ST JOSEPHS PHYSICIAN ASSOCIATES INC, 10KSB40, 1998-04-15

ST JOSEPHS PHYSICIAN ASSOCIATES INC
10KSB40, 1998-04-15
HOME HEALTH CARE SERVICES

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<PAGE> 1

FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 33-22011-A

ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC.
(Name of small business issuer in its charter)

FLORIDA 59-2858209
(State or other jurisdic- (IRS Employer Identi-
tion of incorporation) fication No.)

4900 North Habana Ave., Tampa, Florida 33614
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (813) 854-4668
--------------

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
----- -----

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year. $153,252

State the aggregate market value of the voting stock held by
non-affiliates of the registrant.

Approximately $1,327,063 as of February 28, 1998 (estimate
based on book value due to lack of trading market).

State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:

Common Stock, par value $1.00 per share -- 430 shares as of March 31, 1998

Documents incorporated by reference: None

<PAGE> 2

ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC.

ANNUAL REPORT ON FORM 10-KSB
for the
YEAR ENDED DECEMBER 31, 1997

TABLE OF CONTENTS

<TABLE>
<S> <C>
PART I........................................................................................................1
ITEM 1. BUSINESS........................................................................................1
ITEM 2. PROPERTIES.....................................................................................31
ITEM 3. LEGAL PROCEEDINGS............................................................................. 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................32

PART II......................................................................................................32
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................................................32
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION...........................................................................36
ITEM 7. FINANCIAL STATEMENTS...........................................................................49
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................................................49

PART III.....................................................................................................50
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT............................................................................50
ITEM 10. EXECUTIVE COMPENSATION.........................................................................54
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..........................................................................54
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................55

PART IV......................................................................................................56
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...............................................................56
</TABLE>

<PAGE> 3

PART I

ITEM 1. BUSINESS.

BACKGROUND

General

St. Joseph's Physician Associates, Inc. ("SJPA" or the "Company") is a
Florida corporation which was organized on November 20, 1987 to establish,
organize, and operate as an association of qualified physicians, for the
purposes of engaging directly or indirectly in the provision of professional
services through one or more managed care arrangements and engaging in health
care related businesses, including in particular the acquisition of one-half of
the voting common stock of St. Joseph's Physicians - Healthcenter Organization,
Inc. (the "PHO") and one-half of the outstanding common stock of Hospitals' Home
Health Care of Hillsborough County, Inc., d/b/a St. Joseph's Home Health
Services ("SJHHS").

The PHO, a Florida corporation, was organized in 1987 and originally
was wholly owned by St. Joseph's Enterprises, Inc. ("Enterprises"), a Florida
not-for-profit corporation affiliated with St. Joseph's Hospital, Inc. (the
"Hospital Corporation"), which operates St. Joseph's Hospital, St. Joseph's
Women's Hospital and The Tampa Children's Hospital (collectively, the
"Hospital"), each of which is located in Hillsborough County, Florida. In
February 1989, the Company acquired 2,500 shares of the common stock of the PHO.
With the acquisition of such stock by the Company, Enterprises and the Company
became equal owners of the voting common stock of the PHO. Until its redemption
on January 31, 1997, Enterprises also owned all of the nonvoting preferred stock
of the PHO.

The PHO is principally a vehicle through which the Company and
Enterprises together indirectly provide hospital and professional services to
various managed care organizations and operate certain businesses. The PHO owns
100% of St. Joseph's Preferred, Inc. ("SJP") and St. Joseph's Health Network,
Inc. ("SJHN"). SJP, a Florida corporation, was organized on March 13, 1991 to
provide health care services as a "preferred provider" network. SJHN, also a
Florida corporation, was organized on May 26, 1995 to develop a network of
hospitals and physicians and to negotiate at-risk contracts with managed care
organizations on behalf of its hospital and physician network. The PHO also is
currently the managing general partner of St. Joseph's Same-Day Surgery Center,
Ltd. (the "Same-Day Surgery Center Partnership"), a Florida limited partnership
which operates an ambulatory care center.

SJHHS, a Florida corporation, was organized to provide home health
services, including nursing and certain other health care services in the homes
of home-bound patients. In June 1989, the Company purchased 50% of the
outstanding common stock of SJHHS. The other 50% of the outstanding common stock
of SJHHS is owned by St. Joseph's Ancillary Services, Inc. ("SJAS"), a wholly
owned subsidiary of St. Joseph's Health Care Center, Inc. ("HCC"). On January 5,
1998, the Company sold all of its ownership interest in SJHHS to SJAS for
$100,000. See "HOSPITALS'

<PAGE> 4

HOME HEALTH CARE OF HILLSBOROUGH COUNTY, INC. d/b/a St. Joseph's Home Health
Services - Nature of SJPA Interest" in Item 1 for further discussion.

An important facet of ownership of stock in the Company is that only
stockholders in the Company are permitted to participate in SJP's preferred
provider network, to invest in the Same Day Surgery Center Partnership or to
participate in SJHN's provider network (although, if a need is identified for an
additional physician-provider that cannot be filled by an SJPA stockholder, then
SJHN has the discretion to allow a non-stockholder physician to participate in
its network).

Organization and Operations -- General

As currently operated, the primary function of the Company is to
provide a vehicle whereby stockholders of the Company can, as a group, (1)
indirectly participate (along with Enterprises) in the decision making processes
affecting SJP, SJHN, the Same-Day Surgery Center Partnership, and other ventures
in which the Company may have a direct or indirect interest, (2) realize
economic benefits from the operations of such ventures; and (3) consider and
evaluate the feasibility of other ventures relating to the provision of health
care services and of matters affecting the medical community as a whole and the
Company and its stockholders in particular. However, as to the PHO and ventures
in which only an indirect interest is held through the PHO, the stockholders of
the Company have only limited managerial control because, as a group, they can
affect only the selection of one half of the directors of the PHO, SJP and SJHN.
The Company's stockholders cannot directly participate in the management of the
PHO, SJP, SJHN, or the Same Day Surgery Center Partnership, nor can they
substantially participate in the decision making process affecting the PHO, SJP,
SJHN, or the Same Day Surgery Center Partnership.

In addition to its investment in the PHO, the Company owns five, of a
total of 40, limited partner units in the Same-Day Surgery Center Partnership.
Seven such units were purchased on January 1, 1991 for $4,000 in cash plus
$10,000 in contingent promissory notes per unit, for a total of $28,000 in cash
and $70,000 in contingent promissory notes. The Company sold two of such units
in March 1991 for $22,000 in cash with the release of $10,000 in contingent
promissory notes per unit, for a total of $44,000 in cash and the release of
$20,000 in contingent promissory notes. The contingent promissory notes were
payable by their terms in full on September 30, 1992, unless the Managing
General Partner, in its discretion, chose to waive such obligation. On September
9, 1992, the Board of Directors of the PHO, as Managing General Partner of the
Same-Day Surgery Center Partnership, decided to waive the obligation, because
the funds were not needed.

The PHO, SJP, SJHN, the Same Day Surgery Center Partnership, and SJHHS
(in light of the Company's ownership of 50% of the outstanding stock during 1997
and until January 5, 1998) are collectively referred to herein as the "Partially
Owned Operations." The two diagrams on the following pages are flow chart
diagrams showing the structural relationship between the Company and the
Partially Owned Operations. The first diagram shows the ownership affiliations
of the Company, the PHO, SJP, SJHN, the Same Day Surgery Center Partnership, and
SJHHS as of December 31, 1997. The second diagram shows the ownership
affiliations of the Company, the PHO, SJP, SJHN, and the Same Day Surgery Center
Partnership after the Company's sale of its 50% ownership interest in SJHHS on
January 5, 1998.

<PAGE> 5

ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1997

[CHART]

<PAGE> 6

ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC.
ORGANIZATIONAL CHART
SUBSEQUENT TO JANUARY 5, 1998 SALE OF HOME HEALTH STOCK

[CHART]

<PAGE> 7

The Company's Principal Ventures -- the PHO and SJHHS

Ownership Interest in the PHO. In 1997, the authorized capital stock of
the PHO consisted of 5,000 shares of voting common stock, par value $1.00 per
share, and 6,250 shares of nonvoting (except as required by law) preferred
stock, par value $20.00 per share. The Company and Enterprises each own 2,500
shares of the common stock of the PHO, constituting all of the outstanding stock
of the PHO. Until January 31, 1997, Enterprises also owned all 6,250 shares of
the preferred stock of the PHO, which preferred stock gave Enterprises the right
to require the PHO to redeem its preferred stock at any time after July 31, 1992
upon 30 days notice, at par plus dividends owing with respect thereto, on the
sole condition that funds be legally available therefor. Enterprises exercised
its right to require redemption, and all 6,250 shares of nonvoting preferred
stock were redeemed, effective on January 31, 1997, for $184,375 (including
cumulative unpaid dividends). As a result of this redemption, the Company and
Enterprises now each own a 50% interest in the PHO.

PHO's Ownership Interest in SJP. The PHO owns 100% of St. Joseph's
Preferred, Inc., a Florida corporation ("SJP"), organized to provide health care
services through a "preferred provider" network.

SJP has signed contracts with the Hospital Corporation, the Same-Day
Surgery Center Partnership, SJHHS, the St. Joseph's Diagnostic Center, Ltd. and
approximately 400 SJPA physician stockholders (collectively referred to as the
"PPO Providers"). These PPO Providers agree to accept discounted fees as payment
in full for services provided to any patient covered under a contract between
SJP and an employer, employer group, insurance carrier or other payor pursuant
to which such payors engage the services of SJP's preferred provider network
(each a "PPO Contract"). These PPO Contracts require that the health care
benefit plan of the contracting entity have a design feature which provides some
economic incentive to the patient to use a PPO Provider (versus a non-PPO
Provider).

SJP has signed a Network Linking Agreement ("Network Linking
Agreement") with BayCare Health Network, Inc. (formerly known as CareFirst
Health Network, Inc. and, before that, as SunHealth Care Plans - Gulf Coast,
Inc.) ("BayCare"), which allows SJP to offer its services to clients of BayCare
requiring access to health care providers in Hillsborough County, Florida.
BayCare currently is owned by Enterprises and by University Community Hospital,
Inc. and South Florida Baptist Hospital, not-for-profit hospitals located in
Hillsborough County, Florida, and by St. Anthony's Hospital, Inc., Bayfront
Medical Center, Inc., and Morton F. Plant Hospital Association, Inc. and The
Trustees of Mease Hospital, Inc., d/b/a Morton Plant Mease Health Care,
not-for-profit hospitals located in Pinellas County, Florida. Because of mergers
and affiliations of the above-named hospitals, BayCare currently has five
hospital-stockholders.

All current PPO Contracts are held by BayCare, and access to the PPO
Providers is through the Network Linking Agreement. Currently, BayCare has 93
contracts covering approximately 33,400 enrolled employees, to provide standard
preferred provider, primary care preferred provider (i.e., "gatekeeper") and
various insured health care products. These include contracts with the Hospital
Corporation and the Same-Day Surgery Center Partnership covering approximately
3,600 employees.

<PAGE> 8

In addition, BayCare has contracts with other managed care entities
through which the PPO Providers are made available to provide services to the
approximately 25,400 enrolled employees of these other entities (21,250 of such
employees being under hospital services only contracts).

The bylaws of BayCare currently provide that each hospital-stockholder
is entitled to appoint two physicians to seats on the Board of Directors of
BayCare, along with two administrators of the hospital-stockholder. Prior to
February 1995, the bylaws of BayCare also had included director quorum and
voting requirements which effectively provided that certain actions could not be
taken by BayCare without the affirmative vote of the directors of BayCare that
were designated by SJPA. However, the bylaws of BayCare were modified by the
Board of Directors of BayCare in February 1995 so as to retain the director
quorum requirements, but to replace the director voting requirements with
provisions that require simply a two-thirds majority vote of the directors
present at the meeting, thus eliminating the requirement that certain actions
could not be taken by BayCare without the affirmative vote of the directors of
BayCare that are designated by SJPA. In addition, in November 1996, the Board of
Directors of BayCare voted to change the quorum requirements to specify that a
quorum exists when any two representatives (physician or administrators) from
five out of the then seven hospital-stockholders (i.e., at least two
representatives of 70% of the stockholders) are present at a meeting. Finally,
in February, 1998, BayCare proposed an additional change to its Articles of
Incorporation and Bylaws that, among other things, would reduce the number
directors to ten, with each hospital stockholder appointing one physician and
one administrator to seats on the Board of Directors of BayCare (the documents
effectuating these changes have been circulated for signature, but the required
votes and signatures of the current directors to effectuate the changes have not
yet been obtained). There can be no assurance that there will be no additional
changes to the Bylaws of BayCare that would operate to further limit the impact
that the directors of BayCare that are designated by SJPA would have on the
BayCare Board of Directors.

Prior to 1996, SJP had no staff and relied on BayCare to perform all
operational and marketing functions for SJP. In 1996, a PHO Director was hired,
as well as a PHO Coordinator and a Provider Relations Representative, to staff
the operations of the PHO, SJP, SJHN and the physician hospital organization
operated for St. Anthony's Hospital (an organization affiliated with the
Hospital Corporation) and the physicians at that hospital in St. Petersburg,
Florida. Two additional staff were hired in 1997, one to serve as a financial
analyst and the other to act as Provider Relations Coordinator.

PHO's Ownership Interest in SJHN. The PHO also owns 100% of St.
Joseph's Health Network, Inc., a Florida corporation ("SJHN"). SJHN, a
physician-hospital organization, was incorporated on May 26, 1995 for the
purpose of developing a network of hospitals and physicians (collectively
referred to as the "SJHN Providers") and negotiating at-risk (i.e., capitation)
contracts, or discounted fee-for-service contracts that will evolve over time
into capitation contracts, with managed care organizations on behalf of the SJHN
Providers to provide high quality, competitively priced health care services for
persons residing or employed in the Hillsborough County, Florida area. The
network of providers comprising the SJHN Providers is separate and distinct from
the PPO Providers comprising SJP's PPO network (although many of the SJHN
Providers also are PPO Providers). Because SJHN concentrates its efforts on
negotiating at-risk contracts (as opposed to the pure discounted fee-for-service
contracts under which the PPO Providers provide services, without assuming
direct risk), there will be fewer physicians in SJHN's network, and the ratio of

<PAGE> 9

primary care (i.e., pediatrics, family and general internal medicine and OB-Gyn)
physicians to specialist physicians will be more strictly controlled.

During 1996 and 1997, SJHN conducted a provider credentialing process,
and 189 physicians currently are participating as SJHN Providers. SJHN is
actively negotiating for capitation contracts. Its first such contract, covering
the employees of St. Joseph's Hospital, became effective on May 1, 1997.

The PHO provided the initial funding for the development of SJHN.
However, SJHN may require additional capital, and it is anticipated that the
PHO, as well as the Company, may be called upon to provide a portion of the
funding for the balance of SJHN's initial capitalization.

PHO's Ownership Interest in the Same-Day Surgery Center Partnership.
The PHO also owns a four percent (4%) partnership interest in the Same-Day
Surgery Center Partnership, and serves as managing general partner of the
Same-Day Surgery Center Partnership. Accordingly, through its ownership of the
PHO the Company beneficially owns a two percent (2%) interest in the Same-Day
Surgery Center Partnership (prior to the January 31, 1997 redemption of
Enterprises' preferred stock in the PHO, the Company beneficially owned an
eighty-eight one-hundredths percent (0.88%) interest). Prior to the January 31,
1997 redemption of Enterprises' preferred stock in the PHO, the Company's
participation in the net income of the PHO was determined after deduction for
accumulated PHO preferred stock dividends, and, thus, any cash distributed by
the Same-Day Surgery Center Partnership to the PHO was applied first to
accumulated unpaid dividends on the PHO preferred stock. As a result of the
redemption, cash distributed by the Same-Day Surgery Center Partnership to the
PHO will be available for other purposes, including distribution equally to
Enterprises and the Company (as the Board of Directors of the PHO deems
appropriate). However, there can be no assurance that the Same-Day Surgery
Center Partnership will distribute cash to the PHO or that the PHO will make any
distribution of any cash that it receives to the Company.

As managing general partner of the Same-Day Surgery Center Partnership,
the PHO is not guaranteed any management fees or other compensation for its
services (although it is entitled to reimbursement for its out-of-pocket
expenses). The PHO is entitled to enter into contracts with, and to compensate,
anyone, including itself or its affiliates, for services rendered to the
Same-Day Surgery Center Partnership. Thus, there is no guarantee to the PHO of
any economic benefits other than the benefits of being a four percent (4%)
partner in the Same-Day Surgery Center Partnership.

Ownership Interest in SJHHS. Prior to the January 5, 1998 sale of stock
to SJAS, the Company owned 50% (4,000 shares) of the common stock of Hospitals'
Home Health Care of Hillsborough County, Inc. ("SJHHS"). SJHHS primarily
provides medical services in the homes of patients. These services include
nursing services by registered nurses ("RNs") and licensed practical nurses
("LPNs"), personal care services, custodial and companion services by home
health aides, and other ancillary services, such as infusion therapy.

<PAGE> 10

Future Ventures

The Company, along with the PHO and, at times, affiliates of
Enterprises, continually investigates other health care related ventures.

Pursuant to an agreement among the Company, Enterprises and the PHO
(the "PHO Agreement," as described below), the Company cannot undertake or
participate in certain specified health care related ventures without first
offering to the PHO the right to form, organize and develop the venture. If the
PHO fails to accept the offer or to proceed with respect to the venture in the
manner and within the time required by the PHO Agreement, then the PHO will lose
all rights with respect to the venture, and the Company will be free to proceed
with respect to the venture described in the offer. Thus, there is no assurance
that any venture will be undertaken even if believed to be feasible; and, if
undertaken, there is no assurance that any such venture will provide any
economic benefit to the Company. See "ST. JOSEPH'S PHYSICIANS-HEALTHCENTER
ORGANIZATION, INC. - The PHO Agreement, Right of First Refusal" in this Item 1
for further discussion.

Government Regulation

The activities of the Partially Owned Operations are subject to strict
government regulation which may indirectly impact the Company and the
stockholders of the Company.

Certain of the Partially Owned Operations currently are subject to
state licensure requirements. While such entities have at all relevant times
satisfied such requirements, a failure to do so for any reason would preclude
such entities from operating and therefore would have a material adverse effect
upon the Company. The Company is not aware of any facts or circumstances which
would prevent such entities from complying with all licensure and other
requirements currently in effect.

Some or all of the Partially Owned Operations are subject to the rules
and regulations relating to federal health care programs, including the Medicare
and Medicaid Programs. These rules and regulations include the applicable fraud
and abuse rules and the rules prohibiting a physician from referring a Medicare
or Medicaid patient for certain designated health services to an entity in which
the physician is an investor or has a financial interest.

In 1992, the Florida Legislature passed legislation (known as the
"Patient Self-Referral Act of 1992"), which became effective on October 1, 1994,
that directly affects some of the Partially Owned Operations and the Company.
The Florida Legislature also has passed comprehensive health care reform
legislation that has impacted and could continue to substantially affect the
Partially Owned Operations and the Company.

Also, from time to time, bills are considered by the Florida
legislature and the United States Congress, and regulations are proposed by
various Florida and federal regulatory agencies, that could change or expand the
prohibitions on physicians' ability to refer patients to entities in which they
are investors. If implemented, one or all of these legislative or regulatory
proposals could substantially affect some or all of the Partially Owned
Operations and the Company. There is no assurance that future legislation or
regulations will not have a materially adverse effect upon the Company.

<PAGE> 11

For a more complete discussion of the regulatory environment, see the
discussion under the heading "SPECIAL CONSIDERATIONS" in Item 6 of this Annual
Report on Form 10-KSB (this "Report"), which provisions are hereby incorporated
by reference into the discussion under this Item 1.

Third Party Reimbursement

Certain of the Partially Owned Operations are subject to accreditation
requirements in order to facilitate reimbursement from third party payors,
including Medicare and Medicaid. To date, such entities have met all such
requirements as are material, and the Company is not aware of any facts or
circumstances which would prevent such entities from complying with such
requirements. However, failure to so comply would adversely affect the ability
of such entities to be reimbursed for services provided, and therefore, would
adversely affect the Company.

It can be anticipated that federal and state governmental agencies, as
well as insurance companies and other third party payors, will continue their
efforts to contain the cost of medical care. There can be no assurance that such
efforts will not substantially curtail the revenues of the Partially Owned
Operations, and therefore, of the Company.

Competition

While the Company does not directly compete with any business, the
Partially Owned Operations are subject to competition which may impact upon the
Company. The health care industry operates in a competitive environment. In
order to maintain market share and replace decreasing revenue sources, health
care institutions and physicians have engaged in various means to diversify
their services.

Three areas believed by the Company to be major targets of such
diversification are the areas of managed care operations, ambulatory care and
home health care, the respective businesses of SJP, SJHN, the Same-Day Surgery
Center Partnership and SJHHS. Public and private efforts to shift care to less
costly alternatives, as well as growing consumerism and competition, have
dictated a need to provide efficiency and comfort to patients usually not
available within the traditional hospital. In addition, the Medicare program's
prospective payment system and reduced inpatient stays are causing intense
competition to offer outpatient services at alternative sites.

SJP and SJHN compete with a myriad of managed care businesses,
including health maintenance organizations (HMOs) and "independent practice
associations" that market their provider services to HMOs or independently as
"preferred provider organizations" (PPOs) or "exclusive provider organizations"
(EPOs) to insurance carriers or directly to employers and other payors.

The Same-Day Surgery Center Partnership competes with three similar
facilities in Hillsborough County. One such facility is within a short distance
of the partnership's site and offers most of the same services. That center is
currently owned by a group of physicians. The other similar facilities are
located more than ten miles away. Also, the Same-Day Surgery Center Partnership
competes with a nearby outpatient ophthalmic surgery facility. In addition to
competition from other

<PAGE> 12

existing and future free standing centers, the Same-Day Surgery Center
Partnership faces competition from hospital-based programs, including programs
at the Hospital, one of which is connected to the space occupied by the Same-Day
Surgery Center facility. Also, other area hospitals have constructed or may
construct separate outpatient surgery facilities to take advantage of the
growing ambulatory surgery market.

Another area of the expanding ambulatory care market is the delivery of
outpatient services in physicians' offices. Thus, the Same-Day Surgery Center
Partnership also competes with physicians' offices located in the service area
of the Same-Day Surgery Center Partnership.

SJHHS competes with a variety of home health care providers. In recent
years, some large nationwide providers and several locally operated providers of
such services have come to the forefront, some of which compete strongly on the
basis of price. For example, the hospital-stockholders of BayCare recently
decided to expand the scope of BayCare to enable the hospital-stockholders to
integrate and coordinate many of the operations that previously were conducted
separately by each hospital, including home health services. As a result, the
competition with SJHHS in Hillsborough County expanded as the Hospital began to
divert its attention to the home health care service operated by Morton
Plant Mease Health Care, which is the home health service designated to act on
behalf of BayCare.

Conflicts of Interest

The stockholders of the Company, health care related businesses engaged
directly or indirectly by the Company, and employees of such health care related
businesses are subject to potential conflicts of interest as a result of
associations with and/or ownership interests in other facilities that may be
considered to be in competition with the health care related businesses engaged
in directly or indirectly by the Company.

Employees

On October 1, 1991, the Company engaged Charles E. Cernuda, M.D., a
former director and officer of the Company, as a part-time Executive Director to
handle various administrative matters for the Company. The Executive Director
position is not an officer position with the Company. Dr. Cernuda is paid
$40,000 annually for his services in such capacity. In a previous agreement
between the Company, the PHO and Enterprises, the PHO agreed to reimburse SJPA
for all compensation paid to SJPA's Executive Director. However, effective
January 1, 1996, the funding agreement was terminated and, as a result, the
Company currently is funding the Executive Director's compensation from other
revenue sources.

<PAGE> 13

ST. JOSEPH'S PHYSICIANS - HEALTHCENTER ORGANIZATION, INC.

Nature of SJPA Interest

The Company owns 50% (2,500 shares) of the common stock of St. Joseph's
Physicians-Healthcenter Organization, Inc. (the "PHO"). The remaining 50% (2,500
shares) of the common stock is held by St. Joseph's Enterprises, Inc.
("Enterprises"). Prior to January 31, 1997, Enterprises also owned 100% of the
PHO's preferred stock (6,250 shares), which had a par value of $20 per share and
carried the right to receive annual dividends amounting to six percent (6%) of
the par value of such shares, accumulating from year to year until paid in full,
prior to the payment of any dividends with respect to the common stock. All
cumulative preferred dividends were paid in connection with the January 31, 1997
redemption of the preferred stock. Thus, any future dividends that are paid by
the PHO, if any, will be shared equally, on a per share basis, by all shares of
common stock. However, except for the cumulative dividends paid upon redemption
of the preferred stock, no dividends have been paid by the PHO since the Company
became a stockholder in the PHO.

Business

The PHO was organized principally as the vehicle through which the
Company and Enterprises together indirectly provide hospital and professional
services to various managed care organizations, and it also engages directly or
indirectly in various health care related businesses. The PHO owns 100% of SJP,
a Florida corporation organized on March 13, 1991 to provide health care
services through a "preferred provider" network. The PHO also owns 100% of SJHN,
a Florida corporation organized on May 26, 1995 to contract with managed care
entities primarily on a risk bearing basis. The PHO is currently the managing
general partner of, and in that respect owns a four percent (4%) interest in,
the Same-Day Surgery Center Partnership, a Florida limited partnership that
operates an ambulatory care center. In addition, the PHO owns one and one half
(1 1/2) limited partnership units (out of a total of 40 units) in the Same-Day
Surgery Center Partnership, but may resell these units to qualified limited
partners.

The PHO Agreement

General. On February 24, 1988, the Company, Enterprises and the PHO
entered into a written agreement setting forth various aspects of the
organization and operation of the PHO (the "PHO Agreement"). Pursuant to the PHO
Agreement. the Company acquired one-half of the authorized capital common stock
of the PHO for $50,000. Enterprises paid $50,000 for its common stock in the PHO
and $125,000 for its preferred stock (which was redeemed on January 31, 1997).

Management. The PHO Agreement prescribes a Board of Directors for the
PHO composed of ten (10) persons, five (5) of whom are selected by the Company's
Board of Directors and five (5) of whom are selected by Enterprises. Current
members of the Board of Directors of the PHO are:

<PAGE> 14

<TABLE>
<CAPTION>
Company's Representatives(1) Enterprises' Representatives
-------------------------- ----------------------------

<S> <C>
Anthony Brannan, M.D. Brent Amey, M.D.
Norman Castellano, M.D. Tommy Inzina
N. Bruce Edgerton, M.D. Isaac Mallah
Bill Luria, M.D. Nancy Taylor Ward
Benedict Maniscalco, M.D. Vacant
</TABLE>

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

(1) See the discussion under Item 9 of this Report for information
regarding the Company's representatives, which discussion is hereby
incorporated by reference into the discussion under this Item 1. It
should be noted that certain of the Company's representatives may
change when the Company's Board of Directors considers these
appointments at its annual meeting scheduled for April 29, 1998.

Brent Amey, M.D., age 52, has been Vice President of Medical Affairs of
St. Joseph's-Baptist Health Care System since August, 1997, and was Vice
President of Medical Affairs of St. Joseph's/St. Anthony's Health System from
February, 1995 to August, 1997, was Chief of Emergency Medicine at St. Joseph's
Hospital prior to February, 1995 and was engaged in the private practice of
medicine in Tampa, Florida, specializing in emergency medicine, for 21 years
prior to February, 1995, was a Director of St. Anthony's PHO from February, 1995
through 1996, and was President of St. Anthony's PHO during 1997.

Tommy Inzina, age 39, has been Vice President of Finance and Treasurer
of BayCare Health System since 1997, and was Director of Fiscal Services for St.
Joseph's/St. Anthony's Health System from 1993 to 1997.

Isaac Mallah, age 49, has been the President and Chief Executive
Officer of St. Joseph's-Baptist Health Care System since July, 1997, was the
President and Chief Executive Officer of St. Joseph's/St. Anthony's Health
System from January to June, 1997, and was the Executive Vice President from
1993 to 1996, Vice President from 1983 to 1993, and Chief Operating Officer from
1989 to 1993 of St. Joseph's Health Care Center, Inc., Executive Vice President
since 1993 and a Director since 1986 of Enterprises, Secretary/Treasurer and
Director of the PHO since 1986, Secretary/Treasurer and Director of SJHHS and
SJP since 1991, Vice Chairman and Director of BayCare since 1991 and Treasurer
and Director of SJHN since 1995.

Nancy Taylor Ward, age 58, has been the Director of PHOs of St.
Joseph's-Baptist Health Care System and Bayfront-St. Anthony's Health Care
System since July, 1997, and was the Director of PHOs of St. Joseph's/St.
Anthony's Health System from 1995 to June, 1997, and a Director of the PHO since
1997.

The PHO Agreement requires that the President of the Hospital
Corporation shall at all times serve on the PHO Board of Directors as one of the
designees of Enterprises. In no event can an attorney or retired or former
attorney at any time serve on the Board of Directors of the PHO.

<PAGE> 15

Vacancies occurring among the Company's representatives on the PHO
Board of Directors are filled by the Company's Board of Directors. Vacancies
occurring among Enterprises' representatives are filled by Enterprises' Board of
Directors.

For there to be a quorum at meetings of the Board of Directors of the
PHO, there must be present at least a majority of the directors representing the
Company and a majority of the directors representing Enterprises. When a quorum
is present, the act of a majority of the directors representing the Company and
a majority of the directors representing Enterprises will be the act of the
Board of Directors of the PHO.

The Bylaws of the Company contain a number of provisions governing the
electing of directors to the PHO Board and the manner in which the Company's
representatives on such Board shall act.

Officers of the PHO must be members of the PHO Board of Directors, and
the Company and Enterprises select an equal number of such officers.

Enterprises' Affiliates Bound By PHO Agreement. Pursuant to the PHO
Agreement, Enterprises is required to cause all of its present and future
affiliates to be bound by all of the agreements between Enterprises and the PHO
and/or the Company. The term "affiliates" of Enterprises is defined to include
all present and future subsidiaries of St. Joseph's Health Care Center, Inc., or
its successor or successors, and all other present and future affiliated and
related entities and divisions of Enterprises, engaged directly or indirectly in
the delivery of health care services, including without limitation the Hospital
Corporation, the division of an affiliate of the Hospital known as "HealthLine,"
and their respective present and future affiliated and related entities and
divisions.

Right of First Refusal. The PHO Agreement by its terms currently
prohibits Enterprises or any affiliate (as defined in the PHO Agreement) of
Enterprises, and the Company or any group comprised of ten percent (10%) or more
of the Company's stockholders, (individually or collectively, the "Offeror")
from forming, organizing or developing, or accepting any offer to form,
organize, develop, join, invest or otherwise participate in any future health
care related venture (as defined below) without first offering to the PHO the
right to form, organize or develop the same or similar health care related
venture (the "Offer"). The PHO will have thirty (30) days after receipt of an
Offer within which to accept the Offer on the terms and conditions specified
therein.

In the event the PHO accepts an Offer, then the Offeror is prohibited
from forming, organizing, developing, joining, investing or otherwise
participating in the proposed venture. However, an exception is provided for an
Offer by a group of physicians. Each member of the group of physicians will be
entitled to and will have the option to purchase an equitable interest in the
same or similar health care related venture of the PHO.

The "equitable interest" will be determined by the PHO Board of
Directors on a case-by-case basis. In any case-by-case determination, the
equitable interest offered to any physician making an Offer may not be equal to
the equitable interest offered to any other physician making the Offer, but will
be at least equal to the minimum interest which is offered by the PHO to any
other potential physician investor.

<PAGE> 16

The PHO is required to use reasonable efforts to undertake the venture
within sixty (60) days of the PHO's acceptance of the Offer. If the PHO fails to
accept the Offer or to proceed with respect to the venture in the manner and
within the time required by the PHO Agreement, then the PHO will lose all rights
with respect to the venture, and the Offeror will be free to proceed with
respect to the venture described in the Offer.

Whoever proceeds with respect to a venture (whether it be the PHO or
the Offeror) is prohibited from making any substantial changes in the venture as
described in the Offer without obtaining the prior written approval of the other
party.

If either the PHO or the Offeror proceeds with respect to a venture in
violation of the provisions of the PHO Agreement, then the other party will have
the right within one (1) year after it becomes aware of such violation to
purchase the venture at the lower of the cost or appraised value of the venture.

Except as provided in the following paragraph, the term "health care
related venture" is defined to include any venture that is related to the
delivery of health care services, including without limitation any type of
health care clinic, the rental of any property on the Hospital's campus for
physicians' offices or for any type of health care clinic, any expansion of the
services presently offered by a division of an affiliate of the Hospital known
as "HealthLine," any venture that is related to health care services affecting
non-acute inpatients (such as the establishment of a retirement living/nursing
home facility) and/or outpatients (such as the establishment of an intermediate
care facility or surgical ambulatory care center), any venture that is related
to health care and affects the reimbursement mechanism by which the Hospital and
the Company receive payment for services (such as the establishment of a
provider panel to contract with prepaid health plans, including HMOs or PPOs), a
medical office building, a convalescent care or diagnostic facility, durable
medical equipment services, outpatient or home oxygen/respiratory therapy,
outpatient clinical laboratory or imaging services and all opportunities for the
formation of HMOs, PPOs, PHOs and all other physician-hospital organizations or
entities.

However, the term "health care related venture" is defined to exclude,
without limitation, any venture relating to health care services affecting acute
inpatients (such as the purchase of St. Joseph's Women's Hospital or the
development and construction of The Tampa Children's Hospital), any venture
relating to the care delivered in private offices of the Company's stockholders
and any venture relating to instruments, equipment (with the exception of
diagnostic imaging equipment in connection with a venture involving the delivery
of health care services, such as a diagnostic imaging center) and devices used
in the delivery of health care services or ancillary thereto. There are certain
arrangements, specified therein, to which the right of first refusal provision
in the PHO Agreement does not apply.

Although the PHO Agreement by its terms requires the stockholders of
the Company to make the Offer described above, because such stockholders are not
parties to the PHO Agreement, the issue has been raised as to whether
stockholders are bound by such requirement. However, the Company notes that all
stockholders were aware of such requirement prior to their purchase of stock
and, although there can be no assurance of success, the Company would seek to
enforce such requirement against a non-complying stockholder. Further, the
Company would intend to avail itself

<PAGE> 17

of its right to repurchase the Common Stock in the Company owned by any
stockholder who failed to comply with such provision. Any such repurchase would
make the stockholder ineligible to participate in SJP's preferred provider
network and in SJHN's managed care arrangements and ineligible to continue any
ownership interest in the Same-Day Surgery Center Partnership.

Notwithstanding the foregoing, the PHO has not yet decided upon whether
to involve itself in any businesses other than SJP, SJHN and the Same-Day
Surgery Center Partnership, and the PHO may never decide to involve itself in
any other business.

Other situations have arisen during the past several years to which the
Right of First Refusal might apply (e.g., the creation of a pediatric clinic and
purchase of primary care medical practices by Enterprises or its affiliates).
The Company and Enterprises have expressed differing views concerning these
situations, and discussions are ongoing with respect to the parameters of the
Right of First Refusal and the exceptions thereto. In January 1996, Enterprises
proposed that the Right of First Refusal be deleted from the PHO Agreement and
replaced with a memorandum of understanding, pursuant to which the Company and
Enterprises would strive to communicate with each other openly regarding
possible health care related ventures and would consider requests from the other
party to participate in possible health care related ventures (but with no
obligation to do so). A draft of such a memorandum of understanding was
prepared, and the Company has continued, so far unsuccessfully, to attempt to
complete negotiations. There can be no assurance that the Company and
Enterprises will be able to reach a mutually satisfactory resolution concerning
the parameters and application of the Right of First Refusal.

Stock Transfer Restriction; Buy/Sell Option. The PHO Agreement also
provides that, since February 24, 1993 (which is the date five (5) years from
the date of the execution of the PHO Agreement), either the Company or
Enterprises (the "Offeror") may give written notice (the "Notice") to the other
(the "Recipient") that the Offeror desires to purchase the entire interest of
the Recipient in the PHO, or that the Offeror desires to sell to the Recipient
the Offeror's interest in the PHO. The Recipient will have one hundred and
eighty (180) days from the date the Notice is received to accept the offer or to
counteroffer by reversing the offer set forth in the Notice. If the Recipient
does not respond within the 180 day period, then the Recipient will be deemed to
have accepted the offer. If a counteroffer is made, then the Offeror will be
deemed to have accepted the counteroffer on the date of receipt.

In the event either party offers to purchase the interest of the other
party, the purchase price is required to be at least equal to the original
capital contribution and any additional capital contributions by the Recipient,
plus a return from the date of the contribution at the rate of six percent (6%)
per annum, compounded annually. In the event either party offers to sell its
interest to the other party, the selling price will be determined by the party
making the offer to sell.

As of April 15, 1998, no Notice has been given by either party, and the
Company is not presently aware of any intent on the part of either party to give
such a Notice.

Several members of the Board of Directors of the PHO have recommended
that the purchase price for exercise of this option should be changed to the
fair market value of the stock (to be determined in a mutually acceptable
manner), and this change currently is under review by the

<PAGE> 18

Company and Enterprises. There can be no assurance that the Company and
Enterprises will be able to reach a mutually satisfactory resolution concerning
this suggested change.

Except for the buy/sell option, the Company and Enterprises each are
prohibited from attempting, directly or indirectly, to sell, assign, transfer,
mortgage, encumber, pledge, or otherwise deal with or dispose of all or any part
of their respective shares of stock in the PHO without first obtaining the
written consent of the other party.

Financial Matters

Results of Operations. The PHO suffered a decrease in its combined
revenues in 1997, resulting primarily from a decline in the receipt by SJHN of
membership fees from the physicians and the Hospital who have been credentialed
as SJHN Providers. Each physician desiring to be an SJHN Provider pays a
one-time membership fee of either $150 (if a primary care physician) or $1,000
(if a specialist) in connection with his or her credentialing application, which
membership fees are included in revenue if and when such physician is accepted
as an SJHN Provider (although several specialists are paying the membership fee
in installments, and their fees will be included when received). The Hospital
also pays a membership fee equal to the aggregate amount of membership fees paid
by all of the physicians. In 1996, SJHN collected membership fees of $241,300,
while aggregate membership fees in 1997 were $44,300, a decline of $197,000 from
the previous year. After 1997, it is anticipated that SJHN will not receive any
significant membership fees, as its panel is expected to have stabilized (the
only additions being replacements for physicians who leave or die and additions
to meet actual or perceived needs). See the discussion at "ST. JOSEPH'S HEALTH
NETWORK, INC. - Financial Matters," in Item 1 of this Report, which provisions
are hereby incorporated by reference. Other combined revenues earned by the PHO
during 1997 include $7,803 in fees collected by SJHN from the Hospital for the
administration of its ProHealth Plus Employee Plan.

The PHO accounts for its 4% investment in the Same-Day Surgery Center
Partnership under the equity method, because of the PHO's ability to exercise
significant influence over the limited partnership. The PHO's net gain or loss
resulting from its proportionate share of the partnership's revenue and expenses
for the year is included in its statement of income, included with this Report.
For the year ended December 31, 1997, the PHO's equity in earnings of limited
partnerships was $87,617. The annual level of activity from the Same-Day Surgery
Center Partnership has continued during the first three months of 1998. While
there can be no assurance that the level of activity for the Same-Day Surgery
Center Partnership will continue, the Company is not aware of any reason that
such level of activity should change significantly in the immediate future,
although the Company cannot predict the impact of certain regulatory matters.
See "SPECIAL CONSIDERATIONS --Government Regulation" under Item 6 of this
Report, which discussion is incorporated by reference into the discussion under
this Item 1.

The PHO also earned $36,012 in 1997 from its holding of 1 1/2 limited
partnership units in the Same-Day Surgery Center Partnership. Income is recorded
at the time distributions are declared.

Investment income consists of distributions from certain of the
Partially Owned Operations and interest on bank accounts.

<PAGE> 19

The PHO's combined cash balances decreased during 1997, primarily as a
result of the decline in the amount of membership fees collected from
credentialed SJHN Providers and the payment of $184,375 to Enterprises in
redemption of its preferred stock in the PHO (see the discussion at "BACKGROUND
- - The Company's Principal Ventures -- the PHO and SJHHS," in Item 1 of this
Report, which provisions are hereby incorporated by reference).

General and administrative expenses primarily consist of compensation
paid and benefit costs incurred with respect to newly hired management staff,
internal accounting costs and director and officer liability insurance premiums.
Prior to 1996, the PHO had no staff and relied on Enterprises and its affiliates
to perform all management and administrative functions. In 1996, a PHO Director,
a PHO Coordinator and a Provider Relations Representative were hired to staff
the operations of the PHO, SJP, SJHN and the physician hospital organization
operated for St. Anthony's Hospital (an organization affiliated with the
Hospital Corporation) and the physicians at that hospital in St. Petersburg,
Florida. Two additional staff persons were hired in 1997, one to act as a
financial analyst and one to provide provider relations coordination, and it is
anticipated that one additional staff person will be hired by July, 1998. The
PHO will incur general and administrative costs for its share of these
additional personnel, as well as for the share that is attributable to SJP,
which will be allocated to and paid by the PHO (see the discussion at "ST.
JOSEPH'S PREFERRED, INC. - Type of Business," in Item 1 of this Report, which
provisions are hereby incorporated by reference). Thus, general and
administrative costs are expected to increase in 1998 and thereafter, primarily
because of these recent and anticipated hirings. There can be no assurance that
the PHO's existing funds will be sufficient to cover all of these expenses.

Professional fees expense consists of costs associated with the
evaluation of and input with respect to new and proposed legislation and
business ventures, expenditures related to consulting, legal and actuarial
services related to implementation of new ventures, and audit fees. Professional
fees expense decreased in 1997, primarily because of non-recurring expenditures
incurred in the first half of 1996 that were associated with the development of
SJHN. The Company expects that in 1998 and future years, the PHO will continue
to make more in depth investigations of new and proposed legislation and
possible new ventures. However, it is not anticipated that any new ventures will
be implemented in 1998. As a consequence, professional fees expense is not
likely to increase substantially, if at all, in 1998.

Liquidity. As of December 31, 1997, the PHO had cash balances of
$158,678, representing approximately 29% of the PHO's total assets. This
significant decrease in cash balances resulted primarily from the decrease in
revenues received in the form of membership fees paid to SJHN by the SJHN
Providers and the payment of $184,375 to Enterprises in redemption of its
preferred stock in the PHO on January 31, 1997. In addition, the PHO generally
receives quarterly distributions from the Same-Day Surgery Center Partnership.
The Same-Day Surgery Center Partnership makes quarterly distributions in amounts
equal to the amount by which the Same-Day Surgery Center Partnership's cash
balances exceed the amount of the cash reserves estimated as being needed to
satisfy the Partnership's cash needs over a 45 day period. In addition, the PHO
earns interest income on its cash balances. For the near future, management
believes it likely that its current cash inflows, together with the existing
cash balances, will continue to provide sufficient funds for the PHO to pay its
operating expenses, which consist primarily of management personnel costs,
legal, accounting, insurance, tax costs and investigations and funding of new
ventures. No dividends are expected from

<PAGE> 20

SJP or SJHN. It is anticipated that the PHO may provide additional capital to
SJHN, although the amount of such capital has not been determined. It is
expected, however, that the amount of the PHO's contribution to SJHN, if any,
would be determined taking into account the PHO's then available liquidity and
its other anticipated cash needs.

Capital Resources. As the managing general partner of the Same-Day
Surgery Center Partnership, the PHO is contingently liable for all liabilities
of the partnership. As a former managing general partner of the Diagnostic
Center Partnership, the PHO remains contingently liable for liabilities of the
Diagnostic Center Partnership arising prior to sale by the PHO of its interest.
As of December 31, 1997, the Same-Day Surgery Center Partnership had $2,059,691
in current assets in excess of current liabilities and long-term debt and the
Diagnostic Center Partnership had $5,263,283 in current assets in excess of
current liabilities and long-term debt. In addition, all long-term debt of the
partnerships is collateralized by inventory, accounts receivable and medical
equipment.

Also, as the managing general partner of the Same-Day Surgery Center
Partnership, the PHO has determined that it will seek to cause the Same-Day
Surgery Center Partnership to finance, through long-term indebtedness, most, if
not all, of its future acquisitions of new and replacement equipment.

Other than as indicated above, the PHO has no debt and it is not
anticipated that any other debt will be incurred.

Impact on SJPA

The Company accounts for its 50% common stock investment in the PHO on
the equity method. As a result of the redemption from Enterprises of the
preferred stock in the PHO on January 31, 1997, the Company's share of the PHO's
net income or loss will be 50%.

ST. JOSEPH'S PREFERRED, INC.

Nature of SJPA Interest

The PHO owns 100% of the outstanding stock of St. Joseph's Preferred,
Inc. ("SJP"). This corporation was organized by the PHO on March 13, 1991, and
initially capitalized with $10,000.

Type of Business

SJP has signed contracts with the Hospital Corporation, the Same Day
Surgery Center Partnership, SJHHS, and approximately 400 SJPA physician
stockholders (collectively referred to as the "PPO Providers"). These PPO
Providers have agreed to accept discounted fees as payment in full for services
provided to any patient covered under a PPO Contract between SJP and a payor.
These PPO Contracts require that the health care benefit plan of the contracting
entity have a design feature that provides some economic incentive to the
patient to use a PPO Provider (versus a non-PPO Provider).

<PAGE> 21

SJP has signed a Network Linking Agreement (the "Network Linking
Agreement") with BayCare Health Network, Inc. ("BayCare"). This Network Linking
Agreement allows SJP to offer the services of its PPO Providers to enrollees of
BayCare requiring access to health care providers in Hillsborough County,
Florida. BayCare previously was owned entirely by Enterprises and by St.
Anthony's Hospital, Inc. and Morton F. Plant Hospital Association, Inc., two
not-for-profit hospitals located in Pinellas County, Florida. During 1994,
several additional hospitals in Hillsborough County and in Pinellas County
acquired ownership interests in BayCare. See the discussions under "BACKGROUND -
The Company's Principal Ventures - the PHO and SJHHS" in Item 1 of this Report,
which provisions are hereby incorporated by reference. BayCare was initially
operated under the name SunHealth Care Plans - Gulf Coast, Inc., which name was
changed in 1994 to CareFirst Health Network, Inc. In 1995, the name again was
changed to BayCare Health Network, Inc.

The majority of the current PPO Contracts are held by BayCare, and
access to SJP's PPO Providers is through the Network Linking Agreement.
Currently BayCare has 93 contracts, covering approximately 33,400 enrolled
employees, to provide standard preferred provider, primary care preferred
provider and various insured health care products. This includes contracts with
the Hospital Corporation and the Same Day Surgery Center Partnership covering
approximately 3,600 employees. In addition, BayCare has entered into linking
agreements with a number of other managed care entities through which the PPO
Providers are made available to provide services to the approximately 25,400
enrolled employees of these other entities (21,250 of such employees being under
hospital services only contracts). In addition, the PHO Director has functioned
as a messenger for the Board of Directors of SJP in contracting with two
additional managed care organizations.

SJP's principal activity is to provide a "managed care" vehicle for
bringing together otherwise unaffiliated service providers and groups of health
care consumers, and coordinating the relationships between PPO Providers and the
groups of consumers. Prior to 1996, SJP had no staff and relied on BayCare to
perform all operational and marketing functions for SJP. In 1996, a PHO Director
was hired, as well as a PHO Coordinator and a Provider Relations Representative,
to staff the operations of the PHO, SJP, SJHN and the physician hospital
organization operated for St. Anthony's Hospital (an organization affiliated
with the Hospital Corporation) and the physicians at that hospital in St.
Petersburg, Florida. Two additional staff were hired in 1997, one to act as a
financial analyst and the other to act as Provider Relations Coordinator, and it
is anticipated that one additional staff person will be hired by July, 1998. The
portion of the personnel costs associated with the management and administration
of SJP is allocated to and paid by the PHO. Accordingly, SJP has no significant
income or expenses.

Only stockholders in the Company are permitted to participate in SJP's
preferred provider network. As is described under the heading "DESCRIPTION OF
SECURITIES-Physician Qualifications" in Item 5 of this Report, only certain
members in good standing of the Active or Senior Active Medical Staff of St.
Joseph's Hospital are eligible to be stockholders in the Company. A physician
must provide services at the Hospital for at least one year as a Provisional
Member before qualifying to become a member of the Active or Senior Active
Medical Staff. In this regard, a question arose as to whether it would be in
SJP's best interest to also allow Provisional Members to participate in SJP's
provider panel, in part to facilitate the provision of care by newly hired
physicians in groups of PPO Providers. The Company did not believe that it was
in its best interests to relax its eligibility requirements or to consent to SJP
relaxing its requirements. Instead, an accommodation

<PAGE> 22

was reached to allow Provisional Members to be given temporary credentials as
providers in BayCare's panel of providers, and the individuals then can provide
services through the network linking agreement between SJP and BayCare. The
temporary credentials will terminate when the physician becomes eligible to be a
member of the Active or Senior Active Medical Staff and does not then become a
stockholder in the Company. In 1995, the Company's Board of Directors voted to
instruct the Company's representatives on the Boards of Directors of the PHO and
SJP to take all steps necessary to inform BayCare that it should no longer
extend temporary provider contracts to members of the Provisional Medical Staff
of St. Joseph's Hospital who are not primary care physicians (i.e., those
physicians practicing in the areas of family or general practice, general
internal medicine and general pediatrics) or specialists who join a group which
already has an existing SJPA stockholder as a part of that group.

Management

The Bylaws of SJP prescribe a Board of Directors for SJP composed of
four (4) persons, two (2) of whom are selected by the Company's Board of
Directors and two (2) of whom are selected by Enterprises. Current members of
the Board of Directors of SJP are:

<TABLE>
<CAPTION>
Company's Representatives(1) Enterprises' Representatives(2)
---------------------------- -------------------------------
<S> <C>
Dennis Agliano, M.D. Isaac Mallah
F. Lane France, M.D. Gilbert Pitisci, M.D.
</TABLE>

- ----------

(1) See the discussion under Item 9 of this Report for information regarding
the Company's representatives, which discussion is hereby incorporated by
reference into the discussion under this Item 1. It should be noted that
certain of the Company's representatives may change when the Company's
Board of Directors considers these appointments at its annual meeting
scheduled for April 1998.

(2) See the discussion above relating to management of the PHO for
information regarding Isaac Mallah.

<PAGE> 23

Gilbert Pitisci, M.D., age 54, was Senior Vice President of the Hospital
Corporation from 1993 to 1997, and was Vice President of Medical Staff Affairs
of the Hospital Corporation from 1987 to 1993, President of the PHO from 1994
to 1995 and 1996 to 1997 and Chairman from 1995 to 1996, a Director of the PHO
from 1989 to 1997, a Director of SJP since 1994, Chairman from 1994 to 1995 and
1996 to 1997 and President from 1995 to 1996, Secretary and Director of
Enterprises from 1993 to 1997, and a Director and Vice Chairman of SJHN since
1995. Since 1974, and prior to his position at St. Joseph's Hospital, Dr.
Pitisci was engaged in the private practice of medicine in Tampa, Florida,
specializing in pediatrics. In 1998, Dr. Pitisci returned to the private
practice of medicine in Tampa, Florida, specializing in pediatrics, as an
employee of HealthPoint Medical Group, which is owned by an affiliate of the
Hospital Corporation.

The above referenced SJP Board members also are Board members of BayCare.

Financial Matters

SJP commenced operations in July 1991. Prior to 1996, SJP did not have
employees or significant administrative or other expenses, nor any significant
income. Although a portion of the costs associated with the PHO Director and
staff will be attributable to SJP's operations, such costs were and continue to
be allocated to and paid by the PHO, so financial matters relating to SJP have
not changed and are not expected to change significantly. It is anticipated
that the majority of SJP's contractual arrangements will continue to be entered
into via its linking agreement with BayCare. SJP also may sign individual
contracts, as well, but these contracts are not expected to result in
significant income for SJP.

Impact on SJPA

Because SJP is not anticipated to have any significant income or
expenses, it is not anticipated to have a material impact on the business, or
the financial condition or results of operations, of the Company.

ST. JOSEPH'S HEALTH NETWORK, INC.

Nature of SJPA Interest

The PHO owns 100% of the outstanding stock of St. Joseph's Health
Network, Inc. ("SJHN"). This corporation was organized by the PHO on May 26,
1995, and initially capitalized with $1,000.

<PAGE> 24

Type of Business

SJHN is a physician-hospital organization established for the purposes
of developing a network of hospitals and physicians (collectively referred to as
the "SJHN Providers") and negotiating at-risk (i.e., capitation) contracts with
managed care organizations on behalf of the SJHN Providers in order to provide
high quality, competitively priced health care services for persons residing or
employed in the Hillsborough County, Florida area.

SJHN is expected to provide a vehicle for risk sharing among the
participating doctors and hospitals, while striving to establish competitive
prices, along with fair payments to the SJHN Providers. SJHN plans to act as the
contracting agent to review, evaluate and negotiate prepaid or capitated
contracts on behalf of the SJHN Providers. Under these contracts, the primary
care physicians (i.e., pediatrics, family practice and general internal
medicine) and perhaps certain of the specialist physicians will be compensated
by a monthly capitation (i.e., fixed payment per subscriber per month) that will
require each physician to assume the risk of providing the medical care needed
by the subscribers in the managed care plan that are assigned to the physician.
This risk may be shared by SJHN and the physician, or it may be borne by the
physician alone. Those physicians who are not capitated also could share in the
volume of care risk, because a portion of the fee-for-service payments that they
will receive may be withheld in risk pools.

The initial invitation to join SJHN as a physician provider was
extended only to SJPA stockholders. To date, approximately 189 physicians have
been credentialed. To be competitive in the capitated managed care business, the
ratio of primary care physicians to specialist physicians must be strictly
controlled. On an ongoing basis, the physician representation on SJHN's panel is
reviewed and evaluated to determine if any additional primary care physicians or
specialists are needed. The Company expects that, if a decision is made that
additional physicians are needed, then invitations will be made only to SJPA
stockholders; provided, that, if a need is identified for an additional
physician-provider that cannot be filled by an SJPA stockholder, then SJHN has
the discretion to allow a physician who is not an SJPA stockholder to
participate in the network.

In 1996, a PHO Director was hired, as well as a PHO Coordinator and a
Provider Relations Representative, to staff the operations of the PHO, SJP, SJHN
and the physician hospital organization operated for St. Anthony's Hospital (an
organization affiliated with the Hospital Corporation) and the physicians at
that hospital in St. Petersburg, Florida. Two additional staff were hired in
1997, one to act as a financial analyst and the other to act as Provider
Relations Coordinator, and it is anticipated that one additional staff person
will be hired by July 1998. The portion of the personnel costs associated with
the management and administration of SJHN is allocated to and paid by SJHN.

Management

The bylaws of SJHN prescribe a Board of Directors for SJHN composed of
nine (9) persons, including five physicians (three primary care physicians and
two specialists) and four hospital representatives. The bylaws of SJHN state
that the Executive Director of SJPA shall serve as an ex-officio board member of
SJHN. In addition, the PHO Director also will serve as an ex-officio board
member. Current members of the Board of Directors of SJHN are:

<PAGE> 25

<TABLE>
<CAPTION>
Physician Representatives (1) Hospital Representatives(2)
----------------------------- ---------------------------

<S> <C>
Todd Rosenthal, M.D. Isaac Mallah
Cres Rodriguez, M.D. Tommy Inzina
Vijay Diwadkar, M.D. Gilbert Pitisci, M.D.
Jack Mezrah, M.D. Vacant
Steve Ferzoco, M.D.
</TABLE>

- ----------
(1) The Physician Representatives are all stockholders in the Company, but do
not currently serve on the Board of Directors of the Company.

(2) See the discussion above relating to management of the PHO and of SJP for
information regarding the Hospital Representatives.

Todd Rosenthal, age 42, received his M.D. degree from the University of
Miami. Since 1984, Dr. Rosenthal has engaged in the private practice of
medicine in Tampa, Florida specializing in Internal Medicine. Dr. Rosenthal is
a holder of a provider contract with SJP.

Cres Rodriguez, age 49, received his M.D. degree from the University
Central de Santo Pedro in the Dominican Republic. Since 1990, Dr. Rodriguez has
engaged in the private practice of medicine in Tampa, Florida specializing in
Internal Medicine. Dr. Rodriguez is a holder of a provider contract with SJP.

Vijay Diwadkar, age 48, received his M.D. degree from the Topiwala
National Medical College in India. Since 1983, Dr. Diwadkar has engaged in the
private practice of medicine in Tampa, Florida specializing in Family Practice.
Dr. Diwadkar is a holder of a provider contract with SJP.

Jack Mezrah, age 69, received his M.D. degree from Emory University.
Since 1961, Dr. Mezrah has engaged in the private practice of medicine in
Tampa, Florida specializing in Gynecology. Dr. Mezrah is a holder of a provider
contract with SJP.

Steve Ferzoco, age 48, received his M.D. degree from Tufts Medical
School. Since 1981, Dr. Ferzoco has engaged in the practice of medicine in
Tampa, Florida specializing in Radiology. Dr. Ferzoco's group practice is a
holder of a provider contract with SJP.

Financial Matters

In 1997, applications and membership fees were received from
approximately 30 physicians expressing an interest in joining SJHN, and 43
physicians completed the credentialing process (some of whose applications were
submitted in 1996). In 1997, revenues of $44,300 were earned by SJHN from
membership fees received from the physicians and the Hospital. SJHN also earned
revenues of $7,803 (at the rate of $1.50 per member per month) from the
Hospital for administrative services rendered to its employees' ProHealth Plus
Employee Plan.

<PAGE> 26

In 1996, $241,300 was earned in membership fees from the physicians and
the Hospital. Membership fee revenues decreased in 1997 as the SJHN Provider
panel credentialing was completed and the panel stabilized. SJHN expects to
credential additional physician providers in 1998, but only as necessary to
replace departing providers and to fill gaps in certain sub-specialities. This
process will generate additional membership fee revenue, but it is not
anticipated that SJHN will receive any significant membership fees in 1998 or
thereafter (see the discussion regarding the membership fees at "ST. JOSEPH'S
PHYSICIANS HEALTHCENTER ORGANIZATION, INC. - Financial Matters -- Results of
Operations," in Item 1 of this Report, which provisions are hereby incorporated
by reference).

However, as SJHN continues to mature, revenues from administrative fees
are expected to increase as at-risk (i.e., capitation) contracts are signed with
managed care organizations. With the panel of SJHN Providers now credentialed,
SJHN has begun to receive capitation payments (on a per member per month basis)
from its contract with the Hospital, and the PHO Director and staff are actively
marketing (directly and through the hospital's affiliation with BayCare) to
obtain more at-risk contracts. It is anticipated that these marketing efforts
will result in more than 3,000 persons being enrolled under capitated contracts
between SJHN and one or more managed care organizations by the end of 1998. A
significant portion of the capitation payments will be allocated to paying the
SJHN Providers for health care services to be rendered to the members of the
managed care organizations which contract with SJHN. Primary care physicians
will be paid on a capitated basis, pursuant to which the primary care physicians
will assume the risk for all primary care medical services performed for the
applicable members, while specialist physicians will be paid on a discounted
fee-for-service basis. The Hospital (and any other hospital that becomes an SJHN
Provider) will be paid on a negotiated per diem basis for inpatient care, while
certain outpatient and ancillary services will be reimbursed pursuant to a
negotiated fee schedule. Also, a portion of the revenues received from the per
member per month capitation payments received by SJHN will be allocated to cover
administrative expenses.

SJHN is expected not to generate any significant direct administrative
costs in 1998, because it does not directly employ any personnel. Rather, the
PHO will continue to provide personnel, and some administrative services will be
obtained from BayCare (through the Hospital's affiliation). In 1997, a portion
of the PHO's fixed administrative costs (most notably salaries and benefits)
were allocated to SJHN on the basis of forty percent (40%) of total fixed costs
(with other entities supported by the PHO being allocated the remaining share).
Total expenses for 1997 amounted to $147,521, and revenues were insufficient to
cover expenses. A similar allocation of administrative overhead is anticipated
in 1998; however, SJHN's allocated personnel costs can be expected to increase
in 1998, with a total of 8.5 employees planned as compared to 7 employees in
1997. Included in this employee count are two employees that are assigned to
another PHO entity which will be merged into a consolidated BayCare organization
in 1998. As a result of the BayCare affiliation through the Hospital, SJHN also
will be allocated twenty-eight percent (28%) of the total fixed costs of this
consolidated organization in 1998.

Impact on SJPA

There can be no assurance that SJHN's revenues will be sufficient to
cover its current operating expenses in 1998, particularly given SJHN's lack of
experience in handling risk-based (i.e.,

<PAGE> 27

capitation) compensation and the inherent uncertainty relative to the funding of
fee-for-service specialist payments, which are dependent upon utilization.
Additional liquidity for SJHN also is expected to be received from other
sources, including possible equity contributions from the PHO and/or from
others, and borrowings. In this regard, the Company might find it appropriate to
assist the PHO to provide funds to SJHN to be used to cover its working capital
needs. The amount of such funding has not been determined at this time. It is
expected that the Company's contribution to such funding would be determined
after taking into account the Company's available liquidity and its other
anticipated cash needs.

ST. JOSEPH'S SAME-DAY SURGERY CENTER, LTD.

Nature of the Company's Interest

The Same-Day Surgery Center Partnership was organized on May 19, 1987
to develop and operate an outpatient surgery center (the "Same-Day Surgery
Center Facility") in the Medical Arts Building which is located on the campus of
the Hospital and is owned by an affiliate of the Hospital Corporation. San
Damiano Enterprises, Inc., a Florida not-for-profit corporation and an affiliate
of the Hospital Corporation ("San Damiano") is the non-managing general partner
of the Same-Day Surgery Center Partnership, owning a forty-eight percent (48%)
partnership interest therein, and the PHO owns a four percent (4%) interest as
the managing general partner of the Same-Day Surgery Center Partnership (the
remaining interests being held by the limited partners). Prior to the redemption
of Enterprises' preferred stock in the PHO on January 31, 1997, the Company
owned approximately a 22.22% interest in the PHO, and therefore approximately a
0.88% indirect interest in the Same-Day Surgery Center Partnership by virtue of
the PHO's 4% interest therein. As a result of the redemption of the preferred
stock in the PHO, as of January 31, 1997 and thereafter, the Company owns a
fifty percent (50%) interest in the PHO, and thus a 2% indirect interest in the
Same-Day Surgery Center Partnership by virtue of the PHO's 4% interest therein.
Also, as indicated above, the Company owns five limited partnership shares in
the Same-Day Surgery Center Partnership, amounting to a direct 6% ownership
interest.

Business

The Same-Day Surgery Center Facility is an outpatient surgery center.
The services offered include gastroenterology and outpatient surgery including
general surgery, ophthalmology, otolaryngology, orthopedics, gynecology
(excluding abortions and sterilizations), urology, and plastic surgery. The
services of the Same-Day Surgery Center are available to patients of local
physicians on a referral basis. Revenues are derived from billing third party
payors, including insurers, managed care organizations, Medicare, Medicaid,
other governmental health programs, and patients the portion to be paid by each.
The PHO, as the managing general partner, is the only partner with management
authority and is responsible for overall management of the affairs of the
Same-Day Surgery Center Partnership.

The Same-Day Surgery Center Partnership has entered into a management
agreement with St. Joseph's Health Care Center, Inc. ("HCC"). HCC is the 100%
owner of San Damiano, a 48% non- managing general partner of the Same-Day
Surgery Center Partnership. The management agreement

<PAGE> 28

provides for a management fee of 2.5% of gross revenues. Services provided under
the management agreement include management of the day-to-day operations of the
Same-Day Surgery Center Facility by a full-time on-site HCC employee, data
processing systems and support, personnel administration, accounting services,
and various other administrative services. In addition, HCC provides billing and
collection services for 5% of net revenues. The Same-Day Surgery Center
Partnership also has entered into agreements with anesthesiologists and other
professionals to provide medical services.

The Same-Day Surgery Center is in competition with three similar
facilities in Hillsborough County. One such facility is within a short distance
of the Same-Day Surgery Center and offers most of the same services. The other
similar facilities are located more than 10 miles away. The Same-Day Surgery
Center also competes with a nearby outpatient ophthalmic surgery facility. In
addition to existing free-standing centers, the Same-Day Surgery Center faces
competition from hospital-based programs, including both a program at the
Hospital to which the space occupied by the Same-Day Surgery Center Facility is
connected and a program at St. Joseph's Women's Hospital, a hospital located
across the street from the Same-Day Surgery Center Facility.

Facilities and Equipment

The Same-Day Surgery Center Partnership leases, from Franciscan
Properties, Inc., a wholly owned subsidiary of HCC and an affiliate of the
Hospital Corporation, approximately 17,000 net square feet on the first floor of
the St. Joseph's Medical Arts Building on the campus of the Hospital. The
Same-Day Surgery Center Partnership recently exercised its final option to renew
the lease for five years and the lease now expires on February 28, 2003. The
rent paid by the Same-Day Surgery Center Partnership currently amounts to
$622,232 annually plus sales tax, and is subject to periodic escalations based
on increases in the Consumer Price Index.

The facility includes the leasehold and improvements providing six
operating suites, three endoscopy rooms, one treatment room, one stereotactic
breast suite, one pre-operative assessment area, one post anesthesia recovery
room with phases I and II, a stage II pediatric recovery area and support
facilities such as waiting areas, physician reading rooms, offices, medical
records and business office. The Same-Day Surgery Center Facility is an
outpatient facility designed to create a comfortable, noninstitutional
environment that will be efficient and convenient for both patients and
physicians.

Financial Matters

Results of Operations. During 1997, the Same-Day Surgery Center
performed 11,498 procedures and generated approximately $9.1 million in net
patient service revenues and a net income of approximately $2.2 million. The
Same-Day Surgery Center Facility experienced a growth in volume of 6.5% in 1997.

Liquidity. At December 31, 1997, the Same-Day Surgery Center
Partnership held approximately $1,354,000 in cash, which accounted for 32% of
total assets. In 1997, the Same-Day Surgery Center Partnership generated
approximately $214,000 of cash per month after paying expenses and debt service.
There can be no assurance that such level of cash flow will continue.

<PAGE> 29

Beginning with the period commencing on July 1, 1991, and for each
fiscal year of the Same-Day Surgery Center Partnership thereafter, an assessment
equal to 1.5% of the partnership's net revenues is being collected to fund
indigent care in Florida.

The Company is not aware of any other reason that the level of cash
flow for the Partnership should change in the immediate future, except to the
extent that any distributions are made, or if additional Florida or federal
legislation is passed which could affect reimbursement rates or impose
additional compliance expenses or there should occur managed care contractual
changes that impact reimbursement. See the discussion under the heading "SPECIAL
CONSIDERATIONS" in Item 6 of this Report, which discussion is hereby
incorporated by reference into the discussion under this Item 1. During 1997,
the Same-Day Surgery Center Partnership declared approximately $2.0 million in
distributions to limited and general partners. This included $120,040 declared
payable to the Company in respect of its five limited partner units, as well as
a distribution of $80,026 declared payable to the PHO in its capacity as
managing general partner. In April 1998, the Same-Day Surgery Center Partnership
will distribute approximately $413,800 to partners of record on March 31, 1998.
Of this amount, $24,705 will be distributed to the Company in respect of its
five limited partner units, and $16,470 will be distributed to the PHO in its
capacity as managing general partner.

Capital Resources. At December 31, 1997, the Same-Day Surgery Center
Partnership had approximately $2.7 million in partners' equity. This represented
capital contributions from the general partners, 40 limited partner shares and
accumulated earnings.

The Same-Day Surgery Center Partnership has long-term debt consisting
of a line of credit with HCC, payable in monthly installments with interest at
prime rate, and a capital lease with an unaffiliated vendor for equipment,
payable in thirty-six (36) monthly installments of principal plus accrued
interest at the annual rate of 8.25%. At December 31, 1997, the aggregate
balance of the HCC line of credit and the capital lease was approximately
$423,500.

In 1997, the Same-Day Surgery Center Partnership completed capital
additions and replacements of approximately $135,000 in replacements and
upgrades, approximately $12,750 of which amount relates to leasehold
improvements.

The Same-Day Surgery Center Partnership plans capital expenditures in
1998 of approximately $381,000 in equipment and instrumentation replacements and
upgrades, which are expected to be funded through additional borrowings.

Impact on SJPA

The Company is affected indirectly by the Same-Day Surgery Center
Partnership through its investment in the PHO, which is the 4% managing general
partner of the Same-Day Surgery Center Partnership. The PHO accounts for its
investment under the equity method, because of the PHO's ability to exercise
significant influence over the Same-Day Surgery Center Partnership.

SJPA accounts for its 50% common stock investment in the PHO on the
equity method. In January 1997, because of the existence of the PHO's cumulative
preferred stock, SJPA was allocated 22.22% of the earnings or losses of the PHO
and indirectly 0.88% of the net income or loss of the

<PAGE> 30

Same-Day Surgery Center Partnership. As a result of the redemption from
Enterprises of its preferred stock in the PHO, beginning February 1, 1997 and
thereafter, SJPA is allocated 50% in the earnings and losses of the PHO and
indirectly 2% of the net income or loss of the Same-Day Surgery Center
Partnership.

In addition, as indicated above, SJPA owns five limited partner units
in the Same-Day Surgery Center Partnership. Revenue on the units will only be
recorded by SJPA upon declaration of distributions or a gain upon sale of the
units. SJPA actually received $121,920 in cash in partnership distributions in
1997 in respect of the five units it owns. SJPA also expects to receive
additional cash distributions during 1998 in respect of the five units.

HOSPITALS' HOME HEALTH CARE OF HILLSBOROUGH COUNTY, INC.
d/b/a St. Joseph's Home Health Services

Nature of SJPA Interest

Until January 5, 1998, the Company owned 50% (4,000 shares) of the
common stock of Hospitals' Home Health Care of Hillsborough County, Inc., d/b/a
St. Joseph's Home Health Services ("SJHHS"). The other 50% was owned by St.
Joseph's Ancillary Services, Inc. ("SJAS"), a wholly owned subsidiary of HCC.
The difference between the Company's cost of acquisition and its equity in the
net liabilities of SJHHS was approximately $84,000 at the acquisition date and
has been amortized using the straight-line method over 40 years as a reduction
of equity in net earnings of investees. The amount of $66,362, representing the
unamortized portion of the difference, was written off and is included in loss
on impairment of equity investment for the year ended December 31, 1997.

Over the last several years, the Company has been reviewing its
ownership of SJHHS. The Company has noted that referral limitations, reductions
in reimbursements from managed care organizations and government health plans,
and increased costs have negatively impacted on SJHHS' profitability (see
"HOSPITALS' HOME HEALTH CARE OF HILLSBOROUGH COUNTY, INC. d/b/a St. Joseph's
Home Health Services - Financial Matters - Results of Operations below for
further discussion). In addition, because the hospital-stockholders of BayCare
have decided to expand BayCare's focus to integrate and coordinate many of the
operations that previously were conducted separately by each hospital (including
home health services), the competition faced by SJHHS in Hillsborough County
grew more intense as the Hospital began to divert its attention to the home
health care service operated by Morton Plant Mease Health Care (which is the
home health service designated to act on behalf of BayCare). Based upon these
facts, the Company determined that it would be prudent to discuss a sale of the
Company's interest in SJHHS to SJAS. After negotiations, it was agreed that SJAS
would purchase the 4,000 shares of SJHHS' common stock owned by the Company for
$100,000, and the sale was agreed upon and consummated on January 5, 1998.

Business

SJHHS primarily provides medical services in the homes of patients.
These services include nursing services by registered nurses ("RNs") and
licensed practical nurses ("LPNs"), personal care

<PAGE> 31

services, custodial and companion services by home health aides, and other
ancillary services, such as infusion therapy.

Since July 1, 1991, SJHHS has been and continues to be managed under a
management agreement with HCC. The agreement with HCC provides for a management
fee based upon the gross revenues of SJHHS.

SJHHS is in competition with a number of home health agencies, IV
infusion companies, oxygen therapy companies, and temporary staffing agencies
throughout Hillsborough County. Due to the large number of companies competing
in the market, the Company believes that no one company has a dominant position
in the market.

Management

The members of the Board of Directors of SJHHS are elected by the vote
of its stockholders, the Company and SJAS. Until January 5, 1998, the members of
the Board of Directors of SJHHS were:

<TABLE>
<CAPTION>
Company's Representatives1 SJAS's Representatives2
-------------------------- -----------------------

<S> <C>
Anthony Brannan, M.D. Isaac Mallah
Norman Castellano, M.D. Tommy Inzina
Allen Miller, M.D. Denton W. Crockett, Jr.
</TABLE>

1 See the discussion under Item 9 of this Report for information regarding
the Company's representatives, which discussion is hereby incorporated by
reference into the discussion under this Item 1.

2 See the discussion above relating to management of the PHO for information
regarding Isaac Mallah and Tommy Inzina.

Denton W. Crockett, Jr., age 47, has been Regional Director - Home Care
Division for BayCare since 1997, and has been Vice President and Director of
Home Health Outreach for Morton Plant Mease Health Care from 1983 to the
present, and currently is President of Ventures DME, Inc., d/b/a Access Medical,
President of Global Health Care, Inc., President of Morton Plant Life Services,
Inc., and Secretary/Treasurer of Morton Plant Mease Health Ventures, Inc. He was
President and Chief Executive Officer of Independent Home Health Services, Inc.
from 1975 to 1983.

Financial Matters

Results of Operations. For the year ended December 31, 1997, SJHHS
generated a pre-tax income of $166,000 on net revenues of $3.0 million. This
significant decrease from 1996 (the pre-tax income for 1996 was $361,000) was
the result of an increase in the volume of Medicaid and certain HMO patients
(referred to SJHHS for infusion therapy and pediatric home care visits by
physicians who were not stockholders in the Company) for whom reimbursements are
lower than for patients covered by commercial insurance (although the patients
require the same level of care, and

<PAGE> 32

thus the same costs). In addition, the cost of providing infusion therapy
services increased during the year.

Health care reform legislation has been enacted by the Florida
Legislature over the past several years and a statute prohibiting physician
referrals for certain "designated health services" (including, among others,
clinical laboratory and physical therapy services) became effective on October
1, 1994. Similar federal legislation became effective on January 1, 1995 which
prohibits a physician from referring a Medicare or Medicaid patient for home
health services, physical therapy services, occupational therapy services,
parenteral and enteral nutrients, equipment and supplies to any entity in which
the physician directly or indirectly owns a financial interest. See the
discussion under the heading "SPECIAL CONSIDERATIONS" in Item 6 of this Report,
which discussion is hereby incorporated by reference into the discussion under
this Item 1. As a result of this Florida and federal legislation, SJHHS was no
longer able to receive referrals from physician-stockholders of the Company, and
elimination of those services resulted in a significant decrease in net income
on an ongoing basis, as compared to operations prior to 1995.

In addition, in the past, SJHHS was able to minimize its general and
administrative expenses by sharing office space and personnel, and the costs
associated therewith, with St. Joseph's Hospital Home Health Care, a home health
agency that was operated as a division of the Hospital Corporation primarily for
Medicare and Medicaid patients ("SJHHH"). Based upon its interpretation of
various Medicare and Medicaid laws and regulations, the Hospital Corporation
determined that it could no longer share office space and personnel with SJHHS.
The Company was faced with the prospect of assuming the full costs of renting an
office and paying the full costs of its personnel, which additional costs would
have significantly affected the profitability of SJHHS.

All of the factors described above were considered by the Company in
connection with its determination that a sale of its interest in SJHHS was
prudent.

Liquidity. The Board of Directors of SJHHS approved a dividend
distribution in December 1997 of $700,000, with the Company receiving its share
of $350,000 on December 23, 1997. At December 31, 1997, SJHHS held approximately
$250,000 in cash. The current ratio of 1.94 indicated the strong liquidity
position of SJHHS at December 31, 1997.

Capital Resources. At December 31, 1997, SJHHS had approximately
$468,000 in stockholders' equity. This represented $80,000 in stock and $388,000
in accumulated earnings. Notwithstanding its current financial position, the
Company believes that, given the market factors described above, it received an
appropriate market value for its stock in SJAS (taking into account the $350,000
dividend paid in December and the $100,000 consideration paid by SJAS for the
stock).

Impact on SJPA

SJPA has recognized its investment in SJHHS on the equity basis. Thus
it recognized 50% of the net income of SJHHS. For the year ended December 31,
1997, SJPA recognized approximately $45,300 in earnings from its interest in
SJHHS. In addition, the equity investment in SJHHS was written down $200,410 to
properly reflect the fair value at December 31, 1997. Given the sale of all of
its stock, future operations of SJHHS will have no impact on the Company.

<PAGE> 33

ITEM 2. PROPERTIES.

The Company does not own any tangible property, either real or
personal. The Company's principal assets are its investments in other entities,
and the Company does not have any present plans to acquire any significant
properties other than interests in other entities. Although the entities in
which the Company owns interests do own significant properties, and although the
Company does exercise some degree of indirect control over the management of
those entities and their properties, as discussed elsewhere in this Report, the
Company does not directly own or control any such properties.

ITEM 3. LEGAL PROCEEDINGS.

Declaratory Statement Action With Respect to SJHHS

The language of the Patient Self-Referral Act of 1992 is ambiguous in
many respects. One such ambiguity can be found in the definition of an
"investor," which relates to whether a stockholder in SJPA is deemed indirectly
to be an "investor" in the Same-Day Surgery Center Partnership or SJHHS. A
provision of the Patient Self-Referral Act of 1992 allows a person or an entity
that could be affected by the prohibitions included in the Patient Self-Referral
Act of 1992 to request that the Florida Agency for Health Care Administration
("AHCA"), or the applicable professional board under the Florida Department of
Business and Professional Regulation, issue a declaratory statement defining how
the applicable state agency interprets an ambiguous provision of the Patient
Self-Referral Act of 1992. Using this procedure, a Petition for Declaratory
Statement was filed by Charles E. Cernuda, M.D. and SJPA (the "Declaratory
Statement Action"), seeking an interpretation from the Board of Medicine of the
Department of Business and Professional Regulation (the "Board") on whether a
stockholder in SJPA is deemed to indirectly be an "investor" in SJHHS, thereby
prohibiting the stockholder in SJPA from referring a patient to SJHHS for
physical therapy services, occupational and speech therapy services or clinical
laboratory services that are rendered as an incident to other home health
services provided by SJHHS.

In a Final Order issued on March 16, 1995, the Board of Medicine ruled
that the definition of "investor" should be broadly interpreted and concluded
that each stockholder's investment interest in SJPA results in such stockholder
also being an "investor" in SJHHS (by virtue of SJPA's ownership of 50% of the
outstanding stock of SJHHS). Accordingly, the Board concluded that the
stockholders of SJPA are subject to the absolute prohibition for referrals to
SJHHS for the "designated health services" that are specified in the Patient
Self-Referral Act of 1992. For the impact of this ruling, see the discussion
under the heading "HOSPITALS' HOME HEALTH CARE OF HILLSBOROUGH COUNTY, INC.
d/b/a St. Joseph's Home Health Services - Nature of SJPA Interest" in Item 1 of
this Report, which provisions are hereby incorporated by reference into the
discussion under this Item 3. For further discussion regarding the Patient
Self-Referral Act of 1992, see the discussion under the heading "SPECIAL
CONSIDERATIONS" in Item 6 of this Report, which provisions are hereby
incorporated by reference into the discussion under this Item 3.

To the knowledge of the Company's management, there are no other
material pending legal proceedings, other than ordinary routine litigation
incidental to the business of the Company, or its

<PAGE> 34

Partially Owned Operations, to which the Company or any of its Partially Owned
Operations is a party or of which any of their property is the subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

GENERAL

No Market for the Company's Stock

There are substantial limitations on the ownership and transfer of the
Company's Common Stock. Accordingly, there has never been nor will there ever be
(unless there are substantial revisions to the Company's Articles of
Incorporation and Bylaws) any public or other market for the Company's Common
Stock.

Due to restrictions in the Bylaws, there is no market in the Common
Stock, except for repurchase by the Company at a price equivalent to current
book value. All shares of the Company's Common Stock that are issued and
outstanding were purchased directly from the Company. Shares sold to date
include the nine shares sold to the Company's nine initial stockholders shortly
after the Company's organization, shares sold in the Company's initial public
offering in the third quarter of 1988, an additional 11 shares issued in several
transactions not involving a public offering in the third quarter of 1990, all
at $1,250 per share, an additional 19 shares issued in several transactions not
involving a public offering in the third quarter of 1991 at $1,500 per share, an
additional 62 shares issued in several transactions not involving a public
offering in the second quarter of 1992 at $1,750 per share, an additional 62
shares issued in several transactions not involving a public offering in the
second quarter of 1993 at $1,925 per share, an additional 46 shares issued in
several transactions not involving a public offering in the second quarter of
1994 at $2,570 per share, an additional 43 shares issued in several transactions
not involving a public offering in the second quarter of 1995 at $3,000 per
share, an additional 22 shares issued in several transactions not involving a
public offering in the second quarter of 1996 at $3,200, and an additional 10
shares issued in several transactions not involving a public offering in the
second quarter of 1997 at $3,450.

Shares have been repurchased by the Company during the second half of
1990 and during 1991, 1992, 1993, 1994, 1995, 1996, and 1997, and additional
share repurchases are anticipated during 1998. The most recent repurchases were
for $3,448 per share, or approximately $2,198 per share more than the original
purchase price of such shares.

<PAGE> 35

Holders

As of March 31, 1998, there were 430 Common Stockholders of record,
each owning exactly one share.

Dividends

In 1997, the Company did not declare any dividends on its Common Stock.
For the foreseeable future, the Board of Directors generally intends to continue
to retain earnings for use in the Company's business. Any future determination
as to declaration and payment of dividends will be made at the discretion of the
Board of Directors and will depend upon, among other things, the Company's
future earnings, capital requirements and financial condition, as well as all
other relevant factors.

DESCRIPTION OF SECURITIES

General

The Company has an authorized capital of 7,500 common shares of one
class, $1.00 par value per share. Upon any dissolution or liquidation of the
Company, the holders of Common Stock will share pro rata in all assets remaining
after the payment of expenses and debts. The holders thereof have no preemptive
or conversion rights. Holders of Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of the Company's stockholders.
Such holders are entitled to receive such dividends as may be declared by the
Board of Directors out of assets legally available for the payment of dividends.

Eligibility to Participate in Other Ventures

An important facet of ownership of stock in the Company is that only
stockholders in the Company are permitted to participate in SJP's preferred
provider network, to participate in SJHN's at-risk managed care network, or to
invest in the Same Day Surgery Center Partnership.

Non-Cumulative Voting

The holders of Common Stock do not have cumulative voting rights, which
means that the holders of more than 50% of such outstanding shares participating
in any election of directors can elect all of the directors to be elected if
they so choose, and in such event the holders of the remaining shares will not
be able to elect any directors.

Reports to Stockholders

The Company furnishes its stockholders upon request with annual reports
containing financial statements, as soon as practicable after the end of each
fiscal year.

<PAGE> 36

Restrictions on Transferability

Shares of Common Stock of the Company are not transferable without the
prior written consent of the Company (which consent may be withheld in the sole
discretion of the Board of Directors), and such Shares are subject to redemption
by the Company under certain circumstances.

Physician Qualifications

General. As provided in the Bylaws of the Company, only
individual physicians who are members in good standing of the Active or Senior
Active Medical Staff of the Hospital are qualified to be stockholders. A
stockholder at all times must satisfy the foregoing requirement unless waived by
a vote of two-thirds of the members of the Board of Directors. A stockholder's
failure at any time to satisfy such requirement for any reason whatsoever,
including death, retirement or disability, will cause a termination of such
stockholder's interest and the share of Common Stock held by such stockholder
will be redeemed by the Company. In addition, in 1995, the Board of Directors
voted to restrict the offering of shares to only those Active and Senior Active
members of the Medical Staff of the Hospital who are primary care physicians
(i.e. family or general practitioners, general internists and general
pediatricians) or specialists who are members of a group in which at least one
existing SJPA stockholder also is a part. If additional shares of stock of the
Company are sold in 1998, it is possible that similar restrictions on potential
investors could be imposed again by the Board of Directors.

Notwithstanding a physician's satisfaction at any time of such
requirement, if a determination is made by two-thirds (2/3) of the members of
the Board of Directors that continued qualification of the physician as a
stockholder is not in the best interests of the Company, then the physician will
not be permitted to acquire or retain any interest in the Company, and there
shall then be a mandatory redemption of such stockholder's Common Stock in the
Company.

Special Consideration for Primary Care Physicians. Historically,
physicians have been given the opportunity to become stockholders of the Company
during specified offering periods by paying the then applicable purchase price
in cash. More recently, a concern was expressed to the Company that many younger
primary care physicians (i.e., family practitioners, general practitioners,
general internists and general pediatricians) have been deterred from purchasing
stock because the purchase price is required to be paid all at once. The Company
has recognized the importance of having a substantial number of primary care
physicians available in the pool of physicians who may participate in the
preferred provider network offered by SJP, in the network offered by SJHN or for
other managed care ventures in which the Company may become involved in the
future. As an inducement for primary care physicians, the Company has decided
that, any time an offering of Common Stock is to proceed, primary care
physicians may be given the option by the Company's Board of Directors, of
either paying the entire purchase price for a share of stock at the time of
purchase or making three annual installments (with interest) of the purchase
price. This special consideration may be given only to primary care physicians,
as classified by the Company; all other physicians will be required to pay the
purchase price in cash all at once before shares of stock may be issued to such
other physicians. In 1997, the Board of Directors of the Company decided that
interest should be charged on the deferred installments (prior to 1997, the
installments were due without interest). The interest rate is determined on the
date of the promissory note evidencing the

<PAGE> 37

installment obligation, based upon the "applicable federal rate" (i.e., the rate
necessary to avoid imputed interest on a "below market" loan under the Internal
Revenue Code of 1986 and the Treasury Regulations promulgated thereunder), and
it is fixed for the period that the installment obligation remains outstanding.

Procedure for Redemption and Termination of Interest

The redemption price of each share of Common Stock redeemed pursuant to
mandatory redemption will be the adjusted book value per share as of the end of
the fiscal quarter immediately preceding the date on which the Company receives
notice of the mandatory redemption event.

If any stockholder, for any reason other than a mandatory redemption
event, desires to terminate the stockholder's interest in the Company and offers
to transfer such stockholder's share to the Company, then the Company will be
obligated to accept the transfer to the Company of such stockholder's share. The
price and the terms of payment, if any, for each such share accepted by the
Company will be determined by the Board of Directors in its sole and absolute
discretion, within thirty (30) days after receipt by the Company of the
certificate representing the share transferred to the Company. No stockholder
will have the right to require the Company to pay anything to the stockholder
upon termination of the stockholder's interest for any reason other than a
mandatory redemption event. Accordingly, the stockholder may lose the entire
purchase price paid for the share.

<PAGE> 38

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following table sets forth, for the periods indicated, selected
financial data with respect to the Company:

YEAR ENDED DECEMBER 31,

1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Equity in net earnings of
investees $ 2,763 $ 146,911 $ 16,402 $ 228,891 $181,053

Income (loss) before
cumulative effect of a
change in accounting
principle (144,780) 133,111 63,068 149,135 192,379

Cumulative effect of a
change in accounting
principle -0- -0- -0- -0- 8,951

Net income (loss) (144,780) 133,111 63,068 149,135 183,428

Income per common share(1):

Income (loss) before
cumulative effect (333) 307 154 402 599

Cumulative effect -0- -0- -0- -0- 28

Net income (loss) (333) 307 154 402 571

Total assets 1,408,868 1,584,002 1,406,982 1,216,228 966,452

Long-term obligations -0- -0- -0- -0- -0-

Cash dividends declared
per common share -0- -0- -0- -0- 100
</TABLE>

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

(1) The adoption of Financial Accounting Standards Board ("FASB") Statement
128, Earnings per Share, had no effect on the computation of income per
common share.

Because there exist material uncertainties as to matters that could
affect the Company, the data reflected above may not be indicative of the
Company's future financial condition or results of operations. See the
discussion under the heading "SPECIAL CONSIDERATIONS" in Item 6 of this Report,
which provisions are hereby incorporated by reference into the discussion under
this Item 6.

<PAGE> 39

1997 vs. 1996

In 1997, revenues decreased as a result of the decrease in the
profitability of the PHO and SJHHS. The decrease in the profitability of the PHO
is a result of (1) an increase in expenses relating to compensation and benefit
costs incurred with respect to recently hired staff, and (2) a decrease in
member and credentialing fees associated with SJHN (see the discussion regarding
the membership fees at "ST. JOSEPH'S PHYSICIANS HEALTHCENTER ORGANIZATION, INC.
- - Financial Matters -- Results of Operations," in Item 1 of this Report, which
provisions are hereby incorporated by reference). The decrease in the
profitability of SJHHS is the result of an increase in the volume of Medicaid
and certain HMO patients (referred to SJHHS for infusion therapy and pediatric
home care visits by physicians who were not stockholders in the Company) for
whom reimbursements are lower than for patients covered by commercial insurance
(although the patients require the same level of care, and thus the same costs).
In addition, the cost of providing infusion therapy services increased during
1997. It is expected that these items will have similar impacts in 1998 and
future years.

Expenses increased in 1997 because of increases in general and
administrative expenses relating to (1) consulting fees incurred for an analysis
of the issues relating to the feasibility of the sale of SJHHS' common stock
and the negotiation of such sale with SJAS, and (2) bookkeeping fees incurred
which were previously provided without charge by HCC. These increases were
offset by a decrease in legal fees and reduced cost of directors and officers
liability insurance. It is anticipated that general and administrative expenses
will continue to be incurred in 1998 at levels consistent with 1997, and it also
is anticipated that legal fees in 1998 will increase as the Company is now
engaged, with the assistance of its counsel, in a review of strategic planning
options.

During 1997, the Company adopted FASB Statement 128, Earning per Share.
The adoption of this Statement had no effect on the computation of income per
common share of the Company.

On January 5, 1998, the Company sold its 4,000 shares of the common
stock of SJHHS to SJAS, which owned the other outstanding 50%, for $100,000.
Although the Company believes that the sales price reflected the fair market
value for the stock of SJHHS, the investment was sold for a price that was lower
than the equity investment in SJHHS at December 31, 1997. As a result, the
equity investment in SJHHS was written down $200,410 to properly reflect the
fair value at December 31, 1997. The sale of the equity investment in SJHHS will
also have the impact of reducing income of SJPA in 1998 and future years. The
Company recognizes that its current revenues likely will not be sufficient to
fund its expenses as they currently exist. A review of expenses and strategic
planning for additional revenue sources currently is underway.

1996 vs. 1995

In 1996, revenues increased as a result of the increase in the
profitability of the PHO and SJHHS. The increase in the profitability of the PHO
is a result of (1) an decrease in expenditures for the evaluation and
implementation of new ventures and (2) the receipt of significant one-time
membership fees paid to SJHN by the physicians and the Hospital which were
credentialed and became SJHN Providers. It is anticipated that SJHN will receive
additional membership fees in 1997 as well, although not as much as in 1996.
After 1997, it is anticipated that SJHN will not receive any significant
membership fees, as its panel is expected to have stabilized (see the discussion
regarding the membership fees at "ST. JOSEPH'S PHYSICIANS HEALTHCENTER
ORGANIZATION, INC. - Financial Matters -- Results of Operations," in Item 1 of
this Report, which provisions are hereby

<PAGE> 40

incorporated by reference). The increase in the profitability of SJHHS is the
result of a significant increase in home care revenue and intravenous therapy
revenue in 1996 as compared to 1995.

Expenses increased in 1996 because of the payment by the Company,
without reimbursement, of the Executive Director's salary (prior to 1996, the
PHO reimbursed the Company for the amount of such salary). It is anticipated
that general and administrative expenses will increase in 1997, because of
additional expenditures relating to bookkeeping and administrative expenses that
previously were provided without charge by HCC.

LIQUIDITY AND CAPITAL RESOURCES

Shortly after its organization, the Company's nine founding
stockholders each purchased one share of Common Stock in the Company for $1,250
per share. An additional 202 shares of Common Stock were sold for the same
amount in the Company's initial public offering, conducted in the period from
August 12, 1988 through December 31, 1988, bringing the Company's total initial
capitalization to $263,750. The following table sets forth information
concerning additional shares that have since been issued:

<TABLE>
<CAPTION>
=====================================================================================================================
Year Shares Issued Per Share Price Total Consideration Received
=====================================================================================================================
<S> <C> <C> <C>
1990 11 $1,250 $13,750
- ---------------------------------------------------------------------------------------------------------------------
1991 19 $1,500 $28,500
- ---------------------------------------------------------------------------------------------------------------------
1992 62 $1,750 $108,500
- ---------------------------------------------------------------------------------------------------------------------
1993 62 $1,925 $119,350
- ---------------------------------------------------------------------------------------------------------------------
1994 46 $2,570 $118,220
- ---------------------------------------------------------------------------------------------------------------------
1995 43 $3,000 $119,000 cash plus $10,000
in notes
- ---------------------------------------------------------------------------------------------------------------------
1996 22 $3,200 $63,800 cash plus $6,600
in notes
- ---------------------------------------------------------------------------------------------------------------------
1997 10 $3,450 $34,500
=====================================================================================================================
</TABLE>

The following table sets forth information concerning share repurchases:

<TABLE>
<CAPTION>
=============================================================================================================
Time Period Shares Repurchased Total Amount Paid
=============================================================================================================
<S> <C> <C>
Second half of 1990 6 $ 5,639
- -------------------------------------------------------------------------------------------------------------
Second half of 1991 3 $ 3,512
- -------------------------------------------------------------------------------------------------------------
Second half of 1992 3 $ 5,769
- -------------------------------------------------------------------------------------------------------------
Second half of 1993 4 $ 8,124
- -------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE> 41

<TABLE>
<CAPTION>
=============================================================================================================
Time Period Shares Repurchased Total Amount Paid
=============================================================================================================
<S> <C> <C>
Second half of 1994 5 $13,134
- -------------------------------------------------------------------------------------------------------------
First half of 1995 1 $ 2,627
- -------------------------------------------------------------------------------------------------------------
Second half of 1995 5 $15,241
- -------------------------------------------------------------------------------------------------------------
First half of 1996 1 $ 3,048
- -------------------------------------------------------------------------------------------------------------
Second half of 1996 15 $45,848
- -------------------------------------------------------------------------------------------------------------
Second half of 1997 12 $39,376
=============================================================================================================
</TABLE>

No dividends were declared in 1997, and no dividends are contemplated
in the near future.

No dividends were received from the PHO in 1997 and no dividends are
expected from the PHO in 1998. SJHHS paid $350,000 to the Company ($87.50 per
share on 4,000 shares) in aggregate dividends in 1997. All other operating cash
in 1997 was derived from the distributions with respect to the Company's limited
partner units in the Same-Day Surgery Center Partnership. Operating cash in 1998
is expected to be derived from distributions with respect to the Company's
limited partnership units in the Same-Day Surgery Center Partnership and from
cash on hand at the end of 1997. Such cash is anticipated to meet the Company's
cash needs during 1998. Further, the Company may elect to conduct a private
offering of its Common Stock in 1998 at a price that will be determined based
upon the then per share book value of the Company's stock. See the discussion
under the heading "Physician Qualifications" in Item 5 of this report, which
discussion is hereby incorporated by reference into the discussion under this
Item 6. If additional shares are sold in this fashion, such purchases will
reduce the percentage of the Company owned by each shareholder, and thus also
the percentage of the net income and net assets attributable to each
shareholder.

PARTIALLY OWNED OPERATIONS

The financial condition, results of operations, liquidity and capital
resources of the Company reflect and depend upon the financial condition,
results of operations, liquidity and capital resources of the Partially Owned
Operations. The discussions of such matters under Item 1 of this Report are
hereby incorporated by reference into the discussion under this Item 6.

SPECIAL CONSIDERATIONS

As with any business venture, there are matters which the Company
cannot predict with certainty. Several of these matters are discussed below,
some of which already have materialized, and others, if they were to
materialize, could have a materially adverse effect on the Company.

<PAGE> 42

Government Regulation

Several new laws and regulations affecting the health care business
were adopted, at both the state and federal levels, during the last several
years, including 1996 and 1997. Additional healthcare reform currently is being
considered by the Florida Legislature during its Session that began on March 3,
1998 and currently is scheduled to continue through the first week in May.
Additional health care reform legislation also is being considered in 1998 at
the federal level. All of the legislation and regulation could have a
dramatically adverse impact on the Company, the Partially Owned Operations and
the stockholders of SJPA.

Indigent Care Assessment. Legislation was passed by the Florida
Legislature during its 1991 Session to raise additional State revenues to fund
health care for the indigent. This legislation imposed an assessment (the
"Assessment") equal to 1.5% of the annual "net operating revenues" (gross
revenues less expenses of collection and certain contractual adjustments and
discounts) of certain specified health care entities. The specified health care
entities include: (1) ambulatory surgical centers, (2) clinical laboratories,
(3) free standing radiation therapy centers and (4) free standing outpatient
diagnostic imaging centers.

Beginning July 1, 1993, for an entity's 1993 fiscal year and
thereafter, the annual Assessment is due on a quarterly basis. AHCA is
responsible for administration of the Assessment, and it published final
regulations relating to the Assessment during 1992. An entity subject to the
Assessment which fails to file the required reports, or which files incomplete
reports, will be subject to a fine not to exceed $1,000 per day for each
violation. In addition, a delinquent report, other than a false report, will
subject the entity to a fine not to exceed $50 per day for the first violation,
$100 per day for the second violation and $500 per day for the third or
subsequent violations. Also, if an entity fails to pay the Assessment in a
timely manner, it will be subject to a fine not to exceed $100 per day for the
first violation, $500 per day for the second violation and $1,000 per day for
the third or subsequent violations.

The Same-Day Surgery Center Partnership is subject to the Assessment.
The partnership provided for this accrued expense in its financial statements
for the period ended December 31, 1997. See the discussion under "ST. JOSEPH'S
SAME-DAY SURGERY CENTER, LTD. - Financial Matters" in Item 1 of this Report,
which provisions are hereby incorporated by reference into this Item 6. The
Assessment will adversely impact the cash flow available for distribution to the
investors in the partnership, which, in turn, will impact on the cash flow of
the PHO and the Company.

Fraud and Abuse in Health Care Programs. The Medicare Anti-Kickback
Statute (the "Statute"), which came into law in the 1970's, is violated by
anyone who offers, pays or receives "remuneration" in return for referring (or
inducing a referral) or for purchasing, leasing or ordering any business
reimbursed under the Medicare or Medicaid Program. This law is commonly known as
the "fraud and abuse statute." On July 29, 1991, the Office of Inspector General
("OIG") of the U.S. Department of Health and Human Services ("DHHS") published
its final Medicare and Medicaid fraud and abuse safe harbor regulations, and
additional final regulations were added on November 5, 1992 (collectively, the
"Regulations"). The Regulations, which became effective immediately upon
publication, are designed to identify certain arrangements that fall within
"safe harbors" and are deemed not to be violations of the Statute.

<PAGE> 43

Any entity that provides health care services and is reimbursed for
those services under the Medicare or Medicaid Program is subject to the
provisions of the Statute. SJP currently does not enter into contracts that
cover Medicare patients. SJHN currently contracts with managed care
organizations that are qualified to enroll Medicare patients. Thus, SJHN will
be, and the other Partially Owned Operations are, subject to the provisions of
the Statute.

The original Regulations, published on July 29, 1991 established
guidelines and standards for eleven different arrangements that, if the
guidelines and standards are met, are deemed not to be violations of the Statute
(i.e., are "safe harbors"). The arrangements covered include: (1) investments in
privately held ventures (such as the Partially Owned Operations), (2) rental of
office space, (3) rental of equipment, (4) personal service and management
contracts and (5) group purchasing arrangements.

The additional Regulations, published on November 5, 1992, added two
additional safe harbors that were specifically designed to address the
relationships between healthcare providers, managed care organizations (i.e.,
health maintenance organizations and preferred provider organizations), and
enrollees in managed care organizations. These safe harbors include protections
for: (1) incentives to enrollees (including waiver of coinsurance and deductible
amounts), and (2) negotiated price reductions between healthcare providers and
managed care organizations.

The Company has no intention, and it believes that none of the entities
responsible for operation or management of any of the Partially Owned Operations
intends, to be involved in arrangements that constitute a fraud and abuse
violation. The Company believes that the various rental and management contract
arrangements to which the various Partially Owned Operations are parties and any
group purchasing arrangements in which any of the Partially Owned Operations may
participate, comply with the applicable provisions of the Regulations. However,
as structured, the Partially Owned Operations that are subject to the Statute
(primarily the Same-Day Surgery Center Partnership) will not comply with the
guidelines and standards established for investment interests.

Failure to comply with the Regulations does not mean that an
arrangement automatically violates the Statute. All of the facts and
circumstances of the arrangement must be considered to determine whether a fraud
and abuse violation exists. Violation of the Statute is a criminal felony,
punishable by fines of up to $25,000 and up to five years in prison. In addition
to the potential criminal sanctions, in certain cases the OIG can exclude any
physician or other provider from the Medicare or Medicaid Program for a period
of five years (or longer in some cases). This exclusionary authority is
draconian in effect. Medicare and Medicaid will not pay any amount to an
excluded physician, to the patient or to any provider through which services or
medications are ordered or prescribed by the excluded physician. The exclusion
applies whether or not the physician is "participating" in the Medicare or
Medicaid Program, and the right to appeal the exclusion generally arises only
after the exclusion has been imposed. The exclusion of one physician also could
adversely affect his or her entire group's ability to be paid by Medicare or
Medicaid during the period of exclusion.

Several laws passed by the United States Congress and regulations
issued by the OIG and DHHS since 1992 have added additional sanctions and
clarified the application of the Statute and the Regulations. For example, the
Health Insurance Portability and Accountability Act of 1996

<PAGE> 44

(commonly known as "HIPAA"), which was signed into law on August 21, 1996, among
other things, expanded the scope of the Statute to apply its fraud and abuse
provisions to all federal health care programs, other than the Federal Employees
Health Benefits Program. In addition, it clarified the definition of
"remuneration" (especially as it relates to waivers and partial waivers of
coinsurance and deductible amounts), and it added six statutory "safe harbors,"
including exceptions to the fraud and abuse Statute for certain managed care
arrangements (e.g., an arrangement which places a provider at "substantial
financial risk," such as a capitation agreement).

HIPAA also created five new criminal statutes that apply to a "health
care benefit program," which term is broadly defined to cover governmental and
private health programs (e.g., private insurance or self-insured plans for
employees). These new laws are in addition to the Statute (which, by its terms,
applies only to fraud and abuse in federal health benefit programs), and they
prohibit fraudulent or abusive activities, embezzlement or stealing, making of
false statements, and obstructing, preventing or misleading a criminal
investigation relating to any health care benefit program. In addition, existing
federal criminal laws relating to money laundering, asset forfeiture, and fraud
injunctions were expanded to cover "federal health care offenses." Finally,
HIPAA increases the sanctions that may be imposed for a violation of the law
(including exclusion from continued participation in the Medicare or Medicaid
Programs).

In the Balanced Budget Act of 1997, which became law in the summer of
1997, Congress continued to expand the scope of the Statute by adding several
new civil money penalties for violation of the fraud and abuse Statute. As a
result, the government now has greater flexibility in choosing whether to pursue
a violation in a civil action (which carries a lower burden of proof and does
not require the same level of "intent" to violate the law as would a criminal
prosecution) or a criminal prosecution.

The net effect of these changes is to further augment the arsenal of
criminal and civil statutes available to the federal government to combat actual
or perceived health care fraud and abuse. The Company, the PHO, SJP and SJHN are
continuing to evaluate how these laws and regulations may impact on their
business arrangements and relationships.

In addition, a number of proposals for federal health care reform are
under consideration by the United States Congress. Included in several of the
bills proposed by the President and various members of Congress is an expansion
of the Statute to cover all health care payors, including Medicare/Medicaid,
private insurers, self-insured plans and health maintenance organizations. If
the Statute is expanded in this manner, it is anticipated that the concepts
underlying the Regulations also will be expanded, and the OIG and DHHS (or
another federal regulatory body) will be given authority to enforce the expanded
scope of the Statute and Regulations.

The Company, in conjunction with the various entities responsible for
operating and managing the applicable Partially Owned Operations, is continuing
to review whether the arrangements could be deemed to constitute fraud and abuse
violations under the Statute, both in its current form and with respect to the
proposed expansion, and to review the planning options available to limit or
avoid the risks. The Company cannot predict whether any of the arrangements
would constitute a fraud and abuse violation.

<PAGE> 45

Finally, in connection with the publication of the Regulations, certain
health care entities (including SJHHS) were required to report the names of
physician-investors to the Health Care Financing Administration ("HCFA" - the
department within DHHS responsible for administering Medicare). Because of the
broad definitions included on the reporting form, it was concluded that the
names of all physicians who were stockholders of SJPA at the time that such
information was requested should be included as indirect owners of SJHHS. This
information was intended to be used in analyzing referral patterns and
utilization. The Company cannot predict how the reporting of its stockholders
could impact on any individual stockholder.

The Florida Patient Self-Referral Act of 1992. At the close of its 1992
Session on March 13, 1992, the Florida Legislature passed several bills that
apply to the business of health care. One bill that directly impacted on the
Company, the Partially Owned Operations and the stockholders of SJPA was known
as the "Patient Self-Referral Act of 1992" (the "Patient Self-Referral Act"). It
applied new prohibitions, rules and restrictions on the conduct of business by a
"health care provider" (defined to include an allopathic physician, osteopathic
physician, chiropractor, podiatrist, optometrist and dentist) and any other
"entity" (defined to include an individual, partnership, firm, corporation or
other business entity) that provides any health care services in Florida.

The applicable provisions of the Patient Self-Referral Act:

(1) absolutely prohibit a referral by a health care provider for the
provision of "designated health services" (clinical laboratory
services, diagnostic imaging services, radiation therapy services,
physical therapy services and comprehensive rehabilitation services,
including speech therapy, audiology, occupational therapy and physical
therapy) to an entity in which the health care provider is an investor
or has an investment interest;

(2) prohibit a referral by a health care provider for any other health
care item or service to an entity in which the health care provider is
an investor or owns an investment interest, unless certain safe harbors
are met;

(3) prohibit an entity from making claims for payment or receiving
payment from any individual, third party payor or other entity for a
service that is furnished pursuant to a prohibited referral;

(4) require any entity that furnishes the specified "designated health
services" to be licensed by the Florida Agency For Health and
Administration ("AHCA");

(5) require a health care provider to provide written disclosure before
referring a patient for any health care service to an entity in which
the health care provider has an ownership interest, such written
disclosure to include: (a) the existence of the ownership interest in
the entity, (b) the name and address of the entity, (c) the patient's
right to choose where to have the service rendered (including the
entity in which the health care provider owns an interest), and (d) the
names and addresses of at least two alternative sources of the item or
service;

(6) require any entity that provides health care services to get the
signature of a patient on a written disclosure form before service is
rendered, such written disclosure to include: (a)

<PAGE> 46

the existence or nonexistence of a financial relationship with the
referring health care provider, (b) a schedule of typical fees charged
by the entity or a written estimate of the fees specific to the
patient, (c) the patient's right to choose where to have the service
rendered and (d) the names, addresses and telephone numbers of two
reasonable alternative sources at which the patient can receive the
health care item or service;

(7) prohibit a health care provider from "marking up" the cost of
services purchased by the health care provider from any entity outside
of the provider's practice, other than a $2 handling fee (this
provision was repealed by the Florida "Health Care and Insurance Reform
Act of 1993," discussed below); and

(8) impose a limiting fee schedule (the "fee cap") on entities that
provide the specified "designated health services" (with exceptions for
physicians practicing in a group that meets the definition of a "group
practice" and for licensed hospitals).

The fee cap described in the eighth item above was found to be
unconstitutional by the United States District Court for the Northern District
of Florida, but the United States District Court was overruled by the United
States Eleventh Circuit Court of Appeals. That Federal Case now is over, a
petition for certiorari to the United States Supreme Court having been denied.
An injunction against the imposition of the limiting fee schedule also was
entered by the Circuit Court of the Second Judicial Circuit, Leon County,
Florida, which was upheld on appeal to the Florida First District Court of
Appeals, and the appeal then was taken before the Florida Supreme Court. No
decision had yet been rendered by the Supreme Court when the fee cap was
repealed retroactively to its effective date by several bills passed by the
Florida Legislature during its 1996 Legislative Session.

As originally enacted, the provision described in the first item above,
which absolutely prohibits referrals for the specified "designated health
services," was to apply to referrals made on or after October 1, 1995 by a
health care provider who acquired his or her interest in the entity before May
1, 1992. However, the effective date was moved back to October 1, 1994 by the
Florida "Health Care and Insurance Reform Act of 1993" (discussed below). Thus,
if a provider acquired his or her interest in an entity before May 1, 1992, then
referrals made on or after October 1, 1994 for the specified "designated health
services" are absolutely prohibited; but if a provider acquired his or her
interest in an entity on or after May 1, 1992, then referrals made on or after
the effective date of the bill (April 8, 1992) for the specified "designated
health services" are absolutely prohibited.

The provision described in the second item above, which limits
referrals for other health care items or services to those complying with the
safe harbors, was applicable on and after July 1, 1992.

The provision described in the third item above, which prohibits making
claims for payment or receiving payments for a service rendered pursuant to a
prohibited referral, was effective on July 1, 1992. Licenses were to be
required, under the provision described in the fourth item above, for entities
providing the specified "designated health services" on or after April 8, 1992,
although regulations for administering the licensing requirements first must be
specified by AHCA, and the Company is not aware that AHCA has issued any
proposed or final regulations implementing the licensing procedures. The
disclosure requirements described in the fifth and sixth items above became
effective on April 8, 1992.

<PAGE> 47

One provision of the Patient Self-Referral Act allows a person or an
entity that could be affected by the prohibitions included in the Patient
Self-Referral Act to request that AHCA, or the applicable professional board
under the Florida Department of Business and Professional Regulation, issue a
declaratory statement defining how the applicable state agency interprets an
ambiguous provision of the Patient Self-Referral Act. As a result,
interpretations of the law periodically are made as declaratory statements are
issued (e.g., see the discussion under "LEGAL PROCEEDINGS - Declaratory
Statement Action With Respect to SJHHS" in Item 3 of this Report, which
provisions are hereby incorporated by reference into this Item 6). As a result,
the Company is continuing to review the applicability to the various Partially
Owned Operations of each of the specific provisions of the Patient Self-Referral
Act that remain in effect.

It is clear that the new law must be analyzed in two ways with respect
to each individual stockholder of SJPA. First, if an individual physician owns
any direct investment interest (e.g., a limited partnership interest) in any of
the Partially Owned Operations, then he or she must apply the rules to his or
her specific situation. Second, as described in the Declaratory Statement Action
discussed under Item 3 of the Report (which discussion is incorporated herein by
reference), the provisions of the Patient Self-Referral Act could be applicable
merely because of an individual stockholder's ownership of stock in SJPA
(whether or not he or she owns any direct investment interest in any of the
Partially Owned Operations).

The Company continues to be unable to resolve one issue to its
satisfaction. That is, it is not clear from the language of the Patient
Self-Referral Act whether the absolute prohibition will apply to all referrals
in which a "designated health service" is involved, or whether the referral must
specifically be for a "designated health service." For example, would the
absolute prohibition apply to a referral for an item or service that is not a
"designated health service" if a "designated health service" is provided as an
incident to the provision of the other item or service? The answer to this
question would be important, for example, when a patient is referred for
ambulatory surgery services to the Same-Day Surgery Center Facility, and
clinical laboratory services also are performed as an incident to the provision
of ambulatory surgery services. As of this time, by analogy to recently issued
proposed federal regulations which are similarly designed to prohibit physician
referrals to entities in which the physician owns an interest, it appears that
the Patient Self-Referral Act could be interpreted to "bundle" both the specific
service which constitutes the ancillary "designated health service" and the
primary service to be provided, thus prohibiting the referral for both services.

With respect to referrals to the Same-Day Surgery Center Facility, the
definition of "referral" under the Patient Self-Referral Act specifically
excludes referrals by a health care provider for services provided by a licensed
ambulatory surgical center, such as the Same-Day Surgery Center Facility. Thus,
the Company believes that the Patient Self-Referral Act does not apply to
prohibit or limit referrals to the Same-Day Surgery Center Facility. However, as
described above, it is not clear whether the Same-Day Surgery Center Partnership
would be entitled to charge for clinical laboratory services that are provided
as an incident to the ambulatory surgery services rendered at the Same-Day
Surgery Center Facility.

With respect to SJP and SJHN, the Company does not believe that these
entities provide or will provide health services. Rather, they act to facilitate
the direct provision of health services by PPO Providers or SJHN Providers, as
the case may be, to the individuals contracting for such

<PAGE> 48

services. Accordingly, the Company does not believe that the Patient
Self-Referral Act's provisions relating to limitation on referrals would apply
to SJP or SJHN.

If violations of the Patient Self-Referral Act are found, then the
applicable entity, and the physician who makes the prohibited referral, could be
subject to penalties. The penalties are as follows. Any health care provider who
makes a prohibited referral will be subject to disciplinary action by the
appropriate board of the Florida Department of Business and Professional
Regulation. Any entity or person that presents or causes to be presented a claim
for services that were rendered pursuant to a prohibited referral is subject to
a civil penalty of not more than $15,000 for each such claim. Finally, any
health care provider or entity that enters into a cross-referral arrangement
which is designed to circumvent the provisions of the Patient Self- Referral Act
will be subject to a civil penalty of not more than $100,000 for each such
cross-referral arrangement.

Any health care provider or entity which fails to make the appropriate
disclosures to patients prior to making a referral, or prior to rendering
services, as the case may be, will be subject to criminal prosecution for a
misdemeanor of the first degree, carrying a fine of up to $1,000 or imprisonment
for a period not exceeding one year. In addition, any health care provider who
violates the disclosure requirements will be subject to disciplinary action by
the appropriate board of the Florida Department of Professional Regulation.

The Florida Health Care and Insurance Reform Act of 1993. At the close
of its 1993 Session on April 2, 1993, the Florida Legislature passed sweeping
health care reform legislation that was designed to reduce the spiraling cost of
health care and to ensure the availability of affordable health care for all
Floridians. The Governor signed the "Florida Health Care and Insurance Reform
Act of 1993" (the "Reform Act") into law on April 29, 1993. It still is not
clear that the new law will achieve its lofty goals - which are to be met
through a combination of changes in the way that health care is offered to the
public, tort reform and health insurance reform. Refinements to the law have
been made in each of the 1994, 1995, 1996 and 1997 Legislative Sessions, but
none of the refinements have made substantive changes in the Reform Act's
primary provisions.

The center piece of the Reform Act was the formation during 1993 and
1994 of "community health purchasing alliances" ("CHPAs") which are to contract,
on behalf of small employers (with between one and fifty employees), qualified
individuals, state employees and Medicaid recipients, directly with groups of
health care providers who will group together (either on their own or as PPO or
PPO-type panels through HMOs and health insurers) into "accountable health
partnerships" ("AHPs") to offer health services (and assume the risks for such
care) and negotiate reimbursements with each CHPA on a negotiated bid basis.
This "managed competition" model is coupled with the creation of medical
practice parameters based upon hospital patient outcomes data and nationally
developed practice guidelines (and protection from tort liability for following
the parameters) and requirements for health insurance companies to ensure that
small businesses and individuals can qualify for and afford health insurance.

As noted above, the new law also amended the Patient Self-Referral Act
in certain respects.

<PAGE> 49

Various provisions of the Reform Act became effective at different
times, ranging from the date that the Governor signed the bill (April 29, 1993)
through October 1, 1994. With limited exceptions, the provisions regarding CHPAs
and AHPs became effective on July 1, 1993.

The Company, along with the entities responsible for operation and
management of the Partially Owned Operations, is continuing to analyze the
impact of the Reform Act and the various changes that have been made since its
enactment. There can be no assurance that the Reform Act, as it is implemented
and refined over time, will not have a substantial adverse impact on the amount
of revenues received by each of the Partially Owned Operations for specific
services rendered.

The Florida Legislature currently is holding its 1998 Regular Session,
and pending legislation, among other things, would affect the scope and
applicability of the Reform Act. However, the Company cannot currently predict
whether any pending legislation will ever become law, or, if it does, what the
impact of the legislation could be on the Company and on the various Partially
Owned Operations.

Other Federal Prohibitions on Physician Referrals - The "Stark"
Provisions. In August 1993, President Clinton signed into law the Omnibus Budget
Reconciliation Act of 1993 ("OBRA '93"), which contained a number of provisions
affecting the Medicare and Medicaid programs. The primary focus of the Medicare
provisions was a reduction in payments to providers (e.g., hospitals), under
Medicare Part A, and physicians, durable medical equipment suppliers and other
providers of services under Medicare Part B. Taken together, these provisions
have, and will continue to, reduce the level of reimbursement paid to the
Partially Owned Operations with respect to services rendered to Medicare
patients, thus reducing the cash flow and profitability of the Partially Owned
Operations. In addition, OBRA '93 specified that there would be no inflation
updates in Medicare payments for ambulatory surgical center services for fiscal
years 1994 and 1995.

OBRA '93 also extended the scope of the federal prohibition on
physicians referring Medicare patients to entities in which they own a financial
interest or have a compensation arrangement. Prior to OBRA '93, federal law
prohibited referrals to entities in which a physician holds a financial interest
or has a compensation arrangement only to referrals for clinical laboratory
services (the so-called "Stark I Referral Prohibition"). OBRA '93 extended the
prohibition to cover referrals for other "designated health services," including
(1) clinical laboratory services, (2) physical therapy services, (3)
occupational therapy services, (4) radiology services, including magnetic
resonance imaging, computerized axial tomography scans, and ultrasound services,
(5) radiation therapy services, (6) the furnishing of durable medical equipment,
(7) parenteral and enteral nutrients, equipment and supplies, (8) prosthetics,
orthotics and prosthetic devises, (9) home health services, (10) outpatient
prescription drugs and (11) inpatient and outpatient hospital services (the
so-called "Stark II Referral Prohibitions"). Generally, OBRA '93 prohibits a
physician with an ownership or investment interest in or a compensation
arrangement with an entity from making referrals to that entity for the
furnishing of any of the "designated health services".

On August 14, 1995, final regulations were issued that applied to the
Stark I Referral Prohibition relating to clinical laboratory services. On
January 9, 1998, regulations were proposed to apply the Stark II Referral
Prohibitions to the eleven enumerated "designated health services." These
regulations clarify a number of issues that were left open in the first
regulations, and they add

<PAGE> 50

some additional restrictions with respect to the scope of the Stark II Referral
Prohibitions. The Preamble to the proposed regulations asked for public comments
to be made by March 10, 1998, and it is possible that final regulations could be
issued at any time thereafter.

The Company is continuing to review the applicability of the physician
referral prohibitions contained in the Stark I and Stark II Referral
Prohibitions to the various Partially Owned Operations. It is clear that the
prohibitions will apply to most, if not all, of the services provided by SJHHS.
It is not clear at this time whether the prohibitions will apply to the services
rendered by the Same-Day Surgery Center Partnership. With respect to SJHHS, it
no longer provides services to Medicare patients (see the discussions under
"HOSPITALS' HOME HEALTH CARE OF HILLSBOROUGH COUNTY, INC. - Financial Matters"
in Item 1 of this Report, which provisions are incorporated by reference into
this Item 6).

The reductions in payments were effective at various times, ranging
from the date that OBRA '93 became effective through January 1, 1994. The
extension of the prohibition against physician referrals were effective for
referrals made after December 31, 1994 (other than for clinical laboratory
services, which prohibition became effective on January 1, 1992).

Uncertainty of Financial Results and Capital Needs

If the Company and/or the Partially Owned Operations do not meet their
goals with respect to revenues, or if their expenses of operation are higher
than anticipated, substantial additional funds may be required. Such additional
funds may be sought from a number of sources, including issuance of additional
shares of Common Stock, sale of investments, and loans from banks or other
financial institutions.

Uninsured Professional Liability Claims

The health care industry is extremely vulnerable to claims for
professional liability. The physicians providing services at the facilities
operated by the Partially Owned Operations are required to maintain malpractice
insurance coverage in order to protect against liability for medical malpractice
which may occur at such facilities. Such facilities also maintain their own
professional liability insurance. Although the Company believes that required
professional liability insurance policy limits and coverage of staff are
adequate, there can be no assurance that any of the Partially Owned Operations
will not be subject to a professional liability claim. Any such liability could
have a material adverse effect on the business and financial condition of the
Company.

<PAGE> 51

ITEM 7. FINANCIAL STATEMENTS.

Financial statements meeting all applicable requirements are included
in this report immediately following Item 13 hereof.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

<PAGE> 52

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

QUALIFICATION AND ELECTION

The Bylaws of the Company provide that the Board of Directors is to be
composed of nine of its stockholders, consisting of four stockholders
representing surgery specialties, four stockholders representing non-surgery
specialties and one stockholder who is a Hospital based physician. The directors
are to serve staggered terms of four years each. The directors representing
non-surgery specialties are to be selected from the Hospital's Departments of
Internal Medicine, Family Practice, Pediatrics and Psychiatry; provided,
however, that at least one primary care physician at all times is to serve on
the Board of Directors. The directors representing surgery specialties are to be
selected from the Departments of General Surgery, Cardiac Surgery,
Ophthalmology, Otolaryngology, Orthopedics and Urology; provided, however, that
at least one general surgeon at all times is to serve on the Board of Directors.

Directors are nominated by a Nominating Committee, whose members
consist of the members of the Executive Committee. The Executive Committee is
comprised of the Chairman of the Board, the President and one additional
director. Nominations in addition to those made by the Nominating Committee may
be made by petition signed by at least 25% of the Company's stockholders. The
officers of the Company, except for the Chairman of the Board, are selected
every two years, to serve two-year terms, at the Annual Meeting of the Board of
Directors. The Chairman of the Board is not elected; instead, the President
succeeds to the office of Chairman of the Board.

The Bylaws of the Company require that all officers must be directors,
and that the officers at all times must be equally divided between
representatives of surgery specialties and representatives of non-surgery
specialties, except that one office may be filled by a Hospital based physician.

The Bylaws of the Company also require that all directors be
shareholders of the Company. In addition, each director representing surgery
specialties and each director representing non-surgery specialties must be a
"qualified physician" within the given specialty in which he or she practices
for the two-year period ending on the date that he or she is nominated as a
director. Generally, the term "qualified physician" means a physician who is a
member in good standing of the Active or Senior Active medical staff of the
Hospital.

DIRECTORS AND OFFICERS

All of the following individuals are members of the Board of Directors
at the present time and have served continuously since the dates of their
election shown below. Information regarding the present officers and directors
of the Company and specialties represented is as follows:

<PAGE> 53

<TABLE>
<CAPTION>
Has Served
Principal As a Expiration Office
Occupation Director of Term of Currently
Name Age or Employment(1) Since Office Held
---- --- ---------------- ----- ------ ----

<S> <C> <C> <C> <C> <C>
Anthony Brannan, M.D.** 44 Physician 1994 1998 President
Norman Castellano, M.D.* 51 Physician 1994 1998 Chairman
N. Bruce Edgerton, M.D.* 51 Physician 1995 1999 Secretary
F. Lane France, M.D.* 59 Physician 1997 2001
Bill Luria, M.D.** 51 Physician 1996 2000 Treasurer
Benedict S. Maniscalco, M.D.* 56 Physician 1996 2000
Allen Miller, M.D.** 48 Physician 1997 2001 Vice President
John Rasmussen, M.D.*** 42 Physician 1997 1998
Michael Wasylik, M.D.** 55 Physician 1995 1999
</TABLE>

- ----------

(1) Each of the directors and officers has been engaged in the practice of
medicine in the Tampa, Florida area for the last five years.
* non-surgery specialties
** surgery specialties
*** Hospital based

The following individuals have been nominated for election to four year
term positions or one year term positions, as indicated, on the Company's Board
of Directors, such election to be held at the Company's upcoming annual meeting
of stockholders in April 1998:

<TABLE>
<CAPTION>
Name Age Occupation Term of Office
---- --- ---------- --------------

<S> <C> <C> <C>
Anthony Brannan, M.D.** 44 Physician 4 years
Norman Castellano, M.D.* 51 Physician 4 years
Michael Westbury, M.D.*** 45 Physician 1 year
</TABLE>

- ----------

* non-surgery specialties
** surgery specialties
*** Hospital based

None of the directors (present or nominated) or officers of the Company
are related by blood, marriage or adoption.

Anthony Brannan, M.D., age 44, received his M.D. degree from Vanderbilt
University School of Medicine. Since 1986, Dr. Brannan has been engaged in the
private practice of medicine in Tampa, Florida, specializing in general surgery.
Dr. Brannan also is a Director of the PHO, a Director of SJHHS, a limited
partner in the Same-Day Surgery Center Partnership and a holder of a provider
contract with SJP.

<PAGE> 54

Norman Castellano, M.D., age 51, received his M.D. degree from the
University of Guadalajara. Since 1978, Dr. Castellano has been engaged in the
private practice of medicine in Tampa, Florida, specializing in internal
medicine. Dr. Castellano also is a Director of the PHO, a Director SJHHS and a
holder of a provider contract with SJP.

N. Bruce Edgerton, M.D., age 51, received his M.D. degree from the
University of Florida. Since 1978, Dr. Edgerton has engaged in the private
practice of medicine in Tampa, Florida, specializing in gastroenterology. Dr.
Edgerton also is a Director of the PHO, a Director of SJHHS and a holder of a
provider contract with SJP.

Lane France, M.D., age 59, received his M.D. degree from Temple
University. Since 1971, Dr. France has engaged in the private practice of
medicine in Tampa, Florida, specializing in pediatrics. Dr. France also is a
Director of SJP and a holder of a provider contract with SJP.

Bill Luria, M.D., age 51, received his M.D. degree from the Far Eastern
University in the Philippines. Since 1985, Dr. Luria has engaged in the private
practice of medicine in Tampa, Florida, specializing in plastic surgery. Dr.
Luria also is a Director of the PHO and a holder of a provider contract with
SJP.

Benedict S. Maniscalco, M.D., age 56, received his M.D. degree from
Duke University. Since 1976, Dr. Maniscalco has engaged in the private practice
of medicine in Tampa, Florida, specializing in cardiology. Dr. Maniscalco also
is a Director of the PHO and a holder of a provider contract with SJP.

Allen Miller,. M.D., age 48, received his M.D. degree from McGill
University. Since 1979, Dr. Miller has been engaged in the private practice of
medicine in Tampa, Florida, specializing in orthopedics. Dr. Miller also is a
Director of SJHHS and is a holder of a provider contract with SJP.

John Rasmussen, M.D., age 42, received his M.D. degree from the
University of Wisconsin. Since 1989, Dr. Rasmussen has been engaged in the
private practice of medicine in Tampa, Florida, specializing in radiology. Dr.
Rasmussen is a holder of a provider contract with SJP.

Michael Wasylik, M.D., age 55, received his M.D. degree from Ohio State
University. Since 1975, Dr. Wasylik has engaged in the private practice of
medicine in Tampa, Florida, specializing in orthopedics. Dr. Wasylik is a holder
of a provider contract with SJP.

Michael Westbury, M.D., age 45, received his M.D. degree from the
University of Florida. Since 1991, Dr. Westbury has engaged in the private
practice of medicine in Tampa, Florida, specializing in anesthesiology. Dr.
Westbury is a holder of a provider contract with SJP.

POTENTIAL CONFLICTS OF INTEREST

The relationships between the officers, the members of the Board of
Directors, the stockholders and the Company are such that the parties are
subject to potential conflicts of interest.

<PAGE> 55

The officers and the members of the Board of Directors will not be
required to devote any specific amount of time to the business of the Company,
and there may be conflicting and competing demands upon their time and talent
that could be detrimental to the Company. However, the officers and the members
of the Board of Directors intend to devote sufficient time to discharge their
responsibilities to the Company and to the stockholders.

A potential conflict of interest also exists with respect to any group
of ten percent (10%) or more of the stockholders required to offer to the PHO
the right to engage in a health care venture pursuant to the right of first
refusal provisions in the PHO Agreement. The interests of the Company's
representatives on the PHO Board of Directors (or the interests of the Company's
Board of Directors in directing its representatives on the PHO Board of
Directors) in voting to accept or reject the right to engage in the venture may
conflict with the interests of the offering stockholders.

Notwithstanding the foregoing, the members of the Board of Directors
must act as fiduciaries to the Company and to the stockholders in resolving any
conflict of interest. Decisions under various state laws, which will govern the
affairs of the Company, recognize the rights of stockholders to bring suit
against the Board of Directors, on behalf of the Company, when fiduciary duties
are violated. When a question has arisen, courts have held that a stockholder
may institute legal action on behalf of himself or herself and similarly
situated stockholders (a class action), or on behalf of the Company itself (a
derivative action), to recover damages for the breach by a director of his or
her fiduciary duty.

The Bylaws of the Company provide that the officers, directors and
their employees and agents are to be indemnified against any loss, damage or
expense incurred by them and any of the other indemnified parties by reason of
any act or omission performed or omitted by them, for or on behalf of the
Company in furtherance of its interests. However, this indemnification does not
relieve the directors or the other indemnified parties from liability resulting
from gross negligence, fraud, or bad faith. As a result of these Bylaw
provisions, the stockholders may have more restricted rights of action against
the officers and the Board of Directors than would otherwise be the case absent
the indemnity provisions.

As indicated above, certain of the officers and directors of the
Company now or in the future may hold various positions with the Partially Owned
Operations, with affiliates of the Company, and with businesses in competition
with the Company. The holding of such positions could give rise to conflicts of
interest. The directors and officers of the Company are not required to resolve
any such conflicts in any particular manner, provided that all such conflicts
are disclosed to the Company and provided that under certain circumstances a
director or officer may choose not to participate in any decision relating to a
matter in which such director or officer has an interest.

The foregoing summary involves a number of technical issues in the
fiduciary responsibility area of the law. Any stockholder who believes that a
breach of fiduciary duty has occurred should consult his own counsel.

<PAGE> 56

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Florida corporation law provides that a corporation shall have power to
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, 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, including any appeal thereof, 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 Company's Bylaws provide that, under certain circumstances, it will
indemnify any person who is a party to any litigation or proceeding by reason of
the fact that he or she is or was a director or officer of the Company or is or
was a member of a Committee of the Company or is or was serving at the request
of the Company as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise. The Company maintains liability
insurance for the benefit of its directors and officers.

ITEM 10. EXECUTIVE COMPENSATION.

No compensation has been paid by the Company to any of its directors or
officers in their capacities as such in connection with the organization or
operation of the Company, or otherwise, and there is no arrangement between the
Company and any of such persons that would result in the payment of any
compensation to any such person for services in his respective capacity as
director or officer. However, on October 1, 1991 the Company engaged Charles E.
Cernuda, M.D., a former director of the Company, as a part-time executive
director to handle various administrative matters for the Company. The Executive
Director position is not an officer position with the Company. Dr. Cernuda is
paid $40,000 annually for his services in such capacity.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The Company does not know of any person, either individually or as part
of a group, who beneficially owns more than five percent (5%) of the outstanding
Common Stock of the Company. The following table sets forth certain information
as to the shares of the Company's Common Stock owned of record and beneficially
by each officer and director of the Company and by all officers, directors and
nominees for directors as a group:

<PAGE> 57

<TABLE>
<CAPTION>
Title of Name of Beneficial Amount and Nature of Percent
Class Owner Beneficial Ownership of Class
- ------------ -------------------------- -------------------- --------

<S> <C> <C> <C>
Common Stock Anthony Brannan, M.D.** 1 Share *
Common Stock Norman Castellano, M.D.** 1 Share *
Common Stock N. Bruce Edgerton, M.D. 1 Share *
Common Stock F. Lane France, M.D. 1 Share *
Common Stock Bill Luria, M.D. 1 Share *
Common Stock Benedict S. Maniscalco, M.D. 1 Share *
Common Stock Allen Miller, M.D. 1 Share *
Common Stock John Rasmussen, M.D. 1 Share *
Common Stock Michael Wasylik, M.D. 1 Share *
Common Stock Michael Westbury, M.D.** 1 Share *

10 Shares 2.31%
</TABLE>

* Less than 0.5%

** Nominee for director

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Company is not aware of any particular transaction of a type
required to be disclosed under this Item 12. However, reference is made to the
discussions of the relationships between and among various persons and entities
under Item 1 of this Report, which provisions are hereby incorporated by
reference into the discussion under this Item 12.

<PAGE> 58

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this Report and
included immediately following the signature pages.

Financial Statements of Issuer

- Report of Ernst & Young LLP dated as of February 27, 1998,
as to the financial statements of St. Joseph's Physician
Associates, Inc. for the years ended December 31, 1997
and 1996.

- Balance Sheets of St. Joseph's Physician Associates, Inc. as
of December 31, 1997 and 1996.

- Statements of Operations of St. Joseph's Physician
Associates, Inc. for the years ended December 31, 1997
and 1996.

- Statements of Changes in Stockholders' Equity of St.
Joseph's Physician Associates, Inc. for the years ended
December 31, 1997 and 1996.

- Statements of Cash Flows of St. Joseph's Physician
Associates, Inc. for the years ended December 31, 1997 and
1996.

- Notes to Financial Statements.

Consolidated Financial Statements of St. Joseph's Physicians-
Healthcenter Organization, Inc., an entity 50% or less owned by
issuer.

- Report of Ernst & Young LLP dated February 27, 1998, as to
the Consolidated Financial Statements of St. Joseph's
Physicians-Healthcenter Organization, Inc. for the years
ended December 31, 1997 and 1996.

<PAGE> 59

- Consolidated Balance Sheets of St. Joseph's
Physicians-Healthcenter Organization, Inc. as of December
31, 1997 and 1996.

- Consolidated Statements of Operations of St. Joseph's
Physicians-Healthcenter Organization, Inc. for the years
ended December 31, 1997 and 1996.

- Consolidated Statements of Changes in Stockholders' Equity
of St. Joseph's Physicians-Healthcenter Organization, Inc.
for the years ended December 31, 1997 and 1996.

- Consolidated Statements of Cash Flows of St. Joseph's
Physicians-Healthcenter Organization, Inc. for the years
ended December 31, 1997 and 1996.

- Notes to Consolidated Financial Statement.

The following exhibits are filed as part of this report (exhibits marked with an
asterisk have been previously filed with the Commission and are incorporated
herein by this reference):

*3.1 Articles of Incorporation of the Company (previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-18,
Number 33-22011-A).

*3.2 Amended and Restated Bylaws of the Company dated April 29, 1991
(previously filed as Exhibit 3.2 to the Company's 1991 Annual Report
on Form 10-K).

*3.3 Amendment to Article II of the Bylaws of the Company adopted
December 9, 1991 (previously filed as Exhibit 3.3 to the Company's
1991 Annual Report on Form 10-K).

*3.4 Amendment to Article V of the Bylaws of the Company adopted April 4,
1994 (previously filed as Exhibit 3.4 to the Company's 1994 Annual
Report on Form 10-K)..

*4.1 Agreement between St. Joseph's Physician Associates, Inc., St.
Joseph's Enterprises, Inc. and St. Joseph's Physicians-Healthcenter
Organization, Inc. (previously filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-18, Number 33-22011-A).

*10.3 Management Agreement between St. Joseph's Same-Day Surgery Center,
Ltd. and St. Joseph's Health Care Center, Inc. (previously filed as
Exhibit 10.4 to the Company's Registration Statement on Form S-18,
Number 33-22011-A).

<PAGE> 60

*10.4 Management Agreement between Hospitals' Home Health Care of
Hillsborough County, Inc. and ServiceMaster Home Health Care
Services, Inc. (previously filed as Exhibit 28 to the Company's
Current Report on Form 8-K dated June 29, 1989).

*10.5 Service Agreement June 22, 1987 between Hospitals' Home Health Care
of Hillsborough County, Inc. and American Home Patient Centers, Inc.
(previously filed as Exhibit 10.5 to the Company's 1989 Annual
Report on Form 10-K).

*10.6 Agreement between St. Joseph's Physician Associates, Inc., St.
Joseph's Enterprises, and St. Joseph's Physicians-Healthcenter
Organization, Inc. dated October 1, 1991 (previously filed as
Exhibit 10.6 to the Company's 1991 Annual Report on Form 10-K).

*10.6.1 Letter, dated October 3, 1995, from Isaac Mallah, Executive Vice
President of St. Joseph's Enterprises, Inc. to Thomas Mawn, M.D.,
Chairman of St. Joseph's Physician Associates, Inc., effecting an
amendment to the Agreement between St. Joseph's Physician
Associates, Inc., St. Joseph's Enterprises, and St. Joseph's
Physicians-Healthcenter Organization, Inc. dated October 1, 1991
(previously filed as Exhibit 10.6.1 to the Company's 1995 Annual
Report on Form 10-KSB).

*10.7 Executive Director Agreement between St. Joseph's Physician
Associates, Inc. and Charles E. Cernuda, M.D. dated October 1, 1991
(previously filed as Exhibit 10.7 to the Company's 1991 Annual
Report on Form 10-K).

*10.8 Lease between St. Joseph's Same-Day Surgery Center, Ltd. and
Franciscan Properties, Inc. (previously filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-18, Number 33-22011-A).

27 Financial Data Schedule (For SEC Use Only)

*99.1 Limited Partnership Agreement dated January 1, 1991 between St.
Joseph's Same-Day Surgery Center, Ltd. and the Company (previously
filed as Exhibit 28.1 to the Company's Current Report on Form 8-K
dated January 14, 1991).

*99.2 Contingent Promissory Note due September 30, 1989 running from the
Company to St. Joseph's Same-Day Surgery Center, Ltd. (previously
filed as Exhibit 28.2 to the Company's Current Report on Form 8-K
dated January 14, 1991).

*99.3 Contingent Promissory Note due September 30, 1990 running from the
Company to St. Joseph's Same-Day Surgery Center, Ltd. (previously
filed as Exhibit 28.3 to the Company's Current Report on Form 8-K
dated January 14, 1991).

<PAGE> 61

*99.4 Contingent Promissory Note due September 30, 1991 running from the
Company to St. Joseph's Same-Day Surgery Center, Ltd. (previously
filed as Exhibit 28.4 to the Company's Current Report on Form 8-K
dated January 14, 1991).

*99.5 Form of Purchase Agreement pursuant to which two of the Company's
limited partner units in Same-Day Surgery Center, Ltd. were sold in
two unrelated transactions on March 29, 1991.

*99.6 Form of Transfer and Assignment pursuant to which two of the
Company's limited partner units in Same-Day Surgery Center, Ltd.
were sold in two unrelated transactions on March 29, 1991.

(b) Reports on Form 8-K

None.

<PAGE> 62

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC.

By: /s/ ALLEN MILLER, M.D. April 14, 1998
------------------------------------------------ --------------------
ALLEN MILLER, M.D., Vice President Date
(in the absence of the President)

In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

By:
------------------------------------------------ --------------------
ANTHONY BRANNAN, M.D., President, Director Date

By: /s/ NORMAN CASTELLANO, M.D. April 15, 1998
------------------------------------------------ --------------------
NORMAN CASTELLANO, M.D., Chairman, Director Date
(principal executive officer)

By: /s/ N. BRUCE EDGERTON, M.D. April 14, 1998
------------------------------------------------ --------------------
N. BRUCE EDGERTON, M.D., Secretary, Director Date

By: /s/ F. LANE FRANCE, M.D. April 14, 1998
------------------------------------------------ --------------------
F. LANE FRANCE, M.D., Director Date

By: /s/ BILL LURIA, M.D. April 15, 1998
------------------------------------------------ --------------------
BILL LURIA, M.D., Treasurer, Director Date
(principal financial and accounting officer)

By:
------------------------------------------------ --------------------
BENEDICT S. MANISCALCO, M.D., Director Date

<PAGE> 63

By: /s/ ALLEN MILLER, M.D. April 14, 1998
------------------------------------------------ --------------------
ALLEN MILLER, M.D., Vice President, Director Date

By: /s/ JOHN RASMUSSEN, M.D. April 14, 1998
------------------------------------------------ --------------------
JOHN RASMUSSEN, M.D., Director Date

By: /s/ MICHAEL WASYLIK, M.D. April 14, 1998
------------------------------------------------ --------------------
MICHAEL WASYLIK, M.D., Director Date

<PAGE> 64

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

For the fiscal year ended December 31, 1997 Commission File No. 33-22011-A

ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Item
- ------ ----

<S> <C>
27 Financial Data Schedule (For SEC Use Only)
</TABLE>

<PAGE> 65

Financial Statements

St. Joseph's Physician Associates, Inc.

Years ended December 31, 1997 and 1996
with Report of Independent Certified Public Accountants

<PAGE> 66

St. Joseph's Physician Associates, Inc.

Financial Statements

Years ended December 31, 1997 and 1996

CONTENTS

<TABLE>
<S> <C>
Report of Independent Certified Public Accountants................................................................1

Audited Financial Statements

Balance Sheets....................................................................................................2
Statements of Operations..........................................................................................3
Statements of Changes in Stockholders' Equity.....................................................................4
Statements of Cash Flows..........................................................................................5
Notes to Financial Statements.....................................................................................6
</TABLE>

<PAGE> 67

Report of Independent Certified Public Accountants

Board of Directors
St. Joseph's Physician Associates, Inc.

We have audited the accompanying balance sheets of St. Joseph's Physician
Associates, Inc. as of December 31, 1997 and 1996, and the related statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of St. Joseph's Physician
Associates, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

Tampa, Florida
February 27, 1998

<PAGE> 68

St. Joseph's Physician Associates, Inc.

Balance Sheets

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,150,633 $ 769,570
Distribution receivable from limited partnership
investments 36,640 38,520
Income taxes receivable -- 6,379
Prepaid expenses 6,375 6,666
-----------------------------
Total current assets 1,193,648 821,135

Equity investments 195,220 742,867
Other investments 20,000 20,000
-----------------------------
Total assets $ 1,408,868 $ 1,584,002
=============================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses $ 21,398 $ 23,978
Income taxes payable 28,340 --
-----------------------------
Total current liabilities 49,738 23,978

Deferred income taxes 21,988 78,326

Stockholders' equity:
Common stock, $1 par value: 7,500 shares authorized;
428 shares at December 31, 1997 and 426 shares at
December 31, 1996 issued and outstanding 428 426
Common stock subscribed, 3 shares at December 31,
1997 and 7 shares at December 31, 1996 3 7
Subscriptions receivable (4,500) (11,600)
Additional paid-in capital 698,101 704,975
Retained earnings 643,110 787,890
-----------------------------
Total stockholders' equity 1,337,142 1,481,698
-----------------------------
Total liabilities and stockholders' equity $ 1,408,868 $ 1,584,002
=============================
</TABLE>

See accompanying notes.

<PAGE> 69

St. Joseph's Physician Associates, Inc.

Statements of Operations

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------
<S> <C> <C>
Equity in net earnings of investees $ 2,763 $146,911
Distribution income 120,040 154,080
------------------------
122,803 300,991
Expenses:
Salary 40,000 40,000
General and administrative 81,622 79,718
------------------------
Operating income 1,181 181,273

Interest income 30,449 25,547
Loss on impairment of equity investment (200,410) --
------------------------
Income (loss) before income taxes (168,780) 206,820

Provisions for income taxes (benefit) (24,000) 73,709
------------------------
Net income (loss) $(144,780) $133,111
========================

Net income (loss) per common share--basic and diluted $ (333) $ 307
========================

Weighted average shares outstanding and subscribed 435 434
========================
</TABLE>

See accompanying notes.

<PAGE> 70

St. Joseph's Physician Associates, Inc.

Statements of Changes in Stockholders' Equity

<TABLE>
<CAPTION>
COMMON ADDITIONAL
COMMON STOCK SUBSCRIPTIONS PAID-IN RETAINED
STOCK SUBSCRIBED RECEIVABLE CAPITAL EARNINGS TOTAL
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $422 $5 $(10,000) $685,477 $654,779 $1,330,683
Sale and subscription of
common stock 19 3 (3,600) 70,378 - 66,800
Redemption of common stock (15) (1) 2,000 (50,880) - (48,896)
Net income - - - - 133,111 133,111
--------------------------------------------------------------------------------------
Balance at December 31, 1996 426 7 (11,600) 704,975 787,890 1,481,698
Sale and subscription of
common stock 13 (3) 5,100 34,490 - 39,600
Redemption of common stock (11) (1) 2,000 (41,364) - (39,376)
Net loss - - - - (144,780) (144,780)
--------------------------------------------------------------------------------------
Balance at December 31, 1997 $428 $3 $ (4,500) $698,101 $643,110 $1,337,142
======================================================================================
</TABLE>

See accompanying notes.

<PAGE> 71

St. Joseph's Physician Associates, Inc.

Statements of Cash Flows

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (144,780) $ 133,111
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Equity in net earnings of investees (2,763) (146,911)
Distribution income (120,040) (154,080)
Loss on impairment of equity investment 200,410 --
Deferred income taxes (56,338) 42,808
Changes in operating assets and liabilities:
Prepaid expenses 291 1,372
Income taxes receivable 6,379 (6,379)
Accrued expenses (2,580) 5,353
Income taxes payable 28,340 (22,156)
--------------------------
Net cash used in operating activities (91,081) (146,882)

INVESTING ACTIVITIES
Dividends from equity investments 350,000 95,000
Distributions received 121,920 159,560
--------------------------
Net cash provided by investing activities 471,920 254,560

FINANCING ACTIVITIES
Proceeds from sale of common stock 39,600 66,800
Redemption of common stock (39,376) (48,896)
--------------------------
Net cash provided by financing activities 224 17,904
--------------------------

Increase in cash and cash equivalents 381,063 125,582
Cash and cash equivalents at beginning of year 769,570 643,988
--------------------------
Cash and cash equivalents at end of year $1,150,633 $ 769,570
==========================
</TABLE>

See accompanying notes.

<PAGE> 72

St. Joseph's Physician Associates, Inc.

Notes to Financial Statements

December 31, 1997

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

St. Joseph's Physician Associates, Inc. (the Company) was organized on November
20, 1987 to establish and operate an association of qualified physicians and
engage directly or indirectly in health care related ventures.

In February 1989, the Company acquired 2,500 shares of the common stock of St.
Joseph's Physicians-Healthcenter Organization, Inc. (PHO) for $20 per share. The
2,500 shares represent 50% of the outstanding common stock of the PHO. The PHO
had 6,250 preferred shares outstanding as of December 31, 1996. For 1996, the
Company earned equity in the net earnings of the PHO at 22.22% of the PHO's
earnings after deducting a 6% cumulative dividend for the 6,250 preferred
shares. The PHO's preferred shares were redeemed effective January 31, 1997.
After this redemption, the Company earned equity in the net earnings of the PHO
at 50% of the PHO's earnings. The PHO was organized for the purpose of engaging
directly or indirectly in health care related ventures.

In June 1989, the Company acquired 4,000 shares of the common stock of
Hospitals' Home Health Care of Hillsborough County, Inc. d/b/a St. Joseph's Home
Health Services (HHC) for $10 per share. The 4,000 shares represent 50% of the
outstanding common stock of HHC.

On January 5, 1998, the Company sold its 4,000 shares of HHC to St. Joseph's
Ancillary Services, Inc. for $100,000. The investment in HHC was sold for a
price that was lower than the equity investment in HHC at December 31, 1997. As
a result, the equity investment in HHC was written down by $200,410, to properly
reflect its fair value at December 31, 1997.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.

6
<PAGE> 73

St. Joseph's Physician Associates, Inc.

Notes to Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EQUITY INVESTMENTS

The Company accounts for its investments in the PHO and HHC on the equity
method. Accordingly, these investments have been stated in the accompanying
balance sheets at the cost of acquisition plus the Company's equity in the
undistributed earnings/losses since acquisition through December 31, 1997 and
1996, respectively. None of the assets or liabilities of the investments are
included in the balance sheets except to the extent of the Company's interests
in the underlying net assets included in equity investments. The excess of the
cost of acquisition of the investment in HHC over the Company's interest in the
underlying net liabilities at the date of acquisition was $84,264 and has been
amortized as a component of equity in net earnings of investees over 40 years.
The unamortized portion of the excess of $66,362 was written off and is included
in loss on impairment of equity investment for the year ended December 31, 1997.

OTHER INVESTMENTS

The Company owns five limited partnership units, a 6% interest, in St. Joseph's
Same-Day Surgery Center, Ltd. Management has not actively marketed these
partnership units and intends to hold them beyond one year. Accordingly, this
investment is presented as noncurrent, other investments. The investment is
accounted for at cost due to the limited percentage interest in the partnership
and inability to exercise significant influence over the partnership.
Distributions are recorded as income when declared and reported as distribution
income.

SUBSCRIPTIONS RECEIVABLE

Subscriptions receivable relate to agreements to purchase common stock of the
Company and are to be paid in installments during 1998.

CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.

7
<PAGE> 74

St. Joseph's Physician Associates, Inc.

Notes to Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

The Company accounts for income taxes under FASB Statement No. 109, Accounting
for Income Taxes. Deferred income tax assets and liabilities are determined
based upon differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

INCOME PER COMMON SHARE

Income per common share is based upon the weighted average number of common
shares outstanding during the period.

2. EQUITY INVESTMENTS

A summary of the changes in equity investments is presented below:

<TABLE>
<CAPTION>
HHC PHO TOTAL
------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1996 $589,486 $101,470 $ 690,956
Equity in net earnings of investees 110,614 36,297 146,911
Dividend received (95,000) - (95,000)
------------------------------------------------
Balance at December 31, 1996 605,100 137,767 742,867
Equity in net earnings of investees 45,310 (42,547) 2,763
Loss on impairment of equity investment (200,410) - (200,410)
Dividend received (350,000) - (350,000)
------------------------------------------------
Balance at December 31, 1997 $100,000 $ 95,220 $ 195,220
================================================
</TABLE>

8
<PAGE> 75

St. Joseph's Physician Associates, Inc.

Notes to Financial Statements (continued)

2. EQUITY INVESTMENTS (CONTINUED)

The condensed balance sheets of the equity investees are as follows:

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------
<S> <C> <C>
HHC
Assets:
Current assets $1,516,114 $2,128,418
Noncurrent assets 2,374 4,902
--------------------------
Total assets 1,518,488 $2,133,320
==========================

Liabilities and stockholders' equity:
Current liabilities $ 801,591 $ 827,404
Long-term liabilities 248,799 232,654
Stockholders' equity 468,098 1,073,262
--------------------------
Total liabilities and stockholders' equity $1,518,488 $2,133,320
==========================

PHO
Assets:
Current assets $ 309,443 $ 529,474
Noncurrent assets 231,749 259,025
--------------------------
Total assets $ 541,192 $ 788,499
==========================

Liabilities and stockholders' equity:
Current liabilities $ 130,226 $ 163,323
Stockholders' equity 410,966 625,176
--------------------------
Total liabilities and stockholders' equity $ 541,192 $ 788,499
==========================
</TABLE>

9
<PAGE> 76

St. Joseph's Physician Associates, Inc.

Notes to Financial Statements (continued)

2. EQUITY INVESTMENTS (CONTINUED)

The condensed statements of operations of the equity investees are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
HHC
Revenues $ 2,998,416 $ 3,121,893
Expenses (2,832,248) (2,760,438)
-----------------------------
166,168 361,455
Income tax provision 71,333 136,015
-----------------------------
Net income $ 94,835 $ 225,440
=============================

PHO
Revenues $ 182,050 $ 398,432
Expenses (264,100) (197,991)
-----------------------------
(82,050) 200,441
Income tax provision 6,535 27,957
-----------------------------
Net income (loss) $ (88,585) $ 172,484
=============================
</TABLE>

3. INCOME TAXES

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
----------------------
<S> <C> <C>
Current:
Federal $ 27,000 $26,408
State 5,000 4,521
Deferred:
Federal (48,000) 36,528
State (8,000) 6,252
======================
Provision for income taxes (benefit) $(24,000) $73,709
======================
</TABLE>

10
<PAGE> 77

St. Joseph's Physician Associates, Inc.

Notes to Financial Statements (continued)

3. INCOME TAXES (CONTINUED)

The differences between the federal income tax rate and the Company's effective
income tax rate for the years ended December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
1997 1996
-------------------
<S> <C> <C>
Federal income tax at statutory rate (34.0)% 34.0%
State income taxes, net of federal income
tax benefit (3.6) 3.6
Effect of permanent differences 23.4 --
Other -- (2.0)
-------------------
(14.2)% 35.6%
===================
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------
<S> <C> <C>
Deferred tax liabilities:
Investments accounted for under equity method for
financial accounting purposes $133,000 $112,980
----------------------
Total deferred tax liabilities 133,000 112,980

Deferred tax assets:
Difference in basis of investments in limited partnership
interests between financial and
tax reporting 110,000 33,862
Other 1,012 792
----------------------
Total deferred tax assets 111,012 34,654
----------------------
Net deferred tax liability $ 21,988 $ 78,326
======================
</TABLE>

The Company paid income taxes of approximately $19,000 and $37,000 in 1997 and
1996, respectively.

12
<PAGE> 78

St. Joseph's Physician Associates, Inc.

Notes to Financial Statements (continued)

4. RELATED PARTIES

The members of the Board of Directors of the Company are also members of the
medical staff of St. Joseph's Hospital, Inc. St. Joseph's Hospital, Inc. is a
controlled affiliate of St. Joseph's Health Care Center, Inc. (the Center). The
Center provided administrative support to the Company at no charge. Effective
February 1, 1997, the Center charged the Company for administrative support and
direct costs (i.e., supplies, food charges, printing, etc.).

All limited partner investors in PHO's ventures are investors in the Company.
Additionally, all physicians who hold provider contracts with a subsidiary of
the PHO are investors in the Company.

St. Joseph's Enterprises, Inc. and St. Joseph's Ancillary Services, Inc., both
affiliates of the Center, own 50% of the outstanding common stock of PHO and
HHC, respectively.

12
<PAGE> 79
Consolidated Financial Statements

St. Joseph's Physicians-Healthcenter
Organization, Inc.

Years ended December 31, 1997 and 1996
with Report of Independent Certified Public Accountants

<PAGE> 80

St. Joseph's Physicians-Healthcenter Organization, Inc.

Consolidated Financial Statements

Years ended December 31, 1997 and 1996

CONTENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants ................... 1

Audited Consolidated Financial Statements

Consolidated Balance Sheets .......................................... 2
Consolidated Statements of Operations ................................ 3
Consolidated Statements of Changes in Stockholders' Equity ........... 4
Consolidated Statements of Cash Flows ................................ 5
Notes to Consolidated Financial Statements ........................... 6
</TABLE>

<PAGE> 81
Report of Independent Certified Public Accountants

Board of Directors
St. Joseph's Physicians-Healthcenter Organization, Inc.

We have audited the accompanying consolidated balance sheets of St. Joseph's
Physicians-Healthcenter Organization, Inc. as of December 31, 1997 and 1996 and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Organization's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of St. Joseph's
Physicians-Healthcenter Organization, Inc. at December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.

/s/ Ernest & Young LLP

Tampa, Florida
February 27, 1998

1
<PAGE> 82

St. Joseph's Physicians-Healthcenter Organization, Inc.

Consolidated Balance Sheets

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $158,678 $459,628
Accounts receivable 61,618 12,800
Distribution receivable -- 37,236
Income tax receivable 73,885 --
Prepaid insurance 11,445 --
Due from affiliated organizations 3,817 8,280
Other current assets -- 11,530
----------------------
Total current assets 309,443 529,474

Equity investment in limited partnership 106,013 98,422
Other investments 72,575 52,000
Deferred income taxes 53,161 108,603
----------------------
Total assets $541,192 $788,499
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 17,241 $ 32,445
Income taxes payable -- 39,072
Dividends payable -- 58,750
Membership fee deposits 13,500 15,000
Due to affiliated organizations 99,485 18,056
----------------------
Total current liabilities 130,226 163,323

Stockholders' equity:
Common stock, $1 par value, 5,000 shares
authorized, issued and outstanding 5,000 5,000
Preferred Stock, $20 par value, 6% cumulative,
6,250 shares authorized; no shares issued and
outstanding as of December 31, 1997 and 6,250 shares
issued and outstanding as of December 31, 1996 -- 125,000
Additional paid-in capital 95,000 95,000
Retained earnings 310,966 400,176
----------------------
Total stockholders' equity 410,966 625,176
----------------------
Total liabilities and stockholders' equity $541,192 $788,499
======================
</TABLE>

See accompanying notes.

<PAGE> 83

ST. JOSEPH'S PHYSICIANS-HEALTHCENTER ORGANIZATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
----------------------
<S> <C> <C>
Revenues:
Membership fees $ 52,103 $241,300
Equity in earnings of limited partnership 87,617 99,260
Investment and other income 42,330 57,872
----------------------
Total revenues 182,050 398,432

Expenses:
General and administrative 220,620 143,028
Professional fees 43,480 53,735
Amortization -- 1,228
----------------------
Total expenses 264,100 197,991
----------------------
(Loss) income before income taxes (82,050) 200,441

Provision for income taxes 6,535 27,957
----------------------
Net (loss) income $(88,585) $172,484
======================

</TABLE>

See accompanying notes.

<PAGE> 84

ST. JOSEPH'S PHYSICIANS-HEALTHCENTER ORGANIZATION, INC.

CONSOLIDATED STATEMENTS OF CHARGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
$20 PAR VALUE
$1 PAR VALUE 6% CUMULATIVE
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------------------------------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNING TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,000 $ 5,000 6,250 $ 125,000 $ 95,000 $ 235,192 $ 460,192
Dividends declared on
Preferred Stock -- -- -- -- -- (7,500) (7,500)
Net income for the year ended
December 31, 1996 -- -- -- -- -- 172,484 172,484
-------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,000 5,000 6,250 125,000 95,000 400,176 625,176
Redemption of
Preferred Stock -- -- (6,250) (125,000) -- -- (125,000)
Dividends declared on
Preferred Stock -- -- -- -- -- (625) (625)
Net loss for the year ended
December 31, 1997 -- -- -- -- -- (88,5850) (88,585)
------------------------------------------------------------------- -----------------------
Balance at December 31, 1997 5,000 $ 5,000 -- $ -- $ 95,000 $ 310,966 $ 410,966
===========================================================================================
</TABLE>

See accompanying notes.

4
<PAGE> 85

ST. JOSEPH'S PHYSICIANS-HEALTHCENTER ORGANIZATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (88,585) $ 172,484
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Amortization -- 1,228
Equity in earnings of limited partnership (87,617) (99,260)
Changes in operating assets and liabilities:
Increase in accounts receivable (48,818) (12,800)
Decrease in distribution receivable 37,236 898
Decrease in prepaid income taxes -- 60,434
Increase in income tax receivable (73,885) --
Increase in prepaid insurance (11,445) --
Increase in due from affiliated organizations (3,817) --
Decrease (increase) in other current assets 19,810 (7,575)
Decrease in other long-term receivable -- 80,000
Decrease (increase) in deferred income taxes 55,442 (16,846)
(Decrease) increase in accounts payable and
accrued expenses (15,204) 15,364
(Decrease) increase in income taxes payable (39,072) 39,072
Decrease in membership fee deposits (1,500) (68,500)
Increase in due to affiliated organizations 81,429 17,620
-------------------------
Net cash (used in) provided by operating activities (176,026) 182,119

INVESTING ACTIVITIES
Purchase of other investments (20,575) (42,000)
Distributions received from limited partnerships 80,026 102,720
-------------------------
Net cash provided by investing activities 59,451 60,720

FINANCING ACTIVITIES
Redemption of preferred stock (125,000) --
Dividends paid (59,375) --
-------------------------
Net cash used in financing activities (184,375) --
-------------------------

(Decrease) increase in cash and cash equivalents (300,950) 242,839
Cash and cash equivalents at beginning of year 459,628 216,789
-------------------------
Cash and cash equivalents at end of year $ 158,678 $ 459,628
=========================
</TABLE>

See accompanying notes.

<PAGE> 86
ST. JOSEPH'S PHYSICIANS-HEALTHCENTER ORGANIZATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

St. Joseph's Physicians-Healthcenter Organization, Inc. (the Company) is
organized as a Florida corporation for the purpose of engaging directly or
indirectly in health care related ventures.

The Company is the managing general partner of St. Joseph's Same-Day Surgery
Center, Ltd. (the Surgery Center), a Florida limited partnership formed to
develop and operate an outpatient surgery center. The Company has a four percent
(4%) partnership interest in the Surgery Center.

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, St. Joseph's Preferred, Inc. (SJP), a development
stage preferred provider network, and St. Joseph's Health Network, Inc. (SJHN),
a physician-hospital organization, formed to negotiate at-risk products with
managed care organizations on behalf of its membership.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates.

EQUITY INVESTMENT IN LIMITED PARTNERSHIP

The Company accounts for its 4% investment in the Surgery Center under the
equity method due to the Company's ability to exercise significant influence
over the limited partnership. Accordingly, this investment has been stated in
the accompanying consolidated balance sheets at the cost of acquisition plus the
Company's equity in the Surgery Center undistributed earnings or losses since
acquisition through December 31, 1997 and 1996, respectively. None of the assets
or liabilities of the partnership are included in the consolidated balance
sheets except to the extent of the Company's interests in the underlying net
assets of the limited partnership. The Company's earnings resulting from its
proportionate shares of the partnership's revenue and expenses are included in
equity in earnings of limited partnership in the consolidated statements of
operations.

6
<PAGE> 87
ST. JOSEPH'S PHYSICIANS-HEALTHCENTER ORGANIZATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.

INCOME TAXES

The Company follows the liability method of accounting for income taxes.
Deferred income taxes relate to the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

MEMBERSHIP FEES

Membership fees represent amounts paid by physicians participating in SJHN.
These amounts are recognized as revenue upon approval of the respective
physician's membership in SJHN by its board of directors. In addition, upon
board approval, St. Joseph's Hospital (see Note 7) pays an additional membership
fee equaling that of the new member physician. Amounts included in membership
fee deposits are from physicians pending board approval.

ACCOUNTS RECEIVABLE

Accounts receivable represents amounts due from physicians and St. Joseph's
Hospital for membership fees.

RECLASSIFICATIONS

Certain Amounts included in the financial statements in 1996 have been
reclassified to conform to the 1997 presentation. Such reclassifications had no
effects on results of operations.

2. PREFERRED STOCK

The outstanding preferred stock of the Company, together with all declared and
unpaid dividends through January 31, 1997, was redeemed through the payment of
$184,375 by the Company on February 6, 1997 ($125,000 for the 6,250 shares of
preferred stock and $59,375 in dividends).

7
<PAGE> 88
ST. JOSEPH'S PHYSICIANS-HEALTHCENTER ORGANIZATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. EQUITY INVESTMENT IN LIMITED PARTNERSHIP

A summary of the changes in the Company's equity investment in a limited
partnership is presented below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
----------------------
<S> <C> <C>
Balance at January 1 $ 98,422 $101,882
Equity in earnings of limited partnership for
the year ended December 31 87,617 99,260
Distributions received (80,026) (102,720)
----------------------
Balance at December 31 $106,013 $ 98,422
======================
</TABLE>

The condensed balance sheets and related statements of income of the limited
partnership are as follows:

<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------
<S> <C> <C>
Assets:
Current assets $3,620,760 $3,415,417
Noncurrent assets 608,827 730,015
--------------------------
Total assets $4,229,587 $4,145,432
==========================

Liabilities and partners' equity:
Current liabilities $1,374,866 $1,238,989
Long-term debt 186,203 423,513
Partners' equity 2,668,518 2,482,930
--------------------------
Total liabilities and partners' equity $4,229,587 $4,145,432
==========================
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
--------------------------
<S> <C> <C>
Revenues $9,183,166 $9,646,996
Expenses 7,000,245 7,165,501
--------------------------
Net income $2,182,921 $2,481,495
==========================
</TABLE>

8
<PAGE> 89

ST. JOSEPH'S PHYSICIANS-HEALTHCENTER ORGANIZATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. OTHER INVESTMENTS

During 1997 and 1996, the Company acquired certain limited partnership units in
the Surgery Center under the Company's right of first refusal as managing
partner. As of December 31, 1997, the Company owned one and three-quarters
partnership units, a 2.1% interest. As of December 31, 1996, the Company owned
one and one-half limited partnership units, a 1.8% interest. These investments
of $72,575 and $52,000 at December 31, 1997 and 1996, respectively, are
presented as other current investments. Management has not actively marketed
these limited partnership units and will likely hold them beyond one year.
Accordingly, these investments are classified as other investments (noncurrent).
Distributions are recorded as income when declared and included in investment
and other income. The difference between accounting for these investments at
cost rather than under the equity method is not material to net income or the
financial position of the Company.

5. INCOME TAXES

The combined federal and state income tax provision consists of the following
components:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-------------------------
<S> <C> <C>
Current:
Federal $ (1,857) $ 38,255
State (318) 6,548
Deferred taxes:
Federal 7 437 (14,384)
State 1,273 (2,462)
-------------------------
Provision for income taxes $ 6,535 $ 27,957
=========================
</TABLE>

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 used for income tax purposes. The Company's deferred
tax liabilities and assets as of December 31 are as follows:

<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Total deferred tax liabilities $ -- $ (524)
Total deferred tax assets 99,894 109,127
Total valuation allowance (46,733) --
---------------------------
Net deferred tax asset $ 53,161 $ 108,603
===========================
</TABLE>

<PAGE> 90

ST. JOSEPH'S PHYSICIANS-HEALTHCENTER ORGANIZATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES (CONTINUED)

Components of the Company's deferred tax assets result primarily from
differences in basis of investments in partnership interest between financial
and tax reporting as well as deferred expenses on investments in SJHN. The total
valuation allowance increased $46,733 during the year ended December 31, 1997.

The Company paid income taxes of $36,000 and $7,920 in 1997 and 1996,
respectively.

6. COMMITMENTS AND CONTINGENCIES

As the managing general partner, the Company is contingently liable for all
liabilities of the Surgery Center.

7. RELATED PARTY TRANSACTIONS

The Company is 50% owned by St. Joseph's Enterprises, Inc., an affiliate of St.
Joseph's Health Care Center, Inc. (the Center). The Center provides
administrative support to the Company. Amounts assessed for this support by the
Center are included in the consolidated statements of operations in general and
administrative expense. The Company paid $160,724 and $90,160 in 1997 and 1996,
respectively. Membership fee revenue from St. Joseph's Hospital, a controlled
affiliate of the Center, totaled $22,150 and $120,650 in 1997 and 1996,
respectively.

All physician limited partners in the Surgery Center are also stockholders in
St. Joseph's Physician Associates, Inc. (SJPA), which is the other 50% owner of
the Company.

10
<PAGE> 91

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934 (THE "ACT").

The following materials are included herewith and furnished to the
Commission for its information:

(1) One copy of the form of proxy and related materials sent to the
registrant's security holders with respect to its 1998 annual meeting
of stockholders.

The foregoing materials shall not be deemed to be "filed" with the
Commission or otherwise subject to the liabilities of Section 18 of the Act.

No annual report or similar material, other than as furnished herewith,
has been sent to the security holders of the registrant with respect to its 1998
annual meeting of stockholders.

<PAGE> 92
[ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC. LETTERHEAD]

March 25, 1998

Dear Stockholder:

The 1998 Annual Meeting of Stockholders will be held on WEDNESDAY, APRIL 29,
1998 AT 6:00 P.M. IN THE MEDICAL ARTS BUILDING AUDITORIUM. For further
information, please refer to the enclosed Notice of Annual Meeting. You also
will find enclosed, a letter from the Chairman of the Board, Norman Castellano,
M.D., and the Nominating Committee's report on its nominations for each
directorship to be filled at the Annual Meeting.

Reports will be presented on all 1997 activities of St. Joseph's Physician
Associates, Inc. This Annual Meeting is intended to provide an opportunity for
all Stockholders to participate in the affairs of the Company. This
participation is very important to the future of the Company and the Bylaws
ensure that participation is open to all Stockholders. The new Board members
will be elected, and soon after the Annual Meeting, new committees will be
re-appointed. Please call me if you are interested in serving on a committee.

We look forward to your participation at the meeting. If you are unable to
attend, however, please complete the enclosed proxy and return it to us in the
enclosed return envelope.

Sincerely,

/s/ Anthony Brannan, M.D.
------------------------------
Anthony Brannan, M.D.
President

Enclosures

<PAGE> 93
[ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC. LETTERHEAD]

March 25, 1998

Dear Stockholder:

One of the purposes of the 1998 Annual Meeting of the Stockholders is to elect
three members of the Board of Directors. The Nominating Committee of the Board
of Directors has met to nominate individuals to fill the three vacancies on the
Board of Directors. The members of this Committee are Anthony Brannan, M.D.,
Allen D. Miller, M.D., and myself. The Chairman of the Committee is Dr. Miller.
All members can be contacted at the above mailing address.

Enclosed is the Nominating Committee's report on its nominations for each
directorship to be filled at the Annual Meeting.

Nominations, in addition to those made by the Nominating Committee, may be made
by petition by at least twenty-five percent (25%) of the shareholders eligible
to vote at the Annual Meeting. There were 430 shareholders of record as of
March 15, 1998, so 108 shareholders must sign a nominating petition. The
petition must be filed with the President, Anthony Brannan, M.D., or the
Secretary, N. Bruce Edgerton, M.D., not later than fourteen (14) days before
the Annual Meeting scheduled on April 29, 1998.

We look forward to seeing you at the meeting.

Sincerely,

/s/ Norman Castellano, M.D.
- ---------------------------------
Norman Castellano, M.D.
Chairman of the Board of Directors

Enclosure
<PAGE> 94
[ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC. LETTERHEAD]

March 13, 1998

Norman J. Castellano, M.D.
Chairman of the Board, SJPA
2727 W. Dr. M.L. King Jr. Blvd.
Suite 450
Tampa, Florida 33607

RE: Nominations for SJPA Board of Directors

Dear Dr. Castellano:

The Nominating Committee, consisting of Anthony Brannan, M.D., 4700 N. Habana
Avenue #403, Tampa, FL 33614; Norman J. Castellano, M.D., 2727 W. Dr. M.L.
King, Jr., Blvd. #450, Tampa, FL 33607; and myself, Allen D. Miller, M.D., 4612
N. Habana Avenue, Suite 203, Tampa, FL 33614, has met and submits the
following nominations:

For a full four-year term on the Board of Directors as provided by our bylaws,
Anthony Brannan, M.D., Surgery representative; Norman J. Castellano, M.D.,
Medicine representative; and for a one year, hospital-based physician term:
Michael Westbury, M.D., Anesthesiology.

Respectfully submitted,

/s/ Allen D. Miller, M.D.
- ---------------------------
Allen D. Miller, M.D.
Chairman, Nominating Committee

ADM:evo
<PAGE> 95
ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

APRIL 29, 1998

You are cordially invited to attend the 1998 Annual Meeting of
the stockholders of St. Joseph's Physician Associates, Inc., which will be held
at the auditorium of the Medical Arts Building, 3003 W. Dr. Martin Luther King,
Jr. Blvd., Tampa, Florida, on Wednesday, April 29, 1998 at 6:00 p.m., local
time, for the following purposes:

(1) To elect three directors, two to serve terms of four years and
one to serve a term of one year;

and

(2) To transact such other business as may properly come before
the meeting or any adjournments thereof.

Only stockholders of record at the close of business on March 15, 1998 are
entitled to notice of and to vote at the meeting or any adjournments thereof.

Accompanying this Notice of Annual Meeting is a form of proxy. In the
event that you will be unable to attend the meeting, please sign, date and
return the proxy in the enclosed return envelope.

By order of the Board of Directors

/s/ N. Bruce Edgerton, M.D.
------------------------------------
N. Bruce Edgerton, M.D., Secretary

March 25, 1998

Enclosures
<PAGE> 96
ST. JOSEPH'S PHYSICIAN ASSOCIATES, INC.

PROXY SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS FOR
1998 ANNUAL STOCKHOLDERS' MEETING

The undersigned stockholder of St. Joseph's Physician Associates, Inc.
(the "Company"), revoking all prior proxies, hereby appoints Norman Castellano,
M.D., Anthony Brannan, M.D. and N. Bruce Edgerton, M.D., or one or more of
them, as the attorneys and proxies of the undersigned, with full power of
substitution and revocation, to vote all the shares of stock of the Company that
the undersigned may be entitled to vote at the 1998 Annual Meeting of the
Stockholders of the Company to be held at the auditorium of the Medical Arts
Building, 3003 W. Dr. Martin Luther King Jr. Blvd., Tampa, Florida, on April
29, 1998, at 6:00 p.m., local time, and at any adjournment or adjournments
thereof, with all powers that the undersigned would possess if personally
present, upon the following matters as more fully described in the
accompanying Notice of Annual Meeting, receipt of which is hereby acknowledged:

(1) Election of Directors to serve terms of four years each:
[ ] FOR the nominees listed below (except as marked to the
contrary):

Norman Castellano, M.D.
Anthony Brannan, M.D.

(To withhold authority to vote for one of the nominees,
strike through his name above.)

[ ] WITHHOLD authority to vote for all nominees listed above.

(2) Election of Director to serve term of one year:
[ ] FOR the nominee listed below:

Michael Westbury, M.D.

[ ] WITHHOLD authority to vote for the nominee listed above.

(3) In their discretion upon such other matters as may properly come
before the meeting.

When properly executed, this proxy will be voted as specified above. If
the proxy is returned with no contrary specification made, it will be voted FOR
Proposal (1) and FOR Proposal (2).

DATED the _____ day of _____________, 1998.

(SIGNATURE) _________________________

(PRINT NAME) ________________________

PLEASE SIGN NAME EXACTLY AS IT APPEARS ON STOCK CERTIFICATE. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, GIVE FULL TITLE. IF
MORE THAN ONE TRUSTEE OR PERSONAL REPRESENTATIVE, ALL MUST SIGN.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ST. JOSEPH'S
PHYSICIAN ASSOCIATES, INC. BALANCE SHEET AND STATEMENT OF INCOME CONTAINED IN
THE 12/31/97 AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,150,633
<SECURITIES> 0
<RECEIVABLES> 36,640
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,193,648
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,408,868
<CURRENT-LIABILITIES> 49,738
<BONDS> 0
0
0
<COMMON> 694,032
<OTHER-SE> 643,110
<TOTAL-LIABILITY-AND-EQUITY> 1,408,868
<SALES> 0
<TOTAL-REVENUES> 153,252
<CGS> 0
<TOTAL-COSTS> 121,622
<OTHER-EXPENSES> 200,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (168,780)
<INCOME-TAX> (24,000)
<INCOME-CONTINUING> (144,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (144,780)
<EPS-PRIMARY> (333)
<EPS-DILUTED> (333)

</TABLE>