AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1996

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MILESTONE HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 8099 75-2592398
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

2501 CEDAR SPRINGS ROAD
SUITE 600, LB15
DALLAS, TEXAS 75201
(214) 871-9600
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

CHARLES L. ALLEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2501 CEDAR SPRINGS ROAD
SUITE 600, LB15
DALLAS, TEXAS 75201
(214) 871-9600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
With Copies to:

J. KENNETH MENGES, JR., P.C. FREDERICK W. KANNER, ESQ.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. DEWEY BALLANTINE
1700 PACIFIC AVENUE 1301 AVENUE OF THE AMERICAS
SUITE 4100 NEW YORK, NEW YORK 10019
DALLAS, TEXAS 75201 (212) 259-8000
(214) 969-2800

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

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

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

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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CALCULATION OF REGISTRATION FEE

=============================================================================================================
PROPOSED MAXIMUM
AMOUNT PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE

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

Common Stock, $.001 par value........... 2,875,000 Shares $12.00 $34,500,000 $11,897
=============================================================================================================

(1) Includes an aggregate of 375,000 shares that the Underwriters have the
option to purchase from the Company to cover over-allotments, if any.

(2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
amount of the registration fee.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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2

MILESTONE HEALTHCARE, INC.

CROSS-REFERENCE SHEET FURNISHED PURSUANT TO
ITEM 501(B) OF REGULATION S-K AND RULE 404

ITEM NUMBER AND CAPTION IN FORM S-1 CAPTION IN PROSPECTUS
----------------------------------- ---------------------

1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors...... Prospectus Summary; Risk Factors; The
Company
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Outside Front Cover Page; Underwriting
6. Dilution.................................. Dilution
7. Selling Security Holders.................. Principal and Selling Stockholders
8. Plan of Distribution...................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................ Description of Capital Stock
10. Interests of Named Experts and Counsel.... *
11. Information with Respect to the
Registrant................................ Outside Front Cover Page; Prospectus
Summary; Risk Factors; The Company; Use of
Proceeds; Dividend Policy; Capitalization;
Dilution; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling
Stockholders; Description of Capital
Stock; Shares Eligible for Future Sale;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... *

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

* Omitted from the Prospectus because item is inapplicable or answer is in the
negative.
3

***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************

SUBJECT TO COMPLETION, DATED JULY 26, 1996

PROSPECTUS

2,500,000 SHARES

MILESTONE
H E A L T H C A R E
COMMON STOCK
---------------------

Of the 2,500,000 shares of Common Stock offered hereby, 2,100,000 shares
are being offered by MileStone Healthcare, Inc. ("MileStone" or the "Company")
and 400,000 shares are being offered by the Selling Stockholders named under
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders.

Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be $12.00 per share. See "Underwriting" for information relating to
the factors considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol "MILE."

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------

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

====================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS

- ----------------------------------------------------------------------------------------------------
Per Share $ $ $ $
- ----------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses of the offering estimated at $ payable
by the Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock on the same terms as set forth
above to cover over-allotments, if any. If the Underwriters exercise such
option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."

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

The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1996 at the offices of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.

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SMITH BARNEY INC. FURMAN SELZ

, 1996
4

[GRAPHICS]

The Company intends to furnish its stockholders annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants and quarterly reports for the first three quarters
of each fiscal year containing unaudited summary financial information.

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

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

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5

PROSPECTUS SUMMARY

The following information is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. See "Risk Factors" for information that should be carefully
considered by prospective investors.

THE COMPANY

MileStone Healthcare, Inc. ("MileStone" or the "Company") is a leading
provider of program management services for specialty care units in hospitals.
The Company's services are designed to enable hospitals to broaden the care
continuum provided to patients. MileStone manages a broad range of clinical
programs that includes inpatient acute physical rehabilitation, comprehensive
outpatient rehabilitation, skilled nursing and subacute care, geropsychiatric
services, cardiac outpatient services, and sports and industrial medicine. The
Company also provides contract therapy services to hospitals, outpatient
facilities, subacute facilities, schools and other locations and owns and
operates nine outpatient therapy clinics. As of May 31, 1996, the Company
provided services in 14 states under 121 contracts. Eighty-three of these were
program management contracts for hospitals, accounting for 82% of MileStone's
revenues for the fiscal year ended May 31, 1996.

The hospital market is characterized by increasing competition and
widespread consolidation, as well as pressures to reduce costs and improve the
quality of patient care. General acute care hospitals are taking steps to change
their operations in order to remain competitive, including treating a growing
percentage of their patients on an outpatient basis and through on-site
specialty care units which, collectively, can provide the full continuum of
health care services. The development and use of specialty care units allows
hospitals to generate incremental revenue that would otherwise be captured by
nursing homes, free-standing clinics and other alternate-site health care
providers. Specialty care units also help hospitals to enhance their
profitability by improving capacity utilization and better matching costs and
services to the required level of patient care.

Hospitals can derive significant benefits by contracting with MileStone for
the design and management of their specialty care or therapy programs. MileStone
believes that its knowledge and experience in the areas of licensing,
certification, staffing and reimbursement allow it to establish programs and
achieve profitability more quickly than hospitals which choose to rely on their
own internal resources, greatly enhancing the likelihood of the program's
operational and financial success. In addition, MileStone assists hospitals in
more effectively integrating their specialty care units with existing services
in order to maximize the potential of the hospital's overall care continuum.
MileStone's objective is to ensure that treatments provided under its programs
are outcome-oriented and delivered on a cost-effective basis.

The Company's growth strategy is focused on enhancing the Company's
position as a leading provider of quality program management services to
hospitals in the United States. The key elements of the Company's strategy are
to: (i) expand MileStone's customer base by providing outcomes driven,
cost-effective services that help differentiate hospital clients in their
respective markets; (ii) increase penetration of existing hospital clients by
expanding the range of services provided; (iii) emphasize clinical outcomes and
cost-effectiveness by utilizing treatment protocols and treatment outcomes
management systems which measure and track the efficacy and productivity of
treatments of the specialty care units; and (iv) pursue acquisitions of
companies that are within the Company's scope of services or that perform
services which are complementary to those of the Company.

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6

THE OFFERING

Common Stock offered by:
The Company........................................... 2,100,000 shares(1)
The Selling Stockholders.............................. 400,000 shares
Common Stock outstanding after the offering............. 6,229,142 shares(1)(2)
Use of proceeds......................................... To repay indebtedness and for
general corporate purposes,
including possible acquisitions
Proposed Nasdaq National Market Symbol.................. MILE

RISK FACTORS

For a discussion of certain factors to be considered by prospective
investors, see "Risk Factors."

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

(1) Does not include up to 375,000 shares of Common Stock that may be sold by
the Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."

(2) Based on the number of shares of Common Stock outstanding as of July 26,
1996. Includes 3,675,000 shares of Common Stock issuable upon the automatic
conversion, in connection with this offering, of all outstanding shares of
the Company's Series A Convertible Preferred Stock (the "Series A
Preferred") and 150,000 shares of Common Stock issuable upon the exercise of
warrants immediately prior to completion of this offering. Excludes (i)
550,571 shares of Common Stock issuable upon the exercise of stock options
outstanding at such date at a weighted average exercise price of
approximately $1.63 per share and (ii) 147,973 shares of Class B Common
Stock issuable upon the exercise, at any time prior to May 31, 2005, of an
outstanding warrant (the "Class B Warrant") with an exercise price of $.82
per share. The Class B Common Stock is convertible at any time, subject to
certain restrictions, into an equal number of shares of Common Stock
(subject to adjustment under certain circumstances), has no voting rights
and is in all other respects identical to the Common Stock. See
"Management -- Stock Option Plans," "Certain Transactions," "Description of
Capital Stock" and Notes 5, 6 and 15 of Notes to Financial Statements.
---------------------

Unless otherwise indicated, all information in this Prospectus (i) assumes
no exercise of the Underwriters' option to purchase from the Company up to
375,000 shares of Common Stock to cover over-allotments, if any, (ii) reflects
the conversion of all outstanding shares of Series A Preferred into 3,675,000
shares of Common Stock as a consequence of this offering, (iii) gives effect to
the one-for-.735 reverse stock split effected in July 1996 in connection with
the merger of the Company and its parent holding corporation and (iv) reflects
the exercise of warrants, immediately prior to the completion of this offering,
to purchase 150,000 shares of Class B Common Stock which will be immediately
converted into Common Stock. See "The Company," "Description of Capital Stock"
and "Underwriting."

4
7

SUMMARY FINANCIAL AND OPERATING DATA
(In thousands, except per share and contract data)

FISCAL PERIOD(1)
-------------------------------
1994 1995 1996
------- ------- -------

STATEMENT OF INCOME DATA:
Net revenues.................................................. $20,245 $24,121 $30,624
Operating expenses:
Salaries.................................................... 13,899 15,664 17,725
Other operating expenses.................................... 3,632 3,378 4,377
Selling, general and administrative expenses................ 1,693 2,087 1,564
Depreciation................................................ 113 98 98
Amortization................................................ 113 78 1,478
------- ------- -------
Total operating expenses.................................... 19,450 21,305 25,242
------- ------- -------
Income from operations........................................ 795 2,816 5,382
Earnings in equity investment................................. (114) (61) (4)
Interest expense.............................................. 297 135 2,424
------- ------- -------
Income before income taxes.................................... 612 2,742 2,962
Income taxes.................................................. 259 1,068 1,200
------- ------- -------
Net income.................................................... $ 353 $ 1,674 $ 1,762
======= ======= =======
Net income per share(2):
Primary..................................................... $ 0.40
Fully diluted............................................... $ 0.39
Weighted average shares outstanding(2)(3)..................... 4,416

MAY 31, 1996
-------------------------
AS
ACTUAL ADJUSTED(5)
------- -----------

BALANCE SHEET DATA:
Working capital................................................ $ 1,951 $ 8,541
Total assets................................................... 27,612 32,815
Long-term debt and subordinated debentures, including current
maturities................................................... 17,543 --
Stockholders' equity........................................... 7,002 29,748

FISCAL PERIOD(1)
-------------------------------
1994 1995 1996
------- ------- -------

OPERATING DATA
Hospital management contracts (at end of period).............. 46 63 83
EBITDA(4)..................................................... $ 1,135 $ 3,054 $ 6,962
Net cash provided by (used in):
Operating activities........................................ 304 591 6,381
Investing activities........................................ (116) 72 (78)
Financing activities........................................ (130) (290) (6,708)

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(1) The periods presented are the 12-month period ending July 31, 1994, the
10-month period ending May 31, 1995 and the 12-month period ending May 31,
1996. The Company changed its fiscal year end to May 31 in order to conform
the current year to the acquisition of the Company by management which
occurred on May 31, 1995 (the "Acquisition"). Financial data for periods
prior to the Acquisition represent the results of operations of the
Company's predecessor. As a result of the varying lengths of the fiscal
periods, period-to-period comparisons are not necessarily meaningful. See
"The Company."

(2) Per share data for 1994 and 1995 are not meaningful due to the Acquisition,
which occurred on May 31, 1995.

(3) Represents weighted average common and common equivalent shares outstanding.

(4) EBITDA represents income before interest expense, income taxes, depreciation
and amortization. Although EBITDA is not intended to represent cash flow or
any other measure of financial performance under generally accepted
accounting principles, the Company believes it is helpful in understanding
cash flow generated from operations that is available for debt service,
taxes and capital expenditures. EBITDA as presented by the Company may not
be comparable to the other similarly titled measures of other companies.

(5) Adjusted to give effect to the conversion of all outstanding shares of the
Series A Preferred into 3,675,000 shares of Common Stock, the exercise of
options covering 10,142 shares of Common Stock at an average exercise price
of $.82 per share occurring on June 30, 1996, the exercise of warrants
covering 150,000 shares of Common Stock at an exercise price of $.82 per
share and the sale of the 2,100,000 shares of Common Stock offered by the
Company hereby (at an assumed public offering price of $12.00 per share) and
the application of the estimated net proceeds therefrom as described under
"Use of Proceeds." See "Certain Transactions," "Description of Capital
Stock" and Note 5 of Notes to Financial Statements.

5
8

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the factors discussed below in
evaluating the Company and its business before purchasing any of the shares of
Common Stock offered hereby. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.

REIMBURSEMENT CONSIDERATIONS

MileStone receives fees for its management services directly from its
general acute care client hospitals. The Company's client hospitals receive
reimbursement under either the Medicare or Medicaid programs or payment from
insurers, self-funded benefit plans or other third-party payors for services
provided by programs managed by the Company. As a result, the availability, or
changes in levels, of such reimbursement or payment could have a significant
impact on the decisions of general acute care hospitals to offer programs
managed by the Company.

Most of the treatment programs managed by the Company are programs for
which a substantial majority of the patients are covered by Medicare. Since
1983, Medicare has generally used a prospective payment system ("PPS") to
reimburse general acute care hospitals for inpatient operating services. Under
PPS, a general acute care hospital receives a fixed payment for each of
approximately 490 diagnosis related groups ("DRGs"), subject to certain payment
adjustments. PPS creates incentives for hospitals to shift services from units
subject to PPS reimbursement to those receiving cost-based reimbursement, such
as rehabilitation distinct part units ("DPUs") or hospital-based skilled nursing
facilities ("SNFs"), the sites from which most of the Company's revenues are
derived. Both the Clinton Administration and Congress have proposed changes that
would constrain payment growth for DPUs and SNFs, including proposals to
implement prospective payment for DPUs and SNFs. Any such change to the payment
method for DPUs and SNFs could have a material adverse effect on the Company.
See "-- Developments in the Health Care Industry" and "Business -- Reimbursement
for Services."

In addition, the Medicare and Medicaid programs are subject to other
statutory and regulatory changes, retroactive and prospective payment
adjustments, administrative rulings and funding restrictions, any of which could
have the effect of limiting or reducing reimbursement levels for services
provided by programs managed by the Company. Any changes which limit or reduce
Medicare or Medicaid reimbursement levels, or which impose significant
restrictions on participation in the Medicare or Medicaid programs, could have a
material adverse effect on the Company's clients and, in turn, on the Company.
The Company cannot predict whether any changes to such government programs will
be adopted or, if adopted, what effect, if any, such changes would have on the
Company. In addition, there can be no assurance that hospitals which offer
programs now or hereafter managed by the Company will satisfy the requirements
for participation in the Medicare or Medicaid programs.

RELIANCE ON KEY CLIENT

Approximately 73% of the Company's net revenues in fiscal 1996 was derived
from 44 management contracts with hospitals owned by Columbia/HCA Healthcare,
Inc. ("Columbia"). These contracts were originally negotiated with hospitals
owned by Epic Healthcare Group, Inc. ("Epic"), HealthTrust, Inc.
("HealthTrust"), Galen Health Care, Inc. ("Galen"), Columbia Healthcare Corp.
and HCA Hospital Corp. of America ("HCA"). Each of these hospitals was
ultimately acquired by Columbia. The termination or non-renewal of all or a
substantial number of these management contracts, whether as a result of a
corporate redirection by Columbia or otherwise, would have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Business -- Clients -- Client Hospitals."

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9

CONTRACT TERMS AND RENEWALS

The revenues of the Company are derived principally from management
contracts with general acute care hospitals. The contracts have initial terms
generally ranging up to five years. Some contracts expire without renewal and
others may be terminated by MileStone or the client hospital for various reasons
prior to their scheduled expiration. On three occasions, the Company has
negotiated a mutual termination of a management contract prior to its stated
term. The continued success of the Company is subject to its ability to renew or
extend existing management contracts and obtain new management contracts.
Contract renewals and extensions are subject to competing proposals from other
contract management companies as well as consideration by hospitals to convert
their programs from independently managed programs to programs operated
internally or to terminate their programs in order to reassign patient beds for
other health care purposes. The termination or non-renewal of a material number
of management contracts could result in a significant decrease in the Company's
net revenues and could have a material adverse effect on the Company's business,
financial condition or results of operations.

Medicare reimburses the "reasonable cost" of hospital-based SNFs, subject
to per diem limits on the costs of routine services. Reimbursable costs include
reasonable management fees, plus an allocation of the hospital's reasonable
overhead costs. A "new" hospital-based SNF is exempt from the reasonable cost
limits for a period of time usually corresponding with the SNF's first three
years of operation. Expiration of a SNF's "new provider" exemption may adversely
affect the prospect of renewal of MileStone's management contract with the SNF.
As of May 31, 1996, the exemption period had not expired for any of the
Company's 30 SNF contracts. The Company's hospital contracts also require the
Company to indemnify the hospital client against any liabilities or expenses
caused (or asserted to have been caused), with or without fault, as a result of
services provided by MileStone, its employees or agents in the contract.

Most of MileStone's management contracts require the Company to indemnify
the client hospital for any Medicare reimbursement disallowances relating to a
patient treated in a program managed by the Company or to the client hospital's
payment of the Company's management fees. The Company's refund obligation
typically survives for a period of approximately three years after termination
of the related management contract. Accordingly, the Company could become
subject to refund obligations to client hospitals. The disallowance by Medicare
of any significant portion of a client hospital's costs relating to a program
managed by the Company could adversely affect the Company. In addition, the
Company's hospital contracts provide the clients with the right, under certain
circumstances, to renegotiate the contract (and to terminate the contract if no
agreement is reached) upon the occurrence of adverse changes in applicable
accreditation standards or changes in the Medicare program, including changes
which have the effect of limiting or reducing reimbursement levels for services
provided by programs managed by the Company. Any such changes would also likely
adversely affect the ability of the Company to renew or extend existing
management contracts and to obtain new management contracts. See
"Business -- Clients -- Hospital Program Management Contracts."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends upon the continued services of its executive
officers and members of its management team, the loss of one or more of whom
could adversely affect the Company. The Company's success and growth strategy
also depend on its ability to attract and retain qualified clinical, management,
marketing and other personnel. The Company competes with general acute care
hospitals and other health care providers for the services of therapists and
other clinical personnel. Historically, there has been a shortage of qualified
individuals for these positions, and the Company believes that this shortage
will continue for the foreseeable future. Demand for such clinical personnel is
high and they are often subject to competing offers. There can be no assurance
that the Company will be able to attract and retain the qualified personnel
necessary for its business in the future. See "Business -- Services" and
"-- Employees."

7
10

DEVELOPMENTS IN THE HEALTH CARE INDUSTRY

The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
health care organizations. The Company's services are designed to function
within the structure of the health care financing and reimbursement system
currently being used in the United States. The Company believes that the
commercial value and appeal of its services may be adversely affected if the
current health care financing and reimbursement system were to be materially
changed. During the past several years, the U.S. health care industry has been
subject to an increase in governmental regulation of, among other things,
reimbursement rates. Certain proposals to reform the U.S. health care system are
currently under consideration by Congress. While they differ in significant
respects, both the Clinton Administration and Congress have proposed
restrictions on the growth of Medicare payments for DPUs and SNFs. These
proposals include provisions that would limit the growth in reimbursement for
DPU and SNF programs managed by the Company. In addition, Congress passed a
fiscal year 1996 budget reconciliation bill that contained a provision that
would have required Medicare to pay SNFs on a prospective payment basis
beginning in October 1997. Although this bill was ultimately vetoed by the
President, the Clinton Administration had proposed adopting prospective payment
for SNFs in 1999. Other legislative proposals, including one adopted by the U.S.
Senate, have called for developing a prospective payment system for non-PPS
hospitals and DPUs. Although the Company cannot predict what effect, if any,
such trends and proposals might have on its business, operating results and
financial condition, there can be no assurance that such factors will not have a
material adverse effect on the Company. In addition, many health care providers
are consolidating to create integrated health care delivery systems with greater
regional market power. These providers could have lower costs of providing
services and other advantages as a result of such consolidation. Other
legislative or market-driven reforms could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business -- Government Regulation."

The growth of managed care payors has created an emphasis on cost
containment and matching the level of service to the needs of the patient.
Increasingly, procedures once performed exclusively in hospitals and requiring
multiple day hospitalizations are now performed in a variety of settings outside
of acute care hospitals. In addition, some hospitals are excluded from managed
care plans. Efforts of managed care or other payors to direct the delivery of
health care services provided by programs managed by the Company to alternate
delivery sites could have a material adverse effect upon the Company's business,
financial condition and results of operations.

PROFESSIONAL AND GENERAL LIABILITY; INSURANCE

Various aspects of the Company's business may subject it to litigation and
liability for damages. Claims against the Company, if successful, could result
in substantial damages awards. While the Company maintains and intends to
continue to maintain professional and general liability insurance coverage,
there can be no assurance that the Company will be able to maintain such
insurance in the future or that such insurance will be available on acceptable
terms or will be adequate to cover any or all potential product or professional
liability claims. A successful product or professional liability claim in excess
of the Company's insurance coverage could have a material adverse effect upon
the Company's business, financial condition or results of operations.

COMPETITION

The health care contract management services industry is highly
competitive. MileStone's competitors include several national companies as well
as many regional and local companies, some of which have, or may obtain, greater
resources than the Company. In addition, the Company's current and potential
clients may choose to operate their own programs rather than contract with the
Company. Furthermore, general acute care hospitals, the primary market for the
Company's services, compete for patients with other providers of similar
services. The inability of the Company or its client hospitals to compete
effectively could have a material adverse effect on the Company's business,
financial condition or results of operations.

8
11

CONCENTRATION OF OWNERSHIP

Upon completion of this offering, the Company's executive officers and
directors together with their affiliates will, in the aggregate, beneficially
own 57.3% of the outstanding Common Stock (60.7% if the Underwriters'
over-allotment option is exercised in full). As a result, the executive officers
and directors of the Company and their affiliates, acting together, will be able
to control the outcome of matters requiring approval by the stockholders of the
Company, including the election of a majority of the directors, mergers,
consolidations and the sale of all or substantially all of the Company's assets.

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of Common Stock in the public market following this offering,
or the perception that such sales may occur, could adversely affect the market
price of the Common Stock. Upon completion of this offering, the Company will
have 6,229,142 shares of Common Stock outstanding, assuming no exercise of
currently outstanding options. Of these shares, the 2,500,000 shares sold in
this offering (plus any additional shares sold upon exercise of the
Underwriters' over-allotment option) will be freely transferable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
unless they are held by "affiliates" of the Company, as that term is defined in
the Securities Act and the regulations promulgated thereunder. All of the
remaining shares that will be outstanding may be sold pursuant to Rule 144,
subject to the limitations of such rule, commencing May 31, 1997. In addition,
all holders of outstanding capital stock of the Company and of options and
warrants to purchase such stock from the Company, including all of the Company's
officers and directors, have agreed, subject to certain limited exceptions, not
to sell or otherwise dispose of any shares of Common Stock or any securities
exercisable or exchangeable for or convertible into shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Smith Barney Inc. There will also be outstanding options to purchase
550,571 shares of Common Stock, of which 143,301 will be exercisable as of
August 31, 1996 and the remaining shares will become exercisable from time to
time thereafter. The shares issuable upon exercise of these options will become
eligible for sale in the public market 90 days after completion of this
offering. Also outstanding upon completion of this offering will be a warrant to
purchase 147,973 shares of Class B Common Stock which is convertible into Common
Stock. In addition, the Company intends to file a registration statement on Form
S-8 under the Securities Act to register shares of Common Stock reserved for
issuance pursuant to stock options granted by the Company. See "Shares Eligible
For Future Sale."

INTANGIBLE ASSETS

At May 31, 1996 (after giving pro forma effect to this offering), $20.9
million, or 63.5%, of the Company's total assets were intangible assets. Of
these intangible assets, $14.9 million are being amortized over a period of 40
years and $6.0 million are being amortized over a period of seven years. For the
fiscal year ended May 31, 1996, the Company recorded approximately $1.5 million
in amortization expense related to these assets. In the event of any sale or
liquidation of the Company, there can be no assurance that the value of such
intangible assets will be realized. In addition, any significant decrease in the
value of such intangible assets could have a material adverse effect on the
Company. See Note 1 of Notes to Financial Statements.

TAX RISKS ASSOCIATED WITH THE MERGER

In July 1996, the Company's parent holding corporation merged with and into
the Company, with the Company as the surviving corporation (the "Merger").
Although the Merger was structured as a tax-free event, if the Company were to
be audited, there can be no assurance that the Internal Revenue Service would
not successfully challenge the tax-free treatment, which could have a material
adverse effect upon the Company's business, financial condition or results of
operations.

ANTITAKEOVER MATTERS

The Company's Restated Certificate of Incorporation, which is expected to
be filed on or about the date of closing of this offering, authorizes the Board
of Directors to issue, without further stockholder approval, up

9
12

to 1,000,000 shares of preferred stock having such rights, preferences and
privileges as designated by the Board of Directors. The ability of the Board of
Directors to issue such preferred stock may delay, deter, or prevent a takeover
of the Company that stockholders may consider to be in their best interests. See
"Description of Capital Stock -- Certain Effects of Authorized but Unissued
Stock."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock. Although application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market, there can be no assurance that an
active trading market will develop or be sustained or that the market price of
the Common Stock will not decline below the initial public offering price. The
initial public offering price for the Common Stock has been determined by
negotiations among the Company and the Representatives of the Underwriters. For
a description of the factors considered in determining the initial public
offering price, see "Underwriting." The market price for the Common Stock
following this offering may be highly volatile. Factors such as the Company's
financial results, developments regarding contracts with clients, developments
regarding reimbursement practices or policies of third-party payors or other
matters affecting the health care industry generally or the industry segment in
which the Company competes specifically, developments regarding the Company's
competitors, sales of Common Stock by existing stockholders and market
conditions generally for similar stocks could cause the market price of the
Common Stock to fluctuate substantially. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations which, in some
circumstances, have been unrelated to the operating performance of particular
companies. Such market volatility may adversely affect the market price of the
Common Stock.

DILUTION

The initial public offering price of the Common Stock is substantially more
than the pro forma net tangible book value per share of the Common Stock.
Accordingly, purchasers of shares of Common Stock in this offering will
experience immediate dilution in the net tangible book value of $10.57 per share
(assuming a public offering price of $12.00 per share). See "Dilution."

THE COMPANY

The Company was incorporated in Delaware in 1991 as a subsidiary of Epic.
In February 1992, the Company acquired TruCare Health Systems, Inc., a Texas
corporation and provider of contract therapy services ("TruCare"). In May 1994,
Epic was acquired by HealthTrust, and Columbia purchased HealthTrust in April
1995. On May 31, 1995, the management of the Company acquired the Company from
Columbia in the Acquisition. See "Certain Transactions."

Unless otherwise indicated, the term "MileStone" or the "Company" refers to
MileStone Healthcare, Inc. and its wholly-owned subsidiaries and, for periods
prior to the Acquisition, the Company's predecessor and its subsidiaries. The
Company's principal executive offices are located at 2501 Cedar Springs Road,
Suite 600, Dallas, Texas 75201, and its telephone number at that address is
(214) 871-9600.

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USE OF PROCEEDS

The net proceeds from the sale of the 2,100,000 shares of Common Stock
offered by the Company hereby are estimated to be approximately $22.8 million
($27.0 million if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $12.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company expects that the net proceeds of this offering will
be used to repay debt incurred in May 1995 to fund the Acquisition, including
(i) senior indebtedness of approximately $7.0 million (the "Senior
Indebtedness"), and (ii) subordinated indebtedness in the aggregate principal
amount of approximately $10.6 million (the "Subordinated Indebtedness"). The
Senior Indebtedness matures on May 31, 2000 and accrues interest at various
rates based on the LIBOR rate plus 2.5% or the prime rate plus 1.0%, at the
Company's discretion. At May 31, 1996 the Senior Indebtedness incurred interest
at a blended rate of 8.26%. The Subordinated Indebtedness matures on November
30, 2000, and accrues interest at a rate of 16.5% per annum. The balance of the
proceeds will be used for general corporate purposes, including possible
acquisitions. Although the Company has had preliminary discussions from time to
time regarding possible acquisition opportunities, the Company is not presently
a party to any definitive purchase agreement or letter of intent regarding any
acquisition, and no portion of the net proceeds of this offering has been
allocated for any specific acquisition.

In connection with the repayment of indebtedness with proceeds from this
offering, the Company will incur a one-time, non-cash charge of approximately
$221,000 in the period in which this offering is completed as a result of the
write-off of unamortized loan origination costs.

Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term U.S. government securities,
high-grade commercial paper, short-term, interest bearing securities, or money
market funds and bank deposits or other similar instruments. The Company will
not receive any of the proceeds from the sale of the shares of Common Stock by
the Selling Stockholders. See "Principal and Selling Stockholders."

DIVIDEND POLICY

The Company intends to retain all of its future earnings, if any, to
finance the growth and development of its business and therefore does not
anticipate paying cash dividends on its Common Stock or Class B Common Stock in
the foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, the future earnings, operations, capital requirements and financial
condition of the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

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CAPITALIZATION

The following table sets forth the capitalization of the Company at May 31,
1996, and as adjusted to reflect (i) the conversion of all outstanding shares of
Series A Preferred into 3,675,000 shares of Common Stock and (ii) the sale of
the 2,100,000 shares of Common Stock offered by the Company hereby (assuming a
public offering price of $12.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses) and the application
of the estimated net proceeds therefrom as described under "Use of Proceeds."
This table should be read in conjunction with the Company's Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.

MAY 31, 1996
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)

Long-term debt and subordinated debentures, including current
maturities............................................................. $17,543 $ --
------- -------
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares authorized;
no shares issued or outstanding..................................... -- --
Series A Preferred Stock, $.001 par value, 5,000,000 shares
authorized; 5,000,000 shares issued and outstanding, actual(1);
and no shares issued or outstanding, as adjusted.................... 5,000 --
Common Stock, $.001 par value; 10,000,000 shares authorized;
294,000 shares issued and outstanding, actual; and
6,229,142 shares issued and outstanding, as adjusted(2)(3).......... -- 6
Class B Common Stock, $.001 par value; 10,000,000 shares
authorized(4); no shares issued or outstanding(3)................... -- --
Additional paid-in capital............................................. 240 28,201
Retained earnings(5)................................................... 1,762 1,541
------- -------
Total stockholders' equity........................................ 7,002 29,748
------- -------
Total capitalization........................................... $24,545 $29,748
======= =======

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

(1) Convertible into 3,675,000 shares of Common Stock.

(2) As adjusted amounts include 10,142 shares issued on June 30, 1996 upon
exercise of options and 150,000 shares issued upon exercise of warrants in
connection with this offering. Excludes 550,571 shares of Common Stock
issuable upon the exercise of stock options with a weighted average exercise
price of $1.63 outstanding as of July 16, 1996. See "Management -- Stock
Option Plans," "Description of Capital Stock" and Notes 5 and 6 of Notes to
Financial Statements.

(3) Excludes 147,973 shares of Class B Common Stock issuable upon exercise of
the Class B Warrant. The Class B Common Stock is convertible into Common
Stock (subject to certain restrictions), and the Common Stock is convertible
into Class B Common Stock, in each case at any time and on a one-for-one
basis. See "Description of Capital Stock" and Note 6 of Notes to Financial
Statements.

(4) As adjusted, authorized shares will be 500,000.

(5) Reflects a one-time, non-cash charge of $221,000 relating to the write-off
of unamortized loan origination costs as a result of the repayment of
indebtedness with the proceeds from this offering. Such charge will be
recognized in the period in which this offering is completed.

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DILUTION

The pro forma net tangible book value (deficit) of the Company as of May
31, 1996 was $(13.9 million), or $(3.37) per share. Pro forma net tangible book
value per share is determined by dividing the pro forma net tangible book value
of the Company (total tangible assets less total liabilities) by the total
number of outstanding shares of Common Stock (giving effect to the conversion of
all outstanding shares of Series A Preferred into 3,675,000 shares of Common
Stock, the issuance of 150,000 shares of Common Stock upon the exercise of
warrants and the issuance of 10,142 shares of Common Stock upon the exercise of
options subsequent to May 31, 1996). Without taking into effect any changes in
pro forma net tangible book value after May 31, 1996, other than to give effect
to the sale of the 2,100,000 shares of Common Stock offered by the Company
hereby (assuming a public offering price of $12.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses), the pro
forma net tangible book value of the Company as of May 31, 1996 would have been
$8.9 million, or $1.43 per share. This represents an immediate increase in pro
forma net tangible book value of $4.80 per share to existing stockholders and an
immediate dilution of $10.57 per share to new investors purchasing shares in the
offering. The following table illustrates the per share dilution:

Assumed public offering price per share.............................. $12.00
Pro forma net tangible book value (deficit) per share as of May 31,
1996............................................................ $(3.37)
Increase in net tangible book value per share attributable to new
investors....................................................... 4.80
------
Pro forma net tangible book value per share after this offering...... 1.43
------
Dilution per share to new investors.................................. $10.57
======

The following table summarizes, on a pro forma basis (giving effect to the
conversion of all outstanding shares of Series A Preferred, the issuance of
150,000 shares of Common Stock upon the exercise of warrants and the issuance of
10,142 shares of Common Stock upon the exercise of options) as of May 31, 1996,
the total number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors purchasing shares in this offering (assuming a
public offering price of $12.00 per share and before deduction of underwriting
discounts and commissions and estimated offering expenses):

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------

Existing stockholders.................. 4,129,142 66.3% $ 5,370,728 17.6% $ 1.30
New investors.......................... 2,100,000 33.7 25,200,000 82.4 12.00
--------- ------- ----------- -------
Total........................ 6,229,142 100.0% $30,570,728 100.0%
======== ===== ========== =====

Except as described above, the foregoing tables assume no exercise of
options or warrants outstanding at July 26, 1996. At such date, there were
outstanding options to purchase 550,571 shares of Common Stock at a weighted
average exercise price of $1.63 per share. In addition, at such date the Class B
Warrant, consisting of a warrant to purchase 297,973 shares of Class B Common
Stock at an exercise price of $.82 per share (of which 150,000 shares are being
sold in this offering), was outstanding. To the extent such options or warrant
are exercised, there will be further dilution to new investors. See
"Management -- Stock Options," "Description of Capital Stock," "Shares Eligible
for Future Sale" and Note 6 of Notes to Financial Statements.

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SELECTED FINANCIAL DATA

The selected financial data set forth below for the 12-month period ending
July 31, 1994, the 10-month period ending May 31, 1995 and the 12-month period
ending May 31, 1996 and at May 31, 1995 and 1996 have been derived from the
Company's financial statements, which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere herein. The selected financial
data for the twelve months ended July 31, 1992, and 1993 and as of July 31,
1992, 1993 and 1994 are derived from the unaudited financial statements of the
Company and include, in the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position of the Company for and as of the end of such periods. The Company
changed its fiscal year end to May 31 in order to conform the current year to
the Acquisition which occurred on May 31, 1995. The 1992, 1993, 1994 and 1995
statement of income data and the 1992, 1993 and 1994 balance sheet data reflect
the operations and financial position of the Company's predecessor. The selected
historical financial data of the Company is qualified by reference to and should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.

FISCAL PERIOD(1)
-------------------------------------------------------
1992(2) 1993 1994 1995 1996
------- ------- ------- ------- -------

(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Net revenues.............................. $9,709 $14,280 $20,245 $24,121 $30,624
Operating expenses:
Salaries................................ 6,820 11,278.. 13,899 15,664 17,725
Other operating expenses................ 761... 1,193 3,632 3,378 4,377
Selling, general and administrative..... 937 1,325.. 1,693 2,087 1,564
Depreciation............................ 133 116 113 98 98
Amortization............................ 37 124.... 113 78 1,478
------- ------- ------- ------- -------
Total operating expenses.................. 8,688 14,036.. 19,450 21,305 25,242
------- ------- ------- ------- -------
Income from operations.................... 1,021 244.... 795 2,816 5,382
Earnings in equity investment............. 0 0 (114) (61) (4)
Interest expense.......................... 258 86 297 135 2,424
------- ------- ------- ------- -------
Income before income taxes................ 763 158 612 2,742 2,962
Income taxes.............................. 297 89 259 1,068 1,200
------- ------- ------- ------- -------
Net income................................ $ 466 $ 69 $ 353 $ 1,674 $ 1,762
====== ======= ======= ======= =======
Net income per share:(3)
Primary................................. $ 0.40
Fully diluted........................... $ 0.39
Weighted average shares
outstanding(3)(4)....................... 4,416

JULY 31, MAY 31,
------------------------------- -------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------

(In thousands)
BALANCE SHEET DATA:
Working capital (deficit)................. $ (625 ) $(1,054) $ 108 $ 467 $ 1,951
Total assets.............................. 3,704 6,659 7,967 29,763 27,612
Long-term debt and subordinated
debentures, including current
maturities.............................. 87 1,776 1,321 22,700 17,543
Stockholders' equity...................... 724 946 2,210 5,240 7,002

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

(1) The periods presented represent the 12-month periods ending July 31, 1992,
1993 and 1994, the 10-month period ending May 31, 1995 and the 12-month
period ending May 31, 1996. As a result of the varying lengths of the fiscal
periods, period-to-period comparisons are not necessarily meaningful.

(2) In February 1992, the Company acquired TruCare. See "The Company."

(3) Per share data for 1992, 1993, 1994 and 1995 are not meaningful due to the
Acquisition.

(4) Represents weighted average common and common equivalent shares outstanding.

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17

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

This Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere herein.

OVERVIEW

The Company was formed in September 1991 as a wholly owned subsidiary of
Epic for the purpose of providing specialty care unit management services to
hospitals. In February 1992, the Company acquired TruCare, a provider of
contract therapy services. In May 1994, Epic was acquired by HealthTrust, and in
April 1995, HealthTrust was acquired by Columbia. On May 31, 1995, the
management of the Company completed the Acquisition of the Company from Columbia
for $27 million in cash.

The Company's revenues are derived from managing hospital specialty care
units and therapy programs, providing contract therapy services to other
healthcare entities and providing services through owned and operated outpatient
therapy clinics. For the fiscal year ended May 31, 1996, hospital program
management services, contract therapy services and outpatient clinic services
represented 82%, 13% and 5% of revenues, respectively. The growth in the
Company's operating revenues and net income during fiscal 1995 and 1996 was
primarily the result of the increase in the number of operational units under
management and the number of patients in each unit. Margins on hospital
management contracts are typically higher than the margins on non-hospital
contracts.

Hospitals typically open the units managed by the Company shortly after the
end of their Medicare fiscal year. A hospital's Medicare fiscal year-end can be
any month of the calendar year, and does not necessarily coincide with the
hospital's fiscal year-end. Because most of the units the Company manages for
hospitals are affected by the hospital's Medicare fiscal year-end, the Company
cannot predict when units will open until a contract has been signed. Often,
several units open in one quarter and significantly fewer open in a subsequent
quarter. For this reason, the Company's quarterly revenues may fluctuate.

MileStone provides its services under contracts with a variety of
compensation arrangements, some of which include risk sharing arrangements.
Depending on the contract, the Company is paid either a fixed monthly fee or a
fee per patient day. Revenues are subject to adjustment for cost of living
increases, bad debt provisions and Medicare cost report settlement adjustments.
To date, the Company has not had to make any refunds to client hospitals as a
result of a Medicare cost report audit. Substantially all of the Company's
expenses are comprised of salaries and contracts for professional services.
Factors such as the number of programs managed, patient census, patient mix,
physician prescribing patterns and changes in contract terms upon renewal affect
the revenues and margins derived from MileStone's individual hospital clients.

The current owners acquired the Company in a transaction that was accounted
for as a purchase. The excess purchase price over net assets was $22.2 million.
Goodwill, contracts and loan origination fees are recorded at cost on the date
of the related agreement or acquisition and are amortized on a straight-line
basis. Goodwill is amortized over 40 years, contracts are amortized primarily
over seven years and loan origination fees are amortized over the five-year term
of the related debt instruments.

The Company changed its fiscal year end to May 31 in connection with the
Acquisition on May 31, 1995. The periods presented represent the 12-month period
ended July 31, 1994, the 10-month period ended May 31, 1995 and the 12-month
period ended May 31, 1996. As a result of the varying lengths of the fiscal
periods, period-to-period comparisons are not necessarily meaningful. The 1992,
1993, 1994 and 1995 statement of income data and the balance sheet data prior to
May 31, 1995 reflect the operations of the Company's predecessor.

15
18

Except for the historical information contained herein, the discussion in
this Prospectus contains certain forward-looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed under "Risk Factors," as
well as those discussed elsewhere herein.

RESULTS OF OPERATIONS

The following table sets forth for the fiscal periods indicated, certain
statement of earnings items expressed as a percentage of net revenues:

1994 1995 1996
----- ----- -----

Net revenues................................................ 100.0% 100.0% 100.0%
Salaries.................................................... 68.7 65.0 57.9
Other operating expenses.................................... 17.8 14.0 14.3
Selling, general and administrative......................... 8.4 8.6 5.1
Depreciation................................................ 0.6 0.4 0.3
Amortization................................................ 0.6 0.3 4.8
----- ----- -----
Income from operations...................................... 3.9 11.7 17.6
Earnings in equity investment............................... (0.6) (0.3) *
Interest expense............................................ 1.5 0.6 7.9
----- ----- -----
Income before income taxes.................................. 3.0 11.4 9.7
Income tax expense.......................................... 1.3 4.4 3.9
----- ----- -----
Net income.................................................. 1.7% 7.0% 5.8%
===== ===== =====

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

* Less than one-tenth of one percent.

Fiscal Period Ended May 31, 1996 (12 months) Compared to Fiscal Period Ended May
31, 1995 (10 months)

Net revenues increased by $6.5 million, or 27.0%, primarily due to an
increase of $7.5 million in hospital revenue, offset in part by a decrease in
non-hospital revenue of $1.1 million. The increase in hospital revenue resulted
from the addition in 1996 of 14 new contracts, a higher patient census in
variable-fee contracts and two additional months in the period. During 1995, the
Company implemented a strategy of terminating or not renewing non-hospital
therapy contracts that did not achieve certain profitability objectives. This
strategy resulted in the decline in non-hospital revenue. The Company continues
to review its non-hospital contracts to evaluate performance relative to its
profitability objectives.

Salaries expense consists of salaries, wages and benefits for corporate and
unit personnel. Salaries expense increased $2.1 million, or 13.2%. The increase
resulted from the extra two months of expenses and the additional contracts
becoming operational, offset in part by the Company's strategy to exit lower
margin non-hospital contracts. As a percentage of net revenue, salaries
decreased from 65.0% to 57.9%, principally as a result of economies of scale.
These economies are derived from the fact that a portion of salaries relates to
corporate and administrative personnel, as opposed to specialty care unit
personnel. Corporate and administrative salaries increased only marginally as
additional personnel were added to the specialty care units to support increased
volume.

Other operating expenses consist primarily of medical director fees, travel
and other operating expenses. Other operating expenses increased $1.0 million,
or 29.6%, and remained approximately 14.0% of net revenues. These expenses
increased as additional contracts became operational and due to the extra two
months of expenses, offset in part by decreases due to the strategy to exit
lower margin non-hospital contracts.

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19

Selling, general and administrative expenses consist primarily of supplies,
professional fees and (for periods prior to the Acquisition) predecessor parent
overhead allocations and other expenses. Selling, general and administrative
expenses decreased $523,000, or 25.0%, due to the elimination of certain
expenses allocated to the Company by its former parent of $654,000, offset in
part by increases primarily due to the extra two months of expenses. As a
percentage of net revenue, selling, general and administrative expenses
decreased from 8.6% to 5.1%, principally as a result of the elimination of
parent overhead allocations and, to a lesser extent, economies of sale.

Amortization expense increased by $1.4 million due to intangible assets
added as a result of the Acquisition.

Income from operations increased $2.6 million, or 91.0%, resulting
primarily from the additional unit openings, improvements in patient census and
two additional months of operation, offset in part by additional amortization
expense resulting from the intangible assets recorded in connection with the
Acquisition.

Interest expense increased $2.3 million due to debt incurred as a result of
the Acquisition.

The Company's effective tax rate remained relatively constant at 39.0% in
1995 and 40.5% in 1996.

Fiscal Period Ended May 31, 1995 (10 months) Compared to Fiscal Period Ended
July 31, 1994 (12 months)

Net revenue increased $3.9 million, or 19.1%, primarily due to an increase
of $6.1 million in hospital revenue, offset in part by a decrease in
non-hospital revenue of $2.2 million. Net revenue also decreased due to the
shorter period. The increase in hospital revenue resulted primarily from the
addition in 1995 of 21 new contracts and a higher patient census related to
variable-fee contracts. The decrease in non-hospital revenue resulted primarily
from therapy services being performed in-house in the long-term care industry
and the Company's strategy to exit lower margin contracts.

Salaries expense increased $1.8 million, or 12.7%. These expenses increased
as additional contracts became operational, offset in part by the Company's
strategy to exit lower margin non-hospital contracts and two fewer months in the
period. As a percentage of net revenues, salaries decreased from 68.7% to 65.0%,
principally as a result of economies of scale.

Other operating expenses decreased $254,000, or 7.0%. These expenses
decreased primarily due to two fewer months in the period coupled with decreases
due to the Company's strategy to exit lower margin non-hospital contracts. As a
percentage of net revenues, other expenses decreased from 17.8% to 14.0%,
principally as a result of economies of scale.

Selling, general and administrative expenses increased $393,000, or 23.2%,
primarily due to an increase in corporate overhead allocation from the Company's
predecessor parent of $510,000, offset in part by decreases primarily due to two
fewer months in the period.

Income from operations increased $2.0 million, or 254.1%, resulting
primarily from the additional unit openings and improvements in patient census,
offset in part by a decrease due to two fewer months of operations in the
period.

LIQUIDITY AND CAPITAL RESOURCES

At May 31, 1996, the Company's working capital was $2.0 million and
included cash and cash equivalents of $504,000. The Company's operating cash
flows constitute its primary source of liquidity and historically have been
sufficient to fund its working capital requirements. During the year ended May
31, 1996, the Company's operating activities generated $6.4 million primarily as
a result of a decrease in accounts receivable, an increase in non-cash charges
for amortization expense of $1.4 million and deferred interest of $1.6 million,
offset in part by a decrease in non-cash charges for income taxes of $1.1
million, as well as an increase in accounts payable and other accrued
liabilities. Net accounts receivable were $4.9 million at May 31, 1996 compared
to $5.5 million at May 31, 1995. Accounts receivable decreased primarily due to
lower revenues generated by therapy services following an effort by the Company
to terminate lower margin non-hospital contracts. Therapy contracts generally,
and those for which the Company bills Medicare

17
20

specifically, have longer collection cycles than hospital contracts. The number
of days of average net revenues in net receivables was 63 days and 65 days as of
May 31, 1996 and May 31, 1995, respectively.

The Company's cash used in investing activities in fiscal 1996 primarily
related to capital expenditures of $107,000. The Company's cash used in
financing activities of $6.7 million for fiscal 1996 related primarily to
payments on debt incurred as a result of the Acquisition.

On May 31, 1995, the Company entered into a revolving loan (the "Revolver")
under a senior indebtedness agreement whereby the Company can borrow up to $5.0
million for working capital. The Revolver expires on May 31, 2000. Borrowings
under the Revolver bear interest at variable rates based, at the Company's
option, on the bank's base rate plus 1/2% or the Eurodollar rate plus 2.25%.
There was no outstanding balance on the Revolver as of May 31, 1996. This
agreement will be terminated upon completion of this offering.

The Company is required under the senior indebtedness agreement with
respect to the term loan to make a mandatory prepayment within 90 days after the
fiscal period-end in an amount equal to 75% of the excess cash flow with respect
to such fiscal year, as defined in the agreement. A prepayment of $3.2 million
is to be paid during the year ended May 31, 1997. Management intends to draw the
prepayment amount under the revolving loan.

The Company expects to fund its future working capital needs, capital
expenditures, business expansion and debt service requirements through a
combination of internal sources and outside financing.

INFLATION

Although inflation has abated during the last several years, the rate of
inflation in healthcare related services continues to exceed the rate
experienced by the economy as a whole. The Company's management contracts
typically provide for an annual increase in the fees paid to the Company by its
clients based upon various inflation indices. The increases have historically
offset the increases in costs incurred by the Company.

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BUSINESS

GENERAL

MileStone is a leading provider of program management services for
specialty care units in hospitals. The Company's services are designed to enable
hospitals to broaden the care continuum provided to patients. MileStone manages
a broad range of clinical programs that includes inpatient acute physical
rehabilitation, comprehensive outpatient rehabilitation, skilled nursing and
subacute care, geropsychiatric services, cardiac outpatient services, and sport
and industrial medicine. The Company also provides contract therapy services to
hospitals, outpatient facilities, subacute facilities, schools and other
locations and owns and operates nine outpatient therapy clinics. As of May 31,
1996, the Company provided services in 14 states under 121 contracts.
Eighty-three of these were program management contracts for hospitals,
accounting for 82% of MileStone's revenues for the fiscal year ended May 31,
1996.

INDUSTRY

Health care is one of the largest industries in the United States,
representing total expenditures of approximately $1 trillion, according to the
Health Care Financing Administration ("HCFA"). Health care expenditures,
including hospital expenditures, historically have outpaced inflation due to,
among other factors, the aging of the population and the increased availability
and use of high-technology treatments and tests. Acute-care hospitals have
traditionally been the focus of health care delivery in the community and have
accounted for a substantial percentage of the expenditures for health care
services. HCFA estimates that in 1995, hospitals accounted for approximately 40%
of total health care expenditures.

A hospital has the choice of either developing and operating its own
specialty care programs or outsourcing such programs to a third party on a
contract basis. Hospitals are increasingly relying on third parties to provide a
wide range of services, including post-acute care, emergency room staffing,
pharmacy management, and pediatric care. A hospital typically contracts with a
third party when it lacks the resident expertise necessary for developing,
managing and operating such programs on its own. A hospital often has
insufficient expertise in the marketing and development activities required to
support such programs and the expertise necessary to design and operate programs
that satisfy regulatory, licensing and accreditation requirements. While
outsourcing has increased significantly in the last few years, it still accounts
for a relatively small percentage of hospital budgets. The Company believes
outsourcing by hospitals will continue to increase in the coming years.

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STRATEGY

The Company's growth strategy is focused on enhancing its position as a
leading provider of quality contract management services to hospitals in the
United States. The key elements of this strategy are to:

Expand Client Base. The Company believes that there will continue to
be strong demand for the outsourcing of specialty care services by
hospitals. The Company's target market consists of approximately 3,500
hospitals in the United States. These hospitals are large enough and have
the market presence to support the Company's programs. The Company intends
to further penetrate this market by providing high quality, cost-effective
management services that differentiate its hospital clients in their
respective markets.

Increase Penetration of Existing Hospital Clients. The Company intends
to increase revenues by expanding the range of services provided to its
existing client base. MileStone believes that the predisposition of its
clients to outsource specialty care and other programs, combined with the
Company's demonstrated expertise in managing the client's existing program
and industry factors that favor the development of specialty care programs
and the use of outsourcing firms, will generate attractive cross-selling
opportunities. The number of hospitals in which the Company managed
multiple programs grew from one at January 1992 to 17 at July 16, 1996. In
addition, to expand the care continuum managed by MileStone and thereby
enhance cross-marketing opportunities, the Company is exploring the
management of additional services, such as senior health centers and
assisted living facilities.

Emphasize Clinical Outcomes and Cost-Effectiveness. MileStone believes
that its emphasis on quality outcomes and continuous quality improvement
gives it a competitive advantage. MileStone utilizes treatment protocols
designed to deliver care efficiently and effectively. The Company also
utilizes proprietary systems designed to enhance the quality and
cost-effectiveness of its programs. These include a treatment outcomes
management system, which measures and tracks the efficacy of prescribed
treatments, and a productivity system designed to capture information
regarding therapist productivity in order to more efficiently deliver
therapy services.

Pursue Complementary Acquisitions. Faced with the uncertainties
related to health care reform, increasing consolidation and sophistication
of client hospitals, a growing need for capital resources and the necessity
to provide a wide range of specialized services, many small companies
providing contract management services to hospitals are seeking to
affiliate with, or be acquired by, larger contract management companies.
The Company intends to capitalize on this trend by pursuing acquisitions of
businesses which are within the Company's scope of services or that perform
services which are complementary to those already offered by the Company.

SERVICES

MileStone is a leading provider of contract management services for
specialty care units in hospitals. The Company also provides contract therapy
services to hospitals, outpatient facilities, subacute facilities, schools and
other locations and owns and operates nine outpatient therapy clinics. At May
31, 1996, the Company provided services in 14 states under 121 contracts, 83 of
which were hospital contracts. The remainder consisted of contracts for the
provision of therapy services outside of the hospital setting. For the fiscal
year ended May 31, 1996, hospital program management services, contract therapy
services and outpatient clinic services represented 82%, 13% and 5% of revenues,
respectively.

The Company's hospital program management services are designed to enable
its client hospitals to respond proactively to market trends by delivering
quality health care throughout the care continuum. The growth of managed care
has led to the need for integrated delivery systems consisting of alliances
among healthcare facilities and providers organized to offer a range of health
care services. The Company believes that by coupling a hospital's existing
plant, equipment and other resources with the Company's expertise in delivering
services throughout the care continuum a hospital can maximize capacity
utilization and become a full service health care provider on a cost-effective
basis.

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The Company believes that a hospital derives two primary benefits by
contracting with MileStone to design and manage specialty care or therapy
programs:

Enhance Likelihood for Operational Success. The Company believes that
its focus on managing these programs has allowed it to develop
significantly greater expertise in the design, operation and marketing of
specialty care programs than that of most acute care hospitals and that
this expertise greatly enhances the likelihood of the operational and
financial success of the program. In addition, the Company's knowledge and
experience in the areas of licensing, certification, staffing and
reimbursement allow it to establish programs and achieve profitability more
quickly than hospitals which choose to rely on internal resources.

Provide for Better Integration with Other Hospital Services. The
Company believes that it possesses a more sophisticated understanding than
most acute care hospitals of how specialty care programs can be integrated
with a hospital's existing services in order to maximize the potential of
the hospital's care continuum, and thereby enhance patient flow. In
designing each program, the Company considers the existing services
provided by the hospital client, as well as by other health care providers
in the market, in order to identify opportunities for maximizing the
success not only of the program but of the hospital's other services.

MileStone manages a broad range of clinical programs, including inpatient
acute physical rehabilitation, comprehensive outpatient rehabilitation
facilities, skilled nursing and subacute care, contract therapy services,
geropsychiatric, cardiac outpatient, and sports and industrial medicine. The
programs use a treatment team approach, with the admitting physician, social
workers, nurses, therapists and counselors coordinating each phase of therapy.
The clinical components may include medical and nursing services, physical
therapy, group and family therapy, recreational therapy, occupational therapy,
lifestyle education, speech language therapy and social services. The
involvement of the patient's family is strongly encouraged. Each program is
individually tailored to address the needs of the patients, the client hospital,
physicians and payor groups.

Under a typical program, MileStone:

- Conducts a strategic marketing assessment to gather hospital census and
demographic data and to create a strategic marketing plan which addresses
the specific needs of the community.

- Provides guidance on issues related to certification, licensing,
reimbursement and other regulatory issues.

- Assists the hospital architect in designing the unit to optimize space
and equipment utilization and meet regulatory requirements.

- Coordinates patient services and resources of the hospital to ensure
optimal clinical path development.

- Supervises hiring, staffing and policy and procedure development as well
as marketing and community relations activities.

- Conducts ongoing training of staff and maintains quality assurance
programs.

- Interfaces with the hospital's administrative and clinical departments to
achieve seamless delivery of patient care. MileStone's name is not used
and its role is not publicly emphasized in the operation or marketing of
the programs.

- Provides family counseling and other services designed to transition the
patient from the hospital setting to the home, nursing home or other
post-acute setting.

In general, the clinical, marketing and administrative staff for each
program managed by the Company is recruited and compensated by MileStone, except
for the nursing staff, which is provided by the hospital. Therapists may also be
provided by the hospital. Each program has a medical director, an administrative
program director who is usually a health care professional, a community
relations coordinator, and additional therapists, as needed. As a condition for
certification, a medical director is required to participate in the Medicare
program. The medical director may be retained and compensated by either the
hospital or

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MileStone. Each local program director receives ongoing support from corporate
and regional support staff in all areas, including recruiting, finance,
reimbursement, development, marketing and quality assurance. The Company
recruits staff by contacting qualified individuals who reside in or near the
location involved or who have expressed an interest in relocating there. The
Company prescreens responses to determine which candidates best satisfy the
Company's qualifications and verifies the licensing, training and professional
references of such candidates. Following this qualification process, the Company
interviews the candidates and arranges interviews for the candidates with
hospital personnel.

The treatment programs managed by MileStone are designed to provide a care
continuum consisting of inpatient and outpatient services. Set forth below is a
description of hospital programs currently managed by the Company.

Acute Rehabilitation Units. Typical patients in acute rehabilitation
units suffer from stroke or orthopedic impairment. To be eligible for these
programs, patients must be strong enough to participate in and benefit from
a minimum of three hours of therapy per day. MileStone is focused on
ensuring that treatments provided are cost-effective and outcome-oriented.
At July 16, 1996, MileStone managed 29 acute rehabilitation units.

Subacute Units. Patients in subacute units typically have a
concentration of pulmonary, cardiac, post-surgical cancer and other medical
conditions and require intravenous antibiotic therapy or nutritional
support. Patients with stroke or orthopedic conditions may also be treated
in subacute units. At July 16, 1996, MileStone managed 30 subacute units.

Outpatient Therapy Programs. Patients in outpatient therapy programs
typically have transitioned from a more acute level of service. At July 16,
1996, MileStone managed 15 outpatient programs, 14 of which were
comprehensive outpatient rehabilitation facilities ("CORFs").

Contract Therapy Management. Hospitals are required to provide therapy
services. A shortage of therapists in the United States coupled with
hospitals' general lack of productivity management tools for therapists
have led to a strong demand for therapy management services. The Company
believes that the MileStone therapy product line with a proprietary therapy
productivity system and dedicated therapy recruiters provide a competitive
advantage in this area. At July 16, 1996, MileStone managed the therapy
programs of nine hospitals.

Other Care Continuum Programs. MileStone also currently manages other
care continuum programs such as geropsychiatric inpatient programs and
cardiac outpatient programs. MileStone intends to explore adding additional
services such as senior health centers, assisted living management and
other complimentary services.

In addition to providing hospital management services, the Company provides
contract therapy services to outpatient facilities, subacute facilities, schools
and other locations, and owns and operates nine outpatient therapy clinics.

CLIENTS

Client Hospitals. MileStone's hospital clients are located in 14 states and
range in size from large tertiary care hospitals to general acute care hospitals
located in smaller communities. The Company's typical hospital has approximately
250 beds. Most of these clients are for-profit general acute care hospitals,
some of which are members of an affiliated group.

At July 16, 1996, MileStone had management contracts with 44 hospitals
owned by Columbia, the largest operator of hospitals in the country. These
hospitals collectively accounted for approximately 73% of the Company's net
revenues for the year ended May 31, 1996. Of the 44 Columbia hospitals with
which MileStone has contracts, eight contracts were originally negotiated by
MileStone with Epic, four were negotiated with HealthTrust, eleven were
negotiated with Galen, three were negotiated with not-for-profit hospitals and
three were negotiated with HCA prior to the acquisition of such entities by
Columbia. The

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Company believes that the broad distribution of the original contracts for these
Columbia facilities demonstrates a correspondingly broad success in marketing to
several for-profit hospital companies.

Hospital Program Management Contracts. MileStone provides its management
services under contracts which have terms that generally range up to five years.
Under the contracts, the hospital typically provides the space (including beds
for inpatient programs), nursing staff and support services (such as billing,
dietary and housekeeping) and may provide therapists and medical directors.
MileStone is paid directly by its hospital clients for the management services
it provides. Under each contract, MileStone receives either a variable fee
related in part to patient census at the program or a fixed fee per month. These
fees are usually required to be paid to the Company by the hospital within 30
days of the billing date. Under most contracts, the management fee is subject to
annual adjustment as a result of changes in the consumer price index or other
economic indicators. The fee may also be subject to adjustments for hospital bad
debt expenses and to reflect discounts given by the client hospital to managed
care and other payors.

Most of MileStone's management contracts require the Company to indemnify
the client hospital for any Medicare reimbursement disallowances relating to a
patient treated in a program managed by the Company or to the client hospital's
payment of the Company's management fees. The Company's refund obligation
typically survives for a period of approximately three years after termination
of the related management contract. Accordingly, the Company could become
subject to refund obligations to client hospitals. The disallowance by Medicare
of any significant portion of a client hospital's costs relating to a program
managed by the Company could adversely affect the Company. The Company's
hospital contracts also require the Company and the hospital client to indemnify
each other against any liabilities or expenses caused (or asserted to have been
caused), with or without fault, as a result of services provided by the
indemnifying party, its employees or agents in the contract. The contracts
typically prohibit the client hospital from soliciting MileStone employees
during the contract term.

The contracts are generally terminable by either party if the program
contemplated by the contract is not operating within a specified time period
(typically one year after the date of the contract). The contracts are also
typically terminable upon a breach of the contract by the other party, the
occurrence of certain other specified events involving insolvency or the
revocation of applicable accreditation or licenses. Furthermore, the contracts
typically provide the Company and its clients with the right to renegotiate the
contract (and to terminate the contract if no agreement is reached) upon the
occurrence of material changes in Medicare regulations or Joint Committee on
Accreditation of Health Care Organizations or other accreditation standards
onerous to either party. Any such changes would also likely adversely affect the
ability of the Company to renew or extend existing management contracts and to
obtain new management contracts. See "Risk Factors -- Reimbursement
Considerations."

Contract Therapy Agreements. The Company's physical rehabilitation services
are provided under contracts which generally have an initial term of one year
and are automatically renewed for subsequent periods of one year unless either
party gives notice. Most of the contracts may be terminated by either party upon
30 days' prior written notice. Most of these contracts entitle the Company to be
paid specified fees by the client per unit of therapist time and include
indemnification requirements for Medicare disallowances similar to the
requirements in hospital program management contracts. See "Clients -- Hospital
Program Management Contracts." Under other contracts, the Company is reimbursed
for services directly through the Medicare program in accordance with prescribed
rates and is subject to retrospective disallowances for approximately three
years.

SALES AND MARKETING

The Company's target market is comprised of for-profit and not-for-profit
hospitals that often have excess capacity and are seeking to gain competitive
advantage through the provision of post-acute, subacute and other specialty care
services. The Company estimates that there are 3,500 of such hospitals in the
United States. These hospitals are large enough and have sufficient market
presence to benefit from the Company's programs. Potential clients include
hospitals without existing programs such as those managed by the Company, as
well as hospitals with existing programs of which the Company could assume
management.

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During the fiscal year ended May 31, 1996, the Company signed 24 new management
contracts and one existing contract was terminated. To date, all six of the
Company's hospital management contracts that have come up for renewal have been
renewed.

The Company markets its services by advertising in hospital and health care
trade journals and by attending and participating in various hospital trade
conferences. Historically, the Company has gained a significant number of its
client hospitals through referrals from existing clients. The Company's
marketing efforts involve the active participation of its executive officers as
well as three full-time management contract sales representatives. The sales
representatives compile information from numerous databases to identify a list
of prospective clients that is updated regularly based on criteria indicating
which hospitals are the most likely potential clients. A MileStone sales
representative directly contacts the prospective clients and, where appropriate,
presents a detailed proposal to the hospital's management. The proposal often
contains detailed financial projections of the proposed programs and is tailored
to address the potential client's specific needs.

REIMBURSEMENT FOR SERVICES

Although MileStone is paid directly by its client hospitals for the
management services it provides, most of the Company's client hospitals receive
reimbursement under the Medicare or Medicaid programs for health services
provided in programs managed by MileStone. In order to receive reimbursement
under the Medicare or Medicaid programs, each hospital or facility must meet
applicable requirements promulgated by the United States Department of Health
and Human Services relating to the standards of patient care and comply with all
state and local laws, rules and regulations. MileStone believes that the
programs it manages comply in all material respects with applicable Medicare and
Medicaid requirements. In addition, under many of its management contracts, the
Company is obligated to refund all or a portion of its fee if either Medicare
denies reimbursement for an individual patient treatment or if the fee paid to
the Company is denied by Medicare as a reimbursable cost.

DPU Management Services. Since 1983, Medicare has generally used the PPS to
reimburse general acute care hospitals for inpatient operating costs. Under this
system, a general acute care hospital receives a fixed payment for each of
approximately 490 DRGs, subject to certain payment adjustments based on
geographic location, teaching status, service to indigent patients and outlier
cases. However, services furnished in a qualifying rehabilitation or psychiatric
DPU or hospital-based SNF, the sites from which most of the Company's revenues
are derived, are exempt from prospective payment. DPU costs are reimbursed on a
reasonable-cost basis, subject to certain limitations and incentives.

SNF Management Services. Medicare reimburses the "reasonable cost" of
hospital-based SNFs, subject to per diem limits on the cost of routine services.
Reimbursable costs include reasonable management fees, plus an allocation of the
hospital's reasonable overhead costs. A "new" hospital-based SNF is exempt from
the reasonable cost limits for a period of time usually corresponding with the
SNF's first three years of operation. Expiration of an SNF's "new provider"
exemption may adversely affect the prospect of renewal of MileStone's management
contract with the SNF. As of May 31, 1996, the exemption period had not expired
for any of the Company's 30 SNF contracts.

Contract Therapy Services. MileStone furnishes therapy services on a
contract basis to certain providers, and the providers bill Medicare for
reimbursement of the amounts paid to MileStone for these services. Medicare has
the authority to establish limits on the amount it reimburses for therapy
services. For services other than inpatient hospital services, these limits are
equivalent to the reasonable amount that would have been paid if provider
employees had furnished the services. Medicare has exercised this authority by
publishing "salary equivalency guidelines" for physical therapy and respiratory
therapy services. Medicare does not currently have salary equivalency guidelines
for other therapy services, but Medicare auditors may nonetheless impose
disallowances if particular rates paid to these therapists are substantially
greater than the rates paid to other contract therapy companies by other
providers in the same locality. Moreover, Medicare is likely to issue salary
equivalency guidelines for occupational therapy and speech therapy services in
the near future. Although for the fiscal year ended May 31, 1996, contract
therapy services represented only 13% of the

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Company's revenues, if HCFA adopts such limits and if such limits are set too
low, the financial condition of the Company would be adversely affected.

The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective payment adjustments, administrative rulings
and funding restrictions, any of which could have the effect of limiting or
reducing reimbursement levels to general acute care hospitals for services
provided by programs managed by the Company. In the legislative area, both the
Clinton Administration and Congress have proposed changes that would constrain
payment growth for DPUs and SNFs, including proposals to implement prospective
payments for DPUs and SNFs. See "Risk Factors -- Developments in the Health Care
Industry." Any changes which limit or reduce Medicare reimbursement levels, or
which impose significant restrictions on participation in the Medicare programs,
could have a material adverse effect on the Company's client hospitals and, in
turn, on the Company. The Company cannot predict whether any changes to such
government programs will be adopted or, if adopted, what effect, if any, such
changes would have on the Company. In addition, there can be no assurance that
hospitals which offer programs now or hereafter managed by the Company will
satisfy the requirements for participation in the Medicare or Medicaid programs.

Federal law contains certain provisions designed to ensure that services
rendered by hospitals to Medicare and Medicaid patients are medically necessary
and meet professionally recognized standards. These provisions include a
requirement that admissions of Medicare and Medicaid patients to hospitals must
be reviewed in a timely manner to determine the medical necessity of the
admissions. In addition, these provisions state that a hospital may be required
by the federal government to reimburse the government for the cost of Medicare-
reimbursed services that are determined by a peer review organization to have
been medically unnecessary. MileStone and its client hospitals have developed
and implemented quality assurance programs and procedures for utilization review
and retrospective patient care evaluation intended to meet these requirements.

COMPETITION

The health care contract management services industry is highly
competitive. MileStone's competitors include several national companies as well
as many regional and local companies, some of which have, or may, obtain greater
resources than the Company. In addition, the Company's current and potential
clients may choose to operate their own programs rather than contract with the
Company. Furthermore, general acute care hospitals, the primary market for the
Company's services, compete for patients with other providers of similar
services. The inability of the Company or its client hospitals to compete
effectively could have a material adverse effect on the Company's business,
financial condition or results of operations. The Company believes that
competition within the market is based principally on quality of care,
operations, marketing abilities and client service.

GOVERNMENT REGULATION

MileStone's business is affected by federal, state and local laws and
regulations concerning, among other matters, facilities and reimbursement for
services. These regulations impact the development and operation of programs
managed by MileStone for its client hospitals. Licensing, certification,
reimbursement and other applicable government regulations vary by jurisdiction
and are subject to periodic revision. MileStone is not able to predict the
content or impact of future changes in laws or regulations affecting the
industry.

Post-Acute Care Facility Use and Certification. Hospital facilities are
subject to certain federal, state and local regulations, including facilities
use, licensure and inspection requirements, and licensing or certification
requirements of federal, state and local health agencies. Many states also have
certificate-of-need laws intended to avoid the proliferation of unnecessary or
under-utilized health care services and facilities. The programs which MileStone
manages are also subject to licensure and certification requirements. MileStone
assists its client hospitals in obtaining and renewing required approvals for
the managed programs. Some approval processes may lengthen the time required for
new programs to commence operations. In granting and renewing a facility's
licenses, governmental agencies generally consider, among other factors, the
physical

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condition of the facility, the qualifications of administrative and professional
staff, the quality of professional and other services, and the continuing
compliance of such facility with the laws and regulations applicable to its
operations. MileStone believes that the programs it manages and the facilities
of the client hospitals used in the operation of such programs comply in all
material respects with applicable licensing and certification requirements.

Medicare Fraud and Abuse and Patient Referral Laws. Various state and
federal laws regulate relationships between health care providers and referral
sources. In particular, the Medicare and Medicaid anti-kickback statute
prohibits any knowing and willful offer, payment or receipt of any form of
remuneration, either directly or indirectly, in return for, or to induce (i)
referral of an individual for a service for which payment may be made by
Medicare or certain state health care programs (e.g., Medicaid) or (ii)
purchasing, leasing, ordering or arranging for, or recommending the purchase,
lease or order of, any service or item for which payment may be made by Medicare
or certain state health care programs. Violations of the anti-kickback law are
punishable by a fine of up to $25,000 per violation and imprisonment for up to
five years. In addition, the U.S. Department of Health and Human Services may
exclude violators from participation in the Medicare and Medicaid programs. The
Company's relationships with its hospital clients and physicians have not been
examined by federal authorities under the anti-kickback rules. Although the
Company believes that its operations do not violate the anti-kickback rules,
there can be no assurance that federal regulatory authorities will not challenge
the Company's activities under these rules.

Subject to certain exemptions, federal law also prohibits Medicare or
Medicaid payments for services furnished by an entity pursuant to a referral by
a physician who has a financial relationship with the entity through ownership,
investment or a compensation arrangement. Any person who submits claims for any
services furnished in violation of the law may be subject to civil fines of up
to $15,000 for each claim and exclusion from the Medicare and Medicaid programs.
In addition, persons entering into schemes or arrangements for the purpose of
circumventing the law may be subject to civil monetary penalties of up to
$100,000 for each scheme and exclusion from the Medicare and Medicaid programs.
The Company's relationships with its hospital clients and physicians have not
been examined by federal authorities under the physician self-referral rules.
Although the Company believes that its operations do not violate the physician
self-referral rules, there can be no assurance that federal regulatory
authorities will not challenge the Company's activities under these rules.

Certain states have adopted, or are considering adopting, restrictions
similar to those contained in the federal anti-kickback and physician
self-referral laws. Although the Company believes that its operations do not
violate applicable state laws, there can be no assurance that state regulatory
authorities will not challenge the Company's activities under such laws.

Health Care Reform. The Clinton Administration and various federal
legislators have considered health care reform proposals intended to control
health care costs and to improve access to medical services for uninsured
individuals. These programs included proposed cutbacks to the Medicare and
Medicaid programs and steps to permit greater flexibility in the administration
of Medicaid. In addition, some states in which the Company operates are
considering various health care reform proposals. It is uncertain at this time
what legislation on health care reform may ultimately be enacted or whether
other changes in the administration or interpretation of governmental health
care programs will occur. The Company's services are designed to function within
the structure of the health care financing and reimbursement system currently
being used in the United States. The Company believes that the commercial value
and appeal of its services may be adversely affected if the current health care
financing and reimbursement system were to be materially changed. There can be
no assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Risk Factors -- Developments in Health Care
Industry."

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EMPLOYEES AND INDEPENDENT CONTRACTORS

At May 31, 1996, the Company had approximately 306 employees. In addition,
as of such date, the Company had contracts with approximately 92 medical
professionals, including physicians and therapists.

PROPERTIES

The space required for programs managed by the Company is provided by the
client hospitals either within their existing facilities or at other locations
owned or leased by the hospitals. The Company also owns and operates nine
physical therapy facilities located in New Mexico and Texas.

The Company presently maintains its executive offices in approximately
7,800 square feet of space in Dallas, Texas pursuant to a lease expiring in 1997
with an unaffiliated third party at an annual rental of approximately $106,000.

LEGAL PROCEEDINGS

The Company is party to routine legal and administrative proceedings
arising in the ordinary course of its business. The proceedings now pending are
not, in the Company's opinion, material either individually or in the aggregate.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company as of the date hereof:

NAME AGE POSITION
- ---- --- --------

Charles L. Allen........................ 43 President, Chief Executive Officer and
Director
Roy W. Griffitts, Jr. .................. 38 Chief Operating Officer and Director
William A. Brosius...................... 32 Chief Financial Officer
Guy L. de Chazal(1)(2).................. 48 Director
Scott S. Halsted(1)(2).................. 36 Director

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

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

Charles L. Allen has served as President, Chief Executive Officer and a
director of the Company since September 1991. Mr. Allen founded MileStone in
1991 and prior to that was Vice President of Business Development and Hospital
Operations for Epic, a $1.0 billion network of 36 hospitals in 10 states. He
began his career in health care as a senior consultant for Coopers & Lybrand.
Mr. Allen holds B.A. and M.B.A. degrees from The University of Texas.

Roy W. Griffitts, Jr. has served as Chief Operating Officer and a director
of the Company since September 1991. Mr. Griffitts was the Vice President of
Business Development for Moss Rehabilitation Hospital in Philadelphia from March
1990 to September 1991. He earned B.S., M.A. and M.B.A. degrees from Michigan
State University, Wayne State University and The University of Detroit,
respectively.

William A. Brosius has served as Chief Financial Officer of the Company
since September 1991. Before joining MileStone, he was responsible for reporting
financial and operational results for 18 of Epic's 36 acute care hospitals. Mr.
Brosius, a C.P.A., earned his B.B.A. degree from Emory University and is a
former Senior Auditor for Arthur Andersen & Co.

Guy L. de Chazal has served as a director of the Company since May 1995.
Mr. de Chazal is a Managing Director of Morgan Stanley & Co., Incorporated
("Morgan Stanley") and a director and President of Morgan Stanley Venture
Capital II, Inc. ("MSVC II"). He joined Morgan Stanley, an investment banking
firm, in 1986. He is also a director of Cytyc Corp., PageMart Wireless Inc.,
SPSS Inc. and several privately held companies. Mr. de Chazal graduated from
Manchester University, England in 1969 with a B.Sc. in Mechanical Engineering.
He earned an M.B.A. with Distinction from Harvard University Graduate School of
Business Administration in 1976.

Scott S. Halsted has served as a director of the Company since May 1995.
Mr. Halsted is a Vice President of MSVC II. Prior to joining MSVC II in October
1987, Mr. Halsted worked in the Business Development Group of Hexcel Medical and
for Intermedics Orthopedics. He also serves on the board of directors of several
privately held companies. Mr. Halsted received an M.M. degree from the Kellogg
Graduate School at Northwestern University in 1987 and received B.A. and B.E.
degrees in Biomechanical Engineering from Dartmouth College in 1981 and 1982.

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

The Board of Directors currently consists of five director positions, one
of which is presently vacant. Each director serves for a one-year term. The
Company intends to nominate and cause to be elected to the Board of Directors
after completion of this offering, at least one individual unaffiliated with
management or any of the Company's current securityholders. There are no family
relationships between any director, officer or person nominated or chosen to
become a director or officer and any other such persons.

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

In the fiscal year ended May 31, 1996, executive officer compensation
decisions were made by the Board of Directors. Messrs. Allen and Griffitts were
members of the Board of Directors and executive officers of the Company during
the fiscal year ended May 31, 1996. No executive officer of the Company served
during this period as a director or as a member of the compensation committee of
any other entity in which an executive officer of such entity served as a
director of the Company.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has two standing committees, the Audit Committee and
the Compensation Committee. The Audit Committee consists solely of independent
directors and meets periodically with representatives of the Company's
independent auditors to review the general scope of the annual audit, including
consideration of the Company's accounting practices and procedures and system of
internal accounting controls, and reports to the Board of Directors with respect
thereto. The Compensation Committee consists solely of "disinterested persons"
within the meaning of Rule 16b-3(c)(2)(i) promulgated under the Exchange Act and
"outside directors" as contemplated by Section 162(m)(4)(c)(i) of the Code. The
Compensation Committee meets periodically to review and make recommendations
with respect to the annual compensation of the Company's executive officers and
administer the Company's stock option plans.

DIRECTOR COMPENSATION

Directors do not receive compensation for service on the Board of Directors
or any committee thereof, but are reimbursed for their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
Board of Directors or committees thereof.

VOTING AGREEMENT

The current members of the Board of Directors were elected pursuant to a
voting agreement contained in the Company's certificate of incorporation. The
voting agreement will be terminated upon the completion of this offering.

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EXECUTIVE COMPENSATION

The following table provides certain summary information concerning the
compensation awarded to, earned by or paid to the chief executive officer and
the four next most highly compensated executive officers of the Company
(collectively, the "Named Executive Officers") for services rendered in all
capacities in the fiscal year ended May 31, 1996.

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) OPTIONS COMPENSATION
--------------------------- -------- -------- ------------ ------------

Charles L. Allen......................... $151,378.. $156,624 175,804 $190(2)
President and Chief Executive Officer
Roy W. Griffitts, Jr..................... 128,022 92,721 94,664 --
Chief Operating Officer
William A. Brosius....................... 86,302 45,630 81,140 --
Chief Financial Officer
Roger Jenkins............................ 96,955 36,347 22,050 --
Chief Operating Officer, Therapy
Services
Deborah J. Bridges....................... 85,861 32,250 25,725 --
Regional Vice President, Operations

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

(1) Amounts shown represent bonuses earned in the year indicated and paid
in the following year.

(2) Amount represents annual premium on term life insurance policy paid by
the Company.

EMPLOYMENT AGREEMENTS

On May 31, 1995, the Company entered into an employment agreement with each
of Charles L. Allen, Roy W. Griffitts, Jr. and William A. Brosius, providing for
a minimum annual base salary of $150,600, $127,364 and $84,500, respectively.
Under the terms of each such agreement, the Company agreed to employ each such
officer until the earliest of the officer's voluntary termination, the Company's
termination of such officer with or without cause, or May 31, 2000. In the event
the officer's employment is terminated without cause, the Company shall have (i)
an obligation to pay the officer an amount equal to the bonus the officer would
have been entitled to receive had he been employed for a full year, prorated for
the portion of the year the officer was actively employed and (ii) a continuing
obligation to make payments of base salary at the rate in effect at the
effective date of the termination for a period of 12 months following the
effective date of the termination. Pursuant to these employment agreements, such
executive officers have agreed, while they are employees of the Company or for a
period of one year thereafter, not to participate in a business or enterprise
that competes with the Company.

On September 25, 1993, TruCare entered into an employment agreement with
Roger T. Jenkins providing for an annual base salary of not less than $90,000.
In addition, while employed by TruCare, Mr. Jenkins is eligible to receive an
annual incentive bonus equal to at least 50% of his then current annual base
salary, provided that TruCare's earnings before income taxes equal or exceed its
budgeted earnings before income taxes in the relevant fiscal year. Under certain
circumstances, the incentive bonus may be increased based on the achievement of
specific criteria set forth in the agreement relating to TruCare's earnings
before income taxes and budgeted earnings before income taxes. Under the terms
of the agreement, TruCare agreed to employ Mr. Jenkins as Chief Operating
Officer of TruCare until the earliest of Mr. Jenkins' voluntary termination,
death or disability, voluntary termination of Mr. Jenkins with or without cause,
or September 30, 1997. In the event Mr. Jenkins' employment is terminated
without cause, TruCare shall have the obligation to

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pay him (i) an amount equal to two times the monthly base compensation being
received on the date of termination and (ii) the incentive compensation bonus he
would have received for the year prorated for the portion of the year Mr.
Jenkins was employed. This employment agreement provides that for a period of
two years following the termination of Mr. Jenkins' employment, he will not
participate in a business that competes with TruCare.

OPTION GRANTS IN FISCAL YEAR 1996

The following table sets forth certain information relating to grants of
stock options made during the fiscal period ended May 31, 1996 to the Named
Executive Officers. Such grants are reflected in the Summary Compensation Table
above.

POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
INDIVIDUAL GRANTS RATES OF STOCK
------------------------------------------------------------- PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS GRANTED EXERCISE OR FOR OPTION TERM
UNDERLYING TO EMPLOYEES IN BASE PRICE EXPIRATION ---------------
OPTIONS GRANTED FISCAL YEAR ($/SH) DATE 5%($) 10%($)
--------------- --------------- ------------ ---------- ----- ------

Charles L. Allen...... -- --%
Roy W. Griffitts,
Jr.................. -- --
William A. Brosius.... -- --
Roger Jenkins......... 11,025 5.5 0.82 8/31/05 452 904
11,025 5.5 4.46 4/04/06 2,459 4,917
Deborah J. Bridges.... 14,700 7.3 0.82 8/31/05 603 1,205
11,025 5.5 4.46 4/04/06 2,459 4,917

FISCAL YEAR-END OPTION VALUE TABLE

The following table provides certain information concerning the number of
securities underlying unexercised stock options held by each of the Named
Executive Officers as of May 31, 1996. None of the Named Executive Officers
exercised any stock options during the fiscal year ended May 31, 1996.

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT MAY 31, 1996 MAY 31, 1996(1)
---------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
----------------------------------- ----------- ------------- -------------- -------------

Charles L. Allen................... 21,976 153,828 $340,849 $ 2,385,906
Roy W. Griffitts, Jr............... 11,833 82,831 183,529 1,284,723
William A. Brosius................. 10,142 70,998 157,309 1,101,194
Roger Jenkins...................... -- 22,050 -- 301,800
Deborah J. Bridges................. -- 25,725 -- 358,800

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

(1) Represents the total gain which would be realized if all in-the-money
options beneficially held at May 31, 1996 were exercised, determined by
multiplying the number of shares underlying the options by the
difference between the per share option exercise price and $12.00 (the
assumed public offering price).

STOCK OPTION PLAN

In July 1996, the Board of Directors and stockholders of the Company
adopted the 1996 Stock Option Plan (the "Plan"). In connection with the Merger,
the Company assumed under the Plan the options granted by the Company's parent
holding corporation under its 1995 Stock Option Plan. The Plan is currently
administered by the Board of Directors and will be administered by the Stock
Option Committee following this offering. The Plan provides that options granted
under the Plan may be either "incentive stock options" ("ISOs") as defined by
the Internal Revenue Code of 1986, as amended (the "Code"), or non-ISOs. The

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34

maximum number of shares of Common Stock available for grant under the Plan is
699,242. Options to purchase 550,571 shares were outstanding under the Plan,
427,829 of which have an exercise price of $.82 per share and 122,742 of which
have an exercise price of $4.46 per share. All of the options granted to date
under the Plan are exercisable over either a four- or five-year period.
Generally, the options granted Messrs. Allen, Griffitts and Brosius vest in
scheduled amounts over time if the Company achieves specified goals related to
its earnings before deduction of interest, taxes, depreciation and amortization
expense. In addition, options not previously vested will vest upon the fifth
anniversary of the vesting commencement date, provided that the optionee is
still an employee of the Company, and upon the occurrence of certain other
events. To date, all options granted under the Plan have been ISOs. Options for
10,142 shares have been exercised under the Plan as of July 16, 1996.

The exercise price of options granted under the Plan shall be determined by
the Board of Directors, but in the case of ISOs, may not be less than 100% of
the fair market value of the Common Stock on the date of grant (110% in the case
of ISOs granted to a holder of more than 10% of the total voting power of all
classes of the Company's capital stock on the date of the grant). Absent a
public market for the Common Stock, the Plan provides for the fair market value
per share of Common Stock to be determined by the Board of Directors of the
Company (or a committee thereof if one has been appointed to administer the
Plan).

An option under the Plan may not be granted with a term exceeding ten years
(five years in the case of ISOs granted to a holder of more than 10% of the
total voting power of all classes of the Company's capital stock on the date of
the grant). In the event of a merger of the Company, options granted under the
Plan shall terminate as of the date of the closing of the merger, to the extent
such options are not assumed or substituted by a successor corporation.
Notwithstanding the foregoing, the Board of Directors may determine, in its
discretion, any additional vesting or acceleration terms for options granted
under the Plan, in the context of a consolidation, merger, sale of assets or
reorganization of the Company. The option exercise price may be paid in cash,
check, promissory note or by delivery of Common Stock already owned by the
optionee (valued at its fair market value at the time of exercise) or any
combination of the foregoing.

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CERTAIN TRANSACTIONS

The Acquisition. On May 31, 1995, Messrs. Allen, Griffitts and Brosius, and
Morgan Stanley Venture Capital (as defined below) (the "Purchasers") purchased
the Company from an indirectly wholly-owned subsidiary of Columbia for
approximately $27.0 million in cash (the "Acquisition"). The Acquisition was
funded through equity financing provided by the Purchasers and through debt
financing provided by Internationale Nederlanden (U.S.) Capital Corporation
("ING") and Morgan Stanley Venture Capital. The Company issued and sold an
aggregate of 5,000,000 shares of Series A Preferred at a purchase price of $1.00
per share, as follows: (i) Morgan Stanley Venture Capital Fund II, L.P.
purchased 2,651,335 shares; (ii) Morgan Stanley Venture Capital Fund II, C.V.
purchased 660,546 shares; (iii) Morgan Stanley Venture Investors, L.P. purchased
688,119 shares; (iv) Mr. Allen purchased 535,714 shares; (v) Mr. Griffitts
purchased 392,857 shares; and (vi) Mr. Brosius purchased 71,429 shares. Messrs.
Allen, Griffitts and Brosius are officers and, in the case of Messrs. Allen and
Griffitts, directors of the Company. Guy L. de Chazal, a director of the
Company, is a director and president of MSVC II. Scott Halsted, a director of
the Company, is a vice president of MSVC II. MSVC II is the managing general
partner of Morgan Stanley Venture Partners II, L.P., the general partner of
Morgan Stanley Venture Investors, L.P., Morgan Stanley Venture Capital Fund II,
L.P. and Morgan Stanley Venture Capital Fund II, C.V. (collectively, "Morgan
Stanley Venture Capital"). In connection with the sale of Preferred Stock, the
Company paid transaction fees to Messrs. Allen, Griffitts and Brosius in the
amounts of $56,538, $40,384 and $8,078, respectively.

Also in connection with the Acquisition, on May 31, 1995, the Company sold
294,000 shares of Common Stock at a purchase price of $.82 per share, as
follows: Mr. Allen purchased 147,000 shares; (ii) Mr. Griffitts purchased 79,154
shares; and (iii) Mr. Brosius purchased 67,846 shares. The shares of Common
Stock sold to each of Messrs. Allen, Griffits and Brosius are subject to
repurchase rights of the Company which may be exercised upon the termination of
employment of such officers, which repurchase rights expire upon a
performance-based vesting schedule which provides for vesting in full on
November 29, 1999.

The Series A Preferred and Common Stock held by Morgan Stanley Venture
Capital and Messrs. Allen, Griffitts and Brosius are subject to certain rights
of first refusal, sale and co-sale rights upon any proposed transfer. These
rights, contained in a stockholders agreement dated May 31, 1995, terminate upon
the closing of this offering.

On May 31, 1995, in connection with the Acquisition, ING extended credit to
the Company to effect the Acquisition. The credit facility consisted of a
revolving loan commitment of up to $5.0 million and a term loan in the principal
amount of $10.0 million. As a condition precedent to extending such credit, ING
was issued the Class B Warrant, consisting of a warrant to purchase up to
297,973 shares of Class B Common Stock at an initial exercise price of $.82 per
share until May 31, 2005. The exercise price and the number of securities
issuable upon the exercise of the Class B Warrant are subject to adjustment from
time to time upon the occurrence of certain events as set forth in the related
warrant purchase agreement. In connection with the issuance of the Class B
Warrant, ING entered into a put and call agreement ("Put and Call Agreement")
providing for certain rights and obligations with respect to the Class B Warrant
and the shares underlying the Class B Warrant. As of May 31, 1996, there was no
outstanding principal balance on the revolving loan commitment and the
outstanding balance on the term loan was $7.0 million. See "Description of
Capital Stock -- Class B Warrant."

As a part of the Acquisition, the Put and Call Agreement was entered into
by and among the Company, its parent holding corporation and ING. Pursuant to
this agreement, the holder of the Class B Warrant has the right, under certain
conditions, to cause the Company to repurchase the Class B Warrant and any
shares of Class B Common Stock which have been received by the holder upon the
exercise of the Class B Warrant at a purchase price per share equal to the fair
market value per share less the exercise price per share. In addition, the Put
and Call Agreement provides that, at any time after June 30, 2000, the Company's
parent holding corporation has the right, under certain conditions, to cause the
holder of the Class B Warrant to sell to the parent holding corporation the
Class B Warrant and any shares of Class B Common Stock which have been received
by the holder upon the exercise of the Class B Warrant at a purchase price per
share equal to the fair

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36

market value per share less the exercise price per share plus ten percent. The
Put and Call Agreement provides that these put and call provisions will
terminate upon the completion of this offering.

The Put and Call Agreement also provides that the holder of the Class B
Warrant has certain rights to participate in a sale of the Common Stock of the
Company by certain stockholders of the Company (and certain of their successors
and assigns) and that the Company has certain rights of first refusal with
respect to the Class B Warrant and certain rights to require the holder of the
Class B Warrant to participate in certain sales of the Common Stock of the
Company, all at the times specified in, and pursuant to the terms and conditions
set forth in, the Put and Call Agreement. These provisions of the Put and Call
Agreement terminate upon a public offering in which the Class B Warrant or
shares of Class B Common Stock received by the holder upon exercise of the Class
B Warrant are registered and sold. These provisions of the Put and Call
Agreement will survive the closing of this offering.

In connection with the issuances of the Series A Preferred, Common Stock
and Class B Warrant described above, the Company granted certain registration
rights to the holders of these securities. See "Description of Capital
Stock -- Registration Rights."

On May 31, 1995, in connection with the Acquisition, the Company issued the
Subordinated Indebtedness to Morgan Stanley Venture Capital in the principal
amount of $9,000,000 at an annual interest rate of 16.5%. As of May 31, 1996,
the outstanding balance of the Subordinated Indebtedness was $10,550,661. Morgan
Stanley Venture Capital sold the Subordinated Indebtedness to unaffiliated third
parties on May 6, 1996. In consideration for their purchase of the Subordinated
Indebtedness, the unaffiliated third parties received warrants entitling them to
purchase from Morgan Stanley Venture Capital an aggregate of 270,270 shares of
Series A Preferred at an exercise price of $1.00 per share. In connection with
the sale of the Subordinated Indebtedness, certain registration rights with
respect to the Series A Preferred issuable upon exercise of the warrants were
assigned to the unaffiliated third parties by Morgan Stanley Venture Capital,
which assignment was acknowledged and agreed to by the Company. The Company has
no other obligations with respect to such warrants.

Other. On June 30, 1996, William A. Brosius exercised options under the
Plan to purchase 10,142 shares of Common Stock at an exercise price of $.82 per
share, for an aggregate purchase price of $8,279.40.

The Company has adopted provisions in its Bylaws which provide, and upon
completion of this offering, the Company will amend its Certificate of
Incorporation to provide, for indemnification of its officers and directors to
the maximum extent permitted under the Delaware General Corporation Law. In
addition, the Company has entered into separate indemnification agreements with
each of its directors which may require the Company, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors to the maximum extent permitted under the
Delaware General Corporation Law, to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
establish a trust for the provision of such expenses under certain
circumstances.

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37

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 31, 1996 (on a pro forma basis to
reflect the automatic conversion of the Series A Preferred into 3,675,000 shares
of Common Stock and the issuance in June 1996 of 10,142 shares of Common Stock
upon the exercise of options) and as adjusted to reflect the sale of the Common
Stock offered hereby (giving effect to the issuance upon the exercise of
warrants of 150,000 shares of Common Stock to be sold in this offering) by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the Common Stock, (ii) each director of the Company, (iii) each Named Executive
Officer, (iv) all directors and executive officers of the Company as a group and
(v) each Selling Stockholder.

SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED PRIOR TO THE TO BE OWNED AFTER THE
OFFERING SOLD IN OFFERING
------------------- THE -------------------
NAME NUMBER PERCENT OFFERING NUMBER PERCENT
- ---- --------- ------- -------- --------- -------

Morgan Stanley Venture Partners II, L.P.(1).... 2,940,000 73.9% -- 2,940,000 47.2%
1221 Avenue of the Americas
33rd Floor
New York, New York 10020
Charles L. Allen(2)............................ 606,677.. 15.0 129,753 476,924 7.6
Roy W. Griffitts, Jr.(3)....................... 403,403 10.0 83,762 319,641 5.1
Internationale Nederlanden
(U.S.) Capital Corporation(4)................ 297,973 7.0 150,000 147,973 2.3
135 East 57th Street
New York, New York 10022
William A. Brosius(5).......................... 150,773.. 3.8 36,485 114,288 1.8
Deborah J. Bridges(6).......................... 3,675.... * -- 3,675 *
Roger Jenkins(7)............................... 2,756 * -- 2,756 *
Guy L. de Chazal(8)............................ 2,940,000.. 73.9 -- 2,940,000 47.2
Scott S. Halsted(9)............................ 2,940,000.. 73.9 -- 2,940,000 47.2
All directors and executive officers as a group
(7 persons)(10).............................. 4,107,284.. 100.0% 3,857,284 60.7%

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

* Less than one percent.

(1) Represents 1,948,732 shares held by Morgan Stanley Venture Capital Fund II,
L.P., 485,501 shares held by Morgan Stanley Venture Capital Fund II, C.V.
and 505,767 shares held by Morgan Stanley Venture Investors, L.P. Of the
shares owned, 198,648 shares are subject to warrants held by unaffiliated
third parties. The exercise price of such warrants is $1.36 per share.

(2) Includes 65,927 shares which may be purchased upon the exercise of options
exercisable within 60 days of July 26, 1996.

(3) Includes 35,499 shares which may be purchased upon the exercise of options
exercisable within 60 days of July 26, 1996.

(4) Represents shares of Common Stock issuable upon conversion of shares of
Class B Common Stock issuable upon exercise of the Class B Warrant, of
which 150,000 shares will be exercised prior to this offering.

(5) Includes 20,285 shares which may be purchased upon the exercise of options
exercisable within 60 days of July 26, 1996.

(6) Represents 3,675 shares which may be purchased upon the exercise of options
exercisable within 60 days of July 26, 1996.

(7) Represents 2,756 shares which may be purchased upon the exercise of options
exercisable within 60 days of July 26, 1996.

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38

(8) Mr. de Chazal is a general partner of Morgan Stanley Venture Partners II,
L.P., which is the general partner of Morgan Stanley Venture Investors,
L.P., Morgan Stanley Venture Capital Fund II, L.P. and Morgan Stanley
Venture Capital Fund II, C.V. Mr. de Chazal disclaims beneficial ownership
of such shares except to the extent of his beneficial ownership interest in
Morgan Stanley Venture Partners II, L.P.

(9) Mr. Halsted is a vice president of MSVC II. Mr. Halsted disclaims
beneficial ownership of such shares.

(10) Includes 128,142 shares which may be purchased upon the exercise of options
exercisable within 60 days of July 26, 1996.

ING, as holder of the Class B Warrant, may at any time exercise the Class B
Warrant for 297,973 shares of Class B Common Stock. Prior to the effective date
of this offering, 150,000 shares of Class B Common Stock will be issued upon
exercise in part of the warrant, immediately converted into Common Stock and
sold in this offering. The Class B Common Stock is non-voting and is convertible
at any time, subject to certain restrictions, into shares of Common Stock on a
one-for-one basis (subject to adjustment under certain circumstances). See
"Certain Transactions," "Description of Capital Stock" and Notes 5 and 6 of
Notes to Consolidated Financial Statements.

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DESCRIPTION OF CAPITAL STOCK

Prior to the closing of this offering, the Company will amend and restate
its Certificate of Incorporation (the "Restated Certificate"). The Restated
Certificate provides that the authorized capital stock of the Company will
consist of 10,000,000 shares of Common Stock, par value $.001 per share, 500,000
shares of Class B Common Stock, par value $.001 per share, and 1,000,000 shares
of Preferred Stock, par value $.001 per share.

The following summary of certain provisions of the Common Stock, Class B
Common Stock and Preferred Stock does not purport to be complete and is subject
to, and qualified in its entirety by, the Restated Certificate of the Company
and the Bylaws of the Company that are included as exhibits to the registration
statement of which this Prospectus forms a part, as well as by the provisions of
applicable law.

COMMON STOCK

As of July 16, 1996, there were 3,979,141 shares of Common Stock
outstanding (as adjusted to reflect the conversion of all of the Series A
Preferred and the reverse stock split which occurred on July 26, 1996) held of
record by six stockholders. The holders of Common Stock are entitled to one vote
per share on all matters to be voted upon by the stockholders and do not have
cumulative voting rights. Subject to any preferences that may be applicable to
any outstanding shares of Preferred Stock, the holders of the Common Stock are
entitled to receive ratably with the holders of the Class B Common Stock such
dividends, if any, as may be declared from time to time by the Board of
Directors out of legally available funds. See "Dividend Policy." In the event of
the liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably with the holders of the Class B Common Stock
in all assets remaining after payment of liabilities, subject to prior
distribution rights of holders of shares of any Preferred Stock then
outstanding. The Common Stock has no preemptive redemption, conversion or other
subscription rights. All outstanding shares of Common Stock are fully paid and
non-assessable, and the shares of Common Stock to be outstanding upon completion
of this offering will be fully paid and non-assessable. The rights, preferences
and privileges of holders of Common Stock are subject to any series of Preferred
Stock which the Company may issue in the future.

CLASS B COMMON STOCK

As of July 16, 1996, there were no shares of Class B Common Stock
outstanding. At any time and from time to time subject to certain restrictions,
shares of Class B Common Stock may be converted into the same number of shares
of Common Stock. Class B Common Stock is not redeemable, nor does it have any
conversion rights and it is not subject to call. In addition, holders of shares
of Class B Common Stock have no preemptive or other subscription rights. Holders
of shares of Class B Common Stock are not entitled to vote on any matter
submitted to a vote of stockholders of the Company. Subject to any preferences
that may be applicable to any outstanding shares of Preferred Stock, the holders
of Class B Common Stock are entitled to receive ratably with the holders of the
Common Stock dividends, if any, as and when declared from time to time by the
Board of Directors of the Company out of legally available funds. See "Dividend
Policy." In the event of the liquidation, dissolution or winding up of the
Company, the holders of Class B Common Stock are entitled to share ratably with
the holders of the Common Stock in all assets remaining after payment of
liabilities, subject to prior distribution rights of holders of shares of any
Preferred Stock then outstanding. The rights, preferences and privileges of the
holders of Class B Common Stock are subject to any series of Preferred Stock
which the Company may issue in the future.

PREFERRED STOCK

Upon the closing of this offering, the outstanding shares of Series A
Preferred will be automatically converted into an aggregate of 3,675,000 shares
of Common Stock. The Restated Certificate does not contain any references to the
previously outstanding series of Preferred Stock and all of the rights,
preferences and privileges contained in the existing Certificate of
Incorporation of such previous series of Preferred Stock are eliminated. In
addition, the number of authorized shares of Preferred Stock is reduced pursuant
to the

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40

Restated Certificate to 1,000,000 shares. The Board of Directors may issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock, and which could, among other
things, render more difficult or discourage an attempt to obtain control of the
Company by means of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of the Company's management. The Board of
Directors will be authorized to issue without stockholder approval such shares
of Preferred Stock in one or more series and to determine and alter all rights,
preferences and privileges and qualifications, limitations and restrictions
thereof, including with respect to the rate and nature of dividends, the price
and terms and conditions on which shares may be redeemed, the amount payable in
the event of voluntary or involuntary liquidation, the terms and conditions for
conversion or exchange into any other class or series of stock, voting rights
and other terms.

CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK

Under the Restated Certificate, upon completion of this offering, there
will be 3,770,858 shares of Common Stock (excluding the 550,571 shares reserved
for issuance under the Plan), 352,027 shares of Class B Common Stock (excluding
147,973 shares reserved for issuance under the Class B Warrant) and 1,000,000
shares of Preferred Stock available for future issuance without stockholder
approval. These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital or to
facilitate corporate acquisitions. The Company does not currently have any plans
to issue additional shares of Common Stock, Class B Common Stock or Preferred
Stock (other than shares of Common Stock which may be issued upon the exercise
of options which have been granted or which may be granted in the future and
shares of Class B Common Stock which may be issued upon exercise of the Class B
Warrant).

CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE AND BYLAWS

Section 102(b)(7) of the Delaware General Corporation Law provides that
Delaware corporations may include in their certificates of incorporation a
provision eliminating or limiting the personal liability of directors to the
corporation or its stockholders for monetary damages for breach of their
fiduciary duty including acts constituting gross negligence, except under
certain circumstances, including breach of the director's duty of loyalty, acts
or omissions not in good faith or involving intentional misconduct or a knowing
violation of law or any transaction from which the director derived improper
personal benefit. The Company's Restated Certificate provides that the Company's
directors are not liable to the Company or its stockholders for monetary damages
for breach of their fiduciary duties, subject to the exceptions specified by
Delaware law.

The Company's Bylaws provide, and the Restated Certificate provides, that
the Company will indemnify its directors and officers to the fullest extent
permitted by Delaware law. The Company is generally required to indemnify its
directors and officers for all judgments, fines, loss, liability, settlements,
legal fees and other expenses incurred in connection with pending or threatened
legal proceedings because of the director's or officer's position with the
Company or another entity that the director or officer serves at the Company's
request, subject to certain conditions, and to advance funds to its directors
and officers to enable them to defend against such proceedings. See "Certain
Transactions."

REGISTRATION RIGHTS

The Company is a party to a registration rights agreement pursuant to which
it granted rights with respect to registration under the Securities Act of (i)
the Common Stock issuable upon conversion of the Preferred Stock including the
Preferred Stock issuable upon exercise of the Warrants held by the purchasers of
the Subordinated Indebtedness, (ii) the Common Stock issued by the Company to
Charles L. Allen, Roy W. Griffitts, Jr. and William A. Brosius (collectively,
the "Management Investors") in connection with the Acquisition and upon
exercise, under the Plan, of options held by the Management Investors, (iii) the
Common Stock issuable upon conversion of the Class B Common Stock issued or
issuable upon exercise of the Class B Warrant (all of such shares of Common
Stock being referred to herein as "Registrable Securities").

38
41

Under this agreement, the holders of at least 40% of the Registrable
Securities can require the Company, subject to certain limitations, to file
registration statements on Form S-1 covering all or any part of their
Registrable Securities. In addition, at the request of any holder of Registrable
Securities, the Company is required to file registration statements on Form S-3
(if the Company becomes eligible to use Form S-3) covering Registrable
Securities. Whenever the Company proposes to register any of its securities
under the Securities Act (other than pursuant to registration required by
holders of Registrable Securities), the holders of Registrable Securities may
require the Company, subject to certain limitations, to include all or any
portion of their Registrable Securities in such registration. Subject to certain
limitations, holders of more than 20% of the shares to be issued upon exercise
of the Class B Warrant have the right, following this offering, to request
registration of the shares to be issued upon exercise of the Class B Warrant if
the reasonably anticipated aggregate price to the public in such offering would
equal or exceed $100,000. This right may not be exercised during the first six
months following the effective date of this offering. The Company has a fair
market value purchase option with respect to the Class B Warrant registration
rights. All expenses with respect to registrations under the Securities Act of
Registrable Securities shall be paid by the Company, except that the Company is
not obligated to pay any such expenses for any registrations on Form S-3
following the first three such registrations requested by the holders of
Registrable Securities. Such expenses are to be paid pro rata among the holders
of Registrable Securities requesting such registration.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.

39
42

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 6,229,142 shares of
Common Stock outstanding, assuming no exercise of currently outstanding options.
Of these shares, the 2,500,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act, unless they
are held by "affiliates" of the Company, as that term is defined in the
Securities Act and the regulations promulgated thereunder. All of the remaining
shares that will be outstanding may be sold pursuant to Rule 144, subject to the
limitations, commencing May 31, 1997. In addition, all holders of outstanding
capital stock of the Company and of options and warrants to purchase such stock
from the Company, including all of the Company's officers and directors, have
agreed, subject to certain limited exceptions, not to sell or otherwise dispose
of any shares of Common Stock or any securities exercisable or exchangeable for
or convertible into shares of Common Stock for a period of 180 days after the
date of this Prospectus without the prior written consent of Smith Barney Inc.
There will also be outstanding options to purchase 550,571 shares of Common
Stock, of which 143,301 will be exercisable as of August 31, 1996 and the
remaining shares will become exercisable from time to time. The shares issuable
upon exercise of these options will become eligible for sale in the public
market 90 days after completion of this offering pursuant to Rule 701 under the
Securities Act. In addition, the Company intends to file a registration
statement on Form S-8 under the Securities Act to register shares of Common
Stock reserved for issuance pursuant to stock options granted by the Company.
Also, outstanding will be warrants to purchase 147,973 shares of Class B Common
Stock which is convertible into Common Stock.

In general, under Rule 144 as currently in effect, beginning 90 days after
the conclusion of this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least two years,
including persons who may be deemed "affiliates" of the Company, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission (the "Commission"). Sales
pursuant to Rule 144 are also subject to certain other requirements relating to
manner of sale, notice and availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed to
have been an affiliate of the Company at any time during the three months
immediately preceding a sale of restricted securities is entitled to sell the
securities pursuant to Rule 144(k) without regard to the limitations described
above, provided that three years has expired since the later of the date on
which such restricted shares were first acquired from the Company or from an
affiliate of the Company.

The Commission has proposed certain amendments to Rule 144 that would
reduce to one year the holding period required prior to restricted securities
becoming eligible for resale in the public market under Rule 144 and reduce to
two years the holding period required prior to a person becoming eligible to
effect sales under Rule 144(k). This proposal, if adopted, would result in a
substantial number of shares of Common Stock becoming eligible for resale in the
public markets pursuant to Rule 144 significantly sooner than would otherwise be
the case, which could adversely affect the market price for the Common Stock. No
assurances can be given concerning whether or when such proposal will be adopted
by the Commission.

As of July 16, 1996, the Company had granted options to purchase 560,713
(of which 10,142 had been exercised) shares of Common Stock to certain officers,
directors and employees of the Company pursuant to the Company's stock option
plans and an additional 138,529 shares are available for future grant
thereunder. As soon as practicable following this offering, the Company intends
to file a registration statement under the Securities Act to register shares of
Common Stock issuable or previously issued upon the exercise of stock options
granted under the Company's stock option plan. Shares issued upon the exercise
of stock options after the effective date of such registration statement or
previously issued on exercise generally will be available for sale in the open
market.

Rule 701 under the Securities Act provides an exemption from the
registration requirements of the Securities Act for offers and sales of
securities issued pursuant to certain compensatory benefit plans or written

40
43

contracts of a company not subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Securities issued pursuant to Rule 701 are defined as restricted
securities for purposes of Rule 144. However, 90 days after the issuer becomes
subject to the reporting provisions of the Exchange Act, the Rule 144 resale
restrictions, except for the broker's transaction requirement, do not apply to
shares acquired pursuant to Rule 701 by non-affiliates. Affiliates are subject
to all Rule 144 restrictions after this 90-day period, but without the Rule 144
holding period requirement.

Because there has been no public market for shares of Common Stock of the
Company, the Company is unable to predict the effect that sales made under Rule
144, Rule 701, pursuant to future registration statements, or otherwise, may
have on any then prevailing market price for shares of the Common Stock.
Nevertheless, sales of a substantial amount of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the Common Stock. See "Risk Factors -- Shares Eligible for
Future Sale" and "-- No Prior Public Market; Possible Volatility of Stock
Price."

41
44

UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Stockholders have agreed to
sell to such Underwriter, shares of Common Stock which equal the number of
shares set forth opposite the name of such Underwriter below.

NUMBER OF
UNDERWRITER SHARES
----------- ---------

Smith Barney Inc. ................................................................
Furman Selz LLC...................................................................
---------
Total............................................................................. 2,500,000
=========

The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.

The Underwriters, for whom Smith Barney Inc. and Furman Selz LLC are acting
as Representatives, propose initially to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to other Underwriters or to certain other dealers. After the
initial public offering, the public offering price and such concessions may be
changed by the Underwriters. The Representatives have informed the Company that
the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 375,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares in such table.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

The Company, its officers and directors, the Selling Stockholders and all
other stockholders, holding in the aggregate all of the Company's currently
outstanding equity securities, have agreed that, for a period of 180 days after
the date of this Prospectus, they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for, Common Stock except, in the case of the Company, in certain
limited circumstances.

Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering for the Common Stock has been
determined by negotiations between the Company and the Representatives of the
Underwriters. Among the factors considered in determining the initial public
offering price were the history of, and the prospects for, the Company's
business and the industry in which it competes, an assessment of the Company's
management, its past and present operations, its past and present earnings and
the trend of such earnings, the prospects for earnings of the Company, the
present state of the Company's

42
45

development, the general condition of the securities market at the time of the
offering and the market prices and earnings of similar securities of comparable
companies at the time of the offering.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P. Certain legal matters will
be passed upon for the Underwriters by Dewey Ballantine, New York, New York.

EXPERTS

The financial statements of MileStone Healthcare Inc. appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, to the extent indicated in their report thereon also
appearing elsewhere herein and in the Registration Statement. Such financial
statements have been included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement under
the Securities Act on Form S-1 (together with all amendments, exhibits and
schedules thereto, the "Registration Statement") with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which have been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement. Statements contained in
this Prospectus regarding the contents of any contract or other document are not
necessarily complete and in each instance reference is hereby made to the copy
of such contract or document filed as an exhibit to the Registration Statement.
Copies of the Registration Statement may be inspected, without charge, at the
principal office of the Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, the New York Regional Office located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and the Chicago Regional office
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, or obtained upon payment of prescribed rates from the
Public Reference Section of the Commission at its principal office. Such
documents may also be obtained through the Web Site maintained by the Commission
at http:()(w)ww.sec.gov.

As a result of this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended. As long as the Company is subject to such
periodic reporting and information requirements, it will file with the
Commission all Commission reports, proxy statements and other information
required thereby, which may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material may
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.

43
46

MILESTONE HEALTHCARE, INC.

FINANCIAL STATEMENTS

YEAR ENDED JULY 31, 1994, TEN MONTHS ENDED MAY 31, 1995, AND YEAR ENDED MAY 31,
1996

CONTENTS

Report of Independent Auditors......................................................... F-2

Audited Financial Statements

Balance Sheets
Consolidated as of May 31, 1995 and May 31, 1996 (Successor)......................... F-3

Statements of Income

Combined for the year ended July 31, 1994 (Predecessor) and for the ten months ended
May 31, 1995 (Predecessor) and consolidated for the year ended May 31, 1996
(Successor)....................................................................... F-4

Statements of Stockholders' Equity

Statements of Cash Flows

Notes to Financial Statements.......................................................... F-7

F-1
47

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
MileStone Healthcare, Inc.

We have audited the accompanying consolidated balance sheets of MileStone
Healthcare, Inc. (the Company) (Successor) as of May 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year ended May 31, 1996, and the combined statements of income,
stockholders equity, and cash flows (Predecessor) for the ten months ended May
31, 1995, and the year ended July 31, 1994. 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 consolidated financial position of MileStone
Healthcare, Inc. (Successor) at May 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for the year ended May 31, 1996,
and the combined results of its operations (Predecessor) for the ten months
ended May 31, 1995, and the year ended July 31, 1994, in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP

Dallas, Texas
July 12, 1996,
except for Note 15, as to which the date is
July 26, 1996

F-2
48

MILESTONE HEALTHCARE, INC.

BALANCE SHEETS

MAY 31
---------------------------
1995 1996
----------- -----------
(SUCCESSOR) (SUCCESSOR)

ASSETS (NOTE 3)
Current assets:
Cash and cash equivalents....................................... $ 909,405 $ 503,632
Accounts receivable, net of allowance for doubtful accounts of
$464,138 in 1995 and $935,031 in 1996........................ 5,549,881 4,890,544
Prepaid expenses................................................ 122,794 278,926
Deferred income tax asset (Note 8).............................. 236,106 410,893
----------- -----------
Total current assets.................................... 6,818,186 6,083,995
Investment in joint venture (Note 2).............................. 86,278 61,328
Equipment, net (Note 1)........................................... 286,332 295,513
Other assets (Note 1):
Goodwill........................................................ 15,246,951 14,865,777
Contracts....................................................... 7,000,000 5,957,143
Loan origination fees........................................... 274,779 221,051
Other........................................................... 50,430 126,896
----------- -----------
22,572,160 21,170,867
----------- -----------
Total assets............................................ $29,762,956 $27,611,703
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 400,135 $ 731,681
Accrued liabilities (Note 14)................................... 1,251,483 1,822,306
Accrued interest................................................ -- 132,446
Current maturities of long-term debt (Note 3)................... 4,700,000 1,165,336
Income taxes payable (Note 8)................................... -- 280,807
----------- -----------
Total current liabilities............................... 6,351,618 4,132,576
Deferred income taxes payable (Note 8)............................ 171,338 99,440
Long-term debt, less current maturities (Note 3).................. 9,000,000 5,826,682
Subordinated debentures (Note 4).................................. 9,000,000 10,550,661
Commitments and contingencies (Notes 7 and 11)
Stockholders' equity (Notes 5, 6 and 15):
Series A preferred stock, $.001 par value, convertible,
liquidation
value $5,000,000:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 5,000,000................... 5,000,000 5,000,000
Series B preferred stock, $.001 par value:
Authorized shares -- 5,000,000............................... -- --
Class A common stock, $.001 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 294,000..................... 294 294
Class B common stock, $.001 par value:
Authorized shares -- 10,000,000.............................. -- --
Paid in capital................................................. 239,706 239,706
Retained earnings............................................... -- 1,762,344
----------- -----------
Total stockholders' equity.............................. 5,240,000 7,002,344
----------- -----------
Total liabilities and stockholders' equity.............. $29,762,956 $27,611,703
=========== ===========

See accompanying notes.

F-3
49

MILESTONE HEALTHCARE, INC.

STATEMENTS OF INCOME

TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, 1994 MAY 31, 1995 MAY 31, 1996
------------- ------------ ------------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)

Net revenues........................................ $ 20,244,901 $ 24,120,768 $30,623,569
Operating expenses:
Salaries.......................................... 13,898,967 15,663,935 17,725,055
Other operating expenses.......................... 3,631,436 3,377,053 4,377,367
Selling, general and administrative expenses...... 1,692,986 2,086,194 1,563,655
Depreciation...................................... 112,894 98,291 98,183
Amortization...................................... 113,154 78,322 1,477,759
----------- ----------- -----------
Total operating expenses.................. 19,449,437 21,303,795 25,242,019
----------- ----------- -----------
Income from operations.............................. 795,464 2,816,973 5,381,550
Interest expense.................................... 296,915 135,354 2,423,396
Earnings in equity investment (Note 2).............. (113,822) (60,683) (4,050)
----------- ----------- -----------
Income before income taxes.......................... 612,371 2,742,302 2,962,204
Income tax expense (Note 8)......................... 258,981 1,068,154 1,199,860
----------- ----------- -----------
Net income................................ $ 353,390 $ 1,674,148 $ 1,762,344
=========== =========== ===========
Net income per common and common equivalent share:
Primary........................................... $ .40
===========
Assuming full dilution............................ $ .39
===========
Weighted average shares outstanding (Note 15)....... 4,416,233
===========

See accompanying notes.

F-4
50

MILESTONE HEALTHCARE, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

PREFERRED COMMON PAID IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
---------- ------- ----------- ----------- -----------

Balance at August 1, 1993
(Predecessor)................. $ 75,623 $ 2,000 $ -- $ 868,218 $ 945,841
Capital contribution.......... -- -- 500,000 -- 500,000
Contribution of income taxes
(Note 8)................... -- -- 410,363 -- 410,363
Net income.................... -- -- -- 353,390 353,390
---------- ------- ----------- ----------- -----------
Balance at July 31, 1994
(Predecessor)................. 75,623 2,000 910,363 1,221,608 2,209,594
Capital contribution.......... -- -- 486,580 -- 486,580
Contribution of income taxes
(Note 8)................... -- -- 1,099,225 -- 1,099,225
Net income.................... -- -- -- 1,674,148 1,674,148
Acquisition (Note 1).......... (75,623) (2,000) (2,496,168) (2,895,756) (5,469,547)
Stock issued in connection
with acquisition (Note
5)......................... 5,000,000 294 239,706 -- 5,240,000
---------- ------- ----------- ----------- -----------
Balance at May 31, 1995
(Successor)................... 5,000,000 294 239,706 -- 5,240,000
Net income.................... -- -- -- 1,762,344 1,762,344
---------- ------- ----------- ----------- -----------
Balance at May 31, 1996
(Successor)................... $5,000,000 $ 294 $ 239,706 $ 1,762,344 $ 7,002,344
========== ======= =========== =========== ===========

See accompanying notes.

F-5
51

MILESTONE HEALTHCARE, INC.

STATEMENTS OF CASH FLOWS

TEN MONTHS YEAR ENDED
YEAR ENDED ENDED MAY 31,
JULY 1, 1994 MAY 31, 1995 1996
------------- ------------- ------------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)

OPERATING ACTIVITIES
Net income............................................ $ 353,390 $ 1,674,148 $ 1,762,344
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 112,894 98,291 98,183
Amortization........................................ 113,154 78,322 1,477,759
Earnings in equity investment....................... (113,822) (60,683) (4,050)
Deferred income taxes............................... (151,382) (31,071) (246,685)
Current income taxes (Note 8)....................... 410,363 1,099,225 --
Deferred interest................................... -- -- 1,550,661
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,706,796) (2,093,017) 659,337
Prepaid expenses................................. (59,581) 26,467 (156,132)
Other assets..................................... (48,898) 73,165 (76,466)
Accounts payable and accrued liabilities......... 1,394,524 (274,232) 902,369
Income taxes payable............................. -- -- 280,807
Accrued interest................................. -- -- 132,446
----------- ----------- -----------
Net cash provided by operating activities... 303,846 590,615 6,380,573
INVESTING ACTIVITIES
Capital expenditures.................................. (256,227) (8,758) (107,364)
Investment in partnership............................. 140,000 81,000 29,000
----------- ----------- -----------
Net cash (used in) provided by investing
activities................................ (116,227) 72,242 (78,364)
FINANCING ACTIVITIES
Payments on long-term debt............................ (451,572) (351,971) (6,707,982)
(Payments to) receipts from HTI/EPIC.................. 321,701 (821,182) --
Cash received at Acquisition.......................... -- 883,226 --
----------- ----------- -----------
Net cash used in financing activities....... (129,871) (289,927) (6,707,982)
Net (decrease) increase in cash and cash
equivalents......................................... 57,748 372,930 (405,773)
Cash and cash equivalents at beginning of period...... 478,727 536,475 909,405
----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 536,475 $ 909,405 $ 503,632
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest................................ $ 124,659 $ 71,536 $ 740,289
=========== =========== ===========
Cash paid for income taxes............................ $ -- $ -- $ 1,165,788
=========== =========== ===========

See accompanying notes.

F-6
52

MILESTONE HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Description of Business

On May 31, 1995, MHI Acquisition, Inc. (MHI), a newly formed entity,
entered into a plan and agreement of reorganization (the Acquisition agreement)
with Healthtrust, Inc.-the Hospital Company (HTI) and HTI's wholly-owned
subsidiary, Coralstone Management, Inc. (Coralstone). MHI purchased from
Coralstone all the stock of MileStone Healthcare, Inc. (MileStone or Company)
and MileStone Healthcare Management, Inc. (MHM) for approximately $27,000,000.
MHM was simultaneously merged into MileStone. In connection with the
Acquisition, MHI issued long-term debt of $13,700,000, subordinated debt of
$9,000,000, preferred stock of $5,000,000 and common stock of $240,000. The
transaction was accounted for as a purchase. The excess purchase price over net
assets acquired was $22,246,951. The fiscal year was changed in connection with
the Acquisition. MHI was subsequently merged into MileStone.

The consolidated financial statements at May 31, 1995, and subsequent
include MileStone and its wholly owned subsidiaries (successor). Prior to May
31, 1995, the financial statements include the combined operations of MileStone
and MHM (predecessor). All intercompany balances and transactions have been
eliminated in consolidation.

MileStone develops, markets, and manages programs for the delivery of
comprehensive medical rehabilitation, skilled nursing, and therapy services in
acute-care hospitals. MileStone also provides physical therapy, speech therapy,
occupational therapy and other related rehabilitation services under contract
for institutions, as well as directly to patients. One of MileStone's
subsidiaries has been certified to participate in the Medicare and Medicaid
programs. MileStone operates primarily in Texas, Kentucky, Louisiana and
Florida.

Net Revenue

Contract revenue is recognized as services are performed.

Net patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payors and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors. Retroactive adjustments are accrued on an estimated basis in
the period the related services are rendered and adjusted in future periods as
final settlements are determined.

Cash and Cash Equivalents

Certificates of deposit with original maturities of three months or less
are considered to be cash equivalents.

Equipment

Equipment is stated at cost and depreciated on a straight-line basis over
the estimated useful lives (primarily three to seven years). Accumulated
depreciation at May 31, 1995 and 1996, was $0 and $98,183, respectively.

Other Assets

Goodwill, contracts and loan origination fees are recorded at cost at the
date of the related agreement or acquisition and are amortized on a
straight-line basis. Goodwill is amortized over 40 years, contracts are
amortized primarily over seven years and loan origination fees are amortized
over the five-year term of the related debt instruments. Accumulated
amortization at May 31, 1996, for goodwill, contracts, and loan origination fees
was $381,174, $1,042,857 and $53,728, respectively.

F-7
53

MILESTONE HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

At each balance sheet date, the Company reviews the carrying value of the
goodwill and contracts to determine if facts and circumstances suggest that they
may be impaired or that the amortization period may need to be changed. The
Company considers external factors relating to each intangible asset, including
contract changes, local market developments, national health care trends, and
other publicly available information. If these external factors indicate the
goodwill or contracts will not be recoverable, the carrying value of the
goodwill or contracts will be analyzed and adjusted accordingly. The Company
does not believe there are any indicators that would require an adjustment to
the carrying value of the goodwill or contracts or their respective remaining
useful lives as of May 31, 1996.

Income Taxes

The Company accounts for income taxes under the liability method as
required by the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes."

Concentration of Credit Risk

The Company performs periodic credit evaluations of its customers'
financial condition and does not require collateral. Receivables are generally
due within 30 days. Credit losses from customers have been within management's
expectations, and management believes that the allowance for doubtful accounts
adequately provides for any expected losses. Medicare accounts receivable is 21%
and 11% of gross accounts receivable at May 31, 1995 and 1996, respectively.

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 those estimates.

Charity Care

The Company provides care without charge or at amounts less than its
established rates to patients meeting certain criteria under its charity care
policy. Charity care is not reported as revenue. The Company provided charity
care of $29,833, $22,326 and $26,191 during 1994, 1995, and 1996, respectively.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
since the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.

Net Income per Share

Net income per common stock and common stock equivalent for 1996 was
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding during the year. The
convertible preferred stock has been considered to be the equivalent of common
stock. The number of shares issuable on conversion of preferred stock was added
to the number of common shares. The number of common shares was also increased
by the number of shares issuable on the exercise of warrants and stock options.
This increase in the number of common shares was reduced by the number of common
shares that are assumed to have been purchased with the proceeds from the
exercise of

F-8
54

MILESTONE HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

the warrants and options; those purchases were assumed to have been made at the
average price of the common stock.

Net income per common and common stock equivalent assuming full dilution
was determined in the same manner as primary net income per share except that
purchases of common stock are assumed to have been made at the year-end price.

Per share data for 1995 and 1994 is not meaningful due to the change in
capital structure at May 31, 1995.

Significant Customer

During 1996, general acute care hospitals directly or indirectly owned by
Columbia/HCA Healthcare Corporation (Columbia) accounted for approximately 73%
of net revenues.

During 1994 and 1995, general acute care hospitals owned by Columbia and by
two separate healthcare systems which were subsequently acquired by Columbia
accounted for approximately 51%, and 66% of net revenues, respectively.

2. INVESTMENT IN JOINT VENTURE

MileStone owns 50% of a joint venture, which provides therapy services in a
clinic located in McAllen, Texas. Net income for the year ended July 31, 1994,
ten months ended May 31, 1995, and year ended May 31, 1996, is $227,644,
$121,366, and $8,100, respectively. Summary financial information regarding
financial position as of May 31, 1995, and May 31, 1996, is summarized below:

1995 1996
-------- --------

Current assets................................................. $149,720 $116,557
Property and equipment, net.................................... 29,996 18,609
Investment in joint venture.................................... 45,332 29,600
-------- --------
Total assets......................................... $225,048 $164,766
======== ========
Current liabilities............................................ $ 52,477 $ 42,112
Equity......................................................... 172,571 122,654
-------- --------
Total liabilities and equity......................... $225,048 $164,766
======== ========

3. LONG-TERM DEBT

Long-term debt at May 31, 1995 and 1996, consists of the following:

1995 1996
----------- ----------

Term loan with Internationale Nederlanden (U.S.) Capital
Corporation (ING), interest at London Interbank Offering
Rate plus 2.5% (8.26% at May 31, 1996); due in quarterly
installments through May 31, 2000; collateralized by
substantially all assets................................. $10,000,000 $6,992,018
Borrowings under a $5,000,000 revolving loan with ING;
expires May 31, 2000; interest at prime plus 1/2%;
collateralized by substantially all assets............... 3,700,000 --
----------- ----------
13,700,000 6,992,018
Less current maturities.................................... 4,700,000 1,165,336
----------- ----------
$ 9,000,000 $5,826,682
=========== ==========

F-9
55

MILESTONE HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate maturities of long-term debt at May 31, 1996, are as follows:

1997........................................... $1,165,336
1998........................................... 1,553,782
1999........................................... 1,942,227
2000........................................... 2,330,673
----------
$6,992,018
==========

The Company is required under the term loan agreement to make a mandatory
prepayment within 90 days after the fiscal period-end in an amount equal to 75%
of the excess cash flow with respect to such fiscal year, as defined in the
agreement. A prepayment of $2,150,000 was made during the year ended May 31,
1996, and $3,200,000 is expected to be paid during the year ended May 31, 1997.
The above maturity schedule has not been adjusted for the expected 1997
prepayment because management intends to draw the prepayment amount under the
revolving loan.

Agreements with ING stipulate that MileStone provide certain information
and maintain certain financial ratios and minimum earnings levels.

4. SUBORDINATED DEBENTURES

On May 31, 1995, MileStone issued $9,000,000 of subordinated debentures at
a stated interest rate of 16.5%. Interest accrues semi-annually until May 31,
1997, and is added to the principal amount due under the note. Commencing on
June 1, 1997, interest is payable quarterly at 11% and the balance of 5.5% is
added to the principal amounts due under the note. All unpaid principal and
interest amounts are due November 30, 2000. These debentures are subordinate to
all of the long-term debt. Unpaid interest added to principal at May 31, 1996,
was $1,550,661.

5. STOCKHOLDERS' EQUITY

On May 31, 1995, MileStone issued 5,000,000 shares of convertible Series A
preferred stock for $5,000,000. Each Series A preferred share is convertible
into .735 share of Class A common stock at the option of the Series A preferred
shareholder or at the closing of a public offering, subject to adjustment as
provided in the purchase agreement. The Series A preferred stock has voting
rights equal to those of the Class A common stock.

The Series A preferred stock pays dividends at the discretion of the Board
of Directors, but at least equal to any dividends paid to the Class A common
stock. In the event of liquidation of the Company, each holder of Series A
preferred stock shall be entitled to be paid $1.00 per share, subject to
adjustment as provided in the purchase agreement, and all declared but unpaid
dividends.

MileStone also issued 294,000 shares of its Class A common stock to members
of management for $240,000 in cash. The Company is required to repurchase this
stock at $.82 per share if certain future earnings targets, as defined in the
purchase agreement, are not met over the next five years.

The Class A and Class B common stock rank equally as to dividends and upon
liquidation and junior to the Series A and Series B preferred stock. The Class B
common stock is nonvoting and convertible to Class A common stock at the option
of the holder.

The Company has 3,675,000 shares of Class A common stock reserved for the
conversion of Series A preferred stock, and 699,242 shares reserved for the
granting of stock options. Additionally, the Company has 297,973 shares of
reserved Class B common stock reserved for issuance upon the exercise of stock
purchase warrants.

F-10
56

MILESTONE HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. STOCK PURCHASE WARRANT AND STOCK OPTIONS

In connection with the financing obtained from ING, MileStone issued a
stock purchase warrant to purchase 297,973 shares of Class B common stock
exercisable at a price of $.82 per share. The warrant expires May 31, 2005.

The warrant is subject to a put and call agreement. The holders of the
warrant have the right, under certain conditions, to cause the Company to
repurchase the warrant and any shares of Class B common stock received upon
exercise of the warrant at the fair market value of the common stock, as defined
in the agreement, less the exercise price of the warrant. Additionally, the
Company has the right, after June 30, 2000, to purchase the warrant and any
shares of Class B common stock issued upon exercise of the warrant at the fair
market value of the common stock, as defined in the agreement, less the exercise
price of the warrant plus 10%. The put and call agreement terminates upon the
completion of a public offering.

The 1995 stock option plan (the Plan) authorizes the granting of incentive
and nonqualified stock options. The purchase price of the shares under option
must be at least 100% of the fair market value of the common stock at date of
grant for incentive stock options and is determined by the Board of Directors
for nonqualified stock options. The options granted become exercisable over a
period determined by the Board of Directors at date of grant and have to be
exercised the earlier of ten years from the date of grant or a date determined
by the Board of Directors. Following is a summary of information regarding the
Plan:

SHARES
RESERVED NUMBER OF PRICE PER
FOR ISSUANCE OPTIONS OPTION
------------ --------- ----------

May 31, 1995..................................... 347,634 351,608 $ .82
Granted........................................ (97,388) 97,388 $ .82
Granted........................................ (104,370) 104,370 $4.46
Lapsed......................................... 11,025 (11,025) $ .82
-------- ------- -----------
May 31, 1996..................................... 156,901 542,341 $.82-$4.46
======== ======= ===========
Exercisable at May 31, 1996...................... 43,951 $ .82
======= ===========

The options granted on May 31, 1995, in connection with the purchase of
MileStone, are exercisable over 5 years based on specified targeted future
earnings of the Company.

Subsequent to May 31, 1996, options to purchase 10,142 shares of Class A
common stock at $.82/share were exercised and options to purchase 18,372 shares
of Class A common stock were granted at an option price of $4.46/share.

7. COMMITMENTS AND CONTINGENCIES

MileStone entered into operating leases for office space and equipment.
Rent expense of $440,985, $405,695 and $461,487 was recognized during 1994, 1995
and 1996, respectively. Future minimum rental payments under operating leases as
of May 31, 1996, are as follows:

1997............................................................ $306,688
1998............................................................ 184,267
1999............................................................ 42,555
2000............................................................ 11,600
--------
Total future minimum payments................................... $545,110
========

F-11
57

MILESTONE HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

A significant number of MileStone's management contracts require the
Company to refund some or all of its fee if Medicare reimbursement to the client
hospital is disallowed for a patient treated in a program managed by the Company
or if the fee paid to MileStone is disallowed as a reimbursable cost. Management
knows of no reimbursements or fees that have been disallowed under the
contracts.

8. INCOME TAXES

The income tax expense (benefit) is as follows:

1994 1995 1996
--------- ---------- ----------

Current:
Federal........................................ $ 340,701 $ 912,624 $1,190,309
State.......................................... 69,662 186,601 256,236
Deferred......................................... (151,382) (31,071) (246,685)
--------- ---------- ----------
$ 258,981 $1,068,154 $1,199,860
========= ========== ==========

A reconciliation between income taxes computed at the federal statutory
rate and the Company's expense for income taxes is as follows:

1994 1995 1996
-------- ---------- ----------

Federal income tax at statutory rate.............. $208,206 $ 932,383 $1,007,149
State income taxes................................ 29,016 119,676 138,490
Nondeductible goodwill amortization............... 19,347 10,692 30,806
Nondeductible meals and entertainment............. 2,412 5,403 22,541
Other............................................. -- -- 874
-------- ---------- ----------
$258,981 $1,068,154 $1,199,860
======== ========== ==========

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. Significant components of
the Company's deferred tax liabilities and assets as of May 31, 1995 and 1996,
are as follows:

1995 1996
-------- --------

Deferred tax liabilities:
Prepaid expenses............................................. $ -- $ 73,888
Amortization of goodwill..................................... 11,463 197,482
Joint venture................................................ 19,747 10,450
Amortization of contracts.................................... 149,320 --
-------- --------
Total deferred tax liabilities....................... 180,530 281,820
Deferred tax assets:
Amortization of contracts.................................... -- 78,100
Allowance for doubtful accounts.............................. 163,085 359,987
Accrued liabilities.......................................... 61,583 124,794
Depreciation................................................. 20,630 30,392
-------- --------
Total deferred tax assets............................ 245,298 593,273
-------- --------
Net deferred tax assets.............................. $ 64,768 $311,453
======== ========

F-12
58

MILESTONE HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

During 1994 and 1995, the Company was included in the consolidated tax
returns of its parents and no current or deferred income taxes were charged to
the Company. The consolidated statements of income for 1994 and 1995 reflect
income tax expense calculated as if the Company filed separate income tax
returns. Since the taxes were not paid, corresponding amounts are reflected as
additions to paid in capital.

9. EMPLOYEE BENEFIT PLANS

MileStone has a 401(k) benefit plan covering all eligible employees.
Employee contributions are voluntary. MileStone matches employee contributions
equal to 100% of the employee's contribution up to 3% of the employee's annual
salary. MileStone recognized expense of $236,619 for its contributions during
1996.

Prior to May 31, 1995, EPIC Holdings, Inc. (EPIC) had an ESOP and HTI had a
profit sharing plan for eligible employees of MileStone and MHM. Both plans were
defined contribution plans. The Company recognized expense of $410,537 and
$516,543 during 1994, and 1995, respectively, for contributions to the plans.

10. HEALTH AND DENTAL BENEFIT PLAN

The Company provides health and dental coverage through participation in a
self insured benefit plan (the Plan). The Company has purchased stop-loss
coverage in the amounts of $75,000 per employee and an amount based on a formula
as defined in the Plan which approximates $1,186,000 in the aggregate for the
period ending May 31, 1996. The Plan covered all employees of MileStone during
1996 and a portion of its employees during 1995 and 1994. Health and dental
insurance expense under the Plan was $197,581, $558,416, and $894,131 during
1994, 1995, and 1996, respectively.

Prior to May 31, 1995, EPIC and HTI provided health and dental coverage
under a self insured plan for certain MileStone employees. Health and dental
insurance expense under this plan was $46,528 and $116,792 during 1994, and
1995, respectively.

11. PROFESSIONAL LIABILITY INSURANCE

The Company pays fixed premiums for annual professional liability insurance
coverage under an occurrence-based policy covering $1,000,000 per individual
claim and $3,000,000 for aggregate claims. The Company accrues the expense of
its share of asserted and unasserted claims occurring during the year by
estimating the probable ultimate cost of any such claim. Such estimates are
based on the Company's own claims experience. Company management does not expect
any claims to exceed the professional liability coverage limits; accordingly, no
accruals for claims have been included in these financial statements.
Additionally, there were no claims filed during the year ended May 31, 1996, and
the Company is not aware of any unasserted claims or unreported incidents.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of MileStone's financial instruments
at May 31, 1995, and 1996, are as follows:

1995 1996
-------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- ----------

Cash and cash equivalents......... $ 909,405 $ 909,405 $ 503,632 $ 503,632
Long-term debt.................... 13,700,000 13,700,000 6,992,018 6,992,018
Subordinated debentures........... 9,000,000 9,000,000 10,550,661 9,664,175

F-13
59

MILESTONE HEALTHCARE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following methods and assumptions were used by MileStone in estimating
its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate fair value.

Long-term debt: Fair values of long-term debt are estimated using
MileStone's incremental borrowing rates for similar types of borrowing
arrangements.

Subordinated debentures: Fair values of subordinated debentures are
estimated using amounts for current sales of the instrument by the holder.

13. ACCRUED LIABILITIES

Accrued liabilities at May 31, 1995 and 1996, includes the following:

1995 1996
---------- ----------

Accrued payroll and payroll taxes........................... $ -- $ 644,120
Accrued bonuses............................................. 346,826 837,345
Other....................................................... 904,657 340,841
---------- ----------
$1,251,483 $1,822,306
========== ==========

14. ALLOWANCE FOR DOUBTFUL ACCOUNTS

The allowance for doubtful accounts for the year ended July 31, 1994, ten
months ended May 31, 1995 and year ended May 31, 1996, consists of the
following:

1994 1995 1996
--------- --------- ---------

Balance at beginning of period.................. $ 212,482 $ 496,116 $ 464,138
Bad debt expense................................ (436,112) (175,373) (596,828)
Write-offs...................................... 152,478 207,351 125,935
--------- --------- ---------
Balance at end of period........................ $ 496,116 $ 464,138 $ 935,031
========= ========= =========

15. REVERSE STOCK SPLIT

In connection with the merger of MHI into Milestone, the Company completed
a reverse stock split effective on July 26, 1996. For every share of stock,
warrants or stock options of MHI, the holder received .735 shares, warrants or
stock options of Milestone. For purposes of determining weighted average common
stock and common stock equivalents, this reverse stock split has been
retroactively applied to May 31, 1995.

F-14
60

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

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

PAGE
----

Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 10
Use of Proceeds....................... 11
Dividend Policy....................... 11
Capitalization........................ 12
Dilution.............................. 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 19
Management............................ 28
Certain Transactions.................. 33
Principal and Selling Stockholders.... 35
Description of Capital Stock.......... 37
Shares Eligible for Future Sale....... 40
Underwriting.......................... 42
Legal Matters......................... 43
Experts............................... 43
Additional Information................ 43
Index to Financial Statements......... F-1

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

2,500,000 SHARES

MILESTONE
H E A L T H C A R E

COMMON STOCK

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

PROSPECTUS

, 1996

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

SMITH BARNEY INC.
FURMAN SELZ

================================================================================
61

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions, are set forth in the following table. All of such expenses will be
borne by MileStone Healthcare, Inc. (the "Company").

SEC registration fees...................................................... $11,897
NASD filing fees........................................................... 3,950
Nasdaq National Market System application and listing fees................. *
Printing and engraving expenses............................................ *
Legal fees and expenses.................................................... *
Accounting fees and expenses............................................... *
Blue sky fees and expenses................................................. *
Transfer agent and registrar fees and expenses............................. *
Miscellaneous.............................................................. *
-------
Total............................................................ $ *
=======

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

* To be filed by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law (the "Delaware Act"), subject to the procedures
and limitations stated therein, to indemnify certain parties. Section 145 of the
Delaware Act provides in part that a corporation shall have the 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 (other than
an action by or in the right of the corporation) by reason of the fact that such
person 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 or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Similar indemnity is authorized for such persons against
expenses (including attorneys' fees) actually and reasonably incurred in the
defense or settlement of any threatened, pending or completed action or suit by
or in the right of the corporation, if such person 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 provided further that (unless a court of competent
jurisdiction otherwise provides) such person shall not have been adjudged liable
to the corporation. Any such indemnification may be made only as authorized in
each specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct. Where an officer or a director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually or reasonably incurred. Section 145 provides further that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.

The Company's Restated Certificate of Incorporation (the "Certificate")
will provide that the Company shall indemnify any and all persons whom it has
the power to indemnify under Section 145 of the Delaware Act to the fullest
extent permitted under such section, and such indemnity shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person. If claim for indemnification is not paid in full by the Company within
sixty

II-1
62

(60) days after a written claim has been received by the Company, the claimant
may bring a suit against the Company to recover the unpaid amount, and if
successful, the claimant shall be entitled to be paid the expenses in
prosecuting such claim.

The Company's Certificate eliminates the personal liability of the
Company's directors to the fullest extent permitted under Section 102(b)(7) of
the Delaware Act, as amended. Such section permits a company's certificate of
incorporation to eliminate or limit the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director: (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware Act (which addresses director
liability for unlawful payment of a dividend or unlawful stock purchase or
redemption) or (iv) for any transaction from which the director derived an
improper personal benefit.

As set forth below, Article VI of the bylaws of the Company (the "Bylaws")
provides for indemnification of directors and officers, and Section 6.3 of the
Bylaws provides for the authority to purchase insurance with respect to
indemnification of directors and officers.

Article VI of the Bylaws provides that the Company shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company 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 to the fullest extent permitted by Delaware law.

Section 9 of the Underwriting Agreement among the Company, the Underwriters
and the Selling Stockholders, a copy of which is filed herein as Exhibit 1,
provides for the indemnification by the Company of the Underwriters and each
person, if any, who controls any Underwriter against certain liabilities and
expenses, as stated therein, which may include liabilities under the Securities
Act of 1933, as amended. The Underwriting Agreement also provides that the
Underwriters shall similarly indemnify the Company, its directors, officers and
controlling persons, as set forth therein.

The Company intends to apply for a directors and officers insurance policy.

The Company has adopted provisions in its Bylaws and will adopt provisions
in its Restated Certificate of Incorporation which provide for indemnification
of its officers and directors to the maximum extent permitted under the Delaware
General Corporation Law. In addition, the Company has entered into separate
indemnification agreements with each of its directors which may require the
Company, among other things, to indemnify them against certain liabilities that
may arise by reason of their status or service as directors to the maximum
extent permitted under the Delaware General Corporation Law, to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified, and to establish a trust for the provision of such
expenses under certain circumstances.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On May 31, 1995, in an acquisition of the Company by management and others
from an indirectly wholly-owned subsidiary of Columbia/HCA Healthcare, Inc. (the
"Acquisition"), the Company issued and sold an aggregate of 5,000,000 shares of
its Series A Preferred Stock, par value $.001 per share (the "Series A
Preferred"), at a purchase price of $1.00 per share as follows: (i) Morgan
Stanley Venture Capital Fund II, L.P. purchased 2,651,335 shares; (ii) Morgan
Stanley Venture Capital Fund II, C.V. purchased 660,546 shares; (iii) Morgan
Stanley Venture Investors, L.P. purchased 688,119 shares; (iv) Charles L. Allen
purchased 535,714 shares; (v) Roy W. Griffitts, Jr. purchased 392,857 shares;
and (vi) William A. Brosius purchased 71,429 shares. Also in connection with the
Acquisition, on May 31, 1995, the Company sold 294,000 shares of its Common
Stock, par value $.001 per share (the "Common Stock"), at a purchase price of

II-2
63

$.82 per share as follows: Charles L. Allen purchased 147,000 shares; (ii) Roy
W. Griffitts, Jr. purchased 79,154 shares; and (iii) William A. Brosius
purchased 67,846 shares.

On May 31, 1995, in connection with the Acquisition, Internationale
Nederlanden (U.S.) Capital Corporation ("ING") extended credit to the Company to
effect the Acquisition. The credit facility consisted of a revolving loan
commitment of up to $5,000,000 and a term loan in the principal amount of
$10,000,000. As condition precedent to extending such credit, ING received a
warrant by the Company which entitles the holder to purchase up to 297,973
shares of Class B Common Stock, par value $.001 per share, of the Company (the
"Class B Common Stock") at an initial exercise price of $.82 per share (the
"Exercise Price") until May 31, 2005. The Exercise Price and the securities
issuable upon the exercise of each warrant are subject to adjustment from time
to time upon the occurrence of certain events as set forth in the related
warrant purchase agreement.

The Company has reserved for issuance a total of 699,242 shares of its
Common Stock for issuance to employees and directors of and consultants to the
Company under the 1995 Stock Option Plan. On May 31, 1995, the Company granted
incentive stock options for 351,608 shares of its Common Stock pursuant to the
1995 Stock Option Plan as follows: Charles L. Allen, 175,804 shares; Roy W.
Griffitts, Jr., 94,664 shares; and William A. Brosius, 81,140 shares.

As of July 16, 1996, the Company has granted options to purchase a total of
550,571 shares of Common Stock under the 1995 Stock Option Plan. All of such
options have been incentive stock options. On June 30, 1996, William A. Brosius
exercised options under the Company's 1995 Stock Option Plan to purchase 10,142
shares of Common Stock at an exercise price of $.82 per share for an aggregate
purchase price of $8,279.40.

Each of the foregoing issuances which occurred in 1995 were exempt from
registration under Section 4(2) of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

EXHIBIT
NUMBER DESCRIPTION
------- -----------

1* -- Form of Underwriting Agreement.

3.1* -- Amended and Restated Certificate of Incorporation of the Company.

3.2* -- Amended and Restated Bylaws of the Company.

4.1* -- Specimen Certificate for shares of Common Stock, $.01 par value, of
the Company.

4.2* -- Registration Rights Agreement, dated as of May 31, 1995, among MHI
and Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley
Venture Capital Fund II, C.V., Morgan Stanley Venture Investors,
L.P., Charles L. Allen, Roy W. Griffitts, Jr., William A. Brosius,
and ING.

4.3* -- Stockholders Agreement, dated as of May 31, 1995, among MHI and
Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture
Capital Fund II, C.V., Morgan Stanley Venture Investors, L.P.,
Charles L. Allen, Roy W. Griffitts, Jr. and William A. Brosius.

4.4* -- Warrant Purchase Agreement, dated as of May 31, 1995, between MHI and
ING.

4.5* -- Warrant Certificate, dated May 31, 1995, pursuant to which MHI issued
297,973 warrants to ING.

4.6* -- Put and Call Agreement, dated as of May 31, 1995, among the Company,
MHI, MHI Acquisition Corporation I and ING.

II-3
64

EXHIBIT
NUMBER DESCRIPTION
-------- -----------

4.7* -- Form of Founder Performance Stock Purchase Agreement dated as of May
31, 1995, between: MHI and each of Charles L. Allen, Roy W.
Griffitts, Jr., and William A. Brosius.
4.8* -- Series A Preferred Stock Purchase Agreement, dated as of May 31,
1995, among MHI and Morgan Stanley Venture Capital Fund II, L.P.,
Morgan Stanley Venture Capital Fund II, C.V., Morgan Stanley Venture
Investors, L.P., Charles L. Allen, Roy W. Griffitts, Jr., and William
A. Brosius.
4.9* -- Morgan Stanley Letter Agreement, dated May 31, 1995, between Morgan
Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Capital
Fund II, C.V., Morgan Stanley Venture Investors, L.P., MHI, MHI
Acquisition Corporation I, the Company, MileStone Healthcare
Management, Inc., Trucare Health Systems, Inc., Trucare
Rehabilitation Systems, Inc., and Trucare Physical Therapy Services,
Inc., and ING.
4.10* -- 1996 Stock Option Plan, including form of Stock Option Agreement.
4.11* -- Form of Warrant dated April 30, 1996, issued by each of Morgan
Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Capital
Fund II C.V. and Morgan Investors, L.P. to each of Alan Gerry and SV
Capital Partners, L.P. for purchase shares of Series A Preferred
Stock of MHI.
4.12* -- Merger Agreement between MHI and the Company dated July 26, 1996.
5* -- Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1* -- Credit Agreement, dated as of May 31, 1995, among MHI Acquisition
Corporation I, the Company and ING.
10.2* -- Revolving Note, dated May 31, 1995, executed by MHI Acquisition
Corporation I and the Company in favor of ING.
10.3* -- Term Note, dated May 31, 1995, executed by MHI Acquisition
Corporation I and the Company in favor of ING.
10.4* -- Security Agreement, dated as of May 31, 1995, among MHI Acquisition
Corporation I, MHI Acquisition Corporation II, the Company, MileStone
Healthcare Management, Inc., Trucare Health Systems, Inc., Trucare
Rehabilitation Services, Inc., and Trucare Physical Therapy Services,
Inc. and ING.
10.5* -- Stock and Notes Pledge Agreement, dated as of May 31, 1995, among MHI
Acquisition Corporation I, the Company and ING.
10.6* -- Assumption Agreement, dated as of June 1, 1995, between the Company
and ING.
10.7* -- Guaranty, dated as of May 31, 1995, made by MHI in favor of ING.
10.8* -- Pledge Agreement, dated as of May 31, 1995, between MHI and ING.
10.9* -- Subsidiary Guaranty, dated as of May 31, 1995, made by MHI
Acquisition Corporation II, MileStone Healthcare Management, Inc.,
Trucare Health Systems, Inc., Trucare Rehabilitation Services, Inc.,
and Trucare Physical Therapy Services, Inc. in favor of ING.
10.10* -- Subsidiary Pledge Agreement, dated as of May 31, 1995, between
Trucare Health Systems, Inc. and Trucare Physical Therapy Services,
Inc. and ING.
10.11* -- Employment Agreement dated May 31, 1995, between MHI and Charles L.
Allen.
10.12* -- Employment Agreement dated May 31, 1995, between MHI and Roy W.
Griffitts, Jr.

II-4
65

EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------

10.13* -- Employment Agreement dated May 31, 1995, between MHI and William A.
Brosius.
10.14* -- Form of Indemnification Agreement dated as of May 31, 1995, between
MHI and each of Charles L. Allen, Roy W. Griffitts, Jr., William A.
Brosius, Scott S. Halsted, and Guy L. de Chazal.
10.15* -- Note Purchase Agreement, dated as of May 31, 1995, between MHI and
Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture
Capital Fund II, C.V., and Morgan Stanley Venture Investors, L.P.
10.16* -- Note Purchase and Sale Agreement dated as of May 6, 1996, by and
among Morgan Stanley Venture Capital Fund II L.P., Morgan Stanley
Venture Capital Fund II C.V. and Morgan Investors, L.P. and Alan
Gerry and SV Capital Partners, L.P. and MHI.
10.17* -- Senior Subordinated Note Due 2000 dated June 1, 1995, from MHI to
Alan Gerry as Holder.
10.18* -- Senior Subordinated Note Due 2000 dated June 1, 1995, from MHI to SV
Capital Partners, L.P. as Holder.
10.19* -- Agreement entered into May 6, 1996 by and among Alan Gerry and SV
Capital Partners L.P., as Purchasers, and MHI.
10.20* -- Lease of Office Space in The 2501 Cedar Springs Building between 2501
Cedar Springs Investors, as Landlord, and the Company, as Tenant,
effective May 1, 1992.
10.21* -- Lease Agreement dated June 11, 1992, between North Dallas Tower,
Ltd., as Landlord, and TruCare Health Systems, Inc., as Tenant.
21* -- List of subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
23.2* -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its
opinion filed as Exhibit 5 hereto).
24 -- Power of Attorney (included on signature page of this Registration
Statement).
27 -- Financial Data Schedule.

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

* To be filed by amendment

(b) Financial Statement Schedules

All schedules have been omitted because they are not required, are not
applicable or the information is included in the Financial Statements or Notes
thereto.

ITEM 17. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.

(b) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement

II-5
66

relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.

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

II-6
67

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on July 26, 1996.

MILESTONE HEALTHCARE, INC.

By: /s/ CHARLES L. ALLEN
---------------------------------
Charles L. Allen,
President, Chief Executive Officer
and Director

The undersigned directors and officers of MileStone Healthcare, Inc. hereby
constitute and appoint Charles L. Allen and William A. Brosius and each of them,
with full power to act without the other and with full power of substitution and
resubstitution, our true and lawful attorneys-in-fact with full power to execute
in our name and behalf in the capacities indicated below any and all amendments
(including post-effective amendments and amendments thereto) to this
Registration Statement and any registration statement for the same offering that
is to be effective upon filing pursuant to Rule 462(b) under the Securities Act
of 1933 and to file the same, with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission and hereby
ratify and confirm all that such attorneys-in-fact, or either of them, or their
substitutes shall lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 26, 1996.

NAME TITLE
---- -----

/s/ CHARLES L. ALLEN President, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
Charles L. Allen

/s/ WILLIAM A. BROSIUS Chief Financial Officer and Secretary
- --------------------------------------------- (Principal Financial and Accounting
William A. Brosius Officer)

/s/ ROY W. GRIFFITTS, JR. Chief Operating Officer and Director
- ---------------------------------------------
Roy W. Griffitts, Jr.

/s/ GUY L. DE CHAZAL Director
- ---------------------------------------------
Guy L. de Chazal

/s/ SCOTT S. HALSTED Director
- ---------------------------------------------
Scott S. Halsted

II-7
68

INDEX TO EXHIBITS

SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------

1* -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of the Company.
3.2* -- Amended and Restated Bylaws of the Company.
4.1* -- Specimen Certificate for shares of Common Stock, $.01 par value, of
the Company.
4.2* -- Registration Rights Agreement, dated as of May 31, 1995, among MHI
and Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley
Venture Capital Fund II, C.V., Morgan Stanley Venture Investors,
L.P., Charles L. Allen, Roy W. Griffitts, Jr., William A. Brosius,
and ING.
4.3* -- Stockholders Agreement, dated as of May 31, 1995, among MHI and
Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture
Capital Fund II, C.V., Morgan Stanley Venture Investors, L.P.,
Charles L. Allen, Roy W. Griffitts, Jr. and William A. Brosius.
4.4* -- Warrant Purchase Agreement, dated as of May 31, 1995, between MHI and
ING.
4.5* -- Warrant Certificate, dated May 31, 1995, pursuant to which MHI issued
297,973 warrants to ING.
4.6* -- Put and Call Agreement, dated as of May 31, 1995, among the Company,
MHI, MHI Acquisition Corporation I and ING.
4.7* -- Form of Founder Performance Stock Purchase Agreement dated as of May
31, 1995, between: MHI and each of Charles L. Allen, Roy W.
Griffitts, Jr., and William A. Brosius.
4.8* -- Series A Preferred Stock Purchase Agreement, dated as of May 31,
1995, among MHI and Morgan Stanley Venture Capital Fund II, L.P.,
Morgan Stanley Venture Capital Fund II, C.V., Morgan Stanley Venture
Investors, L.P., Charles L. Allen, Roy W. Griffitts, Jr., and William
A. Brosius.
4.9* -- Morgan Stanley Letter Agreement, dated May 31, 1995, between Morgan
Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Capital
Fund II, C.V., Morgan Stanley Venture Investors, L.P., MHI, MHI
Acquisition Corporation I, the Company, MileStone Healthcare
Management, Inc., Trucare Health Systems, Inc., Trucare
Rehabilitation Systems, Inc., and Trucare Physical Therapy Services,
Inc., and ING.
4.10* -- 1996 Stock Option Plan, including form of Stock Option Agreement.
4.11* -- Form of Warrant dated April 30, 1996, issued by each of Morgan
Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Capital
Fund II C.V. and Morgan Investors, L.P. to each of Alan Gerry and SV
Capital Partners, L.P. for purchase shares of Series A Preferred
Stock of MHI.
4.12* -- Merger Agreement between MHI and the Company dated July 26, 1996.
5* -- Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1* -- Credit Agreement, dated as of May 31, 1995, among MHI Acquisition
Corporation I, the Company and ING.
10.2* -- Revolving Note, dated May 31, 1995, executed by MHI Acquisition
Corporation I and the Company in favor of ING.
10.3* -- Term Note, dated May 31, 1995, executed by MHI Acquisition
Corporation I and the Company in favor of ING.

SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------

10.4* -- Security Agreement, dated as of May 31, 1995, among MHI Acquisition
Corporation I, MHI Acquisition Corporation II, the Company, MileStone
Healthcare Management, Inc., Trucare Health Systems, Inc., Trucare
Rehabilitation Services, Inc., and Trucare Physical Therapy Services,
Inc. and ING.
10.5* -- Stock and Notes Pledge Agreement, dated as of May 31, 1995, among MHI
Acquisition Corporation I, the Company and ING.
10.6* -- Assumption Agreement, dated as of June 1, 1995, between the Company
and ING.
10.7* -- Guaranty, dated as of May 31, 1995, made by MHI in favor of ING.
10.8* -- Pledge Agreement, dated as of May 31, 1995, between MHI and ING.
10.9* -- Subsidiary Guaranty, dated as of May 31, 1995, made by MHI
Acquisition Corporation II, MileStone Healthcare Management, Inc.,
Trucare Health Systems, Inc., Trucare Rehabilitation Services, Inc.,
and Trucare Physical Therapy Services, Inc. in favor of ING.
10.10* -- Subsidiary Pledge Agreement, dated as of May 31, 1995, between
Trucare Health Systems, Inc. and Trucare Physical Therapy Services,
Inc. and ING.
10.11* -- Employment Agreement dated May 31, 1995, between MHI and Charles L.
Allen.
10.12* -- Employment Agreement dated May 31, 1995, between MHI and Roy W.
Griffitts, Jr.
10.13* -- Employment Agreement dated May 31, 1995, between MHI and William A.
Brosius.
10.14* -- Form of Indemnification Agreement dated as of May 31, 1995, between
MHI and each of Charles L. Allen, Roy W. Griffitts, Jr., William A.
Brosius, Scott S. Halsted, and Guy L. de Chazal.
10.15* -- Note Purchase Agreement, dated as of May 31, 1995, between MHI and
Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture
Capital Fund II, C.V., and Morgan Stanley Venture Investors, L.P.
10.16* -- Note Purchase and Sale Agreement dated as of May 6, 1996, by and
among Morgan Stanley Venture Capital Fund II L.P., Morgan Stanley
Venture Capital Fund II C.V. and Morgan Investors, L.P. and Alan
Gerry and SV Capital Partners, L.P. and MHI.
10.17* -- Senior Subordinated Note Due 2000 dated June 1, 1995, from MHI to
Alan Gerry as Holder.
10.18* -- Senior Subordinated Note Due 2000 dated June 1, 1995, from MHI to SV
Capital Partners, L.P. as Holder.
10.19* -- Agreement entered into May 6, 1996 by and among Alan Gerry and SV
Capital Partners L.P., as Purchasers, and MHI.
10.20* -- Lease of Office Space in The 2501 Cedar Springs Building between 2501
Cedar Springs Investors, as Landlord, and the Company, as Tenant,
effective May 1, 1992.

SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- -----------------------------------------------------------------------------------

10.21* -- Lease Agreement dated June 11, 1992, between North Dallas Tower,
Ltd., as Landlord, and TruCare Health Systems, Inc., as Tenant.
21* -- List of subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
23.2* -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its
opinion filed as Exhibit 5 hereto).
24 -- Power of Attorney (included on signature page of this Registration
Statement).
27 -- Financial Data Schedule.

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

* To be filed by amendment