as a Director and executive officer of
the Company since December 1996. He is currently President of the Company's
Ancillary Division. Dr. Ribaudo has served as President of Metropolitan
Plastic since 1980 and is a board certified, practicing plastic and
reconstructive surgeon. He founded Ballas Outpatient Surgery Center in St.
Louis, Missouri and was its Chairman of the Board and Chief

55
<PAGE>

Executive Officer when it merged with Surgical Health Corporation in 1992. He
was President of SHC Midwest and Senior Vice President of Surgical Health
Corporation when it was acquired by HEALTHSOUTH Corporation in 1995. Dr.
Ribaudo served as Executive Vice President of HEALTHSOUTH Surgery Centers from
1995 to 1996 and currently provides consulting services to that company. He is
also a Director of Flow International, Inc. a publicly-traded machine tool
technology company.

Richard Sanchez, M.D., M.P.H. joined the Company in August 1997 as its
Executive Vice President/Network Development and Contracting. From December
1996 until August 1997, Dr. Sanchez served as Chief Executive Officer of New
York Doctors MSO, Inc., a medical services organization. He was a Senior Vice
President at Blue Cross of New York from 1995 until 1996, where he developed
and filed its first Medicare risk product. From 1992 to 1995, he was a Vice
President at FHP California Inc., a HMO with over two million members, where
he was responsible for network development, quality assurance and other
aspects of health care contracting. Dr. Sanchez was the Health Commissioner of
San Francisco from 1985 until 1991. He is a board certified pediatrician and a
fellow of the American Academy of Pediatrics. Dr. Sanchez earned an M.P.H. at
the University of California at Berkeley.

James G. Burkhart, C.P.A. joined the Company as its Senior Vice
President/Operations and Finance in October 1997. From June 1996 to September
1997, he served as Vice President of Operations/Finance of GranCare, Inc., a
health care company with over $1 billion in annual revenue. Mr. Burkhart was
the Senior Vice President of Finance of Community Care of America from 1995 to
1996 and the Executive Vice President and Chief Financial Officer of
Nationwide Care, Inc. from 1993 to 1995, which are long-term health care
companies with annual revenues exceeding $150 million and $125 million,
respectively. Mr. Burkhart served as a manager at Ernst & Young LLP from 1987
to 1993.

Josh J. Coughlin joined the Company in September 1997 as its Senior Vice
President/Corporate Development. Prior to joining the Company, Mr. Coughlin
was an officer of Preferred Oncology Networks of America, Inc., serving as
Vice President/Corporate Development from January 1996 and Chief Financial
Officer from July 1996. He served as Senior Executive Director of Planning and
Development for Magellan Health Services, Inc. from 1993 to 1995. Mr. Coughlin
was a consultant with Towers Perrin from 1990 to 1993 specializing in health
care delivery systems and managed care companies. Mr. Coughlin received his
M.B.A. from the University of Chicago.

Howard E. Fagin, Ph.D. is a Founder and currently serves as Senior Vice
President/Specialty Contracting. Dr. Fagin has been President of Fagin
Advisory Services, Inc. since 1972, providing consulting services to physician
practices and other health care organizations. Dr. Fagin holds an M.S. in
Public Health, an M.S. in Industrial and Systems Engineering and a Ph.D. in
Health Economics from the University of Oklahoma.

Shamus M. Holt is a Founder and has served the Company since 1995 as Chief
Operating Officer of the Company's Orlando operations. Mr. Holt served as
Administrator of PCS from 1988 until 1995 and has served as Administrator of
IMS since 1988, both of which became Owned Practices in November 1997. Mr.
Holt received his M.B.A. from the University of Central Florida.

Lane Hooton became President of the Company's Arlington Cancer Center
operations in June 1997 when the Company purchased the Arlington Cancer Center
assets. Mr. Hooton has served as the Chief Executive Officer of the Arlington
Cancer Center since 1994. He was a Regional Sales Manager for Signature Health
Care, a home health care organization, from 1993 to 1994. From 1991 to 1993,
Mr. Hooton served as Vice President of Alternate Sites of Curaflex Infusion
Services, where he was responsible for the operation and development of
clinics, infusion suites and ambulatory care centers. Mr. Hooton is a
registered pharmacist.

Julie Rawls Moore, M.S.N. is a Founder and has served the Company in a
variety of roles since 1994, most recently as Senior Vice President/Strategic
Planning. Ms. Moore was Vice President of Development of Surgical Health
Corporation from 1993 to 1994, focusing on the development of surgery centers.
Ms. Moore was with Ernst & Young LLP from 1987 to 1993, most recently as
Senior Manager for Physician Services. Before joining

56
<PAGE>

Ernst & Young LLP, she spent three years as a Regional Vice President in
Marketing and Physician Services developing related physician services and
facilities for American Medical International, Inc., a company that owned and
operated for-profit hospitals.

H. Thomas Scott, C.P.A. is a Founder and has served the Company and its
predecessor in a variety of roles since 1994, including as a Director,
Controller, Senior Vice President/Finance and most recently as Senior Vice
President of its Atlanta operations. From 1991 to 1994, Mr. Scott served as
Controller for Heritage Surgical Corporation, an ambulatory surgery center
company.

Murali Anantharaman has been a Director of the Company since December 1995.
He has been a partner in EGL Holdings, Inc., an Atlanta-based venture capital
and investment banking firm ("EGL Holdings"), since May 1987. Mr. Anantharaman
also serves as a Director of Simione Central Holdings, Inc., a publicly-held
health care information services company. Mr. Anantharaman received his M.B.A.
from Harvard University.

Michael F. Cronin has served as a Director of the Company since June 1997.
He has been a general partner of Weston Presidio Capital, a venture capital
company with over $300 million under management, since 1991. Mr. Cronin
received his M.B.A. from Harvard University.

Alfred DiStefano, M.D. has been a Director of the Company and Chief
Executive Officer of the Arlington Cancer Center division since June 1997. He
has been a practicing medical oncologist with the Arlington Cancer Center
since 1980 and is its Managing Partner.

Carl J. Schramm, Ph.D., J.D. has served as a Director of the Company since
March 1996, served as its Executive Vice President/Global Contracting from
1996 until February 1997, and continues to serve as an employee of the
Company's contracting division. Since 1995, Dr. Schramm has served as the
President of Greenspring Advisors, Inc. a health care information systems
consulting company. From 1993 to 1995 he was an Executive Vice President of
Fortis, Inc. and President of its subsidiary, Time Insurance Co. Dr. Schramm
served as President and Chief Executive Officer of Health Insurance
Association of America from 1987 to 1992. He currently serves on the board of
HCIA, Inc., a publicly-held health care data services company of which he was
a founder.

William C. Stewart, M.D. joined the Company in November 1997 as its Chief
Executive Officer/Memphis Operations. Dr. Stewart has consented to serve as a
Director of the Company upon consummation of the Offering. Dr. Stewart is a
founder and Director of MidSouth Practice Management, Inc., which was acquired
by the Company in November 1997. Since 1995, Dr. Stewart has been the
Chairman, Chief Executive Officer and Medical Director of MidSouth Health
Plan, Inc., the first physician-owned HMO in Tennessee. He also currently
serves as Chief of Staff of Baptist Memorial Hospital in Memphis and was the
Deputy Chief of Staff during 1996. Dr. Stewart was President of Baptist
Rehabilitation Hospital during the 1994 and 1995 calendar years and from 1993
through 1995 he served as Assistant Medical Director. Dr. Stewart is board
certified in internal medicine. He was a founder of Internal Medicine
Associates of Cordova, P.C., and continues to practice part-time in Memphis
with Foundation Medical Group, PLLC, a practice of ten board certified
internists.

BOARD OF DIRECTORS

Upon consummation of the Offering, the Board of Directors of the Company
shall consist of seven members divided into three classes with two directors
in two classes and three directors in one class. Each class shall serve for a
term of three years. At each annual meeting of stockholders, directors will be
elected by the holders of the Common Stock to succeed those directors whose
terms are expiring that year.

In connection with its acquisition of MidSouth Practice Management, Inc.,
the Company has agreed to use its best efforts to cause Dr. Stewart to be
elected to the Board of Directors. In addition, the Company has agreed that at
such time as annual revenues generated by PHC Practices in the Cincinnati
market equal or exceed $75 million and there are more than 100 PHC Physicians
practicing with the PHC Practices in Cincinnati, it will use its best efforts
to nominate and to cause a PHC Physician from Cincinnati to be elected to the
Board of Directors.

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<PAGE>

BOARD COMMITTEES

The Company maintains an Executive Committee, a Compensation Committee, an
Audit Committee and a Compliance Committee. These committees have the
following functions:

The Executive Committee has broad authority to take certain actions on
behalf of the Board of Directors between meetings of the Board of Directors.
This committee currently consists of Ms. Garvin, Mr. Rodgers, Dr. Ribaudo, Mr.
Anantharaman and Mr. Cronin.

The Compensation Committee reviews and approves the salaries, bonuses and
other compensation and benefits of executive officers and advises management
regarding benefits and other terms and conditions of compensation. Ms. Garvin,
Mr. Rodgers and Mr. Cronin currently serve on this committee.

The Audit Committee makes recommendations to the Board of Directors with
respect to the appointment of independent auditors, reviews significant audit
and accounting policies and practices, meets with the Company's independent
public accountants concerning, among other things, the scope of audits and
reports, and reviews the performance of the overall accounting and financial
controls of the Company. This committee currently consists of Mr. Anantharaman
and Mr. Cronin.

The Compliance Committee establishes and communicates to the Company's
officers, employees and agents and to the PHC Practices and PHC Physicians
certain guidelines with regard to compliance with the Company's mission, legal
and regulatory matters (including Medicare/Medicaid compliance) and other
Company policies. The Compliance Committee consults with and advises the Board
of Directors and the executive officers in charge of compliance, as
appropriate, regarding operational compliance with the established guidelines
and procedures for reporting and investigating instances of noncompliance.
This committee has three voting members, Ms. Garvin, Mr. Rodgers and Dr.
DiStefano. Advisory members include Ms. Moore, Stephen R. Mintz, M.D. and
Daniel M. Epstein, M.D.

The Company intends to establish a committee of non-employee directors to
administer the Company's stock option plans on consummation of the Offering.

BOARD OF DIRECTOR COMPENSATION

The Company's Bylaws provide that Directors of the Company may be paid their
expenses of attending Board of Director and Committee meetings and may also be
paid a fixed sum for attendance at such meetings or a retainer for service as
a director. Currently, directors are only reimbursed for expenses and do not
receive any compensation for serving as a director or attending meetings.
Directors are also eligible for discretionary option grants under the 1995
Stock Option Plan. On March 7, 1996, Carl Schramm and Jack Keane (who served
on the Board of Directors from March 1996 to June 1997) were granted options
to purchase 94,200 shares of the Common Stock, at an exercise price of $3.18
per share, for services rendered and to be rendered to the Company. Of each of
their grants, 23,550 options vested immediately, 17,663 vested on March 7,
1997, 17,662 will vest on March 7 of each of 1998 and 2000, and 17,663 will
vest on March 7, 1999. No other compensation was received by any director in
1997 for his or her service as a director.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. Delaware law
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Certificate of Incorporation limits the
liability of directors of the Company to the Company or its stockholders to
the fullest extent permitted by Delaware law. Specifically, directors of the
Company will not personally be liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in the DGCL.

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The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefitted the Company and its
stockholders. The Company's Bylaws provide indemnification to the Company's
officers and directors and certain other persons with respect to certain
matters.

1995 STOCK OPTION PLAN

In October, 1995, the Board of Directors adopted, and the stockholders of
the Company approved, the 1995 Stock Option Plan. The purpose of the 1995
Stock Option Plan is to provide directors, key employees and certain advisors
with additional incentives by increasing their proprietary interest in the
Company. The aggregate amount of Common Stock with respect to which options
may be granted may not exceed 2,198,000 shares prior to consummation of the
Offering and 3,140,000 shares thereafter.

The 1995 Stock Option Plan provides for the grant of incentive stock options
("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and nonqualified stock options (collectively "Awards").
The 1995 Stock Option Plan will be administered by a committee of non-employee
director upon consummation of the Offering. The committee will have, subject
to the terms of the 1995 Stock Option Plan, the sole authority to grant Awards
under the 1995 Stock Option Plan, to construe and interpret the 1995 Stock
Option Plan, and to make all other determinations and take any and all actions
necessary or advisable for the administration of the 1995 Stock Option Plan.

All of the Company's key employees, non-employee directors and advisors are
eligible to receive Awards under the 1995 Stock Option Plan, but only
employees of the Company are eligible to receive ISOs. Options will be
exercisable during the period specified in each option agreement and will
generally become exercisable in installments pursuant to a vesting schedule
designated by the Committee. In the discretion of the Committee, option
agreements may provide that options will become immediately exercisable in the
event of a "change in control" (as defined in the 1995 Stock Option Plan) of
the Company. A "change of control" is deemed to have occurred if the Company
is a party to merger, share exchange or other business combination pursuant to
which the Company does not remain independent or if substantially all of the
assets of the Company are sold or otherwise transferred. No option will remain
exercisable later than ten years after the date of grant (or five years from
the date of grant in the case of ISOs granted to holders of more than 10% of
the voting capital stock of the Company).

The exercise price for ISOs granted under the 1995 Stock Option Plan may be
no less than the fair market value of the Common Stock on the date of grant
(or 110% in the case of ISOs granted to employees owning more than 10% of the
voting capital stock).

401(K) PLAN

Effective January 1996, the Company adopted the Physician Health Corporation
401(k) Plan (the "Savings Plan"). The Savings Plan is intended to provide PHC
employees with retirement benefits. The Savings Plan is intended to constitute
a qualified cash or deferred profit sharing plan within the meaning of
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986.

All employees of the Company are eligible to participate in the Savings Plan
who have reached the age of 21 years and have completed six months of service
with the Company as of any January 1 or July 1. The Savings Plan is
administered by the Board of Directors, which has full power to administer and
interpret the Savings Plan. The assets of the Savings Plan are held by a trust
administered by a trustee pursuant to a trust agreement.

Eligible employees may contribute a portion of their annual compensation, in
the form of payroll deductions, up to the legal maximum established by the
Internal Revenue Service for each plan year. The Company may make profit
sharing contributions, employee matching contributions and other additional
employer

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<PAGE>

contributions of any amount at the Company's sole discretion. Employee
contributions are fully vested immediately. Company contributions are vested
over the first five years of employment. No Company contributions have been
made.

SUMMARY COMPENSATION TABLE

The following table sets forth a summary of the compensation paid by PHC for
services rendered in all capacities to PHC during 1997 to each executive
officer whose total annual salary and bonus exceeded $100,000 in 1997 (the
"Named Executive Officers"):

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------- ----------------------- -------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION RESTRICTED OPTIONS LTIP COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) STOCK AWARDS (#) PAYOUTS ($)
- --------------------------- -------- ----- ------------ ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sarah C. Garvin......... $136,667 -- -- -- -- -- --
Chairman of the Board,
Chief Executive Officer
and President
Thomas M. Rodgers....... 135,000 -- -- -- 90,478(1) $710,000(2)
Chief Financial Officer
and Treasurer
J. Michael Ribaudo, 100,000 -- -- -- 39,250(3) 600,000(4)
M.D....................
President of Ancillary
Division
</TABLE>
- --------

(1) Includes both options to purchase Common Stock and Prime Common Stock. The
number of securities underlying the options to purchase shares of Prime
Common Stock have been adjusted to reflect the conversion of each share of
Prime Common Stock into 0.314 share of Common Stock upon completion of the
Offering.
(2) Amount paid in settlement of fees owed to Mr. Rodgers pursuant to a
consulting agreement between Mr. Rodgers and the Company that was entered
into before Mr. Rodgers became an employee of the Company. See "--
Compensation Committee Interlocks and Insider Participation."
(3) Options granted to Dr. Ribaudo pursuant to a settlement agreement. See
"Certain Transactions."
(4) Amount paid to Dr. Ribaudo pursuant to an Undertakings Agreement. See
"Certain Transactions."

Ms. Garvin currently is receiving an annual salary of $210,000 (to be
increased to $270,000 upon consummation of the Offering). Mr. Rodgers, Dr. J.
Michael Ribaudo, and Dr. Richard Sanchez, who became an employee of the
Company in August 1997, currently are receiving annual salaries of $205,000
(to be increased to $260,000 upon consummation of the Offering), $200,000 (to
be increased to $250,000 upon consummation of the Offering), and $200,000,
respectively. Certain other arrangements with Ms. Garvin, Mr. Rodgers and
Dr. Ribaudo are described in "Certain Transactions."

OPTION GRANTS DURING 1997

The following table sets forth information relating to options granted to
Named Executive Officers in 1997:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (2)
------------------------------------------------- ------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR(1) (PER SHARE) DATE 0% 5% 10%
---- ----------- -------------- ----------- ---------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sarah C. Garvin......... -- -- -- -- -- -- --
Thomas M. Rodgers....... 2,401(3) * $0.04(3) 6/16/97 $7,562 $12,371 $19,749
11,775(3) 1.4% 3.50(3) 6/16/97 -- 19,834 56,015
76,302 4.7% 12.74 6/16/97 -- 611,286 1,549,118
J. Michael Ribaudo,
M.D.................... 39,250 9.1% 12.74 12/31/97 -- 314,447 796,871
</TABLE>
- --------
* less than 1%

60
<PAGE>

(1) The Company has included both Prime Common Stock and Common Stock options
in the total options granted to employees in fiscal year 1997 on an as-
converted-to-Common-Stock basis.
(2) This column shows the hypothetical gains or "option spreads" of the
options based on both the fair market value of the Common Stock for
financial reporting purposes and assumed annual compound stock
appreciation rates of 5% and 10% over the terms of the options. The 5% and
10% assumed rates of appreciation are mandated by the rules of the
Commission and do not represent the Company's estimate or projection of
future Common Stock prices. The gains shown are net of the option exercise
price, but do not include deductions for taxes or other expenses
associated with the exercise of the option or the sale of the underlying
shares, or reflect nontransferability, vesting or termination provisions.
The actual gains, if any, on the exercises of stock options will depend on
the future performance of the Common Stock, among other things.
(3) These options to purchase Prime Common Stock were exercised on June 16,
1997. The number of securities underlying options granted and exercise
price per share have been adjusted for presentation to reflect the Reverse
Split.

AGGREGATE OPTION EXERCISES DURING 1997 AND YEAR-END OPTION VALUES

The following table sets forth information relating to options granted to
Named Executive Officers in 1997:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-
OPTIONS AT MONEY OPTIONS AT
DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($)(1)
------------------------- -------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sarah C. Garvin......... -- -- -- -- -- --
Thomas M. Rodgers....... 124,076 $7,562 -- 76,302 -- $134,379
J. Michael Ribaudo,
M.D.................... -- -- 54,950 125,600 $96,775 221,200
</TABLE>
- --------

(1) Computed based on the difference between the per share exercise price and
mid-point of the assumed range ($14.50 per share).

EMPLOYMENT AGREEMENTS; TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

The Company is party to Employment Agreements (collectively, the "Employment
Agreements") with each of Ms. Garvin, Mr. Rodgers and Dr. Ribaudo. Each of the
Employment Agreements provides for a specified base salary subject to annual
adjustment by the Board of Directors or the Compensation Committee of the
Board of Directors. Currently, the salaries payable under the Employment
Agreements are $210,000 for Ms. Garvin (subject to increase to $270,000 upon
consummation of the Offering), $205,000 for Mr. Rodgers (subject to increase
to $260,000 upon consummation of the Offering) and $200,000 for Dr. Ribaudo
(subject to increase to $250,000 upon consummation of the Offering). In the
event that the Employment Agreements are terminated by the Company for cause
(as defined in the Employment Agreements) or by the employee without cause,
the employee is not entitled to severance pay. In the event that the Company
terminates the employee's employment by the Company without cause, the
employee is entitled to severance pay equal to 12 months' salary.

If the employee's employment with the Company is terminated following a
change in control of the Company (as defined in the Employment Agreement): (i)
by the Company without cause or (ii) by the employee because she or he is
required to relocate, her or his salary is reduced from the amount in effect
immediately prior to the change in control, her or his title is reduced or her
or his duties and responsibilities are substantially diminished, then the
employee is entitled to severance pay equal to 36 months' salary.

The Company and its Founders are parties to a Restated and Amended
Stockholder Agreement dated November 1, 1996, as amended in February 1997 (the
"Stockholder Agreement"). For each Founder 94,200 shares of Common Stock
("Founder Stock") are subject to the Stockholder Agreement. Pursuant to the
Stockholder Agreement, 58,876 shares of Founder Stock have vested, and 17,662
shares of the remaining shares will vest on January 1, 1999 and January 1,
2000 if the Founder remains a full-time employee of the Company until the
applicable vesting date; provided, however, that, with respect to 11,775
shares that would otherwise vest on January 1, 2000, the Company shall have
met certain performance criteria by December 31, 1998. The Stockholder
Agreement provides that all shares of Founder Stock will vest immediately upon
the merger,

61
<PAGE>

consolidation or sale of the Company with or to any other entity if the
Company is not the surviving entity, or upon the sale of substantially all of
the Company's assets.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

In 1997, the Board of Directors established a compensation committee
composed of Ms. Garvin and Messrs. Cronin and Rodgers. Prior to establishment
of the Compensation Committee, compensation for the Company's executive
officers was determined by the entire Board of Directors. Mr. Rodgers
participated in deliberations of the Board of Directors concerning executive
officer compensation prior to his election to the Board of Directors in June
1997.

On May 1, 1997, Ms. Garvin loaned the principal amount of $250,000 to the
Company. On May 1, 1997, Thomas M. Rodgers, Jr. Defined Benefit Keogh Plan
11/15/82 also loaned the principal amount of $50,000 to the Company. Both
notes bear simple interest on principal at 12% per year, require payment of a
1% origination fee upon retirement of the Notes and provide for payment on
demand after the earlier of closing of a venture capital investment by Weston
Presidio Capital or May 1, 1998. Such venture capital investment closed on
June 16, 1997 but neither Ms. Garvin nor Mr. Rodgers has demanded payment of
these notes.

The Company and its Founders, including Ms. Garvin, are parties to a
Restated and Amended Stockholder Agreement dated November 1, 1996, as amended
in February 1997 (the "Stockholder Agreement"). For each Founder 94,200 shares
of Common Stock ("Founder Stock") are subject to the Stockholder Agreement.
Pursuant to the Stockholder Agreement, 58,876 shares of Founder Stock have
vested, and 17,662 shares of the remaining shares will vest on each of January
1, 1999 and January 1, 2000 if the Founder remains a full-time employee of the
Company until the applicable vesting date; provided, however, that, with
respect to 11,775 shares that would otherwise vest on January 1, 2000, the
Company shall have met certain performance criteria by December 31, 1998. The
Stockholder Agreement provides that all shares of Founder Stock will vest
immediately upon the merger, consolidation or sale of the Company with or to
any other entity if the Company is not the surviving entity, or upon the sale
of substantially all of the Company's assets.

Prior to becoming an employee in January 1997, Mr. Rodgers provided
financial consulting services to the Company. His compensation for these
services was to be primarily based on the Company's successful capital raising
activities. In June, 1997, Mr. Rodgers and the Company agreed to terminate
this compensation agreement and to settle all fees earned and expected to be
earned for his financial consulting services. Accordingly, Mr. Rodgers was
granted an option to purchase 7,648 shares of Prime Common Stock at $0.011 per
share, an option to purchase 37,500 shares of Prime Common Stock at an
exercise price of $1.10 per share and an option to purchase 76,302 shares of
Common Stock (vesting over four years) at $12.74 per share. In addition, the
settlement provided for the full vesting of previously granted options to
purchase 350,000 shares of Prime Common Stock at $1.15 per share. Mr. Rodgers
was also granted piggyback registration rights with respect to the 350,000
shares. Upon consummation of the Offering and giving effect to the reverse
Stock Split, each share of Prime Common Stock will convert into 0.314 share of
Common Stock. As cash consideration, Mr. Rodgers has received $810,000. As
provided in his original consulting agreement, the Company has agreed to pay
Mr. Rodgers an amount equal to the difference between the state and federal
taxes he will owe resulting from the exercise of the option to purchase
350,000 shares and the state and federal taxes that he would have paid had the
options received incentive stock option treatment.

Also as part of this settlement, the Company loaned Mr. Rodgers
approximately $442,000 to exercise his options for 37,500 and 350,000 shares
of Prime Common Stock. The loans are non-recourse but are secured by the stock
purchased with the proceeds of the loan. The loans bear simple interest at a
rate of 6.80% per year. At December 31, 1997, the aggregate amount outstanding
under the loan including accrued interest was approximately $459,000, which
was the largest aggregate amount outstanding under the loan during 1997. The
notes are payable at the earlier of the sale of such stock or June 16, 2007.
Interest on these notes will be reimbursed to Mr. Rodgers by the Company (and
grossed up based on applicable tax rates to Mr. Rodgers).

62
<PAGE>

Mr. Cronin is a General Partner of Weston Presidio Capital, which manages
venture capital funds including Weston Presidio Capital II, L.P. ("Weston
II"). On June 16, 1997, the Company entered into a Series B Securities
Purchase Agreement among the Company, Weston II, Asset Management plc, on
behalf of Rowan Nominees Limited ("Mercury") Mercury, NatWest Ventures
Investments Ltd ("NatWest") and certain other investors. Pursuant to the
Series B Securities Purchase Agreement, in June 1997 the Company sold
2,447,772 shares of Series B Preferred Stock for an aggregate purchase price
of $9,791,088, of which 1,529,958 shares of Series B Voting Preferred Stock
were purchased by Weston II for an aggregate purchase price of $6,119,832,
305,938 shares of Series B Voting Preferred Stock were purchased by Mercury
for an aggregate purchase price of $1,223,752 and 152,969 shares of Series B
Voting Preferred Stock were purchased by NatWest for an aggregate purchase
price of $611,876. Upon consummation of the Offering, each share of Series B
Voting Preferred Stock will be converted into .314 share of Common Stock and,
if the initial offering price is less than $13.54 per share, the holder of
such converted stock may be entitled to an extraordinary dividend per share
equal to the amount by which $22.29 exceeds the initial offering price per
share of Common Stock. See "Description of Capital Stock--Authorized Capital
Stock." Pursuant to the Series B Securities Purchase Agreement, Weston II was
granted a warrant to purchase 160,136 shares of Common Stock for an aggregate
purchase price of $5,100, Mercury was granted a warrant to purchase 32,022
shares of Common Stock for an aggregate purchase price of $1,020 and NatWest
was granted a warrant to purchase 16,011 shares of Common Stock for an
aggregate purchase price of $510. All such warrants have an exercise price of
$0.03 per share. The proceeds of the Series B Securities Purchase Agreement
were used to fund the acquisition of certain PHC Practices. Pursuant to an
Equity Call Agreement entered into on June 16, 1997 (the "Equity Call
Agreement") the Company has the ability to require the holder of its Series B
Preferred Stock to purchase shares of Common Stock at $12.74 per share
sufficient to retire a $6.2 million note payable made by the Company on
April 1, 1998 in connection with the purchase of the Arlington Cancer Center.
Weston II, Mercury and NatWest are obligated to purchase, at the request of
the Company, 170,336, 34,067 and 17,033 shares of Common Stock, respectively,
pursuant to such arrangement. The Series B Securities Purchase Agreement and
the Equity Call Agreement have been amended to include subsequent purchasers
of Series B Preferred Stock. Upon such further investment, Weston II, Mercury
and NatWest would receive additional warrants to purchase 17,034, 3,407 and
1,704 shares of Common Stock, respectively, at an exercise price of $0.03 per
share. In connection with the Series B Securities Purchase Agreement, Weston
II, Mercury, NatWest, EGL Holdings, Ms. Garvin, Mr. Rodgers, Mr. Holt, Ms.
Moore, Dr. Fagin, Mr. Scott, Dr. Ribaudo and certain other investors entered
into a Second Amended and Restated Stockholders' Agreement, which granted
Weston II, Mercury, NatWest and EGL Holdings co-sale rights and certain other
voting agreements all of which expire upon consummation of the Offering. The
Second Amended and Restated Stockholders' Agreement was amended on October 27,
1997 to include Paribas Principal, Inc. and Paribas Capital Funding L.L.C. The
Second Amended and Restated Stockholders' Agreement will terminate upon
consummation of the Offering.

In September 1997, the Company borrowed $3.0 million from Southwest Bank
(the "Southwest Loan") to help finance the acquisition of Southern
Dependacare. The Company executed a demand note in connection with this loan,
payment of which was guaranteed by certain holders of the Series B Preferred
Stock (including, without limitation, Weston II, Mercury and NatWest). In
exchange for the guaranty, the Company issued to the guarantors warrants to
purchase a total of 26,841 shares of Common Stock at an exercise price of
$12.74 per share. The Southwest Loan was paid in full in November 1997 using
proceeds from the Banque Paribas financing.

CERTAIN TRANSACTIONS

Mr. Anantharaman is an executive officer and an owner of EGL Holdings. EGL
Holdings from time to time represents Mercury and NatWest, in venture capital
investments. Pursuant to a Stock and Warrant Purchase Agreement dated December
29, 1995, a group of investors led by EGL Holdings, including Mercury and
NatWest, made a $3.0 million investment in the Company through the Class A
Stock. In connection with the Stock and Warrant Purchase Agreement, the
Company issued 95,700 shares of Series 1 Class A Stock and contingent warrants
to purchase up to 95,700 shares of Series 1 Class A Stock to NatWest for an
aggregate purchase price of

63
<PAGE>

$1,435,500 and 95,700 shares of Series 2 Class A Stock and contingent warrants
to purchase up to 95,700 shares of Class A Stock to Mercury Asset for an
aggregate purchase price of $1,435,500. The contingent warrants are
exercisable upon a redemption of the Class A Stock by the Company and have an
exercise price of $15.00 per share. The Company also issued to EGL Holdings
warrants to purchase up to 59,660 shares of Common Stock at an exercise price
of $0.03 per share. In connection with this transaction, Ms. Garvin, Dr.
Fagin, Ms. Moore, Mr. Scott and Mr. Holt each executed a Non-Competition and
Non-Disclosure Agreement. The Company also agreed to engage EGL Holdings to
act as an advisor to the Company, at a fee of $6,000 per month plus
reimbursement of reasonable expenses, from January 1, 1996 until such time as
there are no longer any shares of the Company's Class A Stock outstanding. The
Company paid EGL Holdings approximately $73,000 during 1997 pursuant to this
agreement. Upon consummation of the Offering and after giving effect to the
Reverse Split, each share of Class A Stock will be converted into 3.0144
shares of Common Stock. Mercury and NatWest are also parties to the Series B
Securities Purchase Agreement and the Equity Call Agreement.

Dr. DiStefano is the managing partner of the Arlington Cancer Center.
Pursuant to an Asset Purchase and Contribution Agreement, dated June 16, 1997,
among the Company, the Arlington Cancer Center, the individual physicians
named therein (the "Arlington Physicians"), each of the Arlington Physicians
wholly-owned professional associations (the "Physician Professional
Associations") and MHOA Texas I, L.L.C., a subsidiary of the Company ("MHOA
Texas"), (the "Arlington Purchase Agreement"), the Arlington Cancer Center
sold substantially all of its assets to MHOA Texas for an aggregate purchase
price of $24.5 million, of which $11.8 million was paid in cash, $6.2 million
was paid in the form of a promissory note and $6.5 million was paid in the
form of a subordinated promissory note. It is anticipated that the $6.2
million note will be repaid from the proceeds of this Offering. In addition to
the cash consideration, the Physician Professional Associations received in
the aggregate a 20% interest in MHOA Texas. Pursuant to an exchange rights
agreement, after June 16, 1998 and prior to the first anniversary of the
consummation of the Offering, the Physician Professional Associations may
elect to exchange their interest for an aggregate of 480,423 shares of Common
Stock by providing notice to the Company. The $6.2 million promissory note is
non-interest bearing and the entire principal balance is due on April 1, 1998.
The subordinated promissory note is non-interest bearing and is payable in
four annual installments beginning on April 1, 1999. Through his interest in
the Arlington Cancer Center, Dr. DiStefano has an approximately 4.6% interest
in MHOA Texas. Pursuant to the Arlington Purchase Agreement, the Company also
agreed to appoint Dr. DiStefano to the Board of Directors of the Company. The
Company, MHOA Texas and the Arlington Cancer Center have entered into a
management services agreement with a term of 40 years pursuant to which MHOA
Texas provides physician practice management services to the Arlington Cancer
Center for an annual fee equal 12% of the Arlington Cancer Center's net
practice revenue, an additional 55% of the practice pre-tax income and the
reimbursement of certain interest and depreciation expenses. Physicians'
salaries and operating expenses, including the reimbursable interest and
depreciation expenses, are paid before PHC's management fees are paid. The
annual management fee accrues each year whether or not there are sufficient
practice revenues remaining that year after payment of physician salaries and
operational expenses.

In connection with the purchase of the Arlington Cancer Center assets, MHOA
Texas obtained $8.0 million term debt financing from DVI Financial Services,
Inc. through six separate loans, and $5.0 million revolving credit facility
from DVI Business Credit Corporation. The interest rate on the DVI Financial
Services, Inc. loans is 12.25% simple interest and the loans mature in August,
2002. The interest rate on the DVI Business Credit Corporation facility loan
is 2.5% above the variable rate set by Bank of America, NT&SA in San
Francisco, California and that facility may be terminated by the Company in
August, 1999. The Company agreed to act as guarantor in connection with the
debt financing. The Company issued to DVI Financial Services, Inc. warrants to
purchase up to 15,700 shares of Common Stock at an exercise price of $15.92
per share in consideration of making the loans.

In November 1996, Metropolitan Plastic, of which Dr. Ribaudo is the sole
shareholder, sold substantially all of its assets to the Company in exchange
for: (i) $500,000 payable in the form of a convertible promissory note (the
"Convertible Note"); (ii) 125,000 shares of Prime Common Stock; and (iii) the
assumption of certain liabilities in the amount of $20,718. The promissory
note bore interest at a rate of 5% per annum and would have matured on
November 26, 1999. Prior to maturity but after an initial public offering by
the Company, the

64
<PAGE>

promissory note was convertible in $100,000 increments by the holder into
Common Stock at a price of $4.00 per share. The Company reimbursed Dr. Ribaudo
for approximately $32,000 in legal fees incurred by him in connection with
this transaction. Contemporaneously with the purchase of substantially all of
the assets of Metropolitan Plastic: (a) the Company entered into an
Undertaking Agreement with Dr. Ribaudo and Metropolitan Plastic (the "Ribaudo
Undertaking Agreement"); and (b) Metropolitan Plastic entered into a Practice
Management Agreement with the Company with a term of 40 years. Pursuant to the
Practice Management Agreement, the Company agreed to provide practice
management and development services to Metropolitan Plastic for an annual base
fee of $100,000 plus 20% of the net practice revenue of the practice less its
operating expenses in excess of $550,000 per year during the first five years
of the agreement, and 20% of the net practice revenue of the practice less
operational expenses during the remainder of the agreement. In addition,
Metropolitan Plastic agreed to pay to the Company a development fee equal to
7% of the revenues generated by new practice physicians recruited by the
Company.

Pursuant to the Ribaudo Undertaking Agreement the Company agreed to: (i)
employ Dr. Ribaudo on an at-will basis at an annual salary of $100,000 and to
increase his salary to $250,000 after the completion of an initial public
offering of Common Stock; (ii) appoint Dr. Ribaudo to the Board of Directors
of the Company; (iii) sell to him 31,400 shares of Common Stock at $12.74 per
share (which he has purchased); and (iv) provide him with a quarterly "draw."
Under the draw arrangement, for any month in which Dr. Ribaudo received less
than $29,167 in revenue from his medical practice, he was advanced the
deficiency from the Company. The advance was subject to offset, less certain
amounts Dr. Ribaudo could earn for certain services rendered to PHC, against
amounts due to Dr. Ribaudo or Metropolitan Plastic. Dr. Ribaudo was paid
approximately $248,000 pursuant to this arrangement for the twelve months
ended December 31, 1997. The Ribaudo Undertaking Agreement also granted Dr.
Ribaudo: (a) an option to purchase 94,200 shares of Common Stock at $12.74 per
share, vesting over a period of four years (with accelerated vesting if PHC
completes a single sale of securities resulting in a change of control of the
Company); and (b) options to purchase 47,100 shares of Common Stock at $12.74
per share, 31,400 of which are vested, with options to purchase 7,850 shares
of Common Stock vesting on each of December 31, 1998 and 1999. In addition,
the Ribaudo Undertaking Agreement originally provided that Dr. Ribaudo would
be paid $600,000 upon the Company's achievement of $1.5 million in projected
annual practice revenue from Missouri and central and southern Illinois.

Effective December 31, 1997, Dr. Ribaudo and Company entered into a
settlement agreement (the "Settlement Agreement") pursuant to which: (i) the
draw arrangement was terminated, (ii) Dr. Ribaudo forgave the approximately
$528,000 owed by PHC under the Convertible Note; (iii) PHC forgave any amounts
owed to PHC under the draw arrangement as well a $30,000 loan made by PHC to
Dr. Ribaudo; (iv) the Company paid Dr. Ribaudo the $600,000 referred to in the
Ribaudo Undertaking Agreement in recognition of his substantial role in PHC's
1997 acquisition program as a whole; (v) the Company granted Dr. Ribaudo
options to purchase 39,250 shares of Common Stock at an exercise price of
$12.74 per share (vesting over three years) and (vi) the Company and Dr.
Ribaudo agreed that the Practice Management Agreement between Metropolitan
Plastic and the Company would terminate on the earlier to occur of June 30,
1998 and the date that Dr. Ribaudo ceases to practice medicine. In addition,
the Company agreed to reimburse Dr. Ribaudo for: (a) reasonable moving
expenses related to the relocation of his residence from St. Louis to Atlanta;
(b) malpractice premium expense; (c) legal fees up to $5,000 incurred by him
in connection with negotiation of the Settlement Agreement; (d) rental expense
for an apartment in Atlanta for a period of up to 12 months; and (e) annual
continuing medical education expense up to $5,000 per year.

See also "Management--Compensation Committee Interlocks and Insider
Participation."

COMPANY POLICY

It is anticipated that future transactions with affiliates of the Company
will be minimal, will be approved by a majority of the disinterested members
of the Board of Directors and will be made on terms no less favorable to the
Company than could be obtained from unaffiliated third parties. The Company
does not intend to incur any further indebtedness to, or make any loans to,
any of its executive officers, directors or other affiliates.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

Upon completion of the Offering, the Company's authorized capital stock will
consist of 100,000,000 shares of Voting Common Stock, par value $0.0025 per
share (the "Common Stock"), 40,000,000 shares of Non-Voting Common Stock, par
value $0.0025 per share (the "Non-Voting Common Stock") and 18,000,000 shares
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"). At
February 11, 1997 there were: (i) 500,000 shares of Class A Stock authorized
and 200,000 shares of Class A Stock outstanding; (ii) 9,000,000 shares of
Series B Voting Preferred Stock authorized and 3,460,362 shares of Series B
Voting Preferred Stock outstanding; (iii) 6,000,000 shares of Series B Non-
Voting Preferred Stock authorized and 917,814 shares of Series B Non-Voting
Preferred Stock outstanding; (iv) 20,000,000 shares of Prime Common Stock
authorized and 6,358,140 shares of Prime Common Stock outstanding; (v)
40,000,000 shares of Non-Voting Common Stock authorized, none of which are
outstanding; and (vi) 100,000,000 shares of Common Stock authorized and
3,416,289 shares of Common Stock outstanding. All of the currently outstanding
shares of Common Stock, Non-Voting Common Stock, Prime Common Stock, Class A
Stock, Series B Voting Preferred Stock and Series B Non-Voting Preferred Stock
are validly issued, fully paid and nonassessable under the Delaware General
Corporation Law (the "DGCL"). As of February 11, 1997, the Company had
approximately 204 stockholders of record.

Upon the consummation of the Offering: (i) each share of Class A Stock will
convert into 3.0144 shares of Common Stock; (ii) each share of Prime Common
Stock and Series B Voting Preferred Stock will convert into 0.314 of a share
of Common Stock; and (iii) each share of Series B Non-Voting Preferred Stock
will convert into 0.314 of a share of Non-Voting Common Stock. If the initial
Offering price is less than $13.54 per share of Common Stock, the Company will
be required to accrue an extraordinary dividend payable with respect to each
share of Series B Preferred Stock equal to $22.29 per share less the initial
public offering price per share of Common Stock multiplied by the number of
shares of Common Stock and Non-Voting Common Stock into which such share of
Series B Preferred Stock is converted upon consummation of the Offering.
Accordingly, assuming an initial public offering price of at least $13.50 per
share (which is the low point of the initial public offering price range) such
dividend would be approximately $12.1 million. If payable, the extraordinary
dividend would be due one year after the consummation of the Offering and
could be paid either in cash or in Common Stock. The requirement to pay such
dividend would be terminated if, at any time during the one-year period after
consummation of the Offering, the average price of the Common Stock on the
Nasdaq National Market is greater than $22.29 per share for any 20 consecutive
trading days. If the initial public offering price is less than $13.54, the
Company will request a waiver from the holders of the Series B Preferred Stock
with respect to the payment of this extraordinary dividend. The holders of the
Series B Preferred Stock are not obligated to grant any such waiver.

The following summary describes the capital stock of the Company to be
authorized on completion of the Offering. This summary describes the material
elements of the Company's Fourth Amended and Restated Certificate of
Incorporation (the "Certificate") as it relates to the Company's capital stock
but is subject to, and qualified in its entirety by, the provisions of the
Certificate and by the provisions of applicable law, including the DGCL.

COMMON STOCK AND NON-VOTING COMMON STOCK

Voting Rights

Each holder of Common Stock is entitled to one vote per share in the
election of directors and for all other purposes. The holders of Non-Voting
Common Stock do not have voting rights unless otherwise required by law or by
the Certificate. Except as otherwise provided, there are no cumulative voting
or preemptive rights applicable to any shares of the Company's stock.

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<PAGE>

Dividends and Other Distributions

All shares of Common Stock and Non-Voting Common Stock are entitled to
participate pro rata in distributions and in such dividends as may be declared
by the Board of Directors of the Company out of funds legally available
therefor, subject to any preferential dividend rights of outstanding shares of
Preferred Stock.

Subject to the prior rights of creditors, all shares of Common Stock and
Non-Voting Common Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, or upon the
sale of substantially all of the assets of the Company or upon a merger of the
Company in which the Company is not the surviving entity (each a "Distribution
Event") to participate ratably, share and share alike, in the distribution of
all the remaining assets of the Company after distribution in full of
preferential amounts, if any, to be distributed to holders of Preferred Stock.

Conversion Rights

At the option of Regulated Stockholders (as defined below), each share of
Common Stock and Non-Voting Common Stock is convertible into one share of Non-
Voting Common Stock or Common Stock, as the case may be, at any time and from
time to time, upon delivery to the Company of a certificate signed on behalf
of the holder seeking such conversion. The Company will not convert, redeem,
purchase, acquire or take any other action affecting the outstanding shares of
Common Stock or Non-Voting Common Stock if such action would, with respect to:
(i) any legal entity that is subject to Regulation Y of the Board of Governors
of the Federal Reserve System (12 C.F.R. Part 225) (a "Regulated Stockholder")
or (ii) any affiliate of any such Regulated Stockholder, increase the
percentage of outstanding voting securities owned or controlled by such
Regulated Stockholder to more than 4.9% or increase the percentage of the
total equity or the value of all of the capital stock of the Company owned or
controlled by such Regulated Stockholder to more than 24.9% unless the Company
gives written notice of such action to each Regulated Stockholder or
affiliate. The terms of the Common Stock and Non-Voting Common Stock are the
same with the exception of voting rights. The Company may not redeem or take
any other action affecting outstanding shares of Common Stock or Non-Voting
Common Stock, if after giving effect to such redemption a Regulated
Stockholder would own more than 4.9% of any class of voting securities of the
Company, 24.9% of the total equity of the Company or more than 24.9% of the
total capital stock of the Company. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of any shares of Preferred Stock that may be issued by the Company from
time to time.

PREFERRED STOCK

The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. Subject to the provisions of the
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations,
preferences and relative, participating, optional, exchange or other special
rights, qualifications, limitations or restrictions thereof, including
dividend rights (including whether dividends are cumulative), dividend rates,
terms of redemption (including sinking fund provisions), redemption prices,
conversion rights and liquidation preferences of the shares constituting any
class or series of the Preferred Stock, in each case without any further
action or vote by the holders of Common Stock.

Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For example, the issuance of a series of Preferred Stock might
impede a business combination by including class voting rights that would
enable the holders to block such a transaction; or such issuance might
facilitate a business combination by including voting rights that would
provide a required percentage vote of the stockholders. In addition, under
certain circumstances, the issuance of Preferred Stock could adversely affect
the voting power of the holders of the Common Stock. Although the Board of
Directors is required to make any determination to issue such stock based on
its judgment as to the best interests of the

67
<PAGE>

stockholders of the Company, the Board of Directors could act in a manner that
would discourage an acquisition attempt or other transaction that some or a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then-
market price of such stock. The Board of Directors does not at present intend
to seek stockholder approval prior to any issuance of currently authorized
stock, unless otherwise required by law or the rules of any market on which
the Company's securities are traded.

STATUTORY BUSINESS COMBINATION PROVISION

The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of a corporation's outstanding voting
stock) from engaging in a "business combination" (as defined) with a Delaware
corporation for three years following the date such person became an
interested stockholder unless: (i) before such person became an interested
stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (ii) upon consummation of
the transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder. Under Section 203, the restrictions described above
also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became
an interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.

OTHER MATTERS

Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
law, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Certificate
of Incorporation limits the liability of directors of the Company to the
Company or its stockholders to the fullest extent permitted by Delaware law.
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director,
except for liability for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL.

68
<PAGE>

The Bylaws provide that stockholders may act only at an annual or special
meeting of stockholders and may not act by written consent. The Bylaws provide
that special meetings of the stockholders can be called only by the Chairman
of the Board, the Chief Executive Officer, the President or the Board of
Directors.

The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered terms. As a
result, it is currently contemplated that approximately one-third of the
Company's Board of Directors will be elected each year. The classified board
provision could prevent a party who acquires control of a majority of the
outstanding voting stock of the Company from obtaining control of the Board of
Directors until the second annual stockholders meeting following the date the
acquiror obtains the controlling interest.

The Certificate of Incorporation provides that the number of directors shall
be as determined by the Board of Directors from time to time, but shall be at
least one and not more than nineteen. It also provides that directors may be
removed only for cause, and then only by the affirmative vote of the holders
of at least a majority of all outstanding voting stock entitled to vote. This
provision, in conjunction with the provision of the Bylaws authorizing the
Board of Directors to fill vacant directorships, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.

STOCKHOLDER PROPOSALS

The Company's Bylaws contain provisions: (i) requiring that advance notice
be delivered to the Company of any business to be brought by a stockholder
before an annual meeting of stockholders and (ii) establishing certain
procedures to be followed by stockholders in nominating persons for election
to the Board of Directors. Generally, such advance notice provisions provide
that written notice must be given to the Secretary of the Company by a
stockholder: (a) in the event of business to be brought by a stockholder
before an annual meeting, not less than 90 days prior to the anniversary date
of the immediately preceding annual meeting of stockholders (with certain
exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date), and (b) in the event of
nominations of persons for election to the Board of Directors by any
stockholder, (i) with respect to an election to be held at the annual meeting
of stockholders, not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders (with certain exceptions
if the date of the annual meeting is different by more than specified amounts
from the anniversary date), and (ii) with respect to an election to be held at
a special meeting of stockholders for the election of directors, not later
than the close of business on the 10th day following the day on which notice
of the date of the special meeting was mailed to stockholders or public
disclosure of the date of the special meeting was made, whichever first
occurs. Such notice must set forth specific information regarding such
stockholder and such business or director nominee, as described in the
Company's Bylaws. The foregoing summary is qualified in its entirety by
reference to the Company's Bylaws, which are included as an exhibit to the
Registration Statement of which this Prospectus is a part.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.

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<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information, on a pro forma basis as
of February 11, 1998 to reflect the mandatory conversion to Common Stock of
certain classes of the Company's capital stock and other convertible
securities upon completion of the Offering, and after giving effect to the
completion of the Offering and such mandatory conversion, with respect to the
beneficial ownership of the Company's voting capital stock of: (i) each person
known by the Company to be a beneficial owner of more than 5% of any class of
the Company's voting capital stock; (ii) each executive officer and director
or director nominee of the Company; and (iii) all directors, director nominees
and executive officers of the Company as a group. Except as otherwise
indicated below, the persons named in the table have advised the Company that
they have sole voting and investment power with respect to the shares of
capital stock shown as beneficially owned by them. Unless otherwise indicated,
each person or group has sole voting and investment power with respect to all
such shares. Unless otherwise indicated, the number of shares and percentage
of ownership of Common Stock for each of the named stockholders, directors,
director nominee and executive officers assumes that shares of Common Stock
that the stockholders, directors, director nominee and executive officers may
acquire within 60 days are outstanding.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
-----------------------
SHARES PRO FORMA
BENEFICIALLY PRIOR TO AFTER
NAME OWNED(1) OFFERING(1) OFFERING(2)
- ---- ------------ ----------- -----------
<S> <C> <C> <C>
Murali Anantharaman(3)................... 892,118 12.4% 8.7%
EGL Holdings, Inc.(4).................... 860,718 11.9 8.4
Weston Presidio Capital II, L.P.(5)...... 649,999 8.9 6.3
Michael F. Cronin(6)..................... 649,999 8.9 6.3
Mercury Asset Management plc, on behalf
of Rowan Nominees Limited(7)............ 420,190 5.9 4.1
Sarah C. Garvin.......................... 408,200 5.7 4.0
Banque Paribas(8)........................ 382,530 5.2 3.7
NatWest Ventures Investments Ltd.(9)..... 354,939 5.0 3.5
Thomas M. Rodgers, Jr.(10)............... 206,973 2.9 2.0
J. Michael Ribaudo, M.D.(11)............. 125,600 1.8 1.2
Alfred DiStefano, M.D.................... -- * *
Richard Sanchez, M.D..................... -- * *
Carl J. Schramm, Ph.D.(12)............... 56,913 * *
All directors and executive officers as a
group (8 persons)(13)................... 2,339,803 31.3 22.3
</TABLE>
- --------
* Less than 1%.

(1) Calculated on a pro forma basis to show the effect of mandatory
conversion to Common Stock of certain classes of the Company's capital
stock and other securities upon completion of the Offering and the
Reverse Split, for a total of 7,102,207 shares of Common Stock
outstanding.
(2) Gives effect to the issuance of shares of Common Stock offered hereby.

(3) Includes: (i) 59,660 shares of Common Stock into which a warrant held by
EGL Holdings is currently exercisable; (ii) 384,544 shares of Common
Stock held by Mercury; (iii) 35,646 shares of Common Stock into which
warrants held by Mercury are currently exercisable; (iv) 336,512 shares
of Common Stock held by NatWest; (v) 18,427 shares of Common Stock into
which warrants held by NatWest are currently exercisable; (vi) 25,929
shares of Common Stock held by certain individual investors; and
(vii) 25,120 shares held by David Ellis, a colleague of Mr. Anantharaman.
Mercury, NatWest and the certain individual investors have granted EGL
Holdings full power to vote and exercise all owner rights, powers and
privileges with respect to their shares. Although as a Partner of EGL
Holdings and otherwise, Mr. Anantharaman is likely to exercise voting
rights with respect to all of the forgoing shares, he disclaims any
pecuniary interest in these shares except to the extent of his interest
in the 59,660 shares issuable to

70
<PAGE>

EGL Holdings proportionate to his ownership interest in EGL Holdings.
Beneficial ownership of these shares, except those held by Mr. Ellis, are
also attributed to EGL Holdings and, as applicable, to Mercury or NatWest.
Mr. Anantharaman's business address is 6600 Peachtree Dunwoody Road, 300
Embassy Row, Suite 300, Atlanta, Georgia 30328.

(4) Includes: (i) 59,660 shares of Common Stock into which a warrant held by
EGL Holdings is currently exercisable; (ii) 384,544 shares of Common
Stock held by Mercury; (iii) 35,646 shares of Common Stock into which
warrants held by Mercury are currently exercisable; (iv) 336,512 shares
of Common Stock held by NatWest; (v) 18,427 shares of Common Stock into
which warrants held by NatWest are currently exercisable; and (vi) 25,929
shares of Common Stock held by certain individual investors. Other than
the 59,660 shares into which its warrant is currently exercisable, EGL
Holdings denies any economic interest in these shares. Beneficial
ownership of these shares is also attributed to Mr. Anantharaman and, as
appropriate, to Mercury or NatWest. EGL Holding's business address is
6600 Peachtree Dunwoody Road, 300 Embassy Row, Suite 630, Atlanta,
Georgia 30328.

(5) Includes 169,592 shares of Common Stock into which warrants held by
Weston II are currently exercisable. Beneficial ownership of these shares
is also attributed to Mr. Cronin. The business address of Weston II is
One Federal Street, 21st Floor, Boston Massachusetts 02110.

(6) Includes: (i) 480,407 shares of Common Stock held by Weston II and (ii)
169,592 shares of Common Stock into which warrants held by Weston II are
currently exercisable. Mr. Cronin is a general partner of Weston
Presidio, which is the general partner of Weston II. Mr. Cronin disclaims
all but an insignificant pecuniary interest in these shares. Beneficial
ownership of these shares is also attributed to Weston II. Mr. Cronin's
address is One Federal Street, 21st Floor, Boston, Massachusetts 02110.

(7) Includes 35,646 shares of Common Stock into which warrants held by
Mercury are currently exercisable. Beneficial ownership of these shares
is also attributed to Mr. Anantharaman and to EGL Holdings.

(8) Includes: (i) 173,857 shares of Common Stock held by Paribas Principal,
Inc. ("PPI"); (ii) 57,953 shares of Common Stock into which a warrant
held by PPI is currently exercisable; and (iii) 150,720 shares of Common
Stock into which a warrant held by Paribas Capital Funding, Inc. ("PCF")
is currently indirectly exercisable. PPI and PCF are affiliates of Banque
Paribas.

(9) Includes 18,427 shares of Common Stock into which warrants held by
NatWest are currently exercisable. Beneficial ownership of these shares
is also attributed to Mr. Anantharaman and to EGL Holdings.
(10) Includes 40,820 shares of Common Stock held in a Keogh account for Mr.
Rodger's benefit. Mr. Rodgers denies the right to vote these shares.

(11) Includes: 54,950 shares of Common Stock that may be acquired on the
exercise of vested options.

(12) Includes 41,213 shares of Common Stock that may be acquired upon the
exercise of vested options.
(13) See Notes 3 (Mr. Anantharaman), 6 (Mr. Cronin), 10 (Mr. Rodgers), 11 (Dr.
Ribaudo) and 12 (Dr. Schramm). None of the directors or executive
officers owns any shares of the Non-Voting Common Stock.

71
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have 10,390,401 shares
of Common Stock outstanding (10,840,401 if the Underwriters' over-allotment
option is exercised in full) of which 3,000,000 shares sold in the Offering
(3,450,000 if the Underwriters' over-allotment option is exercised in full)
will be freely tradable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company (as defined in
the Securities Act). The remaining 7,102,207 shares of Common Stock and
288,194 shares of Non-Voting Common Stock are deemed "restricted securities"
under Rule 144 in that they were originally issued and sold by the Company in
private transactions in reliance upon exemptions under the Securities Act, and
may be publicly sold only if registered under the Securities Act or sold in
accordance with an applicable exemption from registration, such as those
provided by Rule 144 promulgated under the Securities Act as described below.

In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of restricted
securities from the issuer or from an affiliate of the issuer, the acquiror or
subsequent holder would be entitled to sell within any three-month period a
number of those shares that does not exceed the greater of one percent of the
number of shares of such class of stock then outstanding or the average weekly
trading volume of the shares of such class of stock during the four calendar
weeks preceding the filing of a Form 144 with respect to such sale. Sales
under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about the issuer. In addition, if a period of at least two years has elapsed
since the later of the date of acquisition of restricted securities from the
issuer or from any affiliate of the issuer, and the acquiror or subsequent
holder thereof has not been an affiliate of the issuer at any time during the
90 days preceding a sale, such person would be entitled to sell such
restricted securities under Rule 144(k) without regard to the volume
limitations and manner of sale and notice requirements described above. Rule
144 does not require the same person to have held the securities for the
applicable periods. The foregoing summary of Rule 144 is not intended to be a
complete description thereof. The Commission has proposed certain amendments
to Rule 144 that would, among other things, eliminate the manner of sale
requirements and revise the notice provisions of that rule. The SEC has also
solicited comments on other possible changes to Rule 144, including possible
revisions to the one- and two-year holding periods and the volume limitations
referred to above.

As of February 11, 1998, options to purchase an aggregate of 1,664,265
shares of Common Stock were outstanding under the 1995 Stock Option Plan. See
"Management--1995 Stock Option Plan." In general, pursuant to Rule 701 under
the Securities Act, any employee, officer or director of, or consultant to,
the Company who purchased his or her shares pursuant to a written compensatory
plan or contract is entitled to rely on the resale provisions of Rule 701,
which permit non-affiliates to sell such shares without compliance with the
public information, holding period, volume limitation or notice provisions of
Rule 144, and permit affiliates to sell such shares without compliance with
the holding period provisions of Rule 144, in each case commencing 90 days
after the date of this Prospectus. In addition, the Company intends to file a
registration statement covering the 3,139,686 shares issuable upon exercise of
stock options that have been or may be granted under the 1995 Stock Option
Plan, in which case such shares of Common Stock generally will be freely
tradable by non-affiliates in the public market without restriction under the
Securities Act.

The Company, its executive officers and directors, and stockholders holding
substantially all of the shares of Common Stock have agreed not to offer,
sell, contract to sell, grant any option or other right for the sale of, or
otherwise dispose of any shares of Common Stock or any securities,
indebtedness or other rights exercisable for or convertible or exchangeable
into Common Stock owned or acquired in the future in any manner prior to the
expiration (the "180-Day Lockup Period") without the prior written consent of
BancAmerica Robertson Stephens, except that the Company may, subject to
certain conditions, issue Common Stock in connection with acquisitions and may
grant Awards (or Common Stock upon exercise of Awards) under the 1995 Stock
Option Plan. These restrictions will be applicable to any shares acquired by
any of those persons in the Offering or otherwise during the 180-Day Lockup
Period. Approximately 2,624,000 shares of Common Stock issued by the Company
in October and November, 1997 were issued subject to agreements in which the
persons who received

72
<PAGE>

the shares of Common Stock in connection with acquisitions agreed not to
transfer the shares for periods ranging from 14 to 42 months following
consummation of the Offering.

Prior to the Offering, there has been no established public market for the
Common Stock. No prediction can be made of the effect, if any, that sales of
shares under Rule 144, or otherwise, or the availability of shares for sale
will have on the market price of the Common Stock prevailing from time to time
after the Offering. The Company is unable to estimate the number of shares
that may be sold in the public market under Rule 144, or otherwise, because
such amount will depend on the trading volume in, and market price for, the
Common Stock and other factors. Upon completion of the Offering, the holders
of approximately 1,503,000 shares of Common Stock will be entitled to demand
registration rights with respect to such shares, and the holders of
approximately 4,394,000 shares of Common Stock will be entitled to piggyback
registration rights. Nevertheless, sales of substantial amounts of shares in
the public market, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock of the Company. See
"Underwriting."

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<PAGE>

UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "Underwriting Agreement"),
the underwriters named below (the "Underwriters"), for whom BancAmerica
Robertson Stephens, NationsBanc Montgomery Securities LLC, A.G. Edwards &
Sons, Inc., and The Robinson-Humphrey Company, LLC are acting as
representatives (the "Representatives"), have severally agreed to purchase,
and the Company has agreed to sell, the respective number of shares of Common
Stock set forth opposite the name of each such Underwriter below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
BancAmerica Robertson Stephens.....................................
NationsBanc Montgomery Securities LLC..............................
A.G. Edwards & Sons, Inc. .........................................
The Robinson-Humphrey Company, LLC.................................
---------
Total............................................................ 3,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Common Stock are subject to certain conditions, and
that, if any of the foregoing shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, then all the shares of
Common Stock agreed to be purchased by the Underwriters pursuant to the
Underwriting Agreement must be so purchased.

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock in part directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such public offering price less a selling concession not in
excess of $ per share, of which $ may be reallowed to other dealers.
After the consummation of this Offering, the public offering price, the
concession to selected dealers and the reallowance may be changed by the
Underwriters. No such reductions shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.

The Company has granted the Underwriters an option to purchase up to 450,000
additional shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions shown on the cover page of this
Prospectus, solely to cover over-allotments, if any. Such option may be
exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that the option is exercised, each Underwriter will
be committed, subject to certain conditions, to purchase a number of
additional shares of Common Stock proportionate to such Underwriter's initial
commitment as indicated in the preceding table.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.

The Company, its executive officers and directors and stockholders holding
substantially all of the shares of Common Stock have agreed not to, directly
or indirectly, offer for sale, sell, contract to sell, grant any option or
other right for the sale of, or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to, result in
the disposition by any person at any time in the future of) any shares of
Common Stock or any securities, indebtedness or other rights exercisable for
or convertible or exchangeable into shares of Common Stock prior to the
expiration of 180 days after the date of this Prospectus, without the prior
written consent of BancAmerica Robertson Stephens, except that the Company
may, subject to certain conditions, issue shares of Common Stock in connection
with acquisitions and grant Awards (or issue shares of Common Stock upon
exercise of Awards) under the 1995 Stock Option Plan. For information
respecting additional restrictions on sales by the Company's executive
officers, directors and current stockholders, see "Shares Eligible for Future
Sale."

74
<PAGE>

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the Offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the Offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has, therefore, not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.

Prior to the Offering, there has been no public market for the Company's
securities. The initial public offering price of the Common Stock will be
determined by negotiation among the Company and the Representatives. Among the
factors to be considered in such negotiations will be prevailing market
conditions, the results of operations of the Company in recent periods, market
valuations of publicly traded companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development, the current state of the industry and the economy as a whole, and
other factors deemed relevant.

The Company has applied to have the Common Stock approved for quotation on
the Nasdaq Stock Markets National Market under the symbol "PHCO." There can be
no assurance, however, that an active or orderly trading market will develop
for the Common Stock or that the Common Stock will trade in the public markets
subsequent to the offering at or above the initial public offering price.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of shares of Common Stock offered hereby to accounts
over which they exercise discretionary authority.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Jackson Walker L.L.P., Dallas, Texas. Certain legal
matters in connection with the sale of the Common Stock offered hereby will be
passed upon for the Underwriters by Alston & Bird LLP, Atlanta, Georgia.

EXPERTS

The audited financial statements of the Company, Greater Cincinnati
Gastroenterology Associates, Inc., Internal Medicine Specialists, Inc.,
Parkcrest Surgical Associates, Inc., and Southern Dependacare, Inc. included
in this Prospectus and elsewhere in the registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their reports with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said reports.

The financial statements of Metroplex Hematology/Oncology Associates, L.L.P.
at December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

75
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all exhibits, schedules and amendments relating thereto,
the "Registration Statement") with respect to the Common Stock offered hereby.
This Prospectus, filed as part of the Registration Statement, does not contain
all the information contained in the Registration Statement, certain portions
of which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement
including the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement accurately describes the material
provisions of such document and are qualified in their entirety by reference
to such exhibits for complete statements of their provisions. All of these
documents may be inspected without charge at the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following regional offices of the
Commission: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies can also be obtained from the Commission at prescribed rates.
The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.

76
<PAGE>

INDEX TO HISTORICAL FINANCIAL INFORMATION

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Physician Health Corporation ("PHC" or the "Company")
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-5
Consolidated Statements of Stockholders' Equity.......................... F-7
Consolidated Statements of Cash Flows.................................... F-9
Notes to Consolidated Financial Statements............................... F-11

The historical financial statements of certain physician practices are
included in this Prospectus since each practice will contribute a significant
management fee to the Company. The operating results of these physician
practices should not be considered indicative of the Company's future
operating results.

Metroplex Hematology / Oncology Associates, L.L.P.
(d/b/a) Arlington Cancer Center
Report of Independent Auditors........................................... F-23
Balance Sheets........................................................... F-24
Statements of Income and Changes in Partners' Capital.................... F-25
Statements of Cash Flows................................................. F-26
Notes to Financial Statements............................................ F-27
Greater Cincinnati Gastroenterology Associates, Inc.
Report of Independent Public Accountants................................. F-32
Balance Sheets........................................................... F-33
Statements of Operations................................................. F-34
Statements of Owners' Equity............................................. F-35
Statements of Cash Flows................................................. F-36
Notes to Financial Statements............................................ F-37
Internal Medicine Specialists, Inc.
Report of Independent Public Accountants................................. F-41
Balance Sheets........................................................... F-42
Statements of Operations................................................. F-43
Statements of Owners' Equity............................................. F-44
Statements of Cash Flows................................................. F-45
Notes to Financial Statements............................................ F-46
Parkcrest Surgical Associates, Inc.
Report of Independent Public Accountants................................. F-50
Balance Sheets........................................................... F-51
Statements of Operations................................................. F-52
Statements of Owners' Equity............................................. F-53
Statements of Cash Flows................................................. F-54
Notes to Financial Statements............................................ F-55
Southern Dependacare, Inc.
Report of Independent Public Accountants................................. F-60
Balance Sheets........................................................... F-61
Statements of Operations................................................. F-62
Statements of Owners' Equity............................................. F-63
Statements of Cash Flows................................................. F-64
Notes to Financial Statements............................................ F-65
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Physician Health Corporation
and Subsidiaries:

We have audited the accompanying consolidated balance sheets of PHYSICIAN
HEALTH CORPORATION (a Delaware corporation) AND SUBSIDIARIES (Successor
Company) as of December 31, 1995 and 1996 and September 30, 1997, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the period from inception (August 29, 1995) through
December 31, 1995, the year ended December 31, 1996, and the nine months ended
September 30, 1997. We have also audited for Physician Health Corporation and
Subsidiaries (Predecessor Company) the accompanying consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year ended
December 31, 1994 and the period from January 1, 1995 to October 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physician Health
Corporation and Subsidiaries (Successor Company) as of December 31, 1995 and
1996 and September 30, 1997, and the results of their operations and their
cash flows for the period from inception (August 29, 1995) through December
31, 1995, the year ended December 31, 1996, and the nine months ended
September 30, 1997 and for the Predecessor Company for the year ended December
31, 1994 and the period from January 1, 1995 to October 31, 1995 in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
December 15, 1997 (except
with respect to the matter in
the last paragraph of Note 10
as to which the date is
January 26, 1998)

F-2

<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES
(SUCCESSOR COMPANY)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $3,011,757 $1,160,910 $ 5,218,651
Accounts receivable, less allowance for
bad debts of $55,170, $463,970, and
$833,912 at December 31, 1995 and 1996
and September 30, 1997, respectively.... 400,479 465,089 8,112,843
Inventory................................ -- -- 430,616
Prepaid expenses and other current
assets.................................. 121,463 124,800 1,303,951
---------- ---------- -----------
Total current assets................... 3,533,699 1,750,799 15,066,061
Property and equipment, net................ 149,820 867,260 6,499,503
Intangible assets, net of accumulated
amortization of $7,936, $54,142, and
$298,295 at December 31, 1995 and 1996 and
September 30, 1997, respectively.......... 1,054,567 1,524,604 19,110,405
Other long term assets..................... 131,455 -- 588,961
---------- ---------- -----------
Total assets........................... $4,869,541 $4,142,663 $41,264,930
========== ========== ===========
</TABLE>

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

F-3
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES
(SUCCESSOR COMPANY)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable........................... $ 77,131 $ 606,531 $ 1,844,450
Accrued expenses........................... 673,735 922,353 5,280,185
Current portion of long-term debt.......... 368,237 75,808 12,988,112
---------- ---------- -----------
Total current liabilities................ 1,119,103 1,604,692 20,112,747
---------- ---------- -----------
Long-term debt............................... 10,358 500,000 14,048,842
---------- ---------- -----------
Commitments and contingencies (Notes 8 and 9)
Class A redeemable preferred stock, $.01 par
value; 500,000 shares authorized, 200,000
issued, and outstanding (redemption or
liquidation preference aggregating
$3,000,000, plus accrued dividends or
guaranteed return).......................... 2,447,836 2,442,712 2,772,204
---------- ---------- -----------
Series B redeemable convertible preferred
stock, $.01 par value; 15,000,000 shares
authorized, 3,824,493 issued and outstanding
at September 30, 1997....................... -- -- 13,675,368
---------- ---------- -----------
Stockholders, equity (deficit):
Common stock, $0.0025 par value;
140,000,000 shares authorized, 1,051,900,
1,196,340, and 1,414,244 shares issued and
outstanding at December 31, 1995 and 1996
and September 30, 1997, respectively...... 2,630 2,991 3,536
Prime common stock, $0.0025 par value;
20,000,000 shares authorized, 125,000 and
4,039,666 shares issued and outstanding at
December 31, 1996 and September 30, 1997,
respectively.............................. -- 313 10,100
Additional paid-in capital................. 1,756,562 2,942,529 11,284,743
Accumulated deficit........................ (466,948) (3,350,574) (20,198,860)
Notes receivable .......................... -- -- (443,750)
---------- ---------- -----------
Total stockholders' equity (deficit)..... 1,292,244 (404,741) (9,344,231)
---------- ---------- -----------
Total liabilities and stockholders'
equity (deficit)........................ $4,869,541 $4,142,663 $41,264,930
========== ========== ===========
</TABLE>

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

F-4
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES
(SUCCESSOR COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION NINE-MONTH PERIOD
(AUGUST 29, 1995) YEAR ENDED ENDED SEPTEMBER 30,
THROUGH DECEMBER 31, --------------------------
DECEMBER 31, 1995 1996 1996 1997
----------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net patient service
revenue................ $ -- $ 23,412 $ -- $ 2,510,529
Management fees......... 30,181 1,215,098 955,456 9,979,823
Other revenue........... 426,125 2,797,454 1,764,886 3,968,803
---------- ----------- ------------ ------------
Net revenue............ $ 456,306 $ 4,035,964 $ 2,720,342 $ 16,459,155
---------- ----------- ------------ ------------
Operating expenses:
Salaries and
benefits............. 662,287 2,915,041 2,123,523 4,880,327
Contract and
professional
services............. 69,830 193,561 369,745 746,304
Medical supplies and
other................ -- -- 32,916 5,487,850
Provision for bad
debts................ 40,170 660,159 104,560 938,383
General and
administrative....... 131,009 2,748,330 1,208,095 6,387,126
Depreciation and
amortization......... 13,577 161,236 80,884 731,892
Write down of assets.. -- 195,236 -- 714,665
Purchased research and
development.......... -- -- -- 13,251,860
---------- ----------- ------------ ------------
Total operating
expenses........... 916,873 6,873,563 3,919,724 33,138,407
---------- ----------- ------------ ------------
Loss from operations.... (460,567) (2,837,599) (1,199,382) (16,679,252)
Interest expense, net... 7,178 29,527 9,662 2,236,289
---------- ----------- ------------ ------------
Loss before minority
interest and income
taxes.................. (467,745) (2,867,126) (1,209,044) (18,915,541)
Minority interest in net
loss of subsidiary..... (797) -- -- (2,080,975)
---------- ----------- ------------ ------------
Loss before income
taxes.................. (466,948) (2,867,126) (1,209,044) (16,834,566)
Income tax expense...... -- 16,500 -- 13,720
---------- ----------- ------------ ------------
Net loss................ $ (466,948) $(2,883,626) $ (1,209,044) $(16,848,286)
========== =========== ============ ============
Loss per share.......... $ (0.50) $ (1.34) $ (0.56) $ (5.82)
========== =========== ============ ============
Weighted average shares
outstanding............ 941,050 2,156,068 2,143,035 2,893,999
========== =========== ============ ============
</TABLE>

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

F-5
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES
(PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1995 TO
1994 OCTOBER 31, 1995
------------ ------------------
<S> <C> <C>
Net revenue..................................... $ 812,144 $1,949,421
--------- ----------
Operating expenses:
Salaries and benefits......................... 530,952 1,532,624
Contract and professional services............ 37,514 124,524
General and administrative.................... 224,673 463,478
Depreciation and amortization................. 58,266 106,584
--------- ----------
Total operating expenses.................... 851,405 2,227,210
--------- ----------
Loss from operations............................ (39,261) (277,789)
Interest expense, net........................... 24,033 86,487
--------- ----------
Loss before income taxes........................ (63,294) (364,276)
Income tax expense.............................. -- --
--------- ----------
Net loss........................................ $ (63,294) $ (364,276)
========= ==========
</TABLE>

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

F-6
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES
(SUCCESSOR COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
COMMON STOCK PRIME COMMON STOCK
--------------------------- ----------------------------
ADDITIONAL ADDITIONAL STOCKHOLDERS'
PAID-IN PAID-IN ACCUMULATED NOTES EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE (DEFICIT)
--------- ------ ---------- --------- ------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August
29, 1995 (period
of inception).... -- $ -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock,
net of issuance
costs of
$38,453......... 1,051,900 2,630 1,364,542 -- -- -- -- -- 1,367,172
Issuance of
options and
warrants to
purchase common
stock........... -- -- 392,020 -- -- -- -- -- 392,020
Issuance of
preferred stock,
net of issuance
costs of
$267,472........ -- -- -- -- -- -- -- -- --
Accretion of
preferred
stock........... -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- (466,948) -- (466,948)
--------- ------ ---------- --------- ------- ---------- ------------ --------- -----------
Balance, December
31, 1995......... 1,051,900 2,630 1,756,562 -- -- -- (466,948) -- 1,292,244
Issuance of
common stock,
net of issuance
costs of
$43,065......... 144,440 1,150 1,185,967 -- -- -- -- -- 1,076,935
Issuance of
prime common
stock, net of
issuance costs
of $15,294...... -- -- -- 125,000 313 109,393 -- -- 109,706
Issuance cost
adjustment...... -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- (2,883,626) -- (2,883,626)
--------- ------ ---------- --------- ------- ---------- ------------ --------- -----------
Balance, December
31, 1996......... 1,196,340 2,991 2,833,136 125,000 313 109,393 (3,350,574) -- (404,741)
Issuance of
common stock,
net of issuance
costs of
$5,836.......... 217,904 545 2,770,909 -- -- -- -- -- 2,771,454
Issuance of
warrants to
purchase common
stock........... -- -- 1,717,106 -- -- -- -- -- 1,717,106
Issuance of
prime common
stock........... -- -- -- 3,914,666 9,787 3,854,199 -- (443,750) 3,420,236
Issuance of
preferred stock,
net of issuance
costs of
$638,282........ -- -- -- -- -- -- -- -- --
Dividends
accrued and
unpaid.......... -- -- -- -- -- -- -- -- --
Accretion of
preferred stock
for redemption.. -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- (16,848,286) -- (16,848,286)
--------- ------ ---------- --------- ------- ---------- ------------ --------- -----------
Balance,
September 30,
1997............. 1,414,244 $3,536 $7,321,151 4,039,666 $10,100 $3,963,592 $(20,198,860) $(443,750) $(9,344,231)
========= ====== ========== ========= ======= ========== ============ ========= ===========
<CAPTION>
REDEEMABLE PREFERRED STOCK
-----------------------------------------
CLASS A SERIES B
------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balance, August
29, 1995 (period
of inception).... -- $ -- -- $ --
Issuance of
common stock,
net of issuance
costs of
$38,453......... -- -- -- --
Issuance of
options and
warrants to
purchase common
stock........... -- -- -- --
Issuance of
preferred stock,
net of issuance
costs of
$267,472........ 200,000 2,447,528 -- --
Accretion of
preferred
stock........... -- 308 -- --
Net loss........ -- -- -- --
------- ----------- --------- -----------
Balance, December
31, 1995......... 200,000 2,447,836 -- --
Issuance of
common stock,
net of issuance
costs of
$43,065......... -- -- -- --
Issuance of
prime common
stock, net of
issuance costs
of $15,294...... -- -- -- --
Issuance cost
adjustment...... -- (5,124) -- --
Net loss........ -- -- -- --
------- ----------- --------- -----------
Balance, December
31, 1996......... 200,000 2,442,712 -- --
Issuance of
common stock,
net of issuance
costs of
$5,836.......... -- -- -- --
Issuance of
warrants to
purchase common
stock........... -- -- -- --
Issuance of
prime common
stock........... -- -- -- --
Issuance of
preferred stock,
net of issuance
costs of
$638,282........ -- -- 3,824,493 12,897,920
Dividends
accrued and
unpaid.......... -- 225,000 -- 673,116
Accretion of
preferred stock
for redemption.. -- 104,492 -- 104,332
Net loss........ -- -- -- --
------- ----------- --------- -----------
Balance,
September 30,
1997............. 200,000 $2,772,204 3,824,493 $13,675,368
======= =========== ========= ===========
</TABLE>

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

F-7
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES
(PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)

<TABLE>
<CAPTION>
COMMON STOCK
------------------------
ADDITIONAL STOCKHOLDER'S
PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, Period of
inception................. -- $ -- $ -- $ -- $ --
Issuance of common
stock................... 1,000 10 490 -- 500
Net loss................. -- -- -- (63,294) (63,294)
----- ---- ---- --------- ---------
Balance, December 31,
1994...................... 1,000 10 490 (63,294) (62,794)
Net loss................. -- -- -- (364,276) (364,276)
----- ---- ---- --------- ---------
Balance, October 31, 1995.. 1,000 $10 $490 $(427,570) $(427,070)
===== ==== ==== ========= =========
</TABLE>

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

F-8
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

(SUCCESSOR COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM NINE-MONTH PERIOD
INCEPTION YEAR ENDED ENDED SEPTEMBER 30,
(AUGUST 29, 1995 DECEMBER 31, -------------------------
TO DECEMBER 31, 1995) 1996 1996 1997
--------------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net loss.............. $ (466,948) $(2,883,626) $(1,209,044) $(16,848,286)
Adjustments to recon-
cile net loss to net
cash provided by
(used in) operating
activities:
Depreciation,
amortization, and
accretion of
preferred stock...... 13,577 161,236 85,448 1,838,832
Compensation expense.. 300,000 -- -- --
Write-down of assets.. -- 195,236 -- 714,665
Purchased research and
development.......... -- -- -- 13,251,860
Loss on disposal of
fixed assets......... -- -- -- 17,645
Minority interest in
net loss of
subsidiary........... (797) -- (1,091) (2,080,975)
Changes in operating
assets and
liabilities:
Accounts receivable,
net................. 38,182 (64,611) (122,729) (4,337,310)
Due from related
physicians and
physician
organizations....... (221,800) 221,800 -- --
Prepaid expenses and
other assets........ 180,104 (93,682) (63,534) (1,981,142)
Accounts payable and
accrued expenses.... 219,745 660,986 (250,336) 3,650,555
----------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities......... 62,063 (1,802,661) (1,561,286) (5,774,156)
----------- ----------- ----------- ------------
Investing activities:
Purchases of busi-
nesses and related
intangibles.......... (1,325,787) (127,345) -- (19,488,272)
Purchases of property
and equipment........ (9,834) (342,008) (278,245) (341,213)
----------- ----------- ----------- ------------
Net cash used in
investing
activities......... (1,335,621) (469,353) (278,245) (19,829,485)
----------- ----------- ----------- ------------
Financing activities:
Proceeds from issuance
of redeemable
preferred stock, net
of issuance costs.... 2,554,528 -- -- 12,897,964
Proceeds from issuance
of common stock, net
of issuance costs.... 1,067,172 1,061,641 683,076 1,398,451
Proceeds from issuance
of stock purchase
warrants............. 285,020 -- -- 1,717,106
Payments for loan
issuance costs for
credit facility...... -- (277,099) -- --
Proceeds from issuance
of long-term debt.... 378,595 -- -- 13,658,237
Repayment of notes
payable.............. -- (363,375) (367,020) (10,376)
----------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 4,285,315 421,167 316,056 29,661,382
----------- ----------- ----------- ------------
Net change in cash and
cash equivalents...... 3,011,757 (1,850,847) (1,523,475) 4,057,741
Cash and cash
equivalents at
beginning of period... -- 3,011,757 3,011,757 1,160,910
----------- ----------- ----------- ------------
Cash and cash
equivalents at end of
period................ $ 3,011,757 $ 1,160,910 $ 1,488,282 $ 5,218,651
=========== =========== =========== ============
Supplemental
disclosures of cash
flow information:
Cash paid for
interest............. $ 6,870 $ 15,872 $ 6,412 $ 261,075
=========== =========== =========== ============
Cash paid for income
taxes................ $ -- $ 16,500 $ -- $ 13,720
=========== =========== =========== ============
Supplemental
disclosures of noncash
financing and
investing activity:
Carrying value of debt
issued in connection
with purchases of
businesses (Note 2).. $ -- $ -- $ -- $ 13,177,186
=========== =========== =========== ============
Common stock issued in
connection with
purchases of
businesses (Note 2).. $ -- $ -- $ -- $ 6,707,349
----------- ----------- ----------- ------------
Preferred stock
subscriptions issued
(Note 6)............. $ -- $ -- $ -- $ 6,210,000
=========== =========== =========== ============
</TABLE>

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

F-9
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES
(PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1995
DECEMBER 31, TO
1994 OCTOBER 31, 1995
------------ ----------------
<S> <C> <C>
Operating activities:
Net loss....................................... $ (63,294) $(364,276)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 58,266 106,584
Changes in operating assets and liabilities:
Accounts receivable, net................... (160,949) (310,138)
Prepaid expenses and other assets.......... (657,683) (133,495)
Accounts payable and accrued expenses...... 208,281 175,943
--------- ---------
Net cash used in operating activities.... (615,379) (525,382)
--------- ---------
Investing activities:
Purchases of property and equipment............ (77,589) (104,841)
--------- ---------
Net cash used in investing activities.... (77,589) (104,841)
--------- ---------
Financing activities:
Proceeds from issuance of common stock......... 500 --
Borrowings under line of credit--parent compa-
ny............................................ 756,756 565,935
--------- ---------
Net cash provided by financing activi-
ties.................................... 757,256 565,935
--------- ---------
Net change in cash and cash equivalents.......... 64,288 (64,288)
Cash and cash equivalents at beginning of peri-
od.............................................. -- 64,288
--------- ---------
Cash and cash equivalents at end of period....... $ 64,288 $ --
========= =========
Supplemental disclosures of cash flow informa-
tion:
Cash paid for interest......................... $ 24,033 $ 86,487
========= =========
Cash paid for income taxes..................... $ -- $ --
========= =========
</TABLE>

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

F-10
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

PHC Merger Corporation (the "Company") was incorporated on August 29, 1995
as a Delaware corporation. On November 3, 1995, the Company acquired, in a
transaction accounted for as a purchase, all of the outstanding common stock
of Physician Health Corporation (the "Predecessor Company"), a wholly owned
subsidiary of Surgical Health Corporation, which was a wholly owned subsidiary
of HealthSouth Corporation. The purchase price was approximately $1,325,000.
The Predecessor Company commenced operations during 1994. Upon completion of
the merger, the Company changed its name to Physician Health Corporation (the
"Successor Company"). The Company is a physician management company focusing
on the integration of managed care contracting, network development and
administration, physician practice management and ancillary health care
services development in selected markets. The Company provides these services
to independent physician networks and Company sponsored physician networks and
to physicians who affiliate with the Company through practice management or
employment agreements. The Company currently provides services described above
in the following geographical markets: Virginia, Georgia, Texas, Alabama,
Tennessee, Florida, Missouri, and Arizona.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned and greater than 50%-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.

Minority Interests

Minority interests represents the minority shareholders' proportionate share
of the equity of three of the Company's subsidiaries. The Company owns 80% of
the capital stock of two of these subsidiaries with 20% owned by minority
interests. These two subsidiaries were acquired in 1997. The Company owns 51%
of another subsidiary with 49% owned by minority interests.

As of December 31, 1995 and 1996 and September 30, 1997, the minority
interests are recorded at zero as cumulative losses applicable to minority
interests exceeded the minority interests in the subsidiaries' capital. For
the period ended December 31, 1995, the year ended December 31, 1996, and the
nine months ended September 30, 1997, the minority interests' net loss was
recorded at $797, $0, and $2,080,975, respectively, and $20,100, $268,824, and
$451,963, respectively, of the net loss was absorbed by the Company.

Use of Estimates

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

Net Loss Per Common and Common Equivalent Share

Net loss per common and common equivalent share is computed using the
weighted average number of shares of common stock and dilutive common stock
equivalent shares ("CSEs") from stock options using the treasury stock method.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common stock and CSEs issued at prices below the expected public offering
price during the 12-month period

F-11
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

prior to filing of the registration statement in connection with the Company's
planned Offering have been included in the calculation as if they were
outstanding for all periods presented prior to the Offering, regardless of
whether they are dilutive.

New Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share." SFAS No. 128 is designed to improve the
earnings per share information provided in the financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of earnings per share data.
SFAS No. 128 is effective for periods ending after December 15, 1997,
including interim periods. The Company will adopt SFAS No. 128 for the fiscal
and interim periods ending December 31, 1997. As of September 30, 1997, the
disclosure requirements of SFAS No. 128 would not require a different
presentation of earnings per share than currently presented due to the
antidilutive effect of all common stock equivalents.

The Emerging Issues Task Force of the FASB has recently issued its Consensus
Opinion 97-2 ("EITF 97-2"). EITF 97-2 addresses certain specific matters
pertaining to the physician practice management industry. EITF 97-2 would be
effective for the Company for its year ending December 31, 1998. EITF 97-2
addresses the ability of physician practice management companies to
consolidate the results of physician practices with which it has an existing
contractual relationship. The Company is still in the process of analyzing the
effect on all of its contractual relationships, but currently believes that
substantially all of its contracts would not meet the criteria of EITF 97-2
for consolidating their results of operations. EITF 97-2 also has addressed
the accounting method for future combinations with individual physician
practices. The Company believes that, based upon the criteria, set forth in
EITF 97-2, that virtually all of its future acquisitions of individual
physician practices will continue to be accounted for under the purchase
method of accounting.

Interim Unaudited Financial Information

The financial statements for the nine months ended September 30, 1996 are
unaudited; however, in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of
the unaudited financial statements for these interim periods have been
included. The results of interim periods are not necessarily indicative of the
results to be obtained for a full year.

F-12
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Prior Year Reclassifications

Certain prior year and period amounts have been reclassified to conform with
the current year presentation.

Cash Equivalents

The Company considers cash on deposit with financial institutions and all
highly liquid investments with original maturities of three months or less to
be cash equivalents.

Revenue

The Company primarily generates management fee revenues from contracts for
providing management services to physician practices, for organizing and
managing capitated network contracts, and for providing administrative
services such as accounting, billing, and collections. The Company also
generates net patient revenues through employed physicians.

Revenue is recognized as services are performed. The Company had two
practices that represented 35% of total revenues for the year ended December
31, 1996 and three practices that represented 73% of total revenues for the
nine months ended September 30, 1997.

Net patient revenues are recorded based on standard charges applicable to
all patients. Under Medicare, Medicaid, and other reimbursement programs, each
practice is reimbursed for services rendered to covered program patients as
determined by reimbursement formulas. The differences between established
billing rates and the amounts reimbursable by the programs and patient
payments are recorded as contractual adjustments and deducted from revenues.

Accounts Receivable and Allowance for Doubtful Accounts

The Company provides an allowance for doubtful accounts equal to the
estimated losses expected to be incurred in the collection of accounts
receivable.

Capitated Contracts

The Company establishes accruals for its capitated contracts reimbursements
based upon historical trends. Any contracts that would have a realized loss
would be immediately accrued for and the loss would be charged to operations.
As of September 30, 1997, the Company had two capitated contracts for which it
was at risk that covered approximately 3,600 lives.

The Company also receives an administration fee related to its administering
of approximately 20 capitated contracts for which it has no risk exposure.

Industry Risks

The health care industry is subject to numerous laws and regulations at all
levels of government. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and regulations by
health care providers. Violations of these laws could result in significant
fines and penalties as well as significant payments for services previously
billed. The Company is subject to similar regulatory reviews. A determination
of liability under any such laws could have a material effect on the Company's
financial position, results of operations, changes in stockholders' equity,
and cash flows.

Property and Equipment

Property and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets, which are
as follows:

<TABLE>
<S> <C>
Equipment............................................... Five years
Furniture and fixtures.................................. Five to seven years
Leasehold improvements.................................. Ten years
</TABLE>

F-13
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Additions that extend the lives of the assets are capitalized, while repairs
and maintenance costs are expensed as incurred. When property and equipment is
retired, the cost of the property and equipment and the related accumulated
depreciation or amortization are removed from the balance sheet and any
resulting gain or loss is recorded.

Intangible Assets

The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the affiliated physician
groups. The Company allocates the purchase price to the tangible assets
acquired and liabilities assumed based on estimated fair market values. In
connection with each acquisition, the Company enters into long-term service
agreements with the affiliated physician groups. The service agreements are
for terms of 40 years and cannot be terminated by either party without cause,
primarily bankruptcy or material default. The service agreement intangible is
being amortized using a straight-line method over an average life of 25 years.

In connection with the allocation of the purchase price to identifiable
intangible assets, the Company analyzes the nature of each group with which a
service agreement is entered into, including the number of physicians in each
group, number of service sites, ability to recruit additional physicians, the
group's relative market position, the length of time the group has been in
existence, and the term and enforceability of the service agreement.

The physician groups continually recruit physicians and, as appropriate and
necessary, add qualified physicians to the group. This manner of operations
allows the physician group to perpetuate itself as individual physicians
retire or are otherwise replaced. Therefore, the Company believes that the
physician groups with which it has service agreements are entities with
indeterminable life.

Income Taxes

The Company is a corporation subject to federal and state income taxes.
Income taxes have been provided using the liability method in accordance with
the Statement of financial accounting standards ("SFAS") No. 109, "Accounting
for Income Taxes."

Impairment of Long-Lived Assets

On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Under SFAS No. 121, intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. If this review indicates that the carrying amount of the
asset may not be recoverable, as determined based on the undiscounted cash
flows of the operations acquired over the remaining amortization period, the
carrying value of the asset is reduced to fair value. Among the factors that
the Company will continually evaluate are unfavorable changes in each
physician group's relative market share and local market competitive
environment, current period and forecasted operations, cash flow levels of the
physician group, and its impact on the management fee earned by the Company,
and legal factors governing the practice of medicine. In 1996, the Company
wrote off certain fixed assets for $195,236. In 1997, the Company wrote off
certain fixed assets and intangible assets for $714,665.

2. ACQUISITIONS

During the year ended December 31, 1996, the Company purchased the assets of
one physician practice ("Metropoliton Plastic & Reconstructive Surgery"). The
Company issued a note in the amount of $500,000 and issued 125,000 shares of
the Company's prime stock.

F-14
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During the nine months ended September 30, 1997, the Company acquired
certain assets and assumed certain liabilities of eleven physician practices
located in Texas, Missouri, Georgia, Illinois and Arizona. These practices
were:

Surgical Group South Ream Optometry
Eye Medical and Surgical Tri-County Eye Center
The Heart Health Center Atlanta Center for Medicine
Jones Eye Center Southern Dependacare
Arlington Cancer Center Surgical Associates
Payson Family Care

Total tangible assets acquired were $9,188,823 and total liabilities assumed
were $2,000,762. To consummate these eleven 1997 acquisitions and reflect
entry into related practice management agreements, the Company paid
$18,325,928 in cash, issued debt in the aggregate amount of $12,611,647, and
issued 2,833,613 and 97,407 shares of the Company's prime and common stock
respectively. In addition, consideration was given in the form of a 20%
interest in two newly formed subsidiaries. These 20% minority interests in the
subsidiaries are convertible into an aggregate of 653,430 shares of common
stock in the Company. The aggregate value of common and prime stock issued was
$6,155,553. As a result of these acquisitions, the Company recorded
intangibles of approximately $17,000,000 (after purchased research and
development), which are being amortized over 25 years. These acquisitions were
accounted for as purchase transactions, and the acquired net assets and post
acquisition operating results are included in the September 30, 1997
consolidated financial statements.

In connection with the acquisition of a physician practice during the nine
months ended September 30, 1997, the Company allocated $13,251,860 to
purchased research and development. Based on management's assessment of no
alternative future benefit to the Company, this amount was charged against
operations on the date of the acquisition.

3. PROPERTY AND EQUIPMENT

As of December 31, 1995 and 1996 and September 30, 1997 property and
equipment are comprised of the following:

<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ----------
<S> <C> <C> <C>
Equipment................................... $115,934 $362,824 $4,267,440
Furniture................................... 27,795 134,391 822,276
Leasehold improvements...................... 11,732 471,885 1,954,644
Construction in progress.................... -- -- 24,333
-------- --------- ----------
155,461 969,100 7,068,693
Less accumulated depreciation............... (5,641) (101,840) (569,190)
-------- --------- ----------
Net property and equipment.................. $149,820 $867,260 $6,499,503
======== ========= ==========
</TABLE>

During the period of inception (August 29, 1995) to December 31, 1995, the
year ended December 31, 1996, and the nine months ended September 30, 1997,
the Company recorded $5,641, $106,796, and $484,292 in depreciation expense,
respectively.

F-15

<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. LONG-TERM DEBT

At December 31, 1995 and 1996 and September 30, 1997, long-term debt
consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
--------- -------- -------------
<S> <C> <C> <C>
Convertible subordinated note to
Metropolitan Plastic and Reconstructive
Surgery, Ltd.; principal and interest at
5% per annum due on demand or on November
26, 1999; note is convertible into common
stock 90 days immediately following the
effective date of a registration statement
under the Securities Act of 1933.......... $ -- $500,000 $ 500,000
Equipment note............................. -- 75,808 75,808
Promissory notes payable to stockholders of
the Company; interest and principal due on
demand.................................... -- -- 300,000
Promissory notes payable to officers and
stockholders; bearing interest at 12%..... 363,375 -- --
Secured promissory note to DVI Business
Credit Corporation; interest on unpaid
principal balance due monthly at the
publicly announced rate by Bank of America
plus 2 1/2% per annum; all unpaid
principal and interest due on July 1,
1999; secured by eligible accounts
receivable of the Company................. -- -- 2,236,186
Noninterest-bearing promissory note for
$6,210,000 to Metroplex
Hematology/Oncology Associates, LLP; im-
puted semiannual interest rate of 10%;
principal and interest due on April 1,
1998; .................................... -- -- 5,903,895
Noninterest-bearing promissory note for
$6,460,000 to Metroplex
Hematology/Oncology Associates, LLP; im-
puted semiannual interest rate of 10%
principal and interest due in four annual
installments, with final payment on April
1, 2002................................... -- -- 4,796,373
Secured promissory notes to DVI Financial
Services, Inc.; interest payable monthly
at 12.25% per annum; principal and
interest due on July 1, 2003; secured by
certain equipment of the Company.......... -- -- 8,000,000
Note payable to Southwest Bank; bearing
interest at an initial rate of prime
subject to change to prime plus 3%;
interest beginning October 10, 1997 and
payable monthly subsequent to initial
payment; principal due on demand or
January 10, 1998.......................... -- -- 3,000,000
Promissory notes payable to stockholders;
bearing interest at rates ranging from 7
to 8%, principal and interest due on
periods ranging from January 1, 1998
through September 12, 2000................ -- -- 2,194,692
Other...................................... 15,220 -- 30,000
--------- -------- -----------
Total Debt................................. 378,595 575,808 27,036,954
Less current maturities.................... (368,237) (75,808) (12,988,112)
--------- -------- -----------
Long-term debt............................. $ 10,358 $500,000 $14,048,842
========= ======== ===========
</TABLE>

On December 31, 1996, the Company entered into a credit agreement with
Nations Credit for working capital and acquisition financing. No draws were
made on the credit arrangement during the nine months ended September 30,
1997, and the credit arrangement was terminated. In connection with the
termination of the credit agreement, the Company wrote off $691,191 of the
remaining unamortized loan issuance costs during the nine months ended
September 30, 1997.

F-16
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Repayment of long-term debt as of September 30, 1997 is as follows:

<TABLE>
<S> <C>
December 31:
Three-months ended 1997....................................... $ 3,352,421
Year ended 1998............................................... 10,296,950
Year ended 1999............................................... 3,070,888
Year ended 2000............................................... 3,520,261
Year ended 2001............................................... 2,888,438
Thereafter.................................................... 4,376,540
-----------
Total $27,505,498
===========
</TABLE>

5. RELATED-PARTY TRANSACTIONS

At December 31, 1995, the Company had outstanding notes payable to officers
and shareholders totaling $363,375. The notes bear interest at 12%. The
proceeds from these notes were used to repay a portion of the line of credit
to Surgical Health Corporation. The notes payable were paid in full in January
1996. Interest paid to related parties was $5,874.

The Company had an intercompany line of credit with Surgical Health
Corporation prior to November 3, 1995 totaling $1,342,893. This line of credit
was paid in full on November 3, 1995, with the proceeds from the issuance of
shares of common stock and related party loans.

The Company maintains management services agreements to provide services to
and receive compensation from physicians that own stock in the Company or the
Company's subsidiaries and physicians that are on the Company's board of
directors. At September 30, 1997, the Company maintains eight management
service contracts that were initiated in connection with asset purchases in
which the Company issued common stock as consideration (Note 2). For the year
ended December 31, 1996 and the nine months ended September 30, 1997, the
Company recognized total management service fees from the contracts of
approximately $62,000 and $9,500,000, respectively. The Company also recorded
capitated contract fees of $140,000 between two of its subsidiaries, however,
the amounts were eliminated in consolidation.

The Company pays monthly consulting fees to affiliated investors and members
of the board for consulting services received. For the nine months ended
September 30, 1997, the Company paid approximately $1,410,000 in consulting
fees to affiliates.

At September 30, 1997, the Company has fourteen promissory notes due to
shareholders of the Company. The total amount due to shareholders is
$2,524,692.

In connection with the exercise of stock options during 1997, the Company
received a note in the amount of $443,750 from a stockholder of the Company.

6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

Class A Redeemable Convertible Preferred Stock

During 1995, 200,000 shares of class A redeemable convertible preferred
stock were issued to certain investors of the Company. At any time prior to
December 29, 2005, each share of preferred stock is convertible into 3.01
common shares, as adjusted.

The conversion rate of the Class A stock shall be adjusted in the event that
the Company: (1) has a liquidity event, as defined, on or prior to December
31, 1997, (2) attains certain levels of profitability, (3) issues common

F-17
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

stock, options, or preferred stock at a price less than the conversion rate
then in effect, (4) declares a stock dividend, (5) declares a stock split, or
(6) is recapitalized. Automatic conversion will occur upon the closing of a
liquidity event (including an initial public offering).

The holders of Class A stock are entitled to dividends on a converted basis,
if declared by the Company's board of directors, at a per share amount, if
any, of any dividend declared for the common stock during the period. In
addition, the stockholders are entitled to receive cumulative dividends of
$1.50 per share (subject to adjustment for any stock splits) per annum. Such
dividends began accruing on December 31, 1996 and are payable annually
beginning in 1998. Dividends have been accrued as of September 30, 1997.

The Class A holders have a liquidation preference of $15 per share plus 12%
per annum from the date of purchase. The 12% compounded annual rate of return
shall be in lieu of, not in addition to, the dividends paid or payable by the
Company. The Class A stock is senior to the common stock with respect to
liquidation and dividends.

After December 31, 2000, each share of Class A stock is redeemable at the
request of the holder. The redemption price is equal to the greater of $15 per
share plus any declared and unpaid dividends or the fair market value of the
Class A stock at the time of redemption. The Class A stock is required to be
redeemed, at the holders request if the principals, as defined, sell 20% or
more of the outstanding shares of capital stock of the Company, become
insolvent, have a breach of warranty under the purchase agreement, or have an
acceleration of debt in excess of $500,000 in the aggregate. No shares have
been redeemed as of September 30, 1997. At September 30, 1997, the Company
recorded accretion of preferred stock of $104,492. Accretion is being
calculated on a straight-line basis, which approximates the interest method.

Series B Redeemable Convertible Preferred Stock

The Company is authorized to issue 15,000,000 shares of Series B Redeemable
Convertible Preferred Stock at $.01 par value in one or more series. This type
of stock has been issued pursuant to several securities purchase agreements
among the Company, and certain other investors. Holders of Series B
Convertible Preferred Preferred Stock are generally entitled to (1) accrue a
dividend in an amount equal to 20% per annum, compounded annually, on $4,
beginning on the later of the original issue date or the date on which the
purchase price for such shares was first released from the applicable purchase
price escrow (holders will also receive a special contingent dividend upon the
consummation of a Liquidity Event), (2) liquidation preference over holders of
common and prime stock in the amount of $4 per share plus accrued and unpaid
dividends, and (3) vote as a single class with the holders of common stock
based on the number of shares of common stock into which the Series B
preferred stock may be converted. All regular dividends are forgiven upon the
occurrence of a Liquidity Event.

Under mandatory redemption, Series B Redeemable Convertible Preferred Stock
is redeemable at a price equal to $4 per share, as adjusted, plus accrued and
unpaid dividends. Mandatory redemption will commence in 2003.

Each share of Series B Redeemable Convertible Preferred Stock is convertible
at the option of the holder at any time into the number of shares of the
common stock of the Company obtained by dividing $4 by the then effective
conversion price of the Series B Redeemable Convertible Preferred Stock.
Provided that a liquidity event has not occurred prior to May 1, 2002, the
conversion price will be $4 per share, and after May 1, 2002, the conversion
price will be $3 per share. Automatic conversion will occur upon the closing
of a liquidity event (including an initial public offering).

The conversion rate of the Series B Redeemable Convertible Preferred Stock
shall be adjusted in the event (1) the Company issues additional shares of
common stock at a price that is less than the applicable conversion price in
effect on the date of, and immediately prior to, such issue, (2) stock is
issued as a dividend, (3) stock is subdivided or diluted, or (4) the
outstanding shares of common stock are combined or consolidated into a lesser
number of shares of common stock.

F-18
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During the nine-month period ended September 30, 1997, the Company issued
3,824,493 shares of Series B Redeemable Convertible Preferred Stock to venture
capitalists in order to receive funding for current and future acquisitions.
The Company has recorded a subscription receivable of $6,210,000 (that has
been offset against the Series B Redeemable Convertible Preferred Stock) in
relation to the issuance of an additional 1,552,500 shares that will be
released to the venture capitalists upon payment of the subscription
receivable. At September 30, 1997, the Company recorded accretion of preferred
stock of $104,332.

Common Stock

On October 6, 1995, 706,500 shares of common stock were issued to certain
employees at a price of $.0025 per share. Through a private placement offering
which closed on November 3, 1995, an additional 345,400 shares of common stock
were issued at a price of $3.18 per share. The Company expensed $300,000 for
compensation related to those transactions.

On February 26, 1996, the Company sold 113,040 shares of common stock at
$6.37 per share and issued a warrant to acquire an additional 83,524 shares at
$.01 per share on or before January 31, 2001. On November 26, 1996, the
Company sold 31,400 shares at $12.74 per share to a related party with whom
the Company has a management agreement.

During the nine-month period ended September 30, 1997, the Company issued
147,939 shares to various shareholders for cash of $1,375,000 and for the
final settlement to NationsCredit in the amount of $160,000 in connection with
the termination of the credit agreement.

Prime Common Stock

The Company has been authorized to issue 20 million shares of prime common
stock with a par value of $.0025 per share. Holders of prime common stock are
entitled to the following: (1) to vote one-tenth of one share with respect to
any matters voted upon by the stockholders of the Company, (2) the right to
receive dividends when declared by the Board of Directors of the Company,
provided that the per share amount is at least equal to the per share amount
declared for common stockholders, and (3) the right to receive a pro rata
share of distributions upon a "distribution event" by the Company after
payment of outstanding debt and other obligations, subject to the preferences
of Class A, Class B, and common stockholders. The fair market value of prime
common stock is determined periodically by outside appraisers. Outstanding
shares of prime common stock will convert to common stock, on a 0.314 to 1
basis, as adjusted, upon the Company's completion of a public offering in
which the sale of common stock results in net proceeds of $20 million or more.

On November 26, 1996, the Company issued 125,000 shares of prime common
stock at $1 per share in connection with the acquisition of the assets of
Metropolitan Plastic and Reconstructive Surgery, Ltd.

F-19
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During the nine months ended September 30, 1997, the Company issued
3,385,518 shares of prime common stock in connection with the purchase of nine
physician practices (Note 2). The Company also issued 529,148 shares of prime
common stock related to exercise of stock options. The consideration for this
exercise was in the form of cash and issuance of notes receivable.

Employee Stock Option Plans and Investor Warrants

The Company has nonqualified and incentive stock option plans to provide key
employees and directors and consultants of the Company with an increased
incentive to work for the success of the Company. The Company also issues
investor warrants to investors of the Company. The option price for all stock
options and warrants is usually the market value at the date of grants and
thus, the plans are generally noncompensatory. The options and warrants
generally expire five to ten years after the dates of their respective grants.

The Company accounts for the stock options and warrants under APB Opinion
No. 25, which requires compensation costs to be recognized only when the
option price differs from the market price at the grant date. FASB Statement
No. 123 allows a company to follow APB Opinion No. 25 with an additional
disclosure that shows what the Company's pro forma net loss would have been
using the compensation model under FASB Statement No. 123. The pro forma loss
for the year ended December 31, 1996 and the nine-month period ended June 30,
1997 was $3,605,446 and $17,235,754, respectively. The Company used the
minimum value method to estimate the fair values of options and warrants for
the pro forma determination. For purposes of the minimum value method, the
Company used U.S. Treasury strip rates for its risk-free rates, assumed no
volatility or future dividends, and assumed the expected lives of the options
and warrants through the applicable expiration dates.

The Company reserved a total of approximately 9,000,000 shares of common
stock for issuance to holders of employee stock options and investor warrants.

Stock option activity (adjusting prime stock options for their common stock
conversion) from inception date, August 29, 1995 to September 30, 1997 is
summarized as follows:

<TABLE>
<CAPTION>
NUMBER
OF OPTION
SHARES PRICE
-------- -------------
<S> <C> <C>
Outstanding at August 29, 1995....................... 0 $0
Granted............................................ 58,090 $ 0.64-$ 3.18
-------- -------------
Outstanding at December 31, 1995..................... 58,090 $ 0.64-$ 3.18
Granted............................................ 574,777 $ 3.18-$12.74
-------- -------------
Outstanding at December 31, 1996..................... 632,867 $ 0.64-$12.74
Granted............................................ 515,210 $ 0.04-$17.52
Exercised ......................................... (166,152) $ 0.04-$3.66
Canceled........................................... (31,400) $12.74
--------
Outstanding at September 30, 1997.................... 950,525 $ 1.59-$17.52
========
Exercisable at September 30, 1997.................... 99,773
========
</TABLE>

During the nine months ended September 30, 1997, the Company issued
1,374,831 warrants to investors of the Company and 566,000 warrants were
canceled. Total outstanding warrants at December 31, 1996 and September 30,
1997 is 756,000 and 1,564,831, respectively. An additional 155,249 warrants
will be released to the venture capitalists upon payment of the $6,210,000
subscription receivable.

F-20

<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and unused tax operating loss carryforwards.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows at December
31, 1995 and 1996 and September 30, 1997:

<TABLE>
<CAPTION>
1995 1996 1997
-------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses................... $ 20,418 $ 1,196,565 $ 7,768,932
Other, net............................. 38,535 (50,069) (199,464)
-------- ----------- -----------
Total net deferred tax assets........ 58,953 1,146,496 7,569,468
Valuation allowance...................... (58,953) (1,146,496) (7,569,468)
-------- ----------- -----------
Net deferred tax assets.................. $ -- $ -- $ --
======== =========== ===========
</TABLE>

Based on uncertainties associated with the future realization of the
deferred tax assets, the Company established a valuation allowance of $58,953
and $1,146,496, at December 31, 1995 and 1996 and $6,377,142 at September 30,
1997, respectively.

A reconciliation from the statutory federal income tax rate to the income
tax expense is as follows:

<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------ ------------------------------------------
JANUARY 1, AUGUST 29, 1995 NINE MONTH
YEAR ENDED 1995 TO TO YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1995 1996 1997
------------ ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Federal tax at statutory
rate................... $(21,520) $(123,854) $(56,762) $(974,823) $(5,723,752)
State income taxes, net
of federal tax
benefit................ (2,532) (14,571) (6,678) (114,685) (673,383)
Other................... -- -- 4,487 18,415 (12,117)
Change in valuation
allowance.............. 24,052 138,425 58,953 1,087,593 6,422,972
-------- --------- -------- --------- -----------
Income tax expense...... $ -- $ -- $ -- $ 16,500 $ 13,720
======== ========= ======== ========= ===========
</TABLE>

At September 30, 1997, the Company had net operating loss carryforwards of
approximately $20,000,000 which will begin to expire in the year 2010.

8. CONTINGENCIES

The Company and its affiliated physician groups are insured with respect to
medical malpractice risks on a claims-made basis. In the opinion of
management, the amount of potential liability with respect to these claims
will not materially affect the Company's financial position or results of
operations.

Under the terms of a management service agreement to provide medical service
to a managed care organization in Central Florida, the Company, through a 51%-
owned subsidiary, is required to place $250,000 in escrow after a minimum
number of members are assigned to the Company for medical care. The escrow
fund is to be used to fund quarterly losses, if any, for the provision of
medical care. The Company currently has $50,000

F-21
<PAGE>

PHYSICIAN HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

in escrow, as the minimum number of participants has not been obtained. Losses
beyond the amount placed in escrow are the responsibility of the managed care
organization. If a quarterly profit exists for two consecutive quarterly
periods, any amounts remaining in escrow are paid to the Company. The
agreement does not require amounts withdrawn from escrow to be replenished.

9. COMMITMENTS

The Company leases office space and certain equipment under operating lease
agreements which expire at various years through 2002. Operating leases may be
renewed for periods ranging from three to five years. At September 30, 1997,
minimum annual rental commitments under capital leases and noncancellable
operating leases with terms in excess of one year are as follows:

<TABLE>
<S> <C>
1997 (October 1997 to December 1997).......................... $ 706,066
1998.......................................................... 2,676,991
1999.......................................................... 2,103,024
2000.......................................................... 1,857,186
2001 and thereafter........................................... 3,406,988
-----------
Total....................................................... $10,750,255
===========
</TABLE>

Rent expense related to operating leases amounted to $43,490, $192,676,
$37,662, $447,794, and $860,115 for the year ended December 31, 1994, for the
period from January 1, 1995 to October 31, 1995, the period from inception
(August 29, 1995) to December 31, 1995, the year ended December 31, 1996, and
the nine months ended September 30, 1997, respectively.

10. SUBSEQUENT EVENTS

Since September 30, 1997, the Company purchased 21 physician practices
located in Atlanta, Cincinnati, Memphis, Orlando, and St. Louis. The total
purchase price for the acquisitions was approximately $42 million, which was
paid for through the issuance of common stock, debt, and payment of cash. The
practices will be accounted for as asset acquisitions by the Company under the
purchase method of accounting.

Subsequent to September 30, 1997, the Company entered into a line of credit
with a bank for a maximum amount of $62,500,000 to fund the acquisitions noted
above.

The board of directors has approved a .314 to 1 reverse stock split. This
reverse stock split has received shareholder approval. Accordingly, the
financial statements reflect the reverse stock split as if it had occurred at
the beginning of each period presented.

F-22
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Partners
Metroplex Hematology/Oncology Associates, L.L.P.

We have audited the accompanying balance sheets of Metroplex
Hematology/Oncology Associates, L.L.P. (the Partnership) as of December 31,
1995 and 1996, and the related statements of income and changes in partners'
capital and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metroplex
Hematology/Oncology Associates, L.L.P. at December 31, 1995 and 1996, 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.

ERNST & YOUNG LLP

Dallas, Texas
April 9, 1997

F-23
<PAGE>

METROPLEX HEMATOLOGY/ONCOLOGY ASSOCIATES, L.L.P.
DBA ARLINGTON CANCER CENTER

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MAY 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................ $ 159,468 $ 32,721 $ --
Accounts receivable, net of allowance for
doubtful accounts and contractual ad-
justments of $1,602,512 in 1995 and
$2,242,429 in 1996...................... 3,446,421 5,205,867 5,761,766
Due from related party................... 79,855 101,574 119,674
Prepaid expenses and other............... 359,207 592,814 395,185
----------- ----------- ----------
Total current assets................... 4,044,951 5,932,976 6,276,625
PROPERTY AND EQUIPMENT, NET................ 4,266,967 3,449,698 3,431,516
OTHER ASSETS............................... 218,875 10,000 19,244
----------- ----------- ----------
Total assets........................... $ 8,530,793 $ 9,392,674 $9,727,385
=========== =========== ==========
LIABILITIES AND PARTNER'S CAPITAL
CURRENT LIABILITIES:
Accounts payable......................... $ 640,987 $ 1,206,294 $1,211,525
Accrued expenses:
Professional liability................. 469,470 344,250 344,250
Group health........................... 226,529 225,729 225,727
Other.................................. 290,204 486,605 406,159
Patient refunds payable.................. 401,674 628,289 612,304
Current portion of obligation to former
partner................................. 110,916 110,916 110,916
Current portion of long-term debt........ 1,088,546 1,007,366 950,358
----------- ----------- ----------
Total current liabilities.............. 3,228,326 4,009,449 3,613,984
LONG-TERM DEBT, LESS CURRENT PORTION....... 1,972,896 966,063 1,097,400
LONG-TERM OBLIGATION TO FORMER PARTNER,
LESS CURRENT PORTION...................... 250,691 139,764 93,545
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL.......................... 3,078,880 4,277,398 4,675,201
----------- ----------- ----------
Total liabilities and partners' capi-
tal................................... $ 8,530,793 $ 9,392,674 $9,727,385
=========== =========== ==========
</TABLE>

See accompanying notes.

F-24
<PAGE>

METROPLEX HEMATOLOGY/ONCOLOGY ASSOCIATES, L.L.P.
DBA ARLINGTON CANCER CENTER
STATEMENTS OF INCOME AND CHANGES IN PARTNERS' CAPITAL

<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED DECEMBER 31 MAY 31,
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Medical fees.......... $19,955,090 $21,100,040 $23,296,897 $9,621,097 $9,832,048
Interest income and
other................ 205,402 184,698 141,858 14,619 13,564
----------- ----------- ----------- ---------- ----------
Total revenues...... 20,160,492 21,284,738 23,438,755 9,635,716 9,845,612
EXPENSES:
Salaries and bene-
fits................. 7,529,827 7,883,595 8,283,100 3,706,359 3,748,022
Medical supplies and
drugs................ 4,811,065 5,114,932 5,905,328 2,148,469 2,727,741
Rent.................. 1,255,144 1,305,057 1,361,150 538,372 561,211
Occupancy............. 682,101 1,082,205 1,203,625 300,981 288,897
Provision for doubtful
accounts............. 260,742 225,070 380,030 109,805 173,569
Purchased services.... 500,410 401,482 627,406 188,902 317,562
Depreciation and
amortization......... 606,239 1,096,267 1,008,758 414,066 316,234
Interest.............. 168,236 276,977 209,914 102,429 63,461
Other................. 1,693,887 2,097,854 1,810,926 778,125 751,172
----------- ----------- ----------- ---------- ----------
Total expenses...... 17,507,651 19,483,439 20,790,237 8,287,508 8,947,809
----------- ----------- ----------- ---------- ----------
NET INCOME.............. 2,652,841 1,801,299 2,648,518 1,348,208 897,803
PARTNERS' CAPITAL AT
BEGINNING OF PERIOD.... 1,993,591 2,727,581 3,078,880 3,078,880 4,277,398
DISTRIBUTIONS TO PART-
NERS................... (1,918,851) (1,450,000) (1,450,000) (600,000) (500,000)
----------- ----------- ----------- ---------- ----------
PARTNERS' CAPITAL AT END
OF PERIOD.............. $ 2,727,581 $ 3,078,880 $ 4,277,398 $3,827,088 $4,675,201
=========== =========== =========== ========== ==========
Pro forma net income:
(Note 11)
Net income............ $ 2,648,518 $ 897,803
Pro forma income
taxes................ (1,032,922) (350,143)
----------- ----------
Pro forma net income.... $ 1,615,596 $ 547,660
=========== ==========
</TABLE>

See accompanying notes.

F-25
<PAGE>

METROPLEX HEMATOLOGY/ONCOLOGY ASSOCIATES, L.L.P.
DBA ARLINGTON CANCER CENTER

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED DECEMBER 31 MAY 31,
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............ $ 2,652,841 $ 1,801,299 $ 2,648,518 $ 1,348,208 $ 897,803
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization....... 606,239 1,096,267 1,008,758 414,066 316,234
Changes in operating
assets and
liabilities:
Accounts
receivable, net.. (195,845) (715,196) (1,759,446) (588,455) (555,899)
Prepaid expenses,
due from related
party, and other
assets........... (536,106) 149,331 (46,451) (117,933) 170,285
Accounts payable,
accrued
liabilities and
patient refunds
payable.......... 236,196 302,917 862,303 (61,993) (91,200)
----------- ----------- ----------- ----------- ---------
Net cash
provided by
operating
activities..... 2,763,325 2,634,618 2,713,682 993,893 737,223
INVESTING ACTIVITIES
Capital expenditures.. (3,109,601) (1,050,346) (191,489) (35,511) (298,053)
----------- ----------- ----------- ----------- ---------
Net cash used in
investing
activities..... (3,109,601) (1,050,346) (191,489) (35,511) (298,053)
FINANCING ACTIVITIES
Proceeds from notes
payable.............. 2,186,855 660,353 -- 360,000 74,329
Payments on notes
payable.............. (600,899) (990,315) (1,088,013) (831,630) --
Distributions to
partners............. (1,918,851) (1,450,000) (1,450,000) (600,000) (500,000)
Obligation to former
partner.............. 472,000 (110,393) (110,927) (46,220) (46,220)
----------- ----------- ----------- ----------- ---------
Net cash
provided by
(used in)
financing
activities..... 139,105 (1,890,355) (2,648,940) (1,117,850) (471,891)
----------- ----------- ----------- ----------- ---------
Net decrease in cash
and cash
equivalents.......... (207,171) (306,083) (126,747) (159,468) (32,721)
Cash and cash
equivalents at
beginning of period.. 672,722 465,551 159,468 159,468 32,721
----------- ----------- ----------- ----------- ---------
Cash and cash
equivalents at end of
period............... $ 465,551 $ 159,468 $ 32,721 $ -- $ --
=========== =========== =========== =========== =========
</TABLE>

See accompanying notes.

F-26
<PAGE>

METROPLEX HEMATOLOGY/ONCOLOGY ASSOCIATES L.L.P.

DBA ARLINGTON CANCER CENTER

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1994, 1995 AND 1996

(INFORMATION AS OF MAY 31, 1997 AND FOR THE FIVE MONTHS ENDED MAY 31, 1996 AND
1997 IS UNAUDITED).

1. ORGANIZATION

Metroplex Hematology/Oncology Associates, L.L.P. (the Partnership) is a
Texas limited liability partnership formed in January 1980. The Partnership
operates and manages a medical practice in Arlington, Texas, specializing in
internal medicine, hematology, oncology, diagnostic radiology and
radiotherapy, and provides related laboratory and clinical services.

The Partnership has a term until December 31, 2050 or until a terminating
event (as defined) occurs. The formation as a limited liability partnership
during 1994 allows for a limitation to the partners on their exposure to
professional liability claims.

2. ACCOUNTING POLICIES

Partnership Basis of Presentation

The financial statements include only those assets, liabilities and results
of operations that relate to the business of the Partnership. The statements
do not include assets, liabilities or results of operations attributable to
the partners' individual activities.

Income Taxes

Income taxes are an obligation of the partners and, accordingly, are not
provided for in the financial statements. The partners include their
proportionate shares of Partnership net income or loss in their individual
income tax returns.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization
of assets owned or under capital leases are computed using straight-line and
accelerated methods over estimated useful lives ranging from 5 to 31 years.

Cash and Cash Equivalents

Cash equivalents are highly liquid money market instruments with original
maturities of less than 90 days.

Concentration of Credit Risk

Cash and cash equivalents used in operations consist primarily of cash in
financial institutions in checking and money market accounts and investments
in short-term money market mutual funds.

Concentration of credit risk relating to accounts receivable is limited to
some extent by the diversity and number of patients and payors. The
Partnership performs ongoing credit evaluations of its payors and maintains
allowances for potential credit losses.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and

F-27
<PAGE>

METROPLEX HEMATOLOGY/ONCOLOGY ASSOCIATES, L.L.P.
DBA ARLINGTON CANCER CENTER

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

related notes. Actual results could differ from these estimates and
assumptions. The primary areas of estimation affecting the accompanying
financial statements include the determination of the allowance for doubtful
accounts, contractual adjustments and the liability for medical malpractice
risks.

Health Insurance Program Reimbursement

The Partnership operates and manages a medical practice in Arlington, Texas.
Revenues from the Medicare and Medicaid programs combined accounted for
approximately 22% of the Partnership's net medical fees for the years ended
December 31, 1995 and 1996. Laws and regulations governing the Medicare and
Medicaid programs are complex and subject to interpretation. The Partnership
believes that it is in compliance with all applicable laws and regulations and
is not aware of any pending or threatened investigations involving allegations
of potential wrongdoing. While no such regulatory inquires have been made,
compliance with such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare and Medicaid programs.

Revenue Recognition

Patient revenues are recognized net of contractual adjustments related to
third-party payors and the Medicare and Medicaid programs. The amount paid by
the third-party payors is dependent upon the benefit included in the patient's
policy or amounts contractually established between the Partnership and the
third-party payors.

Interim Unaudited Financial Information

The financial statements as of May 31, 1997 and for the five months ended
May 31, 1996 and 1997 are unaudited; however, in the opinion of management,
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the unaudited financial statements for these
interim periods have been included. The results of interim periods are not
necessarily indicative of the results to be obtained for a full year.

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Furniture and fixtures.............................. $ 1,298,966 $ 1,314,003
Leasehold improvements.............................. 1,328,889 1,356,895
Computer equipment.................................. 910,757 965,988
Medical equipment................................... 9,757,840 9,812,402
Automobiles......................................... 145,908 184,561
----------- -----------
13,442,360 13,633,849
Less accumulated depreciation and amortization...... 9,175,393 10,184,151
----------- -----------
$ 4,266,967 $ 3,449,698
=========== ===========
</TABLE>

F-28
<PAGE>

METROPLEX HEMATOLOGY/ONCOLOGY ASSOCIATES, L.L.P.
DBA ARLINGTON CANCER CENTER

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

4. LONG-TERM DEBT

Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Note payable to a financial institution, secured by
medical equipment, bearing interest at 2.5% over
the U.S. Treasury rate (7.97% at December 31,
1996), payable in monthly installments to November
1999............................................... $ 755,534 $ 583,937
Notes payable to a bank secured by accounts receiv-
able and medical equipment, bearing interest at
prime (8.25% at December 31, 1996), payable in
monthly installments of $48,000 plus interest to
December 1998...................................... 1,664,609 1,078,109
Note payable to a bank, secured by medical
equipment, bearing interest at prime (8.25% at
December 31, 1996), payable in monthly installments
of $15,000 plus interest to January 1998........... $ 360,000 $ 195,000
Note payable to a bank, secured by medical
equipment, bearing interest at prime (8.25% at
December 31, 1996), payable in monthly installments
of $5,516 plus interest to September 1998.......... 189,583 116,383
Notes payable to partners, unsecured................ 91,716 --
---------- ----------
3,061,442 1,973,429
Less current portion of long-term debt.............. 1,088,546 1,007,366
---------- ----------
$1,972,896 $ 966,063
========== ==========
</TABLE>

The Partnership maintains a $250,000 revolving line of credit. There were no
borrowings outstanding at December 31, 1995 or 1996. Additionally, the note
agreements contain certain restrictive covenants that require the Partnership
to maintain minimum net worth, as defined in the note agreements, of
$1,500,000.

The Partnership's debt approximates fair value based on current incremental
borrowing rates for similar types of borrowing arrangements.

Maturities of long-term debt for the three years succeeding December 31,
1996, are as follows:

<TABLE>
<S> <C>
1997.............................................................. $1,007,366
1998.............................................................. 767,767
1999.............................................................. 198,296
Thereafter........................................................ --
----------
$1,973,429
==========
</TABLE>

All property and equipment and accounts receivable at December 31, 1995 and
1996 have been pledged as security under long-term debt and capital lease
obligations.

The Partnership is contingently liable for certain debt of a related
partnership (see Note 7).

Cash paid for interest was approximately $166,000 in 1994, $276,000 in 1995
and $214,000 in 1996.

F-29
<PAGE>

METROPLEX HEMATOLOGY/ONCOLOGY ASSOCIATES, L.L.P.
DBA ARLINGTON CANCER CENTER

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

5. OPERATING LEASES

The Partnership leases office space and equipment under operating leases
expiring at various dates through 2004. Some of the office space lease
agreements include an escalation clause based on increases in the U.S.
Consumer Price Index (CPI). Such possible increases are not considered in
computing future minimum lease payments.

Future minimum annual rental payments under noncancelable operating leases
are as follows at December 31, 1996:

<TABLE>
<S> <C>
1997.............................................................. $1,357,624
1998.............................................................. 1,283,955
1999.............................................................. 1,124,959
2000.............................................................. 1,085,436
2001.............................................................. 1,056,000
Thereafter........................................................ 3,168,000
----------
$9,075,974
==========
</TABLE>
6. RELATED PARTY TRANSACTIONS

The partners, individually, have invested in certain ventures outside of the
Partnership and are guarantors of the debt of such ventures.

The partners are also partners of R-M Medical Plaza I, L.P. (RM-I) and
certain partners are partners of R-M Medical Plaza II, L.P. (RM-II), which are
real estate partnerships whose sole purpose is to purchase and operate medical
office buildings. Included in rent expense is rent of $1,056,000 for 1995 and
1996 related to RM-I and $185,000 for 1995 and $202,000 for 1996 relating to
RM-II.

During the year, the Partnership advanced funds on behalf of RM-II. Amounts
owed the Partnership by RM-II were approximately $80,000 as of December 31,
1995 and $102,000 as of December 31, 1996.

7. COMMITMENTS AND CONTINGENCIES

The partnership agreement provides that partners terminating after December
31, 1995 with ten or more years of service to the Partnership will receive an
additional payment. The additional payment is determined by multiplying the
partner's interest in the Partnership by the profits of the Partnership for
the fiscal year preceding the terminating event and this amount is payable
over 60 months. At December 31, 1996, two of the seven partners were eligible
for this additional payment in the amount of $1,447,887. This amount is not
accrued in the financial statements and is unfunded.

During 1994, a partner retired from the practice and the Partnership
obligated itself to pay him $555,000 for consulting services to be performed.
The obligation bears no interest and is payable ratably over the next five
years regardless of when consulting services are requested by the Partnership.
Of the obligation, $304,000 has been paid through December 31, 1996. The
related asset has been amortized in full as of December 31, 1996.

An RM-II loan from a bank is secured by guarantees of certain partners and
of the Partnership who are each jointly and severally liable for the balance
of the loan ($1,791,410 at December 31, 1996). Additionally, the Partnership
has agreed to certain covenants in the loan agreement that, among other
things, require the

F-30
<PAGE>

METROPLEX HEMATOLOGY/ONCOLOGY ASSOCIATES, L.L.P.
DBA ARLINGTON CANCER CENTER

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

maintenance of certain financial ratios, restrict the issuance of new debt,
limit the amount of future investments, and restrict the amount of
distributions to the partners.

8. EMPLOYEE BENEFIT PLAN

The Partnership participates in a defined contribution plan, established in
May 1989. Employees who have completed one year of service and attained the
age of 21 are eligible to participate. Participants contribute a voluntary
amount that is matched by the Partnership at 50% of the employee's
contribution, up to 5% of the employee's salary. Participants are fully vested
in their voluntary contributions. Participants vest in the Partnership's
contributions 20% upon completion of two years of vesting service and 20% for
each of the next four years. The Partnership contributed to the plan
approximately $91,000 in 1995 and $98,000 in 1996, which amounts are included
in salaries and benefits in the accompanying statements of income.

9. LITIGATION

In the ordinary course of business, the partners and or the Partnership are
sometimes named as defendants in various legal proceedings although there are
no current matters pending. The results of litigation cannot be predicted with
certainty; however, the Partnership maintains claims-made insurance coverage
and historically litigation, when it arises, will be adequately covered by
insurance and will not have a material adverse effect on the Partnership's
financial statements.

10. AGREEMENT TO SELL CERTAIN ASSETS

Subsequent to December 31, 1996, the Partnership formally entered into an
agreement to sell certain assets of the Partnership, as well as, an agreement
whereby an independent company will manage the physicians' medical practice.
The agreements are contingent upon the closing of the transaction, which is
expected to include cash, notes and stock in the newly created company. The
Partnership is expected to continue operations after the transaction.

11. PRO FORMA INCOME TAXES (UNAUDITED)

The income taxes on earnings of the partnership is the responsibility of the
partners. The pro forma adjustments reflected on the statements of income
assume this partnership was subject to income taxes. Pro forma income tax
expense has been calculated using statutory federal and state tax rates,
estimated at 39%.

F-31
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Greater Cincinnati Gastroenterology Associates, Inc.:

We have audited the accompanying balance sheet of GREATER CINCINNATI
GASTROENTEROLOGY ASSOCIATES, INC. (an Ohio corporation) as of December 31,
1996 and September 30, 1997 and the related statements of operations, owners'
equity, and cash flows for the year ended December 31, 1996 and the nine
months ended September 30, 1997. 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 Greater Cincinnati
Gastroenterology Associates, Inc. as of December 31, 1996 and September 30,
1997 and the results of its operations and its cash flows for the year then
ended December 31, 1996 and the nine months ended September 30, 1997 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Cincinnati, Ohio
November 20, 1997

F-32
<PAGE>

GREATER CINCINNATI GASTROENTEROLOGY ASSOCIATES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 9,901 $ 310,566
Accounts receivable, less allowance for
uncollectible accounts of $100,000 and $117,000
at December 31, 1996 and September 30, 1997,
respectively..................................... 986,258 1,265,536
Prepaid expenses and other........................ 2,546 23,369
---------- ----------
Total current assets............................ 998,705 1,599,471
Property and equipment, net (Note 3)................ 138,010 111,891
---------- ----------
Total assets.................................... $1,136,715 $1,711,362
========== ==========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 150,054 $ 178,723
Other accrued liabilities......................... 78,476 208,091
Deferred taxes.................................... 294,907 412,873
---------- ----------
Total current liabilities....................... 523,437 799,687
---------- ----------
Deferred taxes.................................... 16,040 17,857
Commitments and contingencies (Note 6)
Owners' equity (Note 2):
Common stock, no par value; 500 shares authorized,
430 shares issued and outstanding at December 31,
1996 and September 30, 1997...................... 3,225 3,225
Additional paid in capital........................ 7,203 7,203
Retained earnings................................. 586,810 883,390
---------- ----------
Total owners' equity............................ 597,238 893,818
---------- ----------
Total liabilities and owners' equity............ $1,143,439 $1,711,362
========== ==========
</TABLE>

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

F-33
<PAGE>

GREATER CINCINNATI GASTROENTEROLOGY ASSOCIATES, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE-MONTH PERIOD
1996 ENDED SEPTEMBER 30
------------ ----------------------
1996 1997
----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net patient service revenues............ $6,097,350 $4,560,122 $4,393,872
---------- ---------- ----------
Operating expenses:
Salaries, wages, and benefits......... 754,139 522,389 604,354
Compensation to owner physicians...... 4,230,815 2,763,334 2,449,314
General and administrative expenses... 1,038,713 791,180 807,732
Bad debt expense...................... 50,055 37,500 38,200
Depreciation.......................... 24,749 23,804 30,139
---------- ---------- ----------
6,098,471 4,138,207 3,929,739
---------- ---------- ----------
(Loss) income from operations........... (1,121) 421,915 464,133
Other income, net....................... 26,055 24,776 14,221
---------- ---------- ----------
Income before income taxes.............. 24,934 446,691 478,354
Provision for income taxes.............. 9,475 169,743 181,774
---------- ---------- ----------
Net income.............................. $ 15,459 $ 276,948 $ 296,580
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-34

<PAGE>

GREATER CINCINNATI GASTROENTEROLOGY ASSOCIATES, INC.

STATEMENTS OF OWNERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
------------- ADDITIONALPAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ----------------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1995..................... 430 $3,225 $7,203 $577,351 $587,779
Net income.............. -- -- -- 15,459 15,459
Dividends............... -- -- -- (6,000) (6,000)
--- ------ ------ -------- --------
Balance, December 31,
1996..................... 430 3,225 7,203 586,810 597,238
Net income ............. -- -- -- 296,580 296,580
--- ------ ------ -------- --------
Balance, September 30,
1997 .................... 430 $3,225 $7,203 $883,390 $893,818
=== ====== ====== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-35
<PAGE>

GREATER CINCINNATI GASTROENTEROLOGY
ASSOCIATES, INC,

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1996 1996 1997
------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows from operating activities:
Net income................................ $ 15,459 $ 276,948 $296,580
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation............................ 24,749 18,586 30,139
Bad debt expense........................ 50,055 37,500 38,200
Changes in assets and liabilities:
Accounts receivable................... (142,467) (119,747) (311,477)
Prepaid expenses and other............ 9,348 (28,131) (20,823)
Accounts payable...................... (227) (57,015) (28,669)
Accrued liabilities................... 9,807 (74,983) 129,615
Deferred taxes........................ 9,475 169,743 119,783
--------- --------- --------
Total adjustments................... (39,260) (54,047) 14,106
--------- --------- --------
Net cash (used in) provided by
operating activities............... (23,801) 222,901 310,686
Cash flows from investing activities:
Additions to property and equipment, net.. (50,127) (2,689) (10,021)
Cash flows from financing activities:
Dividends paid............................ (6,000) -- --
--------- --------- --------
Net (decrease) increase in cash and cash
equivalent equivalents..................... (79,928) 220,212 300,665
Cash and cash equivalents, beginning of
period..................................... 89,829 89,829 9,901
--------- --------- --------
Cash and cash equivalents, end of period.... $ 9,901 $ 310,041 $310,566
========= ========= ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest.. $ 79 $ 79 $ --
========= ========= ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-36
<PAGE>

GREATER CINCINNATI GASTROENTEROLOGY ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(INFORMATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND OPERATIONS

Greater Cincinnati Gastroenterology Associates, Inc., an Ohio corporation,
(the "Company") was incorporated in 1968. The Company currently employs nine
physicians and over 30 employees. The physicians specialize in the diagnosis
and treatment of diseases of the digestive system. There are currently twelve
office locations throughout the Greater Cincinnati area.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Unaudited Financial Information

Cash and Cash Equivalents

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

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.

Accounts Receivable

Accounts receivable principally represents receivable 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.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method for financial reporting purposes and accelerated
methods for tax purposes.

The useful lives of property and equipment are as follows:

<TABLE>
<S> <C>
Equipment................................................. Five years
Furniture and fixtures.................................... Seven years
Leasehold improvements.................................... Life of the lease
</TABLE>

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.

F-37
<PAGE>

GREATER CINCINNATI GASTROENTEROLOGY ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Owners' Equity

Owners' equity includes the respective capital stock owned by physician-
owners, 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 to the continuing owners in the case of
certain events such as the owner's retirement or death.

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 governmental programs such
as Medicare and Medicaid and by private insurers. The Company manages credit
risks 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 as of December 31, 1996 and September 30, 1997
consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Leasehold improvements............................ $ 17,345 $ 17,345
Equipment......................................... 13,529 13,371
Furniture and fixtures............................ 174,386 183,063
-------- ---------
205,260 213,779
Less accumulated depreciation..................... (67,250) (101,888)
-------- ---------
$138,010 $ 111,891
======== =========
</TABLE>
4. 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).

The following details the temporary differences and carryforwards giving
rise to the deferred tax assets and liabilities at December 31, 1996 and
September 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Accounts receivable, net.......................... $(374,778) $(480,904)
Depreciation...................................... (16,040) (17,857)
Accounts payable.................................. 31,710 47,634
Other accrued liabilities......................... 25,397 20,397
Net operating loss carryforwards.................. 22,764 --
--------- ---------
Net deferred tax liability........................ $(310,947) $(430,730)
========= =========
</TABLE>

F-38
<PAGE>

GREATER CINCINNATI GASTROENTEROLOGY ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

As reported on the balance sheet as of December 31, 1996 and September 30,
1997:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Current deferred tax liability....................... $(294,907) $(412,873)
Noncurrent deferred tax asset........................ (16,040) (17,857)
--------- ---------
$(310,947) $(430,730)
========= =========
</TABLE>

A reconciliation of the provision for income taxes at the federal statutory
rate to the Company's effective tax rate for the year ended December 31, 1996
and the nine months ended September 30, 1997 is as follows:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Provision at statutory rate.......................... $8,478 $162,640
State income taxes, net of federal benefit........... 997 19,134
------ --------
Provision for income taxes........................... $9,475 $181,774
====== ========
</TABLE>

5. EMPLOYEE BENEFIT PLAN

The Company sponsors a qualified profit-sharing plan for eligible employees.
Contributions to the plan, which are made at the discretion of the board of
directors, aggregated approximately $248,000 and $229,000 for the year ended
December 31, 1996 and for the nine months ended September 30, 1997.

6. COMMITMENTS AND CONTINGENCIES

Lease Obligations

The Company leases facilities under operating leases which expire at various
dates through 2006. Future minimum lease payments under these operating leases
are as follows:

<TABLE>
<S> <C>
1998 (October 1997 through September 1998)......................... $152,387
1999............................................................... 134,552
2000............................................................... 131,856
2001............................................................... 123,856
2002............................................................... 107,856
Thereafter......................................................... 413,448
</TABLE>

Lease expense for the year ended December 31, 1996 and the nine months ended
September 30, 1997 totaled approximately $152,000 and $123,000, 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.

Employment Agreements

Certain management personnel and physician employees are covered by
employment agreements that may be terminated at any time in accordance with
the terms of the agreement. The agreement also includes terms for professional
conduct, salary, and benefits provisions.

F-39

<PAGE>

GREATER CINCINNATI GASTROENTEROLOGY ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

7. 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.

8. RELATED-PARTY TRANSACTIONS

For the year ended December 31, 1996 and the nine months ended September 30,
1997, the Company expensed approximately $150,500 and $118,000, respectively,
in rent and maintenance for one of its locations in Cincinnati which is owned
by certain physician-owners.

The Company provides medical treatment of endoscopic patients for a clinical
research company owned by certain physician-owners. For the year ended
December 31, 1996, and the nine months ended September 30, 1997 the Company
recognized approximately $64,000 and $59,000, respectively, in fee income and
was reimbursed for approximately $208,000 and $142,000, respectively, for
specific operating expenses paid by the Company on behalf of the physician-
owners. These operating expenses primarily were specifically incurred by the
physician-owners with minimal allocation of expenses.

The Company shares certain operating costs with a surgical center owned by
an independent third party. During 1996 and the first nine months of 1997, the
Company was reimbursed approximately $31,000 and $18,800, respectivley, for
such specifically identifiable costs. In addition, certain patients received a
global charge for services performed by the Company and the surgical center.
The global fee is then paid to the Company. In 1996 and the nine months of
1997, the Company paid $27,000 and $2,300, respectively, to the surgical
center for its share of global fees received by the Company.

During the first five months of 1996, the Company leased office space from a
partnership owned by certain physician-owners. The Company expensed
approximately $16,000 in rent for this location for the year ended December
31, 1996.

F-40
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Internal Medicine Specialists, Inc.:

We have audited the accompanying balance sheet of INTERNAL MEDICINE
SPECIALISTS, INC., (a Florida corporation), as of December 31, 1996 and
September 30, 1997 and the related statements of operations, owners' equity,
and cash flows for the year ended December 31, 1996 and the nine months ended
September 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Internal Medicine
Specialists, Inc. as of December 31, 1996 and September 30, 1997 and the
results of its operations and its cash flows for the year ended December 31,
1996 and the nine months ended September 30, 1997 in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
November 20, 1997

F-41
<PAGE>

INTERNAL MEDICINE SPECIALISTS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 28,836 $ 336,904
Accounts receivable, less estimated allowances for
uncollectible accounts of $137,920 and $158,305
at December 31, 1996 and September 30, 1997, re-
spectively....................................... 679,160 988,739
Prepayments and other............................. 34,842 41,000
---------- ----------
Total current assets............................ 742,838 1,366,643
Property and equipment, net......................... 248,302 218,844
Deferred taxes...................................... 94,831 37,211
---------- ----------
Total assets.................................... $1,085,971 $1,622,698
========== ==========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 85,037 $ 67,191
Accrued expenses.................................. 84,552 377,352
Notes payable line of credit...................... 292,646 437,654
Current portion of long term debt................. 19,362 25,864
Deferred taxes.................................... 251,412 266,746
---------- ----------
Total current liabilities....................... 733,009 1,174,807
---------- ----------
Long term debt...................................... 60,932 37,622
---------- ----------
Commitments and contingencies (Note 8)
Owners' equity:
Common stock, $10 par value, 500 shares
authorized, 280 shares issued, and 40 shares held
in treasury at December 31, 1996 and
September 30, 1997............................... 2,800 2,800
Additional paid in capital........................ 3,767 3,767
Retained earnings................................. 307,149 425,388
Treasury stock.................................... (21,686) (21,686)
---------- ----------
Total owners' equity............................ 292,030 410,269
---------- ----------
Total liabilities and owners' equity............ $1,085,971 $1,622,698
========== ==========
</TABLE>

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

F-42
<PAGE>

INTERNAL MEDICINE SPECIALISTS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------- ---
1996 1996 1997
------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net patient revenues.................... $6,166,927 $4,721,065 $5,310,453
---------- ---------- ----------
Operating expenses:
Salaries, wages, and benefits......... 1,901,646 1,378,937 1,592,276
Compensation to owner physicians...... 2,628,951 1,984,685 2,230,343
General and administrative expenses... 1,312,409 1,124,885 1,124,383
Bad debt expense...................... 125,754 94,316 80,385
Depreciation.......................... 68,030 51,024 57,777
---------- ---------- ----------
6,036,790 4,633,847 5,085,164
---------- ---------- ----------
Income from operations.................. 130,137 87,218 225,289
Interest and other expense, net......... 25,953 17,340 34,095
---------- ---------- ----------
Income before income taxes.............. 104,184 69,878 191,194
Provision for income taxes.............. 38,120 25,132 72,955
---------- ---------- ----------
Net income.............................. $ 66,064 $ 44,742 $ 118,239
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-43

<PAGE>

INTERNAL MEDICINE SPECIALISTS, INC.

STATEMENTS OF OWNERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------- PAID IN --------------- RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at, December 31,
1995................... 280 $2,800 $3,767 (40) $(21,686) $241,085 $225,966
Net income............ -- -- -- -- -- 66,064 66,064
--- ------ ------ --- -------- -------- --------
Balance at, December 31,
1996................... 280 2,800 3,767 (40) (21,686) 307,149 292,030
Net income............ -- -- -- -- -- 118,239 118,239
--- ------ ------ --- -------- -------- --------
Balance at, September
30, 1997............... 280 $2,800 $3,767 (40) $(21,686) $425,388 $410,269
=== ====== ====== === ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-44
<PAGE>

INTERNAL MEDICINE SPECIALISTS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------
1996 1996 1997
------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 66,064 $ 44,746 $ 118,239
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 68,030 51,024 57,777
Bad debt expense....................... 125,754 94,316 80,385
Change in assets and liabilities:
Accounts receivable.................. (248,822) (199,327) (389,964)
Prepayments and other................ (8,543) 26,299 (6,185)
Accounts payable and accrued liabili-
ties................................ 42,263 256,277 274,954
Deferred taxes, net.................. 38,120 25,132 72,955
--------- --------- ---------
Total adjustments.................. 16,802 253,724 89,949
--------- --------- ---------
Net cash provided by operating ac-
tivities.......................... 82,866 298,470 208,188
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant, and equip-
ment.................................... (124,061) (120,612) (28,320)
--------- --------- ---------
Cash flows from financing activities:
Principal payments of debt............... (165,773) (124,330) (16,808)
Proceeds from line of credit............. 232,434 180,851 145,008
--------- --------- ---------
Net cash provided by financing ac-
tivities.......................... 66,661 56,521 128,200
--------- --------- ---------
Net increase in cash and cash equivalents.. 25,466 234,379 308,068
Cash and cash equivalents at beginning of
period.................................... 3,370 3,370 28,836
--------- --------- ---------
Cash and cash equivalents at end of peri-
od........................................ $ 28,836 $ 237,749 $ 336,904
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest............................... $ 25,953 $ 17,340 $ 34,095
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-45
<PAGE>

INTERNAL MEDICINE SPECIALISTS, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(INFORMATION FOR THE NINE MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND OPERATIONS

Internal Medicine Specialists, Inc. (the "Company") was incorporated in the
state of Florida on October 27, 1971. The Company currently has 14 physicians,
7 nephrologists, and 7 gastroenterologists. The physicians within the group
primarily focus on kidney and stomach surgery. There are currently three
office locations in Orlando and Ocoee, Florida.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Unaudited Financial Information

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.

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
and bad debts. 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.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated service lives of depreciable
assets (five years for equipment, five to seven years for furniture and
fixtures, and ten years for leasehold improvements). 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 capital stock owned by 12 physician-
owners and treasury stock repurchased by the Company from two terminated
physician-owners, recorded at cost. Various types of

F-46
<PAGE>

INTERNAL MEDICINE SPECIALISTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

agreements exist among the owners which call for the repurchase of a
physician's ownership interest by the Company in the case of certain events,
such as the owner's termination, retirement, or death.

Net Patient Service Revenues

Concentration of Credit Risk

The Company extends credit to patients covered by insurance programs,
including governmental programs, such as 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 September 30, 1997 consisted
of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Leasehold improvements............................... $ 111,517 $ 112,744
Equipment............................................ 473,837 498,814
Furniture and fixtures............................... 439,793 441,908
---------- ----------
1,025,147 1,053,466
Less accumulated depreciation........................ (776,845) (834,622)
---------- ----------
$ 248,302 $ 218,844
========== ==========
</TABLE>

4. NOTES PAYABLE--LINES OF CREDIT

The notes payable consist of two lines of credit with a bank. One of the
lines of credit allows total borrowings of up to $200,000 with principal and
interest due monthly at a rate of 8.5%, due on demand or January 3, 1997. The
Company has another line of credit with the same bank that allows maximum
borrowing of up to $300,000 with principal and interest due monthly at a rate
of 8.25%, due on demand or October 4, 1997. Both lines of credit are secured
by certain assets of the Company. As of December 31, 1996 and September 30,
1997, the outstanding balance on the lines of credit was $292,646 and
$437,654, respectively.

F-47
<PAGE>

INTERNAL MEDICINE SPECIALISTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

5. LONG-TERM DEBT

The Company's long-term debt at December 31, 1996 and September 30, 1997 is
as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Note payable to a terminated physician-owner of
the Company for stock repurchased by the Company;
principal and interest of 9% per annum due in 84
monthly installments beginning March 1, 1993..... $ 9,562 $ 4,914
Note payable to a terminated physician-owner of
the Company as compensation for past services;
principal and imputed interest of 8.5% payable in
84 monthly installments beginning March 1, 1993.. 40,116 31,682
Note payable to a terminated physician-owner of
the Company as compensation for past services;
principal and 30,616imputed interest of 8.5%
payable in 84 monthly installments beginning
August 1, 1994................................... 30,616 26,890
-------- -------
Total 80,294 63,486
Less current portion.............................. (19,362) (25,864)
-------- -------
Long-term debt.................................... $ 60,932 $37,622
======== =======
</TABLE>

The aggregate maturities of long-term debt at September 30, 1997 are as
follows:

<TABLE>
<S> <C>
1998................................................................. $25,864
1999................................................................. 23,050
2000................................................................. 9,896
2001 and thereafter.................................................. 4,676
-------
$63,486
=======
</TABLE>

6. INCOME TAXES

The provision for income taxes is 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).

The following details the temporary differences and carryforwards giving
rise to the deferred tax assets and liabilities at December 31, 1996 and
September 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Accounts receivable, net........................... $(258,321) $(374,723)
Depreciation....................................... (4,533) 126
Accounts payable................................... 20,006 123,389
Other accrued liabilities.......................... 26,595 20,275
Net operating loss carryforwards................... 72,769 16,810
Other.............................................. (13,097) (15,412)
--------- ---------
Net deferred tax liability......................... $(156,581) $(229,535)
========= =========
</TABLE>

As reported on the balance sheet as of December 31, 1996 and September 30,
1997:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
Current deferred tax liability..................... $(251,412) $(266,746)
Noncurrent deferred tax asset...................... 94,831 37,211
--------- ---------
$(156,581) $(229,535)
========= =========
</TABLE>

F-48
<PAGE>

INTERNAL MEDICINE SPECIALISTS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

A reconciliation of the provision for income taxes at the federal statutory
rate to the Company's effective tax rate for the year ended December 31, 1996
and for the nine months ended September 30, 1997 is as follows:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Provision at statutory rate.......................... $35,423 $65,006
State income taxes, net of federal benefit........... 2,697 7,949
------- -------
Provision for income taxes........................... $38,120 $72,955
======= =======
</TABLE>

7. EMPLOYEE BENEFIT PLAN

The Company sponsors a defined contribution plan under Section 401(k) of the
Internal Revenue Code that covers substantially all employees. The plan is
contributory with respect to employees only. The Company does not contribute
to the plan.

8. 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 September 30, 1997 are as follows:

<TABLE>
<S> <C>
1998 (October 1, 1997 through December 31, 1998)................... $226,893
1999............................................................... 17,896
2000............................................................... 18,408
2001............................................................... 18,912
2002 & Thereafter.................................................. 52,870
</TABLE>

Rent expense for the year ended December 31, 1996 and the nine months ended
September 30, 1997 was $273,600 and $224,441, respectively.

Insurance

Employment Agreements

Physician-owners of the Company are covered by employment agreements that
may be terminated at any time in accordance with terms of the agreement. The
agreement also includes terms for professional conduct, salary, and benefits
provisions.

9. LEGAL PROCEEDINGS

The Company is subject to legal proceedings and 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.

10. RELATED-PARTY TRANSACTIONS

As of December 31, 1996 and September 30, 1997, the Company has outstanding
receivables of $8,423 and $90,000, respectively from two physicians of the
Company.

The Company has outstanding notes payable to two terminated physicians of
the Company for consideration of deferred compensation and the repurchase of
common stock. The total outstanding notes payable to these physicians are
$80,294 and $63,486 at December 31, 1996 and September 30, 1997, respectively.

F-49
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Parkcrest Surgical Associates, Inc.:

We have audited the accompanying balance sheet of PARKCREST SURGICAL
ASSOCIATES, INC. (a Missouri corporation) as of March 31, 1997 and September
30, 1997 and the related statements of operations, owners' equity, and cash
flows for the year ended March 31, 1997 and the six months ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Parkcrest Surgical
Associates, Inc. as of March 31, 1997 and the results of its operations and
its cash flows for the year ended March 31, 1997 and the six months ended
September 30, 1997 in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

St. Louis, Missouri
December 9, 1997

F-50
<PAGE>

PARKCREST SURGICAL ASSOCIATES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
---------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 76,263 $ 2,973
Accounts receivable, less estimated allowances for
uncollectible accounts of $299,077 and $302,195 as
of March 31, 1997 and September 30, 1997,
respectively...................................... 1,644,928 1,662,075
Receivable from physicians......................... 53,394 28,393
Prepaid expenses and other......................... 264,228 179,697
---------- ----------
Total current assets............................. 2,038,813 1,873,138
Property and equipment, net (Note 3)................. 521,470 561,571
Deferred Taxes....................................... 48,115 141,320
Other noncurrent assets.............................. 15,518 13,651
---------- ----------
Total assets..................................... $2,623,916 $2,589,680
========== ==========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Note payable line of credit (Note 4)............... $ 200,000 $ 300,000
Current maturities of long term debt (Note 5)...... 153,842 62,613
Accounts payable................................... 232,677 388,525
Accrued liabilities................................ 168,207 109,656
Deferred taxes..................................... 602,419 611,417
---------- ----------
Total current liabilities........................ 1,357,145 1,472,211
---------- ----------
Long term debt (Note 5).............................. 52,992 41,080
---------- ----------
Other long term liabilities.......................... 164,000 164,000
---------- ----------
Commitments and contingencies (Note 8)
Owners' equity:
Common stock, $1 par value; 3,000 shares
authorized, 1,300 shares issued (1,040 shares
outstanding and 260 shares held in treasury)...... 1,300 1,300
Additional paid in capital......................... 67,210 67,210
Retained earnings.................................. 994,971 857,581
Treasury stock, at cost............................ (13,702) (13,702)
---------- ----------
Total owners' equity............................. 1,049,779 912,389
---------- ----------
Total liabilities and owners' equity............. $2,623,916 $2,589,680
========== ==========
</TABLE>

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

F-51
<PAGE>

PARKCREST SURGICAL ASSOCIATES, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED ENDED SEPTEMBER 30,
MARCH 31, ----------------------
1997 1996 1997
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Net patient service revenues.............. $10,515,243 $5,182,617 $5,465,726
----------- ---------- ----------
Operating expenses:
Salaries, wages, and benefits........... 2,222,021 945,252 1,180,034
Compensation to owner physicians........ 4,693,182 2,270,598 2,801,529
Bad debt expense........................ 43,887 26,052 30,518
General and administrative expenses..... 3,195,313 1,505,490 1,634,635
Depreciation and amortization........... 48,201 21,695 28,141
----------- ---------- ----------
10,202,604 4,769,087 5,674,857
----------- ---------- ----------
Income (loss) from operations............. 312,639 413,530 (209,131)
Other income (expense), net............... 26,776 39,442 (12,466)
----------- ---------- ----------
Income (loss) before taxes................ 339,415 452,972 (221,597)
Provision (benefit) for income taxes (Note
7)....................................... 128,978 172,125 (84,207)
----------- ---------- ----------
Net income (loss)......................... $ 210,437 $ 280,847 $ (137,390)
=========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-52
<PAGE>

PARKCREST SURGICAL ASSOCIATES, INC.

STATEMENTS OF OWNERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------- PAID IN RETAINED ---------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
------ ------ ---------- --------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1996................... 1,300 $1,300 $67,210 $ 784,534 -- $ -- $ 853,044
Purchase of treasury
stock................ -- -- -- -- (260) (13,702) (13,702)
Net income............ -- -- -- 210,437 -- -- 210,437
----- ------ ------- --------- ---- -------- ----------
Balance, March 31,
1997................... 1,300 1,300 67,210 994,971 (260) (13,702) 1,049,779
Net income............ -- -- -- (137,390) -- -- (137,390)
----- ------ ------- --------- ---- -------- ----------
Balance, September 30,
1997................... 1,300 $1,300 $67,210 $ 857,581 (260) $(13,702) $ 912,389
===== ====== ======= ========= ==== ======== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-53
<PAGE>

PARKCREST SURGICAL ASSOCIATES, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED ENDED SEPTEMBER 30,
MARCH 31, ---------------------
1997 1996 1997
---------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 210,437 $ 280,847 $(137,390)
--------- --------- ---------
Adjustments to reconcile net income to net
cash provided by (used for) operating ac-
tivities:
Loss on disposal of fixed assets......... 75,979 -- --
Depreciation and amortization............ 48,201 21,695 28,141
Bad debt expense......................... 43,887 26,052 30,518
(Increase) in accounts receivable........ (285,272) (169,337) (47,665)
(Increase) decrease in receivable from
physicians.............................. (53,394) -- 25,001
Decrease in prepaid expenses and other... 88,164 149,857 84,531
(Increase) decrease in other noncurrent
assets.................................. (1,757) (517) 1,867
Increase in accounts payable............. 169,488 10,053 155,848
Decrease in accrued liabilities.......... (41,239) (81,749) (58,551)
Increase in current taxes payable........ -- 132,358 --
Increase (decrease) in net deferred tax
liabilities............................. 128,978 39,771 (84,207)
--------- --------- ---------
Total adjustments...................... 173,035 128,183 135,483
--------- --------- ---------
Net cash provided by (used in) operat-
ing activities........................ 383,472 409,030 (1,907)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........ (259,807) (111,543) (68,242)
Proceeds from sale of fixed assets......... 37,400 -- --
--------- --------- ---------
Net cash used in investing activities.. (222,407) (111,543) (68,242)
--------- --------- ---------
Cash flows from financing activities:
Payments on long-term debt................. (134,402) (9,665) (103,141)
Purchase of treasury stock................. (13,702) -- --
Net proceeds (payments) under line of cred-
it........................................ -- (170,000) 100,000
--------- --------- ---------
Net cash used in financing activities.. (148,104) (179,665) (3,141)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 12,961 117,822 (73,290)
Cash and cash equivalents at beginning of
period...................................... 63,302 63,302 76,263
--------- --------- ---------
Cash and cash equivalents at end of period... $ 76,263 $ 181,124 $ 2,973
========= ========= =========
Supplemental disclosure of cash flows
information:
Cash paid during the period for interest... $ 43,038 $ 22,146 $ 17,824
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-54
<PAGE>

PARKCREST SURGICAL ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 1997 AND SEPTEMBER 30, 1997

(INFORMATION FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND OPERATIONS

Parkcrest Surgical Associates, Inc. (the "Company") was incorporated in
1969. The Company operates a medical practice at various locations and
provides surgical and other health care services to individuals in the St.
Louis Metropolitan Area. The physicians within the group specialize in general
surgery, spinal surgery, colo-rectal surgery, vascular surgery, sports
medicine, orthopedic surgery, surgical oncology, plastic and reconstructive
surgery, hand surgery, podiatric surgery, and physical medicine and
rehabilitation. There are currently 17 physicians and 5 physician assistants.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Unaudited Financial Information

The financial statements for the six months ended September 30, 1996 are
unaudited; however, in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of
the unaudited financial statements for these interim periods have been
included. The results of interim periods are not necessarily indicative of the
results to be obtained for a full year.

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.

Property and Equipment

Equipment and leasehold improvements are carried at cost, less accumulated
depreciation and amortization computed using straight-line and accelerated
methods. Equipment and furniture and fixtures are depreciated over periods
ranging from 3 to 5 years. Leasehold improvements are amortized over periods
ranging from 3 to 40 years.

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.

Net Patient Service Revenues

F-55
<PAGE>

PARKCREST SURGICAL ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

and others for services rendered. Additionally, the Company participates in
agreements with managed care organizations to provide services at negotiated
rates.

Owners' Equity

Owners' equity includes the respective capital stock owned by various
physician-owners and treasury stock repurchased by the Company from terminated
physician-owners, recorded at cost. Various types of agreements exist among
the owners which call for the repurchase of a physician's ownership interest
by the Company in the case of certain events, such as the owner's termination,
retirement, or death.

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

Equipment and leasehold improvements as of March 31, 1997 and September 30,
1997 consist of the following:

<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
Medical and laboratory equipment...................... $ 338,324 338,122
Furniture and fixtures................................ 351,737 371,210
Leasehold improvements................................ 367,150 416,121
---------- ---------
1,057,211 1,125,453
Less accumulated depreciation and amortization........ (535,741) (563,882)
---------- ---------
$ 521,470 $ 561,571
========== =========
</TABLE>

Certain leases in which the Company is lessee are considered to be
equivalent to installment purchases for purposes of accounting presentation.
Equipment under capital leases in the amount of $12,805 at March 31, 1997 and
$59,411 at September 30, 1997 is capitalized using interest rates appropriate
at the inception of the related leases.

Depreciation and amortization expense was $48,201 for the year ended March
31, 1997 and $28,141 for the six months ended September 30, 1997.

4. NOTE PAYABLE -- LINE OF CREDIT

The note payable consists of a line of credit with a bank that allows for
borrowings of up to $250,000 at March 31, 1997 and $350,000 at September 30,
1997. The borrowings are secured by accounts receivable, furniture and
equipment and are due on demand or September 30, 1998. Interest on the
borrowings is payable monthly at the prime rate. As of March 31, 1997 and
September 30, 1997, outstanding borrowings were $200,000 and $300,000,
respectively.

F-56
<PAGE>

PARKCREST SURGICAL ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

5. LONG-TERM DEBT

Long-term debt at March 31, 1997 and September 30, 1997 consists of the
following:

<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Note payable-bank secured by equipment and personal
guarantees of stockholders and employees, payable in
monthly installments of $16,834 including principal
and interest of 7.5%, with the final installment due
December 1997........................................ $141,409 $44,282
Capitalized lease obligations, secured by equipment,
payable in monthly installments of $1,527 including
principal and interest at 9.858%, with final install-
ment due October 2001................................ 65,425 59,411
-------- -------
206,834 103,693
Less current maturities............................... 153,842 62,613
-------- -------
$ 52,992 $41,080
======== =======
</TABLE>

The scheduled maturities of long-term debt as of September 30, 1997 are as
follows:

<TABLE>
<S> <C>
1998 (October 1997 through September 1998)......................... $ 62,613
1999............................................................... 18,331
2000............................................................... 18,331
2001............................................................... 16,803
--------
116,078
Less amounts representing interest................................. 12,385
--------
$103,693
========
</TABLE>

Interest paid amounted to $43,038 for the year ended March 31, 1997 and
$17,824 for the six months ended September 30, 1997.

6. DEFERRED COMPENSATION PLANS

The Company has a qualified, noncontributory, trusteed pension plan covering
eligible full-time employees. The Company's policy is to contribute into the
Plan at a fixed percentage of salaries.

The Company also has a qualified, noncontributory, trusteed profit sharing
plan covering eligible full-time employees. The plan provides for
contributions by the Company in such amounts as the board of directors may
annually determine.

Contributions to the plans for the year ended March 31, 1997 and the six
months ended September 30, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Pension plan......................................... $366,815 $231,938
Profit sharing plan.................................. 283,182 156,777
-------- --------
$649,997 $388,715
======== ========
</TABLE>

F-57
<PAGE>

PARKCREST SURGICAL ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

7. INCOME TAXES

The following details the temporary differences and carryforwards giving
rise to the deferred tax assets and liabilities at March 31, 1997 and
September 30, 1997:

<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Accounts receivable, net.......................... $(625,072) $(632,773)
Depreciation...................................... (22,585) (52,279)
Accounts payable.................................. 38,989 27,819
Other accrued liabilities......................... 117,084 94,835
Net operating loss carryforwards.................. 8,380 131,279
Other............................................. (71,100) (38,978)
--------- ---------
Net deferred tax liability........................ $(554,304) $(470,097)
========= =========
As reported on the balance sheet as of March 31,
1997 and September 30, 1997:
Current deferred tax liability.................. $(602,419) $(611,417)
Noncurrent deferred tax asset................... 48,115 141,320
--------- ---------
$(554,304) $ 470,097
========= =========
</TABLE>

A reconciliation of the provision for income taxes at the federal statutory
rate to the Company's effective tax rate is as follows:

<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Provision (benefit) at statutory rate................ $115,401 $(75,343)
State income taxes, net of federal benefit........... 13,577 (8,864)
-------- --------
Provision (benefit) for income taxes................. $128,978 $(84,207)
======== ========
</TABLE>

8. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company is obligated under a long-term lease expiring December 31, 1999
for one office at an annual rental of $280,911. The Company is obligated under
a lease expiring September 30, 2000 for a second office at a base annual
rental of $25,024 to be adjusted each October 1 based on the Consumer Price
Index. The Company rents additional office space at five locations on a month-
to-month basis.

Rent expense for all leases amounted to $375,546 for the year ended March
31, 1997 and $136,673 for the six months ended September 30, 1997.

The approximate future minimum rental commitments required under the
noncancellable operating leases are as follows:

<TABLE>
<S> <C>
1998 (October 1997 through March 1998)............................. $140,456
1999............................................................... 280,911
2000............................................................... 210,684
</TABLE>

F-58
<PAGE>

PARKCREST SURGICAL ASSOCIATES, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

Employment Agreements

9. 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.

10. RELATED PARTY TRANSACTIONS

The Company has a receivable due from four physicians totaling $53,394 at
March 31, 1997 and from three physicians totaling $28,393 at September 30,
1997 which will be repaid over the next year.

F-59
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Southern Dependacare, Inc.:

We have audited the accompanying balance sheet of SOUTHERN DEPENDACARE, INC.
(an Alabama corporation) as of December 31, 1996 and August 31, 1997 and the
related statements of operations, owner's equity, and cash flows for the year
ended December 31, 1996 and the eight months ended August 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southern Dependacare, Inc.
as of December 31, 1996 and August 31, 1997 and the results of its operations
and its cash flows for the year ended December 31, 1996 and the eight months
ended August 31, 1997 in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

St. Louis, Missouri
December 5, 1997

F-60
<PAGE>

SOUTHERN DEPENDACARE, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $107,594 $ 117,261
Accounts receivable, less estimated allowances for
uncollectible accounts of $200,000.................. 665,915 1,269,172
-------- ----------
773,509 1,386,433
-------- ----------
Property and equipment, net (Note 3)................... 17,458 14,888
-------- ----------
Total assets....................................... $790,967 $1,401,321
======== ==========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Current portion of notes payable (Note 4)............ $ 33,854 $ 78,458
Accounts payable..................................... 103,162 640,153
Accrued compensation to owner........................ 265,759 655,675
Other accrued liabilities............................ 303,067 11,067
-------- ----------
705,842 1,385,353
-------- ----------
Notes payable, long-term (Note 4)...................... 69,157 --
-------- ----------
Commitments and contingencies (Note 6)
Owners' Equity:
Common stock, $1 par value; 10,000 shares authorized;
1,000 shares issued and outstanding................. 1,000 1,000
Additional paid-in capital........................... 14,968 14,968
Retained earnings.................................... -- --
-------- ----------
Total owner's equity............................... 15,968 15,968
-------- ----------
Total liabilities and owner's equity............... $790,967 $1,401,321
======== ==========
</TABLE>

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

F-61
<PAGE>

SOUTHERN DEPENDACARE, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
EIGHT-MONTH PERIOD
YEAR ENDED ENDED AUGUST 31,
DECEMBER 31, ----------------------
1996 1996 1997
------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Net patient service revenues................ $3,096,194 $1,777,698 $2,803,765
---------- ---------- ----------
Operating expenses:
Salaries, wages, and benefits............. 1,026,917 475,452 630,253
Compensation to owner physician........... 574,042 272,991 316,146
General and administrative expenses....... 1,406,767 972,676 1,812,643
Bad debt expense.......................... 50,000 40,000 35,500
Depreciation and amortization............. 20,091 14,494 6,832
---------- ---------- ----------
3,077,817 1,775,613 2,801,374
---------- ---------- ----------
Income from operations...................... 18,377 2,085 2,391
Interest expense............................ 18,377 2,085 2,391
---------- ---------- ----------
Net income.................................. $ -- $ -- $ --
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-62
<PAGE>

SOUTHERN DEPENDACARE, INC.

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, 1995........... 1,000 $1,000 $14,968 $-- $15,968
Net income......................... -- -- -- -- --
----- ------ ------- ---- -------
Balance, December 31, 1996........... 1,000 1,000 14,968 -- 15,968
Net income......................... -- -- -- -- --
----- ------ ------- ---- -------
Balance, August 31, 1997............. 1,000 $1,000 $14,968 $-- $15,968
===== ====== ======= ==== =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-63
<PAGE>

SOUTHERN DEPENDACARE, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
EIGHT-MONTH PERIOD
YEAR ENDED ENDED AUGUST 31,
DECEMBER 31, --------------------
1996 1996 1997
------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ -- $ -- $ --
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 20,091 14,494 6,832
Bad debt expense........................ 50,000 40,000 35,500
Change in assets and liabilities:
Accounts receivable................... 170,144 256,832 (638,757)
Accounts payable...................... 7,483 (35,800) 536,991
Accrued liabilities................... (3,771) (49,182) 97,917
-------- -------- --------
Total adjustments................... 243,947 226,344 38,483
-------- -------- --------
Net cash provided by operating
activities......................... 243,947 226,344 38,483
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....... (9,815) (5,087) (4,263)
Proceeds from disposals of fixed assets... 109,807 100,807 --
-------- -------- --------
Net cash provided by (used in)
investing activities............... 99,992 9,572 (4,263)
-------- -------- --------
Cash flows from financing activities:
Principal payments on line of credit...... (50,000) (50,000) --
Principal payments on notes payable....... (318,187) (212,125) (24,553)
Borrowings under notes payable............ 115,050 115,050 --
-------- -------- --------
Net cash used in financing
activities......................... (253,137) (147,075) (24,553)
-------- -------- --------
Net increase in cash and cash equivalents... 90,802 174,989 9,667
Cash and cash equivalents at beginning of
period..................................... 16,792 16,792 107,594
-------- -------- --------
Cash and cash equivalents at end of period.. $107,594 $191,781 $117,261
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest.. $ 18,377 $ 2,085 $ 2,391
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-64
<PAGE>

SOUTHERN DEPENDACARE, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND AUGUST 31, 1997
(INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996 IS UNAUDITED)

1. THE ORGANIZATION AND OPERATIONS

Southern Dependacare, Inc., an Alabama corporation, (the "Company") was
organized in 1990. The Company currently has 4 physicians, specializing in
oncology and cancer care. There are 3 rural networks of clinics located in
Carbondale, Illinois; Natchez, Mississippi; and Abbington, Virginia.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Unaudited Financial Information

The financial statements for the eight months ended August 31, 1996 are
unaudited; however, in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of
the unaudited financial statements for these interim periods have been
included. The results of interim periods are not necessarily indicative of the
results to be obtained for a full year.

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.

Accounts Receivable

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed on the
straight-line method over the estimated service lives of depreciable assets
(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.

Owner's Equity

Owner's equity includes the respective capital stock, partnership capital
and retained earnings of the Company. The capital stock of the Company is
wholly-owned by one physician.

F-65
<PAGE>

SOUTHERN DEPENDACARE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Net Patient Service Revenues

Concentration of Credit Risk

3. PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1996 and August 31, 1997 consists of
the following:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Equipment............................................... $ 253,023 $257,285
Furniture and fixtures.................................. 20,557 20,557
--------- --------
273,580 277,842
Less accumulated depreciation........................... (256,122) (262,954)
--------- --------
$ 17,458 $ 14,888
========= ========
</TABLE>

4. NOTES PAYABLE

The Company's notes payable at December 31, 1996 and August 31, 1997 are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ ----------
<S> <C> <C>
Note payable to bank, due February 28, 2000, payable
in equal monthly installments at a fixed rate of 8%,
secured by checking account at the bank(1)........... $ 96,188 $78,458
Note payable to bank dated February 4, 1997, payable
in equal monthly installments at a fixed rate of 9%,
secured by property and equipment.................... 6,823 --
-------- -------
103,011 78,458
Less current portion.................................. 33,854 78,458
-------- -------
Notes payable due after one year...................... $ 69,157 $ --
======== =======
</TABLE>
- --------
(1) The outstanding balance of $78,458 was paid in full in September 1997.

During 1996, the Company entered into a line of credit agreement with a
maximum borrowing amount of $500,000 with a local bank. Interest is charged at
a fixed rate of 8.25% based on outstanding borrowings. As of December 31, 1996
and June 30, 1997, there were no borrowings outstanding under this financing
agreement.

F-66
<PAGE>

SOUTHERN DEPENDACARE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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 stockholder in
computing the federal and state individual income tax liabilities.

6. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases facilities under operating leases which expire at various
dates through February 2001. Future minimum lease payments under these leases
as of August 31, 1997 are as follows:

Insurance

The Company is insured with respect to medical malpractice risks on 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.

Employment Agreements

Certain physician employees are covered by employment agreements that vary
in length from two to five years, which include, among other terms, salary and
benefits provisions. Future minimum payments under these agreements as of
August 31, 1997 are approximately:

7. LEGAL PROCEEDINGS

8. SALE OF NET ASSETS

Effective September 1, 1997, the Company completed the sale of certain of
its net assets to Physician Health Corporation ("PHC"). The Company has also
entered into an agreement with PHC to manage the physician's medical practice.

F-67
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses to be paid by the Company (other
than underwriting compensation expected to be incurred) in connection with the
offering described in this Registration Statement. All amounts are estimates,
except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq National
Market Listing Fee.

<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 20,910
NASD Filing Fee.................................................. 7,400
Nasdaq National Market Listing Fee............................... 78,875
Blue Sky Fees and Expenses....................................... 20,000
Printing Costs................................................... 400,000
Legal Fees and Expenses.......................................... 750,000
Accounting Fees and Expenses..................................... 750,000
Transfer Agent and Registrar Fees and Expenses................... 20,000
Miscellaneous.................................................... 452,815
----------
Total.......................................................... $2,500,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Delaware General Corporation Law

Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.

Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in

II-1
<PAGE>

which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.

Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.

Section 145(d) of the DGCL states that any indemnification under subsections
(a) and (b) of Section 145 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in subsections (a) and (b). Such determination shall be made (1) by the board
of directors by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.

Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation as authorized in Section
145. Such expenses (including attorneys' fees) incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the board of
directors deems appropriate.

Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.

Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.

Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who
has ceased to be a director, officer, employee or agent, and shall inure to
the benefit of the heirs, executors and administrators of such a person.

Certificate of Incorporation

The Certificate of Incorporation provides that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided for in Section 174 of the DGCL. If the DGCL is amended to authorize
the further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any

II-2
<PAGE>

repeal or modification of such provision of the Certificate of Incorporation
by the stockholders of the Company shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Company existing at the time of such repeal or modification.

Bylaws

The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent
permitted by applicable law, as in effect as of the date of the adoption of
the Bylaws or to such greater extent as applicable law may thereafter permit,
from and against all losses, liabilities, claims, damages, judgments,
penalties, fines, amounts paid in settlement and expenses (including
attorneys' fees) whatsoever arising out of any event or occurrence related to
the fact that such person is or was a director or officer of the Company and
further provide that the Company may, but is not required to, indemnify and
hold harmless any employee or agent of the Company or a director, officer,
employee or agent of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise who is or was serving in such
capacity at the written request of the Company; provided, however, that the
Company is only required to indemnify persons serving as directors, officers,
employees or agents of the Company for the expenses incurred in a proceeding
if such person has met the standards of conduct that make it permissible under
the laws of the State of Delaware for the Company to indemnify the claimant
for the amount claimed, but the burden of proving such defense will be on the
Company. The Bylaws further provide that, in the event of any threatened, or
pending action, suit or proceeding in which any of the persons referred to
above is a party or is involved and that may give rise to a right of
indemnification under the Bylaws, following written request by such person,
the Company will promptly pay to such person amounts to cover expenses
reasonably incurred by such person in such proceeding in advance of its final
disposition upon the receipt by the Company of (i) a written undertaking
executed by or on behalf of such person providing that such person will repay
the advance if it is ultimately determined that such person is not entitled to
be indemnified by the Company as provided in the Bylaws and (ii) satisfactory
evidence as to the amount of such expenses.

Underwriting Agreement

The Underwriting Agreement provides for the indemnification of the directors
and officers of the Company in certain circumstances.

Insurance

The Company intends to maintain liability insurance for the benefit of its
directors and officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The Company issued its first securities on October 5, 1995 and has issued
unregistered securities to (a) founders, investors and employees and (b) to
physicians and others in connection with the affiliation transactions with the
medical practices (the "Affiliation Transactions"). Each such issuance was
made in reliance upon the exemption from the registration requirements of the
Securities Act of 1933, as amended, contained in Section 4(2) or Rule 701
promulgated under the Securities Act on the basis that such transactions did
not involve a public offering. The securities issuances below consider the
.314 to 1 reverse stock split for the Common Stock. Prime Stock, Class A
Stock, Series B Stock will be adjusted through their revised conversion rates.

1. On October 5, 1995, the Company issued an aggregate of 706,500 shares of
Common Stock, par value $.0025 per share (the "Common Stock"), to the
following individuals in connection with the organization and initial
capitalization of the Company for an aggregate purchase price of $5,625: Sarah
C. Garvin, H. Thomas Scott, Julie Rawls Moore, Howard E. Fagin and Shamus M.
Holt.

2. Since October 26, 1995, pursuant to the Company's 1995 Amended and
Restated Stock Option Plan, the Company has granted options to purchase up to
an aggregate of 1,664,579 shares of Common Stock to certain Company employees,
physicians and consultants with exercise prices varying between $1.59 and
$31.85.

II-3
<PAGE>

3. On November 3, 1995, the Company issued an aggregate of 345,400 shares of
Common Stock to the following individuals, in connection with a private
placement of stock to raise funds for the acquisition of the Company's
predecessor, for an aggregate purchase price of $1,100,000: Dean G. Anderson,
Don Buswell Charkow, Stephen & Susan Cooper, David Ellis, Howard E. Fagin,
Sarah C. Garvin, Shamus M. Holt, Jack C. Keane, Julie Rawls Moore, NationsBank
of Georgia, Trustee U/A Howard & Mary Morrison for Howard J. Morrison, Paine
Webber FBO Thomas M. Rodgers, Jr., Carl J. Schramm, H. Thomas Scott, Laura
Scott, Larry B. Stanely, sep, City Bank & Trust Company custodian, Robert F.
Stonerock, Jr. and Ira L. Snider.

4. On December 29, 1995, pursuant to a Securities Purchase Agreement and in
connection with a venture capital financing, the Company issued an aggregate
of 104,300 shares of Series 1 Class A Stock, par value $.01 per share (the
"Series 1 Class A Stock"), and 95,700 shares of Series 2 Class A Stock, par
value $.01 per share (the "Series 2 Class A Stock"), to the following
investors for an aggregate purchase price of $3,000,000: Larry Gerdes, William
Eason, Edward H. Bowman, Jr., Martin Lamaison, Orville R. Gordon, Howard F.
Elkins, Richard V. Lawry, Guaranty & Trust Co. c/o David O. Ellis, Kathleen E.
J. Ellis, Jeremy Ellis, Karen Ellis, Gemma Ellis, Rowan Nominees c/o Mercury
Asset Management Ltd., and NatWest Ventures Investments, Ltd. The same
investors were also granted contingent warrants to purchase up to an aggregate
of 200,000 shares of Class A Stock, in the event of a redemption of the
outstanding shares of Class A Stock, at an exercise price of $15.00 per share.
In connection with the Securities Purchase Agreement, the Company also issued
to EGL Holdings, Inc. a warrant to purchase up to an aggregate of 59,660
shares of Common Stock with an exercise price of $.03 per share, for an
aggregate purchase price of $1,900.

5. On December 12, 1995, pursuant to a consulting agreement relating to the
provision of financial consulting services to the Company by Thomas M.
Rodgers, the Company granted to Thomas M. Rodgers an option to purchase an
aggregate of 134,000 shares of Prime Common Stock at an exercise price of
$0.20 per share.

6. On February 26, 1996, the Company issued 113,040 shares of Common Stock
and a warrant to purchase up to an aggregate of 83,524 shares of Common Stock
to Healthmark Partners, LLC for an aggregate purchase price of $720,000.

7. On November 25, 1996, pursuant to an Undertaking Agreement relating to
the employment of J. Michael Ribaudo, M.D. as an officer of the Company the
Company issued 31,400 shares of Common Stock to J. Michael Ribaudo for an
aggregate purchase price of $400,000.

8. On November 26, 1996, pursuant to an Asset Purchase Agreement, the
Company issued to Metropolitan Plastic and Reconstructive Surgery, Ltd.
125,000 shares of Prime Common Stock, par value $.0025 per share (the "Prime
Common Stock"), and a $500,000 note that is convertible into 39,250 shares of
Common Stock.

9. On January 27, 1997, the Company issued 15,700 shares of Common Stock to
Sarah C. Garvin for an aggregate purchase price of $200,000.

10. On January 27, 1997, the Company issued an aggregate of 35,718 shares of
Common Stock to following individuals for an aggregate purchase price of
$455,000: Julie Rawls Moore, Peggy S. Block, Doris Boye Mintz, Peter Charman,
Dan Epstein, Henry Harrison Culver Trust, Elizabeth Jenny Culver Trust, Martha
C. Mathews, Churchill Matthews, Jr. and Elizabeth Culver.

11. On January 31, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger John W. Daake, Inc. and all
shares of the capital stock of John W. Daake, Inc. were converted into shares
of Prime Common Stock, the Company issued an aggregate of 151,905 shares of
Prime Common Stock to the following individuals: John W. Daake, M.D., Robert
F. Beckman, M.D. and Kent L. Kossoy, M.D.

II-4
<PAGE>

12. On June 16, 1997, pursuant to an Amended and Restated Letter Agreement,
the Company issued an aggregate of 400,000 shares of Prime Common Stock to the
following individuals at the request of Ira L. Snider in consideration for Dr.
Snider's provision of development services for the Company: Ira L. Snider,
Joan M. Snider Custodian for Elise P. Snider, Joan M. Snider Custodian for
Julie A. Snider and Barry Dewar.

13. On March 5, 1997, pursuant to an Agreement and Plan of Merger pursuant
to which the Company acquired by merger of Eye Medical Surgical Associates,
Inc. and all shares of the capital stock of Eye Medical Surgical Associates,
Inc. were converted into shares of Prime Common Stock, the Company issued
598,500 shares of Prime Common Stock to Sidney Hanish, M.D.

14. On March 26, 1997, the Company issued an aggregate of 27,632 shares of
Common Stock to the following purchasers for an aggregate purchase price of
$352,000: Health Solutions, Inc. Profit Sharing Plan, Howard Fagin, Trustee
Fagin Advisory Services, Inc. Profit Sharing Plan, Harold A. Fuselier, Jr.,
John Daake, Shamus Holt, Galtney Group, Inc. and Elliot Baker.

15. On April 11, 1997, pursuant to an Agreement and Plan of Merger pursuant
to which the Company acquired by merger The Heart Health Center, P.C. and all
shares of the capital stock of The Heart Health Center, P.C. were converted
into shares of Prime Common Stock, the Company issued an aggregate of
1,048,812 shares of Prime Common Stock to the following individuals: Allen D.
Soffer, M.D., Robert G. Kopitsky, M.D., Steven J. Pieper, M.D. and Patricia L.
Cole, M.D.

16. On May 7, 1997, pursuant to a consulting agreement, the Company issued
to Thomas M. Rodgers an option to purchase an aggregate of 350,000 shares of
Prime Common Stock at an exercise price of $1.15 per share.

17. On May 14, 1997, the Company issued an aggregate of 5,888 shares of
Common Stock to the following individuals for an aggregate purchase price of
$75,000: Garth F. Fort and Christopher Gilson.

18. On May 20,1997 pursuant to a Contribution Agreement entered into in
connection with the acquisition of an 80% interest in the assets of the
medical practice of Robert M. Jones, M.D. Dr. Jones, was issued 200 shares of
prime common stock, par value $0.01 per share, in a subsidiary of the Company,
which are convertible into an aggregate of 173,007 shares of Common Stock.

19. On May 28, 1997, the Company issued 1,963 shares of Common Stock to
Thomas E. Douglas for an aggregate purchase price of $25,000.

20. On June 16, 1997, pursuant to the terms of a Loan Agreement, the Company
issued a warrant to purchase up to an aggregate of 15,700 shares of Common
Stock, with an exercise price of $15.92 per share to DVI Financial Services,
Inc. for an aggregate purchase price of $500 and in consideration of making
such loans.

21. On June 16, 1997 and July 31, 1997, pursuant to a Securities Purchase
Agreement entered into in connection with a venture capital financing, the
Company issued an aggregate of 2,906,679 shares of Series B Redeemable
Convertible Preferred Stock, par value $.01 per share (the "Series B Voting
Preferred Stock") and 917,814 shares of Series B Non-Voting Redeemable
Convertible Preferred Stock, par value $.01 per share (the "Series B Non-
Voting Preferred Stock"), to the following investors for an aggregate purchase
price of $13,552,512: Weston Presidio Capital II, L.P., NatWest Ventures
Investments, Ltd., St. Paul Venture Capital IV, LLC, Mercury Asset Management,
plc on behalf of Rowan Nominees, Ltd., Partech U.S. Partners III C.V., U.S.
Growth Fund Partners C.V., Axa U.S. Growth Fund LLC, Double Black Diamond II,
LLC, Almanori Limited, Multinvest Limited, BancBoston Investments, Inc. and
National City Venture Corporation. In connection with the Securities Purchase
Agreement, the Company also issued warrants to the same investors to purchase
up to an aggregate of 304,236 shares of Common Stock and up to 96,066 shares
of Non-Voting Common Stock, par value $.0025 per share (the "Non-Voting Common
Stock"), with an exercise price of $.03 per share, for an aggregate purchase
price of $1,269.

II-5
<PAGE>

22. On June 16, 1997, pursuant to a letter agreement terminating and
settling earlier consulting agreements, the Company granted to Thomas M.
Rodgers an option to purchase an aggregate of 7,648 shares of Prime Common
Stock at an exercise price of $0.011 per share and an option to purchase an
aggregate of 37,500 shares of Prime Common Stock at an exercise price of $1.10
per share.

23. On June 16, 1997, the Company issued an aggregate of 529,148 shares of
Prime Common Stock to Thomas M. Rodgers upon exercise of stock options in
exchange for $27,853 in cash and $442,781 in notes.

24. On June 16, 1997, pursuant to the terms of an Asset Purchase and
Contribution Agreement pursuant to which the Company acquired substantially
all of the assets of the Arlington Cancer Center, Metroplex
Hematology/Oncology LLPC received a 20% equity interest in a Company
subsidiary that is exchangeable into 480,423 shares of Common Stock.

25. On July 31, 1997, pursuant to an Agreement and Plan of Merger pursuant
to which the Company acquired by merger Ream Optometry, Ltd. and all the
capital stock of Ream Optometry, Ltd. were converted into shares of Prime
Common Stock, the Company issued an aggregate of 206,773 shares of Prime
Common Stock to the following individuals: Ann C. Ream and Scott R. Ream.

26. On August 8, 1997, the Company issued 21,038 shares of Common Stock to
Karel A. Dicke for an aggregate purchase price of $268,000.

27. On August 8, 1997, pursuant to an Agreement and Plan of Merger pursuant
to which the Company acquired by merger Tri-County Eye Care Center and all
shares of the capital stock of Tri-County Eye Care Center were converted into
shares of Common Stock, the Company issued 97,408 shares of Common Stock to
Howard N. Short.

28. On August 13, 1997, pursuant to an Amended and Restated Stock Purchase
Agreement pursuant to which the Company acquired all of the outstanding
capital stock of Payson Family Care Associates, Inc., the Company issued an
aggregate of 95,250 shares of Prime Common Stock to the following
individuals: Timothy A. Shaw, Mark Ivey, Jr. and Jim L. Burke.

29. On August 29, 1997, pursuant to an Agreement and Plan of Merger pursuant
to which the Company acquired by merger Surgical Associates, Inc. and all
shares of the capital stock of Surgical Associates, Inc. were converted into
shares of Prime Common Stock, the Company issued 200,000 shares of Prime
Common Stock to Michael Vranich.

30. On September 2, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger Atlanta Center for Medicine,
Inc. and all the capital stock of Atlanta Center for Medicine, Inc. were
converted into shares of Prime Common Stock, the Company issued an aggregate
of 144,278 shares of Prime Common Stock to the following individuals: Revati
Alturi, M.D., D. Timothy Daughterty, M.D., Shelly Carter Davis, M.D., Alan O.
Feingold, M.D., Robert A. Kirkland, M.D. and Paul H. Krissman, M.D.

31. On September 12, 1997, pursuant to an Asset Purchase Agreement, pursuant
to which the Company acquired substantially all of the assets of Southern
Dependacare, Inc., the Company issued 432,000 shares of Prime Common Stock to
Southern Dependacare, Inc. and issued 108,000 shares of Prime Common Stock to
Donnie E. McDaniel.

32. On September 12, 1997, October 12, 1997 and November 5, 1997, pursuant
to a Warrant and Stock Purchase Commitment, the Company issued to the
following investors warrants to purchase in the aggregate up to 26,841 shares
of Common Stock with an exercise price of $.03 per share, in exchange for
their Agreement to guaranty a loan to the Company from Southwest Bank: Weston
Presidio Capital II, L.P., Mercury Asset Management, plc on behalf of Rowan
Nominees, Ltd., Natwest Ventures Investments, Limited, St. Paul Venture
Capital IV, LLC, Banc Boston Investments, Inc., Partech U.S. Partners III
C.V., U.S. Growth Fund Partners,

II-6
<PAGE>

C.V., Axa U.S. Growth Fund LLC, Double Black Diamond II, LLC, Almanon Limited,
Multinvest Limited, and National City Venture Corporation.

33. On September 19, 1997, pursuant to a settlement agreement with
NationsCredit Commercial Corporation ("NationsCredit"), the Company issued
NationsCredit 12,560 shares of Common Stock and paid NationsCredit and its
attorneys $151,300 in outstanding fees related to a loan agreement. Other than
such fees there were no outstanding amounts due under the loan agreement. In
exchange, NationsCredit agreed to terminate the loan agreement and forfeit a
warrant to purchase up to 300,000 shares of Common Stock with an exercise
price of $4.00 per share.

34. On September 30, 1997, pursuant to the terms of an Employment Agreement,
the Company issued 45,000 shares of Prime Common Stock to William W. Benedict.

35. On October 3, 1997, pursuant to an Agreement and Plan of Merger pursuant
to which the Company acquired by merger Louisville Cardiology, Inc. and all
shares of the capital stock of Louisville Cardiology, Inc. were converted into
shares of Prime Common Stock, the Company issued an aggregate of 750,000
shares of Prime Common Stock to the following individuals: Rudolph Licandro,
M.D. and Michael J. Imburgia, M.D.

36. On October 14, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger George M. Bohigan, Ltd. and
all shares of the capital stock of George M. Bohigan, Ltd. were converted into
shares of Prime Common Stock, the Company issued 121,238 shares of Prime
Common Stock to George M. Bohigan, M.D.

37. On October 17, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger G.H. Kursar, M.D., Inc. and
all shares of the capital stock of G.H. Kursar, M.D., Inc. were converted into
shares of Common Stock, the Company issued 51,844 shares of Common Stock to
G.H. Kursar.

38. On October 21, 1997, the Company issued 314 shares of Common Stock to
Christie Bohigan for an aggregate purchase price of $5,000.

39. On October 27, pursuant to a Credit Agreement and Loan Agreement, the
Company issued 553,683 shares of Series B Voting Preferred Stock to Paribas
Principal Incorporated, Inc. for an aggregate purchase price of $2,214,732.

40. On October 27, 1997, pursuant to a Credit Agreement and Loan Agreement,
the Company issued a warrant to purchase up to an aggregate 376,800 shares of
Common Stock with an exercise price of $.03 per share to Paribas Principal
Incorporated, and a warrant to purchase up to an aggregate of 57,953 shares of
Non-Voting Common Stock with an exercise price of $.03 per share to Paribas
Capital Funding, LLC, for an aggregate purchase price of $13,845.61.

41. On October 29, 1997, the Company issued 83,524 shares of Common Stock to
Healthmark Partners, LLC for an aggregate purchase price of $655 upon the
exercise of warrants with an exercise price of $.0025 per share.

42. On November 7, 1997, pursuant to an Agreement and Plan of Reorganization
pursuant to which the Company acquired by merger Southern Crescent Women's
Healthcare, Inc. and all shares of the outstanding capital stock of Southern
Crescent Women's Healthcare, Inc. were converted into the right to receive
shares of Common Stock, the Company issued an aggregate of 137,376 shares of
Common Stock to W. Darrel Martin, M.D. and Elizabeth W. Killebrew, M.D.

43. On November 7, 1997, pursuant to an Agreement and Plan of Reorganization
pursuant to which the Company acquired by merger Eagles Landing OB-GYN
Associates, P.C. and all shares of the outstanding capital stock of Eagles
Landing OB-GYN Associates, P.C. were converted into the right to receive
shares of Common Stock, the Company issued an aggregate of 97,341 shares of
Common Stock to the following individuals: John P. Schilling, M.D., Shoba C.
Rao, M.D. and Jeffrey D. Lovinger.

44. On November 7, 1997, pursuant to an Agreement and Plan of Reorganization
pursuant to which the Company acquired by merger Northside OB-GYN, Inc. and
all shares of the outstanding capital stock of

II-7
<PAGE>

Northside OB-GYN, Inc. were converted into the right to receive shares of
Common Stock, the Company issued an aggregate of 25,513 shares of Common Stock
to Alan Joffe, M.D.

45. On November 10, 1997, pursuant to an Asset Purchase Agreement pursuant
to which the Company acquired substantially all of the assets of National
Sleep Dynamics, Inc. and HomeCare for Sleep Disorders, Inc., the Company
issued 35,168 shares of Common Stock to National Sleep Dynamics, Inc..

46. On November 12, 1997, the Company granted to Bi-State Network warrants
to purchase up to an aggregate of 31,400 shares of Common Stock with an
exercise price of $12.74 per share in exchange for entering into a contract
administration agreement with the Company.

47. On November 10, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger Internal Medicine
Specialists, Inc. and all shares of the outstanding capital stock of Internal
Medicine Specialists, Inc. were converted into the right to receive shares of
Common Stock, the Company issued an aggregate of 329,264 shares of Common
Stock to the following individuals: Alex Menendez, C. Raymond Cottrell,
Antonio Caos, Kenneth R. Feuer, Robert T. Baker, Robert F. Stonerock, Thomas
C. Marbury, Timothy L. Prince, Lionel C. Abbott, Mark Williams and Jeffrey M.
Cohen. In connection with the Agreement and Plan of Merger, the Company issued
an aggregate of 22,608 shares of Common Stock to Avanish Aggarwal in
consideration for his execution and performance of an employment agreement
with Internal Medicine Specialists, Inc.

48. On November 10, 1997, pursuant to a Stock Purchase Agreement pursuant to
which the Company acquired all shares of the outstanding capital stock of
Primary Care Specialists, Inc., the Company issued an aggregate of 85,881
shares of Common Stock to the following individuals: Don Buswell-Charkow,
Thomas Wentzell, John M. Cappleman, Christopher Edwards and Allen Castello.

49. On November 12, 1997, pursuant to an Agreement and Plan of
Reorganization pursuant to which the Company acquired by merger Greater
Cincinnati Gastroenterology, Inc. and all shares of the outstanding capital
stock of Greater Cincinnati Gastroenterology, Inc. were converted into the
right to receive shares of Common Stock, the Company issued an aggregate of
409,821 shares of Common Stock to the following individuals: George D.
Waissbluth, Ronald C. Schnieder, Michael A. Safdi, Alan V. Safdi, Michael D.
Kreines, Kris Ramprasad, Kim R. Jurell, David G. Mangels, Pradeep K. Bekal and
Daniel G. Walker Trust, u/a/d July 1, 1997 Alan V. Safdi, Trustee.

50. On November 12, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger LaRach & Williamson, M.D.,
P.A. and all shares of the outstanding capital stock of LaRach & Williamson,
M.D., P.A. were converted into the right to receive shares of Common Stock,
the Company issued an aggregate of 106,266 shares of Common Stock to the
following individuals: Sergio W. LaRach, Paul R. Williamson and Andrea
Ferrara. In connection with the Agreement and Plan of Merger, the Company
issued an aggregate of 17,192 shares of Common Stock to Michael F. Trevisani
in consideration for his execution of an employment agreement with LaRach &
Williamson, Inc.

51. On November 12, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger MidSouth Practice Management,
Inc. and all of the outstanding capital stock of MidSouth Medical Management,
Inc. were converted into the right to receive shares of Common Stock,
warrants, the Company issued an aggregate of 272,534 shares of Common Stock to
the following individuals and entity: A. Cary Cox, Robert A. Frist, Jack D.
Furst, R. Ellis Godshall, Sr., Robert Ellis Godshall, Jr., Douglas J.
Marchant, Dale Menard, Medical Practice Partners, L.P., Herbert L. Thomas,
Jr., Robert Bruce Thompson, Dean Witter Custodian FBO R. Bruce Thompson,
Daniel Caldwell, Memphis Children's Clinic, PLLC , William C. Stewart, Jr.,
M.D., Beau B. Pittman, M.D., David B. Wright, M.D., Michael Steffan, M.D.,
Lynda Freeland, M.D., Martha N. Taylor, M.D., Ann D. Brown, M.D., Mark Vlasak,
M.D. and James W. Bryant, M.D. In addition, the Company granted to Petra
Capital a warrant to purchase up to an aggregate of 35,231 shares of Common
Stock with an exercise price of $.03 per share in exchange for warrants it
held to purchase MidSouth stock and granted to the

II-8
<PAGE>

preferred shareholders of MidSouth Practice Management, Inc. and Delta Capital
Partners, L.L.C. warrants to purchase up to an aggregate of 56,991 shares of
Common Stock with an exercise price per share equal to the greater of $31.85
and 125% of the initial public offering price.

52. On November 12, 1997, pursuant to a Stock Purchase Agreement pursuant to
which the Company acquired all of the capital stock of Physician Alliance,
Inc. and its subsidiary, Physicians Strategic Alliance of Orlando, Inc., the
Company issued an aggregate of 88,862 shares of Common Stock to the following
individuals in exchange for each of their interest in Physician Strategic
Alliance, Inc.: Calver Fund, Inc., Jack R. Anderson, Rose Marie Garcia
Anderson, Leslie B. Daniels, The Daniels Family Trust and Gastroenterology
Associates Osceola, P.A. In connection with the Stock Purchase Agreement, the
Company issued to certain of such individuals warrants to purchase up to an
aggregate of 15,700 shares of Common Stock at an exercise price of the greater
of $31.85 a share or 125% of any per share initial public offering price.

53. On November 12, 1997, pursuant to an Interest Purchase Agreement, the
Company issued an aggregate of 78,500 shares of Common Stock to the following
individuals and entity in exchange for each of their interests in Persch
Family Practice, L.P.: Hirsch Family, L.P., Michael A. Noble, Ben Tischler,
Mark Goran, Monte Sandler and Michael Gerling.

54. On November 12, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger Pulmonary Sleep Consultants,
Inc. and all shares of the outstanding capital stock of Pulmonary Sleep
Consultants, Inc. were converted into the right to receive shares of Common
Stock, the Company issued 94,228 shares of Common Stock to Myron Jacobs, M.D.

55. On November 12, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger Diagnostic Internists, Inc.
and all shares of the outstanding capital stock of Diagnostic Internists, Inc.
were converted into the right to receive shares of Prime Common Stock, the
Company issued 108,000 shares of Prime Common Stock to the following
individuals: James A. Reynolds, M.D., Mark A. Novack, M.D. and Jeffrey Zohner,
M.D.

56. On November 12, 1997, pursuant to an Agreement and Plan of Merger
pursuant to which the Company acquired by merger Parkcrest Surgical
Associates, Inc. and all shares of the outstanding capital stock of Parkcrest
Surgical Associates, Inc. were converted into the right to receive shares of
Prime Common Stock, the Company issued an aggregate of 1,294,236 shares of
Prime Common Stock to the following individuals: Donald R. Bassman, M.D.,
David A. Caplin, M.D., Patricia A. McGuire, M.D., Alan M. Londe, M.D., Charles
R. Nathan, M.D., Marlys E. Schuh, M.D., Stanley L. London, M.D., Kenneth J.
Bennett, M.D., James P. Emanuel, M.D., Kurt W. Kaufman, D.P.M., Mark A.
Ludwig, M.D., Glen E. Johnson, M.D., Cesar A. Gomez, M.D., Sondra L. Tate,
M.D. and Diane M. Radford, M.D.

57. On November 12, 1997, pursuant to an Asset Purchase Agreement pursuant
to which the Company acquired substantially all of the assets of used in the
medical practice of Richard Rames, M.D., Richard Rames, M.D. received 200
shares of prime common stock, par value $.01 per share, in a subsidiary of the
Company which are convertible into an aggregate of 40,182 shares of Common
Stock.

58. On November 12, 1997, the Company issued an aggregate of 56,520 shares
of Common Stock to the following individuals for an aggregate purchase price
of $900,000: R.L. Wolfson, Andrew S. Wolfson, Ethel Wolfson, Erwin Barry
Hyman, Stephen A. Hyman, Martin Isenberg, and Stephen M. Mintz and Doris Boye
Mintz. Each of the foregoing individuals is an accredited investor with an
existing relationship with the Company or with an executive officer of the
Company. Additionally, Steven M. Mintz and Doris Boye-Mintz are officers of
the Company. The purpose of the respective issuances was to raise capital for
the Company.

59. Pursuant to a binding subscription agreement entered into in October
1997, on January 21, 1998 the Company issued 8,972 shares of Common Stock to
Jackie L. Grosklos, M.D. as partial consideration for her execution of a
guaranty of certain management fees to the Company.

60. On December 29, 1997 the Company issued 314 shares of Common Stock to
Thomas L. Rowe pursuant to an exercise of stock options previously granted to
Mr. Rowe under the Company's 1995 Amended and Restated Stock Option Plan.

II-9
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1.1 Form of Underwriting Agreement.(1)
3.1 Fourth Amended and Restated Certificate of Incorporation of Physician
Health Corporation.(1)
3.1a Fifth Amended and Restated Certificate of Incorporation of Physician
Health Corporation.*
3.2 Second Amended and Restated Certificate of Designation, Preferences
and Rights of the Series B Redeemable Convertible Preferred Stock of
Physician Health Corporation.(1)
3.2a Certificate of Amendment to the Second Amended and Restated
Certificate of Designation, Preferences and Rights of the Series B
Redeemable Convertible Preferred Stock and the Series B Non-Voting
Redeemable Convertible Preferred Stock of the Company.*
3.3 Amended and Restated Bylaws of Physician Health Corporation.(1)
4.1 Form of Common Stock Certificate.(1)
5.1 Opinion of Jackson Walker, L. L.P.(1)
9.1 Second Amended and Restated Stockholders' Agreement, dated as of June
16, 1997, among Physician Health Corporation, Weston Presidio Capital
II, L.P., the Weston Investors, the EGL Investors and other
shareholders added from time to time.(1)
9.2 Amendment and Joinder to Second Amended and Restated Stockholders'
Agreement, dated as of October 27, 1997, among Physician Health
Corporation, Paribas Principal, Inc., Paribas Capital Funding, LLC and
certain other stockholders of Physician Health Corporation.(1)
10.1 Asset Purchase and Contribution Agreement dated June 16, 1997, by and
among Metroplex Hematology/Oncology Associates, L.L.P., the
Shareholders of Metroplex Hematology/Oncology Associates, L.L.P., each
Physician's wholly owned professional association and Physician Health
Corporation.(1)
10.2 Management Services Agreement, by and among Metroplex Hematology/
Oncology Associates, L.L.P., MHOA Texas I, L.L.C., Physician Health
Corporation and the Metroplex Providers.(1)
10.3 Supplemental Agreement by and among Metroplex Hematology/Oncology
Associates, L.L.P., MHOA Texas I, L.L.C., Physician Health Corporation
and the Metroplex Providers.(1)
10.4 Agreement and Plan of Reorganization by and among Physician Health
Corporation, Greater Cincinnati Gastroenterology Associates, Inc. and
the Shareholders of Greater Cincinnati Gastroenterology Associates,
Inc.(1)
10.5 Practice Management Agreement by and among PHC Ohio, Inc. and GCGA
Physicians, Inc.(1)
10.6 Agreement and Plan of Merger by and among Physician Health
Corporation, PHC-Orlando Acquisition Subsidiary II, Inc., Internal
Medicine Specialists, Inc. and the Shareholders of Internal Medicine
Specialists, Inc.(1)
10.7 Form of Employment Agreement by and among Internal Medicine
Specialists, Inc. and each of the Shareholders of Internal Medicine
Specialist, Inc.(1)
10.8 Option Agreement by and among Central Florida Surgical Centers, Inc.,
C. Raymond Cottrell, M.D., Antonio Caos, M.D., Kenneth R. Feuer, M.D.,
Robert T. Baker, M.D. and PHC Holding Corporation.(1)
10.9 Option Agreement by and among Oakwater Surgical Center, Inc., C.
Raymond Cottrell, M.D., Antonio Caos, M.D., Alex Menendez, M.D.,
Kenneth R. Feuer, M.D., Robert T. Baker, M.D. and PHC Holding
Corporation.(1)
10.10 Agreement and Plan of Merger, dated as of September 4, 1997, among
Physician Health Corporation, PHC-Midwest, Inc. and the Shareholders
of Parkcrest Surgical Associates, Inc.(1)
10.11 Practice Management Agreement among Physician Health Corporation, PHC-
Midwest, Inc. and P.S.A. Medical Group, Inc.(1)
</TABLE>

II-10
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.12 Asset Purchase Agreement by and among Physician Health Corporation,
PHC Regional Oncology Care, Inc., Southern Dependacare, Inc. and Jack
G. Hilton, M.D.(1)
10.13 Practice Management Agreement, by and among Physician Health
Corporation, PHC Regional Oncology Care, Inc., PHC Illinois 1, S.C.
and PHC-Mississippi, P.L.L.C.(1)
10.14 Agreement and Plan of Merger by and among Physician Health
Corporation, MidSouth Practice Management, Inc. and PHC Tennessee
Acquisition Subsidiary I, Inc.(1)
10.15 Management Services Agreement, dated as of September 22, 1997, by and
among MidSouth Practice Management, Inc., Foundation Medical Group,
PLLC and the Physicians named therein.(1)
10.16 Management Services Agreement, dated as of September 22, 1997, by and
between Memphis Children's Clinic and the Physicians named therein.(1)
10.17 Management Services Agreement, dated as of November 10, 1997, by and
between MidSouth Management Inc. and Bryant Medical Services, P.C.(1)
10.18 First Amendment to Management Services Agreement, dated as of November
10, 1997, by and among MidSouth Practice Management, Inc., Foundation
Medical Group, PLLC and the Physicians named therein.(1)
10.19 First Amendment to Management Services Agreement, dated as of November
10, 1997, by and among MidSouth Practice Management, Inc., Memphis
Children's Clinic, PLLC and the Physicians named therein.(1)
10.20 First Amendment to Management Services Agreement, dated as of November
10, 1997, by and among MidSouth Practice Management, Inc., Bryant
Medical Services, P.C. and James W. Bryant, M.D.(1)
10.21 Physician Health Corporation Amended and Restated 1995 Stock Option
Plan.(1)
10.22 Employment Agreement, dated January 1, 1998, by and between Physician
Health Corporation and Sarah C. Garvin.(1)
10.23 Employment Agreement, dated January 1, 1998, by and between Physician
Health Corporation and Tom Rodgers.*
10.24 Employment Agreement, dated January 1, 1998, by and between Physician
Health Corporation and J. Michael Ribaudo, M.D.(1)
10.25 Letter Agreement, dated June 16, 1997, by and between Thomas Rodgers
and Physician Health Corporation.*
10.26 General Undertakings Agreement, dated as of October 1996, by and among
Physician Health Corporation, PHC St. Louis Acquisition Subsidiary I,
Inc., Metropolitan Plastic and Reconstructive Surgery, Ltd. and J.
Michael Ribaudo, M.D.(1)
10.27 Amendment to General Undertakings Agreement.(1)
10.28 Settlement Agreement, dated December 31, 1997, by and among Physician
Health Corporation, PHC-St. Louis Acquisition Subsidiary I,
Metropolitan Plastic and Reconstructive Surgery, Ltd. and J. Michael
Ribaudo, M.D.*
10.29 Stock and Warrant Purchase Agreement, dated December 29, 1995, among
Physician Health Corporation, Sarah C. Garvin, Howard E. Fagin, Ph.D.,
H. Thomas Scott, Julie Rawls Moore, Shamus Holt, EGL Holdings, Inc.,
Mercury Asset Management, Plc, NatWest Ventures Investments Limited
and certain individuals and custodians.(1)
10.30 Form of Contingent Share Warrant to Purchase Shares of Class A
Preferred Stock pursuant to the EGL Stock and Warrant Purchase
Agreement.(1)
10.31 Warrant, dated December 29, 1995, issued to EGL Holdings, Inc. to
purchase 190,000 shares of Common Stock.(1)
</TABLE>

II-11
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.32 Securities Purchase Agreement, dated as of June 16, 1997, among
Physician Health Corporation, Weston Presidio Capital II, L.P.,
BancBoston Investments, Inc., Mercury Asset Management, plc, on behalf
of Rowan Nominees Limited and NatWest Ventures Investments Limited.(1)
10.33 Amendment No. 1 to Securities Purchase Agreement, dated as of July 31,
1997, among Physician Health Corporation, Weston Presidio Capital II,
L.P., Metroplex Hematology/Oncology Associates, L.L.P, BancBoston
Investments, Inc., Mercury Asset Management, plc, on behalf of Rowan
Nominees Limited, NatWest Ventures Investments Limited, St. Paul
Venture Capital, IV, LLC, Partech U.S. Partners III, C.V., U.S. Growth
Fund Partners, C.V. AXA U.S. Growth Fund LLC, Double Black Diamond II
LLC, Almanori Limited, Multinvest Limited and National City Venture
Corporation.(1)
10.34 Amendment No. 2 to Securities Purchase Agreement, dated as of October
27,1997, among Physician Health Corporation, Weston Presidio Capital
II, L.P., BancBoston Investments, Inc., Mercury Asset Management, plc,
on behalf of Rowan Nominees Limited, NatWest Ventures Investments
Limited, St. Paul Venture Capital, IV, LLC, Partech U.S. Partners III,
C.V., U.S. Growth Fund Partners, C.V. AXA U.S. Growth Fund LLC, Double
Black Diamond II LLC, Almanori Limited, Multinvest Limited, National
City Venture Corporation and Paribas Principal Incorporated.(1)
10.35 Equity Call Agreement, dated as of June 16, 1997, among Physician
Health Corporation, Weston Presidio Capital II, L.P., Metroplex
Hematology/Oncology Associates, L.L.P, BancBoston Investments, Inc.,
Mercury Asset Management, plc, on behalf of Rowan Nominees Limited,
NatWest Ventures Investments Limited.(1)
10.36 Amendment No. 1 to Equity Call Agreement, dated as of July 31, 1997,
among Physician Health Corporation, Weston Presidio Capital II, L.P.,
Metroplex Hematology, Oncology Associates, L.L.P, BancBoston
Investments, Inc., Mercury Asset Management, plc, on behalf of Rowan
Nominees Limited, NatWest Ventures Investments Limited, St. Paul
Venture Capital, IV, LLC, Partech U.S. Partners III, C.V., U.S. Growth
Fund Partners, C.V. AXA U.S. Growth Fund LLC, Double Black Diamond II
LLC, Almanori Limited, Multinvest Limited and National City Venture
Corporation.(1)
10.37 Joinder to Equity Call Agreement, dated as of October 27, 1997, among
Physician Health Corporation, Weston Presidio Capital II, L.P.,
Metroplex Hematology/Oncology Associates, L.L.P, BancBoston
Investments, Inc., Mercury Asset Management, plc, on behalf of Rowan
Nominees Limited, NatWest Ventures Investments Limited, St. Paul
Venture Capital, IV, LLC, Partech U.S. Partners III, C.V., U.S. Growth
Fund Partners, C.V. AXA U.S. Growth Fund LLC, Double Black Diamond II
LLC, Almanori Limited, Multinvest Limited, National City Venture
Corporation and Paribas Principal Incorporated.(1)
10.38 Escrow Agreement, dated as of June 16, 1997, among Physician Health
Corporation, Weston Presidio Capital II, L.P., BancBoston Ventures,
Inc., Mercury Asset Management, plc, on behalf of Rowan Nominees
Limited and NatWest Ventures Investments, Limited.(1)
10.39 Amendment No. 1 to Escrow Agreement, dated as of July 31, 1997, among
Physician Health Corporation, Weston Presidio Capital II, L.P.,
BancBoston Investments, Inc., Mercury Asset Management, plc, on behalf
of Rowan Nominees Limited, NatWest Ventures Investments Limited,
St. Paul Venture Capital, IV, LLC, Partech U.S. Partners III, C.V.,
U.S. Growth Fund Partners, C.V. AXA U.S. Growth Fund LLC, Double Black
Diamond II LLC, Almanori Limited, Multinvest Limited and National City
Venture Corporation.(1)
10.40 Amendment No. 2 to Escrow Agreement, dated as of October 27, 1997,
among Physician Health Corporation, Weston Presidio Capital III, L.P.,
BancBoston Investments, Inc., Mercury Asset Management, plc, on behalf
of Rowan Nominees Limited, NatWest Ventures Investments Limited,
St. Paul Venture Capital, IV, LLC, Partech U.S. Partners 111, C.V.,
U.S. Growth Fund Partners, C.V. AXA U.S. Growth Fund LLC, Double Black
Diamond II LLC, Almanori Limited, Multinvest Limited, National City
Venture Corporation and Paribas Principal Incorporated.(1)
</TABLE>

II-12
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.41 Weston Presidio--Form of Common Stock Warrant.(1)
10.42 Credit Agreement, dated as of October 27, 1997, among Physician Health
Corporation, PHC Holding Company, Various Banks and Banque Paribas, as
Agent.(1)
10.43 Securities Purchase Agreement dated as of October 27, 1997, by and
between Physician Health Corporation and Paribas Principal
Incorporated.(1)
10.44 Warrant, dated October 12, 1997, issued by Physician Health
Corporation to Paribas Principal Incorporated.(1)
10.45 Senior Subordinated Loan Agreement, dated as of October 27, 1997,
among Physician Health Corporation, PHC Holding Corporation, the
financial institutions from time to time party thereto and Paribas
Capital Funding, LLC, as Agent.(1)
10.45a Amendment No. 1 to the Senior Subordinated Loan Agreement among
Physician Health Corporation, PHC Holding Corporation, the Lenders
party thereto and Paribas Capital Funding LLC, as Agent.(1)
10.46 Warrant Purchase Agreement dated as of October 27, 1997, by and
between Physician Health Corporation and Paribas Capital Funding,
LLC.(1)
10.47 Warrant Certificate, dated as of October 27, 1997, issued by Physician
Health Corporation to Paribas Capital Funding, LLC.(1)
10.48 Warrant Agreement, dated as of October 27, 1997, by and between
Physical Health Corporation and Paribas Capital Funding, L.L.C.(1)
10.49 Restated and Amended Stockholder Agreement, dated November 1, 1997, by
and among Physician Health Corporation, Sarah, C. Garvin, Howard E.
Fagin, Ph.D., H. Thomas Scott, Julie Rawls Moore, and Shamus Holt.(1)
10.50 Amendment to Restated and Amended Stockholder Agreement, dated
February 1997, by and among Physician Health Corporation, Sarah, C.
Garvin, Howard E. Fagin, Ph.D., H. Thomas Scott, Julie Rawls Moore,
and Shamus Holt.(1)
10.51 Non-Competition and Non-Disclosure Form of Agreement executed by each
Founder of Physician Health Corporation.(1)
10.52 Amended and Restated Registration Rights Agreement by and among
Physician Health Corporation and the stockholders named therein.(1)
10.53 Joinder to Amended and Restated Registration Rights Agreement, dated
October 1997, by Thomas M. Rodgers.(1)
10.54 Letter Agreement, dated September 16, 1997, by and between
NationsCredit Settlement Agreement and Physician Health
Corporation.(1)
10.55 Warrant, dated June 16, 1997, issued by Physician Health Corporation
to DVI Financial Services, Inc.(1)
10.56 Loan and Security Agreement No. 1 among MHOA Texas I, L.L.C., as
Borrower, Physician Health Corporation, as Guarantor, and DVI
Financial Services, Inc., as Lender, dated June 16, 1997.(1)
10.57 Loan and Security Agreement No. 2 among MHOA Texas I, L.L.C., as
Borrower, Physician Health Corporation, as Guarantor, and DVI
Financial Services, Inc., as Lender, dated June 16, 1997.(1)
10.58 Loan and Security Agreement No. 3 among MHOA Texas I, L.L.C., as
Borrower, Physician Health Corporation, as Guarantor, and DVI
Financial Services, Inc., as Lender, dated June 16, 1997.(1)
10.59 Loan and Security Agreement No. 4 among MHOA Texas I, L.L.C., as
Borrower, Physician Health Corporation, as Guarantor, and DVI
Financial Services, Inc., as Lender, dated June 16, 1997.(1)
10.60 Loan and Security Agreement No. 5 among MHOA Texas I, L.L.C., as
Borrower, Physician Health Corporation, as Guarantor, and DVI
Financial Services, Inc., as Lender, dated June 16, 1997.(1)
</TABLE>

II-13
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.61 Loan and Security Agreement No. 6 among MHOA Texas I, L.L.C., as
Borrower, Physician Health Corporation, as Guarantor, and DVI
Financial Services, Inc., as Lender, dated June 16, 1997.(1)
10.62 Loan and Security Agreement, dated as of June 16, 1997, among MHOA
Texas I, L.L.C. and DVI Business Credit Corporation.(1)
10.63 Warrant and Preferred Stock Commitment, dated September 12, 1997, by
and among Physician Health Corporation, Weston Presidio Capital II,
L.P. and the holders of Series B Preferred Stock or Common Stock named
therein.(1)
10.64 Warrant, dated September 12, 1997, issued by Physician Health
Corporation to Weston Presidio Capital II, L.P.(1)
21.1 Subsidiaries.(1)
23.1 Consent of Arthur Andersen LLP.*
23.2 Consent of Ernst & Young LLP.*
24.1 Power of Attorney (contained on the signature page of this
Registration Statement).(1)
27 Financial Data Schedule(1)
99.1 Consent of Director designee William C. Stewart, Jr., M.D.(1)
</TABLE>
- --------
* Filed herewith
(1) Previously filed

II-14

<PAGE>

(b) Financial Statement Schedules.

All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes
thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes as follows:

(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.

(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 14,
or otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payments
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

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

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

II-15
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, Physician Health
Corporation has duly caused this Amendment No. 3 Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia, on February 13, 1998.

Physician Health Corporation

/s/ Sarah C. Garvin
By: _________________________________
SARAH C. GARVIN
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

Pursuant to the requirements of the Securities Act, as amended, this
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities indicated and on February 13, 1998.

SIGNATURE TITLE

<TABLE>
<S> <C>
/s/ Sarah C. Garvin Chairman of the Board, President
- ------------------------------------- and Chief Executive Officer
SARAH C. GARVIN (Principal Executive Officer)

/s/ Thomas M. Rodgers Director, Executive Vice
- ------------------------------------- President, Chief Financial
THOMAS M. RODGERS Officer, Secretary and Treasurer
(Principal Financial and
Accounting Officer)

* Director
- -------------------------------------
MURALI ANANTHARAMAN

* Director
- -------------------------------------
MICHAEL F. CRONIN

* Director, Chief Executive Officer
- ------------------------------------- of Arlington Cancer Center
ALFRED DISTEFANO, M.D. Division

* Director
- -------------------------------------
CARL J. SCHRAMM, PH.D., J.D.

* Director, President of Ancillary
- ------------------------------------- Division
J. MICHAEL RIBAUDO, M.D.

/s/ Sarah C. Garvin
*By: ________________________________
SARAH C. GARVIN
ATTORNEY-IN-FACT PURSUANT TO POWER
OF ATTORNEY GRANTED IN REGISTRATION
STATEMENT (NO. 333-40073) AS FILED
ON
NOVEMBER 12, 1997
</TABLE>
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1.1 Form of Underwriting Agreement.(1)
3.1 Fourth Amended and Restated Certificate of Incorporation of Physician
Health Corporation.(1)
3.1a Fifth Amended and Restated Certificate of Incorporation of Physician
Health Corporation.*
3.2 Second Amended and Restated Certificate of Designation, Preferences
and Rights of the Series B Redeemable Convertible Preferred Stock and
Series B Non-Voting Redeemable Convertible Preferred Stock of
Physician Health Corporation.(1)
3.2a Certificate of Amendment to the Second Amended and Restated
Certificate of Designation, Preferences and Rights of the Series B
Redeemable Convertible Preferred Stock and the Series B Non-Voting
Redeemable Convertible Preferred Stock of the Company.*
3.3 Amended and Restated Bylaws of Physician Health Corporation.(1)
4.1 Form of Common Stock Certificate.(1)
5.1 Opinion of Jackson Walker, L.L.P.(1)
9.1 Second Amended and Restated Stockholders' Agreement, dated as of June
16, 1997, among Physician Health Corporation, Weston Presidio Capital
II, L.P., the Weston Investors, the EGL Investors and other
shareholders added from time to time.(1)
9.2 Amendment and Joinder to Second Amended and Restated Stockholders'
Agreement, dated as of October 27, 1997, among Physician Health
Corporation, Paribas Principal, Inc., Paribas Capital Funding, LLC and
certain other stockholders of Physician Health Corporation.(1)
10.1 Asset Purchase and Contribution Agreement dated June 16, 1997, by and
among Metroplex Hematology/Oncology Associates, L.L.P., the
Shareholders of Metroplex Hematology/Oncology Associates, L.L.P., each
Physician's wholly owned professional association and Physician Health
Corporation.(1)
10.2 Management Services Agreement, by and among Metroplex Hematology/
Oncology Associates, L.L.P., MHOA Texas I, L.L.C., Physician Health
Corporation and the Metroplex Providers.(1)
10.3 Supplemental Agreement by and among Metroplex Hematology/Oncology
Associates, L.L.P., MHOA Texas I, L.L.C., Physician Health Corporation
and the Metroplex Providers.(1)
10.4 Agreement and Plan of Reorganization by and among Physician Health
Corporation, Greater Cincinnati Gastroenterology Associates, Inc. and
the Shareholders of Greater Cincinnati Gastroenterology Associates,
Inc.(1)
10.5 Practice Management Agreement by and among PHC Ohio, Inc. and GCGA
Physicians, Inc.(1)
10.6 Agreement and Plan of Merger by and among Physician Health
Corporation, PHC-Orlando Acquisition Subsidiary II, Inc., Internal
Medicine Specialists, Inc. and the Shareholders of Internal Medicine
Specialists, Inc.(1)
10.7 Form of Employment Agreement by and among Internal Medicine
Specialists, Inc. and each of the Shareholders of Internal Medicine
Specialist, Inc.(1)
10.8 Option Agreement by and among Central Florida Surgical Centers, Inc.,
C. Raymond Cottrell, M.D., Antonio Caos, M.D., Kenneth R. Feuer, M.D.,
Robert T. Baker, M.D. and PHC Holding Corporation.(1)
10.9 Option Agreement by and among Oakwater Surgical Center, Inc., C.
Raymond Cottrell, M.D., Antonio Caos, M.D., Alex Menendez, M.D.,
Kenneth R. Feuer, M.D., Robert T. Baker, M.D. and PHC Holding
Corporation.(1)
10.10 Agreement and Plan of Merger, dated as of September 4, 1997, among
Physician Health Corporation, PHC-Midwest, Inc. and the Shareholders
of Parkcrest Surgical Associates, Inc.(1)
10.11 Practice Management Agreement among Physician Health Corporation, PHC-
Midwest, Inc. and P.S.A. Medical Group, Inc.(1)
</TABLE>
<PAGE>

<PAGE>

FIFTH RESTATED CERTIFICATE OF INCORPORATION
OF
PHYSICIAN HEALTH CORPORATION

It is hereby certified that:

FIRST: The name of the corporation is "Physician Health Corporation" (the
"Corporation"). The name under which the Corporation was originally incorporated
was "PHC Merger Corporation."

SECOND: The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware, on the 29th day of
August, 1995.

THIRD: The Amendments to the Fourth Restated Certificate of Incorporation
of the Corporation effected by this Fifth Restated Certificate of Incorporation
(the "Amendments") are to (upon the consummation of a firm commitment
underwritten public offering on or before April 30, 1998 involving the sale by
the Corporation of shares of Common Stock with minimum net proceeds to the
Corporation (after deducting underwriting discount and offering expenses) of at
least $20 million) (i) split, reclassify and convert each share of Voting
Common Stock, par value $.0025 per share, of the Corporation that is outstanding
immediately prior to the consummation of a firm commitment underwritten public
offering involving the sale by the Corporation of shares of Common Stock with
certain minimum net proceeds to the Corporation, into .314 of one share of
Voting Common Stock, subject to the treatment of fractional share interests as
described in this Certificate, provided that such public offering shall have
occurred on or prior to April 30, 1997 and (ii) make equitable adjustments to
the provisions governing the conversion of the Prime Common Stock, par value
$.0025 per share, of the Corporation into Voting Common Stock.

FOURTH: The Amendments and the Fifth Restatement of the Certificate of
Incorporation herein certified (the "Certificate") have been duly adopted by the
stockholders in accordance with Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware. Prompt written notice of the adoption
of the Amendments and of the Certificate shall be given to those stockholders
who have not consented in writing thereto, as provided in Section 228 of the
General Corporation Law of the State of Delaware.

FIFTH: This Certificate shall be effective as of February 4, 1998.

SIXTH: That the text of the Certificate of Incorporation of Physician
Health Corporation, as amended, is hereby restated and further amended as of the
date this Certificate is filed with the Secretary of State of the State of
Delaware, to read in full, as follows:
<PAGE>

FIFTH RESTATED CERTIFICATE OF INCORPORATION
OF
PHYSICIAN HEALTH CORPORATION

ARTICLE I
NAME

The name of the corporation is Physician Health Corporation (the
"Corporation").

ARTICLE II
ADDRESS OF REGISTERED OFFICE;
NAME OF REGISTERED AGENT

The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of its registered agent at
that address is The Corporation Trust Company.

ARTICLE III
PURPOSE AND POWERS

The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may now or hereunder be organized under the General
Corporation Law of the State of Delaware. It shall have all powers that may now
or hereafter be lawful for a corporation to exercise under the General
Corporation Law of the State of Delaware.

ARTICLE IV
CAPITAL STOCK

The Corporation shall have five classes of stock: Voting Common Stock, Non-
Voting Common Stock, Prime Common Stock, Class A Stock and Preferred Stock.
References herein to "Common Stock" shall mean only Voting Common Stock and Non-
Voting Common Stock.

The Corporation shall have the authority to issue 100,000,000 shares of
Voting Common Stock, 40,000,000 shares of Non-Voting Common Stock, and (until
the completion of a firm commitment underwritten public offering involving the
sale by the Corporation of shares of Common Stock with minimum net proceeds to
the Corporation (after deducting underwriting discount and offering expenses) of
at least $20 million, at which time such authority shall expire) 20,000,000
shares of Prime Common Stock. All of such shares shall have a par value of
$.0025 each.

The number of authorized shares of Voting Common Stock, Non-Voting Common
Stock, or Prime Common Stock may be increased or decreased (but not below the
number then outstanding) by

2
<PAGE>

the affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote without the consent of the holders of the class of
shares which is being increased or decreased.

The Corporation shall also have the authority to issue (a) (until the
consummation of a Liquidity Event (defined below), at which time such authority
shall expire) 500,000 shares of Class A Stock, $0.01 par value, in two series,
as set forth more fully below, and (b) 18,000,000 shares of Preferred Stock,
$0.01 par value, in series as set forth more fully below.

SECTION A. VOTING AND NON-VOTING COMMON STOCK
----------------------------------

The designations and the powers, preferences and rights of the Voting
Common Stock and the Non-Voting Common Stock (collectively referred to as
"Common Stock") are as follows:

1. Voting Rights.
-------------

(a) Voting Common Stock. Except as set forth herein or as otherwise
-------------------
required by law, each outstanding share of Voting Common Stock shall be entitled
to vote on each matter on which the stockholders of the Corporation shall be
entitled to vote, and each holder of Voting Common Stock shall be entitled to
one vote for each share of such stock held by such holder.

(b) Non-Voting Common Stock. Except as set forth herein or as
-----------------------
otherwise required by law, each outstanding share of Non-Voting Common Stock
shall not be entitled to vote on any matter on which the stockholders of the
Corporation shall be entitled to vote, and shares of Non-Voting Common Stock
shall not be included in determining the number of shares voting or entitled to
vote on any such matters; provided that the holders of Non-Voting Common Stock
shall have the right to vote as a separate class on any merger or consolidation
of the Corporation with or into another entity or entities, or any
recapitalization or reorganization, in which shares of Non-Voting Common Stock
would receive or be exchanged for consideration different on a per share basis
from consideration received with respect to or in exchange for the shares of
Voting Common Stock or would otherwise be treated differently from shares of
Voting Common Stock in connection with such transaction, except that shares of
Non-Voting Common Stock may, without such a separate class vote, receive or be
exchanged for non-voting securities which are otherwise identical on a per share
basis in amount and form to the voting securities received with respect to or
exchanged for the Voting Common Stock so long as (i) such non-voting securities
are convertible into such voting securities on the same terms as the Non-Voting
Common Stock is convertible into Voting Common Stock and (ii) all other
consideration is equal on a per share basis. Notwithstanding the foregoing,
holders of the shares of the Non-Voting Common Stock shall be entitled to vote
as a separate class on any amendment to this paragraph (b) of this Section 1 and
any amendment, repeal or modification of any provision of this Certificate of
Incorporation that adversely affects the powers, preferences or special rights
of holders of the Non-Voting Common Stock in a manner differently from the way
in which the powers, preferences or special rights of the holders of the Voting
Common Stock are affected.

2. Dividends. Any dividend or distribution on the Common Stock shall be
---------
payable on shares of Voting Common Stock and Non-Voting Common Stock, share and
share alike; provided, that (i) in the case of dividends payable in shares of
Common Stock of the Corporation, or options,

3
<PAGE>

warrants or rights to acquire shares of such Common Stock, or securities
convertible into or exchangeable for shares of such Common Stock, the shares,
options, warrants, rights or securities so payable shall be payable in shares
of, or options, warrants or rights to acquire, or securities convertible into or
exchangeable for, Common Stock of the same class upon which the dividend or
distribution is being paid and (ii) if the dividends consist of other voting
securities of the Corporation, the Corporation shall make available to each
holder of Non-Voting Common Stock, at such holder's request, dividends
consisting of non-voting securities of the Corporation which are otherwise
identical to the voting securities and which are convertible into or
exchangeable for such voting securities on the same terms as the Non-Voting
Common Stock is convertible into the Voting Common Stock.

3. Liquidation. In the event of any voluntary or involuntary
-----------
liquidation, dissolution or winding up of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation, the
holders of shares of Voting Common Stock and Non-Voting Common Stock shall be
entitled to share ratably, share and share alike, in the remaining net assets of
the Corporation.

4. Conversion.
----------

(a) Conversion of Voting Common Stock. Subject to and upon compliance
---------------------------------
with the provisions of this Section 4, any Regulated Stockholder (defined below)
shall be entitled to convert at any time and from time to time, any and all of
the shares of Voting Common stock held by such stockholder into the same number
of shares of Non-Voting Common Stock.

(b) Conversion of Non-Voting Common Stock. Subject to and upon
-------------------------------------
compliance with the provisions of this Section 4, each holder of Non-Voting
Common Stock shall be entitled at any time and from time to time in such
holder's sole discretion and at such holder's option, to convert any or all of
the shares of such holder's Non-Voting Common Stock into the same number of
shares of Voting Common Stock; provided, however, that Non-Voting Common Stock
-------- -------
constituting Restricted Stock (defined below), with respect to a Regulated
Stockholder, may not be converted into Voting Common Stock to the extent that
immediately prior thereto, or as a result of such conversion, the number of
shares of Voting Common Stock which constitute such Restricted Stock held by all
holders thereof would exceed the number of shares of Voting Common Stock which
such Regulated Stockholder reasonably determines it and its Affiliates (defined
below) may own, control or have the power or vote under any law, regulation,
rule or other requirement of any governmental authority at the time applicable
to such Regulated Stockholder or its Affiliates; and, provided, further, that
-------- -------
each holder of Non-Voting Common Stock may convert such shares into Voting
Common Stock if such holder reasonably believes that such converted shares will
be transferred within fifteen (15) days or already have been transferred
pursuant to a Conversion Event (defined below) and such holder agrees not to
vote any such shares of Voting Common Stock prior to such Conversion Event and
undertakes to promptly reconvert such shares into Non-Voting Common Stock if
such shares are not transferred pursuant to a Conversion Event within such
fifteen (15) days. Each Regulated Stockholder may provide for further
restrictions upon the conversion of any shares of Restricted Stock by providing
the Corporation with signed, written instructions specifying such additional
restrictions and legending such shares as to the existence of such restrictions.

4
<PAGE>

(c) Conversion Procedure. Each conversion of shares of Common Stock
--------------------
of the Corporation into shares of another class of Common Stock of the
Corporation shall be effected by the surrender of the certificate or
certificates representing the shares to be converted (the "Converting Shares")
at the principal office of the Corporation (or such other office or agency of
the Corporation as the Corporation may designate from time to time by written
notice to the holders of Common Stock) at any time during its usual business
hours, together with written notice by the holder of such Converting Shares,
stating that such holder desires to convert the Converting Shares, or a stated
number of the shares represented by such certificate or certificates, into an
equal number of shares of the other class of Common Stock (the "Converted
Shares"). Such notice shall also state the name or names (with addresses) and
denominations in which the certificate or certificates for Converted Shares are
to be issued and shall include instructions for the delivery thereof. The
Corporation shall promptly notify each Regulated Stockholder of its receipt of
such notice. Promptly after such surrender and the receipt of such written
notice, the Corporation will issue and deliver in accordance with the
surrendering holder's instructions the certificate or certificates evidencing
the Converted Shares issuable upon such conversion, and the Corporation will
deliver to the converting holder a certificate (which shall contain such legends
as were set forth on the surrendered certificate or certificates) representing
any shares which were represented by the certificate or certificates that were
delivered to the Corporation in connection with such conversion, but which were
not converted; provided, however, that if, to the Corporation's knowledge after
-------- -------
reasonable inquiry, such conversion is subject to Section 6, the Corporation
shall not issue such certificate or certificates until the expiration of the
Deferral Period referred to therein. Such conversion, to the extent permitted
by law, shall be deemed to have been effected as of the close of business on the
date on which such certificate or certificates shall have been surrendered and
such notice shall have been received by the Corporation, and at such time the
rights of the holder of the Converting Shares as such holder shall cease (except
that, in the case of a conversion subject to this Section 6 below, the
conversion shall be deemed to be effective upon the expiration of the Deferral
Period referred to therein) and the person or persons in whose name or names the
certificate or certificates for the Converted Shares are to be issued upon such
conversion shall be deemed to have become the holder or holders of record of the
Converted Shares. Upon issuance of shares in accordance with this Section 4,
such Converted Shares shall be duly authorized, validly issued, fully paid and
non-assessable. The Corporation shall take all such actions it deems to be
reasonably necessary to assure that all such shares of Common Stock may be so
issued without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Common
Stock may be listed (except for official notice of issuance which will be
immediately transmitted by the Corporation upon issuance). The Corporation
shall not close its books against the transfer of shares of Common Stock in any
manner which would interfere with the timely conversion of any shares of Common
Stock.

Notwithstanding any provision of this Section 4 to the contrary, each
holder of Non-Voting Common Stock shall be entitled to convert shares of Non-
Voting Common Stock in connection with any Conversion Event if such holder
reasonably believes that such Conversion Event will be consummated, and a
written request for conversion from any holder of Non-Voting Common Stock to the
Corporation stating such holder's reasonable belief that a Conversion Event
shall occur shall be conclusive and shall obligate the Corporation to effect
such conversion in a reasonably timely manner so as to enable each such holder
to participate in such Conversion Event. The Corporation will not cancel the
shares of Non-Voting Common Stock so converted before the 15th day following

5
<PAGE>

such Conversion Event and will reserve such shares until such 15th day for
reissuance in compliance with the next sentence. If any shares of Non-Voting
Common Stock are converted into shares of Voting Common Stock in connection with
a Conversion Event and such shares of Voting Common Stock are not actually
distributed, disposed of or sold pursuant to such Conversion Event, such shares
of Voting Common Stock shall be promptly converted back into the same number of
shares of Non-Voting Common Stock.

5. Miscellaneous
-------------

(a) Restrictions on Redemptions, Etc. The Corporation shall not
--------------------------------
redeem, purchase, acquire or take any other action affecting outstanding shares
of Common Stock if, after giving effect to such redemption, purchase,
acquisition or other action, a Regulated Stockholder would own more than 4.9% of
any class of voting securities of the Corporation (other than any class of
voting securities which is (or is made prior to any such redemption, purchase,
acquisition or other action) convertible into a class of non-voting securities
which are otherwise identical to the voting securities and convertible into such
voting securities on terms reasonably acceptable to such Regulated Stockholder)
or more than 24.9% of the total equity of the Corporation or more than 24.9% of
the total value of all capital stock of the Corporation (in each case,
determined by assuming such Regulated Holder (but no other holder) has
exercised, converted or exchanged all of its options, warrants and other
convertible or exchangeable securities).

(b) Stock Splits; Adjustments. If the Corporation shall in any manner
-------------------------
subdivide (by stock split, stock dividend or otherwise) or combine (by reverse
stock split or otherwise) the outstanding shares of the Voting Common Stock or
the Non-Voting Common Stock, then the outstanding shares of each other class of
Common Stock shall be subdivided or combined, as the case may be, to the same
extent, share and share alike, and effective provision shall be made for the
protection of the conversion rights hereunder.

In case of any reorganization, reclassification or change of shares of
the Voting Common Stock or Non-Voting Common Stock (other than a change in par
value or from par to no par value or as a result of subdivision or combination),
or in case of any consolidation of the Corporation with one or more corporations
or a merger of the Corporation with another corporation (other than a
consolidation or merger in which the Corporation is the resulting or surviving
corporation and which does not result in any reclassification or change of
outstanding shares of Voting Common Stock or Non-Voting Common Stock), each
holder of a share of Voting Common Stock or Non-Voting Common Stock shall have
the right at any time thereafter, so long as the conversion right hereunder with
respect to such share would exist had such event not occurred, to convert such
share into the kind and amount of shares of stock and other securities and
properties (including cash) receivable upon such reorganization,
reclassification, change, consolidation or merger by a holder of the number of
shares of Voting Common Stock or Non-Voting Common Stock into which such shares
of Voting Common Stock or Non-Voting Common Stock, as the case may be, might
have been converted immediately prior to such reorganization, reclassification,
change, consolidation or merger. In the event of such reorganization,
reclassification, change, consolidation or merger, effective provision shall be
made in the certificate of incorporation of the resulting or surviving
corporation or otherwise which shall entitle holders of such other shares of
stock and other securities and property deliverable

6
<PAGE>

to holders of Voting Common Stock or Non-Voting Common Stock to the conversion
rights of the Voting Common Stock and Non-Voting Common Stock, as near as
reasonably practicable.

(c) Reservation of Shares. The Corporation shall at all times reserve
---------------------
and keep available out of its authorized but unissued shares of Voting Common
Stock and Non-Voting Common Stock or its treasury shares, solely for the purpose
of issuance upon the conversion of shares of Voting Common Stock and Non-Voting
Common Stock, such number of shares of such class as are then issuable upon the
conversion of all outstanding shares of Voting Common Stock and Non-Voting
Common Stock which may be converted.

(d) No Charge. The issuance of certificates for shares of any class
---------
of Common Stock (upon conversion of shares of any other class of Common Stock or
otherwise) shall be made without charge to the holders of such shares for any
issuance tax in respect thereof or other cost incurred by the Corporation in
connection with such conversion and/or the issuance of shares of Common Stock;

provided, however, that the Corporation shall not be required to pay any income
- -------- -------
or other tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the holder
of the Common Stock converted.

(e) Registration of Transfer. The Corporation shall keep at its
------------------------
principal office (or such other place as the Corporation reasonably designates)
a register for the registration of shares of Common Stock. Upon the surrender
of any certificate representing shares of any class of Common Stock at such
place, the Corporation shall, at the request of the registered holder of such
certificate, execute and deliver a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of such class
represented by the surrendered certificate, and the Corporation forthwith shall
cancel such surrendered certificate. Each such new certificate will represent
such number of shares of such class as is requested by the holder of the
surrendered certificate and will be substantially identical in form to the
surrendered certificate. Subject to any other restrictions on transfer to which
such holder or such shares may be bound, the Corporation will also register such
new certificate in such name as requested by the holder of the surrendered
certificate.

6. Regulated Stockholders.
----------------------

The Corporation will not convert or directly or indirectly redeem,
purchase, acquire or take any other action affecting outstanding shares of
capital stock of the Corporation if such action will increase the percentage of
outstanding voting securities owned or controlled by any Regulated Stockholder
and its Affiliates (other than a Regulated Stockholder which waives in writing
its rights under this Section A), unless the Corporation gives written notice
(the "Deferral Notice") of such action to each Regulated Stockholder.

The Corporation will defer making any such conversion, redemption,
purchase or other acquisition, or taking any such other action, for a period of
20 days (the "Deferral Period") after giving the Deferral Notice in order to
allow each Regulated Stockholder to determine whether it wishes to convert or
take any other action with respect to the Common Stock it owns, controls or has
the power to vote. If any Regulated Stockholder then elects to convert any
shares of Voting Common Stock, it shall notify the Corporation in writing within
10 days of the issuance of the Deferral Notice, in which

7
<PAGE>

case the Corporation shall promptly notify from time to time prior to the end of
such 20-day period each other Regulated Stockholder of each proposed conversion
and effect the conversions requested by all Regulated Stockholders at the end of
the Deferral Period.

7. Defined Terms.
-------------

(a) "Affiliate" shall mean, with respect to any legal entity (a
---------
"Person") any other Person directly or indirectly controlling, controlled by or
under common control with such Person. For the purpose of the above definition,
the term "control" (including, with correlative meaning, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of any
such Person, whether through the ownership of voting securities or by contract
or otherwise.

(b) "Conversion Event" shall mean (a) any public offering or public
----------------
sale of securities of the Corporation (including a public offering registered
under the Securities Act of 1933 and a public sale pursuant to Rule 144 of the
Securities and Exchange Commission or any similar rule then in force), (b) any
sale of securities of the Corporation to a person or group of persons (within
the meaning of the Securities Exchange Act of 1934, as amended (the "1934 Act")
if, after such sale, such person or group of persons in the aggregate would own
or control securities which possess in the aggregate the ordinary voting power
to elect a majority of the Corporation's directors (provided that such sale has
been approved by the Corporation's Board of Directors or a committee thereof),
(c) any sale of securities of the Corporation to a person or group of persons
(within the meaning of the 1934 Act) if, after such sale, such person or group
of persons in the aggregate would own or control securities of the Corporation
(excluding any Non-Voting Common being converted and disposed of in connection
with such Conversion Event) which possess in the aggregate the ordinary voting
power to elect a majority of the Corporation's directors, (d) any sale of
securities of the Corporation to a person or group of persons (within the
meaning of the 1934 Act) if, after such sale, such person or group of persons
would not, in the aggregate, own, control or have the right to acquire more than
two percent (2%) of the outstanding securities of any class of voting securities
of the Corporation and (e) a merger, consolidation or similar transaction
involving the Corporation if, after such transaction, a person or group of
persons (within the meaning of the 1934 Act) in the aggregate would own or
control securities which possess in the aggregate the ordinary voting power to
elect a majority of the surviving corporation's directors (provided that the
transaction has been approved by the Corporation's Board of Directors or a
committee thereof).

(c) "Regulated Stockholder" shall mean any stockholder (i) that is
---------------------
subject to the provisions of Regulation Y of the Board of Governors of the
Federal Reserve System, 12 C.F.R. Part 225 (or any successor to such Regulation)
("Regulation Y") and (ii) that holds shares of Common Stock of the Corporation.

(d) "Restricted Stock" means, with respect to any Regulated
----------------
Stockholder, any outstanding shares of Voting Common Stock and/or Non-Voting
Common Stock ever held of record by such Regulated Stockholder or its
Affiliates, excluding treasury shares; provided, however, that any such shares
-------- -------
shall cease to be Restricted Stock when such shares are transferred in a
transaction which

8
<PAGE>

is a Conversion Event or are acquired by the Corporation or any subsidiary of
the Corporation; and provided, further, that the Corporation shall have no
-------- -------
responsibility for determining whether any outstanding shares of Voting Common
Stock and/or Non-Voting Common Stock constitute Restricted Stock with respect to
any particular Regulated Stockholder, but shall instead be entitled to receive,
and rely exclusively upon, a written notice provided by such Regulated
Stockholder designating such shares as Restricted Stock.

8. Reverse Stock Split.
-------------------

Immediately prior to the consummation of a firm commitment underwritten
public offering involving the sale by the Corporation of shares of Common Stock
with minimum net proceeds to the Corporation (after deducting underwriting
discount and offering expenses) of at least $20 million (such time, the
"Effective Time"), each share of the Voting Common Stock issued and outstanding
immediately prior to the Effective Time and each such share held in the
Corporation's treasury (the "Old Voting Common Stock") shall automatically and
without any action on the part of the holder thereof be reclassified as and
changed into .314 of a share of the Voting Common Stock, par value $.0025 per
share (the "Voting Common Stock"). Each fractional share of Voting Common Stock
resulting from the foregoing reclassification shall be rounded up to a whole
share of Voting Common Stock. Each holder of a certificate or certificates
which immediately prior to the Effective Time represented outstanding shares of
the Old Voting Common Stock (the "Old Certificates," whether one or more) shall
be entitled to receive, upon surrender of the Old Certificates to the Secretary
of the Corporation for cancellation, a certificate or certificates representing
the number of whole shares of the Voting Common Stock (the "New Voting Common
Certificates") into which and for which the shares of the Old Voting Common
Stock, formerly represented by the Old Certificates so surrendered, are
reclassified under the terms hereof. From and after the Effective Time, the Old
Certificates shall represent only the right to receive the New Voting Common
Certificates pursuant to the provisions hereof. No certificate or scrip
representing fractional share interests in the Voting Common Stock will be
issued, and no such fractional share interest will entitle the holder thereof to
vote or to any rights of a stockholder of the Corporation. If more than one Old
Certificate shall be surrendered at one time for the account of the same
stockholder, the number of shares of Voting Common Stock for which New Voting
Common Certificates shall be issued shall be computed on the basis of the
aggregate number of shares represented by the Old Certificates so surrendered.
In the event that the Secretary of the Corporation determines that a holder of
Old Certificates has not tendered all of such holder's certificates for
exchange, the Secretary of the Corporation shall carry forward any fractional
share until all certificates of that holder have been presented for exchange.
If any New Voting Common Certificate is to be issued in a name other than that
in which the Old Certificates surrendered for exchange are issued, the Old
Certificates so surrendered shall be properly endorsed and otherwise in proper
form for transfer, and the person or persons requesting such exchange shall
affix any requisite stock transfer tax stamps to the Old Certificates
surrendered, or provide funds for their purchase, or establish to the
satisfaction of the Secretary of the Corporation that such taxes are not
payable. From and after the Effective Time, the total amount of capital
represented by the shares of the Voting Common Stock into which and for which
the shares of the Old Voting Common Stock are reclassified under the terms
hereof shall be the same as the amount of capital represented by the shares of
Old Voting Common Stock so reclassified, until thereafter reduced or increased
in accordance with applicable law. Notwithstanding anything to the contrary
contained herein, in the event that the

9
<PAGE>

Effective Time is not on or before April 30, 1998, there shall be no
reclassification of the Voting Common Stock and the provisions of this paragraph
shall be null and void.

SECTION B. PRIME COMMON STOCK. The Prime Common Stock shall have the
------------------
following designations, preferences, relative, participating, optional or other
rights, qualifications, limitations and restrictions.

1. Voting Rights.
-------------

The holders of Prime Common Stock shall be entitled to vote on each
matter in which the stockholders of the Corporation shall be entitled to vote
and each holder of Prime Common Stock shall be entitled to one-tenth (1/10th) of
one vote for each share of such stock held by such holder. The holders of Prime
Common Stock shall not vote as a class except as otherwise required by law.

2. Dividends.
---------

The holder of each share of Prime Common Stock shall be entitled to
receive, when and as declared by the Board of Directors of the Corporation, out
of funds legally available for that purpose, dividends in cash, stock or
otherwise; provided, however, that the per share amount of any dividend for the
-------- -------
Prime Common Stock in any fiscal year of the Corporation shall be at least equal
to the per share amount, if any, of any dividend declared for the Common Stock
during such fiscal year.

If dividends are paid on the Common Stock in shares of Voting or Non-
Voting Common Stock or both, then each holder of the Prime Common Stock entitled
to receive a corresponding dividend on shares of Prime Common Stock shall
receive only shares of Prime Common Stock in payment of that dividend.

3. Rights Upon Liquidation Dissolution or Winding Up.
-------------------------------------------------

In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, or upon the sale of substantially all of the
assets of the Corporation or upon a merger of the Corporation in which the
Corporation is not the surviving entity (collectively, a "Distribution Event"),
after:

(i) payment or provision for payments of debts and any payment or
declaration and setting aside for payments of any amounts owing on the Class A
Stock and Preferred Stock with respect to a Distribution Event; and

(ii) payment or provision for payment and any payment or declaration
and setting aside for payment of a distribution in an amount equal to Fifteen
Million Dollars ($15,000,000) to holders of the Common Stock with respect to a
Distribution Event;

(iii) the holders of the Prime Common Stock then outstanding shall be
entitled to receive all further distributions pro rata with the holders of the
Common Stock, in the proportion that

10
<PAGE>

the outstanding Common Stock and Prime Common Stock held by each of them bears
to the outstanding Common Stock and Prime Common Stock held by all of them.

4. Conversion.
----------

In the event that at any time while any of the Prime Common Stock
shall be outstanding, the Corporation shall complete a firm commitment
underwritten public offering involving the sale by the Corporation of shares of
Common Stock with minimum net proceeds to the Corporation (after deducting
underwriting discount and offering expenses) of at least $20 million, then all
outstanding shares of Prime Common Stock shall, automatically and without
further action on the part of the holders of the Prime Common Stock, be
converted into shares of Voting Common Stock on a .314 for one (.314 shares of
Voting Common Stock for each share of Prime Common Stock) basis in accordance
with the terms of this subsection 4 with the same effect as if the certificates
evidencing such shares had been surrendered for conversion, such conversion to
be effected simultaneously with the closing under such offering, provided,
however, that certificates evidencing the shares of Voting Common Stock issuable
upon such conversion shall not be issued except on surrender of the certificates
for the shares of Prime Common Stock converted.

SECTION C. CLASS A STOCK. The Corporation shall have the authority to
-------------
issue 500,000 shares of Class A Stock, $.01 par value (the "Class A Stock"), in
two series with the Series 1 Class A Stock having all of the following
designations, preferences, relative, participating, optional or other rights,
qualifications, limitations and restrictions and Series 2 Class A Stock having
all of the following designations, preferences, relative, participating,
optional or other rights, qualifications, limitations and restrictions except
that the Series 2 Class A Stock shall not have any of the rights to vote or
elect directors which are provided to holders of Series 1 Class A Stock in
Sections 4 and 5 thereof except to the extent required by law.

1. Dividends.
---------

(a) The holder of each share of Class A Stock shall be entitled to
receive, when and as declared by the Board of Directors of the Corporation, out
of funds legally available for that purpose, dividends in cash or stock or
otherwise; provided, however, that the per share amount of any dividend for the
-------- --------
Class A Stock in any fiscal year of the Corporation shall be at least equal to
the per share amount, if any, of any dividend declared for the Common Stock
during such fiscal year. In connection with any dividend declared for the
Common Stock, each share of Class A Stock shall be deemed to be converted into
shares of Common Stock as provided in subsection 5 hereof. All dividends
declared upon the Class A Stock shall be declared pro rata per share.
--- ----

(b) In addition to any dividends received pursuant to subsection (a)
above, the holder of each share of Class A Stock shall also be entitled to
receive out of funds legally available for that purpose, dividends equal to
10.0% per annum of the consideration received by the Corporation for the
issuance of the Class A Stock by the Corporation (the "Original Issuance
Price").

The dividend shall begin accruing on December 31, 1996, with respect
to each share of Class A Stock issued prior to that date. Shares issued after
that date will accrue dividends from the

11
<PAGE>

purchase date. Until the later to occur (the "Cash Payment Date") of (i)
January 1, 2003 and (ii) the date on which no Senior Debt (defined below) and no
Subordinated Debt (defined below) remains outstanding, dividends will be payable
at the option of the Corporation either in cash or by the issuance of additional
shares of Class A Stock. For this purpose, Class A Stock shall be valued at
$15.00 per share and whole and fractional shares may be issued to make such
payments. After the Cash Payment Date, all dividends due on the Class A Stock
must be paid in cash.

For purposes of determining the amounts due to holders of Class A
Stock issued in payment of any dividend due on Class A Stock, the Original Issue
Price of Class A Stock issued in payment of any such dividend shall be $15 per
share. The date of purchase of such stock shall be deemed to be the date to
which the dividend obligation paid with the issuance of such stock had accrued.

(c) Payments of dividends shall be made annually beginning in 1998 for
the year 1997. Payments shall be made on any date but in no event later than
June 30th in any year following the year for which dividends are due.

(d) If the Corporation is prevented by law from paying any accrued
dividend when required by this subsection 1, the Corporation shall make payment
of the dividend as soon as such legal prohibition is removed. Accrued but
unpaid dividends will not bear interest.

(e) Dividends to holders of Class A Stock which are paid by the
issuance of shares of Class A Stock shall be paid to the holders of Series 1
shares only in Series 1 shares and to the holders of Series 2 shares only in
Series 2 shares.

2. Rights Upon Liquidation Dissolution or Winding Up.
-------------------------------------------------

(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, or upon the sale of substantially
all of the assets of the Corporation or upon a merger of the Corporation in
which the Corporation is not the surviving entity (collectively, a "Distribution
Event"), the assets of the Corporation available for distribution to its
shareholders, shall be distributed in the following order of priority:

(i) The holders of Class A Stock shall be entitled to receive, prior
and in preference to any distribution to the holders of Common Stock and Prime
Common Stock, but pari passu with the holders of Preferred Stock in accordance
with the relative liquidation preferences of Class A Stock and Preferred Stock,
an amount equal to the Original Issuance Price computed on a per share basis
compounded at rate of 12% per annum from December 31, 1996, for all shares
issued prior to that date and from the date of purchase for all shares issued
after that date, multiplied by the number of shares of Class A Stock then
outstanding.

(ii) The 12% compounded annual rate of return shall be in lieu of, and
not in addition to, the dividends paid or payable by the Corporation as set
forth in subsection 1 hereof. In the event the Corporation has paid dividends
on the Class A Stock prior to the Distribution Event, all such

12
<PAGE>

dividends previously paid shall be deemed a partial prepayment of the 12% annual
return contemplated in this subsection 2(a), whether paid in cash or in Series A
Stock.

(iii) In lieu of the distribution set forth in subparagraph (i)
the holders of Class A Stock shall receive, if greater than the distribution set
forth in subparagraph (i), prior and in preference to any distribution to the
holders of the Common Stock and Prime Common Stock, but pari passu with the
holders of Preferred Stock in accordance with the relative liquidation
preferences of Class A Stock and Preferred Stock, an amount equal to the sum of:
(A) any dividends declared or accrued but unpaid on the Class A Stock, plus (B)
the distribution they would be entitled to receive if the Class A Stock had been
converted into Common Stock pursuant to the terms hereof immediately prior to
the Distribution Event.

(b) If the assets and funds of the Corporation available for
distribution to the holders of Class A Stock shall be insufficient to permit the
payment of the full preferential amounts set forth in subsection 2(a) hereof,
then all of the assets of the Corporation available for distribution shall be
distributed to holders of Class A Stock pro rata, in the proportion that the
aggregate amount due each of them bears to the aggregate amount due all of the
them, but pari passu with the holders of Preferred Stock in accordance with the
relative liquidation preferences of Class A Stock and Preferred Stock.

3. Redemption.
----------

(a)(i) At any time on or after the Cash Payment Date (as defined in
subsection 1(b) above), the Corporation shall (unless otherwise prevented by
law) at the written request of any of the holder(s) redeem the shares of Class A
Stock then owned by such holder(s) of Class A Stock and submitted for
redemption.

The amount per share of Class A Stock at which the shares of Class A
Stock are to be redeemed pursuant to this subsection 3(a)(i) shall be an amount
equal to the greater of (i) the Original Issuance Price plus any declared or
------- --
accrued but unpaid dividends on the Class A Stock which is so redeemed; or (ii)
the Fair Market Value of the Class A Stock which is so redeemed (the "Redemption
Price").

The Redemption Price of the Class A Stock which is redeemed shall be
paid in eight equal quarterly installments beginning on the first March 31, June
30, September 30 or December 31 to occur after the Corporation receives written
notice from a holder electing to redeem any or all of the Class A Stock then
owned by such holder (the "Redemption Date"); provided, however, that if the
Redemption Price is determined pursuant to subpart (i) of the preceding
sentence, the accrued but unpaid dividends on the Class A Stock which is so
redeemed shall be paid in full with the first installment payment of the
Redemption Price.

For this purpose, "Fair Market Value" shall mean an amount agreed to
by the Corporation and the holder(s) of the Class A Stock being redeemed, or in
the event that the Corporation and the holder(s) of the Class A Stock being
redeemed cannot agree upon an amount, an amount equal to the Fair Market Value
of the Class A Stock, without any discount for minority

13
<PAGE>

position, as determined by an appraiser who shall be associated with a
nationally-recognized accounting or investment banking firm, or who shall have
no less than five (5) years of experience in the appraisal of businesses such as
the Corporation's business, who shall be selected by the independent certified
public accountants that are regularly employed by the Corporation to audit its
books and records.

(ii) At any time on or after the Cash Payment Date (as defined in
subsection 1(b) above) and either (A) the sale of 20% or more of the outstanding
shares of capital stock of the Corporation by the Principals (identified below
in subsection 3(a)(iii) or (B) the occurrence of an Event of Default (defined in
subsection 3(a)(iii) below), the Corporation shall (unless otherwise prevented
by law) at the written request of any of the holder(s) thereof, redeem the
shares of Class A Stock then owned by such holders of Class A Stock and
submitted for redemption for an amount per share of Class A Stock determined in
the manner provided in subsection 2(a)(i) above. The redemption price so
determined shall be paid in full upon submission by the holder of written notice
of election to redeem and delivery of the certificate for the shares of Class A
Stock to be so redeemed.

(iii) An Event of Default for purposes of subsection 3(a)(ii)
shall be and include:

(A) the occurrence of any "materially adverse"
misrepresentation or default or breach of warranty or covenant by the
Corporation or the Principals under the Stock and Warrant Purchase Agreement
(the "Stock and Warrant Purchase Agreement") dated December 29, 1995 between the
Corporation, the Class A stockholders and certain management level employees of
the Corporation identified therein as the "Principals";

(B) the acceleration of any indebtedness of the Corporation
which exceeds, in the aggregate, Five Hundred Thousand Dollars ($500,000); or

(C) (1) the filing of any petition, whether voluntary or
involuntary, seeking the reorganization or liquidation of the Corporation under
any provision of the Federal Bankruptcy Code or any other federal or state
reorganization, insolvency or debtor relief law, (2) the appointment of any
receiver, liquidator or trustee for the Corporation or any of its properties by
a court order and which appointment is not vacated within 30 days, or (3) the
Corporation is adjudicated insolvent, or the Corporation shall make an
assignment for the benefit of any of its creditors, admit in writing an
inability to pay debts when they become due in the ordinary course of its
business, or consent to the appointment of a receiver, trustee or liquidator for
the Corporation or all or any part of the property of the Corporation; or

(D) the occurrence of any "Remedy Event" as defined in the
Certificate of Designation, Preferences and Rights to the Corporation's Series B
Redeemable Convertible Preferred Stock.

Notwithstanding the foregoing, an Event of Default shall not include
the failure of any Principal to fulfill his or her obligations under Section 4.1
of the Stock and Warrant Purchase Agreement except for any violation by Sarah C.
Garvin of the noncompete covenant contained in

14
<PAGE>

Section 4.1 of the Stock and Warrant Purchase Agreement which expressly shall be
considered an Event of Default.

As used in this subsection 3(a)(iii), "materially adverse" shall mean
a single or combination of misrepresentations or defaults or breaches of
warranty or covenant that result in a loss or damage to the Corporation or the
holders of the Class A Stock, and which is or are not cured within 30 days after
notice and opportunity to cure, equal to or in excess of $700,000.

(b) Until the entire redemption price for the shares of Class A Stock,
which have been submitted for redemption has been paid in full pursuant to this
subsection 3, the holder of the Class A Stock which has been submitted for
redemption shall retain possession of and all rights attendant to the shares of
Class A Stock including the right to vote submitted shares on all matters.
Shares submitted for redemption shall be deemed redeemed only after payment of
the full redemption price. Shares converted pursuant to subsection 5 prior to
payment of the full redemption price may be converted only after repayment to
the Corporation of the amount of the Original Issuance Price paid by the
Corporation to the holder pursuant to subsection 3(a) above prior to conversion.

(c) If the Corporation is prevented by law from redeeming any Class A
Stock when required by this subsection 3, the Corporation shall offer to redeem
so many of the shares of the Class A Stock pro rata among its holders as it is
--- ----
able and shall notify the holders of the Class A Stock when and as such legal
prohibition is removed.

4. Voting.
------

(a) In addition to the rights specified in subsection 4(b) and 5(f)
below and any other rights provided in the Corporation's By-laws or by law, each
share of Series 1 Class Stock shall entitle the holder thereof to a number of
votes equal to the number of shares of Voting Common Stock into which such share
is then convertible, and such holders shall be entitled to vote with the holders
of Voting Common Stock on all matters as to which holders of Voting Common Stock
shall be entitled to vote.

(b) In addition to the rights specified above, the holders of the
Series 1 Class A Stock then outstanding shall, as a class, have the right to
elect two directors to the Corporation's Board of Directors and from time to
time to remove, replace and re-elect such directors.

5. Conversions.
-----------

Subject to the terms and conditions of this subsection 5, the holder
of any share of shares of Class A Stock shall have the right, at its option at
any time prior to December 29, 2005 to convert any of such share or shares of
Class A Stock (except that upon any liquidation of the Corporation the right of
conversion shall terminate at the close of business on the last full business
day next preceding the date fixed for payment of the liquidation payments) into
such number of fully paid and nonassessable whole shares of Voting Common Stock
or Non-Voting Common Stock or both, as the holder may elect, as is obtained by
multiplying the number of shares of Class A Stock to be converted by $15 and
dividing the result by the Class A Conversion Price.

15
<PAGE>

The Class A Conversion Price for Class A Stock (the "Class A
Conversion Price") shall mean $1.5625 (the "Undiluted Conversion Price Number")
or such other Class A Conversion Price as shall be determined pursuant to the
last adjustment made pursuant to subsection 5(d) below (as if such Class A
Conversion Price had been in effect at the date of issuance of the Class A
Stock) and in effect at the date any share or shares of Class A Stock are
surrendered for conversion; provided, however, that the Undiluted Conversion
Price Number shall increase to:

(i) $2.2058823 in the event a Liquidity Event (as defined in
subsection 5(p)) occurs on or before December 31, 1997;

(ii) $2.500000 in the event a Liquidity Event does not occur on
or before December 31, 1997, but the Corporation achieves net after-tax income,
as determined by the Corporation's independent outside accountants in accordance
with generally accepted accounting principles consistently applied ("Net After-
Tax Income"), of at least $6.0 million in its fiscal year ending December 31,
1998 or any fiscal year ending before December 31, 1998;

(iii) $2.6086956 in the event a Liquidity Event does not occur on
or before December 31, 1997 but the Corporation achieves Net After-Tax Income of
at least $70 million in its fiscal year ending December 31, 1998 or any fiscal
year ending before December 31, 1998; or

(iv) $2.7272727 in the event a Liquidity Event does not occur on
or before December 31, 1997 but the Corporation achieves Net After-Tax Income of
at least $80 million in its fiscal year ending December 31, 1998 or any fiscal
year ending before December 31, 1998.

(a) Exercise of Conversion Rights. The rights of conversion herein
-----------------------------
provided shall be exercised by any holder of shares of Class A Stock by giving
written notice that such holder elects to convert a stated number of shares of
Class A Stock into Voting or Non-Voting Common Stock or both as shall be stated
in the notice and by surrender of a certificate or certificates for the shares
to be so converted to the Corporation at its principal office (or such other
office or agency of the Corporation as the Corporation may designate by notice
in writing to the holder or holders of the Class A Stock) at any time during its
usual business hours on the date set forth in such notice, together with a
statement of the name or names (with address) in which the certificate or
certificates for shares of Common Stock shall be issued.

(b) Issuance of Certificates; Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt of the written notice referred to in subsection 5(a) and
surrender of the certificate or certificates for the share or shares of the
Class A Stock to be converted, the Corporation shall issue and deliver, or cause
to be issued and delivered, to such holder, registered in such name or names as
such holder may direct, subject to compliance with applicable laws (as evidenced
by an opinion of counsel acceptable to the Corporation, if the Corporation so
requests) to the extent such designation shall involve a transfer, a certificate
or certificates for the number of whole shares of Common Stock issuable upon the
conversion of such share or shares of Class A Stock.

To the extent permitted by law, such conversion shall be deemed to
have been effected and the Class A Conversion Price shall be determined as of
the close of business on the date on which

16
<PAGE>

such written notice shall have been received by the Corporation and the
certificate or certificates for such share or shares shall have been surrendered
as aforesaid (the "Conversion Effective Date"), and at such time the rights of
the holder of such share or shares of Class A Stock shall cease, and the person
or persons in whose name or names any certificate or certificates for shares of
Common Stock that shall be issuable upon such conversion shall be deemed to have
become the holder or holders of record of the shares represented thereby.

(c) Fractional Shares; Dividends; Partial Conversion. No fractional
------------------------------------------------
shares shall be issued upon conversion of the Class A Stock into Common Stock
and no payment or adjustment shall be made upon any conversion on account of any
cash dividends on the Common Stock issued upon such conversion.

At the time of each conversion, to the extent permitted by law, the
Senior Debt Documents and the Subordinated Debt Documents (as such terms are
defined below), the Corporation shall pay in cash an amount equal to all unpaid
dividends declared or accrued on the shares surrendered for conversion to the
date upon which such conversion is deemed to take place as provided in
subsection 5(b).

To the extent that the Corporation is either not permitted by law, the
Senior Debt Documents or the Subordinated Debt Documents to pay all or any
portion of such amount at the time of each conversion, it shall pay such unpaid
amount as soon as it may legally do so to the person who was entitled to receive
such amount at the time of such conversion. Accrued but unpaid dividends shall
be prorated and paid through the Conversion Effective Date.

In case the number of shares of Class A Stock represented by the
certificate or certificates surrendered pursuant to subsection 5(a) exceeds the
number of shares converted, the Corporation shall, upon such conversion, execute
and deliver to the holder thereof, at the expense of the Corporation, a new
certificate or certificates for the number of shares of Class A Stock of the
same series represented by the certificate or certificates surrendered that are
not to converted.

If any fractional interest in a share of Common Stock would, except
for the provisions of the first sentence of this subsection 5(c), be deliverable
upon any such conversion, the Corporation, in lieu of delivering the fractional
share thereof, may pay to the holder surrendering the Class A Stock for
conversion an amount in cash equal to the current market price of such
fractional interest as determined in good faith by the Board of Directors of the
Corporation if such payment is permitted by the Senior Debt Documents and the
Subordinated Debt Documents.

(d) Adjustment of Price Upon Issuance of Common Shares. Except as
--------------------------------------------------
provided in subsection 5(g) hereof, if and whenever the Corporation shall issue
or sell, or is, in accordance with subsections 5(d)(1) through 5(d)(7), deemed
to have issued or sold any shares of its Common Stock for a consideration per
share less than the Class A Conversion Price in effect immediately prior to the
time of such issue or sale, then, forthwith upon such issue or sale, the Class A
Conversion Price shall be reduced to the price determined by dividing:

17
<PAGE>

(i) an amount equal to the sum of (a) the number of shares of
Common Stock outstanding immediately prior to such issue or
sale (including as outstanding all shares of Common Stock
issuable upon conversion of outstanding Class A Stock)
multiplied by the then existing Class A Conversion Price,
and (b) the consideration, if any, received, or deemed to
have been received pursuant to such subsection 5(d)(1)
through 5(d)(7), by the Corporation upon such issue or sale;
by

(ii) the total number of shares of Common Stock outstanding, or
deemed to be outstanding, immediately after such issue or
sale (including as outstanding all shares of Common Stock
issuable upon conversion of outstanding Class A Stock).

No adjustment of the Class A Conversion Price, however, shall be made
in an amount less than $0.001 per share, and any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried forward
shall amount to $0.001 per share or more.

For purposes of this subsection 5(d) the following subsections 5(d)(1)
to 5(d)(7) shall also be applicable except to the extent the securities
described in subsections 5(d)(1) to 5(d)(7) are issued to holders of Class A
Stock as part of any redemption or conversion of Class A Stock:

(d)(1) Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any rights to subscribe for or to purchase, or any options
for the purchase of, Common Stock or any stock or securities convertible into or
exchangeable for Common Stock (such rights or options being herein called
"Options" and such convertible or exchangeable stock or securities being herein
called "Convertible Securities") whether or not such Options or the right to
convert or exchange such Convertible Securities are immediately exercisable, and
the price per share for which Common Stock is issuable upon the exercise of such
options or upon conversion or exchange of such Convertible Securities
(determined by dividing (i) the total amount, if any, received or receivable by
the Corporation as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the Corporation
upon the exercise of all such Options, plus, in the case of such Options which
relate to Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the Class A
Conversion Price in effect immediately prior to the time of the granting of such
Options, then the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise of such Options
shall be deemed to have been issued for such price per share as of the date of
granting of such Options and thereafter shall be deemed to be outstanding.

18
<PAGE>

Except as otherwise provided in subsection 5(d)(3), no adjustment of
the Class A Conversion Price shall be made upon the actual issue of such Common
Stock or of such Convertible Securities upon exercise of such Options or upon
the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.

(d)(2) Issuance of Convertible Securities. In case the Corporation
----------------------------------
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable and the price per
share for which Common Stock is issuable upon such conversion or exchange
(determined by dividing (i) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such Convertible
Securities plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by (ii)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities) shall be less than the Class A
Conversion Price in effect immediately prior to the time of such issue or sale,
then the total maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall be deemed to have been
issued for such price per share as of the date of the issue or sale of such
Convertible Securities and thereafter shall be deemed to be outstanding,
provided that:

(i) except as otherwise provided in subsection 5(d)(3) below, no
adjustment of the Class A Convertible Price shall be made upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible Securities,
and

(ii) if any such issue or sale of such Convertible Securities is made
upon exercise of any Option to purchase any such Convertible Securities for
which adjustments of the Class A Conversion Price have been or are to be made
pursuant to other provisions of this subsection 5(d), no further adjustment of
the Class A Conversion Price shall be made by reason of such issue or sale.

For the purposes of this Section 5, the Prime Common Stock is a Convertible
Security.

(d)(3) Change in Option Price or Conversion Rate. Upon the happening
-----------------------------------------
of any of the following events, namely if the purchase price provided for in any
Option referred to in subsection 5(d)(1), the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities referred
to in subsection 5(d)(1) or 5(d)(2), or the rate at which any Convertible
Securities referred to in subsection 5(d)(1) or 5(d)(2) are convertible into or
exchangeable for Common Stock shall change at any time (in each case other than
under or by reason of provisions designed to protect against dilution), the
Class A Conversion Price in effect at the time of such event shall forthwith be
readjusted to the Class A Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold.

On the expiration of any such Option or the termination of any such
right to convert or exchange such Convertible Securities (without exercise,
conversion, or exchange), the Class A Conversion Price then in effect hereunder
shall forthwith be increased to the Class A Conversion Price

19
<PAGE>

which would have been in effect at the time of such expiration or termination
had such Option or Convertible Securities, to the extent outstanding immediately
prior to such expiration or termination, never been issued, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding.

If the purchase price provided for in any such Option referred to in
subsection 5(d)(1) or the rate at which any Convertible Securities referred to
in subsection 5(d)(1) or 5(d)(2) are convertible into or exchangeable for Common
Stock shall be reduced at any time under or by reason of provisions with respect
thereto designed to protect against dilution, then, in case of the delivery of
Common Stock upon the exercise of any such Option or upon conversion or exchange
of any such Convertible Securities, the Class A Conversion Price then in effect
hereunder shall forthwith be adjusted to such respective amount as would have
been obtained had such Option or Convertible Securities never been issued as to
such Common Stock and had adjustments been made upon the issuance of the shares
of Common Stock delivered as aforesaid, but only if as a result of such
adjustment the Class A Conversion Price then in effect hereunder is thereby
reduced.

(d)(4) Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock, Options for Convertible Securities, any Common Stock,
Options or Convertible Securities, as the case may be, issuable in payment of
such dividend or distribution shall be deemed to have been issued or sold
without consideration except that a dividend or distribution of Class A Stock to
holders of Class A Stock shall be deemed to be an issuance or sale for
consideration equal to the number of shares of Class A Stock paid as a dividend
or distributed times $15 per share.

(d)(5) Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith.

In case any shares of Common Stock, Options or Convertible Securities
shall be issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall be deemed to be
the fair value of such consideration as determined in good faith by the Board of
Directors of the Corporation, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith.

The amount of consideration deemed to be received by the Corporation
pursuant to the foregoing provisions of this subsection 5(d)(5) upon any
issuance and/or sale of shares of Common Stock, Options or Convertible
Securities, pursuant to an established compensation plan of the Corporation, to
directors, officers or employees of the Corporation in connection with their
employment shall be increased by the amount of any tax benefit realized by the
Corporation as a result of such issuance and/or sale, the amount of such tax
benefit being the amount by which the federal and/or state income or other tax
liability of the Corporation shall be reduced by reason of any

20
<PAGE>

deduction or credit in respect of such issuance and/or sale in the fiscal year
of such issuance and/or sale.

In case any Options shall be issued in connection with the issue and
sale of other securities of the Corporation, together comprising one integral
transaction in which no specific consideration is allocated to such Options by
the parties thereto, such Options shall be deemed to have been issued without
consideration.

(d)(6) Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to receive
a dividend or other distribution payable in Common Stock, Options or Convertible
Securities, or (ii) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.

(d)(7) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purpose of this subsection
5(d).

(e) Subdivision or Combination of Stock. In case the Corporation
-----------------------------------
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Class A Conversion Price in effect immediately
prior to such subdivision shall be proportionately reduced, and conversely, in
case the outstanding shares of Common Stock of the Corporation shall be combined
into a smaller number of shares, the Class A Conversion Price in effect
immediately prior to such combination shall be proportionately increased.

(f) Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
If any capital reorganization or reclassification of the capital stock of the
Corporation or any consolidation or merger of the Corporation with another
Corporation or the sale of all or substantially all of its assets to another
Corporation shall be effected in such a way (including, without limitation, by
way of consolidation or merger) that holders of Common Stock shall be entitled
to receive stock securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization or reclassification, lawful
and adequate provisions (in form reasonably satisfactory to the holders of at
least 66-2/3% of the outstanding shares of Class A Stock) shall be made whereby
each holder of a share or shares of Class A Stock shall thereafter have the
right to receive, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock of the Corporation immediately
theretofore receivable upon the conversion of such share or shares of the Class
A Stock such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such stock immediately theretofore so
receivable had such reorganization or reclassification not taken place.

In such case appropriate provision shall be made with respect to the
rights and interests of such holder to the end that the provisions hereof
(including without limitation provisions for

21
<PAGE>

adjustment of the Class A Conversion Price) shall thereafter be applicable, as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of such conversion rights (including,
if necessary to effect the adjustments contemplated herein, an immediate
adjustment, by reason of such reorganization reclassification, of the Class A
Conversion Price to the value for the Common Stock reflected by the terms of
such reorganization or reclassification if the value so reflected is less than
the respective Class A Conversion Price or Prices in effect immediately prior to
such reorganization or reclassification).

In the event of a merger or consolidation of the Corporation as a
result of which a greater or lesser number of shares of Common Stock of the
surviving corporation are issuable to holders of Common Stock of the Corporation
outstanding immediately prior to such merger or consideration, the Class A
Conversion Price in effect immediately prior to such merger or consolidation
shall be adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock of the Corporation.

The Corporation will not effect any such consolidation or merger, or
any sale of all or substantially all of its assets and properties, unless prior
to the consummation thereof the successor corporation (if other than the
Corporation) resulting from such consolidation or merger or if the Corporation
purchasing such assets shall assume by written instrument (in form reasonably
satisfactory to the holders of at least 66-2/3% of the shares of Class A Stock
at the time outstanding) executed and mailed or delivered to each holder of
shares of Class A Stock at the last address of such holder appearing on the book
of the Corporation, the obligation to deliver to such holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to receive.

(g) Treatment of Certain Issues of Common Stock. Anything herein to
-------------------------------------------
the contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Class A Conversion Price by reason of (i) any Common Stock
issued or sold (or deemed to have been issued or sold in accordance with
subsections 5(d)(1) through 5(d)(7) hereof) prior to December 29, 1995; (ii) any
Common Stock issued or sold after such date as the result of the exercise of any
Option or the conversion of any Convertible Security (including Class A Stock)
issued prior to such date; (iii) any warrants granted in connection with the
Stock and Warrant Purchase Agreement; (iv) the issuance or exercise of incentive
stock options or other stock options covering Common Stock of the Corporation
pursuant to a plan adopted by the Board of Directors of the Corporation on or
before December 29, 1995, which provides for the issuance of options to
employees and consultants of the Corporation only, and which allows for the
issuance of options covering not more than 1,414,000 shares of Common Stock; (v)
the issuance of any shares of Common Stock upon exercise of the options
described in subparagraph (iv) above; (vi) any issuance of Options, Convertible
Securities, Common Stock or other securities of the Corporation which have, in
advance of grant or issuance, been approved by the Board of Directors of the
Corporation and consented to in writing by EGL Holdings, Inc., or the successor
in interest of EGL Holdings, Inc. ("EGL"), (vii) the issuance of 626,000 shares
of Common Stock (or a lesser number of shares of Common Stock, coupled with
Common Stock warrants, which, when exercised, will total 626,000 shares of the
Corporation's Common Stock, when added to the Common Stock originally issued),
to be issued to Mr. Woody Miller or an entity controlled by Mr. Woody Miller,
for cash consideration of not less than $720,000; or (viii) the

22
<PAGE>

conversion of any Voting Common Stock into Non-Voting Common Stock or the
conversion of any Non-Voting Common Stock into Voting Common Stock.

Consent or a vote of approval as a director by any member of the Board
of Directors nominated or elected by EGL or the holders of the Class A Stock
Series 1 shall not constitute the consent required in subsection (vi) above.

(h) Automatic Conversion. In the event that at any time while any of
--------------------
the Class A Stock shall be outstanding, the Corporation shall complete a firm
commitment underwritten public offering involving the sale by the Corporation of
shares of Common Stock with minimum net proceeds to the Corporation (after
deducting underwriting discount and offering expenses) of $20,000,000, then all
outstanding shares of the Class A Stock shall, automatically and without further
action on the part of the holders of the Class A Stock, be converted into shares
of Common Stock in accordance with the terms of this subsection 5 with the same
effect as if the certificates evidencing such shares had been surrendered for
conversion, such conversion to be effected simultaneously with the closing of
such underwritten public offering, provided, however, that certificates
evidencing the shares of Common Stock issuable upon such conversion shall not be
issued except on surrender of the certificates for the shares of Class A Stock
so converted.

(i) Notice of Adjustment. Upon any adjustment of the Class A
--------------------
Conversion Price, the Corporation shall give written notice thereof, by first
class mail, postage prepaid, addressed to each holder of shares of Class A Stock
at the address of such holder as shown on the books of the Corporation, which
notice shall state the Class A Conversion Price resulting from such adjustment,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.

(j) Notices. In case at any time
-------

(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;

(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or other
rights;

(3) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation, or consolidation or merger of the
Corporation with, or a sale of all or substantially all its assets to another
Corporation.

(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation; or

(5) the Corporation shall take any action or there shall be any
event which would result in an automatic conversion of the Class A Stock
pursuant to subsection 5(h);

23
<PAGE>

then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, return receipt requested, addressed to each holder
of any shares of Class A Stock at the address of such holder as shown on the
books of the Corporation:

(a) at least 20 days' prior written notice of the date on
which the books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up;

(b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least 20
days' prior written notice of the date when the same shall take place; and

(c) in the case of any event which would result in an
automatic conversion of the Class A Stock pursuant to subsection 5(h), at least
20 days' prior written notice of the date on which the same is expected to be
completed.

Such notice in accordance with the foregoing clause (a) shall also
specify, in the case of such dividend, distribution or subscription rights, the
date on which the holders of Common Stock shall be entitled thereto, and such
notice in accordance with the foregoing clause (b) shall also specify the date
on which the holders of Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.

(k) Stock to be Reserved. The Corporation will at all times reserve
--------------------
and keep available out of its authorized Common Stock, solely for the purpose of
issue upon the conversion of the Class A Stock as herein provided, such number
of shares of Common Stock as shall be issuable upon the conversion of all
outstanding shares of Class A Stock.

The Corporation covenants that all shares of Common Stock which shall
be so issued upon any such conversion shall be duly and validly issued and fully
paid and nonassessable and free from all taxes, liens and charges arising out of
or by reason of the issue thereof. The Corporation will take all such action
as may be necessary on its part to assure that all such shares of Common Stock
may be so issued without violation of any applicable law or regulation, or of
any requirements of any national securities exchange upon which the Common Stock
of the Corporation may be listed.

The Corporation will not take any action which would cause the total
number of shares of Common Stock issued and issuable after such action upon
conversion of the Class A Stock to exceed the total number of shares of Common
Stock then authorized by the Corporation's Certificate of Incorporation.

(l) No Reissuance of Class A Stock. Shares of Class A Stock which are
------------------------------
converted into shares of Common Stock as provided herein shall not be reissued.

24
<PAGE>

(m) Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of the Class A Stock shall be made without charge to the
holders thereof for any issuance tax in respect thereof, provided that the
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than of the holder of the Class A Stock which is being converted.

(n) Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Class A Stock or of any shares of
Common Stock issued or issuable upon the conversion of any shares of Class A
Stock in any manner which interferes with the timely conversion of such Class A
Stock.

(o) Definition of Common Stock. As used in this Section 5, the term
--------------------------
"Common Stock" shall mean and include the Corporation's authorized Voting and
Non-Voting Common Stock, $.0025 par value per share, as constituted on the
effective date of this Restated Certificate of Incorporation, and shall also
include any capital stock or any class of the Corporation thereafter authorized
which shall not be limited to a fixed sum or percentage of par value in respect
of the rights of the holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided that the shares of Common
--------
Stock receivable upon conversion of shares of the Class A Stock of the
Corporation, or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
subsection 5(f) shall include only shares designated as Common Stock of the
Corporation on the effective date of this Restated Certificate of Incorporation,
and provided further, that neither Class A Stock nor Price Common Stock shall be
----------------
deemed to be "Common Stock" for the purposes of this Section 5(o).

(p) Definition of Liquidity Event. As used in this Section 5, the
-----------------------------
term "Liquidity Event" shall mean either (i) the sale or merger of substantially
all of the assets or equity securities of the Corporation at a valuation for the
Corporation of at least $40,000,000 net of assumed and retained liabilities, or
(ii) the completion of a firm commitment underwritten public offering involving
the sale by the Corporation of shares of Common Stock (i) with minimum gross
proceeds to the Corporation of at least $20 million, and (ii) with a Corporation
pre-offering valuation of at least $40 million. As used herein, tradable
securities shall mean registered securities which become freely tradable no
later than 180 days after closing of the sale or merger.

6. Defined Terms. In addition to the other terms defined in this
-------------
Certificate, as used herein, the following capitalized terms have the respective
meanings set forth below:

(a) "Senior Debt Documents" means (i) the Credit Agreement and the
other Credit Documents, in each case as amended (including by any amendment and
restatement), supplemented, modified or extended from time to time, including
each loan or credit agreement and other related agreements extending the
maturity of, replacing, refinancing, refunding, or otherwise restructuring
(including without limitation, increasing the amount of the available
borrowings thereunder), in whole or in part, the debt under the Credit
Agreement, whether by the same or any other agent, lender or group of lenders,
and (ii) any other loan or credit agreement, promissory note or other related
credit document which by its terms states that it is "Senior Debt" of the
Corporation for purposes of this

25
<PAGE>

Certificate and, so long as the Agent under Senior Debt Documents (without
giving effect to this clause (ii)) consents to such other loan, credit
agreement, promissory note or other related credit document being treated as
"Senior Debt Documents" for purposes of this Certificate.

(b) "Credit Agreement" means the Credit Agreement dated on or about
October 27, 1997, among the Corporation, the Banks party thereto and Banque
Paribas, as Agent.

(d) "Senior Debt" means and includes all obligations, liabilities and
indebtedness of the Corporation now or hereafter existing, whether fixed or
contingent, and whether for principal, premium, interest (including, without
limitation, interest accruing after the filing of a bankruptcy petition), fees,
expenses, indemnification, reimbursement obligations or otherwise, under the
Senior Debt Documents.

(e) "Subordinated Debt" means and includes all obligations,
liabilities and indebtedness of the Corporation now or hereafter existing,
whether fixed or contingent, and whether for principal, premium, interest
(including, without limitation, interest accruing after the filing of a
bankruptcy petition), fees, expenses, indemnification, reimbursement obligations
or otherwise, under the Senior Subordinated Loan Agreement (herein so called)
dated on or about October 27, 1997, among the Corporation, Paribas Capital
Funding LLC and the lenders party thereto and otherwise under the Subordinated
Debt Documents.

(f) "Subordinated Debt Documents" means (i) the Senior Subordinated
Loan Agreement as amended (including by any amendment and restatement),
supplemented, modified or extended from time to time, including each loan or
credit agreement and other related agreements extending the maturity of,
replacing, refinancing, refunding, or otherwise restructuring (including without
limitation, increasing the amount of the available borrowings thereunder), in
whole or in part, the debt under the Senior Subordinated Loan Agreement, whether
by the same or any other agent, lender or group of lenders, and (ii) any other
loan or credit agreement, promissory note or other related credit document which
by its terms states that it is "Subordinated Debt" of the Corporation for
purposes of this Certificate and, so long as the Agent under the Subordinated
Debt Documents (without giving effect to this clause (ii)) consents to such
other loan, credit agreement, promissory note or other related credit document
being treated as "Subordinated Debt Documents" for purposes of this Certificate.

SECTION D. PREFERRED STOCK. Subject to the limitations prescribed by law
---------------
and the provisions of this certificate of incorporation, the board of directors
of the Corporation is authorized to issue the Preferred Stock from time to time
in one or more series, each of such series to have such voting powers, full or
limited, or no voting powers, and such designations, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions thereof, as shall be determined by the board of
directors in a resolution or resolutions providing for the issue of such
Preferred Stock.

26
<PAGE>

ARTICLE V
INDEMNIFICATION

Section A. Right to Indemnification. Each person who was or is made a
------------------------
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact:

(1) that he or she is or was a director or officer of the Corporation,
or

(2) that he or she, being at the time a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
trustee, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (collectively, "another enterprise" or "other
enterprise"), whether either in case (1) or in case (2) the basis of such
proceeding is alleged action or inaction (x) in an official capacity as a
director or office of the Corporation, or as a director, trustee, officer
employee or agent of such other enterprise, or (y) in any other capacity related
to the Corporation or such other enterprise while so serving as a director,
trustee, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent not prohibited by Section 145 of the
General Corporation Law of the State of Delaware (or any successor provision or
provisions) as the same exists or may hereafter be amended (but, in the case of
any such amendment, with respect to alleged action or inaction occurring prior
to such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), against all expense, liability and loss (including without limitation
attorneys' fee and expenses, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such person
in connection therewith. The persons indemnified by this Article are
hereinafter referred to as "indemnitees." Such indemnification as to such
alleged action or inaction shall continue as to an indemnitee who has after such
alleged action or inaction ceased to be a director or officer of the
Corporation, or director, trustee, officer, employee or agent of such other
enterprise; and shall inure to the benefit of the indemnitee's heirs, executors
and administrators. Notwithstanding the foregoing, except as may be provided in
the Bylaws or by the board of directors, the Corporation shall not indemnify any
such indemnitee in connection with a proceeding (or portion thereof) initiated
by such indemnitee (but this prohibition shall not apply to a counterclaim,
cross-claim or third party claim brought by the indemnitee in any proceeding)
unless such proceeding (or portion thereof) was authorized by the Board of
Directors. The right to indemnification conferred in this Article: (i) shall be
a contract right; (ii) shall not be affected adversely to any indemnitee by any
amendment of this Certificate of Incorporation with respect to any alleged
action or inaction occurring prior to such amendment; and (iii) shall, subject
to any requirements imposed by law and the Bylaws, include the right to be paid
by the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition.

Section B. Relationship to Other Rights and Provisions Concerning
------------------------------------------------------
Indemnification. The rights to indemnification and to the advancement of
- ---------------
expenses conferred in this Article shall not be exclusive of any other right
which any person may have or hereafter acquire under this Certificate of
Incorporation, any statute, bylaw, agreement, vote of stockholders or
disinterested directors or

27
<PAGE>

otherwise. The Bylaws may contain such other provisions concerning
indemnification, including provisions specifying reasonable procedures relating
to and conditions to the receipt by indemnitees of indemnification, provided
that such provisions are not inconsistent with the provisions of this Article.

Section C. Agents and Employees. The Corporation may, to the extent
--------------------
authorized from time to time by the Board of Directors, grant rights to
indemnification, and to the advancement of expenses, to any employee or agent of
the Corporation (or any person serving at the Corporation's request as a
director, trustee, officer, employee or agent of another enterprise) or to any
person who is or was a director, officer, employee or agent of any of the
Corporation's affiliates, predecessor or subsidiary corporations or of a
constituent corporation absorbed by the Corporation in a consolidation or merger
or who is or was serving at the request of such affiliate, predecessor or
subsidiary corporation or of such constituent corporation as a director,
trustee, officer, employee or agent of another enterprise, in each case as
determined by the Board of Directors to the fullest extent of the provisions of
this Article in cases of the indemnification and advancement of expenses of
directors and officers of the Corporation, or to any lesser extent (or greater
extent, if permitted by law) determined by the Board of Directors.

ARTICLE VI
LIMITATION ON LIABILITY OF DIRECTORS

No person shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, provided,
however, that the foregoing shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the Corporation
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 General Corporation Law of the State of Delaware, or (iv) for
any transaction from which the director derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is amended hereafter to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware, as so amended. Any amendment, repeal
or modification of this Article shall not adversely affect any right or
protection of a director of the Corporation existing hereunder with respect to
any act or omission occurring prior to such amendment, repeal or modification.

ARTICLE VII
COMPROMISE

Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of these, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of Title 8 of the Delaware code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this

28
<PAGE>

Corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
to be summoned in such a manner as the said court directs. If a majority in
number representing three fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also of this Corporation.

ARTICLE VIII
MEETINGS OF STOCKHOLDERS

At all meetings of stockholders, a quorum will be present if the holders of
a majority of the shares entitled to vote at the meeting are represented at the
meeting in person or by proxy. From and after the first date as of which any
class of the Corporation's equity securities is traded on a national securities
exchange or through the Nasdaq Stock Market's automated quotation system, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at an annual or special meeting of stockholders of the
Corporation and may not be effected by any consent in writing by such
stockholders.

ARTICLE IX
DENIAL OF CUMULATIVE VOTING AND PREEMPTIVE RIGHTS

Stockholders of the Corporation will not have the right of cumulative
voting for the election of directors or for any other purpose. Except as
otherwise set forth in this Certificate or in any Certificate of Designation,
Rights and Preferences relating to the Corporation's capital stock as may be in
effect from time to time, no stockholder of the Corporation will, solely by
reason of holding shares of any class, have any preemptive or preferential right
to purchase or subscribe for any shares of the Corporation, now or hereafter to
be authorized, or any notes, debentures, bonds or other securities convertible
into or carrying warrants, rights or options to purchase shares of any class,
now or hereafter to be authorized, whether or not the issuance of any such
shares or such notes, debentures, bonds or other securities would adversely
affect the dividend, voting or any other rights of such stockholder. The Board
of Directors may authorize the issuance of, and the Corporation may issue,
shares of any class of the Corporation, or any notes, debentures, bonds or other
securities convertible into or carrying warrants, rights or options to purchase
any such shares, without offering any shares of any class to the existing
holders of any class of stock of the Corporation.

29
<PAGE>

ARTICLE X
CLASSIFIED BOARD OF DIRECTORS

From and after the first date as of which any class of the Corporation's
equity securities is traded on a national securities exchange or through the
Nasdaq Stock Market's automated quotation system, the directors shall be
classified, with respect to the time for which they severally hold office, into
three classes (Class A, Class B and Class C), as nearly equal in number as
possible, as determined by the Board of Directors, one class to hold office
initially for a term expiring at the annual meeting of stockholders to be held
in 1998, another class to hold office initially for a term expiring at the
annual meeting of stockholders to be held in 1999 and another class to hold
office for a term expiring at the annual meeting of stockholders to be held in
2000, with members of each class to hold office until whichever of the following
occurs first: his or her successor is elected and qualified, his or her
resignation, his or her removal from office by the stockholders or his or her
death. At each annual meeting of stockholders of the Corporation, the
successors to the class of directors whose term expires at the meeting shall be
elected to hold office for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election.

ARTICLE XI
AMENDMENT OF BYLAWS

The Board of Directors shall have the power to adopt, amend, alter, change
or repeal any Bylaws of the Corporation to the fullest extent permitted by the
General Corporation Law of the State of Delaware.

ARTICLE XII
AMENDMENT OF CERTIFICATE OF INCORPORATION

The Corporation hereby reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.

ARTICLE XIII
SEVERABILITY

In the event that any of the provisions of this Restated Certificate of
Incorporation (including any provision within a single Section, paragraph or
sentence) is held by a court of competent jurisdiction to be invalid, void or
otherwise unenforceable, the remaining provisions are severable and shall remain
enforceable to the full extent permitted by law.

IN WITNESS WHEREOF, the undersigned does make this Certificate, hereby
declaring and certifying that this is the act and deed of the Corporation, and
the facts herein stated are true, and

30
<PAGE>

accordingly, have hereunto set my hand and caused the Corporate Seal of the
Corporation to be hereunto affixed this 3rd day of February, 1998.

/s/ Sarah C. Garvin
-------------------------
Sarah C. Garvin
President

<PAGE>

CERTIFICATE OF AMENDMENT
TO THE
SECOND AMENDED AND RESTATED CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS OF THE SERIES B REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND THE SERIES B NON-VOTING REDEEMABLE CONVERTIBLE PREFERRED
STOCK OF
PHYSICIAN HEALTH CORPORATION

Physician Health Corporation, a corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies:

FIRST: That, pursuant to actions adopted by unanimous written consent of
the Board of Directors of the Corporation (the "Board") on January 23, 1998 in
accordance with Section 141 of the General Corporation Law of the State of
Delaware, the Board has duly adopted the following resolution in accordance with
Section 242 of the General Corporation Law of the State of Delaware:

RESOLVED: That the Board declares it advisable and in the best interest of
the Corporation that the Second Amended and Restated Certificate
of Designation, Preferences and Rights of the Series B
Redeemable Convertible Preferred Stock and the Series B Non-
Voting Redeemable Convertible Preferred Stock to the Certificate
of Incorporation of the Corporation be amended so that the
following language is added at the end of Section 3.3:

"Notwithstanding the foregoing, in the event the Company closes
an underwritten initial public offering of Common Stock
registered under the Securities Act of 1933 (a) on or prior to
the earlier of (i) the date immediately prior to the earliest
date on which any party may request the Equity Payment (as
defined therein) pursuant to the Equity Call Agreement dated as
of June 16, 1997 among the Company, Metroplex
Hematology/Oncology Associates, L.P., and the investors party
thereto, as amended, and (ii) June 30, 1998; and (b) at a price
to the public of not less than $4.25 per share (prior to
adjustment for any stock splits, stock dividends or similar
<PAGE>

recapitalization transactions after January 1, 1998), the
provisions of this Section 3.3 shall be terminated and shall
have no force and effect."

SECOND: That such amendment has been consented to and authorized by
written consent of the holders of at least 90% of the Series B Redeemable
Convertible Preferred Stock of the Corporation voting separately as a class, by
written consent given in accordance with Section 228 of the General Corporation
Law of the State of Delaware, and that pursuant to Section 228(d) thereof prompt
notice of the taking of the foregoing action without a meeting has been given to
those stockholders who have not consented in writing.

THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 242 and 228 of the General Corporation Law
of the State of Delaware.

IN WITNESS WHEREOF, Physician Health Corporation has caused this
Certificate to be executed on its behalf by Sarah C. Garvin, its President, as
of this third day of February, 1998.

PHYSICIAN HEALTH CORPORATION

By: /s/ Sarah C. Garvin
----------------------------------------------
Sarah C. Garvin
President

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<PAGE>

EXHIBIT 10.23

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (this "Agreement") is effective as of the 1st day
of January, 1998 (the "Effective Date"), by and between Physician Health
Corporation, Delaware Corporation (the "Company") and Thomas M. Rodgers, Jr.
("Employee").

W I T N E S S E T H:

WHEREAS, Employee is employed as the Executive Vice President, Chief
Financial Officer and Treasurer of the Company; and

WHEREAS, the Company and Employee wish to document certain terms of the
employment of Employee in such capacity;

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:

ARTICLE I. RESPONSIBILITIES

SECTION 1.1 SCOPE OF EMPLOYMENT. Employee is employed by Company to serve
as Executive Vice President, Chief Financial Officer and Treasurer of the
Company with the powers and responsibilities set forth for such position in the
Bylaws of the Company or as may be designated from time to time by the Chief
Executive Officer ("CEO") and Chairman of the Company, Sarah C. Garvin.
Employee accepts employment upon the terms set forth in this Agreement and will
perform diligently to the best of his abilities those duties set forth in the
Bylaws or as may be designated from time to time by the CEO and Chairman of the
Company, Sarah C. Garvin, and in this Agreement in a manner that promotes the
interests and goodwill of the Company. Employee will devote his best efforts and
40 hours per week, exclusive of paid vacation and sick time available to
Employee pursuant to Section 2.3 hereof, to and for the benefit of the Company.
Employee may, at his option, devote reasonable time and attention to civic,
charitable, business or social organizations or speaking engagements as he deems
appropriate and engage in the other activities set forth on Annex I attached
hereto.

ARTICLE II. COMPENSATION

SECTION 2.1 GENERAL TERMS. The Company agrees to compensate Employee on a
salary basis at an annual rate of Two Hundred Five Thousand Dollars ($205,000),
payable in accordance with the Company's ordinary payroll policies and
procedures subject to annual review and adjustment by the Board of Directors of
the Company (the "Board") or the Compensation Committee thereof.
Notwithstanding the foregoing, upon the consummation of the underwritten initial
public offering (the "IPO") of the Company's common stock or in the event that
any class of equity securities of the Company or one of its successors becomes
registered under the Securities Exchange "Act of 1934, as amended (the "Exchange
Act"), Employee will be compensated at an annual rate of Two Hundred Sixty
Thousand Dollars ($260,000).
<PAGE>

SECTION 2.2 REIMBURSEMENT. It is acknowledged by the parties that
Employee, in connection with the services to be performed by him pursuant to the
terms of this Agreement, will be required to make payments for travel,
communications, entertainment of business associates and similar expenses. The
Company will reimburse Employee for all reasonable documented expenses of types
authorized by the Company and incurred by Employee in the performance of his
duties hereunder, including reasonable documented expenses related to providing
puzzles and other appropriate modest gifts to vendors and development prospects.
Employee will comply with such budget limitations and approval and reporting
requirements with respect to expenses as the Company may establish from time to
time. Approval of any reimbursement to Employee by the Company's Chief
Executive Officer shall be conclusive evidence that such reimbursement is
reasonable. Expenses incurred by Employee prior to the date of this Agreement
shall also be subject to the foregoing reimbursement provision.

SECTION 2.3 EMPLOYEE BENEFITS. During the term of this Agreement,
Employee shall be entitled to participate in and receive benefits under any and
all employee benefit plans and programs which are from time to time generally
made available to the executive employees of the Company including, without
limitation, health and disability insurance and bonuses as may be specified in
applicable employee manuals.

ARTICLE III.
NONDISCLOSURE OF CONFIDENTIAL INFORMATION

SECTION 3.1 DEFINITIONS. For purposes of this Agreement, "Confidential
Information" is any data or information that is unique to the Company,
proprietary, competitively sensitive, and not generally known inside the
physician practice management industry, including, but not limited to, the
Company's initial business plan, prospective customers ("prospective customers"
is understood to mean those potential customers with whom or with which the
Company is engaged in active discussion about a business relationship), training
manuals, development plans, bidding and pricing procedures, market plans and
strategies, business plans and projections, internal performance statistics,
financial data, confidential personnel information concerning employees of the
Company, operational or administrative plans, policy manuals, terms and
conditions of contracts and agreements, and all similar information related to
the business of the Company's customers or potential customers or suppliers,
other than information that is publicly available. The term "Confidential
Information" shall not apply to information which is (i) already in Employee's
possession (unless such information was obtained by Employee from the Company in
the course of Employee's employment by the Company), including knowledge derived
by Employee related to the study of the physician practice management industry
conducted by Employee prior to his initial engagement by the Company; (ii)
received by Employee from a third party with no restriction on disclosure; (iii)
required to be disclosed by any applicable law or by an order of a court of
competent jurisdiction or (iv) contained in documents or other information that
is generally available to the public and filed by the Company with any
governmental agency or entity.

SECTION 3.2 USE AND DISCLOSURE. Employee recognizes and acknowledges that
the Confidential Information constitutes valuable, special and unique assets of
the Company and its affiliates. Except as required to perform Employee's duties
as an employee of the Company, until such time as they cease to be Confidential
Information through no act of Employee in violation of this Agreement, Employee
will not use or disclose any Confidential Information of the Company.

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<PAGE>

The Company specifically acknowledges that Employee may be required to disclose
Confidential Information to prospective acquisition targets and to financing
sources in the performance of his duties hereunder and that such disclosure
shall not constitute a violation of the terms of this Agreement.

SECTION 3.3 SURRENDER. Upon the request of the Company and, in any event,
upon the termination of this Agreement for any reason, Employee will surrender
to the Company (i) all memoranda, notes, records, drawings, manuals or other
documents pertaining to the Company's business including all copies and/or
reproductions thereof and (ii) all materials involving any Confidential
Information of the Company.

ARTICLE IV. NONCOMPETITION

SECTION 4.1 RESTRICTION. In consideration of the severance provisions
contained herein and the access to the Confidential Information granted to
Employee, Employee hereby agrees that, until two years after the termination of
Employee's employment hereunder (the "Restricted Period"), Employee will not,
without the prior written consent of the Company, directly or indirectly, within
a fifty (50) mile radius of any Company location at which the Company conducts
its business (i) provide as a manager, employee, officer or consultant any
services of the type included in Employee's employment duties described below
for any medical management services company which develops, owns or manages
physician networks, engages in managed care contracting services or provides
management services to physician practices, or (ii) solicit or attempt to
solicit any employee of the Company either to work for Employee personally or on
behalf of any other person or entity. For purposes of this section, Employee's
employment duties shall consist of acting as Chief Financial Officer and
Treasurer. Notwithstanding the foregoing, in the event that this Agreement is
terminated by the Company without cause as provided in Section 6.1(a) hereof, or
by the Company following a Change In Control as defined in Section 7.2 hereof,
the restrictions set forth in this Section 4.1 shall not apply; provided,
however, that should the Company terminate this Agreement following a Change In
Control and continue to pay Employee his then current salary as of the date of
termination for a period of two (2) years following such termination on a timely
basis, the restrictions set forth in this Section 4.1 shall apply for such two
(2) year period. The foregoing restrictions shall not apply to Employee's
dealings with business identified in annexes to the April 1996 letter agreement
between Employee and the Company.

SECTION 4.2 REFORMATION AND SEVERANCE. If a judicial determination is
made that any of the provisions of the above restriction constitutes an
unreasonable or otherwise unenforceable restriction against Employee, it shall
be rendered void only to the extent that such judicial determination finds such
provisions to be unreasonable or otherwise unenforceable. In this regard, the
parties hereby agree that any judicial authority construing this Agreement shall
be empowered to sever any portion of the prohibited business activity from the
coverage of this restriction and to apply the restriction to the remaining
portion of the business activities not so severed by such judicial authority.
Moreover, notwithstanding the fact that any provisions of this restriction are
determined by a court not to be specifically enforceable through injunctive

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<PAGE>

relief, the Company shall nevertheless be entitled to seek to recover monetary
damages as a result of the breach of such provision by Employee. The time
period during which the restrictions shall apply shall be tolled and suspended
as to Employee for a period equal to the aggregate quantity of time during which
Employee violates such prohibitions in any material respect; provided that the
Company is able to demonstrate that it has been damaged by any such violation by
a loss of income experienced by the Company as the result of such violation.

ARTICLE V. TERM

This Agreement shall continue in full force and effect commencing on the
Effective Date until either party terminates the Agreement pursuant to the terms
of Article VI hereof.

ARTICLE VI. TERMINATION

SECTION 6.1 TERMINATION. Employee's employment hereunder will terminate
upon the occurrence of any of the following events:

(a) By Company Without Cause. The Company may terminate this
Agreement at any time without cause. In the event of the termination of
this Agreement pursuant to this Subsection, Employee's salary shall be paid
at the then current rate, for a period of one year after termination
pursuant to this Subsection. Employee also shall be entitled to receive
expense reimbursements under Section 2.2 hereof for expenses incurred in
the performance of his duties prior to termination.

(b) By Employee Without Cause. Employee may terminate this Agreement
at any time without cause. Upon termination of his employment pursuant to
this Subsection, the Company will pay any portion of Employee's salary at
the then current rate and benefits, if any, accrued but unpaid from the
last monthly payment date to the date of termination. Employee shall also
be paid expense reimbursements under Section 2.2 hereof for expenses
incurred in the performance of his duties hereunder prior to termination.

(c) By Company With Cause. This Agreement may be terminated by
Company acting through its Chief Executive Officer at any time upon written
notice for any of the following reasons:

I. a substantial breach by the Employee of a material provision of
this Agreement, which breach remains uncorrected for more than
thirty (30) days following written notice detailing the specific
provision for which a breach is alleged, and setting forth the
actions, which, when taken, will correct the breach;

II. conviction of the Employee for a felony which in the reasonable
judgment of the CEO materially affects Employee's ability to
perform his duties pursuant to this Agreement;

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<PAGE>

III. commission by Employee of an act of fraud, embezzlement, or
material dishonesty against the Company or its affiliates as
determined by the Company's Chief Executive Officer based on
information she deems reasonable and adequate; or

IV. intentional neglect of or material inattention to Employee's
duties, which neglect or inattention remains uncorrected for more
than thirty (30) days following written notice from the Board
detailing the Board's concern.

Employee will not be entitled to any severance pay or other compensation
upon termination of his employment pursuant to this Subsection except for
any portion of his base salary accrued but unpaid from the last monthly
payment date to the date of termination and expense reimbursements under
Section 2.2 hereof for expenses incurred in the performance of his duties
hereunder prior to termination.

Prior to any termination for cause based on allegations of improper payment
or reimbursement of business or personal expenses, Employee will be given
written notice of the expenses at issue and the opportunity to pay to the
Company such expenses during the ten (10) day period following the delivery
of the notice. In the event that the payment is made during the ten (10)
day period, the Employee will not be terminated. If at the time of
Employees termination for cause Sarah C. Garvin is not the Company's
Chairman of the Board or Chief Executive Officer or in the event that
during the 90 day period following the date of Employee's termination for
cause Sarah C. Garvin is removed as the Company's Chairman of the Board or
Chief Executive Officer, any determination made under subparagraph III
above must be confirmed by arbitration in accordance with the "Expedited
Procedures" set forth in the Commercial Arbitration Rules of the American
Arbitration Association as then in effect (the "Rules"). The arbitration
shall be held in such place in the metropolitan Atlanta, Georgia area as
may be specified by the arbitrator, and shall be conducted in accordance
with the Rules and (regardless of any other choice of law provision in this
agreement) the United States Arbitration Act (9 U.S.C. (S)(S)1-16) to the
extent not inconsistent with this Agreement. The decision of the
arbitrator will be final and binding upon the parties. The determination
of which party (or combination of them) will bear the costs and expenses of
the arbitration proceeding shall be determined by the arbitrator. The
arbitrator will have the discretionary authority to award to a party part
of the reasonable attorney's fees expense of a party. The Company and
Employee further acknowledge and agree that either party must request
arbitration of any claim or controversy within sixty (60) days of the date
of the event giving rise to the claim or controversy by giving written
notice of the party's request for arbitration. Failure to give notice of
any claim or controversy within sixty (60) days of the event giving rise to
the claim or controversy shall constitute waiver of the claim or
controversy.

(d) Termination on Death. In the event of Employee's death, this
Agreement will be deemed to have terminated on the date of his death. In
the event of his death, the Company will pay to the testamentary trusts

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<PAGE>

created by Employee's will, or if there are no such trusts, to his estate,
any portion of Employee's salary at the then current rate and benefits, if
any, accrued but unpaid from the last monthly payment date to the date of
termination. Additionally, the Company will pay to such testamentary trusts
or Employee's estate expense reimbursements under Section 2.2 hereof for
expenses incurred in the performance of his duties hereunder prior to his
death.

(e) Termination on Disability. This Agreement will terminate
immediately in the event Employee becomes physically or mentally disabled.
Employee will be deemed disabled if, as a result of Employee's incapacity
due to physical or mental illness, Employee shall have been absent from his
duties with the Company on a full-time basis for 120 consecutive business
days. In the event of the termination of this Agreement pursuant to this
Subsection, Employee's salary shall be paid at the then current rate for a
period of three (3) months. Additionally, the Company will pay Employee
expense reimbursements under Section 2.2 hereof for expenses incurred in
the performance of his duties hereunder prior to termination.

(f) By Employee on Constructive Termination. Employee shall have the
right to terminate this Agreement in the event that his duties or
responsibilities are substantially diminished or in the event of
irreconcilable policy differences between Employee and the Company's Chief
Executive Officer. In the event of termination of this Agreement pursuant
to this Subsection, Employee's salary shall be paid at the then current
rate, for a period of one year after termination pursuant to this
Subsection. Employee shall also be entitled to receive expense
reimbursements under Section 2.2 hereof for expenses incurred in
performance of his duties prior to termination. Any disputes under this
subparagraph (f) must be submitted to arbitration in accordance with the
"Expedited Procedures" set forth in the Rules. The arbitration shall be
held in such place in the metropolitan Atlanta, Georgia area as may be
specified by the arbitrator, and shall be conducted in accordance with the
Rules and (Regardless of any other choice of law provision in this
agreement) the United States Arbitration Act (9 U.S.C. (S)(S)1-16) to the
extent not inconsistent with this Agreement. The decision of the
arbitrator will be final and binding upon the parties. The determination
of which party (or combination of them) will bear the costs and expenses of
the arbitration proceeding shall be determined by the arbitrator. The
arbitrator will have the discretionary authority to award to a party part
of the reasonable attorney's fees expense of a party. The Company and
Employee further acknowledge and agree that either party must request
arbitration of any claim or controversy within sixty (60) days of the date
of the event giving rise to the claim or controversy by giving written
notice of the party's request for arbitration. Failure to give notice of
any claim or controversy within sixty (60) days of the event giving rise to
the claim or controversy shall constitute waiver of the claim or
controversy.

ARTICLE VII. CHANGE IN CONTROL TERMINATION PAYMENT

SECTION 7.1 TERMINATION PAYMENT. Notwithstanding anything to the contrary
contained in Article VI hereof, if, after a Change In Control (as defined in
Section 7.2 hereof), Employee's employment with the Company terminates pursuant
to Section 6.1(a) of this Agreement following a Change In Control or Employee

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<PAGE>

terminates this Agreement because he is requested to relocate, his salary is
reduced from the amount in effect immediately prior to the Change in Control,
his title is reduced or his duties and responsibilities are substantially
diminished, the Company will pay Employee a lump sum payment (the "Termination
Payment") in cash equal to three years salary at the then current rate in effect
immediately prior to the Change In Control. The Termination Payment shall be
payable on or before the tenth (10th) day following the date of termination of
employment. Late payments of the Termination Payment shall bear interest at the
rate of eight percent (8%) per annum.

SECTION 7.2 CHANGE IN CONTROL. A Change In Control will be deemed to have
occurred for purposes hereof, upon any one of the following events: (i) any
person (within the meaning of Sections 13(d) and 14(d) of the Exchange Act),
other than the Company (including its subsidiaries, directors, and executive
officers) has become the beneficial owner, within the meaning of Rule 13d-3
under the Exchange Act, of fifty percent (50%) or more of the combined voting
power of the Company's then outstanding Common Stock or equivalent in voting
power of any class or classes of the Company's outstanding securities ordinarily
entitled to vote in elections of directors ("voting securities"); or (ii) shares
representing fifty percent (50%) or more of the combined voting power of the
Company's voting securities are purchased pursuant to a tender offer or exchange
offer (other than an offer by the Company or its subsidiaries or affiliates); or
(iii) as a result of, or in connection with, any tender offer or exchange offer,
merger or other business combination, sale of assets, or contested election, or
any combination of the foregoing transactions (a "Transaction"), the persons who
were Directors of the Company before the Transaction shall cease to constitute a
majority of the Board of the Company or of any successor to the Company; or (iv)
following the Effective Date, the Company is merged or consolidated with another
corporation and as a result of such merger or consolidation less than fifty
percent (50%) of the outstanding voting securities of the surviving or resulting
corporation shall then be owned in the aggregate by the former shareholders of
the Company, other than (A) any party to such merger or consolidation, or (B)
any affiliates of any such party; or (v) the Company transfers more than fifty
percent (50%) of its assets, or the last of a series of transfers results in the
transfer of more than fifty percent (50%) of the assets of the Company, to
another entity that is not wholly-owned by the Company; or (vi) Sarah C.
Garvin's employment by the Company as Chief Executive Officer is terminated.
For purposes of subsection (v), the determination of what constitutes fifty
percent (50%) of the assets of the Company shall be made by the Board, as
constituted immediately prior to the events that would constitute a Change in
Control if fifty percent (50%) of the Company's assets were transferred in
connection with such events, in its sole discretion. Notwithstanding anything
to the contrary contained in this Section 7.2, a Change In Control shall not be
deemed to have occurred for the purposes hereof, upon any of the following
events: (1) the consummation of an IPO; or (2) the conversion of existing
classes of Class A Stock and Preferred Stock of the Company into Common Stock.

SECTION 7.3 NO RIGHT TO CONTINUED EMPLOYMENT. This Article VII will not
give Employee any right of continued employment or any right to compensation or
benefits from the Company except the rights specifically stated herein.

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<PAGE>

SECTION 7.4 ARBITRATION. Any dispute arising under this Article VII will
be resolved in the manner provided in Article VIII.

ARTICLE VIII. ARBITRATION

SECTION 8.1 SCOPE. The Company and Employee acknowledge and agree that
any claim or controversy arising out of or relating to Section VII of this
Agreement shall be settled by final and binding arbitration in the city in which
the Company's principal executive offices are located in accordance with the
National Rules of the American Arbitration Association for the Resolution of
Employment Disputes in effect on the date of the event giving rise to the claim
or controversy. The Company and Employee further acknowledge and agree that
either party must request arbitration of any claim or controversy within sixty
(60) days of the date of the event giving rise to the claim or controversy by
giving written notice of the party's request for arbitration. Failure to give
notice of any claim or controversy within sixty (60) days of the event giving
rise to the claim or controversy shall constitute waiver of the claim or
controversy.

SECTION 8.2 PROCEDURES. All claims or controversies subject to
arbitration shall be submitted to arbitration within six (6) months from the
date that a written notice of request for arbitration is effective. All claims
or controversies shall be resolved by a panel of three (3) arbitrators who are
licensed to practice law in the State of Georgia and who are experienced in the
arbitration of labor and employment disputes. These arbitrators shall be
selected in accordance with the National Rules of the American Arbitration
Association for the Resolution of Employment Disputes in effect at the time the
claim or controversy arises. Either party may request that the arbitration
proceeding be stenographically recorded by a Certified Shorthand Reporter. The
arbitrators shall issue a written decision with respect to all claims or
controversies within thirty (30) days from the date the claims or controversies
are submitted to arbitration. The parties shall be entitled to be represented
by legal counsel at any arbitration proceedings. The determination of which
party (or combination of them) will bear the costs and expenses of the
arbitration proceeding will be determined by the arbitrators. The arbitrators
will have the discretionary authority to award to a party part of the reasonable
attorney's fees expense of a party.

SECTION 8.3 ENFORCEMENT. The Company and Employee acknowledge and agree
that the arbitration provisions in this Agreement may be specifically enforced
by either party, and that submission to arbitration proceedings may be compelled
by any court of competent jurisdiction. The Company and Employee further
acknowledge and agree that the decision of the arbitrators may be specifically
enforced by either party in any court of competent jurisdiction.

SECTION 8.4 LIMITATIONS. Notwithstanding the arbitration provisions set
forth herein, Employee and the Company acknowledge and agree that nothing in
this Agreement shall be construed to require the arbitration of any claim or
controversy arising under Articles III or IV of this Agreement. These
provisions shall be enforceable by any court of competent jurisdiction and shall
not be subject to arbitration. Employee and the Company further acknowledge and
agree that nothing in this Agreement shall be construed to require arbitration
of any claim for workers' compensation or unemployment compensation.

-8-
<PAGE>

ARTICLE IX. GENERAL TERMS

SECTION 9.1 NOTICES. All notices and other communications hereunder will
be in writing or by written telecommunication, and will be deemed to have been
duly given if delivered personally or if sent by overnight courier or by written
telecommunication, to the relevant address set forth below, or to such other
address as the recipient of such notice or communication will have specified to
the other party hereto in accordance with this Section:

If to the Company to:

Physician Health Corporation
One Lakeside Commons
990 Hammond Drive, Suite 300
Atlanta, Georgia 30328
Attn: Sarah C. Garvin, President
Fax No.: (770) 673-1970

with a copy to:

Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202-3797
Attn: James S. Ryan, III
Fax No.: (214) 953-5822

If to Employee, to:

Thomas M. Rodgers, Jr.
___________________________
___________________________
Fax No.: ___________________

with a copy to:
___________________________
___________________________
___________________________
___________________________
Fax No.: ___________________

SECTION 9.2 WITHHOLDING; NO OFFSET. All payments required to be made by
the Company under this Agreement to Employee will be subject to the withholding
of such amounts, if any, relating to federal, state and local taxes as may be
required by law. No payment under this Agreement will be subject to offset or
reduction attributable to any amount Employee may owe to the Company or any
other person.

-9-
<PAGE>

SECTION 9.3 ENTIRE AGREEMENT; MODIFICATION. This Agreement and its
Attachments constitute the complete and entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements
between the parties. The parties have executed this Agreement based upon the
express terms and provisions set forth herein and have not relied on any
communications or representations, oral or written, which are not set forth in
this Agreement.

SECTION 9.4 AMENDMENT. The covenants or provisions of this Agreement may
not be modified by an subsequent agreement unless the modifying agreement: (i)
is in writing; (ii) contains an express provision referencing this Agreement;
(iii) is signed and executed on behalf of the Company by an officer of the
Company other than Employee; (iv) is approved by resolution of the Board; and
(v) is signed by Employee.

SECTION 9.5 LEGAL CONSULTATION. Both parties have been accorded a
reasonable opportunity to review this Agreement with legal counsel prior to
executing this Agreement.

SECTION 9.6 CHOICE OF LAW. This Agreement and the performance hereof will
be construed and governed in accordance with the laws of the State of Georgia,
without regard to its choice of law principles.

SECTION 9.7 ATTORNEY'S FEES; INTEREST.

(a) If legal action is commenced by either party to enforce or defend
its rights under this Agreement, the party substantially obtaining the
relief requested in such action shall be entitled to recover its costs and
reasonable attorneys' fees in addition to any other relief granted.

(b) In the event that Sarah C. Garvin ceases to serve as Chairman of
the Board or Chief Executive Officer of the Company, the Company fails to
fulfill its obligations to Employee under this Agreement and Employee takes
legal action or submits issues to arbitration to enforce his rights under
this Agreement, the Company will pay any and all legal fees incurred by
Employee in successfully enforcing his rights under this Agreement. Such
fees shall be paid monthly in advance by the Company based on the estimates
of Employee's counsel. Any unused advances shall be returned to the
Company. In the event that a court or arbitration panel determines that
Employee's legal actions were without merit, Employee shall be obligated to
reimburse the Company for all such advances. The Company waives any rights
to contest the enforceability of this Section 9.7(b) on public policy or
any other grounds.

(c) Any amounts recovered by Employee as damages resulting from a
breach by the Company of the terms of this Agreement shall bear interest at
the rate of eight percent (8%) per annum from the date that the breach
occurred.

SECTION 9.8 SUCCESSORS AND ASSIGNS. The obligations, duties and
responsibilities of Employee under this Agreement are personal and shall not be
assignable. In the event of Employee's death or disability, this Agreement
shall be enforceable by Employee's estate, executors or legal representatives.

-10-
<PAGE>

SECTION 9.9 WAIVER OF PROVISIONS. Any waiver of any terms and conditions
hereof must be in writing and signed by the parties hereto. The waiver of any
of the terms and conditions of this Agreement shall not be construed as a waiver
of any subsequent breach of the same or any other terms and conditions hereof.

SECTION 9.10 SEVERABILITY. The provisions of this Agreement shall be
deemed severable, and if any portion shall be held invalid, illegal or
enforceable for any reason, the remainder of this Agreement shall be effective
and binding upon the parties provided that the substance of the economic
relationship created by this Agreement remains materially unchanged.

SECTION 9.11 REMEDIES. The parties hereto acknowledge and agree that upon
any breach by Employee of his obligations under either of Articles III and IV
hereof, the Company will have no adequate remedy at law, and accordingly will be
entitled to specific performance and other appropriate injunctive and equitable
relief. No remedy set forth in this Agreement or otherwise conferred upon or
reserved to any party shall be considered exclusive of any other remedy
available to any party, but the same shall be distinct, separate and cumulative
and may be exercised from time to time as often as occasion may arise or as may
be deemed expedient.

SECTION 9.12 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which will be deemed an original, and all of which
together will constitute one and the same instrument.

[intentionally left blank]

-11-
<PAGE>

IN WITNESS WHEREOF, Company and Employee have caused this Agreement to be
executed on the day and year indicated below to be effective on the day and year
first written above.

EMPLOYEE:

________________________________________________ ______________________
Thomas M. Rodgers, Jr. Date

COMPANY:

Physician Health Corporation

By: ____________________________________________ ________________________
Sarah C. Garvin, President Date

-12-

<PAGE>

EXHIBIT 10.25

June 16, 1997

Mr. Thomas M. Rodgers, Jr.
c/o Physician Health Corporation
990 Hammond Drive, Suite 300
Atlanta, Georgia 30328

Dear Tom:

Reference is made to those certain letter agreements dated November 27,
1995 and May 7, 1996, respectively (collectively, the "Letter Agreements")
between Physician Health Corporation ("PHC") and you pursuant to which you have
provided financial consulting services to the Company. Since the respective
dates of the Letter Agreements, you have become employed by PHC as one of its
executive officers. The purposes of this letter agreement (this "Agreement")
are to document the settlement all fees that have been earned or may be earned
under the Letter Agreements, to terminate the Letter Agreements and to
acknowledge the granting of certain options to you.

1. Settlement of Fees. Notwithstanding the terms of the Letter Agreement, in
------------------
settlement of fees that have been earned or may be earned under the Letter
Agreements, you acknowledge that payment of the following amounts and granting
of the following options will fulfill any and all obligations of PHC to you
under the Letter Agreements:

(a) $120,000 on January 15, 1998 or at such other time as may be mutually
agreeable to you and PHC, together with interest at the rate of 9% per annum
from and after June 16, 1997;

(b) $50,000, together with interest at the rate of 9% per annum from and
after January 1, 1996, payable on May 6, 2000 (or earlier if agreed by you and
PHC);

(d) A non-qualified stock option to purchase 7,648 shares of Prime Common
Stock at an exercise price of $0.011 per share; and

(e) A non-qualified stock option to purchase 37,500 shares of Prime Common
Stock at an exercise price of $1.10 per share (the "37,500 Options").

<PAGE>

Thomas M. Rodgers
June 16, 1997
Page 2

In addition, the Company is accelerating the vesting of any options yet
unvested of the 350,000 options granted to you at an exercise price of $1.15 per
share pursuant to the May 7, 1996 Letter Agreement, which were determined to be
exercisable for 350,000 shares of Prime Common Stock by PHC's Board of Directors
(the "350,000 Options"). You acknowledge that in addition to amounts payable to
you as provided above, $100,000 has already been paid to you pursuant to the
November 27, 1995 letter agreement and $320,000 has been paid to you in
connection with the Weston Presidio investment.

2. Termination of Letter Agreements. You and PHC agree that no options, fees
--------------------------------
or other benefits have been or will be earned under the Letter Agreements except
as previously paid or set forth in Section 1 above. The Letter Agreements are
hereby terminated and the obligations set forth in Section 1 shall continue as
independent obligations of PHC. PHC is not obligated to pay you or issue to you
any other options, warrants or other forms of equity securities related to
capital raising activities that you undertake on behalf of PHC. You agree to
waive the right to purchase 12,500 shares of PHC Common Stock at $4 per share as
was granted to you by PHC's Board of Directors.

3. New Options. In consideration of your service as a key PHC employee, the
-----------
Corporation is granting you an incentive stock option to purchase 243,000 shares
of PHC Common Stock at an exercise price of $4 per share (the "243,000 Options")
evidenced by a stock option agreement dated as of the date hereof.

4. Exercise of Certain Options. You hereby exercise the 37,500 Options and
---------------------------
the 350,000 Options. The exercise price for such options will be paid as
follows:

(a) For the 37,500 options, $93.75 in cash (the par value of the shares) and
a note payable in principal amount of $41,156.25.

(b) For the 350,000 Options, $875 in cash (the par value of the shares) and a
note payable in principal amount of $401,675.

The notes will provide for interest at 6.80% and will have a term of ten years
from the date of grant of the respective options (June 16, 1997 and May 7, 1996,
respectively). However, proceeds or payments in respect of or relating to the
shares (whether dividends, sale proceeds or otherwise) will also be applied
against the notes as provided therein. The Company will reimburse you for all
interest paid under each note except interest payable during an event of default
under such note, with an appropriate gross-up to cover any income tax
obligations you incur as a result of the reimbursement. Payment of each note
will be secured by a pledge of the applicable shares, but will otherwise be
nonrecourse.
<PAGE>

Thomas M. Rodgers
June 16, 1997
Page 3

5. Disputes as to Amounts of Reimbursements. In the event that you and
----------------------------------------
PHC are unable to agree on the amount of the reimbursement or gross-up under
Section 4 within 30 days of negotiations, determination of the amount of
reimbursement will be referred to a tax partner in the Atlanta, Georgia office
of Arthur Andersen, LLP whose determination will be final and binding. Each of
us will fully cooperate with Arthur Andersen, LLP, in such process. PHC will
pay the fees of Arthur Andersen, LLP.

6. Grant of Piggy-Back Registration Rights. Contemporaneously with this
---------------------------------------
letter, you will execute a joinder to PHC's Master Registration Rights Agreement
dated as of June 16, 1997, as a "Stockholder" with respect to the shares
received upon exercise of the 350,000 Options. By executing this letter, you
acknowledge that you are not entitled to any other registration rights.

7. Compensation Following Termination of Employment without Cause. In the
--------------------------------------------------------------
event that PHC terminates your employment other than "for cause", you will be
entitled to receive salary and benefits at the rate you are receiving them at
the date of termination of employment for a period of six months following the
termination of employment (the "Severance Package"). You will be entitled to the
Severance Package only if and to the extent that equivalent benefits are not
available to you under any employment agreement between us from time to time in
effect (your "Employment Agreement") or under any other arrangement with PHC. In
other words, the Severance Package is intended to be a "floor" level of benefits
for you in the event of your termination other than for cause, and not in
addition to any other severance benefits to which you may be entitled.

8. Definition of "for cause". A termination by PHC of your employment shall
-------------------------
be deemed to be "for cause" any of the following reasons (provided, however,
that the definition of "for cause" in this paragraph 8 shall be superseded by
any definition of "for cause" termination by PHC as may be included from time to
time in your Employment Agreement):

(a) you shall have substantially breached a material provision of your
Employment Agreement, which breach remains uncorrected for more than thirty
(30) days following written notice detailing the specific provision for which
a breach is alleged, and, if applicable, setting forth the actions which, when
taken, will correct the breach; or

(b) your conviction of a felony which in the reasonable judgment of the
Company's Chairman of the Board of Directors materially affects your ability
to perform your employment duties, or your commission of an act of fraud,
embezzlement or material dishonesty against the PHC or its affiliates as
determined in good faith by the Chairman of the Board of Directors based on
information she deems reasonable and adequate (provided, however, that prior
to any
<PAGE>

Thomas M. Rodgers
June 16, 1997
Page 4

termination for cause based on allegations of improper payment or
reimbursement of personal expenses, you will be given written notice of the
expenses at issue. If you pay such expenses within ten (10) days of the
notice, your employment shall not be terminated for cause.); or.

(c) your intentional neglect of or material inattention to your
employment duties, which neglect or inattention remains uncorrected for more
than thirty (30) days following written notice from PHC's Board of Directors
detailing the Board's concern.

If Sarah Garvin is not as of your termination the Chairman of the Board of
Directors, or is removed as Chairman of the Board of Directors within ninety
(90) days of your termination, then any determination in accordance with this
subparagraph (b) above must be confirmed by arbitration in accordance with the
"Expedited Procedures" set forth in the Commercial Arbitration Rules of the
American Arbitration Association as then in effect (the "Rules"). The
arbitration shall be held in such place in the metropolitan Atlanta, Georgia
area as may be specified by the arbitrator, and shall be conducted in accordance
with the Rules and (regardless of any other choice of law provision in this
agreement) the United States Arbitration Act (9 U.S.C. (S)(S)1-16) to the extent
not inconsistent with this letter agreement. The decision of the arbitrator
will be final and binding upon the parties. The determination of which party (or
combination of them) will bear the costs and expenses of the arbitration
proceeding shall be determined by the arbitrator. The arbitrator will have the
discretionary authority to award to a party part of the reasonable attorneys'
fees expense of a party.

9. Tax Effect of 350,000 Options. The 350,000 Options will be treated as
-----------------------------
non-qualified options under the Internal Revenue Code. If you are required to
pay federal and state income taxes or related amounts (collectively "Taxes") as
the result of exercise of the 350,000 Options, PHC will pay you cash, or at
PHC's option issue to you an amount of PHC securities (valued at the average of
the closing market price of such securities on the five trading days prior to
the date the payment is due or, in the event that PHC Common Stock is not then
publicly traded, the price at which such securities were valued in the then most
recent acquisition transaction in which such securities were issued), in an
amount that would be necessary to make your after-tax gain the same as if the
applied aggregate state and federal tax rate were 24%. At the time you pay the
Taxes, PHC will also lend you the amount of the Taxes for which you are not
entitled to reimbursement. Such loan will be evidenced by a promissory note
with a two year term, interest at the then applicable federal rate and such
other not inconsistent terms as are included in the notes you executed to
exercise your options as provided in this letter. In the event that you and PHC
are unable to agree on the amount of the loan or reimbursement within 30 days of
negotiations, determination of the amount of reimbursement will be referred to a
tax partner in the Atlanta, Georgia office of Arthur Andersen, LLP, whose
determination will be final and binding. Each of us will fully cooperate with
Arthur Andersen, LLP, in such process. PHC will
<PAGE>

Thomas M. Rodgers
June 16, 1997
Page 5

pay the fees of Arthur Andersen, LLP.

10. Disputes Under Certain Circumstances. In the event that Sarah C.
------------------------------------
Garvin ceases to serve as Chairman of the Board and Chief Executive Officer of
PHC and PHC fails to fulfill its obligations to you under this agreement, PHC
shall pay any and all legal fees incurred by you in enforcing your rights under
this agreement. Such fees shall be paid monthly in advance by PHC based on
estimates provided by your attorneys (and any unused fees shall be returned to
PHC). PHC waives any rights to contest the enforceablility of this Section 10 on
public policy or any other grounds.

11. No Other Agreements. This Agreement, the stock option agreement
-------------------
reflecting the 243,000 options, the notes executed in connection with the
purchase of the 350,000 Options and the 37,500 Options and the stock pledge
agreements reflecting the pledge of your stock to pay such notes represent the
entire agreement between you and PHC with respect to the subject matter hereof,
and supersede all prior agreements, written or oral between us with regard to
these matters, including the Letter Agreements.

Very truly yours,

PHYSICIAN HEALTH CORPORATION

By: /s/ Sarah C. Garvin
-------------------
Sarah C. Garvin,
President

AGREED TO AND ACCEPTED
THIS 16th DAY OF JUNE, 1997.

/s/ Thomas M. Rodgers
- ---------------------
Thomas M. Rodgers

<PAGE>

PHYSICIAN HEALTH CORPORATION
990 Hammond, Suite 300
Atlanta, Georgia 30328

December 31, 1997

J. Michael Ribaudo, M.D.
Metropolitan Plastic and
Reconstructive Surgery, Ltd.
450 North New Ballas
St. Louis, Missouri 63141

Re: Physician Health Corporation ("PHC").
-------------------------------------

Dear Dr. Ribaudo:

Reference is made to that certain Asset Purchase Agreement ("Purchase
Agreement"), dated as of October 24, 1996, by and among PHC, PHC-St. Louis
Acquisition Subsidiary I, Inc. ("PHC-Sub") and Metropolitan Plastic and
Reconstructive Surgery, Ltd. ("MPRS"), that certain Practice Management
Agreement (the "Management Agreement"), dated as of November 26, 1997, by and
among PHC, PHC-Sub and MPRS and that certain General Undertakings Agreement (the
"Undertakings Agreement"), dated as of October 25, 1996, by and among PHC, PHC-
Sub, MPRS and J. Michael Ribaudo, M.D. ("Ribaudo"), as amended by the Amendment
to the Undertakings Agreement (the "Amendment"), dated November 11, 1997, by and
among PHC, PHC-Sub, MPRS and Ribaudo (collectively, the Purchase Agreement,
Management Agreement, Undertaking Agreement and Amendment are the "MPRS
Agreements"). Capitalized terms not otherwise defined in this agreement (this
"Letter Agreement") shall have the meanings assigned to such terms in the MPRS
Agreements.

In consideration of good and valuable consideration, the receipt and
sufficiency of which is acknowledged by the parties, PHC, PHC-Sub, MPRS and
Ribaudo agree that as of the close of business on December 31, 1997:

1) The Management Agreement is terminated effective on the earlier to
occur of (i) June 30, 1998 and (ii) the date that Ribaudo ceases to
practice medicine through MPRS. The parties acknowledge that
notwithstanding anything to the contrary contained herein or in the
Employment Agreement (hereafter defined) Ribaudo may practice medicine
through MPRS up to one full day a week through June 30, 1998 in order
that Ribaudo may successfully transition his surgical practice. From
and after the date of this Letter Agreement, Ribaudo shall not
directly or indirectly sell his interest in MPRS to any person or
entity not controlled or managed by PHC or PHC-Sub. Notwithstanding
anything to the contrary in this Letter Agreement, (i) from and after
the date of this Letter Agreement, neither Ribaudo nor MPRS shall

<PAGE>

be responsible for payment of a management fee under the Management
Agreement, (ii) Ribaudo and MPRS shall be responsible for the direct
costs of the practice of medicine by Ribaudo from and after the date
of this Letter Agreement, (iii) Ribaudo and MPRS shall be entitled to
fees derived from the practice of medicine by Ribaudo from and after
the date of this Letter Agreement and (iv) neither PHC nor PHC-Sub
shall be responsible for any negative difference between fees derived
from and direct costs associated with the practice of medicine by
Ribaudo from and after the date of this Letter Agreement.

2) Each of PHC, PHC-Sub and MPRS, their respective predecessors,
successors, assigns, agents, and legal representatives forever release
and discharge each other, their employees, affiliates, successors,
assigns, heirs, agents, and legal representatives of and from any and
all claims, demands, controversies, debts, actions, or causes of
action, of whatever nature or character, whether now known or unknown,
related to or in any way arising out of the Management Agreement or
the relationships or transactions giving rise to such. Nothing in
this paragraph releases PHC, PHC-Sub and MPRS from their obligations
under this Letter Agreement;

3) MPRS hereby forgives the PHC $500,000, 5% Convertible Subordinated
Promissory Note Due 1999, dated November 26, 1996, executed by PHC for
the benefit of MPRS (the "Note") and will have no further rights in
connection with the Note, including the right to convert the Note into
shares of PHC Common Stock;

4) PHC hereby forgives any and all loans (including interest accrued
thereon) made to Ribaudo pursuant to Section 9 of the Undertakings
Agreement; [CONFIRM]

5) PHC will grant to Ribaudo non-qualified stock options (the "Options")
to purchase up to 125,000 shares of PHC Common Stock at an exercise
price of $4.00 per share, with 1/3 of such Options vesting each year
after the date of the grant and with such other terms as be shall set
forth in a non-qualified stock option agreement. In the event that
Ribaudo's employment is terminated without cause prior to the complete
vesting of such options, such options will fully vest on the date of
termination of employment;

6) The right granted to Ribaudo, as set forth in the PHC Written Consent
of Directors, dated as of June 16, 1997 (the "Director Consent") and
relating to PHC's grant of options to Ribaudo to purchase up to
300,000 shares of Common Stock pursuant to the Undertakings Agreement,
to elect to receive a cash payment in event the Company is sold
(through a merger, sale of assets or otherwise) at an effective price
of less than $4.00 per share of Common Stock, equal to the product of:
(i) $0.80 multiplied by (ii) the number of options remaining
unexercised at the time of such change of control multiplied by (iii)
the effective price per share of Common Stock received by the holders
of Common Stock in the sale, provided that Ribaudo remains an employee
of the Company and surrenders that portion of such options that remain
unexercised, is hereby terminated;
<PAGE>

7) PHC acknowledges that as of the date of this Letter Agreement, PHC
will have responsibility for the lease obligations (the "Lease
Obligations") related to 450 North New Ballas Road, Suite 250, St.
Louis, Missouri 63141. MPRS and Ribaudo will use their best efforts to
help PHC and PHC-Sub obtain tenants who will assume Lease Obligations;

8) Concurrently with the execution of this agreement, Ribaudo and PHC
shall execute an Employment Agreement in the form attached hereto as
Exhibit A;

9) PHC's obligation to pay Ribaudo's quarterly draw as set forth in
paragraph 5 of the Undertaking Agreement is terminated;

10) PHC hereby forgives Ribaudo for all quarterly draw payments which have
not been repaid and remain outstanding and forever releases and
discharges Ribaudo and MPRS, its employees, affiliates, successors,
assigns, heirs, agents, and legal representatives of and from any and
all claims, demands, controversies, debts, actions, or causes of
action, of whatever nature or character, whether known or unknown,
related to or in any way arising out of any quarterly draw payment
which has not been repaid to PHC as required by paragraph 5 of the
Undertaking Agreement;

11) Section 7 of the Undertakings Agreement is hereby terminated;

12) From and after January 1, 1997, PHC-Sub shall reimburse Ribaudo and
MPRS for malpractice insurance premium costs, including tail
insurance, at levels consistent with those previously maintained by
Ribaudo and MPRS;

13) From and after January 1, 1997, PHC shall for so long as Ribaudo
remains employed by PHC reimburse Ribaudo for up to $5,000 in
documented continuing medical education expense;

14) PHC confirms its agreement to reimburse Ribaudo for 12 months rental
expense for an apartment in Atlanta (start date August 15, 1997) and
to reimburse Ribaudo for reasonable and documented moving expenses
related to the relocation of his personal residence to Atlanta,
Georgia from St. Louis, Missouri; and

15) PHC will reimburse Ribaudo for up to $5,000 in documented legal
expenses incurred by him in connection with the negotiation and
documentation of this Letter Agreement and the other agreements
contemplated hereby.

16) In recognition of Ribaudo's substantial role in PHC's 1997 acquisition
program as a whole, PHC will pay Ribaudo the $600,000 referenced in
Section 2 of the Undertakings Agreement.

This Letter Agreement shall be governed and construed under the laws of the
State of Georgia except to the extent the MPRS Agreements and the Note provide
otherwise. If any term, provision, covenant, or condition of this Letter
Agreement is held to be invalid or unenforceable by a court of competent
jurisdiction, it is to that extent deemed omitted and the remainder of this
Letter Agreement shall continue in full force and effect. Furthermore, in lieu
of each illegal, invalid or unenforceable provision of this Letter Agreement,
there shall be added automatically as part of this
<PAGE>

Letter Agreement a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and enforceable.

This Letter Agreement may be executed in any number of counterparts, and
each such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one Letter Agreement.

Please execute this Letter Agreement in the space provided below to
evidence that the above is in accordance with our understanding.

Very truly yours,

Physician Health Corporation

By: /s/ Sarah C. Garvin
--------------------
Sarah C. Garvin
President

AGREED AND ACCEPTED:

/s/ J. Michael Ribaudo
- -----------------------
J. Michael Ribaudo, M.D.

Metropolitan Plastic and Reconstructive Surgery, Ltd.

By: /s/ J. Michael Ribaudo
----------------------
Printed Name: J. Michael Ribaudo
------------------
Title: President
------------------

PHC-St. Louis Acquisitions Subsidiary I

By: /s/ J. Michael Ribaudo
----------------------
Printed Name: J. Michael Ribaudo
------------------
Title: President
------------------

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

Arthur Andersen LLP

Atlanta, Georgia

February 11, 1998

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 9, 1997, with respect to the financial
statements of Metroplex Hematology/Oncology Associates, L.L.P., included in
Amendment No. 3 to the Registration Statement (Form S-1 No. 333-40073) and
related Prospectus of Physician Health Corporation for the registration of
shares of its common stock.

/s/ Ernst & Young LLP

Dallas, Texas

February 10, 1998