<PAGE>

                                                                 EXHIBIT 13
                                                                 ==========



                      1996 ANNUAL REPORT TO STOCKHOLDERS


Note:  Attached hereto are the incorporated pages from the Company's 1996 Annual
       Report to Stockholders
<PAGE>

FINANCIAL AND OTHER INFORMATION SECTION

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

Selected Consolidated Financial and Operating Data                16

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

Management's Discussion and Analysis of Results
of Operations and Financial Condition                             18

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

Report of Independent Public Accountants                          23

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

Financial Statements                                              24

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

Notes to Consolidated Financial Statements                        30

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

Officers and Directors                                            38

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

Related Stockholder Matters and Market
for the Company's Common Stock                     Inside Back Cover

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


                                                                              15
<PAGE>

First Commonwealth, Inc.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
--------------------------------------------------------------------------------

The selected consolidated statement of income data and balance sheet data as of,
and for, the years ended December 31, 1996, 1995 and 1994 are derived from, and
are qualified by reference to, the consolidated financial statements of the
Company audited by Arthur Andersen LLP, independent public accountants,
appearing elsewhere in this Annual Report. The selected consolidated statement
of income data and balance sheet data as of, and for, the years ended December
31, 1993 and 1992 are derived from audited financial statements of the Company
not included herein. The selected consolidated financial information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and the Company's consolidated
financial statements and related notes appearing elsewhere in this Annual
Report. The selected operating data has been derived from the accounting records
of the Company and has not been audited. <TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                        -----------------------
                                                 1996(5)         1995            1994            1993            1992
                                                 --------       -------         -------         -------         -------
                                                        (in thousands, except for per share and operating data)
<S>                                              <C>           <C>              <C>             <C>             <C>
Consolidated Statement of Income Data:
Subscriber revenue.............................  $ 44,099      $ 33,315         $22,077         $17,337         $11,265

Benefit coverage expenses......................    27,873        20,286          12,321           9,429           5,453
                                                 --------       -------         -------         -------         -------
Gross margin...................................    16,226        13,029           9,756           7,908           5,812
Selling, general and administrative expense....    12,273         9,883           7,458           6,263           4,575
                                                 --------       -------         -------         -------         -------
Operating income...............................     3,953         3,146           2,298           1,645           1,237

Interest income, net...........................       642           194              59              32              28
                                                 --------       -------         -------         -------         -------
Income before income taxes and
        extraordinary item.....................     4,595         3,340           2,357           1,677           1,265

Provision for income taxes.....................     1,864         1,336           1,009             672             498
                                                 --------       -------         -------         -------         -------
Income before extraordinary item...............     2,731         2,004           1,348           1,005             767

Extraordinary item (1).........................         -             -               -               -             375
                                                 --------       -------         -------         -------         -------
Net income.....................................  $  2,731       $ 2,004         $ 1,348         $ 1,005         $ 1,142
                                                 ========       =======         =======         =======         =======
Weighted average common and
        common equivalent shares outstanding (2)    3,604         2,993           2,841           2,816           2,805

Earnings per share--before
        extraordinary item (2).................  $   0.76       $  0.67         $  0.47         $  0.36         $  0.27

Earnings per share--
        extraordinary item (2).................         -             -               -               -            0.14
                                                 --------       -------         -------         -------         -------
Earnings per share (2).........................  $   0.76       $  0.67         $  0.47         $  0.36         $  0.41
                                                 ========       =======         =======         =======         =======
Selected Operating Data:
Members at end of period (3):

Managed Care...................................   341,600       265,800         215,700         181,800         129,500

Indemnity/PPO..................................    56,200        36,700          11,600          11,300           2,500
                                                 --------       -------         -------         -------         -------
Total Members..................................   397,800       302,500         227,300         193,100         132,000
                                                 ========       =======         =======         =======         =======
Number of managed care providers (4)...........     2,175         1,375           1,025             900             800
</TABLE>

                         See notes on following page.

16
<PAGE>

First Commonwealth, Inc.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA--continued
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                          -----------------------
                                                         1996(5)      1995         1994         1993         1992
                                                         -------     -------      -------      -------      -------
                                                          (in thousands, except for per share and operating data)
<S>                                                      <C>         <C>          <C>          <C>          <C>
Consolidated Balance Sheet Data (at end of period):
Total current assets.................................    $21,023     $16,889      $ 5,716      $ 3,941      $ 2,501

Total assets.........................................     34,454      19,111        7,217        5,203        3,149

Total current liabilities............................     14,331       7,280        3,977        3,276        1,886

Total liabilities....................................     14,498       7,405        4,077        3,414        1,898

Preferred stock......................................          -           -          892          892        1,309

Stockholders' equity.................................     19,956      11,706        2,248          898          (58)
</TABLE>

(1)  Represents the utilization of tax loss carryforwards.
(2)  Earnings per share reflects the conversion of all outstanding shares of
     Series B Preferred Stock upon the consummation of initial public offering
     in November 1995. See Note 2 of the Notes to Consolidated Financial
     Statements.
(3)  Amounts do not include eligible participants in the Company's ASO or PPO
     rental programs.
(4)  Represents the number of managed care providers for the dental HMO and
     PPO in Illinois, Indiana, Michigan and Wisconsin at end of period.

(5)  Reflects results of the acquisition of Smileage Dental Services, Inc. from
     July 18, 1996. Balance sheet data (but not income or operating data) as of
     December 31, 1996 includes amounts relating to Champion Dental Services,
     Inc., which was acquired as of December 31, 1996.

                                                                              17
<PAGE>

First Commonwealth, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
--------------------------------------------------------------------------------
The following discussion and analysis of the Company's consolidated results of
operations and consolidated financial condition should be read in conjunction
with the Selected Consolidated Financial and Operating Data and the Company's
consolidated financial statements, including the notes thereto appearing
elsewhere in this Annual Report.

Overview
--------------------------------------------------------------------------------
The Company began operations in the Chicago area in 1988 and has grown to be
a leading provider of managed dental benefits in the upper Midwest, including
the metropolitan areas of Chicago, Milwaukee, Detroit and Indianapolis.  As of
December 31, 1996, the Company had 341,600 members in its managed care plans,
56,200 members in its fully insured indemnity/PPO plans, and 34,100 eligible
participants accessing the Company's PPO network and members covered under its
administrative services only ("ASO") arrangements.  In 1992, the Company began
marketing indemnity plans as part of its Managed ChoiceSM products. Since the
introduction of Managed ChoiceSM products in 1992, the Company has experienced
significant enrollment growth in this product line, particularly among large
employers.  In January 1996, the Company introduced its new PPO product
(Managed ChoiceSM Triple Option), which integrates a managed component, the PPO
option, into the Company's indemnity plans.  The Indemnity/PPO revenue line now
includes revenue from both indemnity business that includes the PPO component
as well as indemnity business that does not include the PPO component.  The PPO
component was available to less than 10% of the Company's Indemnity/PPO members
as of December 31, 1996. The Company's Managed ChoiceSM products enable the
Company to completely replace an employer's existing indemnity plan with the
Company's combined managed care and indemnity/PPO plan.

Acquisitions
--------------------------------------------------------------------------------
Effective July 18, 1996, the Company completed the acquisition of Smileage
Dental Services, Inc. ("Smileage"), a Wisconsin-based dental HMO administrator,
which provides services to approximately 50,000 members, and an associated
reinsurance transaction, for an aggregate purchase price (including transaction
costs) of $5.6 million.  The acquisition was financed through the issuance
of the Company's common stock.

Effective December 31, 1996, the Company completed the acquisition of
Champion Dental Services, Inc. ("Champion"), a Missouri-based prepaid dental
plan, which provides services to approximately 60,000 members, for an aggregate
purchase price (including transaction costs) of $5.6 million.  The acquisition
was financed through proceeds from the Company's initial public offering and
was paid in cash on January 2, 1997.

Both acquisitions offer managed care products that are typically at a lower
gross margin level than the Company has experienced in the past.  For a
discussion of pro forma results and other information, see Note 15-Business
Combinations in Notes to Consolidated Financial Statements.

Revenues
--------------------------------------------------------------------------------
The Company's annual revenues have increased from $22.1 million in 1994 to
$44.1 million in 1996.  Revenues increased to $44.1 million for 1996 from $33.3
million for 1995. Revenue growth for 1996 has been  strong both in dollar and
percentage terms, primarily as the result of the addition of new managed care
and indemnity/PPO members as well as the acquisition of Smileage in July. The
Company believes that the rate of revenue growth in its current markets will
decline from historical levels primarily as a result of its higher revenue
base.

The Company's product pricing varies based on the type of plan, the services
provided and the member copayment (or coinsurance).  In addition, pricing
varies by marketplace based on employer and employee preference and
competition.  Pricing also may vary as a result of different pricing terms of
the plans in effect at companies when acquired by the Company.  As a result,
per member pricing can fluctuate based on product mix, shifting marketplace
preferences and acquisition timing.  As contracts are renewed, the Company will
seek to improve profitability on lower margin plans by increasing pricing, by
offering plans with additional services at higher prices and margins, and by
offering higher margin plans with fewer services at lower costs.

The largest source of Company revenue comes from members enrolled in managed
care plans. From 1994 to 1996, the Company's revenue from its managed care
products grew from $19.7 million to $32.8 million.  This increase is primarily
attributable to managed care enrollment growth and, to a lesser degree, a shift
toward managed care products with higher benefit and premium levels, as well as
the acquisition of Smileage in July 1996.  In 1994, managed care enrollment
accounted for approximately 89% of total revenue compared to approximately 74%
of total revenue for 1996.

18
<PAGE>

First Commonwealth, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION--continued
--------------------------------------------------------------------------------



The second largest source of Company revenue is generated from indemnity/PPO
plan premiums. From 1994 to 1996, the Company's revenue from its indemnity/PPO
products grew from $1.7 million to $10.6 million.  For 1996, revenue from
indemnity/PPO enrollment accounted for approximately 24% of total revenue
compared to approximately 8% of total revenue in 1994.  The Company believes
that revenue from indemnity/PPO enrollment will continue to increase in the
future.

The third largest source of revenue is fee income which is generated from
the Company's PPO network rental program. Under this program, PPO network
providers offer services according to a reduced fee schedule negotiated by the
Company. The Company charges its PPO groups a monthly fee for each participant
eligible to access such reduced fee arrangements. The Company does not make any
payments to its PPO network providers on behalf of the participants eligible to
access such reduced fee arrangements.

During 1995, one large PPO rental group did not renew its contract which
expired May 31, 1995 and another large group terminated all of its arrangements
with the Company effective at the end of 1995. These contracts have been
terminated as a result of decisions by both such groups to consolidate certain
health and dental insurance coverage based on quotes from several companies.
Collectively, these arrangements accounted for 4.3% of revenues and 9.5% of
gross margin for the year ended December 31, 1994 and 3.0% of revenues and 7.2%
of gross margin for the year ended December 31, 1995. The Company reached an
agreement with a large group pursuant to which, effective January 1, 1996, the
Company has received PPO access fees as well as ASO fees covering approximately
24,000 employees and dependents, and the Company is actively marketing combined
PPO/ASO arrangements to other employers.

Benefit Coverage Expenses
--------------------------------------------------------------------------------
From 1994 to 1996, total benefit coverage expenses increased from $12.3
million to $27.9 million. Between 1994 and 1996, total benefit coverage
expenses as a percentage of revenues increased from 55.8% to 63.2% of total
revenue.  This increase is largely the result of a shift in the Company's
product mix toward a higher percentage of overall revenues represented by the
indemnity/PPO component of the Company's Managed ChoiceSM products (which has
relatively high benefit coverage expenses), a decrease in the percentage of
overall revenues represented by PPO network rental fees (which have no benefit
coverage expenses), and increases in the benefit coverage expenses of the
Company's managed care products (primarily associated with the Company's
acquisition of Smileage in July 1996).

Gross Margin
--------------------------------------------------------------------------------
From 1994 to 1996, gross margin increased from $9.8 million to $16.2
million. Between 1994 and 1996, gross margin as a percentage of total revenue
decreased from 44.2% to 36.8% of total revenue. This change is largely the
result of a shift in the Company's product mix toward a higher percentage of
overall revenues represented by the indemnity component of the Company's
Managed ChoiceSM products (which has a lower percentage gross margin), a
decrease in the percentage of overall revenues represented by PPO network
rental fees (which have a 100% gross margin), and a decline in the gross margin
of the Company's managed care products, primarily due to the lower gross margin
on the managed care products sold in the Wisconsin marketplace in 1996. The
Company believes that its gross margin percentage may continue to decline for
some period of time primarily as a result of the decreasing proportion of PPO
access fee income and the increasing proportion of indemnity/PPO plan revenues.
The Company also will experience a decline in the managed care gross margin
percentage as a result of the relatively lower percentage gross margin members
acquired through the acquisitions of Smileage and Champion.

Selling, General and Administrative
--------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses as a percent of revenues
declined from 33.8% in 1994 to 27.8% in 1996. This decrease was largely
attributable to the increase in the percentage of revenue from indemnity/PPO
products in 1996 as compared to 1994. The change is primarily the result of
economies of scale in meeting the administrative needs of increased enrollment
due to the relatively fixed nature of certain SG&A expenses as well as higher
revenues relative to the SG&A expenses associated with indemnity/PPO plans. This
decrease in SG&A expenses as a percentage of revenue from 1994 through 1996 to a
substantial degree offsets the decreases in the gross margin percentage during
that period. The Company would expect to continue to

                                                                              19
<PAGE>

First Commonwealth, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION--continued
--------------------------------------------------------------------------------

gain operating leverage on meeting the administrative needs of the business
and foresee that SG&A expenses as a percentage of revenue would continue to
decline.

Results of Operations
--------------------------------------------------------------------------------
The following tables set forth certain information from the Company's
consolidated statement of income for the periods indicated. In the opinion of
management, these tables have been prepared on the same basis as the audited
consolidated financial statements appearing elsewhere in this Annual Report and
fairly present the results of operations of the Company for the periods covered
thereby.
<TABLE>
                                              Year Ended December 31,
                                              -----------------------
                                          1996         1995         1994
                                          ----         ----         ----
                                                  (in thousands)
<S>                                     <C>          <C>          <C>
Consolidated Statement of Income Data:
Subscriber revenue
   Managed care.......................  $  32,807    $  25,739    $  19,706
   Indemnity/PPO......................     10,629        6,893        1,663
   Fee income.........................        663          683          708
                                        ---------    ---------    ---------
           Total subscriber
           revenue....................     44,099       33,315       22,077
                                        ---------    ---------    ---------
Benefit coverage expenses
   Managed care.......................     19,555       14,835       10,958
   Indemnity/PPO......................      8,318        5,451        1,363
   Fee income.........................          -            -            -
                                        ---------    ---------    ---------
           Total benefit
           coverage expenses..........     27,873       20,286       12,321
                                        ---------    ---------    ---------
Gross margin
   Managed care.......................     13,252       10,904        8,748
   Indemnity/PPO......................      2,311        1,442          300
   Fee income.........................        663          683          708
                                        ---------    ---------    ---------
           Total gross margin.........  $  16,226    $  13,029    $   9,756
                                        =========    =========    =========
</TABLE>

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

Total subscriber revenue increased by $10.8 million, or 32.4%, to $44.1
million in 1996 from $33.3 million in 1995. Of this increase, $3.6 million, or
33.3%, was attributable to the operations added through the acquisition of
Smileage and the associated reinsurance transaction.  The remaining $7.2
million  increase was a 21.6% growth in revenues and was primarily attributable
to increased enrollment in the Company's managed care and indemnity/PPO dental
plans.  Managed care revenue increased $7.1 million over the same period,
primarily due to the $3.6 million from Smileage and from an increase in new
members.  Indemnity/PPO revenue increased $3.7 million to $10.6 million in 1996
from $6.9 million in 1995, primarily as a result of adding new indemnity/PPO
plan members.

Total gross margin increased by $3.2 million, or 24.5%, to $16.2 million in
1996 from $13.0 million in 1995. Total gross margin as a percentage of revenue
was 36.8% in 1996 as compared to 39.1% in 1995. This percentage decline was
primarily the result of a shift in the Company's product mix toward a higher
percentage of overall revenues  being generated by the Company's indemnity/PPO
products, which have a relatively lower percentage gross margin than the
Company's managed care products. Managed care gross margin as a percentage of
revenue was 40.4% in 1996 as compared to 42.4% in 1995. This percentage decline
was primarily the result of revenue acquired through the Smileage transaction
which has a gross margin percentage of 22.2% as compared with the existing
managed care business which had a gross margin percentage of 42.6%.  The level
of indemnity/PPO gross margin as a percentage of revenue increased to 21.7% in
1996 from 20.9% in 1995. This improved indemnity/PPO gross margin

20
<PAGE>

First Commonwealth, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION--continued
--------------------------------------------------------------------------------

is the result of increased premium rates charged for the Company's indemnity/PPO
plans.

SG&A expenses increased by $2.4 million, or 24.2%, to $12.3 million for 1996
from $9.9 million in 1995. As a percentage of revenue, SG&A expenses dropped to
27.8% for 1996 from 29.7% for 1995. The change is primarily the result of
economies of scale in meeting the administrative needs of increased enrollment
due to the relatively fixed nature of certain SG&A expenses as well as higher
revenues relative to the SG&A expenses associated with indemnity/PPO plans.
Commissions to independent brokers increased 34.1% primarily due to higher
revenue. As a percentage of total revenue, commissions for 1996 declined to
4.3% from 5.3% for 1995 as a result of a higher proportion of direct sales and
lower commissions associated with the Company's growing indemnity/PPO business.
In 1996, included in the SG&A total is $64,000 for the amortization of goodwill
associated with the acquisition of Smileage.

Operating income increased by $807,000, or 25.7%, to $4.0 million for 1996
from $3.1 million in 1995. As a percentage of revenue, operating income was
9.0% in 1996 as compared to 9.4% in 1995. The percentage decline was due
primarily to the decrease in the overall percentage gross margin which was
partially offset by lower SG&A expenses as a percentage of revenue.

The effective tax rate for 1996 was 40.6% compared to 40.0% for 1995. The
tax rate for 1996 was higher primarily as the result of the non-deductibility
of the amortization of goodwill from the Smileage acquisition.  Net income
increased by $727,000, or 36.3%, to $2.7 million for 1996 from $2.0 million for
1995.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
--------------------------------------------------------------------------------
Total subscriber revenue increased by $11.2 million, or 50.9%, to $33.3
million in 1995 from $22.1 million in 1994. This increase is primarily
attributable to increased enrollment in the Company's managed care and
indemnity/PPO dental plans. Managed care revenue increased 30.6% over the same
period, primarily due to a 23.2% increase in new members and, to a lesser
extent, a shift toward managed care products with higher benefit and premium
levels. Indemnity/PPO revenue increased $5.2 million to $6.9 million in 1995
from $1.7 million in 1994, primarily as a result of adding new indemnity/PPO
plan members.

Total gross margin increased by $3.2 million, or 33.5%, to $13.0 million in
1995 from $9.8 million in 1994. Total gross margin as a percentage of revenue
was 39.1% in 1995 as compared to 44.2% in 1994. This percentage decline was
primarily the result of an increasing percentage of revenue being generated by
the Company's indemnity/PPO products, which have a significantly lower gross
margin percentage than the Company's managed care products. Managed care gross
margin as a percentage of revenue was 42.4% in 1995 as compared to 44.4% in
1994. This percentage decline was primarily the result of reduced premium rates
for new large employer groups and an increase in the average monthly dental
specialist expenses per subscriber due to an increase in fee-for-service
payments. The level of indemnity/PPO gross margin as a percentage of revenue
increased to 20.9% in 1995 from 18.0% in 1994. This improved indemnity/PPO gross
margin is the result of favorable claims experience and increased premium rates
charged for the Company's indemnity/PPO plans.

SG&A expenses increased by $2.4 million, or 32.5%, to $9.9 million for 1995
from $7.5 million in 1994.  As a percentage of revenue, SG&A expenses dropped
to 29.7% for 1995 from 33.8% for 1994. The change is primarily the result of
economies of scale in meeting the administrative needs of increased enrollment
due to the relatively fixed nature of certain SG&A expenses as well as higher
revenues relative to the SG&A expenses associated with indemnity/PPO plans.
Commissions to independent brokers increased 34.1% primarily due to higher
revenue. As a percentage of total revenue, commissions for 1995 declined to
5.3% from 6.0% for 1994 as a result of a higher proportion of direct sales and
lower commissions associated with the Company's growing indemnity/PPO business.


Operating income increased by $848,000, or 37.0%, to $3.1 million for 1995
from $2.3 million in 1994. As a percentage of revenue, operating income was
9.4% in 1995 as compared to 10.4% in 1994. The decline was due primarily to the
lower gross margin, partially offset by the lower SG&A as a percentage of
revenue.

The effective tax rate for 1995 was 40.0% compared to 42.8% for 1994. The
tax rate in the first nine months of 1994 was higher primarily due to certain
non-recurring charges.

Net income increased by $656,000, or 48.7%, to $2.0 million for 1995 from
$1.3 million for 1994.

                                                                              21
<PAGE>

First Commonwealth, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION--continued
--------------------------------------------------------------------------------

Liquidity and Capital Resources
--------------------------------------------------------------------------------
The Company's historical operating cash requirements have been met
principally through operating cash flows. The primary uses of cash have been
for operating activities and capital investments in the business.  The
acquisition of Champion was financed through proceeds from the Company's
initial public offering and was paid in cash on January 2, 1997. The Company
believes that cash generated from operations will be adequate to finance its
anticipated operating needs for the foreseeable future.

Cash flow from operations was $3.7 million, $4.2 million and $1.4 million
for the years ended December 31, 1996, 1995 and 1994, respectively. The Company
primarily receives premium payments in advance of disbursing managed care
dentist capitation payments and indemnity/PPO claims payments. Cash balances in
excess of current needs are invested in interest-bearing accounts or cash
equivalents. Cash flow from operations consist primarily of subscriber premiums
and investment income net of capitation payments to network dentists, claims
paid, brokers' commissions, general and administrative expenses and income
taxes.

Capital expenditures were $745,000 during 1996 mainly for furniture,
leasehold improvements, and equipment resulting primarily from the Company
expanding its leased office space. Capital expenditures were $765,000 and
$422,000 for the years ended December 31, 1995 and 1994 respectively, primarily
for office furniture and new computer systems.

Cash used in financing activities was $45,000, $103,000 (excluding the $6.6
million net proceeds received from the initial public offering), and $66,000
for the years ended December 31, 1996, 1995 and 1994, primarily for payments on
capital leases and dividends on preferred stock.

As of December 31, 1996, the Company had cash and cash equivalents of $15.8
million and no long term debt outstanding, except that included in other
current liabilities is a payable to the parent of Champion for the $5.5 million
purchase price.  In addition, the Company has a $500,000 unsecured revolving
line of credit facility which expires June 30, 1997, which has not been drawn
upon during the past three years. Any outstanding indebtedness under the line
of credit will bear interest at a rate equal to the prime rate. To the extent
the Company makes acquisitions, a portion of the purchase price may be financed
through borrowings.

Under applicable insurance laws of the states in which the Company conducts
business, the Company's subsidiaries operating in the particular state are
required to maintain a minimum level of net worth and reserves. The Company may
be required from time to time to invest funds in one or more of its
subsidiaries to meet regulatory requirements, or to expand its operations into
new geographic areas. In addition, applicable laws generally limit the ability
of the Company's subsidiaries to pay dividends to the extent that required
regulatory capital or surplus would be impaired.

Impact of Inflation
--------------------------------------------------------------------------------
The Company does not believe the impact of inflation has significantly
affected the Company's operations.

22
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------

To the Stockholders and Board of Directors
of First Commonwealth, Inc.:

We have audited the accompanying consolidated balance sheets of FIRST
COMMONWEALTH, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1996, 1995 and 1994, and the related consolidated statements of income, changes
in stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Commonwealth, Inc. and
Subsidiaries as of December 31, 1996, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.



ARTHUR ANDERSEN LLP

Chicago, Illinois,
February 12, 1997

                                                                              23
<PAGE>

First Commonwealth, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
As of December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

ASSETS                                                       1996             1995             1994
------                                                       ----             ----             ----
<S>                                                   <C>              <C>              <C>
CURRENT ASSETS:
  Cash and cash equivalents                           $15,817,498      $12,680,153      $ 2,706,412
  Accounts receivable, net of allowance of
     $289,554, $197,316 and $116,782 at
     December 31, 1996, 1995 and 1994,
     respectively                                       3,010,585        1,751,376        1,563,447
  Other receivables                                       220,819           52,091           32,568
  Deposit under reinsurance agreement                     696,564          431,522                -
  Prepaid expenses                                        408,447        1,289,973        1,102,254
  Deferred tax asset                                      869,000          665,000          218,590
  Income taxes receivable                                       -           19,000           92,249
                                                      -----------      -----------      -----------
          Total current assets                         21,022,913       16,889,115        5,715,520
                                                      -----------      -----------      -----------
PROPERTY AND EQUIPMENT, at cost                         3,347,829        2,464,782        1,916,618
  Less- Accumulated depreciation                       (1,725,450)      (1,086,279)        (831,186)
                                                      -----------      -----------      -----------
          Property and equipment, net                   1,622,379        1,378,503        1,085,432
                                                      -----------      -----------      -----------
OTHER ASSETS:
  Restricted cash equivalents and government
  securities on deposit, at cost which
  approximates market                                   1,222,022          798,744          362,637
  Goodwill and other intangibles, net of
  accumulated amortization of $63,814                  10,482,110                -                -
  Deposits and other                                      104,554           44,700           53,471
                                                      -----------      -----------      -----------
          Total other assets                           11,808,686          843,444          416,108
                                                      -----------      -----------      -----------
          Total assets                                $34,453,978      $19,111,062      $ 7,217,060
                                                      ===========      ===========      ===========
</TABLE>


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

24
<PAGE>

<TABLE>
<CAPTION>

First Commonwealth, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS-continued
--------------------------------------------------------------------------------

As of December 31, 1996, 1995 and 1994

LIABILITIES AND STOCKHOLDERS' EQUITY                              1996           1995            1994
------------------------------------                              ----           ----            ----
<S>                                                        <C>             <C>             <C>
CURRENT LIABILITIES:

   Accounts payable--trade..............................   $   338,000    $   364,349      $  148,747
   Accounts payable--dental service providers...........       347,529        399,206         293,203
   Claims liability.....................................     1,579,669      1,257,681         387,714
   Accrued payroll and related costs....................       739,292        846,263         591,777
   Other accrued expenses...............................       648,000        720,179         228,667
   Current portion of capital lease obligations.........            --         26,996          61,425
   Deferred subscriber revenue..........................     4,448,953      3,262,791       2,259,881
   Payable under reinsurance agreement..................       627,789        389,254              --
   Accrued preferred dividends and
       stock redemption payable.........................            --         13,380           5,860
   Income taxes payable.................................       101,472             --              --
   Other current liabilites (Note 2)....................     5,500,000             --              --
                                                           -----------    -----------      ----------
       Total current liabilities........................    14,330,704      7,280,099       3,977,274

CAPITAL LEASE OBLIGATIONS, less current portion.........            --             --          26,996

DEFERRED TAX LIABILITY--long-term.......................       167,157        125,157          72,497
                                                           -----------    -----------      ----------
       Total liabilities................................    14,497,861      7,405,256       4,076,767
                                                           -----------    -----------      ----------

REDEEMABLE PREFERRED STOCK 6% Series B
   ($1,000 par value; no shares authorized or issued
   at December 31, 1996 and 1995; 892 shares
   authorized, issued and outstanding in 1994.).........            --             --         892,000

                                                           -----------    -----------      ----------
STOCKHOLDERS' EQUITY:

   Preferred stock ($.001 par value; 1,000,000 shares
       authorized, none issued).........................            --             --              --
   Common stock ($.001 par value; 15,000,000 shares
       authorized, 3,600,996 shares in 1996, 3,365,375
           shares in 1995 and 1,049,000 shares in 1994
           issued and outstanding)......................         3,601          3,365           1,049
   Capital in excess of par value.......................    13,206,633      7,676,536         175,801
   Retained earnings....................................     6,757,451      4,025,905       2,071,443
   Less 425 shares of common stock held in treasury
       at December 31, 1996, at cost....................       (11,568)            --              --
                                                           -----------    -----------      ----------
       Total stockholders' equity.......................    19,956,117     11,705,806       2,248,293
                                                           -----------    -----------      ----------
       Total liabilities and stockholders' equity.......   $34,453,978    $19,111,062      $7,217,060
                                                           ===========    ===========      ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.

                                                                              25
<PAGE>

First Commonwealth, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------

For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
                                                                    1996            1995             1994
                                                                    ----            ----             ----
<S>                                                          <C>             <C>              <C>
SUBSCRIBER REVENUE.....................................      $44,098,529     $33,315,410      $22,077,668

BENEFIT COVERAGE EXPENSES..............................       27,872,976      20,286,131       12,321,270
                                                              ----------      ----------       ----------

   Gross margin........................................       16,225,553      13,029,279        9,756,398

SELLING, GENERAL AND

ADMINISTRATIVE EXPENSE.................................       12,272,835       9,883,288        7,458,146
                                                              ----------      ----------       ----------

   Operating income....................................        3,952,718       3,145,991        2,298,252

INTEREST INCOME, net...................................          642,828         193,531           58,815
                                                              ----------      ----------       ----------

   Income before income taxes..........................        4,595,546       3,339,522        2,357,067

PROVISION FOR INCOME TAXES.............................        1,864,000       1,336,000        1,009,000
                                                              ----------      ----------       ----------

NET INCOME.............................................      $ 2,731,546     $ 2,003,522      $ 1,348,067
                                                              ==========      ==========       ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING..........................        3,604,468       2,993,319        2,841,178
                                                              ==========      ==========       ==========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE.......................................      $       .76     $       .67      $       .47
                                                              ==========      ==========       ==========
</TABLE>

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

26
<PAGE>

First Commonwealth, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                              Capital                                            Total
                                                              -------                                            -----
                                         Common Stock        in Excess     Retained       Treasury Stock     Stockholders'
                                         ------------        ---------     --------       --------------     -------------
                                     Shares       Dollars      of Par      Earnings    Shares      Dollars      Equity
                                     ------       -------      ------      --------    ------      -------      ------
<S>                                 <C>           <C>       <C>           <C>          <C>       <C>          <C>
BALANCE, December 31, 1993......... 1,016,125      $1,016   $   119,946   $  776,896     --      $       --   $   897,858
   Preferred dividends.............        --          --            --      (53,520)    --              --       (53,520)
   Net income......................        --          --            --    1,348,067     --              --     1,348,067
   Stock issued....................    32,875          33        55,855           --     --              --        55,888
                                    ---------      ------   -----------   ----------   ----      ----------   -----------

BALANCE, December 31, 1994......... 1,049,000       1,049       175,801    2,071,443     --              --     2,248,293
   Preferred dividends.............        --          --            --      (49,060)    --              --       (49,060)
   Net income......................        --          --                  2,003,522     --              --     2,003,522
   Conversion of preferred shares.. 1,784,000       1,784       890,216           --     --              --       892,000
   Stock issued....................   532,375         532     6,610,519           --     --              --     6,611,051
                                    ---------      ------   -----------   ----------   ----      ----------   -----------

BALANCE, December 31, 1995......... 3,365,375       3,365     7,676,536    4,025,905     --              --    11,705,806
   Net income......................        --          --            --    2,731,546     --              --     2,731,546
   Stock issued....................   235,621         236     5,530,097           --     --              --     5,530,333
   Treasury stock purchased........        --          --            --           --   (425)        (11,568)      (11,568)
                                    ---------      ------   -----------   ----------   ----      ----------   -----------

BALANCE, December 31, 1996......... 3,600,996      $3,601   $13,206,633   $6,757,451   (425)     $  (11,568)  $19,956,117
                                    =========      ======   ===========   ==========   ====      ==========   ===========
</TABLE>

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

                                                                              27
<PAGE>

First Commonwealth, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                           1996             1995             1994
                                                           ----             ----             ----
<S>                                                <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Cash received from subscribers................. $ 43,124,110     $ 34,107,857     $ 22,079,386
   Cash paid to providers of care.................  (15,202,299)     (13,984,854)     (10,222,828)
   Cash paid to employees, brokers and suppliers..  (14,465,535)      (9,385,336)      (7,807,407)
   Claims paid....................................   (8,063,681)      (4,581,969)      (1,199,703)
   Interest paid..................................         (514)          (4,995)         (10,205)
   Interest received..............................      624,373          179,154           47,611
   Income taxes paid..............................   (1,911,500)      (1,662,677)      (1,383,728)
   Cash transferred to restricted funds...........     (373,158)        (436,107)         (97,087)
                                                   ------------     ------------     ------------
       Net cash provided by operating activities..    3,731,796        4,231,073        1,406,039
                                                   ------------     ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment, net........     (745,509)        (765,418)        (422,431)
   Purchase of short-term investment..............   (5,161,968)              --               --
   Purchase of long-term investment...............           --               --          (56,177)
   Proceeds from short-term investment............    5,097,314               --               --
   Proceeds from long-term investment.............           --               --           51,768
   Cash received in acquisition...................      432,326               --               --
   Acquisition related expenses...................     (171,680)              --               --
   Organizational costs...........................           --               --          (22,665)
                                                   ------------     ------------     ------------
       Net cash used in investing activities......     (549,517)        (765,418)        (449,505)
                                                   ------------     ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of common stock.......................        7,010        6,611,051           55,888
   Principal payments on capital leases...........      (26,996)         (61,425)         (68,364)
   Purchase of treasury stock.....................      (11,568)              --               --
   Payments of preferred dividends................      (13,380)         (41,540)         (53,520)
                                                   ------------     ------------     ------------
       Net cash (used in) provided by
        financing activities......................      (44,934)       6,508,086          (65,996)
                                                   ------------     ------------     ------------
       Net increase in cash and cash equivalents..    3,137,345        9,973,741          890,538

CASH AND CASH EQUIVALENTS,
beginning of year.................................   12,680,153        2,706,412        1,815,874
                                                   ------------     ------------     ------------

CASH AND CASH EQUIVALENTS,
end of year....................................... $ 15,817,498     $ 12,680,153     $  2,706,412
                                                   ============     ============     ============

SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
   Capital lease obligation incurred.............. $         --     $         --     $      9,209
                                                   ============     ============     ============
</TABLE>
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.

28
<PAGE>

First Commonwealth, Inc. and Subsidiaries
--------------------------------------------------------------------------------
RECONCILIATIONS OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                               1996            1995            1994
                                                               ----            ----            ----
<S>                                                     <C>              <C>             <C>
Net income.........................................     $ 2,731,546      $2,003,522      $1,348,067
Adjustments to reconcile net income to net cash
provided by operating activities--
   Depreciation and amortization...................         648,247         411,927         320,458
   Loss on sale of equipment.......................              --          60,420              --
   (Increase) decrease in assets--
       Accounts receivable, net....................      (1,109,339)       (187,929)       (432,964)
       Other receivables...........................        (149,728)        (19,523)         31,730
       Deposit under reinsurance agreement.........        (265,042)       (431,522)             --
       Prepaid expenses............................         881,526        (187,719)       (288,386)
       Deferred tax asset..........................        (154,000)       (446,410)       (101,913)
       Income taxes receivable.....................              --          73,249         (92,249)
       Restricted cash equivalents and
       government securities.......................        (373,158)       (436,107)        (97,087)
       Deposits and other..........................         (59,854)          8,771          (4,000)
   Increase (decrease) in current liabilities--
       Accounts payable--trade.....................         (26,349)        215,602          61,011
       Accounts payable--dental service providers..         (67,676)        106,003          67,742
       Claims liability............................         321,988         869,967         161,752
       Accrued payroll and related costs...........         (78,972)        254,486         135,512
       Other accrued expenses......................         (91,022)        491,512          82,737
       Deferred subscriber revenue.................       1,186,160       1,002,910         400,326
       Payable under reinsurance agreement.........         238,535         389,254              --
       Income taxes payable........................          56,934              --        (203,715)
   Increase in long-term liabilities--
       Long-term deferred tax liability............          42,000          52,660          17,018
                                                        -----------      ----------      ----------
Net cash provided by operating
activities.........................................     $ 3,731,796      $4,231,073      $1,406,039
                                                        ===========      ==========      ==========
</TABLE>


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

                                                                              29
<PAGE>

First Commonwealth, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994


1. ORGANIZATION
-------------------------------------
The accompanying consolidated financial statements include the accounts of
First Commonwealth, Inc. ("FC Inc."), First Commonwealth of Illinois, Inc.
("FCI"), First Commonwealth Limited Health Services Corporation ("LHSC"), First
Commonwealth Health Services Corporation ("HSC"), First Commonwealth
Reinsurance Company ("FCRC"), First Commonwealth Limited Health Service
Corporation ("LHSCWI"), Smileage Dental Services, Inc.  ("SDS") and Champion
Dental Services, Inc. ("CDS").  These companies are collectively referred to
hereinafter as "the Company."

As discussed in Note 15, FC Inc. completed the acquisitions of SDS on July
18, 1996, and CDS on December 31, 1996.  Included in the consolidated statement
of income for the year ended December 31, 1996, are the results of SDS since
its acquisition.  CDS's balance sheet is also included in the accompanying
consolidated balance sheet as of December 31, 1996.

The Company is a provider of managed dental benefits in the upper Midwest,
including the metropolitan areas of Chicago, Milwaukee, Detroit and
Indianapolis, and with the acquisition of CDS, St. Louis.  The Company provides
dental care coverage and/or arranges for dental care services to be provided to
its subscribers primarily on a prepaid basis.  The Company also provides
indemnity/Preferred Provider Organization dental coverage and administrative
claim services.

FC Inc. operates as an Illinois licensed Third Party Administrator ("TPA").
As a TPA, FC Inc. provides administrative and marketing services to FCI, LHSC
and HSC pursuant to management agreements.  It also provides claim processing
services for self-funded employers.

FCI is an Illinois corporation and is a wholly owned subsidiary of FC Inc.
FCI operates as a Preferred Provider Administrator which directly contracts
with general dentists and specialists. These provider arrangements are made
available to LHSC, LHSCWI and HSC, as well as health maintenance organizations
and self-funded employers.  In making these provider arrangements available,
FCI does not undertake any underwriting risk.

LHSC is an Illinois for-profit corporation and is a wholly owned subsidiary
of FC Inc.  LHSC is licensed under the Illinois Limited Health Service
Organization Act ("LHSO Act").  LHSC is also licensed by the Indiana Department
of Insurance as a Limited Service Health Maintenance Organization.  LHSC has
entered into a Provider Agreement with FCI whereby FCI arranges for dental care
services to LHSC's subscribers through FCI's network of private practice
dentists.  Consistent with its authority under the LHSO Act, LHSC also provides
reimbursement for covered dental care provided outside of this network.  In
providing such services, LHSC undertakes underwriting risk.  The LHSO Act
requires, among other provisions, that LHSC meet certain net worth and deposit
requirements discussed in Note 4.  It is management's opinion that LHSC was in
compliance with these  provisions as of December 31, 1996, 1995 and 1994.

HSC is an affiliated Illinois corporation, licensed under the Voluntary
Health Services Plans Act (the "VHSP Act").  In accordance with the VHSP Act,
HSC is operated and conducted not for profit and is also governed by the
provisions of the General Not for Profit Corporation Act.  HSC was initially
capitalized by FC Inc. through the purchase of a subordinated note.  That note
and accrued interest thereon (both of which are eliminated in consolidation)
may be repaid, in whole or in part, only from HSC's earned surplus, subject to
the written approval of the Director of the Illinois Department of Insurance.
Certain officers and trustees of HSC are common to the officers and directors
of the Company.  Consistent with its authority under the VHSP Act, HSC provides
reimbursement to its members for covered dental care.  The VHSP Act requires,
among other provisions, that HSC not expend more than 20% of its annual
subscriber revenue for administrative costs and 10% for marketing costs.  It is
management's opinion that HSC was in compliance with these provisions as of
December 31, 1996, 1995 and 1994.

FCRC was incorporated in Arizona during 1994 and is a wholly owned
subsidiary of FC Inc.  It is licensed by the Arizona Department of Insurance as
a domestic life and disability reinsurer.  FCRC began reinsurance activity
during 1995.  All of FCRC's reinsurance activity relates to LHSC's indemnity
insurance policies.

LHSCWI was incorporated in Wisconsin in 1996 and is a wholly owned
subsidiary of FC Inc.  LHSCWI is licensed to operate as a Limited Service
Health Organization under Chapter 611 of the Wisconsin insurance statutes ("the
Statutes") and is registered with the Office of the Commissioner of Insurance
of Wisconsin. The Wisconsin insurance statutes

30

<PAGE>

First Commonwealth, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994

require, among other provisions, that LHSCWI meet certain net worth and deposit
requirements discussed in Note 4.  It is management's opinion that LHSCWI was in
compliance with these provisions as of December 31, 1996.

SDS, a wholly owned subsidiary of FC Inc., is a Wisconsin based dental HMO
administrator.

CDS is a Missouri corporation and is a wholly owned subsidiary of FC Inc.
CDS is a St. Louis, Missouri based prepaid dental plan corporation organized
under Section 379.900RSMo.

2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
--------------------------------------------------------------------------------
Principles of Consolidation
The accompanying financial statements include all the accounts of the
Company.  All material intercompany transactions and balances have been
eliminated in consolidation.

HSC, a not-for-profit company managed by FC Inc., has been included in the
accompanying consolidated financial statements. HSC's financial position and
results of operations are not material to the Company's financial statements.

Cash and Cash Equivalents
For purposes of these statements, the Company considers all cash and
short-term investments with original maturities of less than 90 days to be cash
and cash equivalents.

Accounts Receivable and Deferred Subscriber Revenue
The Company invoices most of its subscriber groups prior to the month in
which the groups' members will be entitled to service.  The Company records
these invoices as accounts receivable on the date the invoices are sent and
also records as deferred subscriber revenue those amounts either invoiced or
received in advance of the period of service.

Revenue Recognition
Subscriber revenue collected for dental care is recognized as revenue in the
period in which the member is entitled to service.  Related costs for dental
care are expensed in the period the Company is obligated to provide such
service.

Prepaid Expenses
The Company pays its providers to render covered dental care to eligible
enrolled subscribers and dependents.  Payment is typically made during the
month prior to the month in which the subscribers and dependents become
eligible for coverage.  This payment is recorded as a prepaid expense at
December 31, 1995 and 1994.

Property and Equipment
Depreciation is calculated using the straight-line method over the assets'
estimated useful lives which are as follows:

Leasehold improvements    5 years or life of lease
Furniture                10 years
Office equipment          5 years
Computer equipment
and software              3 years
Property and equipment consist of the following:

                                 December 31
                                 -----------
                        1996        1995        1994
                        ----        ----        ----
Leasehold
improvements         $  422,231  $  349,658  $  239,446
Furniture               780,967     562,400     444,551
Office equipment        513,566     442,668     265,061
Computer
equipment
and software          1,631,065   1,110,056     967,560
                     ----------  ----------  ----------
Total property
and equipment        $3,347,829  $2,464,782  $1,916,618
                     ==========  ==========  ==========

Goodwill
The excess of cost over fair value of net assets acquired resulting from the
SDS and CDS acquisitions, accounted for using the purchase method, is being
amortized using the straight-line method over 40 years.

Accounts Payable-Dental Service Providers
The Company records payables to dental service providers for certain
services not included in the monthly prepayment to such providers discussed
above.

Other Current Liabilites
Other current liabilites at December 31, 1996, represents the Company's
liability relating to its acquisition of CDS.  This amount was paid on
January 2, 1997.

Claims Liability
The Company provides indemnity dental coverage for certain customers and records
a liability for

                                                                              31
<PAGE>

First Commonwealth, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994

incurred but not reported and unpaid claims related to this coverage. Generally,
this liability is estimated based on the age of existing claims and the
Company's historical lag with respect to the reporting and payment of such
claims. Changes in these estimates are reflected in results of operations in the
period in which such changes occur.

Reinsurance Activity
Effective January 1, 1995, LHSC entered into an agreement with a third party
insurer ("Insurer") whereby LHSC ceded certain losses on indemnity insurance
policies to the Insurer. Concurrent with the execution of this agreement,
Insurer entered into an agreement with FCRC whereby Insurer ceded certain losses
related to LHSC policies to FCRC. The Company has effectively retained all
insurance risk on these LHSC losses ceded to Insurer. Accordingly, LHSC accounts
for net payments to Insurer as deposits and records a claims liability for all
incurred and unpaid losses on such policies. FCRC records a payable to Insurer
for amounts Insurer has deposited with FCRC. The Company does not recognize any
revenue from these reinsurance arrangements.

Earnings Per Share
Earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding during the period plus (1)
the number of shares of common stock into which the Series B Preferred Stock
were converted upon the occurrence of the initial public offering for periods
solely prior to the initial public offering; (2) the dilutive effect of stock
options; and (3) the dilutive effect of all shares issued and shares subject to
options granted at prices below the public offering price of $15 per share
within one year prior to the initial filing date of the registration statement
for the initial public offering.

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

4.REGULATORY REQUIREMENTS AND
RESTRICTED FUNDS
----------------------------------------
The State of Illinois statutes and related regulations of the llinois
Department of Insurance require LHSC, which is licensed under the LHSO Act, to
maintain a minimum net worth of $500,000 at December 31, 1996, 1995 and 1994.
LHSC maintains a deposit with the State of $200,000 in accordance with the
State of Illinois requirements.

The State of Indiana statutes and related regulations of the Indiana
Department of Insurance require LHSC, which is licensed as a Limited Service
Health Maintenance Organization, to maintain a $50,000 deposit with the State.

The State of Arizona statutes and related regulations of the Arizona
Department of Insurance require FCRC, which is licensed as a domestic life and
disability reinsurer, to maintain a minimum of $100,000 deposited in trust with
the State and a minimum surplus of $25,000.  FCRC is required to maintain a
trust account equal to the amount of claims payable on all insurance ceded.
Prior to January 1, 1995, there was no reinsurance activity.  At December 31,
1996 and 1995, balances of $705,867 and $450,374, respectively, were required
in the trust account.

The State of Illinois statutes and related regulations of the Illinois
Department of Insurance require HSC, which is licensed under the VHSP Act, to
maintain a contingency reserve in contributed capital of $15,674 at December
31, 1996, and $11,939 at December 31, 1995 and 1994.

The State of Wisconsin insurance statutes require, among other provisions,
that LHSCWI maintain a minimum capital of $100,000, applies a ten percent
compulsory surplus factor to Point of Service (POS) premium, and limits POS
business to ten percent of total premium volume.  LHSCWI has a certificate of
deposit for $102,682 at a Wisconsin bank and did not have any POS business in
1996.

The State of Missouri statutes and related regulations of the Missouri
Department of Insurance require CDS, which is licensed as a Prepaid Dental Plan
Corporation, to maintain a $50,000 deposit with the State and to maintain a
maximum net worth of $150,000.

It is management's opinion that the Company was in compliance with these
provisions at December 31, 1996, 1995 and 1994.

Interest income earned on restricted funds is included in interest income,
net in the consolidated statements of income.

32
<PAGE>

First Commonwealth, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994

5. CLAIMS LIABILITY
--------------------------------------------------------------------------------
The Company's claims liability, claims incurred and payments related to
indemnity policies for the years ended December 31, 1996, 1995 and 1994, are as
follows:

                                    December 31
                                    -----------
                           1996           1995           1994
                           ----           ----           ----
Claims liability,
beginning of year   $ 1,257,681     $  387,714    $   225,962

Add--
Claims incurred       8,341,669      5,451,936      1,361,455

Less--
Claims payments-
Current year         (7,274,355)    (4,421,539)    (1,101,082)

Prior years            (745,326)      (160,430)       (98,621)
                    -----------     -----------   -----------
Claims liability,
end of year         $ 1,579,669     $ 1,257,681   $   387,714
                    ===========     ===========   ===========


6. Lease Obligations
--------------------------------------------------------------------------------
The Company leases office space and various office equipment.  The office
space lease is accounted for as an operating lease while the leases of the
office equipment are classified and accounted for as capital leases.  The
capital lease assets are included in property and equipment in the consolidated
balance sheets.  Rental costs under the operating lease agreements approximated
$486,000, $350,000 and $293,000 for the years ended December 31, 1996, 1995 and
1994, respectively.

The Company's capital leases expired in 1996.  Minimum future obligations
under operating leases in effect at December 31, 1996 are:

Years ending December 31--

        1997                    $  322,013

        1998                       322,409

        1999                       310,796

        2000 and thereafter         47,138
                                ----------

            Total               $1,012,356
                                ==========


7. Income Taxes
--------------------------------------------------------------------------------
The current and deferred components of the provision for taxes are as
follows:
                                   December 31
                                   -----------
                            1996         1995          1994
                            ----         ----          ----
Current               $1,962,000   $1,706,000    $1,093,895

Deferred                 (98,000)    (370,000)      (84,895)
                      ----------   ----------    ----------
Total tax provision   $1,864,000   $1,336,000    $1,009,000
                      ==========   ==========    ==========

A reconciliation of the effective tax rate from statutory U.S. federal
income tax rate of 34% for 1996, 1995 and 1994, is as follows:

                     1996    1995    1994
                     ----    ----    ----
Statutory rate         34%     34%     34%

State tax, net of
federal benefit         5       5       5

Goodwill and other
permanent items         2       1       4
                       --      --      --

Effective tax rate     41%     40%     43%
                       ==      ==      ==

As of December 31, 1996, 1995 and 1994, total net current deferred tax assets
were $869,000, $665,000 and $218,590, respectively, and total net noncurrent
deferred tax liabilities were $167,157, $125,157 and $72,497, respectively.  The
temporary differences that give rise to deferred tax assets and liabilities are
as follows:
                                 December 31
                                 -----------
                           1995       1994       1994
                           ----       ----       ----
Claims liability      $ 616,100  $ 490,500   $154,116

Allowance for
doubtful accounts       112,900     54,400     46,421

Vacation accrual         54,700     39,500     28,583
Miscellaneous            85,300     80,600    (10,530)
                      ---------  ---------   --------
   Total current
   tax asset            869,000    665,000    218,590
                      ---------  ---------   --------
Accumulated
depreciation           (167,157)  (125,157)   (72,497)
                      ---------  ---------   --------
   Total noncurrent
   tax liability       (167,157)  (125,157)   (72,497)
                      ---------  ---------   --------
   Total              $ 701,843  $ 539,843   $146,093
                      =========  =========   ========


8. Sources of Revenue (Unaudited)
--------------------------------------------------------------------------------
The following table shows the percentage of revenue attributable to each
type of product offered:

                      1996    1995      1994
                      ----    ----      ----
Managed care            74%     77%       89%
Indemnity/PPO           24      21         8
Fee income               2       2         3
                       ---     ---       ---
        Total          100%    100%      100%
                       ===     ===       ===


9. Significant Customers
--------------------------------------------------------------------------------
There are no customers that accounted for a significant amount of the Company's
subscriber revenue in the years ended December 31, 1996 and 1995. In 1994, one
customer accounted for approximately 11% of the Company's subscriber revenue.

                                                                              33
<PAGE>

First Commonwealth, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994


10. Line of Credit
--------------------------------------------------------------------------------
The Company entered into an unsecured line of credit agreement (the "Credit
Agreement") with a Chicago bank in September of 1991, which to date has not
been utilized. Under this Credit Agreement, the Company may borrow up to
$500,000 at the prime rate of interest. The credit facility is subject to
annual one-year extensions with the consent of the bank.

11. Preferred Stock
--------------------------------------------------------------------------------
During 1995, the Board of Directors and stockholders of the Company approved
an amendment and restatement of its Restated Certificate of Incorporation to,
among other things, authorize 1,000,000 shares of preferred stock, $.001 par
value, which may be issued from time to time in one or more series with such
rights, preferences and qualifications as the Company's Board of Directors may
determine. The Board of Directors has designated 150,000 shares of the
preferred stock as Series A Junior Participating Preferred Stock. There are no
shares issued or outstanding of the Series A Junior Participating Preferred
Stock.

6% Series B Preferred Stock
Concurrent with the closing of the initial public offering discussed in Note
12, each share of 6% Series B Preferred Stock ("Series B Stock") was converted
into 2,000 shares of common stock in accordance with the conversion features
discussed below. Following the offering, no shares of Series B Stock were
issued or authorized for issuance. While outstanding, the Series B Stock had
voting rights equal to the number of common shares into which such shares could
be converted. The Series B Stockholders were able to elect two of six
directors. Certain rights associated with Series B Stock were as follows:

Dividends Rights
The Series B Stock was entitled to receive a $60 per share annual cumulative
dividend out of funds legally available for payment of dividends, as declared
by the Board.  The Company paid cash dividends on Series B Stock of $49,060 and
$53,520 for the years ended December 31, 1995 and 1994, respectively.  As of
December 31, 1995 and 1994, accrued cumulative dividends for Series B Stock
totaled $13,380 and $5,860, respectively.

Conversion Features
Each share of Series B Stock was convertible, at the option of the holder,
into 2,000 shares of common stock. Additionally, each share of Series B Stock
was automatically converted into 2,000 shares of common stock upon the closing
of a public offering in which the aggregate offering price exceeds $10,000,000
and the offering price per share equals or exceeds $3.50.

12. Common Stock
--------------------------------------------------------------------------------
In November, 1995, the Company completed an initial public offering of
530,000 shares of its common stock at $15 per share.  As discussed in Note 11,
concurrent with the initial public offering, each share of Series B Stock was
converted into 2,000  shares of common stock.

The holder of each share of common stock is entitled to one vote on each
matter submitted to a vote to the stockholders of the Company.

The Company has two incentive plans, a 1987 Statutory-Nonstatutory Stock
Option Plan ("1987 Plan") and a 1995 Long-Term Incentive Plan ("1995 Plan"),
which were approved by the Board of Directors and stockholders.  The Company
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans.  Had compensation cost for the Company's two stock option plans been
determined based on the fair value at the grant date for awards in 1996 and
1995 consistent with the provisions of SFAS No. 123, the Company's net earnings
(in thousands) and earnings per share would have been reduced to the pro forma
amounts of $2,645 and $0.73 in 1996 and $1,987 and $0.66 in 1995.

The weighted average grant-date fair values of options granted in 1996 and
1995 were $12.25 and $8.14, respectively.  The fair value of each option grant
was estimated on the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions for options issued in
1996 and 1995, respectively:  risk-free interest rates of 5.8 and 6.5 percent;
expected lives of 7 years; expected volatility of 42 percent; and no expected
dividends.

Under the 1987 Plan, the Company can award up to 250,000 options to key
employees, granted at a price equal to the fair market value at the date of the
grant as determined by the Board of Directors or the Stock Option Compensation
Committee, and vesting

34
<PAGE>

First Commonwealth, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994

ratably over a period of two to four years from the date of the grant. The
Company had granted 248,125, 248,125 and 240,250 total options as of December
31, 1996, 1995 and 1994, respectively, to key employees and directors at option
prices ranging from $.50 to $15.00 per share. Of the total options granted,
148,950, 134,959 and 113,896 had vested and were exercisable as of December 31,
1996, 1995 and 1994, respectively, and 60,675, 51,375 and 49,000, of the total
options, granted and vested had been exercised as of December 31, 1996, 1995 and
1994, respectively.

In connection with the initial public offering, the Company adopted the 1995
Long-Term Incentive Plan (the "1995 Plan"). Under the 1995 Plan, the Company may
grant incentive stock options or nonqualified stock options. The 1995 Plan also
provides for the grant of stock appreciation rights, bonus stock awards which
are vested upon grant, stock awards which may be subject to a restriction period
and specified performance measures, and performance shares. A total of 150,000
shares of common stock have been reserved for issuance under the 1995 Plan.

Under the 1995 Plan, options are granted at a price equal to the fair market
value at the date of the grant as determined by the Board of Directors and vest
ratably over a period of one to four years from the date of the grant. As of
December 31, 1996 and 1995, the Company had granted 105,500 and 39,000,
respectively, total options to key employees and directors at option prices
ranging from $15.00 to $28.625 per share. Of the total options granted, 11,000
and none, had vested and were exercisable as of December 31, 1996 and 1995,
respectively. In addition, 42,000 options were rescinded as of December 31,
1996, and in 1995, in connection with the initial public offering, stock bonus
awards totaling 1,865 shares of common stock were granted to non-officer
employees.

A summary of the status of the Company's two stock option plans at December 31,
1996 and 1995 and changes during the years then ended is presented in the table
below.

Of the 289,950 total options outstanding at December 31, 1996, 177,450 have
option prices between $.50 and $1.70, with a weighted average option price of
$1.34 and a weighted average remaining contractual life of 6 years. 146,450 of
these options are exercisable at December 31, 1996, with a weighted average
option price of $1.27.

Of the total options outstanding at December 31, 1996, 90,500 have option prices
between $15.00 and $18.75, with a weighted average option price of $16.76 and a
weighted average remaining contractual life of 9 years. 13,500 of these options
are exercisable at December 31, 1996, with a weighted average option price of
$15.00.

The remaining 22,000 of the options outstanding at December 31, 1996 have option
prices between $23.875 and $28.625, with a weighted average option price of
$24.42 and a weighted average remaining contractual life of 10 years. None of
these options are exercisable at December 31, 1996.

During 1995, the Board of Directors adopted a stockholders rights plan. Under
the stockholders rights plan, each share of common stock will have associated
with it one preferred share purchase right (a "Right"). Under certain
circumstances, each Right would entitle the holders thereof to purchase one one-
hundredth of a share of Series A Junior Participating Preferred Stock for a
price of $40 per one one-hundredth of a share. The Rights are not presently
exercisable and are transferable only with the related shares of common stock.

<TABLE>
<CAPTION>
                                           1996                    1995
                                           ----                    ----
                                                Wtd. Avg.              Wtd. Avg.
                                    Shares     Opt. Price    Shares   Opt. Price
                                    -------    ----------    -------  ----------
<S>                                 <C>        <C>           <C>      <C>
Outstanding at beg. year.........   235,750      $ 4.15      191,250    $ 1.31

Granted..........................   105,500       22.06       49,000     15.00

Exercised........................    (9,300)       0.75       (2,375)     1.15

Forfeited........................    (2,000)      21.81       (2,125)     1.49

Cancelled........................   (40,000)      24.12            -         -
                                    -------                  -------

Outstanding at end of year.......   289,950        7.90      235,750      4.15
                                    =======                  =======

Exercisable at end of year.......   159,950        2.43      134,959      1.19
                                    -------                  -------

</TABLE>
                                                                              35
<PAGE>

First Commonwealth, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994


The Rights would become exercisable at the specified exercise price upon the
occurrence of certain events, including the acquisition of 15% or more of the
Company's common stock by a person or group, as defined.  The Rights may be
redeemed, as a whole, at a redemption price of $.01 per Right, subject to
adjustment, at the direction of the Board of Directors, at any time prior to
the occurrence of certain events.  In addition, in certain circumstances, the
Board of Directors may direct the exchange of shares of common stock (or
preferred shares) for all or any part of the Rights at the exchange rate of one
share of common stock (or one one-hundredth of a preferred share) per Right,
subject to adjustment.

13. QUARTERLY FINANCIAL DATA
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

(in thousands, except per share data)
                                                    Quarter
                                                    -------
                                      First     Second     Third    Fourth
                                      -----     ------     -----    ------
<S>                                  <C>       <C>       <C>       <C>
1996
----
Subscriber revenue                   $9,728    $10,019   $11,786   $12,521

Gross margin                          3,699      3,799     4,220     4,460

Net income                              669        698       667       697

Earnings per common share               .19        .20       .18       .19

1995
----
Subscriber revenue                   $7,934    $ 8,204   $ 8,528   $ 8,649

Gross margin                          3,100      3,197     3,291     3,441

Net income                              501        532       513       458

Earnings per common share               .18        .19       .18       .14

1994
----
Subscriber revenue                   $5,172    $ 5,385   $ 5,679   $ 5,841

Gross margin                          2,307      2,361     2,526     2,562

Net income                              347        343       383       275

Earnings per common share               .12        .12       .13       .10

</TABLE>

14. RETIREMENT PLAN
--------------------------------------------------------------------------------
The Company has a 401(k) salary deferral plan in which all employees of the
Company who have completed at least six months of service are eligible to
participate.  Under the plan, the Company provides a matching contribution of
$.50 for every dollar an employee invests in the plan up to an annual maximum
of 2% of the employee's compensation for the year.  The Company may make
additional discretionary contributions to the plan.  The Company incurred
401(k) contributions expense of $58,937, $44,427 and $37,630 during the years
ended December 31, 1996, 1995 and 1994, respectively.

15. BUSINESS COMBINATIONS
--------------------------------------------------------------------------------
Effective July 18, 1996, the Company completed the acquisition of SDS and an
associated reinsurance transaction, for an aggregate purchase price (including
transaction costs) of $5.6 million.  The acquisition was financed through the
issuance of 231,399 shares of the Company's common stock.  The acquisition
resulted in the excess of cost over fair value of net assets acquired of
approximately $5.6 million.

Effective December 31, 1996, the Company completed the acquisition of CDS
for an aggregate purchase price (including transaction costs) of $5.6 million.
The acquisition was financed through proceeds from the Company's initial public
offering and was paid in cash on January 2, 1997.  The acquisition resulted in
the excess of cost over fair value of net assets acquired of approximately $4.9
million.

The acquisitions of SDS and CDS were accounted for using the purchase method
of accounting with SDS's results of operations included in the accompanying
consolidated statement of income for the year ended December 31, 1996 from the
effective date of the acquisition.

Unaudited pro forma combined results of operations of the Company for the
years ended December 31, 1996 and 1995 for the acquisitions are as follows:
Revenue (in thousands) for the years ended December 31, 1996 and 1995 would be
$50,860 and $42,058, respectively;  Net Income (in thousands) for the years
ended December 31, 1996 and 1995 would be $2,856 and $2,444, respectively;  and
Net Income per share for the years ended December 31, 1996 and 1995 would be
$0.77 and $0.66, respectively.  This pro forma information has been prepared
assuming the acquisition of SDS and CDS and the Company's initial public
offering had occurred as of January 1, 1995.


36
<PAGE>

First Commonwealth, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
--------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 and 1994


The pro forma results include the historical accounts of the Company and the
historical accounts of the acquired businesses and pro forma adjustments
including the amortization of the excess purchase price over the fair value of
the net assets acquired, the reduction of salaries and expenses which will not
be incurred on an ongoing basis, and the applicable income tax effects of these
adjustments. The pro forma results of operations are not necessarily indicative
of actual results which may have occurred had the operations of the acquired
company been combined in prior periods.

                                                                              37
<PAGE>

OFFICERS AND DIRECTORS
--------------------------------------------------------------------------------

Officers

Christopher C. Multhauf
        Chairman and Chief Executive Officer

David W. Mulligan
        President and Chief Operating Officer, Secretary

Gregory D. Stobbe
        Senior Vice President, Operations

Mark R. Lundberg
        Vice President, Sales

Scott B. Sanders
        Chief Financial Officer and Treasurer,
        Assistant Secretary

Directors

Christopher C. Multhauf
        Chairman and Chief Executive Officer

David W. Mulligan
        President and Chief Operating Officer, Secretary

Richard M. Burdge, Sr.
        Executive Vice President-Retired,
        CIGNA Corporation

William J. McBride
        President-Retired
        Value Health, Inc.,
        a managed healthcare company

Jackson W. Smart, Jr.
        Chairman and Chief Executive Officer,
        MSP Communications, Inc., a radio
        broadcasting company

38
<PAGE>

Related Stockholder Matters and Market for the Company's Common Stock
for the Company's Common Stock

Form 10-K
A copy of the Form 10-K, which is filed with the Securities and Exchange
Commission, will be sent free to any shareholder upon written request. Write to:
        Mr. Scott B. Sanders
        Chief Financial Officer, Assistant Secretary
        444 N. Wells Street,  Suite 600
        Chicago, IL  60610

Transfer Agent & Registrar
        First Chicago Trust Co. of New York

Analyst Contacts
Security analyst inquiries are welcomed. Please call:
        Mr. Scott B. Sanders
        Chief Financial Officer
        (312) 644-1800

Annual Meeting
        April 30, 1997
        Chicago, Illinois

Dividend Policy

The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. Any payment of cash dividends in the future will
depend upon the financial condition, capital requirements and earnings of the
Company, limitations on dividend payments by subsidiaries of the Company under
applicable state laws requiring the maintenance of specified levels of capital
and surplus and such other factors as the Board of Directors may deem relevant.

Stock Trading and Common Stock Prices
The Company's Common Stock is traded on the NASDAQ National Market under the
symbol FCWI. At February 28, 1997, there were 146 registered shareholders.

The following table sets forth the high and low closing prices by quarter for
1996.

Quarter ending          High     Low
--------------          ----     ---
March 31                $27.00  $24.00
June 30                 $29.00  $24.25
September 30            $29.00  $20.75
December 31             $24.50  $16.50