<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

(Mark One)

[X]      Quarterly Report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the quarterly period ended September 30,
         1999.

[ ]      Transition Report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the Transition period from _____________ to
         _____________.

                         COMMISSION FILE NUMBER: 0-19786


                                  PHYCOR, INC.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


         TENNESSEE                                             62-1344801
-------------------------------                             ----------------
(State or Other Jurisdiction of                             (I.R.S. Employer
Incorporation or Organization)                             Identification No.)

30 BURTON HILLS BLVD., SUITE 400
        NASHVILLE, TENNESSEE                                      37215
-------------------------------                             ----------------
(Address of Principal Executive Offices)                        (Zip Code)


       Registrant's Telephone Number, Including Area Code: (615) 665-9066
                                                          ----------------

                                 NOT APPLICABLE
--------------------------------------------------------------------------------
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]

         As of November 12, 1999, 73,443,612 shares of the Registrant's Common
Stock were outstanding.


<PAGE>   2


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         PHYCOR, INC. AND SUBSIDIARIES
                          Consolidated Balance Sheets
              September 30, 1999 (unaudited) and December 31, 1998
                    (All amounts are expressed in thousands)

<TABLE>
<CAPTION>
                                                                                 1999             1998
                                                                              -----------      -----------
                                                                              (Unaudited)
<S>                                                                           <C>              <C>
ASSETS

Current assets:
     Cash and cash equivalents                                                $    85,963      $    74,314
     Accounts receivable, net                                                     251,144          378,732
     Inventories                                                                   11,879           19,852
     Prepaid expenses and other current assets                                     52,490           55,988
     Assets held for sale, net                                                    156,133           41,225
                                                                              -----------      -----------
                  Total current assets                                            557,609          570,111
Property and equipment, net                                                       159,982          241,824
Intangible assets, net                                                            535,843          981,537
Other assets                                                                       43,117           53,067
                                                                              -----------      -----------

                  Total assets                                                $ 1,296,551      $ 1,846,539
                                                                              ===========      ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Current installments of long-term debt                                   $     2,879      $     4,810
     Current installments of obligations under capital leases                       3,314            5,687
     Bank credit facility debt to be amended (note 9)                             270,000               --
     Accounts payable                                                              40,192           50,972
     Due to physician groups                                                       39,089           51,941
     Purchase price payable                                                        36,609           73,736
     Salaries and benefits payable                                                 29,337           37,077
     Incurred but not reported claims payable                                      44,379           59,333
     Other accrued expenses and current liabilities                               101,236           98,701
                                                                              -----------      -----------
                  Total current liabilities                                       567,035          382,257
Long-term debt, excluding current installments                                      4,700          388,644
Obligations under capital leases, excluding current installments                    1,989            6,018
Purchase price payable                                                              8,898            8,967
Deferred tax credits and other liabilities                                         46,117            8,663
Convertible subordinated notes payable to physician groups                          9,788           47,580
Convertible subordinated notes and debentures                                     297,063          200,000
                                                                              -----------      -----------
                  Total liabilities                                               935,590        1,042,129
                                                                              -----------      -----------
Shareholders' equity:
     Preferred stock, no par value; 10,000 shares authorized:                          --               --
     Common stock, no par value; 250,000 shares authorized; issued
         and outstanding, 73,494 shares in 1999 and 75,824 shares in 1998         839,190          850,657
     Accumulated deficit                                                         (478,229)         (46,247)
                                                                              -----------      -----------
                  Total shareholders' equity                                      360,961          804,410
                                                                              -----------      -----------
                  Total liabilities and shareholders' equity                  $ 1,296,551      $ 1,846,539
                                                                              ===========      ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       2
<PAGE>   3



                          PHYCOR, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
              Three months and nine months ended September 30, 1999
                                    and 1998
     (All amounts are expressed in thousands, except for earnings per share)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                    THREE MONTHS ENDED               NINE MONTHS ENDED
                                                                        SEPTEMBER 30,                    SEPTEMBER 30,
                                                                  ------------------------      ----------------------------
                                                                    1999           1998             1999             1998
                                                                  ---------      ---------      -----------      -----------
<S>                                                               <C>            <C>            <C>              <C>
Net revenue                                                       $ 371,193      $ 408,487      $ 1,181,225      $ 1,102,632
Operating expenses:
     Cost of provider services                                       48,548         52,669          155,160           78,693
     Salaries, wages and benefits                                   122,288        133,616          382,303          381,307
     Supplies                                                        54,511         58,138          173,105          167,787
     Purchased medical services                                       8,858          9,876           28,183           28,449
     Other expenses                                                  56,636         57,129          174,679          159,688
     General corporate expenses                                       7,086          7,614           22,739           22,755
     Rents and lease expense                                         29,150         33,215           92,455           94,928
     Depreciation and amortization                                   23,634         24,453           72,522           65,463
     Provision for asset revaluation and clinic restructuring       393,358         92,500          417,246          114,500
     Merger expenses                                                     --             --               --           14,196
                                                                  ---------      ---------      -----------      -----------
     Net operating expenses                                         744,069        469,210        1,518,392        1,127,766
                                                                  ---------      ---------      -----------      -----------
         Loss from operations                                      (372,876)       (60,723)        (337,167)         (25,134)
Other (income) expense:
     Interest income                                                 (1,133)          (791)          (3,235)          (2,283)
     Interest expense                                                10,211          9,649           30,198           26,452
                                                                  ---------      ---------      -----------      -----------
         Loss before income taxes, minority
              interest and extraordinary item                      (381,954)       (69,581)        (364,130)         (49,303)
Income tax expense (benefit)                                         51,955        (22,176)          57,746          (16,438)
Minority interest in earnings of consolidated partnerships            2,801          3,438           11,123           10,163
                                                                  ---------      ---------      -----------      -----------
         Loss before extraordinary item                            (436,710)       (50,843)        (432,999)         (43,028)
Extraordinary item - gain from extinguishment
     of convertible subordinated debentures                           1,018             --            1,018               --
                                                                  ---------      ---------      -----------      -----------
         Net loss                                                 $(435,692)     $ (50,843)     $  (431,981)     $   (43,028)
                                                                  =========      =========      ===========      ===========
Loss per share:

     Basic - Continuing operations                                $   (5.76)     $   (0.66)     $     (5.70)     $     (0.61)
              Extraordinary item                                       0.01             --             0.01               --
                                                                  ---------      ---------      -----------      -----------
                                                                      (5.75)         (0.66)           (5.69)           (0.61)
                                                                  =========      =========      ===========      ===========
     Diluted - Continuing operations                                  (5.76)         (0.66)           (5.70)           (0.61)
                  Extraordinary item                                   0.01             --             0.01               --
                                                                  ---------      ---------      -----------      -----------
                                                                      (5.75)         (0.66)           (5.69)           (0.61)
                                                                  =========      =========      ===========      ===========
Weighted average number of shares and dilutive
   share equivalents outstanding:
         Basic                                                       75,722         77,501           75,916           70,448
         Diluted                                                     75,722         77,501           75,916           70,448
                                                                  =========      =========      ===========      ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       3
<PAGE>   4


                          PHYCOR, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
              Three months and nine months ended September 30, 1999
                                    and 1998
                    (All amounts are expressed in thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                             SEPTEMBER 30,               SEPTEMBER 30,
                                                                      --------------------------    ----------------------
                                                                        1999             1998         1999         1998
                                                                      ---------         --------    ---------    ---------
<S>                                                                   <C>               <C>         <C>          <C>
Cash flows from operating activities:
   Net loss                                                           $(435,692)        $(50,843)   $(431,981)   $ (43,028)
   Adjustments to reconcile net loss to net cash
     provided by operating activities:
       Depreciation and amortization                                     23,634           24,453       72,522       65,463
       Minority interests                                                 2,801            3,438       11,123       10,163
       Provision for asset revaluation and clinic restructuring         393,358           92,500      417,246      114,500
       Accretion of convertible subordinated debentures                     563               --          563           --
       Merger expenses                                                       --               --           --       14,196
       Increase (decrease) in cash, net of effects of acquisitions,
         due to changes in:
           Accounts receivable                                            9,246           11,100       14,224      (11,022)
           Inventories                                                   (1,170)            (433)        (265)
           Prepaid expenses and other current assets                      1,116           (3,806)     (16,462)     (12,617)
           Accounts payable                                                (987)           1,581        7,244       (1,151)
           Due to physician groups                                       (8,876)          (5,354)      (5,827)        (316)
           Incurred but not reported claims payable                      (6,718)          (1,535)     (11,310)      (1,290)
           Other accrued expenses and current liabilities                57,412          (32,747)      49,259      (21,721)
                                                                      ---------         --------    ---------    ---------
              Net cash provided by operating activities                  34,687           38,500      106,168      112,912
                                                                      ---------         --------    ---------    ---------
Cash flows from investing activities:
   Dispositions (acquisitions), net                                      38,428          (23,546)       2,928     (163,540)
   Purchase of property and equipment                                   (13,426)         (13,315)     (37,262)     (51,285)
   Payments to acquire other assets                                      (3,993)         (17,231)      (8,946)     (28,364)
                                                                      ---------         --------    ---------    ---------
              Net cash provided (used) by investing activities           21,009          (54,092)     (43,280)    (243,189)
                                                                      ---------         --------    ---------    ---------
Cash flows from financing activities:
   Net proceeds from issuance of convertible notes                       94,496               --       94,496           --
   Net proceeds from issuance of common stock                               343            1,172        1,613       17,632
   Repurchase of common stock                                            (9,027)          (2,321)      (9,027)      (2,321)
   Proceeds from long-term borrowings                                        --            6,000           --      145,000
   Repayment of long-term borrowings                                   (125,338)          (3,630)    (121,368)     (12,686)
   Repayment of obligations under capital leases                         (1,332)          (2,160)      (5,145)      (4,058)
   Distributions of minority interests                                   (3,391)          (4,007)     (11,019)      (8,376)
   Loan costs incurred                                                       (4)             (32)        (789)        (308)
                                                                      ---------         --------    ---------    ---------
              Net cash provided (used) by financing activities          (44,253)          (4,978)     (51,239)     134,883
                                                                      ---------         --------    ---------    ---------
Net increase (decrease) in cash and cash equivalents                     11,443          (20,570)      11,649        4,606

Cash and cash equivalents - beginning of period                          74,520           63,336       74,314       38,160
                                                                      ---------         --------    ---------    ---------
Cash and cash equivalents  - end of period                            $  85,963         $ 42,766    $  85,963    $  42,766
                                                                      =========         ========    =========    =========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       4
<PAGE>   5



                          PHYCOR, INC. AND SUBSIDIARIES
                     Consolidated Statements of Cash Flows, Continued
         Three months and nine months ended September 30, 1999 and 1998
                    (All amounts are expressed in thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED       NINE MONTHS ENDED
                                                                           SEPTEMBER 30,            SEPTEMBER 30,
                                                                       ---------------------    --------------------
                                                                         1999         1998        1999         1998
                                                                       --------    ---------    --------    ---------

<S>                                                                    <C>         <C>          <C>         <C>
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects of acquisitions and dispositions, net:
   Assets acquired (disposed), net of cash                             $ (7,885)   $ 123,533    $ 25,703    $ 416,479
   Liabilities paid (assumed), including
      deferred purchase price payments                                    2,805        4,280      12,225      (37,450)
   Cancellation (issuance) of convertible subordinated notes
      payable                                                             7,000       (7,000)      7,000       (8,317)
   Cancellation (issuance) of common stock and warrants                   3,716      (88,820)      4,076     (194,794)
   Cash received from disposition of clinic assets                      (44,064)      (8,447)    (51,932)     (12,378)
                                                                       --------    ---------    --------    ---------
         Acquisitions (dispositions), net                              $(38,428)   $  23,546    $ (2,928)   $ 163,540
                                                                       ========    =========    ========    =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred to acquire
   equipment                                                           $     11    $     151    $    125    $     589
                                                                       ========    =========    ========    =========
Conversion of subordinated notes payable
   to common stock                                                     $     --    $      --    $     22    $   2,000
                                                                       ========    =========    ========    =========
</TABLE>



See accompanying notes to consolidated financial statements.



                                       5
<PAGE>   6



                          PHYCOR, INC. AND SUBSIDIARIES
              Notes to Unaudited Consolidated Financial Statements
         Three months and nine months ended September 30, 1999 and 1998

(1)    BASIS OF PRESENTATION

       The accompanying unaudited financial statements have been prepared in
       accordance with generally accepted accounting principles for interim
       financial reporting and in accordance with Rule 10-01 of Regulation S-X.

       In the opinion of management, the unaudited interim financial statements
       contained in this report reflect all adjustments, consisting of only
       normal recurring accruals, that are necessary for a fair presentation of
       the financial position and the results of operations for the interim
       periods presented. The results of operations for any interim period are
       not necessarily indicative of results for the full year.

       These financial statements, footnote disclosures and other information
       should be read in conjunction with the financial statements and the notes
       thereto included in the Company's Annual Report on Form 10-K for the year
       ended December 31, 1998.

(2)    ACQUISITION PRO FORMA INFORMATION

       The unaudited consolidated pro forma net revenue, net loss and per share
       amounts of the Company assuming the PrimeCare International, Inc.
       (PrimeCare), The Morgan Health Group, Inc. (MHG), CareWise, Inc.
       (CareWise) and First Physician Care, Inc. (FPC) acquisitions had been
       consummated on January 1, 1998 are as follows (in thousands, except for
       earnings per share):

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED         NINE MONTHS ENDED
                                        SEPTEMBER 30, 1998        SEPTEMBER 30, 1998
                                        ------------------        ------------------
<S>                                     <C>                     <C>
       Net revenue                         $   411,293             $   1,230,733
       Net loss                                (51,047)                  (46,516)
       Loss per share:
           Basic                                 (0.65)                    (0.61)
           Diluted                               (0.65)                    (0.61)
</TABLE>

       The consolidated statements of operations include the results of the
       above businesses from the dates of their respective acquisitions.

(3)    NET REVENUE

       Net revenue of the Company is comprised of net clinic service agreement
       revenue, IPA management revenue, net hospital revenue and other operating
       revenues. Clinic service agreement revenue is equal to the net revenue of
       the clinics less amounts retained by physician groups. Net clinic revenue
       recorded by the physician groups is recorded at established rates reduced
       by provisions for doubtful accounts and contractual adjustments.
       Contractual adjustments arise as a result of the terms of certain
       reimbursement and managed care contracts. Such adjustments represent the
       difference between charges at established rates and estimated recoverable
       amounts and are recognized in the period the services are rendered. Any
       differences between estimated contractual adjustments and actual final
       settlements under reimbursement contracts are recognized as contractual
       adjustments in the year final settlements are determined. With the
       exception of the Company's wholly owned subsidiary, PrimeCare, and
       certain clinics acquired as a part of the FPC acquisition, the physician
       groups, rather than the Company, enter into managed care contracts.
       Through calculation of its service fees, the Company shares indirectly in
       any capitation risk assumed by its affiliated physician groups.

                                                                     (Continued)



                                       6
<PAGE>   7


                          PHYCOR, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

       IPA management revenue is equal to the difference between the amount of
       capitation and risk pool payments payable to the IPAs managed by the
       Company less amounts retained by the IPAs. The Company has not
       historically been a party to capitated contracts entered into by the
       IPAs, but is exposed to losses to the extent of its share of deficits, if
       any, of the capitated revenue of the IPAs. Through the PrimeCare and MHG
       acquisitions, the Company became a party to certain managed care
       contracts. Accordingly, the cost of provider services for the PrimeCare
       and MHG contracts is not included as a deduction to net revenue of the
       Company but is reported as an operating expense. The Company commenced
       closing its MHG operations effective April 30, 1999 (See Note 5.)

       The following represent amounts included in the determination of net
       revenue (in thousands):

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED      NINE MONTHS ENDED
                                                              SEPTEMBER 30,           SEPTEMBER 30,
                                                           -------------------   -----------------------
                                                             1999       1998         1999         1998
                                                           --------   --------   ----------   ----------
<S>                                                        <C>        <C>        <C>          <C>
       Gross physician group, hospital and other revenue   $821,213   $885,078   $2,607,694   $2,605,716
       Less:
           Provisions for doubtful accounts
                 and contractual adjustments                359,429    358,471    1,120,656    1,048,365
                                                           --------   --------   ----------   ----------
                 Net physician group, hospital
                    and other revenue                       461,784    526,607    1,487,038    1,557,351
       IPA revenue                                          270,538    230,489      819,479      530,967
                                                           --------   --------   ----------   ----------
                 Net physician group,
                    hospital, IPA
                    and other revenue                       732,322    757,096    2,306,517    2,088,318
       Less  amounts  retained by  physician
           groups and IPAs:
           Physician groups                                 155,554    174,198      511,870      537,261
           Clinic technical employee compensation            21,137     24,127       66,582       70,922
           IPAs                                             184,438    150,284      546,840      377,503
                                                           --------   --------   ----------   ----------
                 Net revenue                               $371,193   $408,487   $1,181,225   $1,102,632
                                                           ========   ========   ==========   ==========
</TABLE>


(4)    BUSINESS SEGMENTS

       The Company has two reportable segments based on the way management has
       organized its operations: physician clinics and IPAs. The physician
       clinics have been subdivided into multi-specialty and group formation
       clinics for purposes of disclosure. The Company derives its revenues
       primarily from operating multi-specialty medical clinics and managing
       IPAs (See Note 3). In addition, the Company provides health care
       decision-support services and operates two hospitals that do not meet the
       quantitative thresholds for reportable segments and have therefore been
       aggregated within the corporate and other category.

                                                                     (Continued)



                                       7
<PAGE>   8


                         PHYCOR, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

       The Company evaluates performance based on earnings from operations
       before asset revaluation and clinic restructuring charges, merger
       expenses, minority interest and income taxes. The following is a
       financial summary by business segment for the periods indicated (in
       thousands):

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                  SEPTEMBER 30,               SEPTEMBER 30,
                                                            ------------------------    ------------------------
                                                              1999           1998         1999           1998
                                                            ---------    -----------    ---------    -----------
<S>                                                         <C>          <C>            <C>          <C>
       Multi-specialty clinics:
           Net revenue                                      $ 261,228    $   294,164    $ 834,597    $   845,545
           Operating expenses(1)                              238,987        265,692      757,769        753,569
           Interest income                                       (455)          (358)      (1,139)          (927)
           Interest expense                                    18,319         19,072       56,754         54,433
           Earnings before taxes and minority interest(1)       4,377          9,758       21,213         38,470
           Depreciation and amortization                       17,121         18,880       53,200         51,831
           Segment Assets                                     811,912      1,406,489      811,912      1,406,489

       Group formation clinics:
           Net revenue                                         10,548         21,286       34,071         84,947
           Operating expenses(1)                               10,020         19,317       31,474         76,634
           Interest  (income) expense                            (252)           (49)        (673)             8
           Interest expense                                       982          3,124        3,464         10,430
           Loss before taxes and minority interest(1)             202          1,106          194          2,125
           Depreciation and amortization                          830          1,358        2,369          5,447
           Segment Assets                                      49,267         88,176       49,267         88,176

       IPAs:
           Net revenue                                         86,100         80,205      272,639        153,464
           Operating expenses(1)                               80,719         72,039      248,212        129,587
           Interest income                                       (654)          (588)      (1,899)        (1,217)
           Interest expense                                     2,744          2,609        8,260          6,405
           Earnings before taxes and minority interest(1)       3,291          6,145       18,066         18,689
           Depreciation and amortization                        3,429          2,348       10,427          5,209
           Segment Assets                                     298,803        262,191      298,803        262,191

       Corporate and other(2):
           Net revenue                                         13,317         12,832       39,918         18,676
           Operating expenses(1)                               20,985         19,662       63,691         39,280
           Interest (income) expense                              228            204          476           (147)
           Interest income                                    (11,834)       (15,156)     (38,280)       (44,816)
           Earnings before taxes and minority interest(1)       3,938          8,122       14,031         24,359
           Depreciation and amortization                        2,254          1,867        6,526          2,976
           Segment Assets                                     136,569        133,544      136,569        133,544
</TABLE>

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

        (1)       Amounts exclude provision for asset revaluation and clinic
                  restructuring and merger expenses.

        (2)       This segment includes all corporate costs and real estate
                  holdings as well as the results for CareWise and the hospitals
                  managed by the Company.

                                                                     (Continued)



                                       8
<PAGE>   9


                          PHYCOR, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

 (5)   ASSET REVALUATION AND CLINIC RESTRUCTURING

       During 1999 and 1998, the Company sold clinic operating assets and
       terminated the related service agreements with a number of clinics
       affiliated with the Company. In the third quarter of 1999, the Company
       determined that it was necessary to create more stability for the Company
       by identifying those clinics which the Company believed were less likely
       to sustain a relationship with the Company in this changed health care
       environment and selling the corresponding assets. The Company intends to
       maintain a core of clinics that it believes can prosper in the changed
       health care environment. This decision to downsize is intended to allow
       the Company to focus on strengthening the core clinic operations and to
       position the Company to resume its growth. These steps will generate cash
       for the Company and result in a smaller company with clinics that are
       more stable, have the ability to grow and are committed to the mutual
       success of the physician groups and the Company.

       In the third quarter of 1999, the Company recorded pre-tax asset
       revaluation and restructuring charges totaling approximately $393.4
       million. The Company is reducing the number of continuing core clinics to
       31, and as a result, recorded $198.7 million of asset revaluation and
       restructuring charges related to 17 clinics the Company has classified as
       assets held for sale. Three of the 17 clinics represent all of the
       Company's remaining operations considered to be "group formation
       clinics". Group formation clinics represented the Company's attempt to
       create multi-specialty groups by combining the operations of several
       small physician groups or individual physician practices.  The remaining
       14 clinics represent multi-specialty clinics that are being disposed
       because of a variety of negative operating and market issues, including
       those related to declining reimbursement for Medicare and commercial
       patient services, market position and clinic demographics, physician
       relations, physician turnover rates, declining physician incomes,
       physician productivity, operating results and ongoing viability of the
       existing medical group.

       Net revenue and pre-tax income (losses) from operations disposed of as of
       September 30, 1999 were $4.4 million and $300,000 for the three months
       ended September 30, 1999, and $59.5 million and ($400,000) for the three
       months ended September 30, 1998, respectively. Net revenue and pre-tax
       income (losses) from operations disposed of as of September 30, 1999 were
       $73.8 million and ($2.1 million) for the nine months ended September 30,
       1999, and $171.4 million and $1.6 million for the nine months ended
       September 30, 1998, respectively. Net revenue and pre-tax income (losses)
       from the remaining operations held for sale were $92.1 million and ($1.5
       million) for the three months ended September 30, 1999, and $95.0 million
       and $4.3 million for the three months ended September 30, 1998,
       respectively. For the nine months ended September 30, 1999, net revenue
       and pre-tax income from the remaining operations held for sale were
       $287.0 million and $2.2 million and $275.6 million and $15.2 million for
       the nine months ended September 30, 1998, respectively.

       At September 30, 1999, net assets currently expected to be sold during
       the next 12 months totaled approximately $156.1 million after taking into
       account the charges discussed above relating to clinics with which the
       Company intends to terminate its affiliation. These net assets consisted
       of current assets, property and equipment, intangible assets and other
       assets less liabilities which are expected to be assumed by purchasers.


                                                                     (Continued)


                                       9
<PAGE>   10
                          PHYCOR, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

       In the third quarter of 1999, the Company recorded approximately $192.5
       million of asset revaluation charges related to the impairment of
       long-lived assets of certain of its ongoing operating units.
       Approximately $172.5 million of these charges relate to clinic operations
       with the remainder relating to the operations of PhyCor Management
       Corporation ("PMC"), an IPA management company acquired in the first
       quarter of 1998. In the third quarter of 1999, events such as the
       anticipated downsizing of some clinics, changes in the Company's
       expectations relative to efforts to change business mix and improve
       margins within certain markets, the failure of certain joint venture or
       ancillary consolidation opportunities, and ongoing local market economic
       pressure, impacted the Company's estimate of future cash flows for
       certain long-lived assets and, in some cases, caused the Company to
       change the estimated remaining useful life for certain long-lived assets.
       The change in the Company's view on recovery of certain long-lived assets
       was also evidenced by the recognition in the third quarter of 1999 of the
       need to change its overall business model for its relationship with
       medical groups to decrease cash flow to the Company and therefore
       increase cash flow to the medical group. Fair value for the long-lived
       assets was determined by utilizing the results of both a discounted cash
       flow analysis and an earnings before interest, taxes, depreciation and
       amortization ("EBITDA") sales multiple analysis based on the Company's
       actual past experience with asset dispositions in similar market
       conditions.

       In the third quarter of 1999, the Company determined to exit the most
       significant market in which PMC operates as a result of a variety of
       factors including primarily the loss of relationships with physicians in
       that market in the current quarter. In addition, of the remaining markets
       in which PMC operates, one is expected to be closed in the fourth quarter
       of 1999 and the others are not expected to generate significant cash flow
       as certain operations in these markets are expected to be closed in the
       fourth quarter of 1999 and during 2000. These events impacted the
       estimated future cash flows relative to the goodwill recorded in the PMC
       acquisition and resulted in an asset impairment charge of approximately
       $20.0 million.

       In the second quarter of 1999, the Company recorded a pre-tax asset
       revaluation charge of $13.7 million. This charge related to the completed
       sale of one clinic's operating assets and pending sale of two of its
       clinics' operating assets and the termination of the related agreements
       with the affiliated physician groups. The factors impacting the decision
       to sell these assets and terminate the agreements with the affiliated
       physician groups is consistent with the factors described above.

       The Company completed the sale of four clinics during the third quarter
       of 1999 and received consideration which consisted of $43.2 million in
       cash and $3.3 million in notes receivable, in addition to certain
       liabilities being assumed by the purchasers. Related to one clinic,
       certain proceeds were being held in escrow pending resolution of certain
       disputed matters. These matters were resolved in the third quarter of
       1999 and the Company recorded an additional asset revaluation charge of
       $2.2 million in the third quarter and received $1.1 million in cash in
       the fourth quarter of 1999.

       The Company recorded net pre-tax restructuring charges totaling
       approximately $3.1 million, $675,000 and $9.5 million in the third,
       second and first quarters of 1999, respectively. The third quarter 1999
       restructuring charge is comprised of a $4.2 million charge less the
       reversal of certain asset revaluation charges recorded in the third
       quarter of 1998 due to sales proceeds exceeding carrying value. These
       charges were comprised of approximately $4.4 million in facility and
       lease termination costs, $5.1 million in severance costs and $4.9 million
       in other exit costs.

       During the third quarter and first nine months of 1999, the Company paid
       approximately $600,000 and $1.2 million, respectively, in facility and
       lease termination costs, $2.6 million and $4.3 million, respectively, in
       severance costs and $650,000 and $4.3 million, respectively, in other
       exit costs. At September 30, 1999, accrued expenses payable included
       remaining liabilities for clinics to be disposed of and exit costs for
       disposed clinic operations of approximately $8.7 million, which included
       $3.4 million in facility and lease termination costs, $2.8 million in
       severance costs and $2.5 million in other exit costs. The Company
       estimates that approximately $6.9 million of the remaining liabilities at
       September 30, 1999 will be paid out during the next twelve months. The
       remaining $1.8 million primarily relates to long term lease commitments.


                                                                     (Continued)


                                       10
<PAGE>   11
                          PHYCOR, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

(6)    CONVERTIBLE SUBORDINATED NOTES

       During the second quarter of 1999, the Company announced a definitive
       agreement allowing for a strategic investment in the Company of up to
       $200.0 million by funds managed by E.M. Warburg, Pincus and Co., LLC
       ("Warburg, Pincus"). The agreement allows for two separate series of zero
       coupon convertible subordinated notes, each resulting in gross proceeds
       to PhyCor of $100 million. The first of these series ("Series A Notes")
       was issued on September 3, 1999. Both series of notes are non-voting,
       have a 6.75% yield, and are convertible at an initial conversion price of
       $6.67 at the option of the holder into approximately 15.0 million shares
       of PhyCor common stock. Each series of notes will accrete to a maturity
       value of approximately $266.4 million at the 15-year maturity date and
       includes an investor option to put the notes to PhyCor at the end of ten
       years. The Company used the net proceeds from the Series A Notes of $94.5
       million to repay indebtedness outstanding under the Company's credit
       facility. Issuance of the second series of notes ("Series B Notes") under
       the current terms is dependent upon market conditions and shareholder
       approval. There is no assurance that the Series B Notes can be issued or
       any other investment in the Company by Warburg, Pincus be made under
       terms mutually acceptable to both parties.

(7)    INCOME TAXES

       Income tax expense of $57.7 million for the nine months ended September
       30, 1999 consisted primarily of an increase in the valuation allowance
       against all deferred tax assets which represented the expected benefits
       of operating loss carryforwards recorded in previous periods. The
       realization of such assets is not more likely than not to occur based on
       historical results and industry trends. The Company will incur no federal
       income tax and make no federal income tax payments during the foreseeable
       future as a result of available net operating loss carryforwards.

(8)    EXTRAORDINARY ITEM

       During the third quarter of 1999, the Company purchased $3.5 million of
       its convertible subordinated debentures for a total consideration of
       approximately $2.5 million, resulting in an extraordinary gain of
       approximately $1.0 million.

(9)    SUBSEQUENT EVENTS

       In November 1999, the Company announced that it had determined to sell
       the assets of 17 of its affiliated clinics and, as a result, was reducing
       the number of continuing core clinics to 31. Also, during the third
       quarter of 1999, the Company concluded that it would begin taking
       significant steps in the fourth quarter of 1999 to change the
       relationships with the continuing core clinics by restructuring the
       current service agreements in order to better align incentives and
       strengthen these groups. These changes in the way the Company structures
       its relationships with clinics will separate the value of the management
       services from the provision of capital. The Company estimates these
       changes will reduce pre-tax earnings by approximately $8.0 million per
       year, but should provide a more stable relationship with the core
       clinics. The Company believes that these service agreement amendments
       should be completed by the end of the first quarter of 2000. The ultimate
       impact of the changes to the service agreements on pre-tax earnings and
       cash flow is expected to be determined in the fourth quarter of 1999.
       There can be no assurance the Company can effect these changes in the
       manner or time in which it currently anticipates.

       As a result of the asset revaluation and restructuring charges taken in
       the third quarter of 1999, the Company was not in compliance with certain
       financial covenants in its bank credit facility and synthetic lease
       facility as of September 30, 1999. In November 1999, the Company received
       waivers of compliance with such covenants as of that date through
       December 30, 1999 and is in the process of obtaining an amendment to the
       credit facility and the synthetic lease facility. Until the amendment is
       obtained, amounts outstanding under the bank credit facility are
       classified as a current liability pursuant to the requirements of the
       Emerging Issues Task Force Issue 86-30 "Classification of Obligations
       When a Violation Is Waived by the Creditor".

       In November 1999, the Company entered into a management agreement with
       the Rockford Health System, a health care delivery system serving
       northern Illinois and southern Wisconsin, to provide practice management
       and support services to its related 170-physician group and health plan.
       The Company also announced an affiliation with Carolina Premier Medical
       Group, a multi-specialty medical group with 29 physicians serving the
       Research Triangle area of North Carolina, to provide long-term management
       services to the medical group effective December 1, 1999.


                                                                     (Continued)

                                       11
<PAGE>   12
                          PHYCOR, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

 (10)  COMMITMENTS AND CONTINGENCIES

       Litigation

       The Company and certain of its current and former officers and directors
       have been named defendants in securities fraud class action lawsuits
       filed in state and federal courts. The factual allegations of the
       complaints in all lawsuits are substantially identical and assert that
       during various periods between April 22, 1997 and September 22, 1998, the
       defendants issued false and misleading statements which materially
       misrepresented the earnings and financial condition of the Company and
       its clinic operations and misrepresented and failed to disclose various
       other matters concerning the Company's operations in order to conceal the
       alleged failure of the Company's business model. Plaintiffs further
       assert that the alleged misrepresentations caused the Company's
       securities to trade at inflated levels while the individual defendants
       sold shares of the Company's stock at such levels. In each of the
       lawsuits, the plaintiff seeks to be certified as the representative of a
       class of all persons similarly situated who were allegedly damaged by the
       defendants' alleged violations during the "class period." Each of the
       lawsuits seeks damages in an indeterminate amount, interest, attorneys'
       fees and equitable relief, including the imposition of a trust upon the
       profits from the individual defendants' trades. The federal court class
       action lawsuits have been consolidated in the U.S. District Court for the
       Middle District of Tennessee. Defendants' motion to dismiss is pending
       before that court. On June 24, 1999, a lawsuit was filed in that court on
       behalf of investors in the Company's debt securities. It is anticipated
       that this lawsuit will be consolidated with the shareholder suits. The
       state court class action lawsuits have been consolidated in Davidson
       County, Tennessee. After the Court granted the defendants' motion to
       dismiss, the plaintiffs filed an amended complaint on July 20, 1999
       naming KPMG LLP, the Company's certified public accounting firm, as an
       additional defendant. KPMG LLP removed the case to federal court.
       Defendants intend to file a motion to dismiss the amended complaint. The
       federal court has ordered the parties to participate in mediation. On
       August 19, 1999, a shareholder derivative action was filed in the
       Chancery Court of Davidson County, Tennessee. On October 14, 1999, the
       Chancery Court stayed the case pending the outcome of the federal court
       litigation. The Company believes that it has meritorious defenses to all
       of the claims, and intends to defend vigorously against these actions.
       There can be no assurance, however, that such defenses will be successful
       or that the lawsuits will not have a material adverse effect on the
       Company. The Company's Restated Charter provides that the Company shall
       indemnify the officers and directors for any liability arising from these
       suits unless a final judgment establishes liability (a) for a breach of
       the duty of loyalty to the Company or its shareholders, (b) for acts or
       omissions not in good faith or which involve intentional misconduct or a
       knowing violation of law or (c) for an unlawful distribution.

       On January 23, 1999, the Company and Holt-Krock Clinic, P.L.C.
       ("Holt-Krock") entered into a settlement agreement with Sparks Regional
       Medical Center and Sparks Regional Medical Center Foundation
       (collectively, "Sparks") to resolve their lawsuits and all related claims
       between the parties and certain former Holt-Krock physicians. Effective
       as of August 1, 1999, Holt-Krock, Sparks and the Company consummated the
       transactions contemplated in the settlement agreement and mutually
       dismissed their lawsuits and related claims between the parties. The
       Company intends to seek recovery of certain of its remaining assets
       through litigation against several physicians formerly affiliated with
       Holt-Krock who did not join Sparks.

       On February 2, 1999, the former majority shareholder of PrimeCare filed
       suit against the Company and certain of its current and former directors
       and executive officers in United States District Court for the Central
       District of California. The complaint asserts fraudulent inducement
       relating to the PrimeCare transaction and that the defendants issued
       false and misleading statements which materially misrepresented the
       earnings and financial condition of the Company and its clinic operations
       and misrepresented and failed to disclose various other matters
       concerning the Company's operations in order to conceal the alleged
       failure of the Company's business model. The Court granted the Company's
       motion to dismiss the action with respect to all of its officers and
       directors, but the plaintiff has amended and refiled his complaint.
       Discovery has begun in this litigation. The Company believes that it has
       meritorious defenses to all of the claims and intends to vigorously
       defend this suit, however, there can be no assurance that if the Company
       is not successful in litigation, that this suit will not have a material
       adverse effect on the Company.

                                                                     (Continued)

                                       12
<PAGE>   13
                          PHYCOR, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

       On February 6, 1999, White-Wilson Medical Center, P.A. ("White - Wilson")
       filed suit against PhyCor of Fort Walton Beach, Inc., the PhyCor
       subsidiary with which it is a party to a service agreement, in the United
       States District Court for the Northern District of Florida. White-Wilson
       is seeking a declaratory judgment regarding the enforceability of the fee
       arrangement in light of an opinion of the Florida Board of Medicine and
       OIG Advisory Opinion 98-4. On November 3, 1999, the Court granted the
       parties' motion to extend all deadlines by 90 days because of the
       imminent settlement of all disputes between the parties. Additionally, on
       March 17, 1999, the Clark-Holder Clinic, P.A. filed suit against PhyCor
       of LaGrange, Inc., the PhyCor subsidiary with which it is a party to a
       service agreement, in Georgia Superior Court for Troup County, Georgia
       similarly questioning the enforceability of the fee arrangement in light
       of OIG Advisory Opinion 98-4. On April 27, 1999, the Company filed a
       motion to remove the case to the federal district court in Georgia. On
       October 7, 1999, the Court granted PhyCor of LaGrange, Inc.'s motion to
       dismiss the action brought by the physician group.

       Certain litigation is pending against the physician groups affiliated
       with the Company and IPAs managed by the Company. Certain plaintiffs in
       such litigation have attempted to join the Company as responsible in
       whole or in part for activities of the physician groups, IPAs or their
       physicians. The Company has not assumed any liability in connection with
       such litigation, and intends to vigorously challenge any theory that the
       Company is liable for the activities of medical groups, IPAs or their
       physicians. Claims against the physician groups and IPAs could result in
       substantial damage awards to the claimants that may exceed applicable
       insurance coverage limits. While there can be no assurance that the
       physician groups and IPAs will be successful in any such litigation, the
       Company does not believe any such litigation will have a material adverse
       effect on the Company. Certain other litigation is pending against the
       Company and certain subsidiaries of the Company, none of which management
       believes would have a material adverse effect on the Company's financial
       position or results of operations on a consolidated basis.

       The U.S. Department of Labor (the "Department") is conducting an
       investigation of the administration of the PhyCor, Inc. Savings and
       Profit Sharing Plan (the "Plan"). The Department has not completed its
       investigation, but has raised questions involving certain administrative
       practices of the Plan in early 1998. The Department has not recommended
       enforcement action against PhyCor, nor has it identified an amount of
       liability or penalty that could be assessed against PhyCor. Based on the
       nature of the investigation, PhyCor believes that its financial exposure
       is not material. PhyCor intends to cooperate with the Department's
       investigation. There can be no assurance, however, that PhyCor will not
       have a monetary penalty imposed against it.


                                       13
<PAGE>   14


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

OVERVIEW

         PhyCor, Inc. ("PhyCor" or the "Company") is a medical network
management company that operates multi-specialty medical clinics, develops and
manages independent practice associations ("IPAs"), provides contract management
services to hospitals and health systems and provides health care
decision-support services, including demand management and disease management
services, to managed care organizations, health care providers, employers and
other group associations. In connection with multi-specialty clinic operations,
the Company manages and operates two hospitals and four health maintenance
organizations. At September 30, 1999, the Company operated 48 clinics with 3,158
physicians in 25 states, of which 17 clinics affiliated with 1,038 physicians
are held for sale, and managed IPAs with approximately 24,000 physicians in 30
markets. On such date, the Company's affiliated physicians provided medical
services under capitated contracts to approximately 1,506,000 patients,
including approximately 337,000 Medicare/Medicaid eligible patients. The Company
also provided health care decision-support services to approximately 3.3 million
individuals within the United States and an additional 500,000 under foreign
country license agreements.

         The Company's strategy is to position its affiliated multi-specialty
medical groups and IPAs to be the physician component of organized health care
systems. PhyCor believes that physician organizations are a critical element of
organized health care systems because physician decisions determine the cost and
quality of care.

         A substantial majority of the Company's revenue in the first nine
months of 1999 and 1998 was earned under service agreements with multi-specialty
clinics. Revenue earned under substantially all of the service agreements is
equal to the net revenue of the clinics less amounts retained by physician
groups. The service agreements contain financial incentives for the Company to
assist the physician groups in increasing clinic revenues and controlling
expenses.

         To increase clinic revenue, the Company works with the affiliated
physician groups to recruit additional physicians, merge other physicians
practicing in the area into the affiliated physician groups, negotiate contracts
with managed care organizations and provide additional ancillary services. To
reduce or control expenses, among other things, PhyCor utilizes national
purchasing contracts for key items, reviews staffing levels to make sure they
are appropriate and assists the physicians in developing more cost-effective
clinical practice patterns.

         The Company has increased its focus on the development of IPAs to
enable the Company to provide services to a broader range of physician
organizations, to enhance the operating performance of existing clinics and to
further develop physician relationships. The Company develops IPAs that include
affiliated clinic physicians to enhance the clinics' attractiveness as providers
to managed care organizations.

         The Company continues to seek additional affiliations with
multi-specialty clinics and IPAs, however, the Company anticipates that its
acquisition growth will continue to be slower than in previous years. During the
first nine months of 1999, the Company affiliated with several smaller medical
practices, made deferred acquisition payments to certain physician groups
pursuant to the terms of their respective agreements and completed purchase
accounting for acquisitions consummated within the last twelve months, adding a
total of approximately $24.2 million in assets. The principal asset acquired was
service agreement rights, which is an intangible asset. The consideration for
the acquisitions consisted of approximately 53% cash and 47% liabilities
assumed. The cash portion of the aggregate purchase price was funded by a
combination of operating cash flow and borrowings under the Company's bank
credit facility.

         In November 1999, the Company announced that it had determined to sell
the assets of 17 of its affiliated clinics and, as a result, was reducing the
number of continuing core clinics to 31. Also, during the third quarter of 1999,
the Company concluded that it would begin taking significant steps in the fourth
quarter of 1999 to change the



                                       14
<PAGE>   15
relationships with the continuing core clinics by restructuring the current
service agreements in order to better align incentives and strengthen these
groups. These changes in the way the Company structures its relationships with
clinics will separate the value of the management services from the provision of
capital. The Company estimates these changes will reduce pre-tax earnings by
approximately $8.0 million per year, but should provide a more stable
relationship with the core clinics. The ultimate impact of the changes to the
service agreements is expected to be determined during the fourth quarter of
1999. There can be no assurance the Company can effect these changes in the
manner or time in which it currently anticipates.

         In November 1999, the Company entered into a management agreement with
the Rockford Health System, a health care delivery system serving northern
Illinois and southern Wisconsin, to provide practice management and support
services to its related 170-physician group and health plan. The Company also
announced an affiliation with Carolina Premier Medical Group, a multi-specialty
medical group with 29 physicians serving the Research Triangle area of North
Carolina, to provide long-term management services to the medical group
effective December 1, 1999.

         The Company has historically amortized goodwill and other intangible
assets related to its service agreements over the periods during which the
agreements are expected to be effective, ranging from 25 to 40 years. Effective
April 1, 1998, the Company adopted a maximum of 25 years as the useful life for
amortization of its intangible assets, including those acquired in prior years.
Had this policy been in effect for the first quarter of 1998, amortization
expense would have increased by approximately $3.3 million. Applying the
Company's historical tax rate, diluted earnings per share would have been
reduced by $.03 in the first quarter of 1998.



                                       15
<PAGE>   16


RESULTS OF OPERATIONS

         The following table shows the percentage of net revenue represented by
various expenses and other income items reflected in the Company's Consolidated
Statements of Operations:

<TABLE>
<CAPTION>
                                                  THREE MONTHS              NINE MONTHS
                                               ENDED SEPTEMBER 30,       ENDED SEPTEMBER 30,
                                                1999         1998         1999         1998
                                                ----         ----         ----         ----
<S>                                             <C>          <C>          <C>          <C>
Net revenue ..............................      100.0%       100.0%       100.0%       100.0%
Operating expenses:
   Cost of provider services .............       13.1         12.9         13.2          7.1
   Salaries, wages and benefits ..........       32.9         32.7         32.4         34.6
   Supplies ..............................       14.7         14.2         14.6         15.2
   Purchased medical services ............        2.4          2.4          2.4          2.6
   Other expenses ........................       15.3         14.0         14.8         14.5
   General corporate expenses ............        1.9          1.9          1.9          2.1
   Rents and lease expense ...............         .8          8.1          7.8          8.6
   Depreciation and amortization .........        6.4          6.0          6.1          5.9
   Provision for asset revaluation
       and clinic restructuring ..........      106.0         22.6         35.3         10.4
   Merger expenses .......................       --           --           --            1.3
                                               ------       ------       ------       ------
Net operating expenses ...................      200.5(A)     114.8(A)     128.5(A)     102.3(A)

       Loss from operations ..............     (100.5)(A)    (14.8)(A)    (28.5)(A)     (2.3)(A)

Interest income ..........................       (0.3)        (0.2)        (0.3)        (0.2)
Interest expense .........................        2.7          2.4          2.6          2.4
                                               ------       ------       ------       ------
       Loss before income taxes, minority
           interest and extraordinary item     (102.9)(A)    (17.0)(A)    (30.8)(A)     (4.5)(A)
Income tax expense (benefit) .............       14.0(A)      (5.4)(A)      4.9 (A)     (1.5)(A)
Minority interest ........................        0.8          0.9          1.0          0.9
                                               ------       ------       ------       ------
       Loss before extraordinary item ....     (117.7)       (12.5)       (36.7)        (3.9)
Extraordinary item .......................        0.3         --            0.1           --
                                               ------       ------       ------       ------
       Net loss ..........................     (117.4)%(A)   (12.5)%(A)   (36.6)%(A)    (3.9)%(A)
                                               ======       ======       ======       ======
</TABLE>

(A) Excluding the effect of the provision for asset revaluation and clinic
restructuring and merger expenses in 1999 and 1998, net operating expenses,
earnings from operations, earnings before income taxes and minority interest,
income tax expense and net earnings, as a percentage of net revenue, would have
been 94.5%, 5.5%, 3.1%, 1.0% and 1.6%, respectively, for the three months ended
September 30, 1999, 92.2%, 7.8%, 5.6%, 1.8% and 2.9%, respectively, for the
three months ended September 30, 1998, 93.2%, 6.8%, 4.5%, 1.4% and 2.3%,
respectively, for the nine months ended September 30, 1999, and 90.6%, 9.4%,
7.2%, 2.4% and 3.9%, respectively, for the nine months ended September 30, 1998.

1999 Compared to 1998

         Net revenue decreased $37.3 million, or 9.1%, from $408.5 million for
the third quarter of 1998 to $371.2 million for the third quarter of 1999, and
increased from $1.1 billion for the first nine months of 1998 to $1.2 billion
for the first nine months of 1999, an increase of 9.1%. Net revenue from
multi-specialty and group formation clinics ("Clinic Net Revenue") decreased in
the third quarter of 1999 from the third quarter of 1998 by $43.7 million,
comprised of (i) a $32.4 million decrease in service fees for reimbursement of
clinic expenses incurred by the Company and (ii) a $11.3 million decrease in the




                                       16
<PAGE>   17
Company's fees from clinic operating income and net physician group revenue.
The decreases in Clinic Net Revenue, excluding same clinic revenue increases
discussed below, were comprised of $1.1 million from clinics acquired during
1998, $41.9 million from clinic operations disposed of in 1998 and through
September 30, 1999 and $2.9 million from clinics whose assets are held for sale
at September 30, 1999. Clinic Net Revenue decreased in the first nine months of
1999 from the first nine months of 1998 by $61.8 million, comprised of (i) a
$56.9 million decrease in service fees for reimbursement of clinic expenses
incurred by the Company and (ii) a $4.9 million decrease in the Company's fees
from clinic operating income and net physician group revenue. Excluding same
clinic revenue increases discussed below, increases in Clinic Net Revenue of
$17.2 million from clinics acquired during 1998 and $11.5 million from clinics
whose assets are held for sale at September 30, 1999 were offset by reductions
in Clinic Net Revenue of $101.7 million as a result of clinic operations
disposed of in 1998 and through September 30, 1999. Included in the changes in
Clinic Net Revenue is the impact of declining reimbursement for services
rendered by the physician groups. Specifically, the provision for doubtful
accounts and contractual adjustments on gross physician group, hospital and
other revenue increased to 43.8% for the third quarter of 1999 from 40.5% for
the third quarter of 1998, and increased to 43.0% for the nine months ended
September 30, 1999 from 40.2% for the nine months ended September 30, 1998. Net
revenue from the service agreements (excluding clinics being restructured or
related assets sold) in effect for all of 1999 and 1998 increased by $2.2
million for the third quarter of 1999 and $11.2 million for the nine months
ended September 30, 1999, compared with the same periods in 1998. Same market
service agreement net revenue growth resulted from the addition of new
physicians, the expansion of ancillary services and increases in patient volume
and fees.

         Net revenue from IPAs increased $5.9 million, or 7.4%, from $80.2
million for the third quarter of 1998 to $86.1 million for the third quarter of
1999, and from $153.5 million for the first nine months of 1998 to $272.6
million for the first nine months of 1999, an increase of $119.1 million or
77.6%. These increases resulted primarily from increases in net revenues from
the acquisition of PrimeCare International, Inc. ("PrimeCare") in 1998 of
approximately $9.3 million and $81.5 million, respectively, for the third
quarter and nine months ended September 30, 1999, and additional IPA markets
entered into subsequent to the first quarter of 1998 of approximately $4.8
million and $17.4 million, respectively, for the third quarter and nine months
ended September 30, 1999. Net revenues were also impacted by increases
(decreases) in net revenues from the acquisition in 1998 and subsequent closing
in 1999 of The Morgan Health Group, Inc. ("MHG") of approximately ($13.2
million) and $4.1 million, respectively, for the third quarter and nine months
ended September 30, 1999. (The Company commenced closing MHG operations
effective April 30, 1999. See "Asset Revaluation and Clinic Restructuring.") Net
revenue from the IPA markets in effect for all of 1999 and 1998 increased by
$5.0 million, or 22.8%, for the third quarter of 1999 and $16.1 million, or
25.5%, for the nine months ended September 30, 1999, compared with the same
periods in 1998. Same market IPA growth resulted from the addition of new
physicians, increases in IPA enrollment and increases in patient volume and
fees.

         During the third quarter of 1999, most categories of operating expenses
were relatively stable as a percentage of net revenue when compared to the same
period in 1998. The addition of cost of provider services is a result of the
acquisitions of PrimeCare and MHG in 1998. PrimeCare and MHG own and manage
IPAs, and each is a party to certain managed care contracts, resulting in the
Company presenting revenue from these operations on a "grossed-up basis." Under
this method, unlike the majority of the Company's IPAs, the cost of provider
services (payments to physicians and other providers under compensation,
sub-capitation and other reimbursement contracts) is not included as a deduction
to net revenue of the Company but is reported as an operating expense. This
revenue reporting resulted in a new cost of provider services expense line item
and in general would cause other expense line items to decrease as a percentage
of net revenue when compared to periods prior to the acquisitions of PrimeCare
and MHG. As a result, during the first nine months of 1999, most categories of
operating expenses decreased as a percentage of net revenue when compared to the
same period in 1998. During the third quarter of 1999, supplies expense, other
expenses and depreciation and amortization had more than a marginal increase as
a percentage of net revenue in the third quarter of 1999 over the same period in
1998. The increase in supplies expense is a result of the continued increases in
costs of drugs and medications. Other expenses increased as a result of the
Company incurring costs associated with information systems and software
conversions in its IPA markets during 1999. The increase in depreciation and
amortization expense resulted from a significant amount of capital expenditures
during 1999 related to conversions of information systems in the Company's
affiliated clinics and IPAs. During the third



                                       17
<PAGE>   18

quarter of 1999, rents and lease expense had more than a marginal decrease as a
percentage of net revenue when compared to the same period in 1998. This
decrease is a result of the disposition of certain of the Company's group
formation clinics during the third and fourth quarters of 1998. These clinics'
rents and lease expense as a percentage of net revenue was higher than that of
the current base of clinics.

         The Company also incurred merger expenses of approximately $14.2
million in the first quarter of 1998 relating to the termination of its merger
agreement with MedPartners, Inc. This charge represents PhyCor's share of
investment banking, legal, travel, accounting and other expenses incurred during
the merger negotiation process.

         Income tax expense of $57.7 million for the nine months ended September
30, 1999 consisted primarily of an increase in the valuation allowance against
all deferred tax assets which represented the expected benefits of operating
loss carryforwards recorded in previous periods. The realization of such assets
is not more likely than not to occur based on historical results and industry
trends. The Company will incur no federal income tax expense and make no federal
income tax payments during the foreseeable future as a result of available net
operating loss carryforwards.

ASSET REVALUATION AND CLINIC RESTRUCTURING

Assets Held for Sale

      During 1998 and 1999, the health care industry has undergone rapid changes
that have significantly impacted physicians and other health care providers.
Declining reimbursement from Medicare and commercial payors has negatively
impacted physician revenues and incomes. It has taken significant time for
physicians and other health care providers to fully understand and accept the
sustaining impact of changes in reimbursement. The Company and its physicians
have attempted to react to this development by devising and implementing plans
to reduce overhead, increase patient volume, increase physician productivity and
change payor mixes. In some clinics, physicians have been slow to engage in
necessary changes because of medical group culture or other market factors and,
as a result, these strategies have been only marginally successful or in some
cases not successful. Physician groups that have weak governance structures or
marginal market presence, among other factors, have experienced difficulty
dealing with the impact of these financial pressures. This difficulty has
affected the relationships among physicians within the groups and between the
physician groups and the Company.

      As a result, during 1998 and 1999 the Company sold clinic operating assets
and terminated the related service agreements with a number of clinics
affiliated with the Company. In the third quarter of 1999, the Company
determined that it was necessary to create more stability for the Company by
identifying those clinics which the Company believed were less likely to sustain
a relationship with the Company in this changed health care environment and
selling the corresponding assets. The Company intends to maintain a core of
clinics that it believes can prosper in the changed health care environment.
This decision to downsize is intended to allow the Company to focus on
strengthening the core clinic operations and to position the Company to resume
its growth. These steps will generate cash for the Company and result in a
smaller company with clinics that are more stable, have the ability to grow and
are committed to the mutual success of the physician groups and the Company. As
part of the decision to downsize the number of clinic operations, the Company is
taking significant steps in the fourth quarter of 1999 to change its
relationship with its core clinics in order to strengthen these clinics and
ensure their long-term viability. For additional discussion of the changes in
these relationships, see "Overview" and "Liquidity and Capital Resources."

         In the third quarter of 1999, the Company recorded pre-tax asset
revaluation and restructuring charges totaling approximately $393.4 million,
consisting of $198.7 million related to assets held for sale, $2.2 million
related to assets previously held for sale and $192.5 million related to asset
impairments. The Company is reducing the number of continuing core clinics to
31, and as a result recorded $198.7 million of asset revaluation and
restructuring charges related to 17 clinics the Company has classified as assets
held for sale. The third quarter 1999 asset revaluation charge related to assets
held for sale included current assets, property and equipment, other assets and
intangible assets of $9.2 million, $19.8 million, $13.3 million and $153.3
million, respectively.



                                       18
<PAGE>   19
         Three of the 17 clinics represent all of the Company's remaining
operations considered to be "group formation clinics." Group formation clinics
represented the Company's attempt to create multi-specialty groups by combining
the operations of several small physician groups or individual physician
practices. The Company has not been able to successfully consolidate the
operations of these clinics as a result of a variety of factors including lack
of medical group governance or leadership, inability to agree on income
distribution plans, separate information systems, redundant overhead structures
and lack of group cohesiveness. The Company has therefore determined to sell the
clinic operating assets and terminate the agreements related to these clinics.
The asset revaluation and restructuring charge related to these clinics in the
third quarter of 1999 was $14.3 million. The net assets held for sale at
September 30, 1999 for these clinics were $20.4 million. Net revenue and pre-tax
income (losses) from these group formation clinics were $10.4 million and
($300,000) for the three months ended September 30, 1999, and $10.4 million and
$300,000 for the three months ended September 30, 1998, respectively. For the
nine months ended September 30, 1999, net revenue and pre-tax income from these
group formation clinics were $32.1 million and $100,000, respectively, compared
to $29.7 million and $1.0 million, respectively, for the nine months ended
September 30, 1998.

         The remaining 14 clinics represent multi-specialty clinics that are
being disposed because of a variety of negative operating and market issues,
including those related to declining reimbursement for Medicare and commercial
patient services, market position and clinic demographics, physician relations,
physician turnover rates, declining physician incomes, physician productivity,
operating results and ongoing viability of the existing medical group. Although
these factors have been present individually from time to time in various
affiliated clinics and could occur in future clinic operations, the combined
effect of these factors at the clinics held for sale resulted in clinic
operations that were difficult to effectively manage. Therefore, the Company
determined in the third quarter of 1999 to sell the clinic operating assets and
terminate the agreements related to these clinics. The asset revaluation and
restructuring charge related to these clinics in the third quarter of 1999 was
$184.4 million. The net assets held for sale at September 30, 1999 for these
clinics were $135.7 million. Net revenue and pre-tax income (losses) from these
14 clinics were $81.7 million and ($1.2 million), respectively, for the three
months ended September 30, 1999, and $84.6 million and $4.0 million,
respectively, for the three months ended September 30, 1998. For the nine months
ended September 30, 1999, net revenue and pre-tax income from these clinics were
$254.9 million and $2.1 million, respectively, compared to $245.9 million and
$14.2, respectively, for the nine months ended September 30, 1998. Included in
these 14 clinics are the net assets of the clinics operating in Lexington,
Kentucky and Sayre, Pennsylvania. In the second quarter of 1999, the Company
disclosed that it did not expect to extend the interim management agreement with
the Guthrie Clinic in Sayre, Pennsylvania, beyond November 1999 and discussed
certain risks associated with the Lexington Clinic operation. In the third
quarter of 1999, the Company reached agreements on the sales of these assets to
the respective physician groups. The transaction with the Guthrie Clinic closed
in the fourth quarter of 1999. The transaction with the Lexington Clinic is
expected to close in the fourth quarter of 1999.

         At September 30, 1999, net assets currently expected to be sold during
the next 12 months totaled approximately $156.1 million after taking into
account the charges discussed above relating to clinics with which the Company
intends to terminate its affiliation. These net assets consisted of current
assets, property and equipment, intangible assets and other assets less
liabilities which are expected to be assumed by purchasers. The Company intends
to recover these amounts during the next 12 months as the asset sales occur.
However, there can be no assurance that the Company will recover this entire
amount. Of this amount, clinic net assets totaling approximately $59.2 million
are expected to be sold during the fourth quarter of 1999. As of November 12,
1999, the Company had completed the sale of three clinics in the fourth quarter
and received approximately $23.8 million of proceeds on those assets held for
sale, of which $18.4 million represents notes receivable, with the purchasers
assuming certain liabilities. Additional clinic net assets totaling
approximately $35.4 million are expected to be sold during the fourth quarter of
1999.

         In the second quarter of 1999, the Company recorded a pre-tax asset
revaluation charge of $13.7 million. This charge related to the completed sale
of one clinic's operating assets and pending sale of two of its clinics'
operating assets and the termination of the related agreements with the
affiliated physician groups. This asset revaluation charge included current
assets, property and equipment, and intangible assets of $2.0 million, $1.5
million and $10.2 million, respectively. As of June 30, 1999 the



                                       19
<PAGE>   20
Company was also in negotiations relating to the sale of the assets of three
additional clinics (including Holt-Krock Clinic ("Holt-Krock") which is
discussed below). The factors impacting the decision to sell these assets and
terminate the agreements with the affiliated physician groups is consistent with
the factors described in the discussion of the third quarter of 1999 asset
revaluation charge above. The Company completed the sale of one of these groups
during the second quarter of 1999 and four of these groups during the third
quarter of 1999,receiving consideration which consisted of approximately $44.5
million in cash and $3.3 million in notes receivable, in addition to certain
liabilities being assumed by the purchasers. With respect to the Holt-Krock
sale, certain proceeds were being held in escrow pending resolution of certain
disputed matters. These matters were resolved in the third quarter of 1999 and
the Company recorded an additional asset revaluation charge of $2.2 million in
the third quarter and received $1.1 million in cash in the fourth quarter of
1999. One clinic remains held for sale as of September 30, 1999. Net revenue and
pre-tax income from the five clinics that have been sold were $4.4 million and
$300,000, respectively, for the three months ended September 30, 1999, and $23.1
million and $300,000, respectively, for the three months ended September 30,
1998. For the nine months ended September 30, 1999, net revenue and pre-tax
income (losses) from these clinics were $40.9 million and ($2.1 million),
respectively, compared to $68.2 million and $2.7 million, respectively, for the
nine months ended September 30, 1998.

         In the fourth quarter of 1998, the Company recorded a pre-tax asset
revaluation charge of $110.4 million of which $75.7 million related to assets to
be sold. The fourth quarter 1998 asset revaluation charge related to assets held
for sale included current assets, property and equipment, other assets and
intangible assets of $2.4 million, $2.9 million, $1.4 million and $69.0 million,
respectively. $26.0 million of this charge related to adjustments of the
carrying value of the Company's assets at Holt-Krock and Burns Clinic Medical
Center ("Burns") as a result of agreements to sell certain assets associated
with these service agreements. The factors impacting the decision to sell these
assets and terminate the agreements with the affiliated physician groups is
consistent with the factors described in the discussion of the third quarter of
1999 asset revaluation charge above. The Company completed the sale of
Holt-Krock assets in the third quarter of 1999, as discussed above. The Company
completed the sale of Burns assets in the second quarter of 1999 and received
proceeds totaling approximately $6.4 million in cash in addition to certain
liabilities being assumed by the purchaser. For the three months ended September
30, 1999, net revenue and pre-tax income from Burns was $19,000 and zero,
respectively, compared to $8.9 million and $700,000, respectively, for the three
months ended September 30, 1998. For the nine months ended September 30, 1999,
net revenue and pre-tax income from Burns was $8.3 million and $200,000,
respectively, compared to $26.8 million and $1.8 million, respectively, for the
nine months ended September 30, 1998.

         In addition, the fourth quarter 1998 charge provided for the write-off
of $31.6 million of goodwill recorded in connection with the July 1998 MHG
acquisition. MHG was an Atlanta-based IPA whose network at such time included
approximately 400 primary care physicians and 1,800 specialists who provided
care to approximately 57,000 managed care members under capitated contracts. In
September 1998, PhyCor announced that the earnings of MHG were significantly
below target because of higher than expected costs from MHG's managed care
contracts. Subsequent to the closing of this acquisition, the claims received
from its principal payor for costs arising before the acquisition revealed that
MHG's costs significantly exceeded its revenues under the payor contract prior
to the date of acquisition. PhyCor continued to fund the premium deficiency
under this principal payor contract, which accounted for approximately 90% of
MHG's revenues, while attempting to renegotiate payment terms with the payor to
allow for this principal payor contract to be economically viable. In January of
1999, a mutually beneficial agreement could not be reached. The payor contract
terminated by mutual agreement on April 30, 1999. PhyCor commenced closing its
MHG operation effective April 30, 1999 and is attempting to recover its
investment in MHG from the sellers of MHG, but there can be no assurance of a
recovery. For the three months and nine months ended September 30, 1999, net
revenue from MHG was zero and $18.1 million, respectively, compared to $13.2
million and $13.9 million, respectively, for the three months and nine months
ended September 30, 1998. MHG recognized no pre-tax income (losses) for the
three months and nine months ended September 30, 1999, compared to ($200,000)
and $500,000, respectively, for the three months and nine months ended September
30, 1998.


                                       20
<PAGE>   21
         Also included in the fourth quarter 1998 pre-tax charge is $18.1
million related to one of the clinics included in the acquisition of First
Physician Care ("FPC") that was experiencing significant problems similar to
those the Company had previously experienced with group formation clinics.
PhyCor recorded the asset revaluation charge primarily to write down goodwill
from the FPC acquisition to recognize the expected decline in future cash flows
of the investment. The net assets held for sale for this FPC clinic at December
31, 1998 was approximately $3.0 million. The Company completed the termination
of its agreements with the FPC clinic in the second quarter of 1999. No net
revenues or pre-tax income was recorded from this FPC clinic for the three
months ended September 30, 1999, compared to $4.0 million and $200,000,
respectively, for the three months ended September 30, 1998. For the nine months
ended September 30, 1999, net revenue and pre-tax income from this FPC clinic
was $5.2 million and $300,000, respectively, compared to $4.0 million and
$200,000, respectively, for the nine months ended September 30, 1998.

         In the third quarter of 1998, the Company recorded a net pre-tax asset
revaluation charge of $92.5 million, which is comprised of a $103.3 million
charge less the reversal of certain restructuring charges recorded in the first
quarter of 1998. This charge related to deteriorating negative operating trends
for three group formation clinic operations which were included in the fourth
quarter 1997 asset revaluation charge and the corresponding decision to dispose
of those assets when the restructuring plan was unsuccessful. Additionally, this
charge provided for the disposition of assets of two group formation clinics
that were not included in the fourth quarter 1997 asset revaluation charge. The
third quarter 1998 asset revaluation charge related to assets held for sale
included current assets, property and equipment, other assets and intangible
assets of $3.4 million, $3.6 million, $6.7 million and $62.2 million,
respectively. The Company completed the termination of its agreements with three
of these clinics in the third quarter of 1998, one clinic in the fourth quarter
of 1998 and one clinic in the first quarter of 1999. Total consideration
received from these terminations consisted of approximately $11.3 million in
cash and $10.4 million in notes receivable, in addition to certain liabilities
being assumed by the purchasers. For the three months ended September 30, 1998,
net revenue and pre-tax losses from these clinics was $9.7 million and $1.4
million, respectively. For the nine months ended September 30, 1998, net revenue
and pre-tax losses from these clinics was $50.4 million and $3.3 million,
respectively.

         In summary, net revenue and pre-tax income (losses) from operations
disposed of as of September 30, 1999 were $4.4 million and $300,000,
respectively, for the three months ended September 30, 1999, and $59.5 million
and ($400,000), respectively, for the three months ended September 30, 1998. For
the nine months ended September 30, 1999, net revenue and pre-tax income
(losses) from operations disposed of as of September 30, 1999 were $73.8 million
and ($2.1 million), respectively, and $171.4 million and $1.6 million,
respectively, for the nine months ended September 30, 1998. Net revenue and
pre-tax income (losses) from the remaining operations held for sale were $92.1
million and ($1.5 million), respectively, for the three months ended September
30, 1999, and $95.0 million and $4.3 million, respectively, for the three months
ended September 30, 1998. For the nine months ended September 30, 1999, net
revenue and pre-tax income from the remaining operations held for sale were
$287.0 million and $2.2 million, respectively, and $275.6 million and $15.2
million, respectively, for the nine months ended September 30, 1998.

         There can be no assurance that in the future a similar combination of
negative characteristics will not develop at a clinic affiliated with the
Company and result in the termination of the service agreement or that in the
future additional clinics will not terminate relationships with the Company in a
manner that may adversely affect the Company.

Asset Impairments

         As previously discussed in "Asset Revaluation and Clinic Restructuring
- Assets Held for Sale," 1998 and 1999 have been periods of rapid changes for
physicians and physician groups. Factors such as unexpected physician
departures, declining Medicare and commercial reimbursement, changing market
conditions, demographics, group governance and leadership, and continued
increasing pressure on operating costs contribute to stagnant and, in some
cases, expected declines in physician incomes and operating results of these
clinic operations. It has taken significant time for physicians and other health
care providers to fully understand and accept the sustaining impact of changes
in reimbursement in the current year. The Company and its physicians have
continued to attempt to react to this development by devising and implementing
plans to reduce overhead, increase patient volume, increase physician
productivity and change payor mixes. In some clinics, physicians have been slow
to engage in necessary changes because of medical group culture or other market
factors, therefore making these strategies only marginally successful. In the
third quarter of 1999, events such as the anticipated downsizing of some
clinics, changes in the Company's expectations relative to efforts to change
business mix and improve margins within certain markets, the failure of certain
joint venture or ancillary consolidation opportunities, and ongoing local market
economic pressure, impacted the Company's estimate of future cash flows for
certain long-lived assets and, in some cases, caused the Company to change the
estimated remaining useful life for certain long-lived assets. The change in the
Company's view on recovery of certain long-lived assets was also evidenced by
the recognition in the third quarter of 1999 of the need to change its overall
business model for its relationship with medical groups to decrease cash flow to
the Company and therefore increase cash flow to the medical group. Fair value
for the long-lived assets was determined by utilizing the results of both a
discounted cash flow analysis and an earnings before interest, taxes,
depreciation and amortization ("EBITDA") sales multiple analysis based on the
Company's actual past experience with asset dispositions in similar market
conditions.

                                       21
<PAGE>   22
         In the third quarter of 1999, the Company recorded approximately $192.5
million of asset revaluation charges related to the impairment of long-lived
assets of certain of its ongoing operating units. Approximately $172.5 million
of these charges relate to certain clinic operations with the remainder relating
to the operations of PhyCor Management Corporation ("PMC"), an IPA management
company acquired in the first quarter of 1998. The Company determined to exit
the most significant market in which PMC operates as a result of a variety of
factors, including primarily the loss of relationships with physicians in that
market in the current quarter. In addition, of the remaining markets in which
PMC operates, one is expected to be closed in the fourth quarter of 1999 and the
others are not expected to generate significant cash flow as certain operations
in these markets are expected to be closed in the fourth quarter of 1999 and
during 2000. These events are expected to impair the estimated future cash flows
from the PMC acquisition and resulted in an asset impairment charge of
approximately $20.0 million.

Restructuring Charges

         In the third quarter of 1999, the Company recorded net pre-tax
restructuring charges totaling approximately $3.1 million, which is comprised of
a $4.2 million charge less the reversal of certain asset revaluation charges
recorded in the third quarter of 1998 due to sales proceeds exceeding carrying
value. This net charge relates to three clinics where management adopted plans
in the third quarter of 1999 to dispose of assets and cease operations. These
charges were comprised of approximately $2.3 million in facility and lease
termination costs, $1.6 million in severance costs and $300,000 in other exit
costs. These plans involve the involuntary termination of 22 employees and are
expected to be completed over the next six months. During the third quarter of
1999, the Company paid approximately $50,000 in exit costs related to the
current quarter charge.

         In the second quarter of 1999, the Company recorded pre-tax
restructuring charges totaling $675,000 with respect to operations that were
being sold or closed. Of these charges, $400,000 related to a clinic and the
remaining $275,000 related to a small IPA. These charges were comprised of
approximately $165,000 in facility and lease termination costs, $380,000 in
severance costs and $130,000 in other exit costs. During the third quarter and
first nine months of 1999, the Company paid approximately $100,000 in facility
and lease termination costs and $400,000 in severance costs related to the
second quarter 1999 charge.

         In the first quarter of 1999, the Company recorded pre-tax
restructuring charges totaling approximately $9.5 million with respect to
operations that were being sold or restructured whose asset revaluation charges
were taken in the fourth quarter of 1998. Of these charges, approximately $8.8
million related to clinics and the remaining $700,000 related to MHG. These


                                       22
<PAGE>   23

charges were comprised of approximately $1.9 million in facility and lease
termination costs, $3.1 million in severance costs and $4.5 million in other
exit costs. During the third quarter and first nine months of 1999, the Company
paid approximately $200,000 and $600,000, respectively, in facility and lease
termination costs, $900,000 and $2.1 million, respectively, in severance costs
and $500,000 and $2.8 million, respectively, in other exit costs related to the
first quarter 1999 charge.

         In the first quarter of 1998, the Company recorded pre-tax
restructuring charges totaling $22.0 million with respect to clinics that were
being sold or restructured whose asset revaluation charges were taken in the
fourth quarter of 1997. These charges were comprised of approximately $15.3
million in facility and lease termination costs, $4.6 million in severance costs
and $2.1 million in other exit costs. During the third quarter and first nine
months of 1999, the Company paid approximately $300,000 and $500,000,
respectively, in facility and lease termination costs, $1.3 million and $1.8
million, respectively, in severance costs and $100,000 and $1.4 million,
respectively, in other exit costs related to the first quarter 1998 charge.
During 1998, the Company paid approximately $3.0 million in facility and lease
termination costs, $2.7 million in severance costs and $1.4 million in other
exit costs related to the first quarter 1998 charge.

         In summary, during the third quarter and first nine months of 1999, the
Company paid approximately $600,000 and $1.2 million, respectively, in facility
and lease termination costs, $2.6 million and $4.3 million, respectively, in
severance costs and $650,000 and $4.3 million, respectively, in other exit
costs. At September 30, 1999, accrued expenses payable included remaining
liabilities for clinics to be disposed of and exit costs for disposed clinic
operations of approximately $8.7 million, which included $3.4 million in
facility and lease termination costs, $2.8 million in severance costs and $2.5
million in other exit costs. The Company estimates that approximately $6.9
million of the remaining liabilities at September 30, 1999 will be paid out
during the next 12 months. The remaining $1.8 million primarily relates to long
term lease commitments.

         The Company currently anticipates recording a charge in the fourth
quarter of 1999 of no more than $20.0 million with respect to markets associated
with the third quarter 1999 asset revaluation charge. The ultimate liability
associated with exiting these markets will be determined in the fourth quarter
of 1999.

         There can be no assurance that in the future a similar combination of
negative characteristics will not develop at a clinic affiliated with the
Company and result in the termination of the service agreement or that in the
future additional clinics will not terminate their relationships with the
Company in a manner that may materially adversely affect the Company.

LIQUIDITY AND CAPITAL RESOURCES

         At September 30, 1999, excluding bank credit facility debt expected to
be amended of $270.0 million which is classified as a current liability during
the Waiver Period (see discussion below), the Company had $260.6 million in
working capital, compared to $187.9 million as of December 31, 1998. The Company
generated $34.7 million of cash flow from operations for the third quarter of
1999 compared to $38.5 million for the third quarter of 1998 and $106.2 million
for the first nine months of 1999 compared to $112.9 million for the same period
in 1998. At September 30, 1999, net accounts receivable of $251.1 million
amounted to 58 days of net clinic revenue compared to $378.7 million and 64 days
at the end of 1998.

         The Company repurchased approximately 2.6 million shares of common
stock for approximately $12.6 million in 1998. The Company has repurchased
approximately 2.9 million shares of common stock for approximately $13.5 million
to date in 1999, of which $9.0 million was settled as of September 30, 1999. The
remaining $4.5 million was settled during October 1999. During the third quarter
of 1999, the Company purchased $3.5 million of its convertible subordinated
debentures for a total consideration of approximately $2.5 million, resulting in
an extraordinary gain of approximately $1.0 million.

         During the second quarter of 1999, the Company announced a definitive
agreement allowing for a strategic investment in the Company of up to $200.0
million by funds managed by E.M. Warburg, Pincus and Co., LLC ("Warburg,
Pincus"). The agreement allows for two separate series of zero coupon
convertible subordinated notes, each resulting in gross proceeds to PhyCor of
$100 million. The first of these series ("Series A Notes") was issued on
September 3, 1999. Both series of notes are non-voting, have a 6.75% yield, and
are convertible at an initial conversion price of $6.67 at the option of the
holder into approximately 15.0 million shares of PhyCor common stock. Each
series of notes will accrete to a maturity



                                       23
<PAGE>   24

value of approximately $266.4 million at the 15-year maturity date and includes
an investor option to put the notes to PhyCor at the end of ten years. The
Company used the net proceeds from the Series A Notes of $94.5 million to repay
indebtedness outstanding under the Company's credit facility. Issuance of the
second series of notes ("Series B Notes") under the current terms is dependent
upon market conditions and shareholder approval. There is no assurance that the
Series B Notes can be issued or any other investment in the Company by Warburg,
Pincus can be made under terms mutually acceptable to both parties.

         Option exercises and other issuances of common stock combined with
repurchases of common stock and net losses for the first nine months of 1999
resulted in an decrease of $443.4 million in shareholders' equity compared to
December 31, 1998.

         Capital expenditures during the first nine months of 1999 totaled $37.3
million. The Company is responsible for capital expenditures at its affiliated
clinics under the terms of its service agreements. The Company expects to make
approximately $10.0 million in additional capital expenditures during the
remainder of 1999.

         Deferred acquisition payments are payable to certain physician groups
in the event such physician groups attain predetermined financial targets during
established periods of time following the acquisitions. If each group satisfied
its applicable financial targets for the periods covered, the Company would be
required to pay an aggregate of approximately $33.0 million of additional
consideration over the next five years, of which a maximum of $9.4 million would
be payable during the next twelve months.

         During 1998 and 1999, the Company sold clinic operating assets and
terminated the related service agreements with a number of clinics affiliated
with the Company. For additional discussion related to these clinics and the
asset revaluation and restructuring charges associated with these clinics, see
"Asset Revaluation and Clinic Restructuring - Assets Held for Sale" and "Asset
Revaluation and Clinic Restructuring - Restructuring Charges". During the third
quarter of 1999, the Company received consideration which consisted of
approximately $43.2 million in cash and $3.3 million in notes receivable, in
addition to certain liabilities being assumed by the purchasers, related to the
sale of assets associated with Holt-Krock and three other clinics. The amounts
received upon disposition of the assets approximated the post-charge net
carrying value, with the exception of Holt-Krock for which an additional charge
of $2.2 million was recorded in the third quarter of 1999. In October 1999, the
Company received an additional $1.1 million in proceeds related to the sale of
assets to Sparks Regional Medical Center ("Sparks"). These proceeds had been
held in escrow pending the resolution of certain disputed matters. The Company
also intends to seek recovery of certain of its remaining assets through
litigation against several physicians formerly affiliated with Holt-Krock who
did not join Sparks. For the nine months ended September 30, 1999, the Company
received consideration which consisted of approximately $51.9 million in cash
and $8.2 million in notes receivable, in addition to certain liabilities being
assumed by the purchasers, related to the sale of clinic assets. For the year
ended December 31, 1998, the Company received consideration which consisted of
approximately $16.1 million in cash and $5.6 million in notes receivable, in
addition to certain liabilities being assumed by the purchasers, related to the
sale of clinic assets.




                                       24
<PAGE>   25

         During 1998 and 1999, the Company has recorded restructuring charges
related to operations that are being sold, restructured or closed. These charges
primarily relate to facility and lease termination costs, severance costs, and
other exit costs incurred or expected to be incurred when these assets are sold,
restructured, or closed. For additional discussion, see "Asset Revaluation and
Clinic Restructuring - Restructuring Charges". During the third quarter and
first nine months of 1999, the Company paid approximately $600,000 and $1.2
million, respectively, in facility and lease termination costs, $2.6 million and
$4.3 million, respectively, in severance costs and $650,000 and $4.3 million,
respectively, in other exit costs. During 1998, the Company paid approximately
3.0 million in facility and lease termination costs, $2.7 million in severance
costs and $1.4 million in other exit costs. The Company estimates that
approximately $6.9 million of the remaining liabilities at September 30, 1999
will be paid out during the next twelve months.

         During the third quarter of 1999, the Company concluded that it would
begin taking significant steps in the fourth quarter of 1999 to change the
relationships with the core clinics by restructuring the current service
agreements in order to better align incentives and strengthen these groups.
These changes in the way the Company structures its relationship with the
clinics will separate the value of management services from the provision of
capital. The Company estimates these changes will reduce pre-tax earnings by
approximately $8.0 million and cash flow by approximately $14.0 million per
year. While this affects earnings and cash flow, it should provide a more stable
relationship with the core clinics. The Company believes that these service
agreement amendments should be completed by the end of the first quarter of
2000. The ultimate impact of the changes to the service agreements on pre-tax
earnings and cash flow is expected to be determined in the fourth quarter of
1999. There can be no assurance that the Company can effect these changes in the
manner or time in which it currently anticipates.

         During the third quarter of 1999, the Company favorably resolved its
outstanding Internal Revenue Service ("IRS") examinations for the years
1988-1995. The IRS had proposed adjustments relating to the timing of
recognition for tax purposes of certain revenue and deductions related to
accounts receivable, the Company's relationship with affiliated physician
groups, and various other timing differences. The tax years 1988 through 1995
have been closed with respect to all issues without a material financial impact,
and the Company is currently not under examination by the IRS for any other
taxable year, except for two subsidiaries which are currently under examination
for the 1995 and 1996 tax years. The Company acquired the stock of these
subsidiaries during 1996. The Company does not believe the resolution of these
examinations will have a material adverse effect on its financial condition. In
August 1999, the Company received a $13.7 million tax refund as a result of
applying the 1998 loss carryback to recover taxes paid in 1996 and 1997. The
Company has approximately $450.0 million in net operating loss carryforwards;
accordingly, the Company does not expect to pay current federal income taxes for
the foreseeable future.

         The Company amended its bank credit facility in March and September
1999. The Company's bank credit facility, as amended, provides for a five-year,
$500.0 million revolving line of credit for use by the Company prior to April
2003 for acquisitions, working capital, capital expenditures and general
corporate purposes. The total drawn cost under the facility is either (i) the
applicable eurodollar rate plus .875% to 1.75% per annum or (ii) the agent's
base rate plus .175% to .40% per annum. The total weighted average drawn cost of
outstanding borrowings at September 30, 1999 was 6.95%. The amended



                                       25
<PAGE>   26

bank credit facility also provides for up to $75 million for the aggregate
amount of letters of credit which may be issued by the Company and provides that
in the event of a reduced rating by certain rating agencies, the Company would
be required to pledge as security for repayment of the credit facility the
capital stock the Company holds in certain of its subsidiaries. The amended
facility also provides for acquisitions without bank approval of up to $25
million individually or $150 million in the aggregate during any 12-month
period. The September bank credit facility amendment allows for $35 million
of securities repurchases.

         The Company also amended its synthetic lease facility in March and
September 1999. The Company's synthetic lease facility, as amended, provides
off-balance sheet financing of $60 million with an option to purchase leased
facilities at the end of the lease term. The total drawn cost under the
synthetic lease facility is .875% to 1.75% above the applicable eurodollar rate.
At September 30, 1999, of the $60 million available under the synthetic lease
facility, an aggregate of approximately $26.3 million was drawn. The amended
synthetic lease facility is not project specific but is expected to be used for,
among other projects, the construction or acquisition of certain medical office
buildings related to the Company's operations.

         The Company's bank credit facility and synthetic lease facility contain
covenants which, among other things, require the Company to maintain certain
financial ratios and impose certain limitations or prohibitions on the Company
with respect to (i) the incurring of certain indebtedness, (ii) the creation of
security interests on the assets of the Company, (iii) the payment of cash
dividends on, and the redemption or repurchase of, securities of the Company,
(iv) investments and (v) acquisitions. As a result of the asset revaluation and
restructuring charges taken in the third quarter of 1999, the Company was not in
compliance with certain of these covenants as of September 30, 1999. The Company
received waivers of compliance with such covenants as of that date through
December 30, 1999 ("Waiver Period") and expects to obtain an amendment to the
bank credit facility and the synthetic lease facility in the fourth quarter of
1999. Until this amendment is obtained, amounts outstanding under the bank
credit facility are classified as a current liability pursuant to the
requirements of the Emerging Issues Task Force Issue 86-30 "Classification of
Obligations When a Violation Is Waived by the Creditor". During the Waiver
Period, outstanding borrowings and letters of credit under the credit facility
are limited to $375 million in the aggregate and under the synthetic lease
facility, outstanding borrowings are limited to $30 million. In addition, the
Company has agreed not to repurchase any of its securities during the Waiver
Period. There can be no assurance that the bank credit facility and the
synthetic lease facility can be amended on terms acceptable to the Company.

         At September 30, 1999, notional amounts under interest rate swap
agreements totaled $210.2 million. Fixed interest rates range from 5.14% to
5.78% relative to the one month or three month floating LIBOR. Up to an
additional $15.8 million may be fixed at 5.28% as additional amounts are drawn
under the synthetic lease facility prior to April 28, 2000. The swap agreements
mature at various dates from July 2003 to April 2005. The lender may elect to
terminate the agreement covering $100 million beginning September 2000 and
another $100 million beginning October 2000. The FASB has issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which will require the Company to mark
certain of its interest rate swap agreements to market due to lender optionality
features included in those swap agreements. SFAS No. 133 was amended by the
issuance of Statement of Financial Accounting Standards (SFAS) No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No.
133, which defers the required date of adoption by the Company to the first
quarter of 2001. Had the Company adopted the requirements of SFAS No. 133 for
the nine months ended September 30, 1999, the Company estimates it would have
recorded pre-tax non-cash earnings of $472,000. The Company has historically not
engaged in trading activities in its interest rate swap agreements and does not
intend to do so in the future.

         At September 30, 1999, the Company had cash and cash equivalents of
approximately $86.0 million and at November 15, 1999, approximately $48.6
million available under its current bank credit facility. The Company believes
that the combination of funds available under the Company's bank credit facility
and synthetic lease facility, together with cash reserves, cash flow from
operations and proceeds from asset dispositions should be sufficient to meet the
Company's current



                                       26
<PAGE>   27

planned acquisition, expansion, capital expenditure and working capital needs
over the next year. In addition, in order to provide the funds necessary for the
continued pursuit of the Company's long-term acquisition and expansion strategy,
the Company may continue to incur, from time to time, additional short-term and
long-term indebtedness and to issue equity and debt securities, the availability
and terms of which will depend upon market and other conditions. There can be no
assurance that such additional financing will be available on terms acceptable
to the Company. The outcome of certain pending legal proceedings described in
Part II, Item 1 hereof may have an impact on the Company's liquidity and capital
resources.

Year 2000

The Following Material is Designated as Year 2000 Readiness Disclosure for
Purposes of the Year 2000 Information and Readiness Disclosure Act.

         PhyCor has developed a program designed to identify, assess, and
remediate potential malfunctions and failures that may result from the inability
of computers and embedded computer chips within the Company's information
systems and equipment to appropriately identify and utilize date-sensitive
information relating to periods subsequent to December 31, 1999. This issue is
commonly referred to as the "Year 2000 issue" and affects not only the Company,
but virtually all companies and organizations with which the Company does
business. The Company is dependent upon Year 2000 compliant information
technology systems and equipment in applications critical to the Company's
business. The Company's information technology systems ("IT systems") can be
broadly categorized into the following areas: (i) practice management, (ii)
managed care information, (iii) consumer decision support system that supports
the operations of CareWise, (iv) ancillary information systems, including
laboratory, radiology, pharmacy and clinical ancillary systems, and (v) other
administrative information systems including accounting, payroll, human resource
and other desktop systems and applications.

         The Company generally owns and provides to its various affiliated
multi-specialty clinics the IT systems in use at those locations, and such
systems represent a variety of vendors. In addition, the Company generally owns
and provides biomedical equipment (laboratory equipment, radiology equipment,
diagnostic equipment and medical treatment equipment) for use by its affiliated
physician groups and by its Company-owned hospitals, as well as other equipment
in use at Company-owned or leased facilities such as telephone and HVAC systems.
Such non-information technology ("Non-IT") equipment often contains embedded
computer chips that could be susceptible to failure or malfunction as a result
of the Year 2000 issue.

         To address the Year 2000 issue, the Company formed a Year 2000
committee comprised of representatives from a cross-section of the Company's
operations as well as the Company's senior management. Beginning in August 1997,
the committee, with the assistance of outside consultants, developed a
comprehensive plan to address the Year 2000 issue within all facets of the
Company's operations. The plan includes processes to inventory, assess,
remediate or replace as necessary, and test the Company's IT and Non-IT systems
and equipment. In addition, the Company has appointed local project coordinators
at all Company-owned facilities that are responsible for overseeing and
implementing the comprehensive project management activities at the local
subsidiary level. Each project coordinator is responsible for developing a local
project plan that includes processes to inventory, assess, remediate or replace
as necessary, and test the Company's IT and Non-IT systems and equipment. Each
local project coordinator is also responsible for assessing the compliance of
the electronic trading partners and business critical vendors for that location.
However, the compliance of certain vendors providing business critical IT
systems in wide use within the Company is being addressed by the Company's
senior management.

         The Company has completed the inventory and assessment phase of
business critical IT systems and is in the process of upgrading or replacing
those business critical IT systems found not to be compliant, either internally
or through the upgrades provided by the Company's vendors. In certain cases, the
Company's plan provides for verification of Year 2000 compliance of
vendor-supplied IT systems by obtaining warranties and legal representations of
the vendors. Much of the remediation is being accomplished as a part of the
Company's normal process of standardizing various IT systems utilized by its
affiliated clinics and IPAs, although in certain cases the standardization
process is moving at an accelerated pace as a result



                                       27
<PAGE>   28

of the Year 2000 issue. As of September 30, 1999, management believed
approximately 90% of the Company's business critical IT systems at the Company
and its subsidiaries to be Year 2000 compliant as a result of upgrades,
replacements or testing. The Company anticipates that all remediation and
testing of its business critical IT systems will be completed by December 1999
with the exception of the Company's Houston IPA market, which is anticipated to
be completed during December 1999.

         The Company is completing the inventory and assessment phase of its
Non-IT systems and equipment, which are comprised primarily of medical equipment
with embedded chip technology that are located throughout the subsidiaries'
facilities. The Company is relying primarily on its local project coordinators
and on the equipment vendors' representations in order to complete the inventory
and assessment phase and either remediate or replace non-compliant equipment. As
of September 30, 1999, substantially all of the Company's subsidiaries had
completed the inventory and assessment phase, and those facilities had completed
approximately 95% of the remediation and testing of Non-IT systems and
equipment. The Company estimates that substantially all of its subsidiaries will
have substantially completed remediation and testing of Non-IT systems and
medical equipment by December 1999.

         The Company is substantially dependent on a wide variety of third
parties to operate its business. These third parties include medical equipment
and IT software and hardware vendors, medical claims processors that act as
intermediaries between the Company's medical practice subsidiaries and the
payors of such claims, and the payors themselves, which includes the Health Care
Financing Administration ("HCFA"). HCFA paid to the Company Medicare claims that
comprised approximately 17% of the Company's net physician group, hospital and
IPA revenue during the first nine months of 1999. In most cases, these third
party relationships originate and are managed at the local clinic level.
Information concerning the Year 2000 readiness of the most significant third
parties has been received and analyzed by the Company. Together with its trade
associations and other third parties, the Company is monitoring the status and
progress of HCFA's Year 2000 compliance. HCFA has represented that its systems
are or will soon be Year 2000 compliant. Effective April 5, 1999, HCFA began
requiring all Medicare providers that submit Medicare claims electronically to
do so in an approved Year 2000 compliant format. The process of billing and
collecting for Medicare claims involves a number of third parties that the
Company does not control, including intermediaries and HCFA independent
contractors. The Company believes that most of these third parties are able to
comply with HCFA billing requirements. The Company is completing the process of
verifying the Year 2000 compliance of third parties upon which the Company
relies to process claims, including significant third party payors.

         The Company currently is working at the parent company level and with
local project coordinators in each of its subsidiary locations to finalize
contingency plans for business critical IT systems and Non-IT medical equipment
to minimize business interruptions and avoid disruption to patient care as a
result of Year 2000 related issues. The Company anticipates that contingency
plans for non-compliant business critical IT systems and non-compliant Non-IT
medical equipment will be completed by December 1999.

         There are a number of risks arising out of Year 2000 related failure,
any of which could have a material adverse effect on the Company's financial
condition or results of operations. These risks include (i) failures or
malfunctions in practice management applications that could prevent automated
scheduling, accounts receivable management and billing and collection on which
each of the subsidiary locations is substantially dependent, (ii) failures or
malfunctions of claims processing intermediaries or payors that may result in
substantial payment delays that could negatively impact cash flows, or (iii) the
failure of certain critical pieces of medical equipment that could result in
personal injury or misdiagnosis of patients treated at the Company's affiliated
clinics or hospitals. The Company has a number of ongoing obligations that could
be materially adversely impacted by one or more of the above described risks. If
the Company has insufficient cash flow to meet its expenses as a result of a
Year 2000 related failure, it will need to borrow available funds under its
credit lines or obtain additional financing. There can be no assurance that such
funds or any other additional financing will be available in the future when
needed.

         To date, the Company estimates that it has spent approximately $28.0
million on the development and



                                       28
<PAGE>   29

implementation of its Year 2000 compliance plan. Of those costs, an estimated
$24.0 million has been incurred to acquire replacement systems and equipment,
including amounts spent in connection with standardizing certain of the
Company's IT systems that it would have spent regardless of the Year 2000
initiative.

         The foregoing estimates and conclusions regarding the Company's Year
2000 plan contain forward looking statements and are based on management's best
estimates of future events. Risks to completing the Year 2000 plan include the
availability of resources, the Company's ability to discover and correct
potential Year 2000 problems that could have a serious impact on specific
systems, equipment or facilities, the ability of material third party vendors
and trading partners to achieve Year 2000 compliance, the proper functioning of
new systems and the integration of those systems and related software into the
Company's operations. Some of these risks are beyond the Company's control.

FORWARD-LOOKING STATEMENTS

         Forward-looking statements of PhyCor included herein or incorporated by
reference including, but not limited to, those regarding future business
prospects, including the future stability and strength of core clinics to be
retained by PhyCor and the profitability and acceptance by the physicians of the
new relationship being structured between the PhyCor and its physician groups,
the acquisition of additional clinics, the development of additional IPAs, the
adequacy of PhyCor's capital resources, the adequacy of recent and proposed
asset impairment and restructuring charges, the future profitability of
capitated fee arrangements and other statements regarding trends relating to
various revenue and expense items, could be affected by a number of risks,
uncertainties, and other factors described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

         During the nine months ended September 30, 1999, there were no material
changes to the Company's quantitative and qualitative disclosures about the
market risks associated with financial instruments as described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

         The Company and certain of its current and former officers and
directors, Joseph C. Hutts, Derril W. Reeves, Richard D. Wright (who is no
longer with the Company), Thompson S. Dent, and John K. Crawford (who is no
longer with the Company) have been named defendants in securities fraud class
action lawsuits filed in state and federal courts. The factual allegations of
the complaints in all lawsuits are substantially identical and assert that
during various periods between April 22, 1997 and September 22, 1998, the
defendants issued false and misleading statements which materially
misrepresented the earnings and financial condition of the Company and its
clinic operations and misrepresented and failed to disclose various other
matters concerning the Company's operations in order to conceal the alleged
failure of the Company's business model. Plaintiffs further assert that the
alleged misrepresentations caused the Company's securities to trade at inflated
levels while the individual defendants sold shares of the Company's stock at
such levels. In each of the lawsuits, the plaintiff seeks to be certified as the
representative of a class of all persons similarly situated who were allegedly
damaged by the defendants' alleged violations during the "class period." Each of
the lawsuits seeks damages in an indeterminate amount, interest,



                                       29
<PAGE>   30

attorneys' fees and equitable relief, including the imposition of a trust upon
the profits from the individual defendants' trades. The federal court class
action lawsuits have been consolidated in the U.S. District Court for the Middle
District of Tennessee. Defendants' motion to dismiss is pending before that
court. On June 24, 1999, a lawsuit was filed in that court on behalf of
investors in the Company's debt securities. It is anticipated that this lawsuit
will be consolidated with the shareholder suits. The state court class action
lawsuits have been consolidated in Davidson County, Tennessee. After the Court
granted the defendants' motion to dismiss, the plaintiffs filed an amended
complaint on July 20, 1999 naming KPMG LLP, the Company's certified public
accounting firm, as an additional defendant. KPMG LLP removed the case to
federal court. Defendants intend to file a motion to dismiss the amended
complaint. The federal court has ordered the parties to participate in
mediation. On August 19, 1999, a shareholder derivative action was filed in the
Chancery Court of Davidson County, Tennessee. On October 14, 1999, the Chancery
Court stayed the case pending the outcome of the federal court litigation. The
Company believes that it has meritorious defenses to all of the claims, and
intends to defend vigorously against these actions. There can be no assurance,
however, that such defenses will be successful or that the lawsuits will not
have a material adverse effect on the Company. The Company's Restated Charter
provides that the Company shall indemnify the officers and directors for any
liability arising from these suits unless a final judgment establishes liability
(a) for a breach of the duty of loyalty to the Company or its shareholders, (b)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law or (c) for an unlawful distribution.

         On January 23, 1999, the Company and Holt-Krock Clinic, P.L.C.
("Holt-Krock") entered into a settlement agreement with Sparks Regional Medical
Center and Sparks Regional Medical Center Foundation (collectively, "Sparks") to
resolve their lawsuits and all related claims between the parties and certain
former Holt-Krock physicians. Effective as of August 1, 1999, Holt-Krock, Sparks
and PhyCor consummated the transactions contemplated in the settlement agreement
and mutually dismissed their lawsuits and related claims between the parties. In
October 1999, the Company received from Sparks approximately $1.1 million from
an escrow account in payment of its remaining assets subject to the escrow. The
Company also intends to seek recovery of certain of its remaining assets through
litigation against several physicians formerly affiliated with Holt-Krock who
did not join Sparks.

         On February 2, 1999, Prem Reddy, M.D., the former majority shareholder
of PrimeCare International, Inc., a medical network management company acquired
by the Company in May 1998, filed suit against the Company and certain of its
current and former directors and executive officers in United States District
Court for the Central District of California. The complaint asserts fraudulent
inducement relating to the PrimeCare transaction and that the defendants issued
false and misleading statements which materially misrepresented the earnings and
financial condition of the Company and its clinic operations and misrepresented
and failed to disclose various other matters concerning the Company's operations
in order to conceal the alleged failure of the Company's business model. The
Court granted the Company's motion to dismiss the action with respect to all of
its officers and directors, but the plaintiff has amended and refiled his
complaint. Discovery has begun in this litigation. The Company believes that it
has meritorious defenses to all of the claims and intends to vigorously defend
this suit, however, there can be no assurance that if the Company is not
successful in litigation, that this suit will not have a material adverse effect
on the Company.

         On February 6, 1999, White-Wilson Medical Center, P.A. ("White -
Wilson") filed suit against PhyCor of Fort Walton Beach, Inc., the PhyCor
subsidiary with which it is a party to a service agreement, in the United States
District Court for the Northern District of Florida. White-Wilson is seeking a
declaratory judgment regarding the enforceability of the fee arrangement in
light of an opinion of the Florida Board of Medicine and OIG Advisory Opinion
98-4. On November 3, 1999, the Court granted the parties' motion to extend all
deadlines by 90 days because of the imminent settlement of all disputes between
the parties. Additionally, on March 17, 1999, the Clark-Holder Clinic, P.A.
filed suit against PhyCor of LaGrange, Inc., the PhyCor subsidiary with which it
is a party to a service agreement, in Georgia Superior Court for Troup County,
Georgia similarly questioning the enforceability of the fee arrangement in light
of OIG Advisory Opinion 98-4. On April 27, 1999, the Company filed a motion to
remove the case to the federal district court in Georgia. On October 7, 1999,
the Court granted PhyCor of LaGrange, Inc.'s motion to dismiss the action
brought by the physician group.



                                       30
<PAGE>   31

         Certain litigation is pending against the physician groups affiliated
with the Company and IPAs managed by the Company. Certain plaintiffs in such
litigation have attempted to join the Company as responsible in whole or in part
for activities of the physician groups, IPAs or their physicians. The Company
has not assumed any liability in connection with such litigation, and intends to
vigorously challenge any theory that the Company is liable for the activities of
medical groups, IPAs or their physicians. Claims against the physician groups
and IPAs could result in substantial damage awards to the claimants that may
exceed applicable insurance coverage limits. While there can be no assurance
that the physician groups and IPAs will be successful in any such litigation,
the Company does not believe any such litigation will have a material adverse
effect on the Company. Certain other litigation is pending against the Company
and certain subsidiaries of the Company, none of which management believes would
have a material adverse effect on the Company's financial position or results of
operations on a consolidated basis.

         The U.S. Department of Labor (the "Department") is conducting an
investigation of the administration of the PhyCor, Inc. Savings and Profit
Sharing Plan (the "Plan"). The Department has not completed its investigation,
but has raised questions involving certain administrative practices of the Plan
in early 1998. The Department has not recommended enforcement action against
PhyCor, nor has it identified an amount of liability or penalty that could be
assessed against PhyCor. Based on the nature of the investigation, PhyCor
believes that its financial exposure is not material. PhyCor intends to
cooperate with the Department's investigation. There can be no assurance,
however, that PhyCor will not have a monetary penalty imposed against it.

         The Company's forward-looking statements relating to the
above-described litigation reflect management's best judgment based on the
status of the litigation to date and facts currently known to the Company and
its management and, as a result, involve a number of risks and uncertainties,
including the possible disclosure of new facts and information adverse to the
Company in the discovery process and the inherent uncertainties associated with
litigation.



                                       31
<PAGE>   32


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

         On September 3, 1999, the Company issued the Series A Notes to funds
managed by Warburg, Pincus resulting in gross proceeds to the Company of $100
million. The Series A Notes accrete to a maturity value of $266,389,621 on the
fifteenth anniversary of the issuance date and are convertible at an initial
conversion price of $6.67 into 14,992,408 shares of the Company's common stock.
The Company issued the Series A Notes in a transaction intended to be exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereunder. The Company used the net proceeds from the
Series A Notes to repay indebtedness under the Company's credit facility.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(A) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER            DESCRIPTION OF EXHIBITS
------            -----------------------

<S>               <C>
3.1       --      Restated Charter of PhyCor (1)
3.2       --      Amendment to Restated Charter of PhyCor (2)
3.3       --      Amendment to Restated Charter of PhyCor (3)
3.4       --      Amended Bylaws of PhyCor (1)
4.1       --      Specimen of Common Stock Certificate (4)
4.2       --      Shareholder Rights Agreement, dated February 18, 1994, between PhyCor and First Union
                  National Bank of North Carolina (5)
10.1      --      PhyCor, Inc. 1999 Incentive Stock Plan (6)
10.2      --      Amendment, dated August 23, 1999, to the Securities Purchase Agreement for Zero Coupon
                  Convertible Subordinated Notes due 2014, dated as of June 15, 1999 (7)
10.3      --      Amendment No. 3 and Consent dated as of September 1, 1999, to the Second Amended and Restated
                  Revolving Credit Agreement, dated as of April 2, 1998, among the Registrant, the Banks named
                  therein and Citibank, N.A. (6)
 27       --      Financial Data Schedule (for SEC use only)(6)
</TABLE>

-------------
(1)  Incorporated by reference to exhibits filed PhyCor's Annual Report on Form
     10-K for the year ended December 31, 1994, Commission No. 0-19786.
(2)  Incorporated by reference to exhibits filed with PhyCor's Registration
     Statement on Form S-3, Registration No. 33-93018.
(3)  Incorporated by reference to exhibits filed with PhyCor's Registration
     Statement on Form S-3, Registration No. 33-98528.
(4)  Incorporated by reference to exhibits filed with PhyCor's Registration
     Statement on Form S-1, Registration No. 33-44123.
(5)  Incorporated by reference to exhibits filed with PhyCor's Current Report on
     Form 8-K dated February 18, 1994, Commission No. 0-19786.
(6)  Filed herewith.
(7)  Incorporated by reference to exhibits filed with PhyCor's Current Report on
     Form 8-K dated September 7, 1999, Commission No. 0-19786.

(B) REPORTS ON FORM 8-K.

          The Company filed a Current Report on Form 8-K on September 7, 1999
announcing the issuance and sale of the Series A Notes to E. M. Warburg, Pincus
& Co., LLC, resulting in gross proceeds to the Company of $100 million, pursuant
to Item 5 of Form 8-K.




                                       32
<PAGE>   33

                                   SIGNATURES

 Pursuant to the requirements of the Securities Exchange Act of 1934, the
 Registrant has duly caused this report to be signed on its behalf by the
 undersigned thereunto duly authorized.


                                       PHYCOR, INC.



                                       By: /s/  W. Carl Whitmer
                                           -------------------------------------
                                           W. Carl Whitmer
                                           Vice President and Treasurer
                                           (principal financial and accounting
                                           officer)

 Date:   November 15, 1999



                                       33
<PAGE>   34





                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER            DESCRIPTION OF EXHIBITS
------            -----------------------

<S>               <C>
3.1       --      Restated Charter of PhyCor (1)
3.2       --      Amendment to Restated Charter of PhyCor (2)
3.3       --      Amendment to Restated Charter of PhyCor (3)
3.4       --      Amended Bylaws of PhyCor (1)
4.1       --      Specimen of Common Stock Certificate (4)
4.2       --      Shareholder Rights Agreement, dated February 18, 1994, between PhyCor and First Union
                  National Bank of North Carolina (5)
10.1      --      PhyCor, Inc. 1999 Incentive Stock Plan (6)
10.2      --      Amendment, dated August 23, 1999, to the Securities Purchase Agreement for Zero Coupon
                  Convertible Subordinated Notes due 2014, dated as of June 15, 1999 (7)
10.3      --      Amendment No. 3 and Consent dated as of September 1, 1999, to the Second Amended and Restated
                  Revolving Credit Agreement, dated as of April 2, 1998, among the Registrant, the Banks named
                  therein and Citibank, N.A. (6)
 27       --      Financial Data Schedule (for SEC use only)(6)
</TABLE>

-------------
(1)  Incorporated by reference to exhibits filed PhyCor's Annual Report on Form
     10-K for the year ended December 31, 1994, Commission No. 0-19786.
(2)  Incorporated by reference to exhibits filed with PhyCor's Registration
     Statement on Form S-3, Registration No. 33-93018.
(3)  Incorporated by reference to exhibits filed with PhyCor's Registration
     Statement on Form S-3, Registration No. 33-98528.
(4)  Incorporated by reference to exhibits filed with PhyCor's Registration
     Statement on Form S-1, Registration No. 33-44123.
(5)  Incorporated by reference to exhibits filed with PhyCor's Current Report on
     Form 8-K dated February 18, 1994, Commission No. 0-19786.
(6)  Filed herewith.
(7)  Incorporated by reference to exhibits filed with PhyCor's Current Report on
     Form 8-K dated September 7, 1999, Commission No. 0-19786.