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                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

                         THE SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended December 31, 1999

                         Commission File Number 0-29172

                           PROMEDCO MANAGEMENT COMPANY

           (Exact name of registrant as specified in its charter)

                   Delaware                                  75-2529809
          (State or other jurisdiction of                  (I.R.S. Employer
          incorporation or organization)                Identification Number)

          801 Cherry Street, Suite 1450
          Fort Worth, Texas                                      76102
           (Address of principal executive offices)            (Zip Code)

          Registrant's telephone number, including area code: (817) 335-5035

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value

         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 .

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         The  aggregate  market value of the  registrant's  Common Stock held by
non-affiliates  of the registrant as of February 17, 2000 (computed by reference
to  the  closing  price  of  such  stock  on the  Nasdaq  National  Market)  was
$50,050,825.

         As of February 17,  2000,  there were  22,287,688  shares of our common
stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

             DOCUMENT                                      WHERE INCORPORATED

Portions of our definitive proxy statement
for our 2000 annual meeting of stockholders                     Part III

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<PAGE>



                           PROMEDCO MANAGEMENT COMPANY

                                    FORM 10-K

                                Table of Contents
<TABLE>
<CAPTION>

Item                                                                                                           Page
<S>     <C>                                                                                                 <C>
                                     Part I

 1       Business...........................................................................................   1
 2       Properties.........................................................................................  10
 3       Legal Proceedings..................................................................................  10
 4       Submission of Matters to a Vote of Security Holders................................................  10

                                     Part II

 5       Market for Registrant's Common Equity and Related Stockholder Matters..............................  11
 6       Selected Financial Data............................................................................  12
 7       Management's Discussion and Analysis of Financial Condition and Results of
         Operations.........................................................................................  13
 8       Financial Statements...............................................................................  21
 9       Changes in and Disagreements With Accountants on Accounting and Financial
         Disclosure.........................................................................................  21

                                    Part III

10       Directors and Executive Officers of the Registrant.................................................  22
11       Executive Compensation.............................................................................  22
12       Security Ownership of Certain Beneficial Owners and Management.....................................  22
13       Certain Relationships and Related Transactions.....................................................  22

                                     Part IV

14       Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................  23
</TABLE>





<PAGE>



                                        5

                                     PART I

Item 1.  Business

General

         We are a medical  services  company  that manages and  coordinates  the
delivery of  healthcare  in non-urban  communities.  We currently  operate in 25
communities  throughout the United States,  and we are a leading  coordinator of
medical  services in each of these local  markets.  Our markets  have an average
population of approximately  150,000 and average annual healthcare  expenditures
of approximately $150 million.

         We believe non-urban  communities offer an excellent opportunity for us
to capture a substantial  portion of the local healthcare  expenditures and thus
expand our  business.  This is because our target  markets  typically  have both
fewer  healthcare  providers and a lower HMO penetration  rate than larger urban
areas.  We  capitalize  on  this  opportunity  by  affiliating  with  a  leading
(typically the largest) medical group in each community,  which then becomes the
platform from which we expand our market share. Our non-urban focus also enables
us to diversify our business among a broad base of markets.  Only one community,
Champaign, Illinois, accounted for more than 10% of our net revenue in 1999.

         We use  medical  groups as our  platform  for two  reasons.  First,  we
believe these groups,  as the main source of referrals for all medical services,
are the most knowledgeable  about referral patterns and are in the best position
to capture a substantial portion of their communities'  healthcare  expenditures
and  influence  the quality of care.  Nationwide,  according  to the Health Care
Financing  Administration,  physician  services account for approximately 20% of
all healthcare expenditures,  and physicians make referrals for treatments (such
as drugs,  surgeries and other  procedures)  that account for an additional 60%.
Second, we believe the medical group offers the optimal outpatient setting for a
variety of new ancillary  services.  Technological  advances in medical devices,
surgical  techniques  and drugs  continue to shift the delivery point of various
procedures from inpatient settings to less costly outpatient settings.

         We believe  primary care  physicians  are, and will continue to be, the
principal point of access in the healthcare  system and are thus critical to our
ability to consolidate the delivery of a community's healthcare services.  About
65%  of  our  physicians  are  primary  care  providers,  which  include  family
practitioners, general internists, pediatricians, obstetrician/gynecologists and
urgent-care physicians.  On average, our groups include approximately 29% of the
primary care physicians in their communities.  In total, there are approximately
830 physicians and 155 mid-level  providers,  primarily physician assistants and
nurse practitioners, in our affiliated medical groups.

         We seek to expand our leading market  positions by adding services that
are already in demand within each market, but have historically been referred by
our affiliated physicians to other unaffiliated  providers.  In addition, we add
new  physicians  to our  medical  groups  from  within  our  markets,  including
specialists who are already  receiving  referrals from the affiliated  group, as
well as  physicians  from  other  communities.  Where  appropriate,  we may also
leverage our physician  base by augmenting it with  mid-level  providers who can
increase the productivity of the physicians significantly.

         We have  consistently  demonstrated  our  ability  to  implement  these
community-level  improvements  since we began  operations  in 1995. We have been
successful in executing our strategy due to our disciplined selection of markets
and collaborative planning process with our affiliated physicians.  In total, we
have added over 50  ancillary  services in our  communities.  We have also added
over 180 physicians to our current communities compared with the staffing levels
on the date of affiliation.

         In addition to our core market strategy,  we have undertaken select new
initiatives  to expand our  presence  in our  communities  and  capture a larger
portion of healthcare expenditures.  These include the November 1999 affiliation
with a clinical  research site management  organization and an investment in two
ambulatory surgery centers.  The aim of these initiatives is to further leverage
our base of physicians  and strong market  positions to generate a higher return
on capital and further diversify our revenue stream.

Development and Expansion

    New Market Development

         The process by which we enter new markets is as follows:

         We perform  substantial  research and analyses to identify our priority
markets, which are generally communities with the following characteristics:

o        populations averaging approximately 30,000 to 500,000;

o        annual healthcare expenditures of approximately $36.0 million to $600.0
         million;

o        less than 20% HMO penetration; and

o        fewer healthcare providers and systems.

         In addition,  we consider  other market  criteria such as the number of
physicians   relative  to  demand,   Medicare   payment  rates,   medical  group
competition,   proximity  to  other  affiliated  groups,  number  of  hospitals,
demographics,  population  growth and the likelihood of  significant  future HMO
growth.

         From a pool  of over  1,200  communities  meeting  our  primary  market
criteria,  we prioritize our  development  activities  among those with the most
favorable   characteristics.   Within  a   community   ranking   high  in  these
characteristics, we initiate discussions with a leading medical group, typically
the  largest in the  community,  in order to assess our ability to work with the
group in implementing our market expansion strategy. We look for groups that are
well  established,  have a reputation for providing  high-quality  care and have
strong leadership committed to growth.

         If our  initial  discussions  with a medical  group  indicate  a strong
potential for market  expansion,  we conduct site visits,  analyze financial and
other data and conduct an extensive due diligence investigation into the group's
operations,  leadership  and commitment to long-term  growth.  If the outcome of
this  investigation is favorable,  we prepare a comprehensive  business plan for
presentation  to the group,  along with a proposal to  affiliate  with the group
through a long-term service agreement.

         Only  if the  group  is in  substantial  agreement  with  our  proposed
business  plan  for  its  continued  operation  and  expansion  do  we  complete
negotiations of the terms of the affiliation. Since 1995 we have affiliated with
medical  groups in 25  communities.  We are  continuously  seeking  to enter new
communities and engage in varying stages of discussions with medical groups.

    Same Market Expansion

         Once we have  affiliated  with a medical group in a new  community,  we
immediately begin  implementation of the business plan developed for the market,
focusing  on  capturing  an  increasing  share  of  the  community's  healthcare
expenditures  through the addition of  ancillary  services  and  recruitment  of
additional physicians and mid-level providers.

         Ancillary Services.  Technological progress has resulted in significant
advances in medical  diagnostic and  therapeutic  equipment.  In radiology,  for
example, computerized tomography, magnetic resonance imaging and nuclear studies
are now  regularly  performed in outpatient  settings.  In  cardiology,  complex
diagnostic  procedures such as cardiac  catheterization have moved to ambulatory
settings.  In  addition,  new  pharmaceuticals  allow more  patients  to receive
advanced  treatments  outside of the hospital.  As a result, a growing number of
diseases can now be diagnosed and treated in outpatient office settings.

         We believe there is significant  opportunity for us to increase our net
revenue by taking  advantage of the shift of patient care to the office  setting
and capturing  revenue from ancillary  services that our groups would  otherwise
refer  to  others.  Unlike  other  providers  of  outpatient  ancillary  medical
services,  such as hospitals and diagnostic  imaging centers,  a multi-specialty
medical group has an assured source of referrals for ancillary  services that it
provides directly to its patients.

         The addition of ancillary  services and  specialists to our groups also
helps us  maintain  a high  level  of  quality  of  healthcare  services  in the
community.  It enhances  the  convenience  to  patients  that is inherent in the
multi-specialty  group. It allows a physician to more closely coordinate patient
care by ordering and supervising these services from a single location.  In many
cases, a physician can immediately review diagnostic results and order necessary
follow-up  services.  In addition,  the  multi-specialty  medical  group setting
allows for cross-disciplinary consultation and care coordination.

         In evaluating the feasibility of adding  ancillary  services at each of
our  affiliated  group  clinics,  we  consider  the  extent  to which  the group
currently refers its patients to outside  providers of the service,  the cost of
the required  equipment and the expected return on the required  investment.  In
total,  we have added over 50  ancillary  services  in our  communities.  For
groups that have been  affiliated  with us for longer  than one year,  ancillary
services represent approximately 22% of total revenue which is up from a typical
starting point of 15% to 16% at the time of affiliation.

         Provider  Recruitment.  We seek to further  increase our net revenue by
recruiting   additional  primary  care  physicians,   selected  specialists  and
mid-level providers to join our groups.  Additions of specialists are based upon
analyses  of the  primary  care group  physicians'  patterns  of referral to the
particular specialty,  as well as demand for the specialty within the community.
Mid-level  providers  can  significantly   increase  physician  productivity  by
enabling them to treat a greater number of patients.  These  professionals  also
enhance  the  quality  of  care  provided,  by  performing  numerous  procedures
otherwise  performed  by the  physicians  and  permitting  a  greater  degree of
personal  attention  to  patients.  To date,  we have  increased  the  number of
physicians in our medical groups by an average of 28%.

    Managing and Coordinating Care

         Currently,  approximately 83% of our affiliated groups' billings are on
a  fee-for-service  basis.  However,  we believe  that the strong  local  market
positions and primary care orientation of our medical groups,  combined with our
demonstrated  medical  management  expertise,  make us  attractive  partners for
managed  care  organizations  and other  payors  seeking to  establish  a strong
presence  in  our  markets,   while  positioning  us  to  enter  into  favorable
arrangements  with them and share in the  efficiencies we believe we can achieve
in our communities.

         We provide  medical  management  services that help providers that have
entered  into  risk-sharing  contracts  control the costs of the  services  they
provide.  This  includes  clinical  quality  assessment,  credentialing,  claims
adjudication,  referral  and  utilization  management  and case  management.  We
provide  these  services  to those of our  affiliated  medical  groups that have
entered  into  risk-sharing   contracts  and  to  several  independent  practice
association  (IPA)  networks on whose behalf we have  entered into  risk-sharing
contracts.  Because  services  provided  by our  groups  and  IPAs  account  for
approximately  two-thirds  of the  total  cost of  services  provided  under our
risk-sharing  contracts,  our  exposure  under them is largely  limited to costs
within our control.

    Clinical Trials and Other Growth Initiatives

         We have undertaken select new initiatives to expand our presence in our
communities  and  capture a larger  portion of  healthcare  expenditures.  These
include the November 1999 affiliation  with a clinical  research site management
organization and investments in two ambulatory surgery centers. The aim of these
initiatives  is to  further  leverage  our base of  doctors  and  strong  market
positions  to  generate a higher  return on capital and  further  diversify  our
revenue stream.

         Through  approximately  2,835  providers  in  our  medical  groups  and
associated IPAs and access to over 5,000,000 patients, we are well positioned to
leverage our existing  infrastructure  in the research arena.  Filling  clinical
trials  with  acceptable  patients  is  a  major  challenge  for  pharmaceutical
companies.  Using our current infrastructure,  we have the ability to screen our
patient database for potential clinical trial candidates,  monitor the patients'
progress in the trials and organize the necessary records and paperwork.

         The addition of two ambulatory  surgery  centers  demonstrates  another
potential benefit of our strategy of becoming the leading healthcare provider in
each of our communities.  By increasing the number of healthcare  access points,
we are  able to  expand  our  position  in our  markets  and  address  a  higher
percentage of a community's total healthcare needs.

Current Operations

         We  are  currently   affiliated  with  approximately  2,835  providers,
consisting of some 830 physicians and 155 mid-level  providers in our affiliated
medical groups and 1,850 physicians in associated IPAs. Approximately 545 of the
physicians  in our groups are primary care  providers.  Primary care  physicians
consist   of   family   practitioners,   general   internists,    pediatricians,
obstetrician/gynecologists,  and  urgent-care  physicians.  Increasingly,  these
physicians  are  augmented  by  mid-level  providers,  primarily  consisting  of
physician  assistants and nurse  practitioners,  which we believe  significantly
increases the efficiency of delivery of a group's primary care services. Each of
the medical groups also provides, to varying degrees, medical specialty services
and ancillary  services.  Medical  specialties  offered include  anesthesiology,
endocrinology,   gastroenterology,   general   surgery,   infectious   diseases,
nephrology,    neurology,    occupational    medicine,    orthopedic    surgery,
otolaryngology,  pulmonology,  rheumatology, and urology. We continually seek to
expand our market  share  through the addition or primary  care  physicians  and
specialists.  We also offer, to varying degrees,  a range of ancillary  services
such as audiology,  clinical laboratory services, diagnostic imaging, and stress
testing.  We continually  evaluate the addition of ancillary services to enhance
growth and profitability.

         Our  associated  IPAs are  organizations  of  independent  primary care
providers  and  specialists  that  contract  to  provide   physician  and  other
healthcare  services to HMOs and other managed care  organizations.  The members
maintain their  individual  practices and, through the IPA  organization,  share
information and managed care systems,  actuarial and financial analysis, medical
management and managed care contract  services  provided by us. The IPAs,  which
accounted for approximately  5.2% of our net revenue in 1999, are located in New
York,  Maine,  New  Hampshire  and  three  of the  communities  in which we have
affiliated medical groups.

         The  following  are  communities  in which we have  affiliated  medical
groups as of December 31, 1999:

    Abilene, TX             Denton, TX        Hudson, NY         Naples, FL
    Boca Raton, FL          Dyer, IN          Lake Worth, TX     Pittsfield, MA
    Champaign, IL           Ft. Myers, FL     Las Cruces, NM     Prescott, AZ
    Clearwater, FL          Flagstaff, AZ     Mayfield, KY       Reno, NV
    Columbus, GA            Harrisburg, PA    Midland, TX        Sarasota, FL
    Corpus Christi, TX      Hollywood, MD     Morristown, TN     Temple, TX
    Cullman, AL

    Management Services

         Upon  affiliation  with a medical  group,  we manage all aspects of the
group's  operations other than the provision of medical services.  All personnel
other than  physicians  and mid-level  providers  become our  employees,  and we
generally own all of the operating assets other than real estate. We provide the
full range of administrative services required for the group's operations. These
include facilities  management;  the purchase of medical malpractice  insurance,
supplies  and  equipment;  and a broad  spectrum  of  financial  and  accounting
services.

         While we provide a  centralized  source of  expertise in all aspects of
management,  we believe that each medical group presents  different  operational
issues and  challenges.  Therefore,  we employ a system of  decentralized  local
management   of  each  group.   We   generally   retain  the  group's   existing
administrative staff as our employees, adding additional management personnel as
the group expands.  We provide  support to the local  management  with corporate
resources in operations,  finance,  human resources and other  disciplines.  Our
national  presence  also allows us to achieve  purchasing  efficiencies  in such
areas as medical and surgical  supplies,  insurance  and physician and executive
recruiting.

         The  physicians  in the group  continue to maintain  full  professional
control of the practice of medicine, including hiring and terminating physicians
within the group and setting practice guidelines and standards. Each group has a
policy  council  comprised  equally of  physicians  and our  representatives  to
determine the broad strategic and operational policies of the group.

    Information Systems

         With respect to financial and reporting systems,  we require all of our
groups to migrate to a single  system.  We have  incorporated  the MGMA chart of
accounts as the corporate standard for our accounting  system,  which enables us
to prepare  consolidated  financial  information  promptly and  efficiently  and
provides  a  platform  for  comparative   benchmarking.   Our  system  generates
comprehensive  reports on a monthly  basis  containing  financial  and operating
information that we use in our management  decision-making  process.  Currently,
over 90% of our groups are utilizing this common financial  system.  We are also
implementing  a system for  extraction  and storage of uniform  operational  and
medical  information from each of our groups. For basic practice management such
as scheduling,  billing and  collections,  we utilize  systems  offered by three
primary vendors,  depending upon individual group  requirements.  We replace the
practice  management systems of our affiliated groups only when they do not meet
operational needs.

         Over the past two years,  we have invested $3.8 million in  information
technology  improvements.  We are currently  evaluating  additional  information
technology  initiatives,   including  standard  software  to  support  ancillary
services,  electronic medical records software and automated  insurance coverage
and code verification software.

    Affiliation Structure

         To date, as medical groups have  affiliated  with us, we have generally
purchased  their  operating  assets,  excluding real estate,  and entered into a
long-term  service  agreement  with the group.  Our  payments to the groups have
included cash, common stock, notes and the assumption of liabilities. In certain
instances,  we  have  utilized  long-term  loans  to  the  groups  and  provided
split-dollar life insurance policies as consideration for the assets. Because we
believe that the stock market has  undervalued  our common stock during the past
year, our recent  affiliations  have not included  stock. If the market price of
our common  stock  recovers to a level that we believe  reflects  its value,  we
intend to make greater use of common stock in future affiliations.

         Our service agreements  generally have a term of 40 years and cannot be
terminated by either party without cause,  consisting primarily of bankruptcy or
material  default.  Under the service  agreement,  we provide the group with the
facilities and equipment used in its medical  practice.  If a service  agreement
expires or is terminated, the medical group is required to purchase our tangible
and intangible  assets  related to the practice,  typically at their current net
book value.

         When we enter into a service  agreement with a medical group, the group
enters into an employment contract with each of its physicians, typically for an
initial  term of five  years.  In  affiliations  involving  our  purchase of the
group's  operating assets,  the employment  contract requires that the physician
repay all or a portion of the  physician's  share of our  payment for the assets
and service  agreement if the physician  breaches the contract.  Each group also
enters into an agreement not to compete with us. In addition,  each  physician's
employment  contract  includes an agreement not to compete with the group during
the  period  of his or her  employment  and for a  period  of  time  thereafter,
typically  two  years.  The  employment  contract  also  provides  that we are a
third-party  beneficiary  entitled to enforce the  repayment  provision  and the
agreement  not  to  compete.  The  employment  agreements  typically  include  a
liquidated damages provision equal to the physician's salary for the most recent
12 months in the event the physician breaches the non-competition provision.

         Our  income  and the  income of the  physicians  within  each  group is
dependent  upon  operating  income.  Under our service  agreement,  we typically
receive  15% to 20% of  operating  income.  Operating  income is  defined as the
group's net revenue,  less certain  agreed  clinic  expenses,  before  physician
salaries and other physician-related  expenses. In our more recent affiliations,
our share of income from new ancillary  services has been  increased to 50%. Our
distribution from the group is typically increased or decreased by 25% to 50% of
the group's surplus or deficit under  risk-sharing  arrangements under capitated
managed care contracts.

         We have also developed alternative affiliation structures which require
minimal initial investment and have recently closed on one such affiliation. The
related  25-year service  agreement  gives us a lower  percentage of the group's
operating  income  than our  typical  agreement,  but  entitles us to 50% of the
income from ancillary services added following the initial affiliation date. The
service  agreement  also allows the group to  terminate  the  agreement  for any
reason  at  five-year  intervals,  but only if the  group  purchases  all of the
practice assets then owned by us and pays us a multiple of additional cash flows
created since the initial affiliation date.

Competition

         The medical services industry is competitive.  We face competition both
in affiliating with medical groups and in managing and coordinating  care in our
communities.  Our competitors  include  hospitals,  managed care  organizations,
other  medical  groups and other  medical  services  companies.  There can be no
assurance  that  we  will  be  able  to  compete  effectively,  that  additional
competitors will not enter the market, or that such competition will not make it
more  difficult  to  enter  into  affiliations  with  medical  groups  on  terms
beneficial to us.

         We also  experience  competition in recruiting and retaining  qualified
physicians and other healthcare professionals. There can be no assurance that we
will be able to recruit or retain a sufficient  number of  qualified  physicians
and other healthcare professionals to continue to expand our operations.

Government Regulation

    Health Care

         As a  participant  in  the  healthcare  industry,  our  operations  and
relationships  are subject to  extensive  regulation  by a number of federal and
state  governmental  entities.  We believe that our  operations  are in material
compliance with applicable laws.  Because the structure of our relationship with
medical  groups  is  relatively  new,  however,  many  aspects  of our  business
operations   have  not  been  the   subject  of  state  or  federal   regulatory
interpretation.  Thus, a review of our or our affiliated physicians' business by
courts or  regulatory  authorities  could result in a  determination  that could
adversely  affect  our  operations.   In  addition,  the  healthcare  regulatory
environment could change so as to restrict or require modification of our or our
affiliated  medical  groups'  operations or limit their  ability to expand.  Our
service  agreements  typically  require the parties to amend the  agreements  to
preserve the underlying economic and financial  arrangements if federal or state
law is interpreted by a court,  regulatory  agency or counsel to both parties to
indicate  that the agreement may violate such law. Only if it is not possible to
amend an agreement to preserve in all material respects the underlying  economic
and financial arrangements, the agreement may be terminated by either party.

         The laws of many states prohibit business  corporations such as us from
practicing  medicine and employing  physicians to practice medicine.  We perform
only  non-medical  administrative  services  and do not  hold  ourselves  out as
providers  of medical  services.  In addition,  we do not exercise  influence or
control  over the  practice  of  medicine by the  physicians  in our  affiliated
groups. Accordingly, we believe we are not in violation of applicable state laws
relating to the practice of medicine.

         In addition to prohibiting  the practice of medicine,  numerous  states
limit the  ability of  entities  such as us to control  physician  revenue or to
receive portions of such revenue in excess of the value of services provided. In
most  states,  these  so-called  "fee-splitting"  laws provide that the laws are
violated only if a physician shares fees with a referral source. A Florida court
recently  upheld a ruling by the Florida Board of Medicine that  interprets  the
Florida fee-splitting law very broadly to include, in some cases, the payment of
percentage-based    management    fees    specifically    when    coupled   with
practice-enhancement  activities.  We are  in  the  process  of  evaluating  the
interpretation and monitoring of subsequent clarifications and determinations to
determine whether the service agreements  covering our medical groups in Florida
will be affected.  There can be no assurance  that further  action by government
authorities  regarding the  structure of our  relationship  with our  affiliated
medical  groups or our managed IPAs,  in Florida or elsewhere,  will not have an
adverse effect upon us.

         Approximately  30% of the  revenue  of our  affiliated  groups has been
derived  from  payments  made  by   government-sponsored   healthcare  programs,
principally  Medicare  and  Medicaid.  As a result,  any  change  in  government
reimbursement  regulations,  policies,  practices,  interpretations  or statutes
could  adversely  affect our  operations.  Violation of the laws creating  these
programs, moreover, can result in civil or criminal penalties and exclusion from
the programs. In addition,  state and federal civil and criminal statutes impose
substantial penalties,  including civil and criminal fines and imprisonment,  on
healthcare  providers that fraudulently or wrongfully bill governmental or other
third-party payors for healthcare services.

         Certain  provisions of the Social Security Act, commonly referred to as
the fraud and abuse  provisions,  prohibit the payment or receipt of any form of
remuneration in return for the referral of Medicare or Medicaid  patients.  Many
states have adopted similar  prohibitions  against payments that are intended to
induce referrals of Medicaid and other third-party  payor patients.  Although we
believe that neither we nor any of our affiliated medical groups is in violation
of any such  prohibitions,  our operations do not fit within any of the existing
or proposed federal safe harbors and may therefore be subject to challenge.

         A section of the Social  Security Act  commonly  known as the Stark Law
further prohibits physicians from referring Medicare or Medicaid patients to any
entity  providing  "designated  health  services" in which the  physician has an
ownership or investment  interest or with which the physician has entered into a
compensation arrangement. A physician's ownership of or compensation arrangement
with the medical  group  through  which the  physician  practices  constitutes a
financial relationship for Stark Law purposes,  necessitating availability of an
exception  under the Stark Law if the medical group provides  designated  health
services.  Although we believe our  affiliated  medical groups are structured to
fit within exceptions contained in the Stark Law, there are no final regulations
or  other   regulatory  or  judicial   guidance   interpreting  the  Stark  Law.
Accordingly,  no assurance can be made that we are in compliance  with the Stark
Law.

         Some   states   have  also   enacted   similar   so-called   "physician
self-referral"  laws,  and  additional  states may follow.  We believe  that the
structure of our affiliated  medical groups fits within exemptions  contained in
these laws.  Nevertheless,  expansion of our operations to certain jurisdictions
may require  structural and  organizational  modifications of our  relationships
with medical groups to comply with new or revised state statutes.

         Several  states  regulate  the  managed  care  support   activities  of
organizations  other than insurers.  In particular,  claims  administration  and
utilization  review functions may require  licensure and the various elements of
our  operations  may be  subject  to  regulation.  We  believe  that we hold all
necessary licenses for our business activities.  However, we cannot be sure that
we will receive necessary  regulatory approvals in all states in which we intend
to conduct business,  or that the applicable  operational  requirements will not
adversely affect our profitability.

         As a result of the continued  escalation  of  healthcare  costs and the
inability of many  individuals to obtain health  insurance,  numerous  proposals
have been or may be  introduced  in the U.S.  Congress  and  state  legislatures
relating to  healthcare  reform.  There can be no  assurance  as to the ultimate
content,  timing or  effect  of any  healthcare  reform  legislation,  nor is it
possible at this time to estimate the impact of potential legislation on us.

    Antitrust

         Each of our affiliated  medical groups is deemed to be separate from us
under the antitrust laws.  Thus, we and they are subject to a wide range of laws
that  prohibit  anti-competitive  conduct  among  separate  legal  entities  and
individuals. In addition, because we have concentrated our business in non-urban
communities and frequently affiliate with the largest group in such communities,
the  antitrust  laws may limit our  ability  and the  ability of our  affiliated
medical  groups to  continue to expand in certain  communities.  There can be no
assurance that a review by courts or regulatory  authorities of the relationship
between us and our  affiliated  medical  groups,  or of our market  position  or
activities  within a particular  community would not result in determinations or
actions that could seriously harm our operations and our relationships  with our
affiliated medical groups.

Insurance

         Our affiliated  medical groups maintain medical  malpractice  liability
insurance in the amount of $1.0 million per  occurrence  and $3.0 million in the
aggregate.  Wherever  allowed  we are  named as the  additional  insured  on the
policies  maintained by each of our affiliated  groups. We also maintain general
liability and umbrella coverage.  The umbrella policy has limits of $1.0 million
per occurrence and a $10.0 million aggregate.  The cost and availability of this
coverage has varied widely in recent years. We maintain individual and aggregate
stop-loss  insurance  coverage  with respect to our and our  affiliated  groups'
risk-sharing contracts. While we believe that our insurance coverage is adequate
for our  current  operations,  there can be no  assurance  that the  coverage we
maintain  will be  sufficient  to cover all future claims or will continue to be
available in adequate amounts or at a reasonable cost.

Employees

         We  currently  employ  approximately  4,200  people,   including  those
employed in our corporate office. We are not party to any collective  bargaining
agreement with a labor union and consider our relations with our employees to be
good.  Generally,  we do not  employ  any of the  physicians  practicing  in our
affiliated groups.

Item 2.  Properties

         We currently  lease  approximately  13,000  square feet of space at 801
Cherry  Street in Fort Worth,  Texas,  where our  headquarters  are located.  We
believe  that  these  facilities  are  adequate  for our  current  uses and that
additional space is available to accommodate our anticipated growth.

         We lease,  sublease,  or occupy under our service agreements the clinic
facilities at which our affiliated  medical groups conduct their practices.  The
leases  have  varying  terms  ranging  from  month-to-month  to  ten  years.  We
anticipate  that  as the  affiliated  practices  continue  to  grow  and add new
services, expanded facilities will be required.

Item 3.  Legal Proceedings

         We and our  affiliated  groups are from time to time subject to medical
malpractice  claims and other various claims and legal actions that arise in the
ordinary  course of  business.  Such  claims,  if  successful,  could  result in
substantial damage awards that may exceed the limits of our insurance  coverage.
We do not engage in the practice of medicine or provide medical services, nor do
we control the  practice of medicine  by our  affiliated  medical  groups or the
compliance  with  regulatory  requirements  directly  applicable  to our groups.
Nevertheless,  there can be no assurance that we will not become subject to such
claims in the future.

Item 4.  Submission of Matters to a Vote of Security Holders

         Not applicable.


<PAGE>



                                                          PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

          Since March 12,  1997,  our common stock has been traded on the Nasdaq
National  Market under the symbol "PMCO." This table sets forth the high and low
sale prices per share of our common  stock as  reported  by the Nasdaq  National
Market for each calendar quarter during 1998 and 1999.

                                                               High         Low

         1998

            First Quarter....................................    16.25     8.81
            Second Quarter...................................    15.87     8.81
            Third Quarter....................................    10.75     8.87
            Fourth Quarter...................................     7.87     4.12
         1999

            First Quarter....................................     6.63     3.75
            Second Quarter...................................     4.81     3.63
            Third Quarter....................................     3.97     2.88
            Fourth Quarter...................................     3.38     2.00


         We have never paid any cash dividends on our common stock. We presently
intend  to  retain  earnings  for  use  in our  business  and  therefore  do not
anticipate paying any cash dividends in the foreseeable  future.  The payment of
any future  dividends  will be  determined by our Board of Directors in light of
conditions  then  existing,  including  our  earnings,  financial  condition and
requirements,  restrictions in financing  agreements,  business conditions,  and
other factors.  In addition,  our ability to pay dividends or make distributions
to our  stockholders  is restricted by the terms of our credit  facility.  As of
February 17, 2000, there were 423 holders of record of common stock.

         During 1999, we issued 659,472  shares of common stock to  stockholders
of two physician  groups and one IPA management  company in connection  with our
affiliations. As of December 31, 1999, we had commitments to issue approximately
12,000  shares of common stock to  physician  groups and their  stockholders  in
connection with affiliations with physicians  joining our existing groups during
1999.  These  shares will be issued  after  completing  a  subsequent  review of
acquired  assets and adjusting the total  consideration  in accordance  with the
respective affiliation agreements.  Each of such issuances was or will be exempt
from registration under the Securities Act, pursuant to section 4(2) of the Act,
as they did not involve any public offering.

         In April 2000,  we expect to complete  the second  stage of a two-stage
transaction in which we will issue an aggregate of 550,000 shares of convertible
preferred  stock to  affiliates  of  Goldman,  Sachs & Co. for  aggregate  gross
proceeds of $55 million. The first stage of the transaction, which was completed
in January 2000,  involved the issuance of $16 million  principal  amount of our
senior  subordinated  notes and  1,250,000  shares of our  common  stock for $16
million.  In the second  stage,  the investors  will exchange the notes,  common
stock,  and an  additional  $39 million for  550,000  shares of our  convertible
preferred stock,  bringing the total investment to $55 million.  The convertible
preferred  stock  has  a  liquidation  preference  of  $100  per  share  and  is
convertible  into shares of our common stock at a conversion  price of $3.25 per
share,  subject  to  adjustment  in  accordance  with  customary   anti-dilution
provisions.


<PAGE>



Item 6.  Selected Financial Data

         The  selected   financial  data  presented  below  should  be  read  in
conjunction   with  our   consolidated   financial   statements  and  notes  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" included elsewhere in this report.  (Amounts in thousands except net
earnings (loss) per share information)
<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                   ----------------------------------------------------------------
                                                      1995          1996         1997         1998         1999
                                                   -----------  -----------  -----------  -----------   -----------
<S>                                                <C>          <C>          <C>          <C>           <C>
Statement of Operations Data:
Net revenue.....................................   $     7,844  $    26,245  $    80,641  $   222,502   $   324,494
Operating expenses:
     Clinic salaries and benefits...............         4,250       11,695       29,860       74,676       112,342
     Clinic rent and lease expense..............           708        2,670        7,016       17,187        28,687
     Clinic supplies............................           624        3,213        9,667       24,874        37,000
     Purchased medical services.................           781          970        7,947       45,444        51,451
     Other clinic costs.........................         1,759        5,019       10,884       25,699        41,232
     General corporate expenses.................           803        2,634        3,793        5,613         9,150
     Depreciation and amortization..............           204          724        2,943        7,239        12,295
     Interest expense...........................            21          209          456        1,104         6,513
     Merger costs...............................         -              682        -            -             -
                                                   -----------  -----------  -----------  -----------   -----------
                                                         9,150       27,816       72,566      201,836       298,670
                                                   -----------  -----------  -----------  -----------   -----------
Income (loss) before provision for income
     taxes and extraordinary charge.............        (1,306)      (1,571)       8,075       20,666        25,824
Provision (benefit) for income taxes............           (54)       -            2,602        7,853         9,813
                                                   -----------  -----------  -----------  -------------------------
Net income (loss) before extraordinary charge...        (1,252)      (1,571)       5,473       12,813        16,011
Extraordinary charge - loss on extinguishment
     of debt, net of $375 income taxes .........         -            -            -             (611)        -
                                                   -----------  -----------  -----------  -----------   -----------
Net income (loss)...............................   $    (1,252) $    (1,571) $     5,473  $    12,202   $    16,011
                                                   ===========  ===========  ===========  ===========   ===========

Net earnings (loss) per share:
Basic:
     Income (loss) before extraordinary charge..   $     (0.16) $    (0.20)  $      0.48  $      0.69   $      0.76
     Extraordinary charge.......................          -            -            -           (0.03)        -
                                                   -----------  -----------  -----------  -----------   -----------
     Net income (loss)..........................   $     (0.16) $     (0.20) $      0.48  $      0.66   $      0.76
                                                   ===========  ===========  ===========  ===========   ===========
Diluted

     Income  (loss) before extraordinary charge.   $     (0.16) $     (0.20) $      0.38  $      0.61   $      0.71
     Extraordinary charge.......................          -            -            -           (0.03)        -
                                                   -----------  -----------  -----------  -----------   -----------
     Net income (loss)..........................   $     (0.16) $     (0.20) $      0.38  $      0.58   $      0.71
                                                   ===========  ===========  ===========  ===========   ===========
Weighted average number of common shares
     outstanding:
     Basic......................................         7,872        7,872       11,376       18,622        21,108
                                                   ===========  ===========  ===========  ===========   ===========
     Diluted....................................         7,872        7,872       14,224       20,958        23,141
                                                   ===========  ===========  ===========  ===========   ===========

Balance Sheet Data:

Cash and cash equivalents.......................   $     3,047  $     1,634  $    15,761  $    13,871   $     7,625
Working capital.................................         3,376        2,253       24,207       55,499        52,106
Total assets....................................         6,203       30,560      162,966      310,408       419,313
Long term debt, less current maturities.........           279        7,416       53,536       91,756       177,093
Redeemable equity securities....................         3,945        3,949        -            -             -
Total stockholders' equity......................           240       10,524       80,619      172,648       182,631
</TABLE>



<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Overview

         We are a medical  services  company  that manages and  coordinates  the
delivery  of a variety of  healthcare  services  in  non-urban  communities.  We
typically affiliate with a leading medical group in the community, which becomes
the platform from which we expand our market  share.  We expand this platform by
adding ancillary services, physicians and mid-level providers.

         Since  our   organization   in  December  1994,  we  have   experienced
substantial  growth,  primarily as a result of entering new communities and also
from same market  growth  within our  communities.  We  currently  operate in 25
communities  where we are affiliated  with medical groups  comprised of some 830
physicians and 155 mid-level  providers.  In addition,  we are  associated  with
approximately 1,850 physicians in IPA networks.

         Our  agreements  with medical groups are structured to provide a common
incentive  for growth.  When  affiliating  with a medical  group,  we  typically
acquire,  at fair market value, the group's non-real estate operating assets and
enter into a 40-year  service  agreement  with the group in exchange for various
combinations of cash, our common stock, other securities issued by us and/or our
assumption of certain liabilities.  Under these service agreements, we receive a
fixed  percentage,  typically 15% to 20%, of operating  income before  physician
compensation.  In our more  recent  affiliations,  our share of income  from new
ancillary  services has been increased to 50%. We also share between 25% and 50%
of each group's surplus or deficit under risk-sharing  arrangements  pursuant to
capitated managed care contracts.

         We have also developed alternative affiliation structures which require
minimal initial investment and have recently closed on one such affiliation. The
related  25-year service  agreement  gives us a lower  percentage of the group's
operating  income  than our  typical  agreement,  but  entitles us to 50% of the
income from ancillary services added following the initial affiliation date. The
service  agreement  also allows the group to  terminate  the  agreement  for any
reason  at  five-year  intervals,  but only if the  group  purchases  all of the
practice assets then owned by us and pays us a multiple of additional cash flows
created since the initial affiliation date.

         Our  net  revenue   represents  total  revenue  for  services  rendered
(reported at the estimated realizable amounts from patients,  third-party payors
and others, net of contractual and other adjustments),  less amounts paid to the
medical groups. The amounts paid to the medical groups,  typically 80-85% of the
operating income, consist primarily of the cost of physician services. Under our
service  agreements,  we provide  each  medical  group with the  facilities  and
equipment used in its medical practice, assume responsibility for the management
of the operations of the practice and employ  substantially all of the personnel
utilized by the group other than the physicians and mid-level  providers.  We do
not consolidate the operating results and accounts of the medical groups.


<PAGE>



Results of Operations

         We began  operations in our first two  communities in June and December
1995, and entered five additional  communities in 1996, six in 1997 and eight in
1998. During 1999, we entered four additional communities. Changes in results of
operations were caused  primarily by expanding into  additional  communities and
same market growth in our existing  communities.  The following table sets forth
the  percentages  of revenue  represented  by  certain  items  reflected  in our
condensed consolidated statements of operations.
<TABLE>
<CAPTION>

                                                                          Years Ended December 31,
                                                            -------------------------------------------------
                                                                 1997              1998              1999
                                                            --------------   ----------------  --------------
<S>                                                         <C>              <C>               <C>
Statement of Operations:

Net revenue...............................................        100.0%           100.0%            100.0%
Operating expenses:
     Clinic salaries and benefits.........................         37.0             33.5              34.6
     Clinic rent and lease expense........................          8.7              7.7               8.8
     Clinic supplies......................................         12.0             11.2              11.4
     Purchased medical services...........................          9.9             20.4              16.0
     Other clinic costs...................................         13.5             11.6              12.7
     General corporate expenses...........................          4.7              2.5               2.8
     Depreciation and amortization........................          3.6              3.3               3.8
     Interest expense.....................................          0.6              0.5               2.0
                                                              ---------         --------         ---------
Income before provision for income
   taxes and extraordinary charge.........................         10.0              9.3               7.9
Provision for income taxes................................          3.2              3.5               3.0
                                                              ---------         --------         ---------
Net income before extraordinary charge....................          6.8              5.8               4.9
Extraordinary charge, net of tax..........................          -               (0.3)              -
                                                              ---------         --------         ---------
Net income................................................          6.8%             5.5%              4.9%
                                                              =========         ========         =========

Other Financial Information:

Total revenue(1) (in thousands)...........................  $   127,716      $   310,454       $   450,877
                                                            ===========      ===========       ===========
Payor breakdown(2):
     Commercial and discounted
        fee-for-service...................................         39.2%            36.3%             38.8%
     Medicare/Medicaid....................................         24.7             29.6              29.5
     Capitation...........................................         16.4             20.7              17.1
     Other................................................         19.7             13.4              14.6
                                                              ---------         --------         ---------
     Total................................................        100.0%           100.0%            100.0%
                                                              =========         ========         =========
</TABLE>

(1)  Total revenue  represents  amounts  received for professional and ancillary
     services  and  for  other  services,  such  as  contract  billing,  medical
     directorship  and interim  management.  These  amounts are  recorded at the
     estimated realizable amounts, net of contractual and other adjustments. Our
     net  revenue  represents  total  revenue,  reduced by  amounts  paid to the
     medical groups.

(2)  As a percentage of total revenue.


<PAGE>



Year Ended December 31, 1999 Compared With Year Ended December 31, 1998

         Net  revenue  increased  by 45.8% to $324.5  million for the year ended
December 31,  1999,  from $222.5  million for the year ended  December 31, 1998.
Approximately  35.6% of this increase was attributable to communities we entered
during 1999, with the remainder  coming  primarily from  communities in which we
began  operations  prior  to  1999.  Same  market  growth  in  net  revenue  for
communities in which we operated for longer than one year was over 14% in 1999.

         Overall  clinic  costs,  including  purchased  medical  services,  as a
percentage of net revenue decreased to 83.5% in 1999, compared to 84.4% in 1998.
Purchased  medical services reflect the cost of services  required under managed
care contracts that are not provided by our medical  groups.  The primary reason
for the overall decrease in clinic expenses as a percentage of net revenue was a
change in purchased medical  services,  which decreased to 16.0% as a percentage
of net revenue in 1999, compared to 20.4% in 1998. This change resulted from the
relative decrease in full  professional and global capitation  revenue (compared
to total revenue) caused by our affiliation  with additional  medical groups and
from the conversion of certain payor contracts from  capitation  arrangements to
discounted  fee-for-service payment contracts. The decrease in purchased medical
services was  partially  offset by an increase in clinic  salaries and benefits,
clinic rent and lease  expense and other clinic costs which  increased to 34.6%,
8.8% and  12.7%,  respectively,  in 1999  compared  to  33.5%,  7.7% and  11.6%,
respectively,  in 1998. These increases were caused by changes in the mix of our
medical  groups and due to the  expansion of ancillary  services we offer within
the communities we serve.

         General corporate  expenses as a percentage of net revenue increased to
2.8% in 1999, compared to 2.5% in 1998,  reflecting  anticipated increases as we
continued  to add  management  and  technology  infrastructure.  We believe that
increases in the amount of general corporate  expenses will continue as we enter
new communities and expand our operations in existing  communities,  although we
expect these costs to remain relatively flat as a percentage of net revenue.

         Depreciation and amortization as a percentage of net revenue  increased
to 3.8% in 1999, compared to 3.3% in 1998. This increase resulted primarily from
the change in the  amortization  period  for our  service  agreement  intangible
assets.  As a result of a change in SEC  accounting  policy,  effective  July 1,
1998, all existing and future service agreement  intangible assets are amortized
over a period  not to  exceed  25 years  from the  inception  of the  respective
service  agreements.  In addition,  depreciation has increased due to changes in
the mix of our medical  groups,  with  certain of our more  recent  affiliations
having a relatively higher amount of property and equipment.

         Net interest  expense as a percentage of net revenue  increased to 2.0%
in 1999,  compared to 0.5% in 1998. This increase is a result of the increase in
long-term debt relating to financing our  affiliation  with  additional  medical
groups  and due to an  increase  in the  overall  effective  rate on our  credit
facility.  In addition,  interest  expense in 1998 was offset by interest income
earned on unused  proceeds  from a public  offering of our common stock that was
completed in May 1998.

         Provision  for income  taxes  reflects an effective  rate of 38%.  This
effective  rate is  higher  than  the  expected  Federal  statutory  rate due to
non-deductible amortization of certain intangible assets and state income taxes,
offset by the  realization of net operating loss  carryforwards,  which had been
previously  reserved.  We expect our  effective tax rate for 2000 to increase to
42%.

Year Ended December 31, 1998 Compared with Year Ended December 31, 1997

         Net revenue  increased  by 176.0% to $222.5  million for the year ended
December  31,  1998,  from $80.6  million for the year ended  December 31, 1997.
Approximately  40.1% of this increase was attributable to communities we entered
during  1998,  with  the  balance  coming  from  communities  in  which we began
operations prior to 1998.  Same-market  growth in net revenue for communities in
which we operated prior to 1997 was over 15% for 1998 compared with 1997.

         Overall  clinic  costs,  including  purchased  medical  services,  as a
percentage of net revenue increased to 84.4% in 1998, compared to 81.1% in 1997.
The change in overall  clinic costs and specific items was due to the changes in
the mix of our medical groups.  Purchased  medical  services created the largest
increase as a percentage of net revenue, increasing to 20.4% in 1998 compared to
9.9% in 1997. This increase  resulted from the increase in full professional and
global  capitation  revenue,  relating  primarily  to two of  our  groups,  that
required the purchase of services outside our medical groups.

         General  corporate  expenses as a percentage of net revenue declined to
2.5% in  1998,  compared  to 4.7% in  1997.  While  these  costs  declined  as a
percentage of net revenue,  the amount of general corporate  expenses  increased
47.9% to $5.6 million for the year ended December 31, 1998 from $3.8 million for
the year ended December 31, 1997. We anticipated this increase in expenses as we
continued to add management and technology infrastructure.

         Depreciation and amortization as a percentage of net revenue  decreased
to 3.3% in 1998, compared to 3.6% in 1997. This decrease resulted primarily from
differences  in the mix of  assets  acquired  in  connection  with  affiliations
completed  during this  period,  but also  reflected  the  impacts of  declining
consideration levels on new affiliations in the latter part of 1998.

         Net interest  expense as a percentage of net revenue  decreased to 0.5%
in 1998,  compared to 0.6% in 1997.  Although long-term debt levels increased in
the latter part of 1998, the resulting  interest  expense was offset by interest
income  earned  in the  earlier  part of 1998 on unused  proceeds  from a public
offering of our common stock that was completed in May 1998.

         In  December  1998,  we  replaced  our  existing  credit  facility.  In
connection with this transaction,  we were required to write off the unamortized
deferred  financing costs relating to the prior credit  facility.  The resulting
extraordinary  charge  amounted to  approximately  $611,000,  net of  applicable
income taxes of approximately $375,000.

         Provision for income taxes  reflected an effective rate of 38.0%.  This
effective rate was higher than the expected Federal statutory rate primarily due
to the impact of state income taxes.


<PAGE>



Summary of Operations by Quarter

         The following table presents our unaudited  quarterly operating results
for the eight quarters  ended  December 31, 1999. In our opinion,  all necessary
adjustments (consisting only of normal recurring adjustments) have been included
in the amounts stated below to present fairly the quarterly results when read in
conjunction  with our  consolidated  financial  statements  and notes  which are
included elsewhere in this Form 10-K. Our future quarterly results may fluctuate
depending on, among other  things,  the timing and number of  affiliations  with
medical groups.  In addition,  results of operations for any particular  quarter
are not  necessarily  indicative of results of operations for a full year or for
future periods.
<TABLE>
<CAPTION>

                                               Three Months Ended                          Three Months Ended
                                    ------------------------------------------  -----------------------------------------
                                     Mar. 31    Jun. 30    Sep. 30    Dec. 31    Mar. 31    Jun. 30    Sep. 30    Dec. 31
                                      1998       1998       1998       1998       1999       1999       1999       1999
                                     ----       ----       ----       ----       ----       ----       ----       ----
<S>                                <C>        <C>         <C>        <C>       <C>        <C>        <C>        <C>
Statement of Operations Data:
(in thousands, except for earnings
    per share information)
Net revenue                         $  40,612   $ 51,994   $ 61,097   $ 68,799   $ 73,092   $ 76,021   $ 84,317  $ 91,064
Operating expenses:
   Clinic salaries and benefits        13,340     17,715     19,334     24,287     25,706     27,277     28,989    30,370
   Clinic rent and lease expense        3,199      3,862      4,529      5,597      6,246      7,134      7,340     7,967
   Clinic supplies                      4,858      6,337      6,598      7,081      8,589      8,970      9,514     9,927
   Purchased medical services           8,132     10,657     14,813     11,843     11,912      9,751     13,631    16,157
   Other clinic costs                   4,322      5,636      6,649      9,092      8,819      9,870     10,972    11,571
   General corporate expenses           1,083      1,291      1,233      2,005      2,010      2,253      2,396     2,491
   Depreciation and amortization        1,294      1,749      2,075      2,121      2,776      3,110      3,093     3,316
   Interest expense (revenue), net        472       (170)       (48)       850      1,011      1,266      1,798     2,438
                                     --------    -------    -------    -------   --------  ---------  ---------  --------
   Income before provision for
     income taxes and
     extraordinary charge               3,912      4,917      5,914      5,923      6,023     6,390      6,584      6,827
   Provision for income taxes           1,486      1,868      2,248      2,251      2,289     2,428      2,502      2,594
                                     --------    -------    -------    -------   --------  ---------  ---------  --------
   Net income before
     extraordinary charge               2,426      3,049      3,666      3,672      3,734     3,962      4,082      4,233
   Extraordinary charge - loss on
     extinguishment of debt, net
     of $375 of income taxes              -          -          -         (611)      -          -          -         -
                                     --------    -------    -------    -------   --------  ---------  ---------  --------
   Net income                        $  2,426    $ 3,049    $ 3,666   $  3,061   $  3,734   $  3,962   $ 4,082    $ 4,233
                                   =========   ========   ========   ========   ========   ========   ========   ========

Net earnings per share:
Basic
   Income before
      extraordinary charge        $     0.18   $   0.17   $   0.17   $   0.17   $   0.17   $   0.19   $   0.19   $   0.20
   Extraordinary charge                   -           -         -       (0.03)      -          -         -           -
                                    --------   --------   --------   --------   --------   -------    -------    --------
    Net income                     $    0.18   $   0.17   $   0.17   $   0.14   $   0.17   $   0.19   $   0.19   $   0.20
                                   =========   ========   ========   ========   ========   ========   ========   ========
Diluted
   Income before
      extraordinary charge        $     0.15   $   0.15   $   0.16   $   0.16   $   0.16   $   0.18   $   0.18   $   0.19
   Extraordinary charge                   -          -          -       (0.03)        -          -          -          -
                                     --------   --------   --------   ---------  --------   -------    -------    -----
   Net Income                      $    0.15   $   0.15   $   0.16   $   0.13   $   0.16   $   0.18   $   0.18   $   0.19
                                   =========   ========   ========   ========   ========   ========   ========   ========

Weighted average number of common shares outstanding:

    Basic                             13,616     17,841     21,450     21,514     21,457    20,867     21,053     21,127
                                     ========   ========   ========   ========   ========   =======    =======    =======
    Diluted                           16,491     20,555     23,540     23,331     23,740    22,988     22,978     22,981
                                     ========   ========   ========   ========   ========   =======    =======    =======

Other Financial Data: (in thousands)
Capital expenditures               $   1,213   $    923   $    851   $  1,095   $  1,098   $ 1,667    $ 2,120    $ 2,543
Total revenue (a)                     61,180     73,062     81,254     94,958    106,784   108,514    113,658    121,921

Other Data (at end of period):
Number of communities                     14         16         18         21         23        24         24         25
Affiliated physicians                    440        592        606        683        740       775        790        830
Mid-level providers                      115        123        127        132        155       155        150        155

</TABLE>


a)   Total revenue  represents  amounts  received for professional and ancillary
     services  and  for  other  services,  such  as  contract  billing,  medical
     directorship  and interim  management.  These  amounts are  recorded at the
     estimated realizable amounts, net of contractual and other adjustments. Our
     net  revenue  represents  total  revenue,  reduced by  amounts  paid to the
     medical groups.

Liquidity and Capital Resources

         At December 31, 1999, we had working capital of $52.1 million, compared
to $55.5 million at December 31, 1998.  Net cash provided by operations  for the
year ended  December  31,  1999 was $11.8  million.  Net income,  combined  with
depreciation  and  amortization  and a decrease in other assets,  provided $29.1
million in cash  flows.  This was offset by uses of cash of $17.3  million  that
resulted from deferred  taxes and increases in accounts  receivable,  management
fees  receivable,  due from affiliated  medical groups and prepaid  expenses and
other current assets,  and decreases in accounts payable,  payable to affiliated
medical groups and accrued expenses and other liabilities.

         Our accounts receivable  increased $7.8 million,  net of the effects of
purchase  accounting  since December 31, 1998. This increase is due primarily to
the  increase in revenues in 1999  compared to 1998.  For the fourth  quarter of
1999, the number of days in accounts receivable was 47 days, which is consistent
with the fourth quarter of 1998. While our days outstanding  compares  favorably
within the healthcare industry,  we are nonetheless focusing significant efforts
at all of our clinics to continue  to improve  the  collections  and the overall
business office processes.

         We had aggregate  cash  expenditures  for purchases of clinic assets of
$97.8  million for the year ended  December  31,  1999.  Of this  amount,  $27.7
million  related  primarily  to deferred  payments  associated  with  previously
completed  acquisitions  and $70.1 million related to acquisitions  completed in
1999. Our capital  expenditures were $7.4 million during 1999.  Although each of
the service agreements with our affiliated medical groups requires us to provide
capital  for  equipment,   expansion,  additional  physicians  and  other  major
expenditures,  we have not  committed  a  specific  amount in  advance.  Capital
expenditures  are made  based  partially  upon the  availability  of funds,  the
sources of funds, alternative projects and an acceptable repayment period.

         We had  aggregate  cash  expenditures  of $57.4  million  and issued or
committed to issue an aggregate of approximately  500,000 shares of common stock
for the acquisition of clinic assets during the year ended December 31, 1998. Of
this,  $14.9  million was for  additional  physicians  at  existing  clinics and
deferred payments  associated with previously  completed  acquisitions.  Capital
expenditures amounted to $4.1 million for the year ended December 31, 1998.

         In January  2000, we entered into a two-stage  transaction  in which we
will issue an  aggregate of 550,000  shares of  convertible  preferred  stock to
affiliates of Goldman,  Sachs & Co. for aggregate gross proceeds of $55 million.
The  first  stage of the  transaction,  which was  completed  in  January  2000,
involved the issuance of $16 million principal amount of our senior subordinated
notes and  1,250,000  shares of our common stock for $16 million.  In the second
stage which is expected to be completed in April 2000,  the new  investors  will
exchange the notes,  common  stock,  and an  additional  $39 million for 550,000
shares of our convertible  preferred stock, bringing the total investment to $55
million.  The convertible  preferred stock has a liquidation  preference of $100
per share and is  convertible  into shares of our common  stock at a  conversion
price of $3.25 per share,  subject to adjustment in  accordance  with  customary
anti-dilution provisions.

         On December 17, 1998, we entered into a new revolving  credit  facility
with a  syndicate  of banks,  to provide  for a  three-year  commitment  to fund
revolving credit borrowings of up to $125.0 million for acquisitions and general
working  capital.  During 1999, this credit facility was amended and expanded to
its current  commitment level of $157.5 million.  The commitment is comprised of
$142.5 million  maximum  commitment  that expires  December 17, 2001 and a $15.0
million  commitment  that expires June 27, 2000. The interest rate is set at our
option and  varies  based on our  leverage,  as  follows:  (i) the higher of the
federal  funds rate plus 0.5% to 1.25% or the prime rate plus 0.0% to 0.75%,  or
(ii) the  Eurodollar  rate plus 1.25% to 2.25%.  As of December  31,  1999,  the
effective  interest rate under the credit facility was 8.5%. The credit facility
includes certain restrictive covenants,  including limitations on the payment of
dividends,  as well as  requirements  for the  maintenance of certain  financial
ratios. At the expiration of the revolving credit commitment, we can convert the
outstanding  balance  to a term  loan.  Upon such  conversion,  the  outstanding
balance will be repaid in 5% increments  over eight  quarters,  with the balance
due December 17, 2003. The credit  facility is secured by  substantially  all of
our assets. In obtaining the credit facility and subsequent amendments,  we paid
fees and other  closing  costs of  approximately  $1.7  million,  which has been
capitalized in other assets on our consolidated  balance sheets and is amortized
as an adjustment to interest expense using the effective  interest method. As of
December 31, 1999, we had $156 outstanding and $1.5 million  available,  subject
to certain conditions under the agreement. The amount outstanding was reduced in
January  2000 by the  proceeds  from  the  first  stage of the  Goldman  & Sachs
transaction described above.

         In November  1998,  we  authorized  a common stock  repurchase  program
whereby we may repurchase up to $10.0 million of our common stock.  During 1999,
we purchased 973,164 shares at an average price of $3.95 per share.

         During May 1998, we completed a public offering of 6,900,000  shares of
common stock at a price of $11.00 per share.  Gross and net  proceeds  from that
offering were $75.9 million and $72.5 million,  respectively.  In addition,  net
proceeds  were  reduced by  approximately  $600,000 of expenses  relating to the
offering.

         In connection  with an August 1997  affiliation,  we agreed to lend the
medical group a total of $42.7  million,  the proceeds of which were utilized by
the group's  physicians.  An initial loan of $3.0 million was funded in November
1997,  $16.4 million in December  1997,  $5.83 million in December 1998 and 1999
and additional loans of $5.83 million will be funded each December through 2001.
This note  receivable is recorded in long-term  receivables on our  consolidated
balance  sheet.   The  note  receivable   earns  interest  at  8.0%  and  is  an
interest-only  loan  payable  monthly  through  November  2007,  after which the
balance is to be repaid in annual  installments  through  December  2022.  After
December  2007, an amount equal to  one-twelfth  of the annual  amortization  is
required to be set aside by the physician group each month to fund each upcoming
annual installment.  Certain assets of the affiliated group have been pledged to
us as security  under the loan,  and the loan provides us with certain rights of
offset against distributions to the medical group under the service agreement in
the event of default  under the loan  agreement.  As of December 31,  1999,  the
outstanding  balance of the loan was $31.1  million,  and we  estimate  that the
carrying value of this receivable approximates the fair value.

         In November 1998, we agreed to lend another medical group $8.0 million,
all of which was funded on November  12,  1998.  The purpose of this loan was to
provide  the  group  with  liquidity  for  general  corporate  purposes  and  to
strengthen  the  physician-association  relationship.  Interest is payable to us
monthly at an annual rate of 8.0%.  The principal  will be repaid in 180 monthly
installments  beginning  November 30,  2008.  Certain  assets of the  affiliated
medical group have been pledged to us as security  under the loan,  and the loan
provides us with certain rights of offset against  distributions  to the medical
group  under  the  service  agreement  in the  event of  default  under the loan
agreement. As of December 31, 1999, the outstanding balance of the loan was $8.0
million,  and we estimate that the carrying value this  receivable  approximates
the fair value.

         In connection with a  May 1999  affiliation,  we agreed to lend another
medical group a total of $5.5 million.  The proceeds of this loan are being used
by the group to purchase split-dollar life insurance policies for the physicians
in the group.  An initial  loan of $1.1  million was funded in April  1999,  and
additional  loans of $1.1 million will be funded each April  through  2003.  The
note  receivable  earns  interest at 8.2% and is an  interest-only  loan payable
monthly through April 2009, after which the principal balance is to be repaid in
monthly installments through April 2039.

         In connection with a March 1997 affiliation,  we issued $8.6 million of
notes payable to be paid in three equal annual  installments in April 1998, 1999
and 2000.  The notes bear  interest at 9%, with  interest  payable in options to
purchase  our common stock at a price of $9.00 per share  (valued in  accordance
with the Black-Scholes model),  provided the market price for the stock is above
the exercise  price at the time of payment.  Interest may be paid in cash at the
option of either party if the market price for the stock is $9.00 or less at the
time of payment.

         In connection with an April 1998 affiliation, we issued $7.6 million in
convertible  subordinated  notes.  The  notes  bear  interest  at 4.75%  payable
annually on March 31 and can be  converted  into shares of our common  stock any
time after  April 17,  1999 and prior to March 31, 2005 at a price of $15.35 per
share, subject to adjustment under the note agreements.

         In connection with an August 1999  affiliation,  we issued  convertible
subordinated  notes which accrue  interest at a rate of 5% paid annually on July
30 and  can  be  converted  into  shares  of the  Company's  common  stock  at a
conversion  price of $5.08,  subject  to  adjustment  under the note  agreement.
During  the first  two  years,  the  noteholders  have the  right to redeem  the
outstanding  principle on these  convertible  subordinated  notes under  certain
conditions.   As  of  December  31,  1999,   the  balance  on  these  notes  was
approximately $937,000.

         We had cash and cash  equivalents of $7.6 million at December 31, 1999.
In addition to this,  our  principal  sources of  liquidity at December 31, 1999
were accounts receivable of $63.8 million and availability of $1.5 million under
the credit facility.  We believe that this,  combined with the proceeds from the
Goldman Sachs transaction,  will be sufficient to meet our working capital needs
for at least the next  twelve  months.  Our future  acquisition,  expansion  and
capital  expenditure  programs  may,  however,  require  substantial  amounts of
additional  capital  resources.  To meet the  additional  capital needs of these
programs,  we will  continue  to  evaluate  alternative  sources  of  financing,
including short- and long-term bank  indebtedness,  additional  equity and other
forms of financing,  the availability and terms of which will depend upon market
and other  conditions.  There can be no assurance that we will be able to obtain
additional financing at acceptable terms.

Forward-Looking Statements

         This report  includes  "forward-looking  statements"  under the Private
Securities  Litigation Reform Act of 1995 about anticipated  results,  including
statements  as to  operating  results,  liquidity  and  capital  resources,  and
expansion  into  and  within  additional   communities.   These  forward-looking
statements  are based upon our internal  estimates,  which are subject to change
because  they  reflect  preliminary  information  and our  assumptions.  Thus, a
variety of factors  could  cause our actual  results  and  experience  to differ
materially from the anticipated  results or other expectations we have expressed
in the forward-looking  statements.  The factors that could cause actual results
or outcomes to differ from our expectations include our ability to:

o        continue to operate profitably,

o        expand in our existing communities,

o        establish operations in additional communities, and

o        obtain additional financing upon terms acceptable to us,

along with the  uncertainties  and other factors described in this report and in
the our public filings and reports.

Item 8.  Financial Statements

         Our  Consolidated  Financial  Statements  are listed in Item  14(a)(1),
included at the end of this report  beginning on page F-1, and are  incorporated
herein by reference.

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

         None


<PAGE>



                                    Part III

Item 10.  Directors and Executive Officers of the Registrant

         The  information  required  by Item 10 will be  contained  in our proxy
statement  for our 2000  annual  meeting  of  stockholders  under  the  captions
"Directors and Nominees,"  "Executive  Officers of the Company" and  "Compliance
with Section 16(a) of the Securities  Exchange Act of 1934." That information is
incorporated by reference in this report.

Item 11.  Executive Compensation

         The  information  required  by Item 11 will be  contained  in our proxy
statement  for our  2000  annual  meeting  of  stockholders  under  the  caption
"Executive  Compensation." That information is incorporated by reference in this
report.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         The  information  required  by Item 12 will be  contained  in our proxy
statement for our 2000 annual meeting of stockholders  under the caption "Common
Stock Ownership of Certain  Beneficial  Owners and Management." That information
is incorporated by reference in this report.

Item 13.  Certain Relationships and Related Transactions

         The  information  required  by Item 13 will be  contained  in our proxy
statement  for our  2000  annual  meeting  of  stockholders  under  the  caption
"Compensation   Committee  Interlocks  and  Insider  Participation  and  Certain
Transactions." That information is incorporated by reference by this report.


<PAGE>



                                     Part IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K.

         (a) (1) List of Financial  Statements.  The  following is a list of the
financial  statements  included at the end of this Report of Form 10-K beginning
on page F-1:

     Report of Independent Public Accountants
     Consolidated Balance Sheets as of December 31, 1998 and 1999
     Consolidated Statements of Operations for the Three Years Ended
          December 31, 1997, 1998 and 1999
     Consolidated Statements of Stockholders' Equity for the
          Three Years Ended December 31, 1997, 1998 and 1999
     Consolidated  Statements of Cash Flows for the Three Years Ended
          December 31, 1997, 1998 and 1999
     Notes to Consolidated Financial Statements

              (2) List of Financial Statement Schedules. All schedules have been
omitted  because  they  are not  applicable  or not  required,  or the  required
information is provided in the financial statements or notes thereto.

         (b)  Reports on Form 8-K.

         No Reports on Form 8-K were filed during the fourth quarter of 1999.

         (c) List of Exhibits.  The  following is a list of exhibits  furnished.
Copies of exhibits will be furnished upon written  request of any stockholder at
a charge of $.25 per page plus postage.
<TABLE>
<CAPTION>

Exhibit
Number                                               Description
<S>               <C>
1                 Form of Purchase Agreement. (1)
2                 Asset Purchase  Agreement dated as of January 19, 1996 by and among ProMedCo,  Inc.,  ProMedCo of
                  Abilene, inc. and Abilene Diagnostic Clinic, P.L.L.C. (2)
2(a)              First  Amendment to Asset Purchase  Agreement dated as of January 19, 1996 by and among ProMedCo,
                  Inc., ProMedCo of Abilene, inc., and Abilene Diagnostic Clinic, P.L.L.C. (2)
2.1               Plan and Agreement  for  Reorganization  dated as of September 13, 1996 by and between  ProMedCo,
                  Inc., ProMedCo of Temple, Inc., and King's Daughters Clinics, P.A. (2)
2.2               Agreement  for  Statutory  merger  dated as of November 7, 1996 by and  between  ProMedCo,  Inc.,
                  ProMedCo of Northern Nevada, Inc. and Western medical Management Corporation, Inc. (2)
3.1               Form of Restated Certificate of Incorporation of ProMedCo Management Company. (2)
3.2               By-laws of ProMedCo Management Company. (2)
4                 Form of Rights Agreement. (2)
10.1              Interim Service  Agreement dated as of January 19, 1996 by and between ProMedCo of Abilene,  inc.
                  and Abilene Diagnostic Clinic, P.L.L.C. (2)(3)
10.1(a)           First Amendment to Service  Agreement and Interim Service  Agreement dated as of January 19, 1996
                  by and between ProMedCo of Abilene, inc. and Abilene Diagnostic Clinic, P.L.L.C. (2)
10.2              Service  Agreement  dated as of January  19, 1996 by and between  ProMedCo of Abilene,  Inc.  and
                  Abilene Diagnostic Clinic, P.L.L.C. (2)(3)
10.3              Service Agreement dated as of March 12, 1996 by and between ProMedCo,  Inc. of Cullman,  Inc. and
                  Cullman Primary Care, P.C. (2)(3)
10.4              Service  Agreement  dated as of April 1, 1996 by and  between  ProMedCo  of  Mayfield,  Inc.  and
                  Morgan-Haugh, P.S.C. (2)(3)
10.5              Amended and Restated Service  Agreement dated as of June 24, 1996 by and between ProMedCo of Lake
                  Worth, Inc. and Tarrant Family Practice, P.A. (2)(3)
10.6              Service  Agreement  dated as of June 30, 1995 by and between  ProMedCo of Denton,  Inc. and North
                  Texas Medical Surgical Clinic, P.A. (2)(3)
10.7              Credit  Agreement  dated as of June 12,  1996 among  ProMedCo,  Inc.,  the  Lenders  referred  to
                  therein, and NationsCredit Commercial Corporation, as Agent. (2)
10.8              1996 Stock Option Plan. (2)
10.9              Employee Stock Purchase Plan. (2)
10.10             Employment Agreement with H. Wayne Posey. (2)
10.11             Employment Agreement with Richard R. D'Antoni. (2)
10.12             Amended and Restated Employment Agreement with Dale K. Edwards. (2)
10.13             Employment Agreement with R. Alan Gleghorn. (2)
10.14             Employment Agreement with Rick E. Weymier. (2)
10.15             Employment Agreement with Deborah A. Johnson. (2)
10.16             Service  Agreement  dated as of  September  1, 1996 by and between  ProMedCo of Temple,  Inc. and
                  Physicians of King's Daughters, P.A. (2)
10.17             Employment Agreement with Robert D. Smith. (2)
10.18             Form of Service  Agreement by and between  ProMedCo of Northern  Nevada,  Inc. and Knutzen Goring
                  Medical Group, Ltd. DBA The Northern Nevada Medical Group. (2)(3)
10.19             1994 Stock Option Plan. (2)
10.20             Asset  Purchase  Agreements  as of April 23, 1997 by and  between  ProMedCo  Management  Company,
                  ProMedCo of  Southwest  Florida,  Inc.,  Naples  Medical  Center,  P.A.  and Naples  Obstetrics &
                  Gynecology,  M.D.,  P.A.  Included as Appendix 2.9A to the Agreement is the Service  Agreement by
                  and between ProMedCo of Southwest Florida and Naples Medical Center, P.A. (4)
10.21             Asset Purchase Agreement as of August 12, 1997 by and between ProMedCo  Management  Company,  PHB
                  Management Company,  Inc. and HealthAmerica  Pennsylvania,  Inc. Service Agreement by and between
                  PHB Management Company, Inc. and HealthAmerica Pennsylvania, Inc. effective October 1, 1997. (5)
10.22             Stock  Purchase  Agreement  as of October 8, 1997 by and  between  ProMedCo  Management  Company,
                  ProMedCo of Sarasota,  Inc., IMG, Inc. (formerly known as Intercoastal  Medical Group, Inc.), and
                  Intercoastal  Medical  Group,  Inc.  Service  Agreement  by and between  ProMedCo of Sarasota and
                  Intercoastal Medical Group, Inc., effective August 1, 1997. (6)
10.23             Agreement for Statutory Merger by and between HP Acquisition  Corp., a Wholly Owned Subsidiary of
                  ProMedCo  Management  Company,  with PBMA Health Systems,  Inc. and Health Plans, Inc. dated July
                  25, 1997. (7)
10.24             Amended and Restated  Credit  Agreement  dated as of November 13, 1997 among ProMedCo  Management
                  Company, the Lenders referred to therein, and NationsCredit Commercial Corporation, as Agent. (8)
10.25             Agreement for Statutory Merger between ProMedCo Management Company,  ProMedCo of Berkshire,  Inc.
                  and Berkshire Physicians & Surgeons, P.C., dated April 14, 1998. (9)
10.26             Service Agreement between  Commonwealth  Health Management  Services,  Inc. and BP&S, P.C., dated
                  April 1, 1998. (9)
10.27             Second  Amended  and  Restated  Credit  Agreement  dated as of April 16,  1998 among  ProMedCo  Management
                  Company, the Lenders referred to therein, and NationsCredit Commercial Corporation, as Agent. (1)
10.28             Credit  Agreement dated as of December 17, 1998 among ProMedCo  Management  Company,  the Lenders referred
                  to therein and NationsBank, N.A. as Agent and NationsBanc Montgomery Securities, LLC, as Arranger
11                Computation of Net Income Per Share.
22                List of Subsidiaries.
23.1              Consent of Independent Public Accountants.
27                Financial Data Schedule.
</TABLE>


(1)  Filed  as an  exhibit  of the same  number  to the  Company's  registration
     statement on Form S-3 (File No. 333-50105).
(2)  Filed  as an  exhibit  of the same  number  to the  Company's  registration
     statement on Form S-1 (File No. 333-10557).
(3)  Confidential  treatment  has been  requested  and an  application  has been
     separately filed with the Commission.
(4)  Filed as  exhibit  2.3 to the  Company's  report on Form 8-K filed with the
     Commission on May 7, 1997.
(5)  Filed as an  exhibit  to the  Company's  report on Form 8-K filed  with the
     Commission on October 15, 1997.
(6)  Filed as an  exhibit  to the  Company's  report on Form 8-K filed  with the
     Commission on October 23, 1997.
(7)  Filed as an  exhibit  to the  Company's  report on Form 8-K filed  with the
     Commission on December 17, 1997.
(8)  Filed as an  exhibit  to the  Company's  report on Form 10-K filed with the
     Commission on March 26, 1998.
(9)  Filed as an  exhibit  to the  Company's  report on Form 8-K filed  with the
     Commission on May 1, 1998.


<PAGE>



                                   SIGNATURES

       Pursuant  to the  requirements  of Section 13 or 15(d) 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.

                                PROMEDCO MANAGEMENT COMPANY

                                By:   /s/ H. WAYNE POSEY
                                      ------------------
                                       H. Wayne Posey
                                       Chairman, President and Chief Executive
                                       Officer

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the  following  persons in the  capacities  and on the
dates indicated.


<TABLE>
<CAPTION>

              Signature                              Title                                 Date

<S>                                      <C>                                         <C>
/s/ H. WAYNE POSEY                       Chairman, President, Chief Executive         March 30, 2000
--------------------------------------   Officer and Director
H. Wayne Posey                           (Principal Executive Officer)



/s/ ROBERT D. SMITH                      Senior Vice President-Finance and            March 30, 2000
--------------------------------------   Chief Financial Officer
Robert D. Smith                          (Principal Financial and Accounting
                                         Officer)


/s/ RICHARD R. RAGSDALE                  Director                                     March 30, 2000
--------------------------------------
Richard R. Ragsdale

/s/ DAVID T. BAILEY, M.D.                Director                                     March 30, 2000
--------------------------------------
David T. Bailey, M.D.

/s/ CHARLES J. BUYSSE, M.D.              Director                                     March 30, 2000
--------------------------------------
Charles J. Buysse, M.D.

/s/ E. THOMAS CHANEY                     Director                                     March 30, 2000
--------------------------------------
E. Thomas Chaney

/s/ JAMES F. HERD, M.D.                  Director                                     March 30, 2000
--------------------------------------
James F. Herd, M.D.

/s/ JACK W. MCCASLIN                     Director                                     March 30, 2000
--------------------------------------
Jack W. McCaslin

/s/ SANJEEV K. MEHRA                     Director                                     March 30, 2000
--------------------------------------
Sanjeev K. Mehra
</TABLE>


<PAGE>




                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

ProMedCo Management Company                                                                                   Page
                                                                                                             -----
<S>                                                                                                          <C>
Report of Independent Public Accountants.....................................................................   F-1

Consolidated Balance Sheets as of December 31, 1998 and 1999 ................................................   F-2

Consolidated Statements of Operations for the Three Years Ended December 31, 1997, 1998 and
     1999....................................................................................................   F-4

Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31,
     1997, 1998 and 1999.....................................................................................   F-5

Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997, 1998 and
     1999....................................................................................................   F-6

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

</TABLE>



<PAGE>















                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
ProMedCo Management Company:

We have  audited  the  accompanying  consolidated  balance  sheets  of  ProMedCo
Management Company (a Delaware  corporation) and subsidiaries as of December 31,
1999  and  1998,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1999. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of ProMedCo Management Company and
subsidiaries  as of  December  31,  1999  and  1998,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting  principles  generally accepted
in the United States.

                            ARTHUR ANDERSEN LLP



Fort Worth, Texas,
March 25, 2000


<PAGE>



                  PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                     (All amounts are expressed in thousands)

<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                                --------------------------------
                                 ASSETS                                              1998              1999
                                 ------                                         --------------    --------------
<S>                                                                             <C>               <C>
Current assets:
         Cash and cash equivalents                                              $       13,871    $        7,625
         Accounts receivable, net of allowances of approximately $45,281
              and $53,269, respectively                                                 51,375            63,811
         Management fees receivable                                                      8,490             9,905
         Due from affiliated medical groups                                              9,334            13,337
         Deferred income taxes                                                           2,206               537
         Prepaid expenses and other current assets                                      13,043            16,102
                                                                                --------------    --------------

                      Total current assets                                              98,319           111,317

Property and equipment, net of accumulated depreciation of approximately
         $5,668 and $10,644, respectively                                               15,125            24,352

Intangible assets, net of accumulated amortization of approximately
         $5,967 and $13,769, respectively                                              153,402           227,006

Long term receivables                                                                   40,429            50,355

Deferred income taxes                                                                        -               993

Other assets                                                                             3,133             5,290
                                                                                --------------    --------------
                      Total assets                                              $      310,408    $      419,313
                                                                                ==============    ==============
</TABLE>


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


<PAGE>



                  PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

                   CONSOLIDATED  BALANCE  SHEETS - (Continued)
             (All amounts are  expressed  in thousands  except for per
                                   share amounts)
<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                                --------------------------------
                  LIABILITIES AND STOCKHOLDERS' EQUITY                               1998              1999
                  ------------------------------------                          --------------    --------------
<S>                                                                             <C>               <C>
Current liabilities:
         Accounts payable                                                       $        4,683    $        6,418
         Accrued salaries, wages and benefits                                            8,146             7,578
         Payable to affiliated medical groups                                            9,455            10,297
         Accrued purchased medical services                                              6,087             9,722
         Accrued expenses and other current liabilities                                  7,676             7,321
         Current maturities of notes payable                                             3,232            11,463
         Current portion of obligations under capital leases                               557               476
         Current portion of deferred purchase price                                      2,137             2,293
         Income taxes payable                                                              847             3,643
                                                                                --------------    --------------
                      Total current liabilities                                         42,820            59,211

Notes payable, net of current maturities                                                58,130           149,674
Obligations under capital leases, net of current portion                                   701               343
Deferred purchase price, net of current portion                                         25,290            17,592
Convertible subordinated notes payable                                                   7,635             9,484
Deferred income taxes                                                                    2,872                 -
Other long term liabilities                                                                312               378
                                                                                --------------    --------------
                      Total liabilities                                                137,760           236,682
                                                                                --------------    --------------

Commitments and contingencies

Stockholders' equity:

         Preferred stock, $0.01 par value, 20,000 shares authorized and no
              shares issued and outstanding                                             -                 -
         Common stock, $0.01 par value; 50,000 shares authorized; 21,024 and
              21,778 shares issued in 1998 and 1999, respectively; 21,024 and
              21,033 outstanding in 1998 and 1999, respectively                            211               219
         Additional paid-in-capital                                                    152,786           156,106
         Common stock to be issued, 413 and 12 shares, in 1998 and 1999,
              respectively                                                               6,005                90
         Treasury stock, 745 shares in 1999                                              -                (2,865)
         Stockholder notes receivable                                                     (370)             (250)
         Retained earnings                                                              14,016            29,331
                                                                                --------------    --------------
                      Total stockholders' equity                                       172,648           182,631
                                                                                --------------    --------------

                      Total liabilities and stockholders' equity                $      310,408    $      419,313
                                                                                ==============    ==============
</TABLE>


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


<PAGE>



               PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF OPERATIONS
                   -------------------------------------
   (All amounts are expressed in thousands, except for net earnings per share)
<TABLE>
<CAPTION>

                                                                           Years Ended December 31,
                                                              --------------------------------------------------
                                                                    1997             1998               1999
                                                              -------------     --------------    --------------
<S>                                                           <C>               <C>               <C>
Net revenue                                                   $      80,641     $      222,502    $      324,494

Operating expenses:
     Clinic salaries and benefits                                    29,860             74,676           112,342
     Clinic rent and lease expense                                    7,016             17,187            28,687
     Clinic supplies                                                  9,667             24,874            37,000
     Purchased medical services                                       7,947             45,444            51,451
     Other clinic costs                                              10,884             25,699            41,232
     General corporate expenses                                       3,793              5,613             9,150
     Depreciation and amortization                                    2,943              7,239            12,295
     Interest expense, net                                              456              1,104             6,513
                                                              -------------     --------------    --------------
              Total operating expenses                               72,566            201,836           298,670
                                                              -------------     --------------    --------------

Income before provision for income taxes and
     extraordinary charge                                             8,075             20,666            25,824

Provision for income taxes                                            2,602              7,853             9,813
                                                              -------------     --------------    --------------

Net income before extraordinary charge                                5,473             12,813            16,011

Extraordinary charge - loss on extinguishment of debt, net
     of income taxes of approximately $375                            -                   (611)            -
                                                              -------------     --------------    --------------

Net income                                                    $       5,473     $       12,202    $       16,011

Net earnings per share:
     Basic

         Income before extraordinary charge                   $        0.48     $         0.69    $         0.76
         Extraordinary charge                                         -                  (0.03)            -
                                                              -------------     --------------    --------------
              Net income                                      $        0.48     $         0.66    $         0.76
                                                              =============     ==============    ==============
     Diluted

         Income before extraordinary charge                   $        0.38     $         0.61    $         0.71
         Extraordinary charge                                         -                  (0.03)            -
                                                              -------------     --------------    --------------
              Net income                                      $        0.38     $         0.58    $         0.71
                                                              =============     ==============    ==============
Weighted average number of common shares outstanding:

     Basic                                                           11,376             18,622            21,108
     Diluted                                                         14,224             20,958            23,141

</TABLE>

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


<PAGE>



                  PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                     (All amounts are expressed in thousands)
<TABLE>
<CAPTION>

                                 Class B               Additional    Common                          Stockholder        Total
                                 Common     Common      Paid-In-    Stock To  Treasury    Notes       Retained      Stockholders'
                                  Stock      Stock      Capital     Be Issued   Stock   Receivable    Earnings         Equity
<S>                          <C>          <C>         <C>           <C>         <C>    <C>          <C>           <C>
Balance,
       December 31, 1996     $        12   $      32  $   11,987     $  2,303   $  -   $    (151)     $  (3,659)   $   10,524

       Common stock
       issued in
       initial public
       offering,  net              -              40      31,705       -           -           -           -           31,745

       Redeemable
       preferred
       shares converted            -               5       2,953       -           -           -           -            2,958

       Redeemable
       common shares
       converted                   -               2         990       -           -           -           -              992

       Class B
       common converted              (12)         12       -           -           -           -           -            -

       Warrants and
       options
       exercised                   -               1          92       -           -           -           -               93

       Subordinated
       notes payable
       converted                   -           -              35       -           -           -           -               35

       Common stock
       issued and
       to be issued, net           -              16      11,566      17,818       -            (250)      -           29,150

       Treasury stock
       purchased
       and retired                 -              (1)       (381)      -           -           -           -             (382)

       Stockholder
       notes payments              -           -           -           -           -              31       -               31

       Net income                  -           -           -           -           -           -           5,473        5,473
                               ---------   ---------   ---------   ---------    --------    --------    --------    ---------

Balance,
       December 31, 1997           -             107      58,947      20,121       -            (370)      1,814       80,619

       Common stock
       offering, net               -              69      71,820       -           -           -           -           71,889

       Warrants and
       options
       exercised                   -               4         547       -           -           -           -              551

       Subordinated notes
       payable converted           -               1         684       -           -           -           -              685

       Common stock
       issued and to be
       issued, net                 -              30      20,788     (14,116)      -           -           -            6,702

       Net income                  -           -           -           -           -           -          12,202       12,202
                               ---------   ---------   ---------   ---------    --------    --------    --------    ---------

Balance,
       December 31, 1998           -             211     152,786       6,005       -            (370)     14,016      172,648


       Warrants and
       options exercised           -               1          21       -             982       -            (696)         308

       Subordinated notes
       payable converted           -               1         105       -           -           -           -              106

       Common stock
       issued and to
       be issued, net              -               6       3,194      (5,915)      -           -           -           (2,715)

       Stockholder
       notes payments              -           -           -           -           -             120       -              120

       Purchase
       of treasury stock           -                       -           -          (3,847)      -           -           (3,847)

       Net income                  -           -           -           -           -           -          16,011       16,011
                               ---------   ---------   ---------   ---------    --------    --------    --------    ---------

Balance,
       December 31, 1999       $   -       $     219   $ 156,106   $      90    $ (2,865)   $   (250)   $ 29,331    $ 182,631
                               =========   =========   =========   =========    ========    ========    ========    =========
</TABLE>

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


<PAGE>




                  PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     (All amounts are expressed in thousands)
<TABLE>
<CAPTION>


                                                                           Years Ended December 31,
                                                               -------------------------------------------------
                                                                    1997             1998               1999
                                                               -------------     -------------    --------------
<S>                                                            <C>               <C>              <C>
Cash flows from operating activities:
    Net income before extraordinary charge                     $       5,473     $      12,813    $      16,011
    Extraordinary charge                                               -                  (611)           -
    Adjustments to reconcile net income to net cash
       provided by (used in) operating activities (net of
       effects of purchase transactions)-
       Depreciation and amortization                                   2,943             7,239           12,295
       Deferred income taxes                                             330             1,267             (462)
       Changes in assets and liabilities-
          Accounts receivable                                         (7,179)          (19,963)          (7,788)
          Management fees receivable                                     457            (6,644)          (1,610)
          Due from affiliated medical groups                          (1,972)           (6,463)          (3,373)
          Prepaid expenses and other assets                           (3,625)           (1,227)          (2,393)
          Other assets                                                  (402)             (640)             775
          Accounts payable                                             1,558            (5,122)            (699)
          Payable to affiliated medical groups                         5,191             4,353             (389)
          Accrued expenses and other liabilities                      (1,500)            2,474             (573)
                                                               --------------    -------------    --------------
              Net cash provided by (used in) operating
                 activities                                            1,274           (12,524)          11,794
                                                               -------------     --------------   -------------

Cash flows from investing activities:

    Purchases of property and equipment                               (2,818)           (4,082)          (7,428)
    Payments for acquisitions, net of cash                           (22,392)          (57,373)         (97,841)
    Increase in notes receivables (net of effects of
       purchase transactions)                                        (20,024)          (17,458)          (5,523)
                                                               --------------    --------------   --------------
              Net cash used in investing activities                  (45,234)          (78,913)        (110,792)
                                                               --------------    -------------    --------------

Cash flows from financing activities:

    Borrowings under notes payable                                    30,551           132,775          109,500
    Payments on notes payable                                         (2,839)         (114,778)         (12,832)
    Payments on capital leases                                          (562)             (425)            (504)
    Payment of deferred financing costs                                 (301)           (1,008)            (985)
    Proceeds from issuance of common stock                            31,838            72,983              366
    Purchase of treasury stock                                          (382)           -                (2,913)
    (Issuance) payments of stockholder notes receivable                 (218)           -                   120
                                                               --------------    -------------    -------------

              Net cash provided by financing activities               58,087            89,547           92,752
                                                               -------------     -------------    -------------

Increase (decrease) in cash and cash equivalents                      14,127            (1,890)          (6,246)

Cash and cash equivalents, beginning of year                           1,634            15,761           13,871
                                                               -------------     -------------    -------------

Cash and cash equivalents, end of year                         $      15,761     $      13,871    $       7,625
                                                               =============     =============    =============
Supplemental disclosure of cash flow information (See Notes 3
    and 7):
    Cash paid during the year-
       Interest expense                                        $         689     $       3,165    $       9,227
       Income taxes                                            $       1,299     $       6,668    $       7,475
</TABLE>

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


<PAGE>



                  PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1997, 1998 and 1999

1.   DESCRIPTION OF BUSINESS
     -----------------------

ProMedCo   Management  Company   ("ProMedCo"  or  the  "Company"),   a  Delaware
corporation,  is a medical  services  company that manages and  coordinates  the
delivery of a wide variety of healthcare services in non-urban markets. To enter
these markets,  the Company typically affiliates with a leading medical group in
a community,  thus providing the opportunity  for increasing  control of medical
expenditures  in these  communities.  The Company  then expands its market share
through affiliations with additional primary care physicians and specialists and
selective  additions of ancillary  services.  In addition to providing operating
and  expansion  capital,  the Company  provides a broad range of  strategic  and
management  expertise  and  services.  The  Company  currently  operates  in  25
communities  throughout the United States,  where it is affiliated  with medical
groups comprised of approximately 830 physicians and 155 mid-level providers. In
addition,  the Company is  associated  with  approximately  1,850  physicians in
associated independent practice association ("IPA") networks.

The Company, through its wholly-owned  subsidiaries,  typically acquires certain
net assets of medical groups and enters into long term service  agreements  with
these groups.  Under the service agreements the Company provides  administrative
and technical support for professional  services rendered by the medical groups.
The Company is reimbursed for all clinic expenses, as defined in the agreements,
and  participates  at varying  levels in the excess of total revenue over clinic
expenses.

2.   SIGNIFICANT ACCOUNTING POLICIES
     -------------------------------

Basis of Presentation/Basis of Consolidation

The consolidated financial statements have been prepared on the accrual basis of
accounting  and  include  the  accounts  of the  Company  and  its  wholly-owned
subsidiaries. The Company's subsidiaries acquire the operating assets and assume
certain  liabilities  of the  medical  groups  and  account  for  the  Company's
management  activities  with the medical  groups under the  Company's  long term
service  agreements.  The Company does not consolidate the operating results and
accounts of the medical groups under EITF 97-2, "Applications of FASB No. 94 and
APB No. 16 to Physician Practice  Management Entities and Certain other Entities
under Contracted  Management  Agreement." All significant  intercompany accounts
and transactions have been eliminated.

Certain  prior  year  balances  have been  reclassified  to  conform to the 1999
presentation.

Net Revenue

Net revenue  represents total revenue reduced by amounts paid to medical groups.
The amounts  paid to medical  groups  (typically  80-85% of the medical  groups'
operating income)  represents amounts paid to the groups pursuant to the service
agreements  between  the Company  and the groups and  primarily  consists of the
compensation cost of the group's physicians.  Under the service agreements,  the
Company  provides each medical group with the  facilities  and equipment used in
its  medical  practice,   assumes  responsibility  for  the  management  of  the
operations of the clinic,  and employs  substantially  all of the  non-physician
personnel. Net revenue is detailed as follows (in thousands):
<TABLE>
<CAPTION>

                                                                   1997             1998              1999
                                                              -------------     --------------   -------------
<S>                                                           <C>               <C>              <C>
              Total revenue                                   $     127,716     $      310,454   $     450,877
              Amounts paid to medical groups                         47,075             87,952         126,383
                                                              -------------     --------------   -------------
              Net revenue                                     $      80,641     $      222,502   $     324,494
                                                              =============     ==============   =============
</TABLE>

Total  revenue  consists  primarily of billings  and charges to patients,  third
party payors and others and payments  received  under  capitated  contracts  for
professional  and  ancillary  services  rendered.  Total  revenue also  includes
amounts earned for other services rendered,  including contract billing; medical
directorships;   interim  management;   strategic  and  financial  planning  and
management  consulting.  Revenue is recorded at the estimated realizable amount,
net of  contractual  and other  adjustments.  Revenue under certain  third-party
payor agreements is subject to audit and retroactive adjustments. Provisions for
third-party  settlements and adjustments are estimated in the period the related
services are rendered  and adjusted in future  periods as the final  settlements
are  determined.  There are no material  claims,  disputes,  or other  unsettled
matters   that   exist  to   management's   knowledge   concerning   third-party
reimbursements.  In  addition,  management  believes  there  are no  retroactive
adjustments that would be material to the Company's financial statements.

Accounts Receivable

Accounts receivable  principally  represents receivables from patients and other
third party payors for medical  services  provided by the medical  groups.  Such
amounts are recorded net of  contractual  allowances  and  estimated  bad debts.
Management   continually   monitors  and  periodically  adjusts  its  allowances
associated  with these  receivables  based on estimated  collection  and payment
rates.  Any  adjustments  to these  estimates  are made in the period  that they
become known and quantifiable.  Under the terms of the service  agreements,  the
medical groups retain a percentage  (typically  80-85%) of the risks  associated
with uncollectible receivable amounts.

Concentration of Risk

During 1997, 1998 and 1999,  approximately  25%, 30% and 30%,  respectively,  of
total  revenue  was  received  under  government-sponsored  healthcare  programs
(principally,  the  Medicare  and Medicaid  programs).  The medical  groups have
numerous  agreements with managed care organizations and other payors to provide
services based on negotiated fee schedules.  The Company also receives  payments
under capitation  arrangements with various managed care  organizations.  During
1997,  1998 and 1999,  approximately  16%, 21%, and 17%, respectively,  of total
revenue was received under capitation  arrangements.  No individual managed care
organization or other payor is material to the Company.

For the year ended December 31, 1999, the Company's  Champaign,  Illinois market
represented  approximately 19% of the Company's net revenue. No other individual
market contributed 10% or more of the Company's net revenue.  For the year ended
December  31,  1998,  two of the  Company's  markets,  Champaign,  Illinois  and
Pittsfield, Massachusetts, contributed 25% and 14% of the Company's net revenue,
respectively.

General Corporate Expenses

General  corporate  expenses  represent  primarily  the salaries and benefits of
corporate  headquarters  personnel,   rent,  travel,  and  other  administrative
expenses.

Net Earnings Per Share

Basic EPS is calculated by dividing income  available to common  stockholders by
the weighted  average  number of common  shares  outstanding  during the period.
Common  stock to be issued is  assumed  to be common  stock  outstanding  and is
included in the weighted  average  number of common shares  outstanding  for the
basic  EPS  calculation.  Options,  warrants,  and  other  potentially  dilutive
securities are excluded from the calculation of basic EPS.  Diluted EPS includes
the options and warrants using the treasury method, and convertible subordinated
notes,  using the if-converted  method,  that are excluded from basic EPS to the
extent that these securities are not anti-dilutive.

For the years ended  December 31, 1997 and 1998,  the  convertible  subordinated
notes payable have been excluded from diluted EPS because they are considered to
be anti-dilutive. Following is a reconciliation of basic and diluted EPS for the
years ended  December 31, 1997,  1998 and 1999 (amounts in thousands  except for
per share amounts):

<TABLE>
<CAPTION>


                                                                      Income           Shares          Per-Share
                                                                    (Numerator)     (Denominator)       Amount
<S>                                                               <C>              <C>               <C>
December 31, 1997
         Basic EPS                                                $        5,473           11,376    $      0.48
                                                                                                     ===========
         Effect of dilutive securities:
              Options                                                    -                    657
              Warrants                                                   -                  2,191
                                                                  --------------    -------------
         Diluted EPS                                              $        5,473           14,224    $      0.38
                                                                  ==============    =============    ===========

December 31, 1998
         Basic EPS, income before extraordinary charge            $       12,813           18,622    $      0.69
                                                                                                     ===========
         Effect of dilutive securities:
              Options                                                     -                   402
              Warrants                                                    -                 1,934
                                                                  --------------    -------------
         Diluted EPS, income before extraordinary charge                  12,813           20,958    $      0.61

         Extraordinary charge - loss on extinguishment of
              debt, net of $375 of income taxes                             (611)          -               (0.03)
                                                                  --------------    -------------    -----------
         Diluted EPS                                              $       12,202           20,958    $      0.58
                                                                  ==============    =============    ===========
December 31, 1999
         Basic EPS                                                $       16,011           21,108    $      0.76
                                                                                                     ===========
         Effect of dilutive securities:
              Options                                                     -                   100
              Warrants                                                    -                 1,332
              Convertible subordinated notes payable                         305              601
                                                                  --------------    -------------
         Diluted EPS                                              $       16,316           23,141    $      0.71
                                                                  ==============    =============    ===========
</TABLE>


Cash and Cash Equivalents

The Company  considers all highly liquid  investments  with  maturities of three
months or less when purchased to be cash equivalents.  Cash and cash equivalents
as  of  December  31,  1998  and  1999,  include  approximately  $4,738,000  and
$3,159,000,  respectively,  of cash held in escrow  accounts  for the payment of
premiums under split-dollar life insurance contracts.  The related liability for
these premiums is included in deferred purchase price.

Management Fees Receivable

Management fees receivable  represent amounts receivable from affiliated medical
groups for interim  management and other  services.  These amounts are typically
received within one to four months after the services are rendered.

Property and Equipment

Property  and  equipment  are  stated  at cost.  Depreciation  of  property  and
equipment  are  calculated  using the  straight-line  method over the  estimated
useful lives of the assets,  which range from three to fifteen years.  Leasehold
improvements  are  amortized  on a  straight-line  basis over the shorter of the
lease term or  estimated  useful life of the  assets.  Routine  maintenance  and
repairs are charged to expense as incurred, while major renewals or improvements
are capitalized.

Intangible Assets

Service Agreement Rights

The  Company's  affiliations  typically  involve the  purchase  of tangible  and
intangible  assets and the  assumption of certain  liabilities of the affiliated
medical groups.  As part of the purchase  allocation,  the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each  acquisition,  the Company
enters into long term service  agreements with the medical  groups.  The service
agreements  are  typically  for a term of 40 years and cannot be  terminated  by
either party  without  cause,  consisting  primarily of  bankruptcy  or material
default.

In connection with the allocation of purchase price to  identifiable  intangible
assets,  the  Company  analyzes  the  nature of each  group with which a service
agreement is entered  into,  including  the number of  physicians in each group,
number of  service  sites and  ability  to recruit  additional  physicians,  the
group's  relative  market  position,  the  length of time each group has been in
existence, and the term and enforceability of the service agreement. Because the
Company  does  not  practice  medicine,  maintain  patient  relationships,  hire
physicians,  or  enter  into  employment  and  noncompete  agreements  with  the
physicians,  the intangible asset created in the purchase  allocation process is
associated solely with the service agreement with the medical group.

The Company believes that there is no material value allocable to the employment
and  noncompete  agreements  entered into  between the group and the  individual
physicians.  The primary economic beneficiary of these agreements is the medical
group,  an entity that the Company does not legally  control.  In addition,  any
damages under the  agreements  are paid solely to the medical group for purposes
of replacing  departing  physicians.  Generally,  due to low expected  physician
turnover  in the  industry  and the  ability  of the group to  actively  replace
departing physicians,  there would be no significant economic loss to either the
medical  group or the Company due to  physician  departure.  The medical  groups
continually  recruit physicians and, as appropriate and necessary,  subsequently
add  qualified  physicians to the group.  This manner of  operations  allows the
medical  group to  perpetuate  itself  as  individual  physicians  retire or are
otherwise  replaced.  The  Company  believes  that the groups  with which it has
service  agreements are thus long- lived entities with an  indeterminable  life,
and that the physicians,  customer  demographics,  and various contracts will be
continuously  replaced. The service agreement intangible is being amortized on a
straight-line  method over a composite  average life of 25 years. (See also Note
10).

Excess of Cost of Acquired Assets Over Fair Value

Excess of cost of acquired assets over fair value  (goodwill) is amortized using
the straight-line method over 25 years. (See also Note 10).

Impairment of Long-Lived Assets

The Company  periodically  reviews its intangible assets for impairment whenever
events or changes in  circumstances  indicate  that the  carrying  amount of the
asset may not be recoverable.  If this review indicates that the carrying amount
of the asset may not be recoverable, based on the undiscounted cash flows of the
operations over the remaining  amortization  period,  then the carrying value of
the asset is reduced to estimated fair value. Among the factors that the Company
will  continually  evaluate  are  unfavorable  changes in each  medical  group's
relative market share and local market competitive  environment,  current period
and  forecasted  operating  and cash flow  levels of the  medical  group and its
impact on the management fee earned by the Company,  and legal factors governing
the practice of medicine. At December 31, 1998 and 1999, no impairment existed.

Income Taxes

The Company  accounts for income taxes under the  liability  method which states
that  deferred  taxes are to be  determined  based on the  estimated  future tax
effects of differences  between the financial  statement and tax bases of assets
and  liabilities  given the provisions of enacted tax laws.  Deferred income tax
provisions  and benefits are based on the changes to the asset or liability from
period to period.  The  Company and its  subsidiaries  file a  consolidated  tax
return.

Use of Estimates

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

Stock-Based Compensation

In October 1995, the Financial  Accounting  Standards Board ("FASB") issued SFAS
No. 123,  "Accounting  for Stock-Based  Compensation,"  which allows entities to
measure  compensation costs related to awards of stock-based  compensation using
either the fair value method or the intrinsic value method. Under the fair value
method,  compensation  expense is  measured  at the grant date based on the fair
value of the award.  Under the intrinsic value method,  compensation  expense is
equal to the  excess,  if any,  of the quoted  market  price of the stock at the
grant date over the amount the employee must pay to acquire the stock.  Entities
electing to measure  compensation  costs using the  intrinsic  value method must
make pro forma  disclosures  of net income and earnings per share as if the fair
value  method  had  been  applied.  The  Company  has  elected  to  account  for
stock-based   compensation  programs  using  the  intrinsic  value  method.  The
following pro forma  disclosures are presented to reflect amounts as if the fair
value method were applied:
<TABLE>
<CAPTION>

                                                                          Years Ended December 31,
                                                              -------------------------------------------------
                                                                   1997             1998              1999
                                                              -------------     -------------    --------------
                                                                (Unaudited)     (Unaudited)        (Unaudited)
<S>                                                           <C>               <C>              <C>
         Net income (in thousands)                            $       3,921     $      10,762    $       14,266
                                                              =============     =============    ==============
         Basic net earnings per share                         $        0.34     $        0.58    $         0.68
                                                              =============     =============    ==============
         Diluted net earnings per share                       $        0.28     $        0.51    $         0.63
                                                              =============     =============    ==============
</TABLE>


For  disclosure  purposes,  the Company uses U.S.  Treasury  strip rates for its
risk-free  interest rates,  assumed no future dividends and assumed the expected
life of the options through the applicable  expiration dates. For 1997, 1998 and
1999, the Company assumes a volatility  rate of 58%, 88% and 78%,  respectively.
(See Note 8).

3.   ACQUISITIONS

Medical Groups

During 1999, 1998 and 1997, the Company, through its wholly-owned  subsidiaries,
acquired  certain  operating  assets  or  all of the  outstanding  stock  of the
following medical groups:

<TABLE>
<CAPTION>

                     Medical Group                      Effective Date                      Location
<S>      <C>                                        <C>                                <C>
1999:    El Paseo Medical Center                     January 1999 (a)                   Las Cruces, NM
         Boca Raton Medical Associates               February 1999 (b)                  Boca Raton, FL
         Medical Office Services                     May 1999                           Flagstaff, AZ
         Family Care Center of Indiana               May 1999                           Dyer, IN
         MedGroup                                    August 1999                        Prescott, AZ
         Horizon Medical Group                       October 1999 (c)                   Columbus, GA

1998:    Berkshire Physicians & Surgeons             April 1998 (d)                     Pittsfield, MA
         Primary Medical Clinics                     May 1998                           Midland, TX
         Prime Medical Associates                    June 1998                          Hudson, NY
         Physicians' Primary Care                    July 1998                          Ft. Myers, FL
         Medical Associates of Pinellas              November 1998 (e)                  Clearwater, FL

1997:    Naples Medical Center                       March 1997                         Naples, FL
         Abilene Diagnostic Clinic                   June 1997 (f)                      Abilene, TX
         Intercoastal Medical Group                  August 1997                        Sarasota, FL
         Beacon Medical Group                        October 1997 (g)                   Harrisburg, PA
         Cowley Medical Associates (h)               November 1997                      Harrisburg, PA
         Thomas-Spann Clinic                         December 1997                      Corpus Christi, TX
         HealthStar, Inc.                            December 1997                      Morristown, TN
</TABLE>

(a)           The Company  operated El Paseo  Medical  Center  under a long-term
              service  agreement   effective   December  1,  1998.  The  Company
              completed its acquisition in January 1999.

(b)           The  Company  operated  Boca  Raton  Medical  Associates  under an
              interim service  agreement  effective October 1, 1998. The Company
              completed its  acquisition  in February  1999,  and entered into a
              long term service agreement effective February 1, 1999.

(c)           The  Company  operated  Horizon  Medical  Group  under an  interim
              service  agreement  effective July 1, 1998. The Company  completed
              its  acquisition  in October  1999,  and entered  into a long term
              service agreement effective October 1, 1999.

(d)           Berkshire  Physicians  and  Surgeons  was  operated by the Company
              under an interim service agreement effective February 1, 1998. The
              Company  completed its acquisition in April 1998, and entered into
              a long term service  agreement  with the medical  group  effective
              April 1, 1998.

(e)           Medical  Associates  of Pinellas was operated by the Company under
              an interim  service  agreement  effective May 1, 1998. The Company
              completed  its  acquisition  in October  1998 and  entered  into a
              long-term  service  agreement  with the  medical  group  effective
              November 1, 1998.

(f)           Abilene  Diagnostic  Clinic was  operated by the Company  under an
              interim service agreement  effective December 1, 1995. The Company
              completed  its  acquisition  of certain  operating  assets in June
              1997,  and entered  into a long term  service  agreement  with the
              medical group effective June 1, 1997.

(g)           Beacon  Medical Group was operated by the Company under an interim
              service  agreement  effective April 1, 1997. The Company completed
              its acquisition of certain  operating  assets in October 1997, and
              entered into a long term service  agreement with the medical group
              effective on that date.

(h)           The  physicians  of  Cowley Medical Associates  combined  with the
              Beacon Medical Group in December 1997.

The acquisitions of the operating assets and liabilities have been accounted for
by the purchase  method of accounting and,  accordingly,  the purchase price has
been allocated to the tangible assets acquired and liabilities  assumed based on
the estimated fair values at the dates of  acquisition.  Simultaneous  with each
acquisition,  the Company  entered into a long term service  agreement with each
medical  group.  In  conjunction  with  certain  acquisitions,  the  Company  is
obligated to make deferred payments to medical groups.  Such amounts,  which are
typically  funded  through  borrowings on the  revolving  credit  facility,  are
included in deferred  purchase price in the  accompanying  consolidated  balance
sheets.  In certain  cases,  the  Company is  obligated  to issue  shares of the
Company's  common stock in future  periods.  The  following  is the  preliminary
allocation  of purchase  price for the  acquisitions  completed  during the year
ended December 31, 1998 and 1999 (amounts in thousands).

<TABLE>
<CAPTION>

                                                                                  1998                1999
                                                                             -----------         -----------
<S>                                                                         <C>                 <C>
         Fair value of assets acquired                                       $    17,075         $    16,562

         Liabilities assumed                                                     (11,950)             (9,763)
         Intangible assets                                                        80,217              80,915
                                                                             -----------         -----------
                                                                                  85,342              87,714
         Less - Fair value of common stock issued and to be issued                 6,270                 826
         Less - Notes issued                                                       6,554               4,218
         Less - Deferred purchase price (payable in cash)                         23,218              16,598
                                                                             -----------         -----------
         Cash purchase price                                                 $    49,300         $    66,072
                                                                             ===========         ===========
</TABLE>

For certain  acquisitions  occurring  close to or at the end of the period,  the
estimated fair values are  preliminary  and,  therefore,  are subject to change.
Under the purchase  agreements,  the purchase price is adjustable by the Company
for a period  between 60 to 120 days after the  closing  of the  transaction  in
order to  finalize  the fair  values  of the  assets  acquired  and  liabilities
assumed.

Other Acquisitions

Effective  December 1, 1997,  the Company,  through a  wholly-owned  subsidiary,
completed its  acquisition  of Health Plans,  Inc.,  and renamed the company PMC
Medical Management , Inc. ("PMC").  PMC provides capitation  management services
through  risk  contracting  with HMOs and other  third-party  payors.  The total
consideration for the transaction was approximately $8.5 million which consisted
of $1.7 million cash and $6.8  million of the  Company's  common stock and stock
options.

Effective  August 1,  1999,  the  Company,  through a  wholly-owned  subsidiary,
completed its acquisition of Primergy,  Inc.,  ("Primergy").  Based in Kingston,
New York,  Primergy  is a medical  network  management  company  which  owns and
operates five IPAs in the Hudson Valley of New York and has under  contract more
than 1,000 physicians.

In November 1999, the Company  purchased an option to acquire  substantially all
of the assets of Tampa Bay Medical Research,  Inc., a regional clinical research
site management organization located in Clearwater,  Florida. This option may be
exercised at any time prior to December 2002.

Pro Forma Information

The  following   unaudited  pro  forma   information   reflects  the  effect  of
acquisitions  of  medical  groups  and other  acquisitions  on the  consolidated
results of operations of the Company assuming that the acquisitions  occurred at
January 1, 1998. Future results may differ  substantially from pro forma results
and cannot be considered indicative of future results.
<TABLE>
<CAPTION>

                                                                                 Years Ended December 31,
                                                                           -----------------------------------
                                                                                 1998                1999
                                                                           ---------------     ---------------
                                                                              (unaudited)         (unaudited)
<S>                                                                       <C>               <C>
         Net revenue (in thousands)                                        $       292,161     $       346,692
                                                                           ===============     ===============

         Net income before extraordinary charge (in thousands)             $        13,198     $        16,622
                                                                           ===============     ===============

         Net income before extraordinary charge per share
                  Basic                                                    $          0.69     $          0.78
                                                                           ===============     ===============
                  Diluted                                                  $          0.62     $          0.72
                                                                           ===============     ===============
         Weighted average number of common shares
                  outstanding (in thousands)
                  Basic                                                             19,044              21,336
                                                                           ===============     ===============
                  Diluted                                                           21,380              23,369
                                                                           ===============     ===============
</TABLE>


4.   PROPERTY AND EQUIPMENT
     ----------------------

Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                December 31,
                                                                     -----------------------------------
                                                                          1998                1999
                                                                     ---------------    ----------------
<S>                                                                 <C>                 <C>
         Furniture, fixtures, and equipment                          $        18,430    $         29,886
         Leasehold improvements                                                2,363               5,110
                                                                     ---------------    ----------------
                                                                              20,793              34,996
         Less- Accumulated depreciation                                       (5,668)            (10,644)
                                                                     ---------------    ----------------

         Property and equipment, net                                 $        15,125    $         24,352
                                                                     ===============    ================
</TABLE>


5.   INTANGIBLE ASSETS
     -----------------

Intangible assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                December 31,
                                                                     -----------------------------------
                                                                          1998                1999
                                                                     ---------------    ----------------
<S>                                                                 <C>                <C>
         Service agreement rights                                    $       152,890     $       224,999
         Excess of cost of acquired assets over fair value                     6,479              15,776
                                                                     ---------------    ----------------
                                                                             159,369             240,775
         Less- Accumulated amortization                                       (5,967)            (13,769)
                                                                     ----------------   -----------------

         Intangible assets, net                                      $       153,402    $        227,006
                                                                     ===============    ================
</TABLE>

6.   LONG TERM RECEIVABLES
     ---------------------

During 1997,  the Company  entered into an agreement to lend up to $42.7 million
to an  affiliated  medical  group.  The  purpose of this loan was to provide the
medical group with liquidity to meet certain  obligations,  general  association
purposes and to strengthen the physician-association  relationships. The loan is
being funded in six advances.  As of December 31, 1999,  four advances  totaling
$31.1  million had been made.  The  remaining  two advances of $5.8 million each
will be made  annually on December 1, 2000 and 2001.  Interest is payable to the
Company  monthly  at an annual  fixed  rate of 8.0%.  The loan will be repaid in
fifteen annual  payments  beginning on November 30, 2008.  Certain assets of the
affiliated  medical group have been pledged as security  under the loan, and the
loan provides certain rights to offset against  distributions  under the service
agreement in the event of default under the loan  agreement.  As of December 31,
1999, the outstanding loan totaled $31.1 million,  and the Company estimates the
carrying value of this receivable approximates the fair value.

In November  1998,  the Company  entered into a similar  agreement with a second
medical  group to loan $8.0  million,  all of which was funded on  November  12,
1998.  The purpose of this loan was to provide the medical group with  liquidity
for general  corporate  purposes and to strengthen the physician  relationships.
Interest is payable to the Company  monthly at an annual fixed rate of 8.0%. The
loan will be repaid in 180 monthly  payments  beginning  on November  30,  2008.
Certain  assets of the  affiliated  medical  group have been pledged as security
under  the  loan,  and the  loan  provides  certain  rights  to  offset  against
distributions under the service agreement in the event of default under the loan
agreement.  As of December 31, 1999, the outstanding  loan totaled $8.0 million,
and the Company estimates the carrying value of this receivable approximates the
fair value.

In May 1999, the Company  entered into a similar  agreement with a third medical
group to loan $5.5 million,  in five equal annual advances.  The purpose of this
loan was to provide the medical  group with funds to purchase  split dollar life
insurance  policies for its  individual  physicians.  Interest is payable to the
Company  monthly at an annual fixed rate of 8.2%. The loan will be repaid in 360
monthly  payments  beginning on May 31, 2009.  Certain  assets of the affiliated
medical  group  have been  pledged  as  security  under  the loan,  and the loan
provides  certain  rights  to offset  against  distributions  under the  service
agreement in the event of default under the loan  agreement.  As of December 31,
1999, the outstanding loan totaled $1.1 million,  and the Company  estimates the
carrying value of this receivable approximates the fair value.

In  connection  with the certain  acquisitions  completed in 1998 and 1999,  the
Company entered into split-dollar life insurance  agreements with the physicians
and prior owners of certain medical groups. Under these agreements,  the Company
purchases life insurance in the name of the individual seller. Upon the death of
the  individual  seller,  the amount of the premiums paid by the Company will be
returned. In addition, these receivables are guaranteed by the individual policy
holders.  For the policies in effect as of December  31, 1999,  the total of the
premiums that will be returned to the Company is  approximately  $33.5  million.
The Company initially records the present value of future premiums receivable as
long term receivables in the allocation of purchase price, using a discount rate
of 6.75% over the estimated  actuarial life of the policy owners.  The accretion
of this receivable from the initial carrying value to the full premium amount is
recorded as a reduction of amortization expense in the accompanying consolidated
statements of  operations.  At December 31, 1998 and 1999, the carrying value of
these receivables was $5.2 million and $6.7 million, respectively.

In May 1997,  the Company  loaned  $600,000 to an officer of the  Company.  This
note,  plus  interest at 6.5%,  was repaid in March 1998.  In August  1998,  the
Company loaned an officer of the Company $2.0 million. Beginning in August 2003,
the loan will be repaid in annual installments of $200,000 plus accrued interest
of 7.0% with the remaining balance due in August 2008. This loan is secured by a
pledge of warrants for up to 620,665 shares of the Company's common stock.

7.   NOTES PAYABLE, OTHER LONG TERM LIABILITIES
     AND OBLIGATIONS UNDER CAPITAL LEASES

Notes payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                December 31,

                                                                           1998              1999
                                                                       -------------    -------------
<S>                                                                   <C>               <C>
         Borrowings under Revolving Credit Facility                    $      54,500    $     156,000
         Notes payable to medical group; unsecured; due in
              three annual installments in April 1998, 1999 and 2000; 9%
              interest payable annually in cash or options to purchase the
              Company's common stock                                           5,787            2,869
         Notes payable to medical group; unsecured; due in
              four  annual installments in December 1998,
              1999, 2000, and 2001; 5% interest payable
              annually                                                           867              640
         Note payable to medical group; unsecured; due in
              four equal installments of principal and 7%
              interest in May 2000, 2001, 2002 and 2003                       -                   800
         Other notes payable                                                     208              828
                                                                       -------------    -------------
                                                                              61,362          161,137
         Less- Current portion                                                (3,232)         (11,463)
                                                                       --------------   --------------
         Notes payable, net                                            $      58,130    $     149,674
                                                                       =============    =============
</TABLE>

The  maturities  of notes  payable at  December  31,  1999,  are as follows  (in
thousands):

                     2000                           $      11,463
                     2001                                 148,748
                     2002                                     402
                     2003                                     357
                     2004                                      66
                     Thereafter                               101
                                                    -------------

                                                    $     161,137

Revolving Credit Facility

Effective  December  17,  1998,  the Company  entered  into a  revolving  credit
agreement  (the  "Credit  Facility")  with a  syndicate  of  banks.  The  Credit
Facility,  as amended,  provides for a three-year  commitment to fund  revolving
credit  borrowings of up to $157.5 million for  acquisitions and general working
capital  purposes.  Initial  borrowings  under the new facility of $52.5 million
were used to payoff the Company's  previous  revolving credit facility (see Note
11) and pay certain  financing  costs.  The Company paid fees and other  closing
costs of  approximately  $1.7 million which has been capitalized in other assets
in the accompanying  consolidated  balance sheets and amortized as an adjustment
to interest expense using the effective  interest  method.  At the expiration of
the revolving credit commitment, the Company can convert the outstanding balance
on the Credit  Facility to a term loan which amortizes at 5% per quarter for the
following eight quarers, with the remaining balance due on December 17, 2003.

The interest rate under the Credit Facility is set at the Company's  options and
varies based on the Company's leverage ratio, as follows:  (i) the higher of the
federal  funds rate plus 0.5% to 1.25% or the prime rate plus 0.0% to 0.75%,  or
(ii) the Eurodollar  rate plus 1.25% to 2.25%. As of December 31, 1998 and 1999,
the  effective  interest  rate  on  the  Credit  Facility  was  7.2%  and  8.5%,
respectively.  The  Credit  Facility  includes  various  restrictive  covenants,
certain of which become more restrictive over time, including limitations on the
payment of dividends as well as the  maintenance  of certain  financial  ratios,
including  fixed charge  coverage and senior debt to EBITDA,  among others.  The
Credit Facility is secured by substantially all the assets of the Company. As of
December  31,  1999,  the Company had $1.5  million  available  under the Credit
Facility subject to certain  conditions as defined by the agreement.  In January
2000,  this  availability  was  increased by $15 million from the closing of the
first stage of the Goldman Sachs Transaction (see Note 16).

Convertible Subordinated Notes Payable

In March 1996, in connection  with the  affiliation of two medical  groups,  the
Company issued $1.8 million in convertible  subordinated  notes.  The notes bear
interest of 7.0% and mature in March 2003. The notes may, at the election of the
noteholders,  be converted into shares of common stock at a conversion  price of
$9.00 per share,  subject to certain  limitations  and automatic  conversions as
defined  in  the  note  agreements.   During  1997,  one  noteholder   converted
approximately  $35,000 of notes into 3,912 shares of the Company's common stock.
During 1998,  noteholders converted  approximately $685,000 of notes into 76,093
shares  of the  Company's  common  stock.  During  1999,  noteholders  converted
approximately  $106,000  of notes into  11,736  shares of the  Company's  common
stock.

In connection  with the  affiliation of a medical group, in April 1998, and as a
result of a reconciliation of total  consideration  completed in September 1999,
the Company issued $7.6 million in  convertible  subordinated  notes.  The notes
bear interest of 4.75% paid annually on March 31, mature on March 31, 2005,  and
can be converted into shares of the Company's  common stock any time after April
17, 1999 and prior to March 31, 2005 at a conversion price of $15.35, subject to
adjustment under the note agreements.

In August 1999, in  connection  with the  affiliation  of a medical  group,  the
Company issued  convertible  subordinated notes which bear interest at a rate of
5.0% paid  annually on July 30,  mature on July 30,  2005,  and can be converted
into  shares  of the  Company's  common  stock at a  conversion  price of $5.08,
subject to adjustment under the note agreement.  Under certain conditions during
the first two years of this  agreement,  the  noteholders  may  redeem a certain
portion of the  outstanding  balance.  As of December 31,  1999,  the balance on
these notes was approximately $937,000.

Obligations Under Capital Leases

In connection with  affiliations  with medical groups and in the ordinary course
of business,  the Company  assumed the  obligation  of various  equipment  under
capital  leases.  As of December 31, 1999,  future  minimum lease payments under
capital leases are as follows (in thousands):

                           2000                                 $       535
                           2001                                         286
                           2002                                          78
                           2003                                           4
                                                                -----------
                                                                        891

                  Less- Portion attributable to interest                (72)
                                                                ------------
                  Obligations under capital leases                      819
                  Less- Current portion                                (476)
                                                                -----------
                                                                $       343

8.   STOCKHOLDERS' EQUITY
     --------------------

The Company has authorized the issuance of 70,000,000  shares of stock, of which
(a) 20,000,000 shares, par value $0.01 per share, are to be designated Preferred
Stock  (of  which  700,000  shares  are to be  designated  Series  A  Redeemable
Convertible  Preferred  Stock) and (b)  50,000,000  shares,  par value $0.01 per
share, are to be of a class designated Common Stock.

During  March 1997,  the Company  completed  the Initial  Offering of its common
stock. The Initial  Offering  consisted of 4,000,000 shares of common stock sold
at a price of $9.00 per share.  Gross and net proceeds from the Initial Offering
were $36.0 million and $33.5 million,  respectively.  In addition,  net proceeds
were reduced by approximately  $1.8 million of expenses  relating to the Initial
Offering.

During May 1998, the Company  completed a public offering of 6,900,000 shares of
common stock at a price of $11.00 per share (the  "Secondary  Offering").  Gross
and net  proceeds  from the  Secondary  Offering  were $75.9  million  and $72.5
million , respectively.  In addition, net proceeds were reduced by approximately
$600,000 of expenses relating to the Secondary Offering.

Redeemable Common Stock

In connection  with an acquisition in 1995, the Company issued 165,296 shares of
Redeemable Common Stock for $991,776. On the completion of the Initial Offering,
the 165,296 shares of Redeemable Common Stock were automatically  converted into
common stock.

Class B Common Stock

During 1994,  the Company  issued  1,226,150  shares of Class B Common Stock and
warrants to purchase 965,916 shares of Class B Common Stock at an exercise price
of $1.25 per share. The Company also granted an option to purchase 155,000 Class
B Common  Stock at an  exercise  price of $0.50 per unit.  Each share of Class B
Common Stock automatically  converted into common stock on the completion of the
Initial  Offering.  Similarly,  the rights to purchase  shares of Class B Common
Stock under the warrants and options were converted into warrants and options to
purchase  shares of common  stock.  The  warrants are  exercisable  on or before
September 30, 2004, and warrants to purchase 866,540 shares of common stock were
outstanding as of December 31, 1999.

Common Stock Warrants

During 1994, the Company issued warrants to purchase  1,428,998 shares of common
stock at an exercise price of $1.25 per share.  The warrants are  exercisable on
or before June 30, 2003. As of December 31, 1999,  warrants to purchase  911,061
shares of common stock were outstanding.

During 1999, in connection with the affiliation of a medical group,  the Company
issued  warrants to purchase  82,000 shares of common stock at an exercise price
of $3.125 per share. The warrants are exercisable on or before July 30, 2004. As
of December 31, 1999, all of these warrants were outstanding.

Common Stock To Be Issued

In  connection  with  acquisitions  completed  in 1998,  common  stock valued at
approximately  $2.3 million were issued in 1999.  In addition to the issuance of
common  stock,   in 1999 the Company made a cash payment of  approximately  $3.6
million to a medical group in lieu of an anticipated stock issuance.

In connection with acquisitions  completed in 1997, common stock valued at $20.1
million was issued in 1998.  The number of shares to be issued and the price per
share were fixed at the consummation date of the specific acquisitions in 1997.

Treasury Stock

The Company has authorized a common stock repurchase program whereby the Company
may  repurchase up to $10.0 million of the  Company's  common stock.  Throughout
1999, the Company purchased 781,616 shares of treasury stock at the market price
on the date of the  transaction.  An additional  191,548  shares were  purchased
through the exercise of put rights which were issued in conjunction  with a 1999
acquisition.  The average  purchase price for all treasury  shares was $3.95 per
share. All unexercised put rights expired on December 28, 1999.

In June 1999, the Company issued 228,504 shares from treasury in connection with
the  exercise  of  warrants  with an  exercise  price of $1.25  per  share.  The
resulting loss of $696,000 on the issuance of these treasury shares was recorded
as a reduction in retained earrings.

Stock Option Plans

The Company has reserved  1,500,000  shares and 3,100,000 shares of common stock
for issuance under its 1994 and 1996 Stock Option Plans (collectively the "Stock
Option Plans").  Options  granted under the Plans may be either  incentive stock
options ("ISO") or  nonqualified  stock options  ("NQSO").  The option price per
share shall not be less than the fair market value of the Company's Common stock
at the date of grant. Generally, options vest over a five-year period and expire
ten years  after the option was  issued.  As of December  31,  1999,  options to
purchase  1,488,679  shares  remain  available  for grant under the Stock Option
Plans.

The following table summarizes the activity in the Stock Option Plans:

<TABLE>
<CAPTION>
                                                                                         Weighted-Average
                                                     Outstanding    Price Per Share       Exercise Price
<S>                                               <C>             <C>                      <C>
         December 31, 1996                            1,064,400     $0.50 - $14.00             $6.85
              Granted                                   626,071     $6.00 - $12.00             $7.88
              Exercised                                  (3,100)         $6.00                 $6.00
              Canceled                                  (61,400)     $6.00 - $9.00             $6.67
                                                    -----------
         December 31, 1997                            1,625,971     $0.50 - $14.00             $6.71
              Granted                                   709,400     $4.69 - $15.00             $9.00
              Exercised                                (117,350)     $0.50 - $9.00             $5.25
              Canceled                                  (96,100)    $6.00 - $14.00             $7.02
                                                    -----------
         December 31, 1998                            2,121,921     $0.50 - $14.00             $7.69
              Granted                                 1,008,450      $2.06 - $6.13             $5.07
              Exercised                                 (44,800)         $0.50                 $0.50
              Canceled                                 (159,500)    $4.25 - $15.00             $9.19
                                                    -----------
         December 31, 1999                            2,926,071     $0.50 - $14.00             $6.82
                                                    ===========
</TABLE>

Options to purchase  shares of the  Company's  common stock are as follows as of
December 31, 1999:
<TABLE>
<CAPTION>

                                                     Options Outstanding                   Options Exercisable
                                        --------------------------------------------  ----------------------------
                                           Number of      Years to       Exercise     Number of         Exercise
         Range of Prices                    Shares       Expiration        Price          Shares          Price
         ---------------                -------------  --------------  -------------  -------------  -------------
<S>                                    <C>            <C>             <C>             <C>            <C>
         $0.50                                 4,800          4.83      $    0.50            -                 n/a
         $2.06 - $2.91                        73,500          6.93           2.38           40,000     $      2.50
         $3.13 - $4.69                       130,500          9.34           4.07            5,000            4.69
         $4.81 - $7.00                     1,628,657          7.80           5.64          578,917            5.98
         $7.44 - $11.00                      976,983          7.81           8.74          310,008            8.50
         $12.00 - $14.00                     111,631          6.49          13.55           65,422           13.56
                                         -----------    ----------      ---------      -----------     -----------
                                           2,926,071          7.79      $    6.82          999,347     $      7.11
                                         ===========    ==========      =========      ===========     ===========
</TABLE>

Stock options  exercisable under the Stock Option Plans as of December 31, 1997,
1998 and 1999, totaled 653,464; 701,791; and 999,347, respectively.

In 1996, the Company entered into a credit facility which has subsequently  been
refinanced (see Note 7). In connection with the original  credit  facility,  the
Company issued 46,875  options to purchase the Company's  common stock at $10.00
per share.  These options are  outstanding  and  exercisable  as of December 31,
1999.

9.   INCOME TAXES
     ------------

The provision  (benefit) for income taxes for the years ended December 31, 1997,
1998 and 1999 consists of the following (in thousands):
<TABLE>
<CAPTION>

                                                                   1997             1998              1999
                                                              -------------     -------------    -------------
<S>                                                         <C>                <C>              <C>
         Current:
              Federal                                         $       2,146     $       5,821    $       8,887
              State                                                     126               765            1,388
         Deferred:
              Federal                                                   307             1,044             (402)
              State                                                      23               223              (60)
                                                              -------------     -------------    -------------
                                                              $       2,602     $       7,853    $       9,813
                                                              =============     =============    =============
</TABLE>

Total  provision for income taxes differed from the amount  computed by applying
the  U.S.  Federal  income  tax  rate  of  35%  to  earnings  before  taxes  and
extraordinary charge as a result of the following (in thousands):

<TABLE>
<CAPTION>

                                                                   1997             1998              1999
                                                              -------------     -------------    -------------
<S>                                                           <C>               <C>              <C>
         Federal tax at statutory rate                        $       2,826     $       7,233    $       9,038

         State income taxes, net of federal income tax
                  benefit                                               422               687              899
         Change in valuation allowance                                 (992)            -               (1,216)
         Amortization of nondeductible service agreement
                  rights                                                209               188            1,345
         Accretion of future premiums receivable                       (171)             (291)            (347)
         Other                                                          308                36               94
                                                              -------------     -------------    -------------
         Total provision for income taxes                     $       2,602     $       7,853    $       9,813
                                                              =============     =============    =============
</TABLE>


Deferred  income tax assets  (liabilities)  reflect net tax effects of temporary
differences  between  the  amounts  of  assets  and  liabilities  for  financial
reporting  purposes and the amounts used for income tax purposes.  In connection
with  acquisitions in 1998 and 1999, the Company  recorded certain net operating
loss   carryforwards   ("NOLs")  and  other  deferred   income  tax  assets  and
liabilities,  net of a valuation allowance,  through purchase accounting.  These
NOLs  begin to expire  in 2012.  Significant  components  of the  Company's  net
deferred tax asset (liability) are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                December 31,
                                                                           1998              1999
                                                                       -------------    -------------
<S>                                                                   <C>               <C>
         Current deferred tax assets (liabilities)
              Operating loss carryforwards                             $       3,006    $         485
              Non-deductible accrued expenses                                    295               52
                                                                       -------------    -------------
                                                                               3,301              537
              Valuation allowance                                             (1,095)           -
                                                                       --------------   -------------
                                                                               2,206              537
                                                                       --------------   -------------
         Non-current deferred tax assets (liabilities)
              Property and equipment, principally due to
                  differences in depreciation                                   (300)          (1,397)
              Service agreement rights                                        (2,024)          (1,867)
              Operating loss carryforwards                                     -                5,152
              Non-deductible accrued expenses                                  -                1,220
              Other                                                             (548)            (698)
                                                                       -------------    --------------

                                                                              (2,872)           2,410
                                                                       --------------   -------------
         Valuation allowance                                                   -               (1,417)
                                                                       -------------    --------------
                                                                              (2,872)             993
                                                                       --------------   -------------
         Net deferred tax asset (liability)                            $        (666)   $       1,530
                                                                       ==============   =============
</TABLE>

10.  CHANGE IN ACCOUNTING ESTIMATE
     -----------------------------

Effective  July 1, 1998,  the Company  changed its estimate  with respect to the
estimated life of its service  agreement rights  intangible assets to conform to
industry standards.  All existing and future service agreement rights intangible
assets will be amortized over a period not to exceed 25 years from the inception
of the respective service agreements. Had the Company adopted this policy at the
beginning of 1997,  amortization  expense would have increased by  approximately
$221,000  resulting in a decrease in diluted earnings per share of $0.01 for the
year ended  December 31, 1997. On the same basis,  amortization  expense for the
year ended 1998 would have increased by  approximately  $480,000  resulting in a
decrease in diluted earnings per share of $0.01.

11.  EXTRAORDINARY CHARGE
     --------------------

On December 17, 1998,  the Company  replaced its then existing  credit  facility
with a new  revolving  credit  facility  (see Note 7). In  connection  with this
transaction,  the Company wrote off the  unamortized  deferred  financing  costs
relating  to the prior  credit  facility.  The  resulting  extraordinary  charge
amounted  to  approximately   $611,000,   net  of  applicable  income  taxes  of
approximately $375,000.

12.  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
     ---------------------------------------------------------

As of December 31, 1998 and 1999,  the fair value of the Company's cash and cash
equivalents,  accounts  receivable,  accounts payable, due to medical groups and
accrued  expenses  approximated  their  carrying  value  because  of  the  short
maturities of those financial instruments.  The fair value of the Company's long
term debt and capital  leases also  approximates  their carrying value since the
related notes bear interest at current market rates.

As of December 31, 1998 and 1999,  the fair value of the  Company's  convertible
subordinated   notes   payable   approximates   its  carrying   value  based  on
consideration of the terms of the conversion features,  the current market price
for the Company's  common stock, and the interest rates on the notes as compared
to current market rates.

13.  SEGMENT REPORTING
     -----------------

The Company has two operating  segments:  the  management of medical  groups and
provision  of  capitation  and  medical  management  services  to IPA  networks.
However,  since the management of IPA networks  represents  less than 10% of the
Company's revenue and assets, the Company's  consolidated  financial  statements
approximate the operations and assets of the medical group  management  segment.
The Company  regularly  reviews the  operating  results of each of the different
medical groups.  However, since each of the medical groups have similar economic
characteristics,  the Company has  aggregated all of the medical groups into one
reporting segment.

The accounting  policies of the segments are the same as those  described in the
summary of significant  accounting policies (see Note 2). Intersegment sales and
transfers  are  based on the  actual  cost of  services  provided.  The  Company
evaluates  performance  based on profit or loss from  operations  before  income
taxes and extraordinary gains or losses.

The Company has no net revenues  attributed  to customers  outside of the United
States and no assets are located in foreign countries.

14.      EMPLOYEE BENEFIT PLAN

The  Company   sponsors  a  401(k)   retirement   plan  (the  "Plan")   covering
substantially  all employees.  Participants may make voluntary  contributions to
the Plan up to 15% of their compensation, as defined. Company contributions vary
by  subsidiary  and may  include a  matching  contribution  of 0% to 4.5% of the
participant's  contributions and a discretionary contribution as a percentage of
the  participant's  compensation.  The Plan  was  adopted  in late  1997 and the
Company's expense during that period was minimal. The Company recognized expense
of $1.5  million  and  $1.9  million  related  to the  Plan in  1998  and  1999,
respectively.

15.  COMMITMENTS AND CONTINGENCIES
     -----------------------------

Leases

Operating  leases  generally  consist of short-term  leases for medical practice
office space, medical practice equipment,  corporate office space, and corporate
equipment.  Lease expense amounted to approximately $7.1 million,  $17.3 million
and $28.7 million for the years ended 1997, 1998, and 1999, respectively.

The following is a schedule of future minimum lease payments under noncancelable
operating leases as of December 31, 1999 (in thousands).

                    2000                  $           20,791
                    2001                              20,077
                    2002                              17,943
                    2003                              15,822
                    2004                              14,246
                    Thereafter                        27,140
                                          ------------------
                                          $          116,019
                                          ==================

Litigation

The  Company is subject to various  claims and legal  actions  that arise in the
ordinary  course  of  business.  In the  opinion  of  management,  the  ultimate
resolution  of such  matters  will not have a  material  adverse  effect  on the
Company's financial position or results of operations.

Insurance

The  Company  and the  medical  groups  are  insured  with  respect  to  medical
malpractice risks on a claims- made basis. Management is not aware of any claims
against the Company or the medical  groups that might have a material  impact on
the Company's financial position or results of operations.

16.  SUBSEQUENT EVENT
     ----------------

In January 2000, the Company  entered into a two-stage  transaction in which the
Company will issue  550,000 of  convertible  preferred  stock to  affiliates  of
Goldman,  Sachs & Co. for aggregate  gross proceeds of $55 million ("the Goldman
Sachs Transaction").  The first stage of the transaction, which was completed in
January 2000,  involved the issuance of $16 million  principal  amount of senior
subordinated  notes and 1,250,000  shares of the Company's  common stock for $16
million.  In the second stage,  which is expected to be completed in April 2000,
the investors  will  exchange the notes,  common  stock,  and an additional  $39
million  for  550,000  shares  of the  Company's  convertible  preferred  stock,
bringing the total  investment to $55 million.  The convertible  preferred stock
has a liquidation preference of $100 per share and is convertible into shares of
the Company's common stock at a conversion price of $3.25 per share,  subject to
adjustment in accordance with customary anti-dilution provisions.

In  connection  with the  completion  of the second  stage of the Goldman  Sachs
Transaction,  the Company will expand its credit  facility by up to $65 million.
This  expansion is expected to come in the form of a  combination  of additional
revolving credit commitments and six year secured term loans.