<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000, OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM          TO
                                                              --------


                          COMMISSION FILE NO.: 0-19786

                                  PHYCOR, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


               TENNESSEE                                 62-1344801
     (STATE OR OTHER JURISDICTION           (I.R.S. EMPLOYER IDENTIFICATION NO.)
   OF INCORPORATION OR ORGANIZATION)

  30 BURTON HILLS BOULEVARD, SUITE 400
         NASHVILLE, TENNESSEE                              37215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                 (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 665-9066

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

            NONE                                       NONE
    (TITLE OF EACH CLASS)            (NAME OF EACH EXCHANGE ON WHICH REGISTERED)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                      COMMON STOCK; NO PAR VALUE PER SHARE
                                (TITLE OF CLASS)

                4.5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
                                (TITLE OF CLASS)

                         PREFERRED STOCK PURCHASE RIGHTS
                                (TITLE OF CLASS)

         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 the 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 shares of common stock (based upon
the closing sales price of these shares as reported on the Over-the-Counter
Bulletin Board on April 16, 2001) of the registrant held by non-affiliates on
April 16, 2001, was approximately $2.7 million.

         As of April 16, 2001, 73,236,562 shares of the registrant's common
stock were outstanding.


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                           FORWARD-LOOKING STATEMENTS

         The disclosure and analysis in this report and other information that
is provided by PhyCor, Inc. ("PhyCor," the "Company" "we," "our" or "us")
contain some forward-looking statements. Forward-looking statements give our
current expectations or forecasts of future events. These statements do not
relate solely to historical or current facts and can be identified by the use of
words such as "may," "believe," "will," "expect," "project," "estimate,"
"anticipate," "plan," "should" or "continue." From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public.

         Any of our forward-looking statements in this report and in any other
public statements we make may turn out to be incorrect. These statements can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in this report - for example, our
ability to operate as a going concern, our ability to restructure our balance
sheet, the adequacy of our capital resources, the possibility of seeking relief
from creditors under U.S. bankruptcy laws, the impact to earnings and the
possibility of additional charges to earnings resulting from terminating or
restructuring our relationships with our IPAs and their payors, our ability to
operate IPAs and other physician organizations profitably, changes in
contractual relationships, competition in the health care industry, regulatory
developments and changes, the nature of capitated fee arrangements and other
methods of payment for medical services, the risk of professional liability
claims, and the outcome of pending litigation will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially. For a more detailed discussion of the
factors that could affect the results of operations and financial condition of
the Company, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Risk Factors."

         We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC.

                                     PART I

ITEM 1.       BUSINESS

         OVERVIEW

         The Company is a medical network management company that develops and
manages independent practice associations ("IPAs"), provides contract management
services to physician networks owned by health systems, manages certain medical
organizations and provides consulting services to independent medical
organizations. Through our CareWise, Inc. subsidiary ("CareWise"), which is held
for sale, we also provide health care decision-support services, including
demand management and disease management services, to managed care
organizations, health care providers, employers and other group associations. We
are planning to provide productivity and health services to self-insured
employers through our wholly-owned subsidiary, HPMdirect, Inc. ("HPMdirect").

         As of December 31, 2000, we managed IPAs with approximately 16,600
physicians in 14 markets. As of December 31, 2000, the Company managed eight
clinics, the assets of six of which were owned and held for sale. We have sold
the assets of these six clinics in 2001. Through CareWise, we provide healthcare
decision-support services to approximately 3.3 million individuals. We are
seeking to sell CareWise, although, as of the date hereof, no definitive
agreement has been reached regarding the sale. Finally, we are seeking to sell
the operations of PrimeCare International, Inc. ("PrimeCare"), our California
IPA division. PrimeCare's operations currently represent over 75% of our
operating revenues. As of the date hereof, however, no definitive agreement
regarding a transaction has been reached.

         We provide management services to the physician network of a health
system and two multi-specialty clinics and offer consulting services and intend
to seek additional management and consulting arrangements through our
wholly-owned subsidiary, PhySys, Inc. ("PhySys"). We operate IPAs in four
markets and continue to seek additional IPA markets through our North American
Medical Management division ("NAMM"), and we intend to provide


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health and productivity services to self-insured employers to manage the
healthcare and productivity costs of their employees through HPMdirect. There
can be no assurance, however, that we will be successful in these endeavors.

         MATERIAL CORPORATE DEVELOPMENTS

         We incurred significant operating losses in 1998, 1999 and 2000 and
expect to continue to incur losses in 2001. We have completed the sale of all of
our assets related to our affiliated multi-specialty clinics as of the date
hereof. In addition, we anticipate selling our California IPA division,
PrimeCare and our CareWise subsidiary in the second or third quarter of 2001.
Substantially all the proceeds from the sales of our assets to date have been
used to pay outstanding indebtedness under our bank credit facility (the "Credit
Facility") and we remain obligated under the Credit Facility to continue to
apply substantially all sale proceeds to any amounts or letters of credit
outstanding thereunder, currently $4.0 million, net of cash collateral. We
anticipate that the proceeds from the sale of PrimeCare and CareWise should
completely repay the amounts due under the Credit Facility.

         As of the date hereof, as a result of our failure to pay the
approximately $4.4 million interest payment due February 15, 2001 on our 4.5%
Convertible Subordinated Notes Due 2003, principal amount outstanding of
approximately $196.5 million (the "Notes"), we are in default under the Notes.
Moreover, the default under the Notes, caused a default under the Credit
Facility, which default has been waived by the senior lenders. If the Notes were
to be accelerated, a default would occur under the Company's Zero Coupon
Convertible Subordinated Notes Due 2014, original issue discount amount of
approximately $109 million (the "Warburg Notes"), held by affiliates of Warburg,
Pincus & Co. ("Warburg, Pincus"). As of the date hereof, we have obtained
limited forbearance agreements through April 30, 2001, with additional automatic
ten business day extensions unless otherwise notified, from bondholders
representing approximately 57% of the Notes in the aggregate and a waiver and
forbearance agreement from Warburg, Pincus through June 30, 2001 subject to
certain conditions. In connection with the audit of our consolidated financial
statements for the year ended December 31, 2000, our independent auditors stated
in their report that our recurring losses from operations, net capital
deficiency and net working capital deficit raise substantial doubt about our
ability to continue as a going concern. We have also defaulted on obligations
related to several equipment and facility leases. We have engaged Jefferies &
Company, Inc. to assist us in restructuring our consolidated balance sheet. In
light of our operating history and current projections and in connection with
the restructuring, it may be necessary to seek protection from our creditors in
the future.

PHYSICIAN AFFILIATIONS

         Sale of Multi-Specialty Clinic Assets

         As of December 31, 2000, we managed eight clinics, the assets of six of
which were owned and held for sale. Throughout 2000, we completed the sale of
the assets of 34 of our affiliated multi-specialty clinics and received proceeds
totaling $219.5 million in cash and $24.7 million in notes receivable and other
deferred payments, in addition to certain liabilities being assumed by the
purchasers. Asset revaluation and restructuring charges recorded in connection
with the sale or closure of such clinics represented approximately $322.3
million of the $556.5 million total asset revaluation and restructuring charges
recorded in 2000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." As of the date hereof, we have completed
the disposition of the assets of all six remaining owned clinics, our remaining
hospital and certain real estate and received proceeds totaling $56.5 million in
cash and $13.8 million in notes receivable in addition to certain liabilities
being assumed by the purchasers. We are required under the terms of the Credit
Facility to use substantially all the proceeds from the sale of assets to pay
all amounts and letters of credit outstanding under the Credit Facility,
currently $4.0 million, net of cash collateral.

         Revenue from multi-specialty clinic operations constituted
approximately 60% of our total revenue for 2000. We believe that our revenues,
as a whole, will decline significantly in the year 2001 and beyond compared to
the revenues for 2000. Revenue from the management of clinics in which we have a
capital investment, will no longer be the majority of our revenues as we will
focus our activities on our other businesses.


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         Service, Management and Consulting Agreements

         Through our PhySys subsidiary, we provide management and support
services to two of our formerly affiliated multi-specialty clinics, the Harbin
Clinic in Rome, Georgia and the Lakeview Medical Group in Suffolk, Virginia.
These agreements are for terms of seven and five years, respectively, subject to
termination for various reasons. We do not employ the personnel at these
clinics. In addition, through PhySys, we provide management services to the
physician networks of health systems. At present, our PhySys subsidiary provides
management and support services to the 124-physician group related to the
Rockford Health System, a health care delivery system serving northern Illinois
and southern Wisconsin. The Rockford agreement is for a period of 38 1/2 months
but is subject to termination on December 31, 2002. In addition, we anticipate
entering an agreement to provide services to a 120-member physician group
affiliated with a large medical system in Sacramento, California in the near
future. The agreement provides for a three year term but is subject to earlier
termination by either party in certain circumstances. In addition, we provide
management services, including billing and collection services, to
Columbia-Healthone, LLC in Denver, Colorado, as well as to an individual
physician group in Colorado. We anticipate closing or selling these operations
in 2001. We are pursuing additional relationships with health systems and
physician groups but there is no assurance that we will enter into similar
arrangements in the future or that such arrangements will be successful.

         We believe that we can assist the health systems and independent
medical organizations in improving the operations of their physician networks by
offering the organizations a range of services to address their needs. Pursuant
to these affiliations, we provide management services to the physician networks
for a fee but do not acquire the assets or employ the personnel of the physician
groups, except certain key employees, and do not have any ongoing obligation to
provide capital to the affiliated groups. If we invest capital with these
groups, we may do so through a joint venture. To date, we have not invested any
capital with these groups. This modified structure enables the physician group
or health system to benefit from our management expertise, yet retain control of
its employees and decisions regarding future capital investment.

         In 2000, through PhySys, we also provided consulting services to
independent medical organizations and intend to pursue other similar engagements
in the future. PhySys not only provides support to physicians in health systems
but also provides consulting services through limited engagements. We anticipate
fees from consulting arrangements will increase in 2001, although there can be
no assurance that we will obtain any additional engagements or that they will be
profitable.

INDEPENDENT PRACTICE ASSOCIATIONS

         IPA Results

         As of December 31, 2000, we managed IPAs with approximately 16,600
physicians in 14 markets. Our IPA management division has experienced losses in
certain markets. In the third quarter of 2000, we determined to cease operations
in Houston, Dallas and two other IPA markets. We completed the closure of the
Houston and Dallas management company operations during the fourth quarter of
2000 and as a result of the closures we incurred asset impairment and
restructuring charges of $81.0 million during 2000. We closed our remaining IPA
management services in Florida in the first quarter of 2001 and sold our IPA
management company in Las Vegas. We are currently in discussions over the sale
of an additional IPA management company in one of our markets. Depending on the
outcome of these discussions, we may cease our IPA management operations in that
market. Through PrimeCare, we operate eight IPAs in California that constitute
over 75% of our revenues. In the fourth quarter of 2000, we determined to sell
our PrimeCare operations. We hope to complete the sale of the PrimeCare division
in the second or third quarter of 2001, although no definitive agreement
relating to the sale has been reached as of the date hereof. These IPA closure
and sale decisions may negatively impact a number of our payor relationships
and, if so, our remaining IPA operations would be materially adversely affected.
We anticipate operating IPA management companies in three or four markets after
the sale of PrimeCare.

         In 2000, revenues from IPA operations constituted approximately 35% of
our total revenue. In 2000, we recorded asset revaluation and restructuring
charges associated with IPA operations totaling approximately $164.7 million
related to the closing of certain IPAs and the subsequent exit from those
markets and the classification of certain assets held for sale. The assets were
written down because of a variety of negative operating and market events,
including the loss of relationships with physicians in those markets, which
resulted in an impairment of


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estimated future cash flows. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." As a result of the closure of
certain IPAs and the pending sale of PrimeCare, we anticipate that revenues from
our IPA division will decline significantly in 2001, although they will
represent a greater percentage of our total revenue in future periods because of
the sale of our clinic assets and the termination of the relevant management
agreements and the planned sale of CareWise.

         Development and Operation

         We are seeking to develop additional management relationships with IPAs
to enhance both capitated and non-capitated managed care contracting systems. We
currently anticipate continuing IPA management operations in three or four
markets developed and managed by NAMM. There can be no assurance that these
operations will continue or be profitable. Our affiliated IPAs provide or
contract for medical management services to assist physician networks in
obtaining and servicing both capitated and non-capitated managed care contracts
and enable previously unaffiliated physicians to assume and more effectively
manage capitated risk. In certain instances we have been required to underwrite
letters of credit to the managed care payor to help ensure payment of health
care costs for which our affiliated IPAs assume responsibility. As of April 6,
2001, we had outstanding letters of credit issued to managed care payors through
our Credit Facility totaling approximately $1.7 million. The terms of the Credit
Facility prohibit us from issuing additional letters of credit which could make
contracting with payors more difficult. We are exposed to losses if a letter of
credit is drawn upon and the related IPA fails to satisfy its reimbursement
obligation to us. We have experienced losses totaling approximately $400,000, as
of December 31, 2000, as a result of draws on such letters of credit.

         In 2000, we owned two HMOs and operated one additional HMO. We
completed the sale of all our affiliated HMOs in 2000, however, Advantage Care,
Inc., our Kentucky HMO operation (the "Kentucky HMO") was placed in voluntary
rehabilitation with the Commonwealth of Kentucky Department of Insurance on
November 8, 2000 by an Order Directing Rehabilitation of the Franklin County
Circuit Court, Division I, Commonwealth of Kentucky. Subsequently, effective
December 1, 2000, by Agreed Order, as the sole shareholder of the Kentucky HMO,
we consented to and requested the entry of an Order of Liquidation, and the
Court ordered that the Commissioner of Kentucky Department of Insurance be
appointed liquidator of the Kentucky HMO. The liquidator is currently winding
down the operations of the Kentucky HMO. It is anticipated that all claims will
be paid from the remaining assets of the Kentucky HMO, and that the liquidation
will be completed in the second quarter of 2001.

OTHER OPERATIONS

         We provide health care decision-support services, including demand
management and disease management services, to managed care organizations,
health care providers, employers and other group associations through CareWise.
At December 31, 2000, through CareWise, we provided healthcare decision-support
services to approximately 3.3 million consumers worldwide. CareWise had revenues
of $16.4 million in 2000. As of the date hereof, CareWise is held for sale,
although no definitive agreement has been reached regarding the sale.

         In 2001, through HPMdirect, we plan to commence offering health and
productivity services to self-insured employers to manage and reduce the
healthcare-related costs of their employees. We anticipate that this new
business will provide a variety of medical management and productivity
management to employers by utilizing technology-based integrated services.
Although we are seeking additional contracts, as of the date hereof we have one
small contract to provide utilization review services. There can be no assurance
that a market for HPMdirect's services will develop or that if developed, the
market will be significant or profitable.

REGULATION

         General

         The health care industry is highly regulated, and consistently subject
to significant change. In connection with the entry into new business lines, new
markets and managed care arrangements, the Company, our managed IPAs, the
physician networks, the health systems, and the employers with whom we contract
to provide services may become subject to additional regulation. In general,
regulation of health care companies is increasing.


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         Every state imposes licensing requirements on individual physicians and
on many facilities and services operated by physicians. In addition, federal and
state laws regulate managed care organizations, third party administrators, and
utilization review agents. Many states require regulatory approval, including
certificates of need, before establishing certain types of health care
facilities, offering certain services or making expenditures in excess of
statutory thresholds for health care equipment, facilities or programs.

         The Company and the physician organizations and health systems to which
we provide services, are also subject to federal, state and local laws dealing
with issues such as occupational safety, employment, medical leave privacy,
insurance regulations, civil rights and discrimination, and medical waste and
other environmental issues. At an increasing rate, federal, state and local
governments are expanding the regulatory requirements on businesses, including
health care organizations. The imposition of these regulatory requirements may
have the effect of increasing operating costs and further reducing our income
from operations.

         HIPAA Privacy and Security Requirements

         The Health Insurance and Portability Accountability Act of 1996, as
amended ("HIPAA") authorized the Department of Health and Human Services to
issue regulations designed to protect the privacy of individually identifiable
health information no later than February 21, 2000 if Congress failed to adopt
standards protecting the privacy of such information by August 1999. Neither
Congress nor the Department of Health and Human Services met these deadlines,
although the Department of Health and Human Services did issue proposed privacy
and security regulations in 1999. Final security regulations have not yet been
issued. Final privacy regulations were issued in December, 2000 and became
effective April 14, 2001. Prior to that date, however, in 2001, the incoming
administration reopened the final privacy regulations for additional comment,
suggesting that the final regulations may be further modified prior to final
implementation.

         In their current form, the HIPAA regulations contain very broad and
complex provisions which increase patient control over medical records, severely
limit the ways patient health information can be used, and require substantial
financial penalties for violating a patient's privacy. The HIPAA regulations
will significantly impact providers, payors and all consultants or business
partners of providers who have access to or transmit information about patients.
In their current form, the final regulations require providers to, among other
things, adopt privacy policies and designate privacy officers charged with
implementing the HIPAA privacy and security standards. The HIPAA privacy and
security regulatory scheme is new, complex and to some extent controversial. We
have little or no available authority interpreting the statute or the
regulations. We intend to comply fully with the HIPAA regulations, once
implemented; however, our actions may be reviewed or challenged by the
authorities having responsibility for HIPAA enforcement. If we violate HIPAA, we
will be subject to monetary fines and penalties, criminal sanctions and civil
causes of action. We cannot predict how further modifications to the final
regulations will impact our ability to comply or the costs of compliance.

         Insurance Regulation

         Our managed IPAs and physician groups enter into contracts and joint
ventures with licensed insurance companies, such as HMOs, whereby these IPAs and
physician groups may be paid on a capitated fee basis. Under capitation
arrangements, health care providers bear the risk, subject to certain loss
limits, that the total costs of providing medical services to members will
exceed the premiums received. To the extent that the IPAs and affiliated
physician groups subcontract with physicians or other providers for their
services on a fee-for-service basis, the managed IPAs and affiliated physician
groups may be deemed to be in the business of insurance. If deemed to be
insurers they will be subject to a variety of regulatory and licensing
requirements applicable to insurance companies or HMOs resulting in increased
costs to the managed IPAs and affiliated physician groups, and corresponding
lower revenue to us.

         In addition, our PrimeCare subsidiary holds a limited Knox-Keene
license in the State of California and, as a result, is subject to an increased
level of state oversight, including reserve requirements by the California
Department of Managed Health Care (the "DMHC"). During the third quarter of
2000, we reached an agreement with the DMHC regarding the funding of certain
cash reserve requirements for claims payment. Our operations would be adversely
affected if we failed to maintain compliance with the agreement and the
California regulators took corrective action. In addition, our planned sale of
PrimeCare will require the approval of the DMHC.


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         Managed Care Plans - Risk of Loss

         As indicated above, under capitation arrangements, health care
providers receive a fixed fee per plan member per month, and providers bear the
risk, generally subject to certain loss limits, that the total costs of
providing medical services to the members will exceed the fixed fee. The IPA
management fees are based, in part, upon a share of the portion, if any, of the
fixed fee that exceeds actual costs incurred. Some agreements with payors also
contain "shared risk" provisions under which, through the IPA, we can share
additional fees or additional costs, depending on the utilization rates of the
members and the success of the IPAs. Any significant costs that exceed the fixed
fee could have a material adverse effect on our operations.

         The health care provider's ability to effectively manage the costs and
utilization of medical services determines the profitability of a capitated fee.
The management fees are also based upon a percentage of revenue collected by the
IPA. Any loss of revenue by the IPAs because of the loss of affiliated
physicians, the termination of third party payor contracts or other changes in
plan membership or capitated fees may reduce our management fees. We, like other
managed care management entities, are often subject to liability claims arising
from the incentives inherent in capitated fee arrangements and activities such
as quality assurance and utilization management, designed to control costs
through more efficient utilization of healthcare services. A successful claim on
this basis against us, a physician group, health system, physician network or
IPA could have a material adverse effect on us.

         Antitrust Risks

         Federal and state antitrust laws prohibit agreements in restraint of
trade, the exercise of monopoly power and other practices that are considered to
be anti-competitive. We believe that we are in material compliance with federal
and state antitrust laws in connection with the operation of our physician
relationships and IPAs.

         State Legislation

         At the state level, all states have laws restricting the unlicensed
practice of medicine, and many states also prohibit the enforcement of
non-competition agreements against physicians. In addition, many states prohibit
referrals to facilities in which physicians have a financial interest. Many
states also prohibit the splitting or sharing of fees between physicians and
non-physician entities. Some states have interpreted management agreements with
physicians as unlawful fee-splitting. We do not believe that our contractual
arrangements with physician networks, hospitals or physician groups going
forward will subject us to these types of claims. Changes in the laws may
necessitate modifications in our relationships with our clients. There can be no
assurance that we would be able to modify our relationships appropriately with
our clients to ensure that the Company and our operations would not be adversely
affected by such changes in the laws. Statutes in some states could restrict the
expansion of our operations to that applicable jurisdiction.

         We anticipate that HPMdirect will provide certain utilization review
processes for its clients, these processes are subject to
regulatory scrutiny by certain states. Approximately 25 states, including the
first three states in which HPMdirect anticipates operating (Tennessee, Texas
and Florida) have some sort of utilization review/management licensing and
oversight regulations. Typically, these regulations require that licensed
registered nurses perform the utilization review and/or management activities,
and that specific policies and procedures be in place and approved by the
appropriate regulating entity of the state. Additionally, disease and case
management are fairly new areas of health care management which HPMdirect plans
to perform, and it is anticipated that new regulations will be developed as this
business develops. Our ability to comply with the existing and new regulations
will determine, in part, our ability to be successful in our HPMdirect
operations.

         Medicare Payment System

         Our affiliated physician groups and IPAs derived approximately 27% of
their net revenue in 2000 from payments for services provided to patients
enrolled in the federal Medicare program, including patients covered by risk
contracts. Clinics and IPAs managed by the Company provide medical services
under risk contracts to approximately 127,000 Medicare members. The prior system
of Medicare payments, other than for risk contracts,


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was based on customary, prevailing and reasonable physician charges and was
phased out from 1992 through 1996 and replaced with an annually-adjusted
resource-based relative value scale ("RBRVS").

         Medicare Fraud and Abuse and Anti-Referral Provisions

         There are many provisions in the Social Security Act that are intended
to address fraud and abuse among providers and other health care companies. One
of the fraud and abuse provisions (the "Anti-Kickback Statute") prohibits
providers and others from soliciting, receiving, offering or paying, directly or
indirectly, any form of remuneration in return for the referral of, or the
arranging for the referral of, Medicare and other federal or state health care
program patients or patient care opportunities. It also prohibits payments in
return for the purchase, lease, arrangement, or order of any item or service
that is covered by Medicare, certain other federal health care programs, or a
state health program.

         In July 1991, the federal government published regulations that provide
exceptions, or "safe harbors," for business transactions that will be deemed not
to violate the Anti-Kickback Statute. In November 1999, additional safe harbors
were published for eight activities, including referrals within group practices
consisting of active investors. In April 1998, the HHS Office of the Inspector
General released Advisory Opinion 98-4, which states that a percentage-based
management fee paid to a medical network management company does not fit within
any safe harbor. The opinion concludes that, because a percentage-based fee does
not fit within a safe harbor, such a fee could implicate the Anti-Kickback
Statute if any part of the management fee is intended to compensate the manager
for its efforts in arranging for referrals to the managed group. The opinion
acknowledges, however, that a management fee that does not fit within a safe
harbor is not necessarily illegal. Both the opinion and the preamble to the
government's published safe harbors state that arrangements that do not fall
within safe harbors are nevertheless legal as long as there is no intent on the
part of either party to pay for or accept payment for referrals. Although many
of our arrangements, including the arrangements between NAMM and providers and
provider groups, do not in all instances fall within the protection offered by
these safe harbors, we believe our operations are in material compliance with
applicable Medicare fraud and abuse laws.

         We believe our operations are in material compliance with the
Anti-Kickback Statute. Although we were receiving remuneration under our service
agreements and management agreements for the services we provided to our
formerly affiliated clinics and IPAs, we were not in a position to make or
influence referrals of federal or state health care program patients or services
to the physician groups or networks. Under our continuing and new agreements, we
will not be in a position to make or influence referrals. Moreover, we believe
that the fees we receive represent fair value for our services. No part of the
fees we receive are intended to be remuneration for improper activities.
Consequently, we do not believe that the service fees we received and management
fees that we receive from our clients could be viewed as remuneration for
referring or influencing referrals of patients or services covered by federal or
state health care programs as prohibited by the Anti-Kickback Statute. We were a
separate provider of Medicare and state health program reimbursed services on a
limited basis in the state of Georgia because we employed four physicians in
that state.

         If any of our arrangements were found to be in violation of the
Anti-Kickback Statute, the Company, the hospital, the physician groups and/or
the individual physicians would be subject to civil and criminal penalties,
including possible exclusion from participation in government health care. These
penalties could have a materially adverse affect on our results of operations.

         Under legislation known as the Stark Law, physicians who have an
ownership interest or a compensation arrangement with certain providers of
"designated health services" are prohibited from referring Medicare and Medicaid
patients to those providers, unless an exception exists. The "designated health
services" covered by the Stark Law include physical therapy services;
occupational therapy services; radiology services, including MRI, CT and
ultrasound; radiation therapy services; durable medical equipment; parenteral
and enteral nutrients, equipment and supplies; prosthetics, orthotics and
prosthetic devices; home health services; outpatient prescription drugs; and
inpatient and outpatient hospital services. If any of the providers with whom we
contract are found to be in violation of the Stark Law, they could be subject to
significant penalties. In such case, the likelihood of us continuing our
relationship with the affected provider is remote, and accordingly, such
termination would negatively impact our revenue.


                                       8
<PAGE>   9

         Impact of Health Care Regulatory Changes

         Congress and many state legislatures routinely consider proposals to
control health care spending. Government efforts to reduce health care expenses
through the use of managed care or the reduction of Medicare and Medicaid
reimbursement may adversely affect our cost of doing business and contractual
relationships. For example, recent developments that affect the Company's
activities include: (a) federal legislation requiring a health plan to continue
coverage for individuals who are no longer eligible for group health benefits
and prohibiting the use of "pre-existing condition" exclusions that limit the
scope of coverage; (b) a Health Care Financing Administration policy prohibiting
restrictions in Medicare risk HMO plans on a physician's recommendation of other
health plans and treatment options to patients; and (c) regulations imposing
restrictions on physician incentive provisions in physician provider agreements.
Our operating results may be adversely effected by these types of legislation,
programs and other regulatory changes.

         We believe our operations are in material compliance with applicable
law and expect to modify our agreements and operations to conform in all
material respects to future regulatory changes. Our ability to be profitable
will depend in part upon our managed physician groups and IPAs obtaining and
maintaining all necessary licenses, certificates of need and other approvals and
operating in compliance with applicable health care regulations. We are unable
to determine what additional government regulations, if any, affecting our
business may be enacted in the future or how existing or future laws and
regulations might be interpreted by the relevant regulatory authorities. The
failure of the Company, any managed IPA or physician network or group with whom
we contract to comply with applicable law could have a material adverse effect
on our results of operations.

COMPETITION

         Our current financial position may adversely affect our ability to
compete effectively in all of our business areas. Managing medical networks is a
highly competitive business. Many businesses compete with us to manage medical
clinics and physician organizations, affiliate with clinic physicians, manage
the physician networks of health systems and to provide services to IPAs. These
competitors include large hospitals, other multi-specialty clinics and health
care companies, HMOs and insurance companies. We may not be able to compete
effectively with existing or new competitors. Additional competition may make it
more difficult to enter into relationships with physician groups and health
systems or to develop or manage IPAs on beneficial terms. To the extent that
health care industry reforms make prepaid medical care more attractive and
provide incentives to form organized health care systems, we anticipate facing
greater competition. Our revenues are dependent upon the IPAs and health systems
that we manage. These organizations face competition from several sources,
including sole practitioners, single and multi-specialty groups and staff model
HMOs.

         In addition, many entities including but not limited to disease
management companies, service companies and consultants and HMOs compete to
provide certain of the medical management programs to self-insured employers, as
contemplated by HPMdirect. Many of these companies have more experience in the
provision of such services and greater access to capital than us, accordingly,
we may not be able to compete effectively with these companies.

INSURANCE

         We maintain managed healthcare errors and omissions insurance on a
claims made basis for all of our managed care operations. Insurance coverage
under such policies is contingent upon a policy being in effect when a claim is
made, regardless of when the events which caused the claim occurred. We also
maintain general liability and some umbrella coverage on an occurrence basis. In
addition, we are named as additional insureds on medical malpractice policies of
some physician group with whom we had service agreements. In other cases,
however, we have no insurance for malpractice claims brought against such
physician groups. The cost and availability of such coverage has varied widely
in recent years. We believe our insurance policies are adequate in amount and
coverage for our current operations. There can be no assurance, however, that
the coverage we maintain is sufficient to cover all future claims or will
continue to be available in adequate amounts or at a reasonable cost.


                                       9
<PAGE>   10

EMPLOYEES

         As of December 31, 2000, we employed approximately 4,000 people, a
decline of 75% from December 31, 1999, as a result of the disposition of our
multi-specialty clinics and certain IPA market closures. This number included 58
employees in the corporate office. None of our employees is a member of a labor
union, and we consider our relations with our employees to be good.

ITEM 2.       PROPERTIES

         We lease approximately 42,000 square feet of rentable space at 30
Burton Hills Boulevard in Nashville, Tennessee, where the Company's headquarters
are located. We pay approximately $57,000 per month in rent, net of sublease
income of $15,000 per month. The rent increases over the term of the lease to
approximately $60,000 per month in the final year. The lease expires in 2003. We
believe this arrangement and other available space are adequate for our
current needs.

         In conjunction with the acquisition of PrimeCare, we acquired real
estate related to PrimeCare's operations. One of these properties is subject to
a mortgage with an aggregate outstanding principal balance as of March 31, 2001
of approximately $1.1 million which bears interest at 9.75% and matures in 2006.

         The Company does not anticipate that it will acquire real estate in
connection with any new activities.

ITEM 3.       LEGAL PROCEEDINGS

         The Company and certain of its current and former officers and
directors, Joseph C. Hutts, Derril W. Reeves, Thompson S. Dent, Richard D.
Wright and John K. Crawford (only Mr. Dent remains employed by the Company while
he and Mr. Hutts serve as directors) have been named defendants in 10 securities
fraud class actions filed in state and federal courts in Tennessee between
September 8, 1998 and June 24, 1999. The factual allegations of the complaints
in all 10 actions are substantially identical and assert that during various
periods between April 22, 1997 and September 22, 1998, the defendants issued
false and misleading statements which materially misrepresented the earnings and
financial condition of the Company and its clinic operations and misrepresented
and failed to disclose various other matters concerning the Company's operations
in order to conceal the alleged failure of the Company's business model.
Plaintiffs further assert that the alleged misrepresentations caused the
Company's securities to trade at inflated levels while the individual defendants
sold shares of the Company's stock at such levels. In each of the actions, the
plaintiff seeks to be certified as the representative of a class of all persons
similarly situated who were allegedly damaged by the defendants' alleged
violations during the "class period." Each of the actions seeks damages in an
indeterminate amount, interest, attorneys' fees and equitable relief, including
the imposition of a trust upon the profits from the individual defendants'
trades. The federal court actions have been consolidated in the U. S. District
Court for the Middle District of Tennessee. Defendants' motion to dismiss was
denied. The state court actions were consolidated in Davidson County, Tennessee.
The Plaintiffs' original consolidated class action compliant in state court was
dismissed for failure to state a claim. Plaintiffs, however, were granted leave
to file an amended complaint. The amended complaint filed by Plaintiffs
asserted, in addition to the original Tennessee Securities Act claims, that
Defendants had also violated Section 11 and 12 of the Securities Act of 1933 for
alleged misleading statements in a prospectus released in connection with the
CareWise acquisition. The amended complaint also added KPMG LLP (KPMG), the
Company's independent public auditors. KPMG removed this case to federal court
and its motion to dismiss has been denied. On October 20, 2000, this case was
consolidated with the original federal consolidated action and a new
consolidated complaint has been filed. The Company, the individual defendants
and KPMG have filed an answer and the discovery process is nearing completion.
The trial of all the consolidated cases is set for November 6, 2001. The Company
believes that it has meritorious defenses to all of the claims, and is
vigorously defending against these actions. There can be no assurance, however,
that such defenses will be successful or that the lawsuits will not have a
material adverse effect on the Company. The Company's Restated Charter provides
that the Company shall indemnify the officers and directors for any liability
arising from these suits unless a final judgment establishes liability (a) for a
breach of the duty of loyalty to the Company or its shareholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or
knowing violation of law or (c) for an unlawful distribution.


                                       10
<PAGE>   11

         On April 18, 2000, a jury in the case of United States of America ex
rel. William R. Benz v. PrimeCare International, Inc. and Prem Reddy, in the
United States District Court, Central District of California, returned a verdict
in favor of the plaintiff as follows: $500,000 against PrimeCare on plaintiff's
breach of contract claims; $900,000 in compensatory damages and $3 million in
punitive damages jointly and severally against PrimeCare and Prem Reddy on
plaintiff's claims for wrongful termination and intentional infliction of
emotional distress; and $200,000 against PrimeCare on plaintiff's claim for
violations of state labor codes. The jury returned a verdict in defendants'
favor on plaintiff's claim for retaliatory termination under the False Claims
Act. The jury was unable to reach a verdict on plaintiff's Medicare fraud
claims. The court entered a final judgment on July 13, 2000. The Company has
recorded as other operating expenses this judgment of $4.6 million in the second
quarter of 2000. PrimeCare is appealing the verdict, and a retrial of the
Medicare fraud claims will not occur until there is a ruling on PrimeCare's
appeal. Plaintiff filed a judgment lien against PrimeCare on August 31, 2000.
PrimeCare has not posted a bond in this matter. PrimeCare and the plaintiff are
discussing settlement of these claims. There can be no assurance that a
settlement will be reached. The Plaintiff's enforcement of this judgment against
PrimeCare would have a material adverse effect on PrimeCare.

         On February 2, 1999, Prem Reddy, M.D., the former majority shareholder
of PrimeCare, a medical network management company acquired by the Company in
May 1998, filed suit against the Company and certain of its current and former
executive officers in the United States District Court for the Central District
of California asserting fraudulent inducement relating to the PrimeCare
transaction and that the defendants issued false and misleading statements which
materially misrepresented the earnings and financial condition of the Company
and its clinic operations and misrepresented and failed to disclose various
other matters concerning the Company's operations in order to conceal the
alleged failure of the Company's business model. On June 5, 2000, the court
granted the Company's motion for partial summary judgment, which eliminated the
plaintiff's allegations of fraud and violations of federal and state securities
laws. On October 4, 2000, the court granted the Company summary judgment motions
with respect to all of plaintiff's remaining claims, granted the Company summary
judgment with respect to the Company's $5 million indemnity counter claim
against the plaintiffs and granted the Company's summary judgment trespass
counter claim against Dr. Reddy, leaving for trial only a determination of the
extent of damages on the trespass counter claim.

         On July 26, 2000, Prem Reddy filed a new action captioned Prem Reddy,
M.D. v. Harry Lifschutz, M.D., PhyCor, Inc. and Does 1 through 50, in Superior
Court of the State of California, County of San Bernardino, alleging claims for
unfair business practices and fraudulent conveyances in connection with the
Company's efforts to sell Company assets located in California and other
locations. In response, the Company, on July 27, 2000, removed the action to the
United States District Court, Central District of California.

         In September 2000, PrimeMed Pharmacy Services, Inc. and Desert Valley
Medical, Inc., companies in which Dr. Reddy owns a controlling interest filed
three suits against PrimeCare International, Inc. and several affiliated medical
groups alleging failure to pay invoices for certain prescription drugs, medical
supplies and equipment of approximately $1,900,000.

         Effective January 1, 2001, all five of the above-described lawsuits
involving Dr. Reddy were settled. Affiliates of Dr. Reddy reacquired Desert
Valley Medical Group, Desert Valley Hospital and Apple Valley Surgery Center for
cash consideration totaling approximately $8.0 million. In connection with the
last three suits, PrimeCare paid $500,000 to the plaintiffs, which was applied
as a credit in connection with the acquisition.

         In August 1999, Medical Arts Clinic Association (Medical Arts) filed
suit against the Company in the District Court of Navarro County, Texas. The
Company removed this case to Federal District Court for the Northern District of
Texas. Medical Arts sought damages for breach of contract and rescission of the
service agreement and declaratory relief regarding the enforceability of the
service agreement alleging it is null and void on several grounds, including but
not limited to, the violation of state law provisions as to the corporate
practice of medicine and fee splitting. On April 24, 2000 the Texas District
Court of Navarro County, Texas, ordered the appointment of a receiver to
rehabilitate Medical Arts. The case was fully settled and resolved in February
2001, upon the sale of all assets by PhyCor of Corsicana, LP to Medical Arts for
cash consideration and assumption of liabilities.

         In September 1999, three relators brought a claim in the United States
District Court for the District of Hawaii under the False Claims Act against
Straub Clinic and Hospital, Inc. ("Straub"), PhyCor of Hawaii, Inc., and


                                       11
<PAGE>   12

the Company. This matter had been under seal until September 2000. On September
20, 2000, the United States government elected to decline to intervene in the
matter. The Company sold PhyCor of Hawaii, Inc. to Straub in November 2000. On
February 21, 2001, plaintiffs filed a Second Amended Complaint. PhyCor, Inc. has
filed a Motion to Dismiss the claim against it, and Straub is defending the
claims against PhyCor of Hawaii, Inc.

         As a result of the Company's determination to exit its IPA market in
Houston, Texas, a number of providers in the market have brought actions naming
several parties, including the Company and an IPA-management subsidiary of the
Company, alleging breach of contract, among other matters. In addition, as a
result of the Company's financial condition, the Company has been unable to meet
certain contractual obligations including, but not limited to, certain ongoing
lease obligations and severance and bonus obligations to former and existing
employees. There can be no assurance that the Company will meet its existing or
additional contractual obligations in the future. Several parties have sent
letters to the Company alleging breach of contract and threatening to bring
claims against the Company. There can be no assurance that additional actions
will not be brought against the Company and its subsidiaries as a result of the
Company's actions. There can be no assurance that if these matters are
determined adversely to the Company that such determinations would not have a
material adverse effect on the Company.

         Certain litigation is pending against the physician groups which were
affiliated with the Company and IPAs managed by the Company. The Company has not
assumed any liability in connection with such litigation. Claims against the
physician groups and IPAs could result in substantial damage awards to the
claimants which may exceed applicable insurance coverage limits. While there can
be no assurance that the physician groups and IPAs will be successful in any
such litigation, the Company does not believe any such litigation will have a
material adverse effect on the Company.

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

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

         Not applicable.


                                       12
<PAGE>   13

                                     PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS

         The Company's common stock is traded on the Over-the-Counter Market
under the symbol PHYC.

<TABLE>
<CAPTION>
                                1999                                              HIGH          LOW
                                ----                                             ------        ------
                   <S>                                                           <C>           <C>
                   First Quarter........................................         $ 8.38        $ 4.50
                   Second Quarter.......................................           7.88          3.88
                   Third Quarter........................................           7.47          3.84
                   Fourth Quarter.......................................           4.56          1.03

<CAPTION>
                   2000

                   First Quarter........................................          $2.75         $0.53
                   Second Quarter.......................................           1.13          0.44
                   Third Quarter........................................           0.72          0.08
                   Fourth Quarter.......................................           0.17          0.03

<CAPTION>
                   2001

                   First Quarter........................................           0.14          0.03
                   Second Quarter (through April 16, 2001) ..............          0.05          0.03
</TABLE>

         As of March 30, 2001, the Company had approximately 26,500
shareholders, including 3,451 shareholders of record and approximately 23,000
persons or entities holding common stock in nominee name.

         We do not pay cash dividends and intend to retain our earnings, if any,
to finance the growth of our businesses. The declaration of other dividends is
currently prohibited by the Credit Facility and our synthetic lease facility,
and it is anticipated that other loan agreements and leases which we may enter
into in the future will also contain restrictions on the payment of dividends by
the Company.


                                       13
<PAGE>   14

ITEM 6.       SELECTED FINANCIAL DATA(1)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                    2000            1999            1998            1997            1996
----------------------------------------------------  -----------      -----------     -----------     -----------     -----------
                                                                       (000'S EXCEPT FOR EARNINGS PER SHARE)
<S>                                                   <C>              <C>             <C>             <C>             <C>
Statement of Operations Data:
Net revenue ......................................... $   914,195      $ 1,516,195     $ 1,512,499     $ 1,119,594     $   766,325
Operating expenses:
  Cost of provider services .........................     227,177          204,202         134,302              --              --
  Salaries, wages and benefits ......................     280,159          490,738         513,646         421,716         291,361
  Supplies ..........................................     112,799          222,007         227,440         181,565         119,081
  Purchased medical services ........................      17,289           36,403          37,774          31,171          21,330
  Other expenses ....................................     157,473          235,165         218,359         171,480         125,947
  General corporate expenses ........................      22,213           32,305          29,698          26,360          21,115
  Rents and lease expense ...........................      61,349          118,104         126,453         100,170          65,577
  Depreciation and amortization .....................      50,818           90,435          90,238          62,522          40,182
  Provision for asset revaluation, restructuring
     and refinancing (2) ............................     559,878          430,965         224,900          83,445              --
  Merger expenses ...................................          --               --          14,196              --              --
                                                      -----------      -----------     -----------     -----------     -----------
     Net operating expenses .........................   1,489,155        1,860,324       1,617,006       1,078,429         684,593
                                                      -----------      -----------     -----------     -----------     -----------
     Earnings (loss) from operations ................    (574,960)        (344,129)       (104,507)         41,165          81,732
Interest income .....................................      (6,059)          (5,022)         (3,032)         (3,323)         (3,867)
Interest expense ....................................      35,739           40,031          36,266          23,507          15,981
                                                      -----------      -----------     -----------     -----------     -----------
     Earnings (loss) before income taxes, minority
      interest and extraordinary item ...............    (604,640)        (379,138)       (137,741)         20,981          69,618
Income tax expense (benefit) ........................       1,029           53,318         (39,890)          6,098          22,775
Minority interest in earnings of consolidated
     partnerships ...................................       2,715           13,088          13,596          11,674          10,463
                                                      -----------      -----------     -----------     -----------     -----------
     Earnings (loss) before extraordinary item.......    (608,384)        (445,544)       (111,447)          3,209          36,380
Extraordinary item - gain from extinguishment of
     convertible subordinated debentures ............          --            1,018              --              --              --
                                                      -----------      -----------     -----------     -----------     -----------
     Net earnings (loss) ............................ $  (608,384)     $  (444,526)    $  (111,447)    $     3,209     $    36,380
                                                      ===========      ===========     ===========     ===========     ===========
Earnings (loss) per share:
  Basic -- Continuing operations .................... $     (8.30)     $     (5.92)    $     (1.55)    $       .05     $       .67
           Extraordinary item .......................          --             0.01              --              --              --
                                                      -----------      -----------     -----------     -----------     -----------
                                                      $     (8.30)     $     (5.91)    $     (1.55)    $       .05     $       .67
                                                      ===========      ===========     ===========     ===========     ===========
  Diluted -- Continuing operations .................. $     (8.30)     $     (5.92)    $     (1.55)    $       .05     $       .60
             Extraordinary item .....................          --             0.01              --              --              --
                                                      -----------      -----------     -----------     -----------     -----------
                                                      $     (8.30)     $     (5.91)    $     (1.55)    $       .05     $       .60
                                                      ===========      ===========     ===========     ===========     ===========
Weighted average shares outstanding(3)
  Basic .............................................      73,281           75,179          71,822          62,899          54,608
  Diluted ...........................................      73,281           75,179          71,822          66,934          61,096

DECEMBER 31,
Balance Sheet Data:
Working capital (deficit) ........................... $  (305,766)     $   197,780     $   187,854     $   203,301     $   182,553
Total assets ........................................     145,014        1,194,925       1,879,285       1,562,776       1,118,581
Long-term debt ......................................       3,499          555,490         651,209         501,107         444,207
Total shareholders' equity (deficit) ................    (264,989)         343,503         804,410         710,488         451,703
</TABLE>

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

(1)      See Item 7. "Management's Discussion and Analysis of Financial
         Condition and Results of Operations" for information relating to
         dispositions of business operations that effect the comparability of
         the information reflected herein and information regarding the
         uncertainty of the Company's future financial condition.

(2)      Provision for asset revaluation and restructuring relates to
         revaluation of assets of certain of the Company's affiliated clinics
         and IPAs.

(3)      Per share amounts and weighted average shares outstanding have been
         adjusted for the three-for-two stock split effected June 1996.


                                       14
<PAGE>   15

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

         We are a medical network management company that develops and manages
IPAs, provides contract management services to physician networks owned by
health systems, manages certain medical organizations and provides consulting
services to independent medical organizations. Through CareWise, which is held
for sale, we also provide health care decision-support services, including
demand management and disease management services, to managed care
organizations, health care providers, employers and other group associations. We
are planning to provide health and productivity services to self-insured
employers through HPMdirect.

         Our CareWise and PrimeCare operations are held for sale. We are
obligated to use substantially all of the cash proceeds from these and any other
asset sales to pay all amounts and letters of credit outstanding under the
Credit Facility, currently $4.0 million, net of cash collateral. The planned
sales of CareWise and PrimeCare should completely satisfy these obligations. In
the event the proceeds from the asset sales are less than anticipated or are not
received when anticipated, we may experience difficulty meeting our obligations
under the Credit Facility. Such difficulty could cause a material adverse effect
on our operations. There can be no assurance that the asset sales will be
consummated, that the terms of the sales will be agreeable to us or that
additional charges to earnings will not be necessary as a result of the final
terms of the assets sales.

         As of the date hereof, as a result of our failure to pay the
approximately $4.4 million interest payment due February 15, 2001 on the Notes,
we are in default under the Notes. Moreover, the default under the Notes, caused
a default under the Credit Facility, which default has been waived by the senior
lenders. If the Notes were to be accelerated, a default would occur under the
Warburg Notes, held by affiliates of Warburg, Pincus. As of the date hereof, we
have obtained limited forbearance agreements through April 30, 2001, with
additional automatic ten business day extensions unless otherwise notified, from
bondholders representing approximately 57% of the Notes in the aggregate, and a
waiver and forbearance agreement from Warburg, Pincus through June 30, 2001
subject to certain conditions. We have also defaulted on obligations related to
several equipment and facilities leases. In connection with the audit of our
financial statements for the year ended December 31, 2000, our independent
auditors stated in their report that our recurring losses from operations, net
capital deficiency and net working capital deficit raise substantial doubt about
our ability to continue as a going concern. We have engaged Jefferies & Company,
Inc. to assist us in restructuring our balance sheet. In light of our operating
history and current projections and in connection with the restructuring, it may
be necessary to seek protection from our creditors in the future.

         The continued sales of our assets will result in a significant
reduction in our revenues in 2001 and beyond. To date in 2001, we have completed
the disposition of the assets of all six remaining owned clinics and our
remaining hospital and certain real estate and received proceeds consisting of
$56.5 million in cash and $13.8 million in notes receivable, in addition to
certain liabilities being assumed by the purchasers. We believe that we will
derive only a small percentage of our revenues from the provision of management
services to clinics in which we have a capital investment in 2001 and beyond.

         Pursuant to our former service agreements with our affiliated clinics,
the affiliated physician groups were obligated to purchase at net book value all
of the assets associated with the clinic upon termination of the service
agreement. Our ability to recover the net book value associated with a
terminated service agreement was largely dependent upon the circumstances of the
termination, the willingness of the physicians to honor their agreement with us
and the financial position of the physicians affiliated with the clinic. We
evaluated, on an individual basis, the appropriate course of action for each of
our terminated service agreements and pursued, what management believed to be,
the most appropriate and effective course, given the facts and circumstances of
the particular termination, to recover the amounts owed as a result of such
termination.

         Under substantially all of our former clinic service agreements, we
received a fee equal to the clinic expenses we incurred plus a percentage of
operating income of the clinic (net clinic revenue less certain contractually
agreed upon clinic expenses before physician distributions) and, under all other
types of service and management agreements except one described in (iv) below,
we received a percentage of net clinic revenue plus a percentage of operating
income. In 2000, our service and management agreement revenue was derived from
contracts with


                                       15
<PAGE>   16

the following fee structures: (i) 91.2% of revenue was derived from contracts in
which the service fee was based on a percentage, ranging from 12% to 18%, of
clinic operating income plus reimbursement of clinic expenses; (ii) 2.0% of
revenue was derived from a contract in which the service fee was based on 51.7%
of net clinic revenue; (iii) 1.3% of revenue was derived from contracts in which
the service fee was based upon a combination of (a) 10% of clinic operating
income, (b) a percentage, ranging from 2.75% to 3.5%, of net clinic revenue and
(c) reimbursement of clinic expenses; and (iv) 5.5% of revenue was derived from
flat fee contracts.

         Historically, we have not consolidated the physician practices we
managed for financial reporting purposes because we did not have operating
control of these practices. Physician practices and IPAs that we owned and
operated are consolidated for financial reporting purposes.

         Through our PhySys subsidiary, we provide management and support
services to two of our formerly affiliated multi-specialty clinics, the Harbin
Clinic in Rome, Georgia and the Lakeview Medical Group in Suffolk, Virginia.
These agreements are for terms ranging from five to seven years, subject to
termination for various reasons. We do not employ the personnel at these
clinics. In addition, through PhySys, we provide management services to the
physician networks of health systems. At present, our PhySys subsidiary provides
management and support services to the 124-physician group related to the
Rockford Health System, a health care delivery system serving northern Illinois
and southern Wisconsin. The Rockford agreement is for a period of 38 1/2 months
but is subject to termination on December 31, 2002. In addition, we anticipate
entering an agreement to provide services to a 120-member physician group
affiliated with a large medical system in Sacramento, California in the near
future. The agreement is for a three year term but is subject to earlier
termination by either party in certain circumstances. In addition, we provide
management services, including billing and collection services, to
Columbia-Healthone, LLC in Denver, Colorado, as well as to an individual
physician group in Colorado. We anticipate closing or selling the Colorado
operations in 2001. We are pursuing additional relationships with health systems
and physician groups but there is no assurance that we will enter into similar
arrangements in the future or that such arrangements will be successful.

         We believe that we can assist the health systems and independent
medical organizations in improving the operations of their physician networks by
offering the organizations a range of services to address their needs. Pursuant
to these affiliations, we provide management services to the physician networks
for a fee but do not acquire the assets or employ the personnel of the physician
groups, except certain key employees, and do not have any ongoing obligation to
provide capital to the affiliated groups. If we invest capital with these
groups, we may do so through a joint venture. To date, we have not invested any
capital with these groups. This modified structure enables the physician group
or health system to benefit from our management expertise, yet retain control of
its employees and decisions regarding future capital investment.

         In 2000, through PhySys we also provided consulting services to
independent medical organizations and intend to pursue other similar engagements
in the future. PhySys not only provides support to physicians in health systems
but also provides consulting services through limited engagements. We anticipate
fees from consulting arrangements will increase in 2001, although there can be
no assurance that we will obtain any additional engagements or that they will be
profitable.

         We anticipate operating IPA management companies in three or four
markets after the sale of PrimeCare. We are seeking to develop additional
contracts to manage IPAs to enhance both capitated and non-capitated managed
care contracting systems. Fees earned from managing the IPAs are based upon a
percentage of revenue collected by the IPAs and a share of surplus, if any, of
capitated revenue of the IPAs. We have not historically been a party to the
capitated contracts entered into by our affiliated IPAs, but through the
calculation of our service fees are exposed to indirect losses based on the
capitated risk assumed by the IPA, if any, resulting from the capitated
contracts of the IPAs. Through the PrimeCare and The Morgan Health Group, Inc.
("MHG") acquisitions in 1998, we became a party to certain managed care
contracts and, accordingly are exposed to direct losses, if any, resulting from
the PrimeCare capitated contracts. We had terminated all managed care contracts
of MHG by April 30, 1999. In addition, at December 31, 2000, we had underwritten
letters of credit totaling $3.1 million for the benefit of certain managed care
payors to help ensure payment of costs for which its affiliated IPAs are
responsible. We are exposed to losses if a letter of credit is drawn upon and
the related IPA fails to satisfy its reimbursement obligation to us. We have
experienced losses totaling approximately $400,000, as of December 31, 2000, as
a result of draws on letters of credit.


                                       16
<PAGE>   17

         The table below indicates the number of clinics and physicians
affiliated with the Company and provides certain information with respect to our
IPA operations at the end of each of the years indicated:

<TABLE>
<CAPTION>
                                                 2000              1999           1998        1997            1996
                                               -------           -------        -------     -------         -------
<S>                                            <C>               <C>            <C>         <C>             <C>
Clinic operations:
Number of affiliated clinics.........                6                41             56          55              44
Number of affiliated physicians......              471             2,581          3,693       3,863           3,050
IPA operations:
Number of markets....................               14                25             35          28              17
Number of physicians.................           16,600            24,400         22,900      19,000           8,700
Number of commercial members.........          472,000           767,000        730,000     420,000         306,000
Number of Medicare members...........          114,000           215,000        171,000      99,000          69,000
</TABLE>

         The table below indicates the payor mix of the aggregate net clinic
revenue earned by the physician groups and IPAs currently affiliated with the
Company.

<TABLE>
<CAPTION>
                                                        2000         1999         1998          1997          1996
                                                      -------      -------      -------       -------       -------
<S>                                                   <C>          <C>          <C>           <C>           <C>
Medicare.....................................           14%           16%          19%          22%           20%
Medicaid.....................................            2             3            3            4             3
Managed care(1)..............................           68            62           51           41            42
Private payor and insurance..................           16            19           27           33            35
                                                      ----           ---          ---          ---           ---
                                                       100%          100%         100%         100%          100%
                                                      ====           ===          ===          ===           ===
</TABLE>

(1)      Includes HMO, PPO, Medicare risk contracts and direct employer
         contracts, of which approximately 70% of 2000 managed care revenue was
         attributable to capitated contracts.

         Many of the payor contracts entered into on behalf of our managed IPAs
are based on capitated fee arrangements. Under capitation arrangements, health
care providers bear the risk, subject to certain loss limits, that the aggregate
costs of providing medical services to members will exceed the payments
received. The IPA management fees are based, in part, upon a share of the
remaining portion, if any, of capitated amounts of revenues after payment of
expenses. Agreements with payors also contain shared risk provisions under which
the Company and the IPA can earn additional compensation based on utilization of
hospital services by members. We may be required to bear a portion of any loss
in connection with such shared risk provisions. The profitability of the managed
IPAs is dependent upon the rates negotiated, the ability of the providers to
effectively manage the costs of providing medical services and the level of
utilization of medical services. The management fees are also based upon a
percentage of revenue collected by the IPAs. Through calculation of our service
fees, we also share indirectly in capitation risk assumed by our affiliated
physician groups.

         We provide health care decision-support services, including demand
management and disease management services, to managed care organizations,
health care providers, employers and other group associations through CareWise.
At December 31, 2000, we provided healthcare decision-support services to
approximately 3.3 million consumers worldwide. CareWise had revenues of $16.4
million in 2000. CareWise is held for sale, although no definitive agreement has
been reached regarding the sale.

         In 2001, through HPMdirect, we plan to commence offering health and
productivity services to self-insured employers to manage and reduce the
healthcare-related costs of their employees. We anticipate that this new
business will provide a variety of medical management and productivity
management to employers by utilizing technology-based integrated services.
Although we are seeking additional contracts, as of the date hereof we have one
small contract to provide utilization review services. There can be no assurance
that a market for HPMdirect's services will develop or that if developed, the
market will be significant or profitable.


                                       17
<PAGE>   18

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                                               2000          1999       1998
---------------------------------------------------------------------------          ------        ------      ------
<S>                                                                                  <C>           <C>         <C>
Net revenue ...............................................................           100.0%       100.0%      100.0%
Operating expenses:
    Cost of provider services .............................................            24.9         13.5         8.9
    Salaries, wages and benefits ..........................................            30.7         32.4        33.9
    Supplies ..............................................................            12.3         14.6        15.0
    Purchased medical services ............................................             1.9          2.4         2.5
    Other expenses ........................................................            17.2         15.5        14.4
    General corporate expenses ............................................             2.4          2.1         2.0
    Rents and lease expense ...............................................             6.7          7.8         8.4
    Depreciation and amortization .........................................             5.6          6.0         6.0
    Provision for asset revaluation and clinic restructuring ..............            61.2         28.4        14.9
    Merger expenses .......................................................              --           --         0.9
                                                                                      -----        -----        ----
Net operating expenses ....................................................           162.9        122.7       106.9
    Loss from operations ..................................................           (62.9)       (22.7)       (6.9)
Interest income ...........................................................            (0.7)        (0.3)       (0.2)
Interest expense ..........................................................             3.9          2.6         2.4
                                                                                      -----        -----        ----
    Loss before income taxes, minority interest and extraordinary item
                                                                                      (66.1)       (25.0)       (9.1)
Income tax expense (benefit) ..............................................             0.1          3.5        (2.6)
Minority interest .........................................................             0.3          0.9         0.9
                                                                                      -----        -----        ----
    Loss before extraordinary item ........................................           (66.5)       (29.4)       (7.4)
    Extraordinary item - gain from early extinguishment of convertible
     subordinated debentures ..............................................              --          0.1          --
                                                                                      -----        -----        ----
         Net loss .........................................................           (66.5)%      (29.3)%      (7.4)%
                                                                                      =====        =====        ====
</TABLE>

2000 COMPARED TO 1999

         Net revenue decreased $602.0 million, or 39.7%, from $1.516 billion for
1999 to $914 million for 2000. Net revenue from clinics ("Clinic Net Revenue")
decreased in 2000 from 1999 by $566.5 million, comprised of (i) a $477.9 million
decrease in our service fees for reimbursement of clinic expenses incurred by us
and (ii) a $88.6 million decrease in our fees from clinic operating income and
net physician group revenue. Decreases in Clinic Net Revenue for the year
included reductions of $5.1 million from clinics whose assets were held for sale
at December 31, 2000 and reductions of $567.3 million as a result of clinic
operations disposed of in 2000. Fees from management contracts that were entered
into in the fourth quarter of 1999 totaling $5.9 million in 2000 partially
offset these decreases. The decrease in Clinic Net Revenue was also impacted by
declining reimbursement for services rendered by the physician groups.
Specifically, the provision for doubtful accounts and contractual adjustments as
a percentage of gross physician group, hospital and other revenue increased from
43.1% for 1999 to 46.2% for 2000.

         Net revenue from IPAs decreased $37.1 million, or 10.3%, from $358.3
million for 1999 to $321.2 million for 2000. The closing of MHG in 1999 caused a
decrease in IPA Net Revenue of approximately $18.0 million in 2000. IPA Net
Revenue decreased approximately $46.8 million in 2000 primarily as a result of
the decision to restructure and close the Houston, Dallas and various other IPA
markets. IPA Net Revenues during 2000 included an increase of approximately $1.6
million from an IPA market and a management agreement entered into subsequent to
the third quarter of 1999. Additionally, IPA Net Revenues increased $44.6
million for 2000 due to the Company's acquisition of the remaining interest in
the Kentucky HMO in late 1999. This HMO was placed in voluntary rehabilitation
with the Commonwealth of Kentucky Department of Insurance in November 2000 as a
result of minimum net worth deficiencies under state insurance laws. IPA Net
Revenue from the IPA markets in


                                       18
<PAGE>   19

effect for the year 2000 and 1999 decreased by $18.3 million, or 7.2% compared
to the same period in 1999 primarily as a result of unfavorable hospital and
payor contract renegotiations for 2000 at PrimeCare.

         During 2000, most categories of operating expenses were relatively
stable as a percentage of net revenue when compared to 1999. The cost of
provider services increased as a result of our acquiring the remaining 50%
interest in the Kentucky HMO in late 1999. In an effort to obtain prepayment of
several notes receivable from clinic personnel, we negotiated discounts totaling
$3.0 million which were recorded as other expenses in the third and fourth
quarter of 2000. In addition, other notes receivables were written down $5.6
million to expected net realizable value in the third and fourth quarters of
2000 and recorded as other expenses. The increase in interest expense as a
percentage of net revenue is primarily due to decreased net revenue and
amendments to our Credit Facility that increased interest costs.

         Our managed IPAs and former affiliated physician groups enter into
contracts with third party payors, many of which are based on fixed or capitated
fee arrangements. Under these capitation arrangements, health care providers
receive a fixed fee per plan member per month and providers bear the risk,
generally subject to certain loss limits, that the total costs of providing
medical services to the members will exceed the fixed fee. The IPA management
fees are based, in part, upon a share of the portion, if any, of the fixed fee
that exceeds actual costs incurred. Some agreements with payors also contain
"shared risk" provisions under which we, through the IPA, can share additional
fees or can share in additional costs, depending on the utilization rates of the
members and the success of the IPAs. Through calculation of our service fees, we
also shared indirectly in capitation risk assumed by its affiliated physician
groups. Incurred but not reported claims payable ("IBNR claims payable")
represent the liability for covered services that have been performed by
physicians for enrollees of various medical plans. The estimated claims incurred
but not reported are based on our historical claims data, current enrollment,
health service utilization statistics and other related information.

         On behalf of certain of our affiliated IPAs, we have underwritten
letters of credit to managed care payors to help ensure payment of health care
costs for which the affiliated IPAs have assumed responsibility. As of December
31, 2000, letters of credit aggregating $3.1 million were outstanding under the
Credit Facility for the benefit of managed care payors. We have experienced
losses on letters of credit totaling approximately $400,000.

         The provision for asset revaluation, restructuring and refinancing for
the year ended December 31, 2000 totaled $559.9 million, consisting of a net
$23.8 million in the first quarter, a net $407.3 million in the second quarter,
a net $54.2 million in the third quarter and a net $74.6 million in the fourth
quarter. See discussion of these charges in "Asset Revaluation, Refinancing and
Restructuring" below. At December 31, 2000, we had disposed of the assets of all
but six clinics whose assets were classified as held for sale.

         We will incur no federal income tax expense and make no federal income
tax payments during the foreseeable future as a result of available net
operating loss carryforwards.

1999 COMPARED TO 1998

         Net revenue increased $3.7 million, or 0.2%, from $1.51 billion for
1998 to $1.52 billion for 1999. Clinic Net Revenue decreased in 1999 from 1998
by $135.0 million, comprised of (i) a $102.8 million decrease in our service
fees for reimbursement of clinic expenses incurred by us and (ii) a $32.2
million decrease in our fees from clinic operating income and net physician
group revenue. Excluding same clinic revenue increases discussed below,
increases in Clinic Net Revenue of $15.6 million from new clinic affiliations in
1999 and the timing of entering into new service agreements in 1998 and
increases of $16.7 million from clinics whose assets are held for sale at
December 31, 1999 were offset by reductions in Clinic Net Revenue of $184.9
million as a result of clinic operations disposed of in 1998 and 1999. Included
in the changes in Clinic Net Revenue is the impact of declining reimbursement
for services rendered by the physician groups. Specifically, the provision for
doubtful accounts and contractual adjustments as a percentage of gross physician
group, hospital and other revenue increased to 43.1% for 1999 from 40.5% for
1998. Net revenue from the service agreements (excluding clinics being sold) in
effect for all of 1999 and 1998 increased by $17.6 million in 1999 compared with
1998. Same market service agreement net revenue growth resulted from the
addition of new physicians, the expansion of ancillary services and increases in
patient volume and fees.


                                       19
<PAGE>   20

         Net revenue from IPAs increased $115.5 million, or 47.6%, from $242.8
million for 1998 to $358.3 million for 1999. This increase resulted primarily
from an approximately $91.3 million increase in net revenues from the
acquisition of PrimeCare in May 1998 and the increase of approximately $20.1
million from five IPA markets and two HMOs entered into subsequent to the first
quarter of 1998. Net revenues were also impacted by decreases in net revenues
from the acquisition in 1998 and subsequent closing in 1999 of MHG of
approximately $12.3 million and the closing of several smaller markets of
approximately $1.9 million. We had terminated all payor contracts relating to
MHG and commenced closing MHG operations by April 30, 1999. See "Asset
Revaluation and Clinic Restructuring." Net revenue from the IPA markets in
effect for all of 1999 and 1998 increased by $18.3 million, or 21.4%, in 1999
compared to 1998. Same market IPA growth resulted from the addition of new
physicians, increases in IPA enrollment and increases in patient volume and
fees.

         During 1999, most categories of operating expenses were relatively
stable as a percentage of net revenue when compared to 1998. The cost of
provider services expense is a result of the acquisitions of PrimeCare and MHG
in 1998. PrimeCare owns and manages IPAs, and is a party to certain managed care
contracts, resulting in the Company presenting revenue from these operations on
a "grossed-up basis." Under this method, unlike the majority of our affiliated
IPAs, the cost of provider services (payments to physicians and other providers
under compensation, sub-capitation and other reimbursement contracts) is not
included as a deduction to our net revenue but is reported as an operating
expense. This revenue reporting resulted in a cost of provider services expense
line item and, in general, caused other expense line items to decrease as a
percentage of net revenue when compared to periods prior to the acquisitions of
PrimeCare and MHG. As a result, during 1999 the majority of operating expense
categories decreased as a percentage of net revenue when compared to 1998.
During 1999, supplies expense, other expenses and depreciation and amortization
had more than a marginal increase as a percentage of net revenue over 1998. The
increase in supplies expense is a result of the continued increases in costs of
drugs and medications. Other expenses increased as a result of our incurring
costs associated with information systems and software conversions in our IPA
markets during 1999. Additionally, other operating expenses incurred by IPAs
were higher as a result of charges to operations taken in the fourth quarter of
1999 related to the shut down of several Florida markets. The increase in
depreciation and amortization expense resulted from a significant amount of
capital expenditures during 1999 related to conversions of information systems
in our affiliated clinics and IPAs. Rents and lease expense had more than a
marginal decrease as a percentage of net revenue when compared 1998 as a result
of the disposition of certain of our group formation clinics during the third
and fourth quarters of 1998. These clinics' rents and lease expense as a
percentage of net revenue was higher than that of the current base of clinics.

         The provision for asset revaluation and clinic restructuring for the
year ended December 31, 1999 totaled $431.0 million, consisting of $9.5 million
in the first quarter, $14.4 million in the second quarter, a net $393.4 million
in the third quarter and a net $13.7 million in the fourth quarter. The third
quarter net charge of $393.4 million was comprised of a $394.5 million charge
less recovery of certain asset revaluation charges recorded in the third quarter
of 1998. The fourth quarter net charge of $13.7 million was comprised of a $17.8
million charge less recovery of certain asset revaluation charges recorded in
the fourth quarter of 1998 and third quarter of 1999. At December 31, 1999, we
had disposed of all group formation clinics and the two First Physician Care,
Inc. ("FPC") clinics that had characteristics similar to group formation
clinics.

         Income tax expense of $53.3 million for 1999 consisted primarily of an
increase in the valuation allowance against all deferred tax assets that
represented the expected benefits of operating loss carryforwards and other
temporary differences recorded in previous periods. The realization of such
assets is not likely to occur based on historical results and industry trends.


                                       20
<PAGE>   21
         SUMMARY OF OPERATIONS BY QUARTER

         The following table presents unaudited quarterly operating results for
2000 and 1999. We believe that all necessary adjustments have been included in
the amounts stated below to present fairly the quarterly results when read in
conjunction with the Consolidated Financial Statements. Results of operations
for any particular quarter are not necessarily indicative of results of
operations for a full year or predictive of future periods.

<TABLE>
<CAPTION>
                                                                             2000 QUARTER ENDED
                                                   ---------------------------------------------------------------
                                                     MAR 31           JUNE 30           SEPT 30            DEC 31
                                                   ---------         ---------         ---------         ---------
<S>                                                <C>               <C>               <C>               <C>
Net revenue ...............................        $ 309,496         $ 258,010         $ 211,976         $ 134,713
Loss before taxes and minority interest ...          (23,709)         (426,539)          (63,038)          (91,354)
Net loss ..................................          (25,573)         (426,824)          (64,375)          (91,612)
Loss per share--diluted ...................        $    (.35)        $   (5.80)        $    (.87)        $   (1.28)
</TABLE>


<TABLE>
<CAPTION>
                                                                          1999 QUARTER ENDED
                                                   ---------------------------------------------------------------
                                                     MAR 31           JUNE 30           SEPT 30            DEC 31
                                                   ---------         ---------         ---------         ---------
<S>                                                <C>               <C>               <C>               <C>
Net revenue ...............................        $ 416,544         $ 393,488         $ 371,193         $ 334,970
Earnings (loss) before taxes, minority
    interest and extraordinary item .......            8,025             1,477          (384,755)          (16,973)
Net earnings (loss) .......................            2,788               923          (435,692)          (12,545)
Earnings (loss) per share--diluted ........        $    (.04)        $     .01         $   (5.75)        $    (.17)
</TABLE>


ASSET REVALUATION, REFINANCING AND RESTRUCTURING

General

After unsuccessful attempts to restructure most of our service agreements in an
effort to create a base of stable clinics that would be able to grow and was
committed to the mutual success of the clinics and the Company, we have divested
of the assets of all of the clinics with which we were affiliated at the
beginning of fiscal year 2000. We entered into management agreements with two of
the clinics that repurchased their assets during 2000 to provide certain
management services; however, we will not have any ongoing obligation to provide
capital to these groups. For additional discussion of the changes in these
relationships, see "Overview."

We have experienced losses in certain IPA markets. In the fourth quarter of
2000, we classified the eight PrimeCare IPA markets as held for sale. PrimeCare
and CareWise are currently held for sale although no definitive agreement
regarding the sale of either PrimeCare or CareWise has been reached. There can
be no assurance, however, that the PrimeCare or CareWise sale will be
consummated or consummated on the terms currently contemplated or that
additional charges to earnings will not be necessary as a result of the final
terms of the PrimeCare or CareWise sale. Two managed IPA markets were closed
during the third quarter of 2000. In addition, we determined in the third
quarter to cease operations in the Dallas and Houston IPA markets and recorded
asset revaluation and restructuring charges for those markets. We classified the
net assets of our Kentucky HMO as held for sale in the second quarter of 2000.
The Kentucky HMO was placed in voluntary rehabilitation with the Commonwealth of
Kentucky Department of Insurance in November 2000 due to its inability to meet
net worth requirements of the state insurance laws. The Commissioner of the
Kentucky Department of Insurance has been appointed liquidator of the Kentucky
HMO. Liquidation of the Kentucky HMO is expected to be completed during the
second quarter of 2001.

Assets Held for Sale

         At December 31, 2000, net assets held for sale primarily consisted of
the net assets of six clinics, several IPA markets, including PrimeCare,
CareWise, our one remaining hospital, and certain real estate holdings which
totaled approximately $72.7 million, including $3.2 million of real estate.
These net assets consisted of current assets, property and equipment, intangible
assets and other assets less liabilities which are expected to be assumed by the
purchasers. We expect to recover these amounts during the next nine months as
the asset sales occur; however, there can be no assurance that we will


                                       21
<PAGE>   22
recover this entire amount. Our failure to recover these amounts could cause a
material adverse effect on our operations. To date in 2001, we have completed
the disposition of the assets of all six remaining owned clinics and our
remaining hospital and certain real estate and received proceeds totaling $56.5
million in cash and $13.8 million in notes receivable, in addition to certain
liabilities assumed by the purchasers, which approximated the net carrying value
of these clinic assets. These dispositions represented $55.8 million of the net
assets held for sale at December 31, 2000. During the second or third quarter of
2001, we expect to complete the sale of the assets of the PrimeCare IPA markets
and CareWise. We expect to recover the tangible book value of the assets of
these operating units, however, there can be no assurance we will do so. The
sale of these assets will negatively impact our future revenues and the failure
to consummate the sales on the anticipated terms would negatively impact our
short term cash flows.

         In the fourth quarter of 2000, we recorded approximately $102.2 million
of asset revaluation charges for the impairment of long-lived assets of certain
of our operating units and recorded a net recovery of $27.6 million related to
assets sold or disposed of during the quarter. The fourth quarter asset
revaluation charge related to assets held for sale including current assets,
property and equipment, and intangible assets of $6.7 million, $10.7 million and
$84.8 million, respectively. In the fourth quarter of 2000, we classified as
held for sale eight PrimeCare IPA markets and certain real estate. Our decision
to classify the assets as held for sale was based upon our decision to exit
certain markets. The net assets held for sale for the operating units classified
as held for sale during the fourth quarter were approximately $11.3 million on
December 31, 2000.

         In the third quarter of 2000, we recorded approximately $29.0 million
of asset revaluation charges for the impairment of long-lived assets of certain
of our operating units and $12.5 million related to assets sold or disposed of
during the quarter. The third quarter asset revaluation charge related to assets
held for sale including current assets, property and equipment, and intangible
assets of $1.4 million, $14.1 million and $13.5 million, respectively. In the
third quarter of 2000, we classified as held for sale ten additional clinics,
two of which were included in the asset impairment charge taken in the third
quarter of 1999 and eight of which were included in the asset impairment charge
taken in the second quarter of 2000. Our decision to classify the assets as held
for sale was based upon our decision to sell all remaining clinic assets back to
the respective physician groups irrespective of any ongoing management
relationship. In addition, we classified as held for sale certain real estate
holdings. We disposed of six of these clinics' assets in the fourth quarter of
2000, receiving consideration consisting of $53.3 million in cash and $1.0
million in deferred payments and certain liabilities assumed by the purchasers.
Net revenue and pre-tax income from the six clinics sold were approximately
$66.2 million and $(600,000), respectively, for the year ended December 31,
2000, and $71.0 million and $2.6 million, respectively, for the year ended
December 31, 1999. The net assets held for sale for the operating units
classified as held for sale during the third quarter of 2000 were approximately
$16.1 million on December 31, 2000, and consisted primarily of accounts
receivable, property and equipment and inventory less certain current
liabilities.

         In the second quarter of 2000, we recorded approximately $198.6 million
of asset revaluation charges for the impairment of long-lived assets of certain
of our operating units and our corporate office and $19.7 million related to
assets sold during the quarter. The second quarter asset revaluation charge
related to assets held for sale including current assets, property and
equipment, other assets and intangible assets of $14.5 million, $12.5 million,
$3.9 million and $167.7 million, respectively. During the second quarter of
2000, we classified as held for sale ten additional clinics, one of which was
included in the asset impairment charge taken in the third quarter of 1999. Our
decision to classify these assets as held for sale was based upon correspondence
received from our discussions with the respective medical groups in the second
quarter of 2000 or the decline in the specific group's stability and economic
situation. In addition, we classified as held for sale our Kentucky HMO
operations and CareWise. We disposed of nine of these clinics' assets in the
third and fourth quarters of 2000 and disposed of our Kentucky HMO operations,
receiving consideration consisting of $84.0 million in cash and $4.9 million in
notes receivable and certain liabilities assumed by the purchasers. We disposed
of the remaining clinic in January 2001 receiving consideration consisting of
$28.7 million in cash and $12.0 million in notes receivable. Net revenue and
pre-tax income from the ten clinics sold were approximately $272.3 million and
$8.3 million, respectively, for the year ended December 31, 2000, and $348.3
million and $20.6 million, respectively, for the year ended December 31, 1999.
At December 31, 2000, the net assets held for sale for the remaining operations
classified as held for sale in the second quarter of 2000 were approximately
$43.6 million and consisted primarily of accounts receivable, property and
equipment and intangible assets less certain current liabilities.


                                       22
<PAGE>   23

         In the first quarter of 2000, we recorded a net pre-tax asset
revaluation charge of approximately $20.1 million, which was comprised of a
$27.1 million charge less recovery of certain asset revaluation charges recorded
in the third quarter of 1999. This net charge consisted of approximately $12.9
million related to assets held for sale, $6.0 million related to assets sold
during the quarter and $1.2 million related to the write off of deferred
financing costs (see discussion below). The net charge related to the
revaluation of certain assets associated with one clinic, the completed sales of
the operating assets of five clinics and the exit from an IPA market. The first
quarter 2000 asset revaluation charge related to assets held for sale including
current assets, property and equipment, other assets and intangible assets for
$2.3 million, $5.7 million, $2.5 million and $2.4 million, respectively. During
the first quarter of 2000, the Company classified as held for sale four
additional clinics, one of which was included in the asset impairment charge
taken in the third quarter of 1999. This determination was based upon
correspondence received from or discussions with the respective medical groups
in the first quarter and the decline in the specific group's stability and
economic situation. We disposed of three of these clinics prior to December 31,
2000, receiving consideration consisting of $12.6 million in cash and certain
liabilities assumed by the purchasers. Net revenue and pre-tax income from the
three clinics' assets sold were approximately $14.7 million and $900,000,
respectively, for the year ended December 31, 2000, and $40.5 million and $2.5
million, respectively, for the year ended December 31, 1999. The net assets held
for sale for the remaining clinic classified as held for sale in the first
quarter of 2000 at December 31, 2000 was approximately $1.7 million and
consisted primarily of accounts receivable. Subsequent to year-end, the Company
disposed of this remaining clinic's assets receiving consideration consisting of
$2.0 million in cash and certain liabilities assumed by the purchasers.

         In 1999, we recorded an asset revaluation and restructuring charge of
approximately $431.0 million. This charge included a net pre-tax asset
revaluation charge of approximately $409.3 million, which was comprised of a
$416.4 million asset revaluation charge less recovery of $7.1 million of certain
asset revaluation charges recorded in the first quarter of 1998 and the third
quarter of 1999 and a $21.7 million restructuring charge. This charge related to
asset impairment of eleven clinic operations classified as held for sale at
December 31, 1999 and the disposition of the assets of fifteen clinic operations
during the year.

         In 1998, the Company recorded an asset revaluation and restructuring
charge of approximately $224.9 million. This charge included a net pre-tax asset
revaluation charge of approximately $202.9 million, which was comprised of a
$213.7 million asset revaluation charge less recovery of $10.8 million of
certain restructuring charges recorded in the first quarter of 1998 and a $22.0
million restructuring charge. This charge related to asset impairment at five
clinic operations and the disposition of the assets of two clinic operations.
Also, the charge provided for an adjustment to recognize the decline in future
cash flows from the acquired physician practice management company, FPC,
pursuant to SFAS 121. Additionally, this charge provided for the write-off of
goodwill recorded in connection with the MHG acquisition and the write down of
certain assets to net realizable value and service agreement intangibles to fair
value.

         In summary, net revenue and pre-tax income (losses) from operations
disposed of or closed as of December 31, 2000 were $507.8 million and $(18.8)
million for the year ended December 31, 2000, compared to $1.1 billion and $33.1
million for the year ended December 31, 1999, and $1.2 billion and $58.4 million
for the year ended December 31, 1998, respectively. Net revenue and pre-tax
income (losses) from the operations held for sale at December 31, 2000 were
$369.0 million and $(15.7) million for the year ended December 31, 2000,
compared to $396.1 million and $7.0 million for the year ended December 31, 1999
and $249.5 million and $9.4 million for the year ended December 31, 1998,
respectively.

Asset Impairments

         In 2000, we recorded asset revaluation charges of approximately $156.3
million related to the impairment of long-lived assets of certain of our
operating units and at our corporate office. Approximately $65.3 million of this
asset revaluation charge related to our managed IPA operations in Houston, $84.8
million related to clinic operations and $6.2 million related to the impairment
of certain long-lived assets at our corporate office.

         We divested of the assets related to the Houston managed IPAs in the
fourth quarter of 2000 and recovered approximately $2.3 of the asset impairment
charge and $600,000 of the restructuring charge, respectively, recorded in the
second quarter of 2000.


                                       23
<PAGE>   24

         The asset revaluation charges related to clinic operations of $84.8
million were based on our decision to restructure our service agreements and to
reduce our investment in the assets of the clinics. In connection with this
decision, we recorded charges in the year 2000 to reduce to net realizable value
the related assets associated with these operations. Approximately $6.2 million
of these charges relate to the impairment of certain long-lived assets at our
corporate office due to the consolidation of administrative office space and the
expected disposition of certain long-lived assets.

         In 1999, we recorded approximately $192.5 million of asset revaluation
charges related to the impairment of long-lived assets of certain of our
operating units. Approximately $172.5 million of these charges relate to certain
clinic operations with the remainder relating to the operations of PhyCor
Management Corporation ("PMC"), an IPA management company acquired in the first
quarter of 1998. We determined to exit the most significant market in which PMC
operated as a result of a variety of factors, including the loss of
relationships with physicians in that market. These events were expected to
impair the estimated future cash flows from the PMC acquisition and resulted in
an asset impairment charge of approximately $20.0 million.

         In 1998, we recorded $51.3 million of asset revaluation charges related
to the impairment of long-lived assets of two of our clinic operations. We had
invested significantly in the operation of the Lexington Clinic to support the
growth and expansion of the clinic and the Kentucky HMO. The Lexington Clinic's
financial performance was negatively impacted by the combination of poor
financial performance at a number of satellite locations, a challenging and
extended information system conversion, a potential loss arising from a dispute
with one of the Kentucky HMO's payors and the repayment of funds used to finance
the Lexington Clinic's and the Kentucky HMO's growth. In light of the existing
circumstances, realization of certain of our assets related to the Lexington
Clinic was unlikely. Additionally, asset revaluation charges related to the
impairment of long-lived assets of one of our ongoing group formation clinic
operations were taken in 1998. We implemented plans to try to maintain the
operations of the clinic, however, all intangible assets were written off based
on our experience with new group formations. Fair value for the long-lived
assets was determined primarily by utilizing the results of a cash flow analysis
and an expectation of recoveries in asset dispositions.

Refinancing Costs

         We recorded approximately $3.4 million of refinancing charges related
to the amendment and restatement of the Credit Facility in January and August
2000. These charges represented unamortized costs that were expensed as a result
of the reduced commitment amounts and the acceleration of the maturity date of
the Credit Facility. The amended Credit Facility converted substantially all of
the outstanding balances under the previous revolving credit and synthetic lease
facilities and outstanding letters of credit to a term loan and a $25 million
revolving loan with a maturity of June 30, 2001. A further amendment effective
March 30, 2001, extended the maturity of the Credit Facility under which only
letters of credit are outstanding until December 31, 2001.

Restructuring Charges

         In 2000, we adopted and implemented restructuring plans and recorded
pre-tax restructuring charges of approximately $50.8 million. These charges
included approximately $16.2 million in severance costs, $24.8 million in
facility and lease termination costs and $9.8 million in other exit costs
detailed as follows:

         In the fourth quarter of 2000, we adopted and implemented restructuring
plans and recorded a pre-tax restructuring recovery of approximately $400,000.
This recovery was comprised of an $800,000 restructuring charge related to the
exit of a small IPA market in our PrimeCare operations, the severance of several
corporate office personnel and the reclassification of approximately $1.2
million related to compensation expense. This $1.2 million restructuring charge
was reclassified in the fourth quarter and recorded as salaries, wages and
benefits expense. These restructuring plans included the involuntary termination
of five corporate personnel.

         In the third quarter of 2000, we adopted and implemented restructuring
plans and recorded a pre-tax restructuring charge of approximately $10.5
million. This charge was comprised of approximately $1.2 million related to the
operations of clinics that were closed, $7.9 million related to management's
plans to cease operations and exit the Dallas and Houston IPA markets, and $1.4
million related to reductions in personnel at the corporate office. This charge
included approximately $5.0 million in severance costs, $1.4 million in facility
and lease


                                       24
<PAGE>   25

termination costs and $4.1 million in other exit costs. These restructuring
plans included the involuntary termination of 199 clinic, IPA management,
business office and corporate personnel.

         In the second quarter of 2000, we adopted and implemented restructuring
plans and recorded pre-tax restructuring charges of approximately $37.1 million.
These charges were comprised of approximately $26.5 million related to the
operations of clinics that were sold, closed or restructured, $700,000 related
to management's plans to cease operations and exit an IPA market, and $9.9
million related to reductions in personnel and office space at the corporate
office. These charges included approximately $11.4 million in severance costs,
$21.5 million in facility and lease termination costs and $4.2 million in other
exit costs. These restructuring plans included the involuntary termination of
512 clinic, IPA management, business office and corporate personnel.

         In the first quarter of 2000, we adopted and implemented restructuring
plans and recorded pre-tax restructuring charges of approximately $3.6 million
with respect to operations that were sold or were to be closed. These charges
were comprised of approximately $1.9 million in facility and lease termination
costs, $700,000 in severance costs and $1.0 million in other exit costs. These
restructuring plans included the involuntary termination of 218 local clinic and
IPA management and business office personnel.

         In 1999, we adopted and implemented restructuring plans and recorded
net pre-tax restructuring charges totaling approximately $21.8 million with
respect to operations that were being sold or shut down, of which approximately
$9.5 million was recorded in the first quarter, $675,000 was recorded in the
second quarter, a net $3.1 million was recorded in the third quarter and $8.5
million was recorded in the fourth quarter. The net third quarter charge of $3.1
million was comprised of a $4.2 million charge less recovery of certain asset
revaluation charges recorded in the third quarter of 1998 due to sales proceeds
exceeding carrying value. The fourth quarter charge of $8.5 million was
primarily related to our plan to exit certain IPA markets. Of these IPA charges,
approximately $8.1 million related to certain Florida markets and were comprised
of approximately $400,000 in facility and lease termination costs, $100,000 in
severance costs and $7.6 million in other exit costs. Due to mounting deficits
and strained relations with payors in several Florida IPA markets, we adopted
and implemented restructuring plans in the fourth quarter of 1999 to terminate
the agreements with these payors and exit the related markets and centralize the
remaining Florida IPA operations. These net charges were comprised of
approximately $4.4 million in facility and lease termination costs, $5.1 million
in severance costs and $12.3 million in other exit costs. These restructuring
plans included the involuntary termination of 382 local clinic and IPA
management and business office personnel.

         In 1998, we adopted and implemented restructuring plans and recorded
pre-tax restructuring charges in the first quarter totaling $22.0 million with
respect to clinics that were being sold or restructured whose asset revaluation
charges were recorded in the fourth quarter of 1997. These charges were
comprised of approximately $15.3 million in facility and lease termination
costs, $4.6 million in severance costs and $2.1 million in other exit costs.
These restructuring plans included the involuntary termination of 344 local
clinic management and business office personnel.

         In summary, during 2000 we paid approximately $8.1 million in facility
and lease termination costs, $13.7 million in severance costs and $8.0 million
in other exit costs related to 2000, 1999 and 1998 charges. At December 31,
2000, the accrued restructuring reserves for clinics to be disposed of and exit
costs for disposed clinic operations totaled approximately $26.9 million, which
included $18.9 million in facility and lease termination costs, $3.5 million in
severance costs and $4.5 million in other exit costs. We estimate that
approximately $11.3 million of the remaining liabilities at December 31, 2000
are due and payable during the next 12 months. The remaining $15.6 million
primarily relates to long term lease commitments.

Liquidity and Capital Resources

General

         In 2000, as a result of the outcome of discussions with our affiliated
clinics, we determined to sell the assets of our medical clinic business and to
apply the proceeds to the amounts outstanding under the Credit Facility. We
failed to meet the February 2001 interest payment obligation under the Notes of
approximately $4.4 million. The default under the Notes created a default under
the Credit Facility, which default has been waived by the senior lenders. If the
Notes were to be accelerated, a default would occur under the Warburg Notes. We
have also


                                       25
<PAGE>   26
defaulted on obligations related to several equipment and facility leases. We
have entered into limited forbearance agreements with noteholders representing a
majority of the aggregate principal amount of the Notes. Pursuant to the
forbearance agreements, the holders have agreed not to take action under the
Notes until April 30, 2001, subject to automatic ten business day extensions,
and Warburg Pincus has agreed to forbear until June 30, 2001, subject to certain
conditions. We have initiated discussions with an informal committee of holders
of the Notes regarding a possible restructuring. We have engaged Jeffries & Co.
to assist us in restructuring our balance sheet. In light of our operating
history and current projections and in connection with the restructuring, it may
be necessary to seek protection from our creditors in the future.

         At December 31, 2000, current liabilities exceeded our current assets
by $305.8 million, compared to $197.8 million of working capital at December 31,
1999 primarily as a result of the reclassification of obligations under the
Credit Facility, Notes and the Warburg Notes as current liabilities. At December
31, 2000, we had $0.9 million in cash and cash equivalents, including $0.6
million of restricted cash and cash equivalents, compared to $60.7 million and
$29.6 million, respectively, at December 31, 1999. Restricted cash and cash
equivalents include amounts held by IPA partnerships and HMOs, the use of which
is restricted to operations of the IPA partnerships or to meet regulatory
deposit requirements.

         We generated $5.6 million of cash flows from operations in 2000
compared to $115.4 million in 1999. Cash flows from operations of clinics that
were disposed of or closed at December 31, 2000 resulted in a decrease of $76.1
million for 2000 compared to 1999. Our IPA management division experienced
losses in certain markets in 2000. We ceased operations in eleven IPA markets in
2000, including the Houston and Dallas managed IPA markets in the fourth quarter
of 2000. Of the 14 IPA markets remaining at December 31, 2000, eight IPA markets
were held for sale and another two were closed during the first quarter of 2001.
Cash flows related to our IPA operations decreased $34.4 million in 2000
compared to 1999, of which $46.1 million related to the managed IPA operations
in Houston.

         To date in 2001, we have completed the disposition of the assets of the
six remaining owned clinics, our remaining hospital and certain real estate held
for sale at December 31, 2000 and received proceeds totaling $56.5 million in
cash in addition to $13.8 million in notes receivable and certain liabilities
being assumed by the purchasers, which approximated the net carrying value of
these assets. In addition, we are seeking to sell CareWise and PrimeCare. We
expect to recover the tangible book value of the assets held for sale, however,
there can be no assurance we will do so. The sale of these operations will
negatively impact our future revenues and the failure to consummate the sales on
the anticipated terms would negatively impact our cash flows.

         The employment agreements with our two executive officers provide for
the payment of bonuses aggregating up to a maximum of $2.25 million upon the
repayment of borrowings under the Credit Facility. Approximately $0.2 million of
the bonuses were earned in 2000 and the remainder was earned during the first
quarter of 2001 of which $1.88 million has been paid to date. In addition, we
have agreements with certain employees to pay such employees two months of
advanced severance when we have no outstanding obligations under the Credit
Facility, and we also owe bonuses to certain CareWise and PhySys employees.
These obligations currently total approximately $800,000 and are in lieu of all
other severance obligations.

         Capital expenditures during 2000 totaled $18.4 million. We expect to
make less than $1.0 million in capital expenditures in 2001, which we anticipate
will be funded primarily from operating cash flows.

         During 1999, we had favorably resolved outstanding Internal Revenue
Service ("IRS") examinations for the years 1988 through 1995. The IRS had
proposed adjustments relating to the timing of recognition for tax purposes of
certain revenue and deductions related to accounts receivable, the Company's
relationship with affiliated physician groups and various other timing
differences. In August 1999, we received a $13.7 million tax refund as a result
of applying the 1998 loss carryback to recover taxes paid in 1996 and 1997.
During 2000, we resolved the outstanding IRS examination for the years 1996
through 1998. The IRS examination resulted in an adjustment to the 1998 loss
carryback and accordingly, we repaid approximately $1.2 million plus interest,
as a result of revisions in the alternative minimum tax calculation. The tax
years 1988 through 1998 have been closed with respect to all issues without a
material financial impact. Additionally, two subsidiaries are currently under
examination for the 1995 and 1996 tax years. We acquired the stock of these
subsidiaries during 1996. For the years under audit, and potentially, for
subsequent years, any such adjustments could result in material cash payments by


                                       26
<PAGE>   27

the Company. We cannot determine at this time the resolution of these matters,
however, we do not believe the resolution of these matters will have a material
adverse effect on our financial condition, although there can be no assurance as
to the outcome of these matters. As of December 31, 2000, we had approximately
$557.8 million in net operating loss carryforwards; accordingly, we do not
expect to pay current federal income taxes for the foreseeable future.

Capital Resources

         We have $196.5 million in principal amount outstanding under the Notes
which mature in 2003. Our failure to make the February 15, 2001 interest payment
on the Notes resulted in an event of default under the terms of the related
indenture on March 17, 2001. We have entered into limited forbearance agreements
with noteholders representing 57% of the aggregate principal amount of the
Notes. Pursuant to the forbearance agreements, the holders have agreed not to
take action under the Notes until April 30, 2001, subject to automatic ten
business day extensions. We have initiated discussions with an informal
committee of holders of the Notes regarding a possible restructuring.

         Our Credit Facility and synthetic lease facility was modified several
times in 2000. The Credit Facility, as amended August 25, 2000, provided for the
conversion of outstanding balances under the previous revolving credit and
synthetic lease facilities and outstanding letters of credit to a term loan
("Term Loan") and a $25 million revolving loan ("Revolving Loan"). Amounts were
available under this Revolving Loan only to the extent repayments were made from
our excess cash flows. The restated credit facility also included a senior
secured revolving loan of up to $10 million ("New Revolving Loan"). Under the
terms of this amended Credit Facility, net cash proceeds from asset sales are
required to be prepaid against outstanding borrowings under the Term Loan, the
Revolving Loan and the New Revolving Loan and then to cash collateralize
outstanding letters of credit. Irrespective of asset sales, the aggregate
balance of these loans and uncollateralized letters of credit is required to be
reduced each month end until maturity on June 30, 2001. At April 6, 2001, all
borrowings under the Credit Facility had been repaid and outstanding letters of
credit totaled $8.9 million for which cash collateral of $4.9 million had been
paid to the agent bank. No additional borrowings are available under the Credit
Facility. The event of default under the Notes also resulted in an event of
default under the Credit Facility, permitting the banks to require us to
immediately provide the remaining $4.0 million needed to fully cash
collateralize the letters of credit. We have obtained a waiver of this event of
default.

         We are obligated to use substantially all of the cash proceeds from
future asset sales to provide cash collateral for letters of credit issued under
the Credit Facility until all such letters of credit are fully collateralized
with cash. In the event the proceeds from the asset sales are less than
anticipated or not received when anticipated, we may experience difficulty
meeting our obligations under the Credit Facility. Such difficulty could cause a
material adverse effect on our operations.

         The total drawn cost under the Credit Facility at December 31, 2000,
was either (i) the applicable eurodollar rate plus 4.50% to 8.00% per annum or
(ii) the agent's base rate plus 1.00% per annum. The total weighted average
drawn cost of outstanding borrowings at December 31, 2000 was 11.33%.

         Outstanding borrowings and letters of credit issued under the Credit
Facility are secured by the capital stock the Company holds in certain of its
subsidiaries (as defined in the Credit Facility), certain of our real property
and the personal property held by the subsidiaries. The Credit Facility contains
covenants which, among other things, imposes limitations or prohibitions on the
Company with respect to (i) the incurring of certain indebtedness, (ii) the
creation of security interests on the assets of the Company, (iii) the payment
of cash dividends on, and the redemption or repurchase of, securities of the
Company, (iv) investments and (v) acquisitions.

         The Company's synthetic lease facility, as amended in January 2000,
provided off balance sheet financing with an option to purchase the leased
facilities at the end of the lease term. The August 2000 amendment resulted in
the conversion of $19.3 million of amounts outstanding under the synthetic lease
facility into the term loan under the Credit Facility. In November 2000, all
such amounts were repaid using asset sale proceeds and the synthetic lease
facility was terminated.


                                       27
<PAGE>   28

         During 1998, we amended our existing $100 million interest rate swap
agreement and entered into additional swap agreements. Fixed interest rates
ranged from 5.14% to 5.78% relative to the one month or three month floating
LIBOR. We terminated the swap agreements in July 2000 and received payments
totaling $2.2 million which were used to reduce amounts outstanding under the
Credit Facility. The FASB has issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,
which the Company is required to adopt in the first quarter of 2001. If we had
retained the swap agreements, adoption of SFAS No. 133 would have required us to
mark certain of its interest rate swap agreements to market due to lender
optionality features included in those swap agreements. We have historically not
engaged in trading activities in our interest rate swap agreements and do not
intend to so do in the future.

         During the second quarter of 1999, we announced a definitive agreement
allowing for an investment in PhyCor of up to $200.0 million by funds managed by
Warburg, Pincus. The agreement allowed for the issuance of two separate series
of zero coupon convertible subordinated notes. The first series of the Warburg
Notes was issued on September 3, 1999 and provided gross proceeds to PhyCor of
$100 million. We used the net proceeds of $92.5 million from the Warburg Notes
to repay indebtedness outstanding under the credit facility. The Warburg Notes
are non-voting, have a 6.75% yield and are convertible at an initial conversion
price of $6.67 at the option of the holders into approximately 15.0 million
shares of PhyCor common stock. The Warburg Notes will accrete to a maturity
value of approximately $266.4 million at the 15-year maturity date and include
an investor option to put the notes to PhyCor at the end of ten years. In the
second quarter of 2000, we mutually agreed with Warburg, Pincus not to issue the
second series of notes. If the principal due under the Notes were to be
accelerated, an event of default would occur under the Warburg Notes. We have
obtained a waiver and forbearance agreement through June 30, 2001 from Warburg
Pincus relating to the possible default under the Warburg Notes, subject to
earlier termination in certain circumstances.

         In conjunction with our securities repurchase program, we repurchased
approximately 2.6 million shares of our common stock for approximately $12.6
million in 1998 and approximately 2.9 million shares of common stock for
approximately $13.5 million in 1999. During the third quarter of 1999, we
repurchased $3.5 million of our convertible subordinated debentures for a total
consideration of approximately $2.5 million, resulting in an extraordinary gain
of approximately $1.0 million. Our Credit Facility prohibits additional
securities repurchases.

         In addition, as a result of the charges recorded by the Company in the
second quarter of 2000, PhyCor no longer satisfied the minimum net tangible
asset listing requirements of the NASDAQ Stock Market, Inc. ("NASDAQ"), and
accordingly, its common stock was delisted as of August 25, 2000. Our common
stock immediately began trading on the OTC Bulletin Board. This delisting
negatively impacts our liquidity because it further hinders our ability to raise
necessary capital through equity financing.

Market Risks Associated with Financial Instruments

         Our interest expense is sensitive to changes in the general level of
interest rates. To mitigate the impact of fluctuations in interest rates, we
have generally maintained a portion of our debt as fixed rate in nature either
by borrowing on a long-term basis or entering into interest rate swap
transactions. The interest rate swap agreements were contracts which
periodically exchanged fixed and floating interest rate payments over the life
of the agreements and were terminated during 2000. We do not hold or issue
derivative instruments for trading purposes and are not a party to any
instruments with leverage features. For the years ended December 31, 2000 and
1999, the Company received a weighted average rate of 6.04% and 5.30% and paid a
weighted average rate on its interest rate swap agreements of 5.45% and 5.45%
respectively.

         The table below presents information about our market-sensitive
financial instruments as of December 31, 2000. For debt obligations, the table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates. The fair values of long-term debt was determined based
on quoted market prices at December 2000 for the same or similar debt issues.


                                       28
<PAGE>   29

<TABLE>
<CAPTION>
                                                                                                             FAIR
 EXPECTED MATURITY           2001       2002      2003      2004      2005     THEREAFTER       TOTAL        VALUE
       DATE                -------     ------   -------    ------    ------    ----------      -------       -----
 -----------------                                            (IN THOUSANDS)
<S>                        <C>         <C>      <C>        <C>       <C>       <C>             <C>           <C>
Long-term debt:
  Fixed rate .........     $ 2,036       491    196,830      357       387       267,871       467,972       40,154
  Average interest
  rate(1) ............        8.95%     7.78%      4.51%    8.12%     8.12%         6.76%         5.82%
  Variable rate ......      44,733        --         --       --        --            --        44,733       44,733
  Average interest
  rate(1) ............       11.33%       --         --       --        --            --         11.33%
</TABLE>

(1)      Average interest rates exclude deferred loan costs and debt offering
         costs.

Summary

         The completed and expected asset sales, including CareWise and
PrimeCare, will substantially reduce our revenue and earnings in the future.
There can be no assurance that the CareWise and PrimeCare operations can be sold
on terms agreeable to us or that additional charges to earnings will not be
necessary as a result of the final terms of the sales. In the event the proceeds
from these asset sales are less than anticipated or are not received when
anticipated, our liquidity may be materially adversely affected. The outcome of
certain legal proceedings described in Part II, Item 1 hereof may have a
negative impact on our liquidity and capital reserves.

         At December 31, 2000, we had cash and cash equivalents of approximately
$0.9 million, including $0.6 million of restricted cash and cash equivalents,
and currently have no availability under the Credit Facility. We defaulted on
our obligation to make an interest payment of approximately $4.4 million, due
February 15, 2001, on the Notes. In addition, the default under the Notes
permitted the senior lenders under the Credit Facility to require the Company to
immediately collateralize with cash all outstanding letters of credit, currently
$4.0 million net of cash collateral; we have obtained a waiver of this default
from our senior lenders. Finally, if the Notes were to be accelerated, a default
would occur under the Warburg Notes. We have also defaulted on obligations
related to several equipment and facility leases. We have obtained a limited
forbearance agreement until April 30, 2001, with automatic extensions for ten
business days, from bondholders representing approximately 57% of the Notes in
the aggregate and a waiver and forbearance agreement from Warburg, Pincus
through June 30, 2001 subject to certain conditions. Failure of the bondholders
or Warburg, Pincus to continue the forbearance agreements could have a material
adverse effect on our operations. There can be no assurance that we could
satisfy any acceleration demand by the bondholders, the senior lenders or
Warburg, Pincus.

         In their report on the audit of our consolidated financial statements
for the fiscal year ended December 31, 2000 our auditors, have stated that our
recurring losses from operations, net capital deficiency and net working capital
deficit raise substantial doubts about our ability to continue as a going
concern. We do not believe our operating income will exceed our costs in 2001
and do not anticipate having access to any additional capital. Accordingly, we
expect to continue to experience negative cash flow. We have engaged Jefferies &
Company, Inc. to assist us in restructuring our balance sheet, however, there
can be no assurance that we will be successful in doing so. In light of our
operating history and current projections and in connection with the
restructuring, it may be necessary to seek protection from our creditors in the
future.

RISK FACTORS

         Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. These statements do not relate solely to historical
or current facts and can be identified by the use of words such as "may,"
"believe," "will," "expect," "project," "estimate," "anticipate," "plan,"
"should" or "continue." From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public.

         Any of our forward-looking statements in this report and in any other
public statements we make may turn out to be incorrect. These statements can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in the discussion - for example, our
ability to operate as a


                                       29
<PAGE>   30

going concern, our ability to restructure our balance sheet, the adequacy of our
capital resources, the possibility of seeking relief from creditors under U.S.
bankruptcy laws, the impact to earnings and the possibility of additional
charges to earnings resulting from terminating or restructuring our
relationships with our IPAs and their payors, our ability to operate IPAs and
other physician organizations profitably, changes in contractual relationships,
competition in the health care industry, regulatory developments and changes,
the nature of capitated fee arrangements and other methods of payment for
medical services, the risk of professional liability claims, and the outcome of
pending litigation will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially.

         We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC. In addition, we include
the following discussion of cautions, risks and uncertainties relevant to our
businesses.

         Our Auditors Have Substantial Doubt About Our Ability to Continue as a
         Going Concern.

         In their report on the audit of our consolidated financial statements
for the fiscal year ended December 31, 2000, our auditors have stated that our
recurring losses from operations, net capital deficiency and net working capital
deficit raise substantial doubts about our ability to continue as a going
concern. We do not believe our operating income will exceed our costs in 2001
and do not anticipate having access to any additional capital. Accordingly, we
expect to continue to experience negative cash flow. We have engaged Jefferies &
Company, Inc. to assist us in restructuring our balance sheet, however, there
can be no assurance that we will be successful in doing so. In light of our
operating history and current projections and in connection with the
restructuring, it may be necessary to seek protection from our creditors in the
future.

         We Defaulted Under Our Debt Obligations.

         We defaulted on our obligation to make an interest payment of
approximately $4.4 million, due February 15, 2001, on our outstanding 4.5%
Convertible Subordinated Debentures Due 2003 (the "Notes"). In addition, the
default under the Notes permitted the senior lenders under the Credit Facility
to require the Company to immediately collateralize with cash all outstanding
letters of credit, currently $4.0 million, net of cash collateral. We have
obtained a waiver of the default from our senior lenders. Finally, if the Notes
were to be accelerated, a default would occur under the Warburg Notes. We have
also defaulted on obligations related to several equipment and facility leases.
We have obtained a limited forbearance agreement until April 30, 2001, subject
to automatic ten business day extensions, from bondholders representing
approximately 57% of the Notes in the aggregate and a waiver and forbearance
agreement from Warburg, Pincus through June 30, 2001, subject to certain
conditions. Failure of the bondholders or Warburg, Pincus to continue the
forbearance agreements could have a material adverse effect on our operations.
There can be no assurance that we could satisfy any acceleration demand by the
bondholders, the senior lenders or Warburg, Pincus. It may be necessary to seek
protection from our creditors in the future.

         The PrimeCare Sale May Not Occur.

         We are currently negotiating an agreement related to the sale of
PrimeCare, our California IPA division. The sale of PrimeCare would enable us to
divest ourselves of all of our California IPA operations. While these operations
are profitable and comprise a majority of our remaining revenue, there are
significant risks inherent in managing a large IPA in this state. Any sale would
require approval of the California DMHC and would require settlement of the Benz
matter which is described in "Legal Proceedings" in Item 3 of this report. At
present no definitive agreement regarding the sale of PrimeCare has been
reached. There are inherent operating risks in the event an agreement is not
reached if we continue to operate PrimeCare.

         Our PhySys Model May Not Be Profitable.

         Through PhySys, we currently provide management services to physician
networks of health systems and independent physician groups, including multi-
and single specialty groups, and are currently seeking additional affiliations
with such groups. Pursuant to these arrangements, we will provide management
services to the physician groups for a fee but will not acquire the assets or
employ the personnel of the physician groups except for certain


                                       30
<PAGE>   31

key employees, and will not have any ongoing obligation to provide capital to
the groups. To date we are providing services to only two physician groups and
one health system based on this model and there can be no assurance that these
affiliations will be successful or that additional affiliations will develop. In
addition, PhySys provides limited consulting services to medical organizations.
There can be no assurance that new contracts will be obtained or if obtained
that such arrangements will be profitable.

         The Efforts of HPMdirect May Be Unsuccessful.

         Through HPMdirect, we plan to market health and productivity services
to self-insured employers to manage the healthcare and related costs of their
employees. At present, we have one small contract to provide utilization review
services, and have limited experience through our IPA management agreements in
providing such services. There can be no assurance that we will be successful in
developing this business or that if developed it will prove profitable. Many
existing companies providing healthcare management services to employers have
longer operating histories and greater access to capital, there can be no
assurance we will be able to compete effectively with these companies.

         The Common Stock Performance May Decline Further.

         On August 25, 2000, our Common Stock was delisted from the Nasdaq
National Market for failing to meet the listing maintenance criteria in effect
at that time. Our Common Stock is currently quoted on the OTC Bulletin Board. As
a result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of the Common Stock. There can be no
assurance that our Common Stock will remain quoted or that its stock price will
not decline further. Moreover, if we were to seek protection from our creditors,
our Common Stock could lose all of its value.

         The Outcome of Shareholder and Other Litigation May Adversely Affect
         Our Business and Financial Results.

         Claims have been brought against us and our executive officers and
directors alleging various violations of state and federal securities laws. In
addition, the Company has defaulted on several of its monetary obligations which
have or are expected to result in litigation. The ultimate disposition of these
matters could have a material adverse effect on our financial condition, cash
flows and results of operations, as described in the discussions of such matters
in "Legal Proceedings" in Item 3 in this report.

         Industry Competition May Increase.

         Managing physician organizations is a competitive business. We compete
with many businesses to manage medical clinics, employ physicians and provide
services to IPAs. These competitors include:

         -        hospitals and health systems;
         -        multi-specialty clinics;
         -        single-specialty clinics;
         -        health care service companies; and
         -        insurance companies and HMOs.

         Some of our competitors have longer operating histories, greater
financial resources and more reliable cash flow. We may not be able to compete
successfully with existing or new competitors.

         Fixed Fee Patient Arrangements May Not Be Profitable.

         Many of our managed IPA contracts with third party payors are based on
fixed or capitated fee arrangements. Under these capitated arrangements, health
care providers receive a fixed fee per person covered under the payor plan per
month and bear the risk, subject to certain loss limits, that the total costs of
providing medical services to the insured persons will exceed the fixed fee.
Because capitated payments are made on a "per member" basis, the total payments
paid to the IPA can vary from month to month as patients move into or out of


                                       31
<PAGE>   32

payor plans. The IPAs' management fees are based, in part, upon a share of the
remaining portion, if any, of the fixed fees. Some agreements with payors also
contain "shared risk" provisions under which we and the IPA share additional
compensation or losses based on the utilization of services. Any such losses
could have a material adverse effect on our business. In certain cases we have
letters of credit that may be drawn upon by the payor should the IPA become
insolvent. Such events could have a material adverse affect on our operations.

         The health care providers' ability to efficiently manage the patient's
use of medical services and the costs of such services determine the
profitability of the capitated fee arrangement. The management fees are also
based upon a percentage of revenue collected by the IPA. Any loss of revenue by
an IPA because of the loss of affiliated physicians, the termination of third
party payor contracts or otherwise may decrease our management fees. We, like
other managed care providers and management entities, are often subject to
liability claims arising from activities such as utilization management and
compensation arrangements designed to control costs by reducing services. A
successful claim on this basis against us, an affiliated clinic or IPA could
have a material adverse effect on our business and financial condition and
results.

         There Are Numerous Regulatory Risks Associated with Our Business and
         Industry.

         The state and federal governments highly regulate the health care
industry and physicians' medical practices. All states restrict the unlicensed
practice of medicine. In addition, many states prohibit physicians from
splitting or sharing fees with nonphysician entities. Most of the states with
fee-splitting laws only prohibit a physician from sharing fees with a referral
source. Because we do not refer business to our managed groups, the
fee-splitting laws in most states should not restrict the physician
organizations from paying our management fee. If courts determined that we
violated the corporate practice of medicine or fee-splitting statutes, courts
could also hold the contracts between us and our managed physicians invalid.

         Federal antitrust law prohibits conduct that may result in price fixing
or other anticompetitive conduct. Additionally, there is increasing scrutiny of
arrangements between health care providers, potential referral sources, and
entities in a position to increase or decrease utilization by (1) law
enforcement authorities, (2) the Office of Inspector General of the Department
of Health and Human Services, (3) the courts and (4) the Congress. Although we
are not aware of any investigations of us that would negatively affect our
business, we may be investigated in the future.

         Pursuant to the Health Insurance Portability and Accountability Act of
1996, the Department of Health and Human Services has promulgated regulations to
address the privacy and security of a broad range of health information. We
intend to comply with such regulations when implemented, but we cannot predict
how such regulations may be modified prior to implementation, or how such
modifications may impair our ability to comply or the costs of compliance.

         Federal law also prohibits offering, paying, soliciting or receiving
payment for referrals, or arranging for referrals of, Medicare or other federal
or state health program patients or patient care opportunities. The government
has adopted or proposed several different exceptions or safe harbors for
arrangements that will not be deemed to violate the Anti-Kickback Statute. The
management fee structure of our remaining service agreements does not fit within
a safe harbor because the fee is calculated in part on a percentage basis.
Accordingly, there can be no assurance that the fee structure will not be
successfully challenged. A successful challenge to our fee structure could
adversely affect our financial condition and results of operations. If we
violate the Medicare or Medicaid statutes, civil and criminal penalties could be
assessed, and we could be excluded from further participation in Medicare or
state health care programs and from providing services to providers in such
programs.

         Efforts to control health care costs are increasing. In many of the
payor agreements of our managed IPAs, the IPAs are paid on a capitated fee
basis. Therefore, the health care provider's ability to effectively manage the
costs and utilization of medical services determines the profitability of the
fee. We, as well as our managed IPAs and affiliated providers, may be subject to
liability claims and government enforcement action resulting from quality
assurance and utilization review activities designed to control costs through
more efficient utilization of health care services. Because we derive our
revenue from the revenues generated by our managed IPAs, a higher than expected
cost of providing services or a higher than expected rate of utilization may
reduce our profitability.


                                       32
<PAGE>   33

         Insurance Regulations May Adversely Affect Our Business.

         Our managed IPAs enter into contracts and joint ventures with licensed
insurance companies such as HMOs. Under these contracts, the IPAs may be paid on
a capitated fee basis. Under capitation arrangements, health care providers bear
the risk, subject to certain loss limits, that the total costs of providing
medical services to members will exceed the premiums received. The IPAs may be
deemed to be in the business of insurance if they subcontract with physicians or
other providers to provide services on a fee-for-service basis. Thus, the IPAs
may be subject to a variety of regulatory and licensing requirements applicable
to insurance companies and HMOs. These requirements could increase the managed
IPA's costs and lower our revenue. In addition, our Prime Care subsidiary holds
a limited Knox-Keene license in the State of California and, as a result, is
subject to an increased level of state oversight, including reserve
requirements. During the third quarter of 2000, we reached an agreement with the
DMHC regarding the funding of certain cash reserve requirements for claims
payment. Our operations would be adversely affected if we failed to maintain
compliance with the agreement and the California regulators took corrective
action. In addition, our planned sale of PrimeCare requires approval of the
DMHC.

         There Is a Risk of Tax Audit Adjustments.

         Two of our subsidiaries are currently under examination for the 1995
and 1996 tax years. We acquired the stock of one of these subsidiaries during
1996 and the other during 1998. For the years under audit and, potentially, for
subsequent years, any such adjustments could require material cash payments by
us. Any successful adjustment by the IRS would cause interest expense to be
incurred. We do not believe the resolution of these matters will have a material
adverse effect on our financial condition, although there can be no assurance as
to the outcome of these matters.

         Our Involvement in the Medical Services Business Exposes Us to Risk of
         Professional Liability Claims.

         As a result of the fact that the physician groups with whom we had
service agreements delivered medical services to the public, there is a risk of
professional liability claims against us. Claims of this nature, if successful,
could result in an award of damages that exceeds the limits of our insurance
coverage. Insurance against losses of this type can be expensive and varies from
state to state. In some cases, we continue to be covered by insurance policies
of the groups, but in many cases, we have no insurance coverage. In the
substantial majority of our markets, we did not control our affiliated
physicians and physician groups' practice of medicine or compliance with
regulatory requirements and accordingly, should not have liability from these
operations. Such cases, however, are costly to defend, and successful
malpractice claims brought against the physician groups, the managed IPAs and
physician members could have a material adverse effect on our operations.

         Anti-Takeover Provisions Could Prevent an Acquisition of Our Company.

         We are authorized to issue up to 10,000,000 shares of preferred stock.
The Board of Directors determines the rights of the preferred stock. In February
1994, the Board of Directors approved the adoption of a Shareholder Rights Plan.
The Shareholder Rights Plan is meant to encourage potential acquirers of PhyCor
to negotiate with the Board of Directors instead of making coercive,
discriminatory and unfair proposals. Our stock incentive plans allow the
acceleration of the vesting of options if there is a change of control. Our
Charter classifies our Board of Directors into three classes. Each class of
directors serves staggered terms of three years. A change of control without the
bank's consent is a default under the Credit Facility. All of these factors may
discourage or make it more difficult for there to be a change of control.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         See Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Liquidity and Capital Resources - Market
Risks Associated With Financial Instruments."


                                       33
<PAGE>   34

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          PHYCOR, INC. AND SUBSIDIARIES
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                  PAGE
                                                                                  ----
<S>                                                                               <C>
Independent Auditors' Report................................................       35

Consolidated Balance Sheets.................................................       36

Consolidated Statements of Operations.......................................       37

Consolidated Statements of Shareholders' Equity (Deficit)...................       38

Consolidated Statements of Cash Flows.......................................       39

Notes to Consolidated Financial Statements..................................       41
</TABLE>


                                       34
<PAGE>   35

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
PhyCor, Inc.:

We have audited the consolidated balance sheets of PhyCor, Inc. and subsidiaries
as of December 31, 2000 and 1999 and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PhyCor, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a net capital deficiency and has a net working capital
deficit that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





                                                      /s/ KPMG LLP


Nashville, Tennessee
March 30, 2001, except as to Notes 12 and 15,
which are as of April 6, 2001


                                       35
<PAGE>   36

                          PHYCOR, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2000 AND 1999
                    (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    2000                1999
                                                                                 -----------        -----------
                                                     ASSETS
<S>                                                                              <C>                <C>
Current assets:
     Cash and cash equivalents - unrestricted ...........................        $       286        $    31,093
     Cash and cash equivalents - restricted .............................                641             29,619
     Accounts receivable, less allowances of $2,035 in 2000 and
         $166,420 in 1999 ...............................................              2,389            230,513
     Inventories, prepaid expenses and other current assets .............              4,810             64,386
     Notes receivable, current installments .............................              1,514              3,994
     Assets held for sale, net ..........................................             72,704            101,988
                                                                                 -----------        -----------
                     Total current assets ...............................             82,344            461,593
Property and equipment, net .............................................             10,024            156,091
Intangible assets, net ..................................................             18,754            522,742
Notes receivable, excluding current installments ........................             31,873             31,211
Other assets ............................................................              2,019             23,288
                                                                                 -----------        -----------
                     Total assets .......................................        $   145,014        $ 1,194,925
                                                                                 ===========        ===========


                                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Current installments of long-term debt and capital leases ..........        $    46,306        $     7,170
     Current installments of convertible subordinated notes and
         debentures .....................................................            305,500                 --
     Accounts payable ...................................................              2,403             34,963
     Due to physician groups ............................................                113             30,142
     Purchase price payable .............................................                 --             20,711
     Salaries and benefits payable ......................................              1,909             25,544
     Incurred but not reported claims payable ...........................              1,297             45,124
     Current portion of accrued restructuring reserves ..................             11,277              7,316
     Other accrued expenses and current liabilities .....................             19,305             92,843
                                                                                 -----------        -----------
                     Total current liabilities ..........................            388,110            263,813

Long-term debt and capital leases, excluding current installments .......              2,862            249,401
Accrued restructuring reserves, excluding current portion ...............             15,578                679
Deferred credits and other liabilities ..................................              2,183             29,858
Convertible subordinated notes payable to physician groups ..............                637              6,839
Convertible subordinated notes and debentures ...........................                 --            298,750
                                                                                 -----------        -----------
                     Total liabilities ..................................            409,370            849,340
                                                                                 -----------        -----------

Minority interest in earnings of consolidated partnerships ..............                633              2,082

Shareholders' equity (deficit):
     Preferred stock, no par value, 10,000 shares authorized ............                 --                 --
     Common stock, no par value; 250,000 shares authorized; issued
         and outstanding 73,281 shares in 2000 and 73,479 shares in
         1999 ...........................................................            834,276            834,168
     Accumulated deficit ................................................         (1,099,157)          (490,773)
                                                                                 ===========        ===========
                      Total shareholders' equity (deficit) ..............           (264,989)           343,503
                                                                                 -----------        -----------

Commitments, contingencies and subsequent events
                      Total liabilities and shareholders' equity ........        $   145,014        $ 1,194,925
                                                                                 ===========        ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       36
<PAGE>   37


                          PHYCOR, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
     (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)

<TABLE>
<CAPTION>
                                                                                2000               1999                1998
                                                                             -----------        -----------        -----------
<S>                                                                          <C>                <C>                <C>
Net revenue ..........................................................       $   914,195        $ 1,516,195        $ 1,512,499
Operating expenses:
   Cost of provider services .........................................           227,177            204,202            134,302
   Salaries, wages and benefits ......................................           280,159            490,738            513,646
   Supplies ..........................................................           112,799            222,007            227,440
   Purchased medical services ........................................            17,289             36,403             37,774
   Other expenses ....................................................           157,473            235,165            218,359
   General corporate expenses ........................................            22,213             32,305             29,698
   Rents and lease expense ...........................................            61,349            118,104            126,453
   Depreciation and amortization .....................................            50,818             90,435             90,238
   Provision for asset revaluation, restructuring and refinancing ....           559,878            430,965            224,900
   Merger expenses ...................................................                --                 --             14,196
                                                                             -----------        -----------        -----------
         Net operating expenses ......................................         1,489,155          1,860,324          1,617,006
                                                                             -----------        -----------        -----------
Loss from operations .................................................          (574,960)          (344,129)          (104,507)
Other (income) expense:
   Interest income ...................................................            (6,059)            (5,022)            (3,032)
   Interest expense ..................................................            35,739             40,031             36,266
                                                                             -----------        -----------        -----------
         Loss before income taxes, minority interest and
          extraordinary item .........................................          (604,640)          (379,138)          (137,741)
Income tax expense (benefit) .........................................             1,029             53,318            (39,890)
Minority interest in earnings of consolidated partnerships ...........             2,715             13,088             13,596
                                                                             -----------        -----------        -----------
         Loss before extraordinary item ..............................          (608,384)          (445,544)          (111,447)
Extraordinary item - gain from early extinguishment of
   convertible subordinated debentures ...............................                --              1,018                 --
                                                                             -----------        -----------        -----------
         Net loss ....................................................       $  (608,384)       $  (444,526)       $  (111,447)
                                                                             ===========        ===========        ===========

Earnings (loss) per share:
   Basic - Continuing operations .....................................       $     (8.30)       $     (5.92)       $     (1.55)
         Extraordinary item ..........................................                --               0.01                 --
                                                                             -----------        -----------        -----------
                                                                             $     (8.30)       $     (5.91)       $     (1.55)
                                                                             ===========        ===========        ===========

   Diluted - Continuing operations ...................................       $     (8.30)       $     (5.92)       $     (1.55)
         Extraordinary item ..........................................                --               0.01                 --
                                                                             -----------        -----------        -----------
                                                                             $     (8.30)       $     (5.91)       $     (1.55)
                                                                             ===========        ===========        ===========
Weighted average number of shares and dilutive share
   equivalents outstanding:
   Basic .............................................................            73,281             75,179             71,822
   Diluted ...........................................................            73,281             75,179             71,822
                                                                             ===========        ===========        ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       37
<PAGE>   38

                          PHYCOR, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                    (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                               RETAINED
                                                                                               EARNINGS
                                                                     COMMON STOCK            (ACCUMULATED
                                                                 SHARES        AMOUNT           DEFICIT)          TOTAL
                                                                 ------       ---------      ------------       ---------
<S>                                                              <C>          <C>            <C>                <C>
Balances at December 31, 1997 ............................       64,530       $ 645,288       $    65,200       $ 710,488
   Issuance of common stock, net of offering expenses
     totaling $140 .......................................       12,663         204,286                --         204,286
   Repurchase of common stock ............................       (2,628)        (12,590)               --         (12,590)
   Conversion of subordinated notes payable to
     common stock ........................................          209           2,000                --           2,000
   Stock options exercised and related tax benefits ......        1,050          11,673                --          11,673
   Net loss ..............................................           --              --          (111,447)       (111,447)
                                                                 ------       ---------       -----------       ---------
Balances at December 31, 1998 ............................       75,824         850,657           (46,247)        804,410
   Issuance of common stock, net of offering expenses
     totaling $46 ........................................          348             797                --             797
   Repurchase of common stock ............................       (2,861)        (13,486)               --         (13,486)
   Cancellation of common stock and warrants .............          (30)         (4,316)               --          (4,316)
   Conversion of subordinated notes payable to
      common stock .......................................            1              22                --              22
   Stock options exercised ...............................          197             602                --             602
   Net loss ..............................................           --              --          (444,526)       (444,526)
                                                                 ------       ---------       -----------       ---------
Balances at December 31, 1999 ............................       73,479         834,276          (490,773)        343,503
   Issuance of common stock, net of offering expenses
     totaling $1 .........................................          295             182                --             182
   Refund of stock purchase plan contributions ...........           --            (290)               --            (290)
   Cancellation of common stock ..........................         (493)             --                --              --
   Net loss ..............................................           --              --          (608,384)       (608,384)
                                                                 ------       ---------       -----------       ---------
Balances at December 31, 2000 ............................       73,281       $ 834,168       $(1,099,157)      $(264,989)
                                                                 ======       =========       ===========       =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       38
<PAGE>   39

                          PHYCOR, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                    (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   2000              1999              1998
                                                                                ----------        ----------        ----------
<S>                                                                             <C>               <C>               <C>
Cash flows from operating activities:
   Net loss .............................................................       $ (608,384)       $ (444,526)       $ (111,447)
   Adjustments to reconcile net loss to net cash provided by operating
     activities:
     Depreciation and amortization ......................................           50,818            90,435            90,238
     Deferred income taxes ..............................................               --            51,355           (43,011)
     Minority interests .................................................            2,715            13,088            13,596
     Provision for asset revaluation, restructuring and refinancing .....          559,878           430,965           224,900
     Accretion of convertible subordinated notes ........................            6,750             2,250                --
     Merger expenses ....................................................               --                --            14,196
     Increase (decrease) in cash, net of effects of acquisitions and
       dispositions due to changes in:
           Accounts receivable, net .....................................           31,770            16,323              (777)
           Inventories ..................................................              (95)           (1,979)             (865)
           Prepaid expenses and other current assets ....................           16,431           (14,146)           (9,620)
           Accounts payable .............................................          (10,888)            5,079            (2,356)
           Due to physician groups ......................................           (4,892)          (11,017)           (1,365)
           Incurred but not reported claims payable .....................           14,279            (8,771)             (535)
           Accrued restructuring reserves ...............................          (30,973)          (18,982)           (7,121)
           Other accrued expenses and current liabilities ...............          (21,855)            5,312            (4,645)
                                                                                ----------        ----------        ----------
              Net cash provided by operating activities .................            5,554           115,386           161,188
                                                                                ==========        ==========        ==========
Cash flows from investing activities:
     Dispositions (acquisitions), net ...................................          210,528            33,648          (185,743)
     Purchase of property and equipment .................................          (18,337)          (51,719)          (67,612)
     Proceeds from (payments for) other assets ..........................           14,649           (17,221)          (17,914)
     Restricted cash held for sale ......................................          (30,378)               --                --
                                                                                ----------        ----------        ----------
           Net cash provided (used) by investing activities .............          176,462           (35,292)         (271,269)
                                                                                ==========        ==========        ==========
Cash flows from financing activities:
     Net proceeds from issuance of convertible subordinated notes .......               --            92,533                --
     Net proceeds from issuance of common stock and warrants ............              165             1,759            18,591
     Refund of stock purchase plan contributions ........................             (290)               --                --
     Repurchase of common stock .........................................               --           (13,486)          (12,590)
     Proceeds from long-term borrowings .................................               --                --           173,000
     Repayment of long-term borrowings ..................................         (228,542)         (151,398)          (16,156)
     Repayment of obligations under capital leases ......................           (3,148)           (6,200)           (6,139)
     Distributions of minority interests ................................           (4,482)          (15,586)          (10,130)
     Loan costs incurred ................................................           (5,504)           (1,318)             (341)
                                                                                ----------        ----------        ----------
           Net cash provided (used) by financing activities .............         (241,801)          (93,696)          146,235
                                                                                ----------        ----------        ----------
Net increase (decrease) in cash and cash equivalents ....................          (59,785)          (13,602)           36,154
Cash and cash equivalents - beginning of year ...........................           60,712            74,314            38,160
                                                                                ----------        ----------        ----------
Cash and cash equivalents - end of year .................................       $      927        $   60,712        $   74,314
                                                                                ==========        ==========        ==========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       39
<PAGE>   40

                          PHYCOR, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                    (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                2000             1999               1998
                                                                             ----------        ----------        ----------
<S>                                                                          <C>               <C>               <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid (received) during the year for:
   Interest ..........................................................       $   28,138        $   40,593        $   34,792
   Income taxes, net of refunds ......................................              611           (13,560)          (14,510)
                                                                             ==========        ==========        ==========
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects of dispositions and acquisitions, net:
   Assets acquired, net of cash ......................................       $   (1,694)       $  (21,722)       $ (377,649)
   Liabilities paid, including deferred purchase price payments ......           (7,262)          (33,193)          (25,583)
   Issuance (cancellation) of convertible subordinated notes
     payable .........................................................               --            (9,806)            8,317
   Issuance (cancellation) of common stock and warrants ..............               --            (4,676)          193,057
   Cash received from disposition of clinic assets, net ..............          219,484           103,045            16,115
                                                                             ----------        ----------        ----------
     Dispositions (acquisitions), net ................................       $  210,528        $   33,648        $ (185,743)
                                                                             ==========        ==========        ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred to acquire equipment ..............       $      220        $      399        $      808
                                                                             ==========        ==========        ==========
Conversion of subordinated notes payable to common stock .............       $       --        $       22        $    2,000
                                                                             ==========        ==========        ==========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       40

<PAGE>   41
                          PHYCOR, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2000, 1999 AND 1998

(1)      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
         PRACTICES

         (a)      Description of Business

         The Company is a medical network management company that develops and
         manages independent practice associations ("IPAs"), provides contract
         management services to physician networks owned by health systems,
         manages certain medical organizations and provides consulting services
         to independent medical organizations. Through the CareWise, Inc.
         subsidiary ("CareWise"), which is held for sale, the Company also
         provides health care decision-support services, including demand
         management and disease management services, to managed care
         organizations, health care providers, employers and other group
         associations for approximately 3.3 million consumers worldwide. Prior
         to the latter half of 2000, the Company, through wholly-owned
         subsidiaries, had acquired certain assets of and operated clinics under
         long-term service agreements with affiliated physician groups that
         practiced exclusively through such clinics. The Company provided
         administrative and technical support for professional services rendered
         by the physician groups under service agreements. In 2000, the Company
         divested the assets related to most of its affiliated physician groups
         and used the proceeds to pay down borrowings under its bank credit
         facility (the "Credit Facility"). The Company operated eight clinics,
         six of which were held for sale, in five states and 41 clinics in
         21 states at December 31, 2000 and 1999, respectively.

         The Company also manages IPAs which are networks of independent
         physicians. Fees earned from managing the IPAs are based upon a
         percentage of revenue collected by the IPAs and also upon a share of
         surplus, if any, of capitated revenue of the IPAs. These IPAs included
         approximately 16,600 and 24,400 physicians in 14 and 25 markets at
         December 31, 2000 and 1999, respectively. Affiliated physicians
         provided medical services under capitated contracts to approximately
         639,000 patients, including approximately 127,000 Medicare and Medicaid
         eligible patients at December 31, 2000.

         The Company anticipates providing health and productivity services to
         large self-insured employers through a wholly-owned subsidiary,
         HPMdirect, Inc. ("HPMdirect").

         (b)      Principles of Consolidation

         The consolidated financial statements include the accounts of the
         Company and its majority owned subsidiaries, partnerships and other
         entities in which the Company has more than a 50% ownership interest or
         exercises control. All significant intercompany balances and
         transactions are eliminated in consolidation. The Company does not
         consolidate the physician practices it manages as it does not have
         operating control. Physician practices and IPAs which are owned and
         operated by the Company are consolidated.

         (c)      Use of Estimates

         Management of the Company has made certain estimates and assumptions
         relating to the reporting of assets and liabilities and the disclosure
         of contingent assets and liabilities to prepare these consolidated
         financial statements in conformity with generally accepted accounting
         principles. Actual results could differ from those estimates.

         (d)      Cash and Cash Equivalents

         The Company considers all highly liquid investments with a maturity of
         three months or less when purchased to be cash equivalents. Cash and
         cash equivalents as of December 31, 2000, included approximately $2.6
         million of consolidated partnership cash of which $1.9 million was
         classified as held for sale. These balances may only be used for the
         operations of the respective partnerships.


                                       41

<PAGE>   42

         (e)      Accounts Receivable

         Accounts receivable principally represent receivables from patients and
         third-party payors for medical services provided by physician groups.
         Terms of the service agreements require the Company to purchase
         receivables generated by the physician groups on a monthly basis. Such
         amounts are recorded net of contractual allowances and estimated bad
         debts. Accounts receivable are a function of net clinic revenue rather
         than net revenue of the Company (See note 3).

         (f)      Inventories

         Inventories are comprised primarily of medical supplies, medications
         and other materials used in the delivery of health care services by the
         physician groups at the Company's clinics and hospitals. The Company
         values inventories at the lower of cost or market with cost determined
         using the first-in, first-out (FIFO) method. At December 31, 2000,
         substantially all inventory is held for sale.

         (g)      Property and Equipment

         Property and equipment are stated at cost. Equipment held under capital
         leases is stated at the present value of minimum lease payments at the
         inception of the related leases. Depreciation of property and equipment
         is calculated using the straight-line method over the estimated useful
         lives of the assets. Equipment held under capital leases and leasehold
         improvements are amortized on a straight line basis over the shorter of
         the lease term or estimated useful life of the assets.

         (h)      Intangible Assets

         Clinic Service Agreements

         Historically, costs of obtaining clinic service agreements were
         amortized using the straight-line method over the periods during which
         the agreements were effective, up to a maximum of 25 years. Clinic
         service agreements represented the exclusive right to operate the
         Company's clinics in affiliation with the related physician groups
         during the term of the agreements. In the event of termination of a
         service agreement, the related physician group was obligated to
         purchase all clinic assets, including the unamortized portion of
         intangible assets, generally at net book value. Currently, the Company
         is providing management services under service agreements which do not
         obligate the Company to provide capital and require no initial capital
         investment.

         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 a period not to exceed 25
         years.

         Other Intangible Assets

         Other intangible assets include costs associated with obtaining
         financing which are being amortized systematically over the terms of
         the related debt agreements.

         Amortization and Recoverability

         Effective April 1, 1998, the Company changed its policy with respect to
         amortization of intangible assets. All existing and future intangible
         assets are amortized over a period not to exceed 25 years from the
         inception of the respective intangible assets. Had the Company adopted
         this policy for the first quarter of 1998, amortization expense would
         have increased by approximately $3.3 million, resulting in a decrease
         in diluted earnings per share of $0.03. Amortization of intangibles
         amounted to $20,324,000, $37,944,000, and $38,034,000 for 2000, 1999
         and 1998, respectively.


                                       42

<PAGE>   43

         The Company periodically reviews its intangible assets to assess their
         recoverability and impairments are recognized in the statement of
         operations if a permanent impairment is determined to have occurred.
         Recoverability of intangibles is determined based on undiscounted
         future operating cash flows from the related business unit or activity.
         The amount of impairment, if any, is measured based on discounted
         future operating cash flows using a discount rate reflecting the
         Company's average cost of funds or based on the fair value of the
         related business unit or activity. The assessment of the recoverability
         of intangible assets will be impacted if estimated future operating
         cash flows are not achieved.

         (i)      Impairment of Long-Lived Assets

         The Company reviews long-lived assets and certain identifiable
         intangibles for impairment whenever events or changes in circumstances
         indicate that the carrying amount of an asset may not be recoverable.
         Recoverability of assets to be held and used is measured by a
         comparison of the carrying amount of an asset to future net cash flows
         expected to be generated by the asset. If such assets are considered to
         be impaired, the impairment to be recognized is measured by the amount
         by which the carrying amount of the assets exceeds the fair value of
         the assets.

         (j)      Income Taxes

         Income taxes are accounted for under the asset and liability method.
         Deferred tax assets and liabilities are recognized for the future tax
         consequences attributable to differences between the financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases. Deferred tax assets and liabilities are measured
         using enacted tax rates expected to apply to taxable income in the
         years in which those temporary differences are expected to be recovered
         or settled. The effect on deferred tax assets and liabilities of a
         change in the tax rates is recognized in income in the period that
         includes the enactment date. A valuation allowance is provided against
         deferred tax assets to the extent that it is not more than likely they
         will be realized.

         (k)      Incurred but not Reported Claims

         Incurred but not reported claims payable represent the liability for
         covered services that have been performed by physicians for enrollees
         of various medical plans. These liabilities include medical expense
         claims reported to the Company and an actuarially determined estimate
         of claims that have been incurred but not reported to the Company. The
         estimated claims incurred but not reported is based on the Company's
         historical claims data, current enrollment, health service utilization
         statistics and other related information.

         (l)      Financial Instruments

         To mitigate the Company's exposure to fluctuating interest rates, it
         entered into an interest rate swap agreement beginning in 1997. During
         1998, the Company amended its existing $100 million interest rate swap
         agreement and entered into additional swap agreements. Fixed interest
         rates ranged from 5.14% to 5.78% relative to the one month or three
         month floating LIBOR. The Company terminated the swap agreements in
         July 2000 and received payments totaling $2.2 million which were
         recorded as a deferred gain and amortized over the term of the Credit
         Facility. The proceeds were used to reduce amounts outstanding under
         its Credit Facility. These agreements were accounted for on the accrual
         method. The Company has historically not engaged in trading activities
         in its interest rate swap agreements and does not intend to so do in
         the future.

         The FASB has issued Statement of Financial Accounting Standards (SFAS)
         No. 133, Accounting for Derivative Instruments and Hedging Activities,
         as amended by SFAS No. 138 which the Company adopted in the first
         quarter of 2001 without any financial impact. If the Company had
         retained the swap agreements, adoption of SFAS No. 133 would have
         required the Company to mark certain of its interest rate swap
         agreements to market due to lender optionality features included in
         those swap agreements.


                                       43

<PAGE>   44

         (m)      Stock Option Plans

         The Company accounts for its compensation and stock option plans in
         accordance with the provisions of Accounting Principles Board (APB)
         Opinion No. 25, Accounting for Stock Issued to Employees, and related
         interpretations. As such, compensation expense would be recorded on the
         date of grant only if the current market price of the underlying stock
         exceeded the exercise price. In accordance with SFAS No. 123,
         Accounting for Stock-Based Compensation, the Company provides pro forma
         net income and pro forma earnings per share disclosures for employee
         stock option grants made in 1995 and subsequent years as if the
         fair-value-based method defined in SFAS No. 123 had been applied.

         (n)      Earnings (Loss) Per Share

         Basic earnings (loss) per share is computed based on weighted average
         shares outstanding and excludes any potential dilution. Diluted
         earnings (loss) per share reflects the potential dilution from the
         exercise or conversion of all dilutive securities into common stock
         based on the average market price of common shares outstanding during
         the period.

         Options and warrants to purchase 3,504,000, 17,476,000 and 14,760,000
         shares of common stock were outstanding at December 31, 2000, 1999 and
         1998, respectively, but were not included in the computation of diluted
         EPS due to losses for all years, as a result of the options and
         warrants being antidilutive. Antidilutive securities at December 31,
         1999 also included 151,000 shares of common stock to be issued at
         future dates related to clinic acquisitions. Additionally, subordinated
         notes payable convertible into 24,000, 223,000 and 1,636,000 shares at
         December 31, 2000, 1999 and 1998, respectively, were antidilutive.
         Interest paid on the convertible notes was offset by service agreement
         fees received by the Company of an equal amount.

         (o)     Comprehensive Income

         Comprehensive income generally includes all changes in equity during a
         period except those resulting from investments by shareholders and
         distributions to shareholders. Net income was the same as comprehensive
         income for 2000, 1999 and 1998.

         (p)      Reclassifications

         Certain prior year amounts have been reclassified to conform to the
         2000 presentation.

(2)      LIQUIDITY AND GOING CONCERN

         The accompanying consolidated financial statements have been prepared
         assuming that the Company will continue as a going concern with the
         realization of assets and the settlement of liabilities and commitments
         in the normal course of business. However, the Company's leveraged
         financial structure and losses from operations give rise to the fact
         that such realization of assets and liquidation of liabilities is
         subject to significant uncertainty. At December 31, 2000, current
         liabilities exceeded the Company's current assets by $305.8 million.

         In 2000, as a result of the outcome of discussions with the Company's
         affiliated clinics, the Company determined to sell the assets in its
         medical clinic business and to apply the proceeds to the amounts
         outstanding under the Credit Facility. The Company failed to meet the
         February 2001 interest payment obligation under the 4.5% convertible
         subordinated notes ("Notes") of approximately $4.4 million. The Company
         has entered into limited forbearance agreements with noteholders
         representing a majority of the aggregate principal amount of the Notes.
         Pursuant to the forbearance agreements, the holders have agreed not to
         take action under the Notes until April 30, 2001, subject to automatic
         ten business day extensions. The Company has initiated discussions with
         an informal committee of holders of the Notes regarding a possible
         restructuring. In connection with the restructuring it may be necessary
         for the Company to seek protection from its creditors. A restructuring
         could materially change the amounts reported in the


                                       44

<PAGE>   45
         accompanying consolidated financial statements, which do not give
         effect to all adjustments of the carrying value of assets or
         liabilities that might be necessary as a consequence of a plan of
         reorganization. The Company's ability to continue as a going concern is
         dependent upon, among other things, future profitable operations, the
         ability to comply with the terms of the Company's credit facility and
         the ability to generate sufficient cash flow from operations and
         financing arrangements to meet obligations.

(3)      NET REVENUE

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

         IPA management revenue is equal to the difference between the amount of
         capitation and risk pool payments payable to the IPAs managed by the
         Company less amounts retained by the IPAs. The Company has not
         historically been a party to capitated contracts entered into by the
         IPAs, but is exposed to losses to the extent of its share of deficits,
         if any, of the capitated revenue of the IPAs. Through the PrimeCare
         International, Inc. (PrimeCare) and The Morgan Health Group, Inc. (MHG)
         acquisitions, the Company became a party to certain managed care
         contracts. Accordingly, the cost of provider services for the PrimeCare
         and MHG contracts is not included as a deduction to net revenue of the
         Company but is reported as an operating expense. The Company had
         terminated all payor contracts relating to MHG and commenced closing
         its MHG operations April 30, 1999. At December 31, 2000, the Company
         had underwritten letters of credit totaling $3.1 million for the
         benefit of certain managed care payors to help ensure payment of costs
         for which the Company's affiliated IPAs are responsible. The Company is
         exposed to losses if a letter of credit is drawn upon and the Company
         is unable to obtain reimbursement from the IPA. The Company has
         experienced losses of approximately $400,000 under letters of credit in
         2000.

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

<TABLE>
<CAPTION>
                                                                      2000          1999          1998
                                                                   ----------    ----------    ----------
<S>                                                                <C>           <C>           <C>
Gross physician group, hospital and other revenue .............    $1,761,621    $3,309,195    $3,494,608
Less:
     Provisions for doubtful accounts and  contractual
       adjustments ............................................       814,377     1,425,570     1,414,728
                                                                   ----------    ----------    ----------
       Net physician group, hospital  and other revenue .......       947,244     1,883,625     2,079,880
IPA revenue: ..................................................       912,415     1,120,843       776,470
                                                                   ----------    ----------    ----------
     Net physician group, hospital, IPA  and other revenue ....     1,859,659     3,004,468     2,856,350
Less amounts retained by physician groups and IPAs:
     Physician groups .........................................       311,672       641,480       715,287
     Clinic technical employee compensation ...................        42,617        84,232        94,906
     IPAs .....................................................       591,175       762,561       533,658
                                                                   ----------    ----------    ----------
         Net revenue ..........................................    $  914,195    $1,516,195    $1,512,499
                                                                   ==========    ==========    ==========
</TABLE>


                                       45

<PAGE>   46

         The Company derived most of its net revenue from its affiliated
         physician groups with which it had service agreements or management
         agreements. The Company's affiliated physician groups derived
         approximately 27%, 25% and 26% of their net revenues from services
         provided under the Medicare program for the years ended December 31,
         2000, 1999 and 1998, respectively. Other than the Medicare program, the
         physician groups have no customers which represent more than 10% of
         aggregate net clinic revenue for the years ended December 31, 2000,
         1999 and 1998 or 5% of accounts receivables at December 31, 2000 and
         1999.

(4)      ACQUISITIONS

         (a)      Multi-Specialty Medical Clinics

         The Company did not affiliate with any multi-specialty medical clinics
         during the year 2000. In 1999, the Company affiliated with the Rockford
         Health System, effective November 1, located in Rockford, Illinois and
         the Carolina Premier Medical Group, effective December 1, located in
         Raleigh, North Carolina. The Company's contract with the Carolina
         Premier Medical Group terminated May 31, 2000. In 1998, the Company
         affiliated with the Grove Hill Medical Center, effective March 1,
         located in New Britain, Connecticut and the Huntington Medical Group,
         effective October 1, located in Huntington, New York. The net assets of
         the Grove Hill Medical Center and the Huntington Medical Group were
         sold in July, 2000 and February, 2001, respectively.

         Historically, the Company acquired certain operating assets of various
         individual physician practices and single specialty groups which were
         merged into clinics already operated by the Company. In 1999, service
         agreement rights of approximately $2.1 million were recorded in
         conjunction with mergers. The Company acquired operating assets and
         liabilities in exchange for cash. Such consideration for the above
         mergers was approximately $2.6 million for 1999 and $152.3 million for
         1998. The acquisitions were accounted for as purchases, and the
         accompanying consolidated financial statements include the results of
         their operations from the dates of their respective acquisitions. The
         physicians as employees of the clinics become subject to the terms of
         the applicable service agreement.

         (b)      Independent Practice Associations (IPAs)

         Effective January 1, 1995, the Company completed its merger with North
         American Medical Management, Inc. (NAMM), an operator and manager of
         IPAs. The Company made additional payments for the NAMM acquisition
         pursuant to an earn-out formula of $35 million in April 1998, of which
         $13.0 million was paid in shares of the Company's common stock.
         Additional payments of approximately $600,000 were made in 1999. In
         July 1998, the Company acquired MHG, an Atlanta-based IPA, for
         approximately 500,000 shares of common stock and assumed liabilities
         for an aggregate purchase price of approximately $33.1 million, of
         which $31.6 million was recorded as goodwill at the time of
         acquisition. Also, during 1998 the Company recorded goodwill of
         approximately $14.3 million primarily related to the acquisition of an
         IPA management company and an HMO. During 1999, the Company recorded
         goodwill of approximately $3.5 million primarily related to additional
         investments in an IPA market and the acquisition of the remaining
         interest in an HMO. At December 31, 2000, all unamortized goodwill
         relating to the NAMM acquisition, with the exception of $2.0 million,
         has been expensed in 2000 as asset revaluation charges in conjunction
         with asset dispositions and impairments.

         (c)      PhyCor Management Corporation (PMC)

         In June 1995, the Company purchased a minority interest of
         approximately 9% in PMC and managed PMC pursuant to a 10-year
         administrative services agreement. PMC developed and managed IPAs and
         provided other services to physician organizations. The Company
         acquired the remaining interests of PMC on March 31, 1998 for an
         aggregate purchase price of approximately $21.0 million paid in shares
         of the Company's common stock and integrated the operations of PMC into
         NAMM. At December 31, 2000, no goodwill remains on the Company's
         balance sheet related to the PMC purchase.


                                       46

<PAGE>   47

         (d)      PrimeCare

         In May 1998, the Company acquired PrimeCare, a medical network
         management company serving southern California's Inland Empire area, in
         a purchase business combination for approximately 4.0 million shares of
         common stock, assumed liabilities and cash for an aggregate purchase
         price of approximately $187.2 million. PrimeCare's delivery network is
         comprised of an integrated campus, including the Desert Valley Medical
         Group, Desert Valley Hospital and Apple Valley Surgery Center, as well
         as the Inland Empire area IPA network. Goodwill of approximately $143.4
         million was recorded in conjunction with the purchase in 1998. The
         remaining net assets of PrimeCare are classified as held for sale at
         estimated fair value less costs to sell in the accompanying
         consolidated balance sheet.

         (e)      CareWise, Inc. (CareWise)

         In July 1998, the Company acquired Seattle-based CareWise, a nationally
         recognized leader in the health care decision-support industry for
         approximately 3.1 million shares of common stock and assumed
         liabilities for an aggregate purchase price of approximately $67.1
         million. The acquisition was accounted for as a purchase. Goodwill of
         approximately $59.5 million was recorded in conjunction with the
         purchase. The remaining net assets of CareWise are classified as held
         for sale at estimated fair value less costs to sell in the accompanying
         consolidated balance sheet.

         (f)      First Physician Care, Inc.

         In July 1998, the Company acquired Atlanta-based FPC, a privately-held
         physician practice management company that operated in six markets in
         Texas, Florida, Illinois, New York and Georgia, and provided practice
         management services to approximately 140 physicians. The acquisition
         was made for approximately 2.9 million shares of common stock and
         assumed liabilities for an aggregate purchase price of approximately
         $60.4 million, and was accounted for as a purchase. Goodwill of
         approximately $43.4 million was recorded in conjunction with the
         purchase in 1998. The operations of First Physician Care, Inc. have
         been sold, liquidated or discontinued as of December 31, 2000 and no
         related goodwill remains on the Company's balance sheet.

(5)      BUSINESS SEGMENTS

         The Company has two reportable segments based on the way management has
         organized its operations: multi-specialty clinics and IPAs. The Company
         derives its revenues primarily from operating multi-specialty medical
         clinics and managing IPAs (See Note 3). In addition, the Company
         provides health care decision-support services and operates two
         hospitals (one at December 31, 2000) that do not meet the quantitative
         thresholds for reportable segments and have therefore been aggregated
         within the corporate and other category.


                                       47


<PAGE>   48



         The accounting policies of the segments are the same as those described
         in the summary of significant accounting policies. The Company
         evaluates performance based on earnings from operations before asset
         revaluation and restructuring charges, refinancing, merger expenses,
         minority interest and income taxes. The following is a financial
         summary by business segment for the periods indicated (in thousands):

<TABLE>
<CAPTION>
                                                                               2000           1999           1998
                                                                            ----------     ----------     -----------
         <S>                                                                 <C>           <C>            <C>
         Multi-specialty clinics:
         Net revenue ...................................................    $  536,889     $1,103,350     $1,237,993
         Operating expenses(1) .........................................       504,810      1,001,394      1,111,088
         Interest income ...............................................        (5,928)        (3,283)        (1,480)
         Interest expense ..............................................        33,872         75,406         85,366
         Earnings before taxes and minority interest(1) ................         4,135         29,833         43,019
         Depreciation and amortization .................................        25,992         67,576         77,718
         Segment assets ................................................        37,703        789,344      1,414,159

         IPAs:
         Net revenue ...................................................       321,240        358,282        242,812
         Operating expenses(1) .........................................       339,924        338,970        209,625
         Interest income ...............................................        (2,389)        (2,505)        (1,729)
         Interest expense ..............................................         9,798         10,674          9,362
         Earnings (loss) before taxes and minority interest(1) .........       (26,093)        11,143         11,958
         Depreciation and amortization .................................        12,775         13,750          8,963
         Segment assets ................................................        71,590        286,979        299,641

         Corporate and other(2):
         Net revenue ...................................................        56,066         54,563         31,694
         Operating expenses(1) .........................................        84,543         88,995         57,197
         Interest income ...............................................         2,258            766            177
         Interest expense ..............................................        (7,931)       (46,049)       (58,462)
         Earnings (loss) before taxes, minority interest and
            extraordinary item(1) ......................................       (22,804)        10,851         32,782
         Depreciation and amortization .................................        12,051          9,109          3,557
         Segment assets ................................................        35,721        118,602        165,485
</TABLE>

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

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

(6)      NOTES RECEIVABLE

         The Company accepted notes receivable as partial consideration for the
         disposition of the assets of several clinics. The notes receivable at
         December 31, consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                            2000        1999
                                                                          --------    --------
         <S>                                                              <C>         <C>
         Notes receivable ............................................    $ 37,325    $ 37,330
         Less: discount for fair value (rates approximating 16%) .....       3,938       2,125
                                                                          --------    --------
           Notes receivable, net .....................................      33,387      35,205
         Less current installments ...................................       1,514       3,994
                                                                          --------    --------
           Notes receivable, excluding current installments ..........    $ 31,873      31,211
                                                                          ========    ========
</TABLE>


                                       48

<PAGE>   49
         In January 2001, the Company accepted a $7.2 million prepayment for a
         $15.1 million long-term note receivable included in notes receivable
         above. The resulting charge to earnings was recorded in the first
         quarter of 2001.

(7)      PROPERTY AND EQUIPMENT

         Property and equipment at December 31, consists of the following (in
         thousands):

<TABLE>
<CAPTION>
                                                                                          2000           1999
                                                                                       ----------     -----------
         <S>                                                                           <C>            <C>
         Land and improvements.........................................                $       --     $    10,066
         Buildings and leasehold improvements..........................                     5,024          44,542
         Equipment.....................................................                    12,406         203,017
         Construction in progress......................................                        42           1,616
                                                                                       ----------     -----------
                                                                                           17,472         259,241
         Less accumulated depreciation and amortization................                     7,448         103,150
                                                                                       ----------     -----------
           Property and equipment, net.................................                $   10,024     $   156,091
                                                                                       ==========     ===========
</TABLE>

         At December 31, 2000 equipment held under capital leases were related
         to entities classified as held for sale in the accompanying
         consolidated balance sheet. At December 31, 1999, equipment with a cost
         of approximately $15.8 million, and accumulated amortization of
         approximately $9.2 million, respectively, was held under capital
         leases.

(8)      INTANGIBLE ASSETS

         Intangible assets at December 31, net of accumulated amortization,
         consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                       2000              1999
                                                                                     --------          ---------
         <S>                                                                         <C>               <C>
         Clinic service agreements.........................................          $  7,544          $ 232,493
         Excess of cost of acquired assets over fair value.................             2,000            277,752
         Loan issuance costs...............................................             9,210             12,497
                                                                                     --------          ---------
           Intangible assets, net..........................................          $ 18,754          $ 522,742
                                                                                     ========          =========
</TABLE>

(9)      FAIR VALUE OF FINANCIAL INSTRUMENTS

         At December 31, 2000 and 1999, the fair value of the Company's cash and
         cash equivalents, accounts receivable, accounts payable, purchase price
         payable 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 also approximates its carrying value
         since the related notes bear interest at current market rates.

         The estimated fair value of the convertible subordinated notes payable
         to physician groups was approximately $586,000 and $5,883,000 as of
         December 31, 2000 and 1999, respectively. The carrying value of these
         notes was approximately $637,000 and $6,839,000 at December 31, 2000
         and 1999, respectively. The estimated fair value of the Company's zero
         coupon convertible subordinated notes was approximately $12,535,000 and
         $53,170,000 as of December 31, 2000 and 1999. The carrying value of the
         zero coupon convertible notes was approximately $109.0 million and
         $102.3 million at December 31, 2000 and 1999, respectively. The
         estimated fair value of these convertible securities is based on the
         greater of their yield to maturity and quoted market prices for similar
         debt issues or the closing market value of the common shares into which
         they could have been converted at the respective balance sheet date.
         The estimated fair value of the Company's convertible subordinated
         debentures was approximately $22,598,000 and $102,180,000 as of
         December 31, 2000 and 1999, respectively, compared to a carrying value
         of $196,500,000 at December 31, 2000 and 1999, respectively. The
         estimated fair value of these convertible debentures is based on quoted
         market prices at these dates.


                                       49
<PAGE>   50

(10)     CONVERTIBLE SUBORDINATED NOTES PAYABLE TO PHYSICIAN GROUPS

         At December 31, 2000 and 1999, the Company had outstanding convertible
         subordinated notes payable to affiliated physician groups in the
         aggregate principal amount of approximately $637,000 and $6,839,000,
         respectively. These notes bear interest at 7.0% and are convertible
         into shares of the Company's common stock at conversion prices ranging
         from $26.35 to $28.91 per share. The convertible notes may be converted
         into approximately 24,000 shares of common stock as of December 31,
         2000 at the option of the holders.

(11)     CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES

         The Company has $196.5 million in principal amount outstanding under
         its 4.5% convertible subordinated debentures ("Notes") which mature in
         2003. Failure by the Company to make the February 15, 2001 interest
         payment on the Notes resulted in an event of default under the terms of
         the related indenture on March 17, 2001. The Company has entered into
         limited forbearance agreements with noteholders representing 57% of the
         aggregate principal amount of the Notes. Pursuant to the forbearance
         agreements, the holders have agreed not to take action under the Notes
         until April 30, 2001, subject to automatic 10 business day extensions.
         The Company has initiated discussions with an informal committee of
         holders of the Notes regarding a possible restructuring.

         The Notes were originally priced at par with a coupon rate of 4.5% and
         are convertible into the Company's common stock at $38.67 per share.
         From February 15, 1999 to maturity, the Notes may be redeemed at prices
         decreasing from 102.572% of face value to 100% of face value. During
         the third quarter of 1999, the Company purchased $3.5 million of the
         Notes for a total consideration of approximately $2.5 million,
         resulting in an extraordinary gain of approximately $1.0 million.

         During the second quarter of 1999, the Company announced a definitive
         agreement allowing for an investment in the Company of up to $200.0
         million by funds managed by E.M. Warburg, Pincus and Co., LLC
         ("EMW LLC"). The agreement allowed for two separate series of zero
         coupon convertible subordinated notes. The first of these series
         ("Series A Notes"), was issued on September 3, 1999, and provided gross
         proceeds to PhyCor of $100 million. The Company used the net proceeds
         from the Series A Notes of $92.5 million to repay indebtedness
         outstanding under the Company's Credit Facility The Series A Notes are
         non-voting, have a 6.75% yield, and are convertible at an initial
         conversion price of $6.67 at the option of the holder into
         approximately 15.0 million shares of PhyCor common stock. The Series A
         Notes, with a carrying value of $109.0 million at December 31, 2000,
         will accrete to a maturity value of approximately $266.4 million at the
         15-year maturity date and include an investor option to put the notes
         to PhyCor at the end of ten years. In the second quarter of 2000, the
         Company mutually agreed with EMW LLC not to issue the second series of
         notes.

         If the principal due under the Notes were to be accelerated, an event
         of default would occur under the Series A Notes. The Company has
         obtained a waiver and forbearance agreement through June 30, 2001 from
         Warburg Pincus & Co. relating to the possible default under the Series
         A Notes, subject to earlier termination in certain circumstances.

(12)     LONG-TERM DEBT

         Long-term debt at December 31, consists of the following (in
         thousands):

<TABLE>
<CAPTION>
                                                                                          2000            1999
                                                                                       ---------        ---------
         <S>                                                                           <C>              <C>
         Bank credit facility,  bearing interest at a weighted average rate            $  44,733        $ 241,000
           of 11.33% at December 31, 2000.......................................
         Mortgages  payable,  bearing  interest at rates ranging from 8.25%                4,012            4,273
           to 9.75%, secured by land, buildings, and certain equipment..........
         Capital lease obligations..............................................             121            5,286
         Other notes payable....................................................             302            6,012
                                                                                       ---------        ---------
                  Total long-term debt..........................................          49,168          256,571
         Less current installments..............................................          46,306            7,170
                                                                                       ---------        ---------
             Long-term debt, excluding current installments.....................       $   2,862        $ 249,401
                                                                                       =========        =========
</TABLE>


                                       50

<PAGE>   51

         The Company modified its Credit Facility and its synthetic lease
         facility several times in 2000. The Credit Facility, as amended August
         25, 2000, provided for the conversion of outstanding balances under the
         previous revolving credit and synthetic lease facilities and
         outstanding letters of credit to a term loan ("Term Loan") and a $25
         million revolving loan ("Revolving Loan"). Amounts were available under
         this Revolving Loan only to the extent repayments were made from excess
         cash flows of the Company. The restated credit facility also included a
         senior secured revolving loan of up to $10 million ("New Revolving
         Loan"). Under the terms of this amended Credit Facility, net cash
         proceeds from asset sales are required to be prepaid against
         outstanding borrowings under the Term Loan, the Revolving Loan and the
         New Revolving Loan and then to cash collateralize outstanding letters
         of credit. Irrespective of asset sales, the aggregate balance of these
         loans and uncollateralized letters of credit is required to be reduced
         each month end until maturity on June 30, 2001. At April 6, 2001, all
         borrowings under the Credit Facility had been repaid and outstanding
         letters of credit totaled $8.9 million for which cash collateral of
         $4.9 million had been paid to the agent bank. No additional borrowings
         are available under the Credit Facility.

         The event of default under the Notes (Note 11) also resulted in an
         event of default under the Credit Facility, permitting the banks to
         require the Company to immediately provide the remaining $4.0 million
         as of March 30, 2001, needed to fully cash collateralize the letters of
         credit. The Company has obtained a waiver, the terms of which had the
         effect of eliminating this event of default.

         The total drawn cost under the Credit Facility at December 31, 2000,
         was either (i) the applicable eurodollar rate plus 4.50% to 8.00% per
         annum or (ii) the agent's base rate plus 1.00% per annum. The total
         weighted average drawn cost of outstanding borrowings at December 31,
         2000 was 11.33%.

         Outstanding borrowings and letters of credit issued under the Credit
         Facility are secured by the capital stock the Company holds in its
         significant subsidiaries (as defined in the Credit Facility), certain
         real property of the Company and the personal property held by the
         significant subsidiaries. The Credit Facility contains covenants which,
         among other things, imposes limitations or prohibitions on the Company
         with respect to (i) the incurring of certain indebtedness, (ii) the
         creation of security interests on the assets of the Company, (iii) the
         payment of cash dividends on, and the redemption or repurchase of,
         securities of the Company, (iv) investments and (v) acquisitions.

         The Company's synthetic lease facility, as amended in January 2000,
         provided off balance sheet financing with an option to purchase the
         leased facilities at the end of the lease term. The August 2000
         amendment resulted in the conversion of $19.3 million of amounts
         outstanding under the synthetic lease facility into the term loan under
         the Credit Facility. In November 2000, all remaining amounts
         outstanding under the synthetic lease facility were repaid using asset
         sale proceeds and the synthetic lease facility was terminated.

         The Company recorded approximately $3.4 million of refinancing charges
         related to the amendment and restatement of the Credit Facility in
         January and August 2000. This charge represented unamortized costs that
         were expensed as a result of the reduced commitment amounts and the
         acceleration of the maturity date of the Credit Facility.


                                       51

<PAGE>   52


         The aggregate maturities of long-term debt at December 31, 2000 are as
         follows (in thousands):

<TABLE>
                           <S>                               <C>
                           2001............................. $  46,306
                           2002.............................       317
                           2003.............................       330
                           2004.............................       357
                           2005.............................       387
                           Thereafter.......................     1,471
                                                             ---------
                                                             $  49,168
                                                             =========
</TABLE>

(13)     LEASES

         The Company has entered into operating leases for commercial property
         and equipment with affiliated physician groups and third parties.
         Commercial properties under operating leases include clinic buildings,
         satellite operations, and administrative facilities.

         The future minimum lease payments under noncancelable operating leases
         net of sublease income at December 31, 2000, are as follows (in
         thousands):

<TABLE>
<CAPTION>
                                                                                            Net
                                                                                         Operating
                                                                                           Leases
                                                                                        -----------
                 <S>                                                                    <C>
                 2001...............................................................    $     9,863
                 2002...............................................................          5,639
                 2003...............................................................          4,621
                 2004...............................................................          3,769
                 2005...............................................................          3,295
                 Thereafter.........................................................          3,823
                                                                                        -----------
                          Total minimum lease payments..............................    $    31,010
                                                                                        ===========
</TABLE>

         Net payments under operating leases at December 31, 2000, include total
         commitments of approximately $107.9 million reduced by amounts to be
         reimbursed under clinic service agreements of approximately $76.8
         million. Payments due under operating leases include approximately
         $40.2 million payable to physician groups and their affiliates.
         Generally, in the event of a service agreement termination, any related
         lease obligations are also terminated. Operating leases with remaining
         payments totaling $18.9 million at December 31, 2000 were not
         terminated in conjunction with the sale or closure of various
         operations. Such liabilities are included in accrued restructuring
         reserves at December 31, 2000.

         An executive officer and director of the Company, is shareholder of
         Healthcare Realty Trust, Incorporated ("HRT"), a real estate investment
         trust, and was a director of HRT from 1993 until February 2001. The
         Company's Vero Beach property is leased from HRT by PhyCor of Vero
         Beach, Inc., a wholly-owned subsidiary of the Company, at a base rental
         of approximately $1.2 million per year until 2009. First Physician Care
         of South Florida, Inc., a wholly-owned subsidiary of the Company made
         payments in 2000 to HRT totaling approximately $400,000 pursuant to a
         lease which terminates in 2009. The Company has guaranteed the lease
         obligations of its formerly affiliated Roanoke, Virginia physician
         group Lewis-Gale Clinic, LLC to HRT. The Roanoke physician group leases
         properties under a 15-year agreement with HRT which includes rent and
         certain operating expenses. Such payments totaled approximately $7.0
         million in 2000.


                                       52
<PAGE>   53

(14)     SHAREHOLDERS' EQUITY

         (a)      Common Stock

         In September 1998, the Company adopted a common stock repurchase
         program whereby the Company may repurchase up to $50.0 million of its
         common stock. In October 1998, the Company announced the expansion of
         its common stock repurchase program into a securities repurchase
         program to include the Company's 4.5% convertible subordinated
         debentures and other securities, the economic terms of which are
         derived from the common stock and/or debentures. In conjunction with
         the securities repurchase program, the Company repurchased
         approximately 2.9 million shares of common stock in 1999 for
         approximately $13.5 million and approximately 2.6 million shares of
         common stock in 1998 for approximately $12.6 million. The Company's
         amended Credit Facility prohibited additional securities repurchases.

         (b)      Preferred Stock

         The Company has 10,000,000 shares of authorized but unissued preferred
         stock. The Company has reserved for issuance 500,000 shares of Series A
         Junior Participating Preferred Stock issuable in the event of certain
         change-in-control events.

         (c)      Warrants

         The following represents a summary of all warrants outstanding at
         December 31, 2000 (shares in thousands):

<TABLE>
<CAPTION>
                                                                                    EXERCISABLE AT
                                      EXPIRATION       NUMBER         EXERCISE       DECEMBER 31,
         GRANT DATE                      DATE         OF SHARES        PRICE            2000
         ----------                   ----------      ---------       --------      ---------------
         <S>                          <C>             <C>             <C>           <C>
         February 1992                   2002             2           $  4.74             2
         June 1995                       2005           348             15.40           348
                                                        ---                             ---
                                                        350                             350
                                                        ===                             ===
</TABLE>

         (d)      Stock Option Plans and Directors' Stock Plan

         The Company has three stock option plans. Under the 1999 Incentive
         Stock Plan ("1999 Plan"), the Company has reserved 4,500,000 shares of
         its common stock for issuance pursuant to option and stock grants to
         employees and directors. No additional options or stock will be granted
         under the Amended 1988 Incentive Stock Plan ("1988 Plan") which
         terminated in 1999. As of December 31, 2000, options to purchase
         2,372,000 shares of common stock were outstanding pursuant to the 1988
         Plan. Under the Amended 1992 Non-Employee Directors' Stock Plan
         ("Directors Plan"), 637,500 shares of common stock are reserved. Under
         all plans, stock options are granted with an exercise price equal to
         the estimated fair market value of the Company's common stock on the
         date of grant. Most options under the 1999 Plan and the 1988 Plan have
         a term of ten years and are exercisable in installments over periods
         ranging up to five years. Options under the Directors Plan have a term
         of ten years and are exercisable when granted. At December 31, 2000,
         there were approximately 7,700,000 and 343,000 additional shares
         available for grant under the 1999 Plan and the Directors Plan,
         respectively.

         In August 1998, the Company adopted an option exchange program
         available to all option holders, excluding the executive officers and
         the Board of Directors. Such eligible holders were given the
         opportunity to exchange options granted after October 1994 for new
         options with a renewed four year vesting schedule representing fewer
         shares at an exercise price of $7.91 per share. Options to purchase an
         aggregate of 3,964,000 shares were issued as a result of the exchange
         of 8,575,000 previously issued options (91% of eligible options.)


                                       53

<PAGE>   54

         During the third quarter of 2000, option holders voluntarily
         surrendered to the Company for no value options to purchase 6,449,000
         shares of common stock.

         In connection with the resignation of an executive officer in 2000, the
         Company agreed to grant an option to purchase 200,000 shares of the
         Company's common stock. The options expire 10 years from the date of
         grant. To date, the Company has not granted these options.

         The per share weighted-average fair value of stock options granted
         during 2000, 1999 and 1998 was $1.63, $2.78, and $8.24 on the date of
         grant using the Black Scholes option-pricing model with the following
         assumptions: an expected dividend yield of 0.0% for all years, expected
         volatility of 167% in 2000, 116% in 1999 and 105% in 1998, risk-free
         interest rate of 5.88% in 2000 and ranging from 4.25% to 6.00% in 1999
         and 4.25% to 5.75% in 1998 and an expected life of five years for 2000
         and 1999 and two to five years for 1998.

         The Company applies APB Opinion No. 25 in accounting for its Plans and,
         accordingly, no compensation cost has been recognized for its stock
         options in the consolidated financial statements. Had the Company
         determined compensation cost based on the fair value at the grant date
         for its stock options under SFAS No. 123, the Company's net loss and
         per share amounts would have been changed to the pro forma amounts
         indicated below (in thousands except for loss per share):

<TABLE>
<CAPTION>
                                                                     2000          1999          1998
                                                                 ---------     ----------     ---------
         <S>                               <C>                   <C>           <C>             <C>
         Net loss                          As reported           $(608,384)    $ (444,526)     $(111,447)
                                           Pro forma              (593,066)      (458,101)      (130,579)
                                           As reported               (8.30)         (5.91)         (1.55)
         Basic loss per share              Pro forma                 (8.09)         (6.09)         (1.82)
                                           As reported               (8.30)         (5.91)         (1.55)
         Diluted loss per share            Pro forma                 (8.09)         (6.09)         (1.82)
</TABLE>

         Stock option activity during the periods indicated is as follows
         (shares in thousands):

<TABLE>
<CAPTION>
                                                                                  Number of      Weighted-Average
                                                                                    Shares        Exercise Price
                                                                                  ----------     ----------------
         <S>                                                                      <C>             <C>
         Balance at December 31, 1997                                              12,983           $   20.99
              Granted                                                               8,742               12.68
              Assumed in connection with acquisitions                                 776                6.77
              Exercised                                                            (1,050)               6.64
              Forfeited                                                            (3,426)              21.49
              Exchanged                                                            (4,611)              18.64
                                                                                  -------           ---------
         Balance at December 31, 1998                                              13,414               10.27
              Granted                                                               6,190                3.36
              Exercised                                                              (187)               3.16
              Forfeited                                                            (3,335)               9.49
                                                                                  -------           ---------
         Balance at December 31, 1999                                              16,082                6.72
              Granted                                                                 367                1.69
              Forfeited                                                            (6,846)               7.16
              Surrendered                                                          (6,449)               6.90
                                                                                  -------           ---------
         Balance at December 31, 2000                                               3,154           $   10.62
                                                                                  =======           =========
</TABLE>


                                       54

<PAGE>   55

         At December 31, 2000, the range of exercise prices and weighted-average
         remaining contractual life of outstanding options was $0.66 - $31.50
         and 6.80 years, respectively. At December 31, 2000, 1999 and 1998, the
         number of options exercisable was 2,625,000, 8,035,000, and 6,366,000,
         respectively, and the weighted-average exercise price of those options
         was $11.18, $10.42, and $13.87, respectively.

         (e)      Stock Purchase Plans

         The Company terminated its employee and affiliate stock purchase plans
         effective June 30, 2000. During 2000, 1999 and 1998, approximately
         111,000, 152,000 and 163,000 shares, respectively, were issued relative
         to the employee stock purchase plan. Shares issued under the employee
         stock purchase plan were generally priced at the lower of 85% of the
         fair market value of the Company's common stock on the first or the
         last trading days of the plan year.

         Under the affiliate stock purchase plan, eligible participants
         generally included physicians and other employees of medical clinics
         with which the Company had a management or service agreement and
         employees of limited liability companies and partnerships in which the
         Company had an equity interest of at least 50%. Shares issued under the
         affiliate plan to employees of limited liability companies and
         partnerships in which the Company had an equity interest of at least
         50% were priced using a method similar to that of the employee stock
         purchase plan. Shares issued under the affiliate plan to other
         participants were priced equal to 95% of the market price on the
         purchase date. During 2000, 1999 and 1998, approximately 92,000,
         162,000 and 760,000 shares, respectively, were issued under this plan.

         Pro forma compensation expense included in the pro forma calculation
         above is recognized for the fair value of each stock purchase right
         estimated on the date of grant using the Black Scholes pricing model.
         The following assumptions were used for stock purchases: an expected
         dividend yield of 0.0% for all years, expected volatility of 167% in
         2000, 116% in 1999 and 105% in 1998, risk-free interest rate of 6.13%
         to 6.38% in 2000, 4.5% to 5.75% in 1999 and 5.5% in 1998, and an
         expected life of three months to one year for 2000 and 1999 and one
         year for 1998.

(15)     ASSET REVALUATION, RESTRUCTURING AND REFINANCING

         In 2000, the Company recorded asset revaluation, restructuring and
         refinancing charges of approximately $559.9 million. This charge
         included a net pre-tax asset revaluation charge of approximately $505.7
         million, which was comprised of a $549.3 million asset revaluation
         charge less recovery of $43.6 million of certain asset revaluation
         charges recorded previously, $50.8 million of restructuring charges and
         $3.4 million of refinancing charges. These charges related to the
         disposition of certain assets associated with the completed sales of
         assets of 34 clinic operations and expected sales of certain assets of
         the Company's clinic operations at amounts less than book value, the
         revaluation of certain assets associated with several operating units
         held for sale, the write off of deferred financing costs related to
         debt refinancing and the Company's decision to cease operations and
         exit certain IPA markets.

         In 1999, the Company recorded asset revaluation and restructuring
         charges of approximately $431.0 million. These charges included a net
         pre-tax asset revaluation charge of approximately $409.3 million, which
         was comprised of a $416.4 million asset revaluation charge less
         recovery of $7.1 million of certain asset revaluation charges recorded
         in the first quarter of 1998 and the third quarter of 1999 and a $21.7
         million restructuring charge. These charges related to asset impairment
         of eleven clinic operations classified as held for sale at December 31,
         1999 and the disposition of the assets of fifteen clinic operations
         during the year.

         In 1998, the Company recorded asset revaluation and restructuring
         charges of approximately $224.9 million. These charges included a net
         pre-tax asset revaluation charge of approximately $202.9 million, which
         was comprised of a $213.7 million asset revaluation charge less
         recovery of $10.8 million of certain restructuring charges recorded in
         the first quarter of 1998 and a $22.0 million restructuring charge.
         These charges related to asset impairment at five clinic operations and
         the disposition of the assets of two clinic operations. Also, the
         charge provided for an adjustment to recognize the decline in future
         cash flows from the acquired physician practice management company,
         FPC, pursuant to SFAS 121. Additionally, this

                                       55

<PAGE>   56

         charge provided for the write-off of goodwill recorded in connection
         with the MHG acquisition and the write down of certain assets to net
         realizable value and service agreement intangibles to fair value.

         At December 31, 2000, net assets held for sale and expected to be sold
         during the next 12 months totaled approximately $72.7 million after
         taking into account the charges relating to clinics and IPAs with which
         the Company intends to terminate or restructure its affiliation and the
         revaluation of certain other assets. These net assets consisted of
         current assets, property and equipment, intangible assets and other
         assets less liabilities which are expected to be assumed by the
         purchasers.

         Net revenue and pre-tax income (losses) from operations disposed of or
         closed as of December 31, 2000 were $507.8 million and $(18.8) million
         for the year ended December 31, 2000, compared to $1.1 billion and
         $33.1 million for the year ended December 31, 1999, and $1.2 billion
         and $58.4 million for the year ended December 31, 1998, respectively.
         Net revenue and pre-tax income (losses) from the operations held for
         sale at December 31, 2000 were $369.0 million and $(15.7) million for
         the year ended December 31, 2000, compared to $396.1 million and $7.0
         million for the year ended December 31, 1999 and $249.5 million and
         $9.4 million for the year ended December 31, 1998, respectively.

         The Company completed the disposition of the assets of 34 clinics,
         certain real estate holdings and other assets during 2000 and received
         consideration consisting of $219.5 million in cash and $24.7 million in
         notes receivable and deferred payments, in addition to certain
         liabilities assumed by the purchasers. As of April 6, 2001, the Company
         has completed the disposition of the assets of its six remaining
         clinics and hospital and certain real estate and received proceeds
         totaling $56.5 million in cash and $13.8 million in notes receivable,
         in addition to certain liabilities assumed by the purchasers, which
         approximated the net carrying value of these clinic assets. These
         dispositions represented $55.8 million of the net assets held for sale
         at December 31, 2000. During the second or third quarter of 2001, the
         Company expects to complete the sale of its PrimeCare IPA operations
         and CareWise. The Company expects to recover in excess of tangible book
         value of the assets of these operating units held for sale, however,
         there can be no assurance it will do so. The sale of these operating
         units will negatively impact the Company's future revenues and the
         failure to consummate the sales on the anticipated terms would
         negatively impact the Company's near term cash flows.

         Restructuring charges totaling $22.0 million were recorded in the first
         quarter of 1998 with respect to clinics that were being sold or
         restructured. These restructuring plans included the involuntary
         termination of 344 local clinic management and business office
         personnel. Approximately $10.8 million of restructuring liabilities
         from the first quarter 1998 restructuring charge were reversed against
         the third quarter 1998 asset revaluation charge as the Company
         determined to dispose of certain clinic operations that were originally
         anticipated to be restructured. In 1999, the Company adopted and
         implemented restructuring plans and recorded net pre-tax restructuring
         charges totaling approximately $21.8 million with respect to operations
         that were being sold or shut down. These restructuring plans included
         the involuntary termination of 382 local clinic and IPA management and
         business office personnel. In 2000, the Company adopted and implemented
         restructuring plans and recorded net pre-tax restructuring charges
         totaling approximately $50.8 million with respect to operations that
         were being sold or shut down. These restructuring plans included the
         involuntary termination of 933 clinic, IPA management, business office
         and corporate personnel and such terminations are expected to be
         completed over the next six months. The Company estimates that
         approximately $11.3 million of the remaining liabilities at December
         31, 2000 are due and payable during the next 12 months. The remaining
         $15.6 million primarily relates to long term lease commitments.


                                       56



<PAGE>   57


         The following table summarizes the restructuring accrual and payment
         activity for 2000 and 1999 (in thousands):


<TABLE>
<CAPTION>
                                                         FACILITY &        SEVERANCE &      OTHER
                                                     LEASE TERMINATION       RELATED         EXIT
                                                          COSTS               COSTS         COSTS        TOTAL
                                                     -----------------     -----------     --------     --------
<S>                                                  <C>                   <C>             <C>          <C>
Balances at December 31, 1998                        $             740     $     1,713     $  1,652     $  4,105
  1999 charges                                                   4,320           5,119       12,308       21,747
  Transfer of excess assets impairment charge                      550             325          250        1,125
  Payments                                                      (1,812)         (4,922)     (12,248)     (18,982)
  Other re-allocations                                          (1,154)            146        1,008           --
                                                     -----------------     -----------     --------     --------
Balances at December 31, 1999                                    2,644           2,381        2,970        7,995
  2000 charges                                                  24,764          16,249        9,833       50,846
  Payments                                                      (8,134)        (13,701)      (7,979)     (29,814)
  Non-utilized charges taken into income                          (104)         (1,288)        (780)      (2,172)
  Other re-allocations                                            (289)           (179)         468           --
                                                     -----------------     -----------     --------     --------
Balances at December 31, 2000                        $          18,881     $     3,462     $  4,512     $ 26,855
                                                     =================     ===========     ========     ========
</TABLE>


(16)     MERGER EXPENSES


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

(17)     INCOME TAX EXPENSE

         Income tax expense (benefit) for the years ended December 31, 2000,
         1999 and 1998, consists of (in thousands):

<TABLE>
<CAPTION>
                                                                        2000             1999             1998
                                                                     ----------       ----------        ---------
         <S>                                                         <C>              <C>               <C>
         Current:
              Federal..........................................      $       --       $       --               300
              State............................................           1,029            1,963             2,821
         Deferred:
              Federal..........................................              --           52,585           (42,124)
              State............................................              --           (1,230)             (887)
                                                                     ----------       ----------         ---------
                                                                     $    1,029       $   53,318         $ (39,890)
                                                                     ==========       ==========         =========
</TABLE>

         For federal income tax purposes, the Company receives a deduction
         arising from the exercise of non-qualified stock options equal to the
         difference between the fair market value at date of exercise and the
         exercise price. This tax benefit was recorded as a credit to common
         stock in the amount of $4.7 million in 1998. No such tax benefit was
         realized in 2000 or 1999.


                                       57

<PAGE>   58


         Total income tax expense (benefit) differed from the amount computed by
         applying the U.S. federal income tax rate of 35 percent in 2000, 1999
         and 1998 to earnings (loss) before income taxes as a result of the
         following (in thousands):

<TABLE>
<CAPTION>
                                                                              2000            1999           1998
                                                                            ----------     ----------     ----------
         <S>                                                                <C>            <C>            <C>
         Computed "expected" tax expense (benefit) .....................    $ (212,574)    $ (136,923)    $  (52,968)
         Increase (reduction) in income taxes resulting from:
              Change in valuation allowance ............................       138,226        146,634             --
              State income taxes, net of federal income tax benefit ....         1,029            477          1,257
              Amortization of nondeductible goodwill ...................         3,472          5,737          4,103
              Nondeductible goodwill written off .......................        71,236         32,034          8,582
              Other, net ...............................................          (360)         5,359           (864)
                                                                            ----------     ----------     ----------
                   Total income tax expense (benefit) ..................    $    1,029     $   53,318     $  (39,890)
                                                                            ==========     ==========     ==========
</TABLE>

         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31 are presented below (in thousands):

<TABLE>
<CAPTION>
                                                                                        2000          1999
                                                                                     ----------    ----------
         <S>                                                                         <C>           <C>
         Deferred tax assets:
              Clinic service agreements .........................................    $   18,735    $   50,046
              Reserves (including incurred but not reported self-insurance
                claims) .........................................................        79,101        35,486
              Operating loss carryforwards ......................................       243,108       116,482
              Cash to accrual adjustment ........................................         7,778         9,923
              Other .............................................................         1,598         1,923
                                                                                     ----------    ----------
                  Total gross deferred tax asset ................................       350,320       213,860
         Valuation allowance ....................................................       328,379       190,153
                                                                                     ----------    ----------
              Net deferred tax assets ...........................................        21,941        23,707
                                                                                     ----------    ----------
         Deferred tax liabilities:
              Plant and equipment, principally due to differences in depreciation         2,827         7,600
              Capital leases ....................................................         2,369         5,175
              Prepaid expenses ..................................................           437         1,429
              Income from partnerships ..........................................        14,719         5,893
              Accounts receivable ...............................................            --         1,661
              Other .............................................................         1,589         1,949
                                                                                     ----------    ----------
                  Total gross deferred tax liabilities ..........................        21,941        23,707
                  Net deferred tax assets .......................................    $       --    $       --
                                                                                     ==========    ==========
</TABLE>


         The significant components of the deferred tax expense (benefit) as of
         December 31, 1999 are as follows (in thousands):


<TABLE>
<CAPTION>
                                                                                                     1999
                                                                                                   --------
         <S>                                                                                       <C>
         Change in net deferred tax assets ....................................................    $ 32,746
         Expense resulting from tax benefits allocated to reduce intangible assets.............      35,221
         Benefit resulting from release of reserves upon settlement of Internal Revenue Service
              exams ...........................................................................      (3,697)
         Utilization of net operating loss carryback ..........................................     (13,666)
         Other ................................................................................         751
                                                                                                   --------
              Deferred tax expense ............................................................    $ 51,355
                                                                                                   ========
</TABLE>


                                       58

<PAGE>   59

         The net change in the total valuation allowance for the year ended
         December 31, 2000, which primarily relates to federal and state net
         operating loss carryforwards and expenses relating to the provision for
         asset revaluation and restructuring charges not expected to be
         deductible for federal and state tax purposes, was an increase of
         $138.2 million. As of December 31, 2000, the Company had approximately
         $557.8 million of federal and $547.1 million of state net operating
         loss carryforwards which begin to expire in 2007. The utilization of
         these carryforwards is subject to the future level of taxable income of
         the Company and its applicable subsidiaries. However, the Company
         believes the realization of the deferred tax assets is not more likely
         than not to occur based on the historical results and industry trends.
         Refundable federal and state income taxes totaled approximately
         $600,000 at December 31, 1999.

         During 1999, the Company favorably resolved its outstanding Internal
         Revenue Service ("IRS") examinations for the years 1988 through 1995.
         The IRS had proposed adjustments relating to the timing of recognition
         for tax purposes of certain revenue and deductions related to accounts
         receivable, the Company's relationship with affiliated physician
         groups, and various other timing differences. The tax years 1988
         through 1998 have been closed with respect to all issues without a
         material financial impact. Two subsidiaries are currently under
         examination for the 1995 and 1996 tax years. The Company acquired the
         stock of these subsidiaries during 1996. Additionally, one subsidiary
         is currently under examination by the state of California for the 1996
         tax year. The Company acquired the stock of this subsidiary during
         1998. For the years under audit, and potentially, for subsequent years,
         any such adjustments could result in material cash payments by the
         Company. Any successful adjustment by the IRS or California would cause
         interest expense to be incurred. PhyCor does not believe the resolution
         of this matter will have a material adverse effect on its financial
         condition, although there can be no assurance as to the outcome of this
         matter. In August 1999, the Company received a $12.5 million tax refund
         as a result of applying the 1998 loss carryback to recover taxes paid
         in 1996 and 1997. The Company has approximately $557.8 million in
         federal net operating loss carryforwards; accordingly, the Company does
         not expect to pay current federal income taxes for the foreseeable
         future.

(18)     EMPLOYEE BENEFIT PLANS

         As of January 1, 1989, the Company adopted the PhyCor, Inc. Savings and
         Profit Sharing Plan. The Plan is a defined contribution plan covering
         the majority of employees. Company contributions are based on specified
         percentages of employee compensation. The Company funds contributions
         as accrued. The plan expense for 2000, 1999 and 1998 amounted to $7.0
         million, $15.4 million, and $14.0 million, respectively.

         In connection with certain of the Company's acquisitions, the Company
         adopted defined contribution employee retirement plans previously
         sponsored solely by the physician groups. The Company has recognized as
         expense its required contributions to be made to the plans of
         approximately $4.1 million, $7.7 million, and $7.6 million relative to
         its employees for 2000, 1999 and 1998, respectively.

(19)     COMMITMENTS AND CONTINGENCIES

         (a)      Employment Agreements

         The Company has entered into employment agreements with certain of its
         management employees, which include, among other terms, non-compete
         provisions and salary and benefits continuation.

         The employment agreements with the Company's two executive officers
         provide for the payment of bonuses aggregating up to a maximum of $2.25
         million upon the repayment of borrowings under the Credit Facility.
         Approximately $0.2 million of the bonuses were earned in 2000 and the
         remainder was earned during the first quarter of 2001 of which $1.88
         million was paid as of March 30, 2001. In addition, we have agreements
         with certain employees to pay such employees two months of advanced
         severance when we have no outstanding obligations under the Credit
         Facility, and we also owe bonuses to certain CareWise and PhySys
         employees. These obligations total approximately $800,000.


                                       59

<PAGE>   60

         (b)      Litigation

         The Company and certain of its current and former officers and
         directors, Joseph C. Hutts, Derril W. Reeves, Thompson S. Dent, Richard
         D. Wright and John K. Crawford (only Mr. Dent remains employed by the
         Company while he and Mr. Hutts serve as directors) have been named
         defendants in 10 securities fraud class actions filed in state and
         federal courts in Tennessee between September 8, 1998 and June 24,
         1999. The factual allegations of the complaints in all 10 actions are
         substantially identical and assert that during various periods between
         April 22, 1997 and September 22, 1998, the defendants issued false and
         misleading statements which materially misrepresented the earnings and
         financial condition of the Company and its clinic operations and
         misrepresented and failed to disclose various other matters concerning
         the Company's operations in order to conceal the alleged failure of the
         Company's business model. Plaintiffs further assert that the alleged
         misrepresentations caused the Company's securities to trade at inflated
         levels while the individual defendants sold shares of the Company's
         stock at such levels. In each of the actions, the plaintiff seeks to be
         certified as the representative of a class of all persons similarly
         situated who were allegedly damaged by the defendants' alleged
         violations during the "class period." Each of the actions seeks damages
         in an indeterminate amount, interest, attorneys' fees and equitable
         relief, including the imposition of a trust upon the profits from the
         individual defendants' trades. The federal court actions have been
         consolidated in the U. S. District Court for the Middle District of
         Tennessee. Defendants' motion to dismiss was denied. The state court
         actions were consolidated in Davidson County, Tennessee. The
         Plaintiffs' original consolidated class action compliant in state court
         was dismissed for failure to state a claim. Plaintiffs, however, were
         granted leave to file an amended complaint. The amended complaint filed
         by Plaintiffs asserted, in addition to the original Tennessee
         Securities Act claims, that Defendants had also violated Section 11 and
         12 of the Securities Act of 1933 for alleged misleading statements in a
         prospectus released in connection with the CareWise acquisition. The
         amended complaint also added KPMG LLP (KPMG), the Company's independent
         public auditors. KPMG removed this case to federal court and its motion
         to dismiss has been denied. On October 20, 2000, this case was
         consolidated with the original federal consolidated action and a new
         consolidated complaint has been filed. The Company, the individual
         defendants and KPMG have filed an answer and the discovery process is
         nearing completion. The trial of all the consolidated cases is set for
         November 6, 2001. The Company believes that it has meritorious defenses
         to all of the claims, and is vigorously defending against these
         actions. There can be no assurance, however, that such defenses will be
         successful or that the lawsuits will not have a material adverse effect
         on the Company. The Company's Restated Charter provides that the
         Company shall indemnify the officers and directors for any liability
         arising from these suits unless a final judgment establishes liability
         (a) for a breach of the duty of loyalty to the Company or its
         shareholders, (b) for acts or omissions not in good faith or which
         involve intentional misconduct or knowing violation of law or (c) for
         an unlawful distribution.

         On April 18, 2000, a jury in the case of United States of America ex
         rel. William R. Benz v. PrimeCare International, Inc. and Prem Reddy,
         in the United States District Court, Central District of California,
         returned a verdict in favor of the plaintiff as follows: $500,000
         against PrimeCare on plaintiff's breach of contract claims; $900,000 in
         compensatory damages and $3 million in punitive damages jointly and
         severally against PrimeCare and Prem Reddy on plaintiff's claims for
         wrongful termination and intentional infliction of emotional distress;
         and $200,000 against PrimeCare on plaintiff's claim for violations of
         state labor codes. The jury returned a verdict in defendants' favor on
         plaintiff's claim for retaliatory termination under the False Claims
         Act. The jury was unable to reach a verdict on plaintiff's Medicare
         fraud claims. The court entered a final judgment on July 13, 2000. The
         Company has recorded as other operating expenses this judgment of $4.6
         million in the second quarter of 2000. PrimeCare is appealing the
         verdict, and a retrial of the Medicare fraud claims will not occur
         until there is a ruling on PrimeCare's appeal. Plaintiff filed a
         judgment lien against PrimeCare on August 31, 2000. PrimeCare has not
         posted a bond in this matter. PrimeCare and the plaintiff are
         discussing settlement of these claims. There can be no assurance that a
         settlement will be reached. The Plaintiff's enforcement of this
         judgment against PrimeCare would have a material adverse effect on
         PrimeCare.

         On February 2, 1999, Prem Reddy, M.D., the former majority shareholder
         of PrimeCare, a medical network management company acquired by the
         Company in May 1998, filed suit against the Company and certain of its
         current and former executive officers in the United States District
         Court for the Central District of California asserting fraudulent
         inducement relating to the PrimeCare transaction and that the
         defendants


                                       60

<PAGE>   61

         issued false and misleading statements which materially misrepresented
         the earnings and financial condition of the Company and its clinic
         operations and misrepresented and failed to disclose various other
         matters concerning the Company's operations in order to conceal the
         alleged failure of the Company's business model. On June 5, 2000, the
         court granted the Company's motion for partial summary judgment, which
         eliminated the plaintiff's allegations of fraud and violations of
         federal and state securities laws. On October 4, 2000, the court
         granted the Company summary judgment motions with respect to all of
         plaintiff's remaining claims, granted the Company summary judgment with
         respect to the Company's $5 million indemnity counter claim against the
         plaintiffs and granted the Company's summary judgment trespass counter
         claim against Dr. Reddy, leaving for trial only a determination of the
         extent of damages on the trespass counter claim.

         On July 26, 2000, Prem Reddy filed a new action captioned Prem Reddy,
         M.D. v. Harry Lifschutz, M.D., PhyCor, Inc. and Does 1 through 50, in
         Superior Court of the State of California, County of San Bernardino,
         alleging claims for unfair business practices and fraudulent
         conveyances in connection with the Company's efforts to sell Company
         assets located in California and other locations. In response, the
         Company, on July 27, 2000, removed the action to the United States
         District Court, Central District of California.

         In September 2000, PrimeMed Pharmacy Services, Inc. and Desert Valley
         Medical, Inc., companies in which Dr. Reddy owns a controlling interest
         filed three suits against PrimeCare International, Inc. and several
         affiliated medical groups alleging failure to pay invoices for certain
         prescription drugs, medical supplies and equipment of approximately
         $1,900,000.

         Effective January 1, 2001, all five of the above-described lawsuits
         involving Dr. Reddy were settled. Affiliates of Dr. Reddy reacquired
         Desert Valley Medical Group, Desert Valley Hospital and Apple Valley
         Surgery Center for cash consideration totaling approximately $8.0
         million. In connection with the last three suits, PrimeCare paid
         $500,000 to the plaintiffs, which was applied as a credit in
         connection with the acquisition.

         In August 1999, Medical Arts Clinic Association ("Medical Arts") filed
         suit against the Company in the District Court of Navarro County,
         Texas. The Company removed this case to Federal District Court for the
         Northern District of Texas. Medical Arts sought damages for breach of
         contract and rescission of the service agreement and declaratory relief
         regarding the enforceability of the service agreement alleging it is
         null and void on several grounds, including but not limited to, the
         violation of state law provisions as to the corporate practice of
         medicine and fee splitting. On April 24, 2000 the Texas District Court
         of Navarro County, Texas, ordered the appointment of a receiver to
         rehabilitate Medical Arts. The case was fully settled and resolved in
         February 2001, upon the sale of all assets by PhyCor of Corsicana, LP
         to Medical Arts for cash consideration and assumption of liabilities.

         In September 1999, three relators brought a claim in the United States
         District Court for the District of Hawaii under the False Claims Act
         against Straub Clinic and Hospital, Inc. ("Straub"), PhyCor of Hawaii,
         Inc., and the Company. This matter had been under seal until September
         2000. On September 20, 2000, the United States government elected to
         decline to intervene in the matter. The Company sold PhyCor of Hawaii,
         Inc. to Straub in November 2000. On February 21, 2001, plaintiffs filed
         a Second Amended Complaint. PhyCor, Inc. has filed a Motion to Dismiss
         the claim against it, and Straub is defending the claims against PhyCor
         of Hawaii, Inc.

         As a result of the Company's determination to exit its IPA market in
         Houston, Texas, a number of providers in the market have brought
         actions naming several parties, including the Company and an
         IPA-management subsidiary of the Company, alleging breach of contract,
         among other matters. In addition, as a result of the Company's
         financial condition, the Company has been unable to meet certain
         contractual obligations including, but not limited to, certain ongoing
         lease obligations and severance and bonus obligations to former and
         existing employees. There can be no assurance that the Company will
         meet its existing or additional contractual obligations in the future.
         Several parties have sent letters to the Company alleging breach of
         contract and threatening to bring claims against the Company. There can
         be no assurance that additional actions will not be brought against the
         Company and its subsidiaries as a result of


                                       61

<PAGE>   62

         the Company's actions. There can be no assurance that if these matters
         are determined adversely to the Company that such determinations would
         not have a material adverse effect on the Company.

         Certain litigation is pending against the physician groups which were
         affiliated with the Company and IPAs managed by the Company. The
         Company has not assumed any liability in connection with such
         litigation. Claims against the physician groups and IPAs could result
         in substantial damage awards to the claimants which may exceed
         applicable insurance coverage limits. While there can be no assurance
         that the physician groups and IPAs will be successful in any such
         litigation, the Company does not believe any such litigation will have
         a material adverse effect on the Company.

         (c)      Insurance

         The Company and its affiliated physician groups are insured with
         respect to medical malpractice risks on a claims-made basis. There are
         known claims and incidents that may result in the assertion of
         additional claims, as well as claims from unknown incidents that may be
         asserted. Management is not aware of any claims against it or its
         affiliated physician groups which might have a material impact on the
         Company's financial position.

         (d)      Letters of credit

         At December 31, 2000, letters of credit totaling $10.5 million were
         outstanding under the Company's Credit Facility. On behalf of certain
         of the Company's affiliated IPAs, the Company has been required to
         issue letters of credit, aggregating $3.1 million at December 31, 2000
         to managed care payors to help ensure payment of health care costs for
         which the affiliated IPAs have assumed responsibility. Approximately
         $400,000 has been drawn on letters of credit related to IPA's as of
         December 31, 2000 which have not been reimbursed by the IPA's. The
         Company is exposed to losses if a letter of credit is drawn upon and
         the related IPA fails to satisfy reimbursement obligation to the
         Company. The $7.4 million remaining letters of credit secure
         malpractice insurance deductibles, bonds required for third party
         administrator licenses and real estate leases.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not Applicable.


                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                    DIRECTORS

         The Company's Restated Charter provides that the Board of Directors
shall be divided into three classes of as nearly equal size as possible.
Approximately one-third of the directors are elected each year. The Company's
Amended Bylaws provide that the Board of Directors shall consist of not less
than three nor more than 15 directors as established by the Board of Directors.
The size of the Board of Directors has been established at 13 directors, and
currently consists of six directors. Mr. Derril W. Reeves resigned his positions
as a director and as Executive Vice President and Chief Development Officer of
the Company effective June 8, 2000. Ms. C. Sage Givens resigned effective June
15, 2000. Mr. Sam A. Brooks resigned from the Board effective August 15, 2000.
Dr. James Moncrief resigned effective November 15, 2000, Messrs. Joel Ackerman
and Ronald Moorhead resigned effective March 5, 2001. The vacancies created by
these departures have not yet been filled. The Company intends to consider the
composition of the Board and the committees thereof in the near future.


                                       62
<PAGE>   63
                                    DIRECTORS

CLASS I DIRECTORS SERVING UNTIL 2001

DR. WINFIELD DUNN
Age - 73
Director since 1988

         Dr. Dunn is a former Governor of the State of Tennessee. Dr. Dunn
served as Vice Chairman of the Board of Directors of Total eMed, Inc., a
provider of web-based electronic medical transcription services, from June 1998
to September 2000. From 1993 to 1998, Dr. Dunn served as Chairman of the Board
of MedShares Management Group, Incorporated, an owner and manager of home health
care agencies. From 1987 to 1991, Dr. Dunn served as Chairman of the Board of
First Cumberland Bank. From 1979 to 1985, Dr. Dunn served as Senior Vice
President, Government Affairs, for HCA. Dr. Dunn is a director of Province
Healthcare Company.

DR. JOSEPH A. HILL
Age - 60
Director since 1989

         Dr. Hill is a physician specializing in family practice at Gold, Vann &
White, P.A. (the "Doctors' Clinic") in Vero Beach, Florida, a clinic managed by
the Company. Dr. Hill joined the Doctors' Clinic in 1973 and served as its
President from 1988 to 1991.

CLASS II DIRECTORS SERVING UNTIL 2002:

THOMPSON S. DENT
Age - 50
Director since 1992

         Mr. Dent has served as Chairman and Chief Executive Officer of the
Company since June 8, 2000 and as the President of the Company since October
1998. Mr. Dent served as Chief Operating Officer of the Company from October,
1997 until his appointment as Chief Executive Officer. From October 1997 to
October 1998, Mr. Dent also served as Executive Vice President. Mr. Dent served
as Executive Vice President, Corporate Services, from the inception of the
Company until October 1997 and served as Secretary of the Company from 1991 to
October 1998. Mr. Dent also served as Vice President of Development of EQUICOR
from 1986 until 1988. Prior to 1986, Mr. Dent served as Director of Mergers and
Acquisitions for HCA. Mr. Dent is a director of HealthStream, Inc., a web-based
company providing continuing medical education on-line. Mr. Dent also served on
the board of directors of Healthcare Realty Trust Incorporated ("HRT"), a real
estate investment trust, from 1993 until February 2001.

KAY COLES JAMES
Age - 51
Director since 1997

         Ms. James is a Senior Fellow at The Heritage Foundation in Washington,
D.C. From 1996 to 1999, Ms. James served as dean of Regent University, Robertson
School of Government in Virginia Beach, Virginia. From 1997 to 1999, Ms. James
also served as Chairperson of the National Gambling Impact Study Commission.
From January 1994 to 1997, Ms. James served as Secretary of Health and Human
Resources for the Commonwealth of Virginia. Ms. James is a director of
AMERIGROUP Corporation, a provider of Medicaid managed care services.


                                       63
<PAGE>   64

CLASS III DIRECTORS SERVING UNTIL 2003

RONALD B. ASHWORTH
Age - 55
Director since 1992

         In 1991, Mr. Ashworth assumed the role of Executive Vice President and
Chief Operating Officer of the Sisters of Mercy Health System, St. Louis,
Missouri ("SMHS"), a system consisting of hospitals and affiliated health care
entities serving a seven-state area in the central and southwestern United
States. In July 1999, he became President and Chief Executive Officer of SMHS.
Mr. Ashworth has been a director of SMHS since its inception in 1986. From 1986
to 1990, Mr. Ashworth served as Vice Chairman of Specialized Industries and
Marketing for KPMG LLP, the Company's independent public accountants. From 1978
to 1985, Mr. Ashworth served as the National Director of the health care
practice of KPMG LLP.

JOSEPH C. HUTTS
Age - 59
Director since 1988

         Mr. Hutts served as Chairman of the Board and Chief Executive Officer
of the Company from its inception until his resignation on June 8, 2000. Mr.
Hutts also served as President from the Company's inception until the
appointment of Mr. Dent as President in October 1998. From 1977 to 1986, Mr.
Hutts served in various positions with Hospital Corporation of America ("HCA"),
including Vice President, Operations, Senior Vice President, Western Operations
and President of HCA Health Plans, a managed care subsidiary of HCA. Mr. Hutts
served as Vice Chairman and Chief Operating Officer of EQUICOR - Equitable HCA
Corporation ("EQUICOR") from 1986 to 1987. Mr. Hutts serves on the boards of
directors of Renal Care Group, Inc., a provider of nephrology services ("Renal
Care") and Quorum Health Group, Inc. ("Quorum"), an owner and operator of
hospitals.

INFORMATION REGARDING THE BOARD OF DIRECTORS

         The Board of Directors held ten meetings, including regular and special
meetings, and took action by written consent 20 times during 2000. Each
director, except for Mr. Ashworth and Ms. Givens, attended at least 75% of the
meetings of the Board of Directors and committees thereof on which the director
serves.

         The Committees of the Board of Directors consist of an Audit Committee,
on which Ms. James and Mr. Ashworth and Dr. Dunn currently serve and, Mr.
Ackerman, Mr. Brooks and Ms. Givens served until their resignations and a
Compensation Committee, on which Mr. Ashworth, Dr. Dunn, and Dr. Hill serve and
Dr. Moncrief and Mr. Moorhead served until their resignations. During 2000, the
Audit Committee met five times and the Compensation Committee met two times and
took action by written consent 17 times. The Audit Committee is responsible for
recommending the independent public accountants to the Board of Directors,
reviewing audit fees and supervising matters relating to audit functions and
other financial controls. The Compensation Committee is responsible for
approving compensation arrangements for executive officers of the Company,
reviewing compensation plans, granting stock options, restricted stock and bonus
stock awards and reviewing employee compensation policies.

         The Board of Directors has no standing nominating committee.

COMPENSATION OF DIRECTORS

         Directors who are employees of the Company receive no additional
compensation for serving on the Board of Directors. Non-Employee Directors are
entitled to receive (i) a retainer equal to $7,000 times the number of years for
which the Non-Employee Director is elected, payable in restricted shares of the
Common Stock, at a price per


                                       64
<PAGE>   65
share equal to the closing sales price of the Common Stock as of the date of the
annual meeting of shareholders at which the director is elected to serve, and
(ii) options for the purchase of 6,750 shares of Common Stock, pursuant to the
Director Plan, automatically issued as of January 1 of each year during which
the Non-Employee Director serves the Company at a per share price equal to the
closing sales price of the Common Stock on the date of grant. Such newly granted
options are immediately exercisable for all shares subject to such options. The
shares of restricted stock are held by the Company on behalf of the Non-Employee
Director, and each Non-Employee Director receives one-third of the shares upon
the completion of each year of his or her term. In addition, Non-Employee
Directors receive $2,500 in cash per regular and special meeting of the Board of
Directors, and $1,000 per committee meeting. Board members are reimbursed for
their expenses incurred in attending such meetings. The Board has determined to
waive compensation for all telephonic board meetings.

         The following table sets forth the number of shares of Common Stock
underlying outstanding options that have been granted to the current directors
throughout their tenure pursuant to the Non-Employee Director Plan as of March
31, 2001:

<TABLE>
<CAPTION>
                                                                   NUMBER OF SHARES
          NAME                                                    UNDERLYING OPTIONS
          ----                                                    ------------------
          <S>                                                     <C>
          Ronald B. Ashworth.............................                50,493

          Dr. Winfield Dunn..............................                52,181

          Dr. Joseph A. Hill.............................                52,181

          Kay Coles James................................                23,493

          Joseph C. Hutts................................                 6,750
</TABLE>

EXECUTIVE OFFICERS OF THE COMPANY

         The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME                                    AGE     POSITION
----                                    ---     --------
<S>                                     <C>     <C>
Thompson S. Dent....................     50     Chairman of the Board, Chief
                                                Executive Officer and President

Tarpley B. Jones....................     43     Executive Vice President and
                                                Chief Financial Officer
</TABLE>

         Tarpley B. Jones has served as Executive Vice President and Chief
Financial Officer of the Company since February 1, 2000. Mr. Jones has informed
the Company that he is exploring other employment opportunities and that he
could terminate his employment with the Company as early as May 31, 2001,
however, the discussions regarding his tenure with the Company are ongoing. From
February 1997 until January 2000, Mr. Jones served as President, Chief Executive
Officer and a Director of Cardiology Partners of America, Inc., a physician
practice management company that operated and managed cardiology physician
practices and clinics. Mr. Jones was President of the Surgery Center Division of
HEALTHSOUTH from January 1996 until January 1997. He was Senior Vice President
and Chief Financial Officer of Surgical Care Affiliates, Inc. ("SCA") from
January 1, 1992 until its


                                       65
<PAGE>   66
merger with HEALTHSOUTH in January 1996. Prior to joining SCA, he was Executive
Vice President and Chief Financial Officer of Comdata Holdings Corporation and
Comdata Network.

         See "Directors" for information regarding Mr. Dent.

             SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Exchange Act requires the Company's officers,
directors and persons who own more than 10% of a registered class of the
Company's securities to file reports of ownership and changes in ownership with
the Commission.

         Based solely on a review of copies of reports filed with the Commission
and written representations from certain of the Company's directors and
executive officers, all reports required to be filed with the Commission by
Section 16(a) of the Exchange Act during the most recent fiscal year or prior
fiscal years have been filed in a timely manner, except Messrs. Ackerman and
Moorhead, former directors of the Company, failed to file their Annual Reports
on Form 5 in a timely manner, which included two automatic option grants for
Messrs. Ackerman and Moorhead and one automatic stock grant for Mr. Moorhead.

ITEM 11.      EXECUTIVE COMPENSATION

         The following table sets forth summary information concerning
compensation paid or accrued by or on behalf of the Company's Chief Executive
Officer and the three other most highly compensated executive officers of the
Company whose total annual salary and bonus exceeded $100,000 (hereinafter,
collectively referred to as the "Named Executive Officers") for services
rendered in all capacities to the Company for the years ended December 31, 1998,
1999 and 2000:

<TABLE>
<CAPTION>
                                                  Summary Compensation Table
                                                       Annual Compensation                              Long-Term Compensation
                                   ---------------------------------------------------------      -------------------------------
                                                                                  Other           Securities
           Name and                                                               Annual          Underlying         All Other
      Principal Position            Year        Salary($)        Bonus($)    Compensation(1)      Options(#)      Compensation($)
-------------------------------     ----        ---------       ----------   ----------------     -----------     ---------------
<S>                                 <C>         <C>             <C>          <C>                  <C>             <C>
Thompson S. Dent                    2000        $500,000             --               --                 --        $1,353,766(2)
Chairman of the Board, Chief        1999         500,000             --               --            525,000            71,046(3)
Executive Officer and               1998         471,000(4)     $55,000(5)            --            364,619           101,739(6)
President

Tarpley B. Jones                    2000        $343,750             --               --                 --                --
Executive Vice President and        1999              --             --               --                 --                --
Chief Financial Officer             1998              --             --               --                 --                --

Joseph C. Hutts (7)                 2000        $263,636(8)          --         $350,000(9)             --         $3,379,137(10)
Director                            1999         600,000             --               --            600,000           117,275(3)
                                    1998         646,000(4)     $60,000(5)            --            402,199           201,910(6)


Derril W. Reeves (11)               2000        $186,744(12)         --          247,917(13)             --        $1,985,112(14)
                                    1999         425,000             --               --            450,000           104,122(3)
                                    1998         471,000(4)     $55,000(5)            --            334,619           165,573(6)
</TABLE>

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

(1)      Except as otherwise noted, for 1998, 1999 and 2000 the perquisites and
         personal benefits paid to each of the Named Executive Officers was less
         than $50,000 or 10% of the total salary and bonus reported for the
         Named Executive Officers, and, therefore, the amount of such other
         annual compensation is not reported.
(2)      Includes the 2000 contribution of $8,000 to a defined contribution plan
         for Mr. Dent. Includes a distribution of $936,766 and a transfer of
         $409,000 equal to the cash surrender value of a life insurance policy
         held by the Company for the benefit of Mr. Dent in connection with the
         termination of the supplemental retirement plan described herein.
(3)      Includes the 1999 contributions of $8,000 by the Company to a defined
         contribution plan for each of Messrs. Hutts, Dent and Reeves. Includes
         $109,275, $61,813 and $96,122 for each of Messrs. Hutts, Dent and
         Reeves, respectively, which equals the amount accrued in 1999 pursuant
         to the supplemental retirement plan described herein. Also includes
         $1,233 for Mr. Dent, which constitutes the reportable economic benefit
         in 1999 to Mr. Dent of his split dollar insurance policy.
(4)      Includes cash compensation of $586,000, $416,000 and $416,000 and
         options to purchase 9,023, 8,271 and 8,271 shares of Common Stock for
         Messrs. Hutts, Dent and Reeves respectively. Mr. Hutts' options are
         exercisable at a price of $19.00 per share and expire January 14, 2008.
(5)      In lieu of any cash bonus for 1998, Messrs. Hutts, Dent and Reeves were
         granted options to purchase 40,060, 29,534 and 29,534 shares of Common
         Stock, respectively, at an exercise price of $19.00 per share. Mr. Dent
         voluntarily surrendered his options for no value on August 1, 2000.
(6)      Includes the 1998 contributions of $8,000 by the Company to a defined
         contribution plan for Messrs. Hutts, Dent and Reeves. Also includes
         $193,910, $93,739 and $157,573 for each of Messrs. Hutts, Dent and
         Reeves, respectively, which equals the amount accrued in 1998 pursuant
         to the supplemental retirement plan described herein.
(7)      Mr. Hutts resigned his positions as Chairman of the Board and Chief
         Executive Officer of the Company on June 8, 2000. Mr. Hutts remains on
         the Board of Directors.


                                       66
<PAGE>   67

(8)      Represents Mr. Hutts' salary through the date of his resignation as
         Chairman of the Board and Chief Executive Officer of the Company on
         June 8, 2000.
(9)      Amounts paid pursuant to the terms of the Separation and Release
         Agreement between Mr. Hutts and the Company.
(10)     Includes the 2000 contribution of $8,000 by the Company to a defined
         contribution plan for Mr. Hutts. Includes a distribution of $2,319,907
         and a transfer of $1,050,000 cash surrender value of life insurance
         policies held by the Company for the benefit of Mr. Hutts in connection
         with the termination of the supplemental retirement plan described
         herein. Also includes $1,230, which constitutes the reportable economic
         benefit in 2000 to Mr. Hutts of his long-term disability insurance
         policy.
(11)     Reeves resigned his positions as Vice Chairman, Executive Vice
         President, Chief Development Officer and a Director of the Company
         effective June 8, 2000.
(12)     Represents Mr. Reeves salary through June 8, 2000, the date of his
         resignation from the Company.
(13)     Amounts paid pursuant to the terms of the Separation and Release
         Agreement between Mr. Reeves and the Company.
(14)     Includes the 2000 contribution of $8,000 by the Company to a defined
         contribution plan for Mr. Reeves. Includes a distribution of $1,485,703
         and a transfer of $490,538 equal to the cash surrender value of life
         insurance policies held by the Company for the benefit of Mr. Reeves in
         connection with the termination of the supplemental retirement plan
         described herein. Also includes $871, which constitutes the reportable
         economic benefit in 2000 to Mr. Reeves of his long-term disability
         insurance policy.


                                       67
<PAGE>   68

         The following table sets forth information concerning the stock options
granted to the Named Executive Officers in 2000:


                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                            Individual Grants
                              -------------------------------------------                      Potential Realizable Value at
                              Number of       Percent of                                       Assumed Annual Rates of Stock
                              Securities     Total Option                                      Price Appreciation for Option
                              Underlying      Granted to      Exercise or                                 Term(2)
                               Options       Employees in      Base Price       Expiration     -----------------------------
           Name               Granted(#)      Fiscal Year      ($/Sh) (1)          Date          5% ($)             10% ($)
------------------------      ----------     -------------    -----------       ----------     ---------          ----------
<S>                          <C>             <C>              <C>               <C>            <C>                <C>
Thompson S. Dent(3).....          --              --                 --             --             --                 --

Tarpley B. Jones........     250,000(4)(5)                        $1.88          2/1/10            --                 --

Joseph C. Hutts (6).....          --              --                 --             --             --                 --

Derril W. Reeves (7)....          --              --                 --             --             --                 --
</TABLE>

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

(1)      Represents the fair market value per share of the Common Stock on the
         date of the grant of the option.
(2)      Amounts represent hypothetical gains that could be achieved for the
         respective options if exercised at the end of the option term and based
         upon assumed rates of appreciation in the market price of the Common
         Stock of 5% and 10% compounded annually from the date of grant to the
         expiration date. Actual gains, if any, upon the exercise of stock
         options will depend on the future performance of the Common Stock and
         the date on which the options are exercised.
(3)      Mr. Dent voluntarily surrendered all of his options to the Company for
         no value on August 1, 2000. Pursuant to the terms of the Dent
         Employment Agreement, the Company agreed to grant Mr. Dent an option to
         purchase certain shares of the Company's Common Stock by March 1, 2001,
         subject to shareholder approval. Mr. Dent has waived any right to
         receive these options.
(4)      Options were granted under the Company's 1999 Incentive Stock Plan.
(5)      Mr. Jones voluntarily surrendered these options to the Company for no
         value on July 31, 2000.
(6)      Mr. Hutts resigned his position as an executive officer of the Company
         effective June 8, 2000. In connection with his resignation, the Company
         agreed to grant Mr. Hutts an option to purchase 200,000 shares of the
         Company's Common Stock at a date mutually agreed upon by the
         Compensation Committee and Mr. Hutts, but no later than March 1, 2001.
         The Company has not granted and does not anticipate granting such
         options in the future.
(7)      Mr. Reeves resigned his position as an executive officer and director
         of the Company effective June 8, 2000. All options held by Mr. Reeves
         expired pursuant to their terms in connection with his resignation.


                                       68
<PAGE>   69

         The Named Executive Officers did not exercise any options during 2000.
The following table sets forth information with respect to unexercised options
held as of the end of the fiscal year by the Named Executive Officers:

                       AGGREGATED OPTION EXERCISES IN LAST
                         FISCAL YEAR AND FISCAL YEAR END
                                  OPTION VALUES


<TABLE>
<CAPTION>
                                               Number of Securities Underlying             Value of Unexercised
                                               Unexercised Exercisable Options           In-the-Money Exercisable
                    Name                             at Fiscal Year-End(#)            Options at Fiscal Year-End($)(1)
-----------------------------------------      -------------------------------        -------------------------------
<S>                                            <C>                                    <C>
Thompson S. Dent (2).....................                         --                                --
Tarpley B. Jones (3).....................                         --                                --
Joseph C. Hutts (4)......................                  2,090,615                                --
Derril W. Reeves (5).....................                         --                                --
</TABLE>

-------------------
(1)      Based upon the closing sales price of a share of Common Stock as quoted
         on the over the counter market on the date of exercise less the
         exercise price for the options, none of the outstanding options are
         currently in the money.
(2)      In August, 2000, Mr. Dent surrendered all his options to the Company
         for no value. Pursuant to the terms of the Dent Employment Agreement,
         the Company agreed to grant an option to receive certain options,
         subject to shareholder approval. Mr. Dent has waived any right to
         receive these options.
(3)      Mr. Jones was granted 250,000 options in connection with his employment
         by the Company. On July 31, 2000, Mr. Jones surrendered all his options
         to the Company for no value.
(4)      Mr. Hutts resigned his position as an executive officer of the Company
         effective June 8, 2000. In connection with his resignation, the Company
         agreed to grant Mr. Hutts an option to purchase 200,000 shares of the
         Company's Common Stock at a date mutually agreed upon by the
         Compensation Committee and Mr. Hutts, but no later than March 1, 2001.
         The Company has not granted and does not anticipate granting such
         options in the future.
(5)      Mr. Reeves resigned his position as an executive officer and director
         effective June 8, 2000. All outstanding options held by Mr. Reeves were
         canceled pursuant to their terms in connection with his resignation.

         In 2000, the Company did not award SARs to any employee of the Company
and has no long-term incentive plans, as such term is defined in Commission
regulations.

RETIREMENT PLAN

         Effective as of June 8, 2000, the Company terminated its supplemental,
non-qualified retirement plan (the "Retirement Plan") in which Messrs. Hutts,
Dent and Reeves were eligible to participate. In connection with their
resignations from the Company, Mr. Hutts and Mr. Reeves received sums previously
set aside by the Company on their behalf pursuant to the Retirement Plan. These
sums totaled approximately $5.3 million in the aggregate, approximately $3.3
million for Mr. Hutts and approximately $2.0 million for Mr. Reeves,
respectively, which amounts represented the cash surrender value of life
insurance policies held by the Company on behalf of each of the former
executives and amounts set aside by the Company in rabbi trusts for the benefit
of each of Messrs. Hutts, Dent and Reeves to fund payments under split dollar
life insurance arrangements for the former executives. In connection with his
appointment as Chairman of the Board, Chief Executive Officer and President of
the Company, the Company paid Mr. Dent all amounts previously set aside by the
Company for his retirement. These sums totaled approximately $1.3 million in the
aggregate, and included amounts set aside in a rabbi trust on Mr. Dent's behalf
and the release of the Company's collateral assignment on Mr. Dent's split
dollar life insurance policy.

         As of the date hereof, the Company has established no new retirement
plans for the benefit of its executive officers and has no present intention to
do so.


                                       69
<PAGE>   70

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

         Mr. Dent was appointed Chairman of the Board, Chief Executive Officer
and President of the Company pursuant to an Employment Agreement dated June 8,
2000 (the "Dent Employment Agreement"). The Dent Employment Agreement is for a
four year term, with a possible two year extension. Pursuant to the Dent
Employment Agreement, Mr. Dent's compensation consists of an annual salary
determined by the Compensation Committee, vacation, a bonus potential not to
exceed 100% of base salary determined in the Board's sole discretion and
reimbursement for all reasonable expenses incurred in the performance of his
duties. For the year 2000, Mr. Dent's base salary was $500,000, and may be
increased each year by the Compensation Committee.

         The Dent Employment Agreement also provides that Mr. Dent was to
receive an option to purchase certain shares of the Company's Common Stock,
subject to shareholder approval. Mr. Dent has waived any right the receive these
options.

         The Dent Employment Agreement provides that Mr. Dent is eligible to
receive a bonus of up to $1.75 million based upon the total amount of principal
indebtedness outstanding under the Company's Amended and Restated Revolving
Credit, subject to certain exclusions, as of March 31, 2001 (the "Total Debt").
The amount of the bonus is determined as follows: if the Total Debt is less than
$50 million, the amount of the bonus shall equal 0.035 multiplied by the
difference between $50.0 million and the Total Debt (the "Bonus Payment"). As of
the date hereof, Mr. Dent has earned the entire bonus and the Company has paid
$1.46 million of the bonus. The Bonus Payment is credited against any severance
amounts due and payable to Mr. Dent pursuant to the terms of the Dent Employment
Agreement as described below. Additionally, in the event the Bonus Payment
exceeds any severance amount due and payable to Mr. Dent, Mr. Dent is obligated
to repay to the Company the excess, subject to certain limitations for taxes.

         Pursuant to the Dent Employment Agreement, in the event Mr. Dent
becomes disabled and his disability continues for a period of 90 consecutive
days, the Company may terminate Mr. Dent's employment and he shall be entitled
to receive all base salary and benefits through the date of termination and for
a period of twenty-four months thereafter. Mr. Dent's salary would be reduced by
any disability income paid pursuant to any disability insurance policy
maintained by the Company for Mr. Dent. Mr. Dent has an individual disability
insurance policy, the premiums for which are paid by the Company. All other
officers and employees of the Company have disability insurance through a group
policy, the premiums for which are also paid by the Company.

         Mr. Dent may terminate the Dent Employment Agreement upon giving
written notice of termination to the Company. The Dent Employment Agreement
further provides that the Company may terminate Mr. Dent's employment at any
time without cause or with cause, which includes an uncured breach by Mr. Dent
of any material term of the Dent Employment Agreement or Mr. Dent's conviction
of a felony that, in the determination of the Board of Directors, adversely
affects the Company or his commission of an act of dishonesty, fraud or
embezzlement against the Company.

         The Dent Employment Agreement provides that at the end of the two year
extension or if Mr. Dent's employment is (a) terminated by the Company without
cause, (b) terminated by Mr. Dent as the result of a change of control, a
reduction in his duties or his removal as Chairman, Chief Executive Officer or
President of the Company or (c) not renewed by the Company, the Company shall
pay Mr. Dent an amount equal to the sum of (i) his base salary and benefits due
and payable through the termination date, (ii) an amount equal to 300% of Mr.
Dent's then current base salary and (iii) $250,000. In addition, in the event
Mr. Dent elects not to extend the term of the Employment Agreement after the end
of the four year term, the Company shall pay Mr. Dent an amount equal to the sum
of (i) his base salary and benefits due and payable through the last day of the
term (ii) an amount equal to 150% of Mr. Dent's then current base salary and
(iii) $125,000. In the event Mr. Dent becomes subject to an excise tax under
Section 4999 of the Code as a result of any severance payments, the Company will
provide additional payments to Mr. Dent to avoid any adverse economic impact
from such excise tax.

         Mr. Jones was appointed Executive Vice President and Chief Financial
Officer of the Company pursuant to an Employment Agreement dated February 1,
2000, as amended June 15, 2000 (the "Jones Employment Agreement"). The Jones
Employment Agreement is for a three year term, with automatic one year renewals.
Pursuant to the Jones Employment Agreement, Mr. Jones's compensation consists of
an annual salary of $375,000


                                       70
<PAGE>   71

which can be increased each year, vacation, a discretionary bonus (targeted at
40% of base salary) and reimbursement for all reasonable expenses. Mr. Jones has
informed the Company that he is exploring other employment opportunities and
that he could terminate his employment with the Company as early as May 31,
2001, however, the discussions regarding his tenure with the Company are
ongoing.

         The Jones Employment Agreement provides that Mr. Jones is eligible to
receive a bonus of up to $500,000 based upon the total amount of principal
indebtedness outstanding under the Company's Amended and Restated Revolving
Credit Facility (the "Credit Facility"), subject to certain exclusions, as of
March 31, 2001 (the "Total Debt"). The amount of the bonus is determined as
follows: if the Total Debt is less than $50 million, the amount of the bonus
shall equal 0.01 multiplied by the difference between $50.0 million and the
Total Debt (the "Bonus Payment"). As of the date hereof, Mr. Jones has earned
the entire bonus and the Company has paid $417,000 of the bonus. The Bonus
Payment is credited against any severance amounts due and payable to Mr. Jones
pursuant to the terms of the Jones Employment Agreement. Additionally, in the
event the bonus payment exceeds any severance amount due and payable to Mr.
Jones, Mr. Jones is obligated to repay to the Company the excess, subject to
certain limitations for taxes.

         Mr. Dent and Mr. Jones have agreed that during the term of their
Employment Agreements and for a period of 24 months and 18 months, respectively,
following the expiration or termination thereof for any reason, they will not
(i) operate, develop or own any interest in, other than the ownership of less
than 5% of the equity securities of a publicly-traded company, any business
which has significant (viewed in relation to the business of the Company, its
subsidiaries or affiliates) or has announced intentions to focus significant
resources, relating to the ownership, management or operation of multi-specialty
medical clinics, physician group practices, independent practice associations,
or other similar entities (a "Business"), (ii) compete with the Company or any
of its subsidiaries and affiliates in the operation or development of any
Business within the United States, (iii) be employed by any business which owns,
manages or operates a Business, (iv) interfere with, solicit, disrupt or attempt
to disrupt any past, present or prospective relationship, contractual or
otherwise, between the Company, its subsidiaries or affiliates and any customer,
client, supplier or employee of the Company, its subsidiaries or affiliates, or
(v) solicit any employee of the Company, its subsidiaries or affiliates to leave
their employment with the Company, its subsidiaries or affiliates, or hire any
such employee to work for a Business. The definition of Business included in the
Employment Agreements is intended to include entities that own, manage and
operate multiple clinics, practices, IPAs, physician organization, etc., and
does not restrict Mr. Dent's or Mr. Jones' employment (i) with a single clinic,
group, IPA, etc. provided such employment is not primarily focused upon the
acquisition and management of multiple physician organizations similar to the
operations of the Company or (ii) with an enterprise that owns, manages or
operates multiple entities as a single business enterprise in a single market.

         Mr. Hutts resigned his position as an executive officer of the Company
pursuant to a Separation and Release Agreement dated June 8, 2000. Mr. Hutts
remains a director of the Company. Mr. Hutts received separation payments equal
to the amounts previously set aside by the Company for his retirement as
described under the section entitled "Retirement Plan," and the Company has
agreed to pay Mr. Hutts an aggregate separation payment of $1.3 million in
monthly installments of $50,000 payable through August 31, 2002, or in a single
lump sum upon receipt of bank consent for such payment. The Company ceased
making the payments to Mr. Hutts in February 2001 because of its cash flow
difficulties, and, accordingly, Mr. Hutts may have a contractual claim against
the Company.

         Mr. Reeves resigned his position as an executive officer and director
of the Company pursuant to a Separation and Release Agreement dated June 8,
2000. Mr. Reeves received separation payments equal to the amounts previously
set aside by the Company for his retirement, as described under the section
entitled "Retirement Plan," and the Company has agreed to pay Mr. Reeves an
aggregate separation payment of approximately $921,000, in monthly installments
of $35,417, payable through August 31, 2002, or in a single lump sum upon
receipt of bank consent for such payment. The Company ceased making the payments
to Mr. Reeves in February 2001 because of it cash flow difficulties, and,
accordingly, Mr. Reeves may have a contractual claim against the Company.
Pursuant to the Company's Restated Charter, the Company will continue to advance
to each executive expenses and fees for retention of legal counsel in connection
with matters relating to actions as an officer, director or employee of the
Company, and each executive will continue to be entitled to the benefit of the
indemnification and limitation of liability provisions contained in the
Company's Restated Charter. The Company will continue to insure both executives
under the Company's directors and officers liability insurance policies for a
period of five years. In addition, the Company is obligated to continue to pay
for health and disability insurance for each executive until


                                       71
<PAGE>   72

August 2002. The Company ceased paying for such insurance in February 2001
because of its cash flow difficulties.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         As of the date hereof, the Compensation Committee of the Board of
Directors consists of Mr. Ashworth, and Drs. Dunn and Hill. Mr. Hutts, a
director of the Company, served as a member of the Compensation Committee of
Renal Care Group, of which Mr. Brooks, a director of the Company until August
2000, is Chairman and Chief Executive Officer. None of the members of the
Company's Compensation Committee has at any time been an officer or employee of
the Company or any of its subsidiaries, nor have any of the members had any
relationship with the Company requiring disclosure by the Company, except for
Dr. Hill whose relationship is described hereinafter under the caption "Certain
Relationships and Related Transactions."


                                       72
<PAGE>   73

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding beneficial
ownership as of March 31, 2001 (unless otherwise indicated) by (i) all
directors, nominees for directors and executive officers, (ii) each person known
by the Company to be the beneficial owner of more than 5% of the Common Stock of
the Company, and (iii) all directors and officers as a group. Except as
otherwise indicated, the beneficial owners listed below have sole voting and
investment power with respect to all shares owned by them, except to the extent
such power is shared by a spouse under applicable law.

<TABLE>
<CAPTION>
                                                                         SHARES BENEFICIALLY       PERCENTAGE OF
               NAME AND ADDRESS OF BENEFICIAL OWNER(1)                        OWNED(2)           OUTSTANDING SHARES
-------------------------------------------------------------            -------------------     ------------------
<S>                                                                      <C>                     <C>
Thompson S. Dent(3)..........................................                   165,907                    *
Joseph C. Hutts(4)...........................................                 2,201,036                  2.9%
Ronald B. Ashworth(5)........................................                   136,112                    *
Dr. Winfield Dunn(6).........................................                    96,478                    *
Dr. Joseph A. Hill(7)........................................                   121,790                    *
Kay Coles James (8)..........................................                    63,835                    *
Tarpley B. Jones.............................................                        --                    *
Warburg, Pincus Equity Partners, L.P. (9)....................                 9,032,206                 27.2%
All directors and officers as a group (7 persons)(10)........                 2,787,158                  3.7%
</TABLE>

---------------
*        Less than 1%.
(1)      Except as otherwise indicated, the addresses for each director, nominee
         for director, executive officer and beneficial owner is: care of
         PhyCor, Inc., 30 Burton Hills, Suite 400, Nashville, Tennessee 37215.
(2)      Includes shares of Common Stock subject to options which may be
         exercised within 60 days of March 31, 2000. Such shares are deemed to
         be outstanding for the purposes of computing the percentage ownership
         of the individual holding such shares, but are not deemed outstanding
         for purposes of computing the percentage of any other person shown in
         the table.
(3)      Of Mr. Dent's 165,907 shares, 14,950 are owned by his wife, Joy
         Griffith Dent and 141,977 shares are held in four trusts by Mr. Dent
         for the benefit of members of his immediate family. Pursuant to the
         terms of the Dent Employment Agreement, the Company agreed to grant Mr.
         Dent an option to purchase certain shares of the Company's Common Stock
         by March 1, 2001, subject to shareholder approval. Mr. Dent has waived
         all rights to receive those options.
(4)      Mr. Hutts resigned as an officer on June 8, 2000. He remains a director
         of the Company. Shares owned include options to acquire 2,097,365
         shares, which options are immediately exercisable.
(5)      Includes options to purchase 89,000 shares of Common Stock and 44,775
         shares of restricted Common Stock.
(6)      Includes options to purchase 90,688 shares of Common Stock and 436
         shares of restricted Common Stock.
(7)      Includes options to purchase 90,688 shares of Common Stock and 436
         shares of restricted Common Stock.
(8)      Includes options to purchase 62,000 shares of Common Stock and 2,218
         shares of restricted Common Stock.
(9)      Warburg, Pincus Equity Partners, L.P., including three related limited
         partnerships ("WPEP"), is an investment fund. Warburg, Pincus is the
         sole general partner of WPEP. WPEP is managed by E.M. Warburg, Pincus &
         Co., LLC ("EMW LLC"). Lionel I. Pincus is the managing partner of
         Warburg, Pincus and the managing member of EMW LLC, and may be deemed
         to control both entities. The address of the Warburg, Pincus entities
         is 466 Lexington Avenue, New York, NY 10017.
(10)     Includes options to purchase 2,429,741 shares of Common Stock and
         47,865 shares of restricted Common Stock.


                                       73
<PAGE>   74

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                  Dr. Joseph A. Hill, a director of the Company, is a
shareholder of the Doctors' Clinic. The Company managed the Doctors' Clinic
pursuant to a 40-year service agreement which terminated effective March 31,
2001. Under the service agreement, the Company received a management fee equal
to clinic expenses incurred by the Company plus a percentage of operating income
of the clinic.

                  Mr. Dent, chairman and chief executive officer of the Company,
is shareholder of HRT and was a director of HRT from 1993 until February 2001.
The Company's Vero Beach property is leased from HRT by PhyCor of Vero Beach,
Inc., a wholly-owned subsidiary of the Company, at a base rental of
approximately $1.2 million per year until 2009. First Physician Care of South
Florida, Inc., a wholly-owned subsidiary of the Company made payments in 2000 to
HRT totaling approximately $400,000 pursuant to a lease which terminates in
2009. The Company has guaranteed the lease obligations of its formerly
affiliated Roanoke, Virginia physician group Lewis-Gale Clinic, LLC to HRT. The
Roanoke physician group leases properties under a 15-year agreement with HRT
which includes rent and certain operating expenses. Such payments totaled
approximately $7.0 million in 2000.

                  Mr. Hutts, a director of the Company, and Mr. Sam A. Brooks, a
former director of the Company, are directors of Quorum. The Company has entered
into an agreement with Quorum to obtain access to volume purchasing agreements,
materials management support and other services. Total payments by the Company
to Quorum for such services during 2000 were approximately $283,000. Mr. Brooks,
formerly a director of the Company, is Chairman and Chief Executive Officer of
Renal Care Group, Inc. Mr. Hutts, a director of the Company and a director of
Renal Care, serves on the Compensation Committee of Renal Care.


                                       74
<PAGE>   75

                                     PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                  FORM 8-K

(a)      Index to Consolidated Financial Statements, Financial Statement
         Schedules and Exhibits

         (1)      Financial Statements: See Item 8 herein.

         (2)      Financial Statement Schedules:

                  Independent Auditors' Report       S-1

                  Schedule II - Valuation and Qualifying Accounts          S-2

All other schedules are omitted, because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.



                                       75
<PAGE>   76

         (3)      Exhibits:

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER             DESCRIPTION OF EXHIBITS
 -------             -----------------------
<S>                  <C>
  3.1         --     Amended Bylaws of the Company (1)
  3.2         --     Restated Charter of the Company (1)
  3.3         --     Amendment to Restated Charter of the Company (2)
  3.4         --     Amendment to Restated Charter of the Company (3)
  4.1         --     Form of 4.5% Convertible Subordinated Debenture due 2003 (4)
  4.2         --     Form of Indenture by and between the Company and First American National Bank, N.A. (4)
 10.1         --     Employment Agreement dated June 8, 2000 between Mr. Dent and the Company (5)
 10.2         --     Company's Amended 1988 Incentive Stock Plan (6)
 10.3         --     Company's Amended 1992 Non-Qualified Stock Option Plan for Non-Employee Directors (6)
 10.4         --     Reserved
 10.5         --     Company's Savings and Profit Sharing Plan (7)
 10.6         --     Fourth Amended and Restated Revolving Credit Agreement dated as of August 25, 2000, among the
                     Company, the Banks named therein and Citibank USA, Inc. (8)
 10.7         --     Employment Agreement dated February 1, 2000 between Mr. Jones and The Company (8).
 10.8         --     Amendment dated June 15, 2000 to Employment Agreement between Mr. Jones and the Company (5)
 10.9         --     Company's 1999 Incentive Stock Plan (9)
10.10         --     Risk Contract Management Agreement, dated as of May 1, 1995, by and between North American
                     Medical Management-Illinois, Inc. and Elmhurst Physician Hospital Organization, LLC (10)
10.11         --     First Amendment to Risk Contract Management Agreement, dated as of November 1, 1996, by and
                     between Elmhurst Physician Hospital Organization, LLC and North American Medical Management -
                     Illinois, Inc. (10)
10.12         --     Amendment to Risk Contract management Agreement, dated as of May 1, 2000, by and between
                     Elmhurst Physician Hospital Organization, LLC and North American Medical Management-Illinois,
                     Inc. (10)
10.13         --     Management Services Agreement, dated as of September 1, 1998, by and between North American
                     Medical Management - Illinois, Inc. and Health Options Illinois, Inc. (10)
10.14         --     Management Agreement by and between North American Medical Management - Illinois, Inc. and
                     Ingalls Provider Group (10)
10.15         --     Amendment to Management Agreement, dated November 30, 1999, by and between Ingalls Provider
                     Group and North American Medical Management - Illinois, Inc. (10)
10.16         --     Management Agreement, dated April 1, 2000, by and between North American Medical Management
                     -Illinois, Inc. and Northwest Community Capco, Inc. (10)
10.17         --     Management Agreement, dated October 1, 1999, by and between North American Medical Management
                     -Illinois, Inc. and Silver Cross Managed Care Organization (10)
10.18         --     Management Agreement, dated August 1, 1996, by and between NAMM-Illinois, Inc. and Swedish
                     Covenant Managed Care Alliance, Inc. (10)
10.19         --     Amendment to Management Agreement, dated December 31, 1999, by and between Swedish Covenant
                     Managed Care Alliance, Inc. and North American Medical Management-Illinois, Inc. (10)
</TABLE>


<PAGE>   77

<TABLE>

<S>                  <C>
10.20         --     Management Services Agreement by and between Kansas City Physician Management, LLC and New Century Health
                     Quality Alliance, Inc. (10)
10.21         --     Management Agreement, dated April 1, 1996, by and between IPA Management Associates, Inc. and
                     Quality Care Network of Texas, Ltd. (10)
10.22         --     Full Service Management Agreement by and between Tri-Co, LLC and Tri-County Physicians Association, Inc. (10)
10.23         --     Management Agreement, dated October 15, 1999, by and among PhyCor of Rockford, Inc., PhyCor,
                     Inc., Rockford Health System and Rockford Memorial Health Services Corporation (10)
10.24         --     Reserved
10.25         --     Addendum to Management Agreement by and among PhyCor of Rockford, Inc., PhyCor, Inc., Rockford Health System,
                     Inc. and Rockford Memorial Health Services Corporation (10)
10.26         --     Service Agreement, dated November 30, 2000, by and between PhyCor of Western Tidewater, Inc., and Lakeview
                     Medical Center, Inc. (10)
10.27         --     Service Agreement, dated September 30, 2000, by and between SynerPhy of Rome, Inc. and Harbin
                     Clinic, LLC (10)
   21         --     List of subsidiaries of the Company (10)
   23         --     Consent of KPMG LLP (10)
</TABLE>

(1)      Incorporated by reference to exhibits filed with the Annual Report on
         Form 10-K for the year ended December 31, 1994, Commission No. 0-19786.
(2)      Incorporated by referenced to exhibits filed with the Company's
         Registration Statement on Form S-3, Commission No. 33-93018.
(3)      Incorporated by referenced to exhibits filed with the Company's
         Registration Statement on Form S-3, Commission No. 33-98528.
(4)      Incorporated by reference to exhibits filed with the Company's
         Registration Statement on Form S-3, Registration No. 333-328.
(5)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
         Commission No. 0-19786.
(6)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1997, Commission
         No. 0-19786.
(7)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1993, Commission
         No. 0-19786.
(8)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarter ended March 31,2000,
         Commission No. 0-19786
(9)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1999, Commission
         No. 0-19786.
(10)     Filed herewith.


<PAGE>   78


                  EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS


The following is a list of all executive compensation plans and arrangements
filed as exhibits to this Annual Report on Form 10-K:

         (1)      Employment Agreement, dated as of June 8, 2000, between the
                  Company and Mr. Dent (filed as Exhibit 10.1)

         (2)      Employment Agreement, dated as of February 1, 2000 between the
                  Company and Mr. Jones (filed as Exhibit 10.7)

         (3)      Amendment to Employment Agreement, dated as of June 15, 2000
                  between the Company and Mr. Jones (filed as Exhibit 10.8)

         (4)      Company's Amended 1988 Incentive Stock Plan (filed as Exhibit
                  10.2)

         (5)      Company's Amended 1992 Non-Qualified Stock Option Plan for
                  Non-Employee Directors (filed as Exhibit 10.3)

         (6)      Company's 1999 Incentive Stock Plan (filed as Exhibit 10.9)

(b)      Reports on Form 8-K

         Not applicable.

(c)      Exhibits

         The response to this portion of Item 14 is submitted as a separate
         section of this report. See Item 14(a)(3)

(d)      Financial Statement Schedules

         The response to this portion of Item 14 is submitted as a separate
         section of this report. See Item 14(a)(2).


<PAGE>   79

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Nashville, State
of Tennessee, on April 16, 2001.


                                PHYCOR, INC.

                                By:   /s/ Thompson S. Dent
                                   --------------------------------------------
                                Thompson S. Dent
                                Chairman of the Board, Chief Executive Officer,
                                President and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Company and in the
capacities and on the date indicated.


<TABLE>

<S>                                           <C>                                                 <C>
/s/ Thompson S. Dent                          Chairman of the Board, Chief Executive              April 16, 2001
-----------------------------------------     Officer, President and Director
      Thompson S. Dent

/s/ Tarpley B. Jones                          Executive Vice President and Chief Financial        April 16, 2001
-----------------------------------------     Officer
      Tarpley B. Jones

/s/ Joseph C. Hutts                           Director                                            April 16, 2001
-----------------------------------------
      Joseph C. Hutts

/s/ Ronald B. Ashworth                        Director                                            April 11, 2001
-----------------------------------------
      Ronald B. Ashworth

/s/ Winfield Dunn                             Director                                            April 11, 2001
-----------------------------------------
      Winfield Dunn

/s/ Joseph A. Hill, M.D.                      Director                                            April 16, 2001
-----------------------------------------
      Joseph A. Hill, M.D.

/s/ Kay Coles James                           Director                                            April 10, 2001
-----------------------------------------
      Kay Coles James
</TABLE>


<PAGE>   80


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
PhyCor, Inc.:

Under date of March 30, 2001, except as to notes 12 and 15, which are as of
April 6, 2001, we reported on the consolidated balance sheets of PhyCor, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 2000 as contained in
the 2000 annual report to shareholders. These consolidated financial statements
and our report thereon are included in the Annual Report on Form 10-K for the
year 2000. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule.
The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.

In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein. The audit report on
the consolidated financial statements of PhyCor, Inc. and subsidiaries referred
to above contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations, has a net capital deficiency and has
a net working capital deficit that raise substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.


                                                      /s/ KPMG LLP

Nashville, Tennessee
March 30, 2001



                                      S-1
<PAGE>   81


PHYCOR, INC. AND SUBSIDIARIES

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                             BEGINNING      ADDITIONS                                         ENDING
                                              BALANCE        EXPENSE       DEDUCTIONS         OTHER(1)        BALANCE
                                             ---------      ---------      ----------         --------        -------
<S>                                          <C>            <C>            <C>                <C>             <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
CONTRACTUAL ADJUSTMENTS (IN THOUSANDS)

December 31, 1998                             $208,534      1,419,501      (1,432,358)         35,108         230,785

December 31, 1999                             $230,785      1,468,674      (1,601,421)         68,382         166,420

December 31, 2000                             $166,420        814,377      (1,015,742)         36,980           2,035
</TABLE>

(1) Represents allowances of operations held for sale


                 See accompanying independent auditors' report.



                                      S-2


<PAGE>   82

                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER             DESCRIPTION OF EXHIBITS
 -------             -----------------------
<S>                  <C>
  3.1         --     Amended Bylaws of the Company (1)
  3.2         --     Restated Charter of the Company (1)
  3.3         --     Amendment to Restated Charter of the Company (2)
  3.4         --     Amendment to Restated Charter of the Company (3)
  4.1         --     Form of 4.5% Convertible Subordinated Debenture due 2003 (4)
  4.2         --     Form of Indenture by and between the Company and First American National Bank, N.A. (4)
 10.1         --     Employment Agreement dated June 8, 2000 between Mr. Dent and the Company (5)
 10.2         --     Company's Amended 1988 Incentive Stock Plan (6)
 10.3         --     Company's Amended 1992 Non-Qualified Stock Option Plan for Non-Employee Directors (6)
 10.4         --     Reserved
 10.5         --     Company's Savings and Profit Sharing Plan (7)
 10.6         --     Fourth Amended and Restated Revolving Credit Agreement dated as of August 25, 2000, among the
                     Company, the Banks named therein and Citibank USA, Inc. (8)
 10.7         --     Employment Agreement dated February 1, 2000 between Mr. Jones and The Company (8).
 10.8         --     Amendment dated June 15, 2000 to Employment Agreement between Mr. Jones and the Company (5)
 10.9         --     Company's 1999 Incentive Stock Plan (9)
10.10         --     Risk Contract Management Agreement, dated as of May 1, 1995, by and between North American
                     Medical Management-Illinois, Inc. and Elmhurst Physician Hospital Organization, LLC (10)
10.11         --     First Amendment to Risk Contract Management Agreement, dated as of November 1, 1996, by and
                     between Elmhurst Physician Hospital Organization, LLC and North American Medical Management -
                     Illinois, Inc. (10)
10.12         --     Amendment to Risk Contract management Agreement, dated as of May 1, 2000, by and between
                     Elmhurst Physician Hospital Organization, LLC and North American Medical Management-Illinois,
                     Inc. (10)
10.13         --     Management Services Agreement, dated as of September 1, 1998, by and between North American
                     Medical Management - Illinois, Inc. and Health Options Illinois, Inc. (10)
10.14         --     Management Agreement by and between North American Medical Management - Illinois, Inc. and
                     Ingalls Provider Group (10)
10.15         --     Amendment to Management Agreement, dated November 30, 1999, by and between Ingalls Provider
                     Group and North American Medical Management - Illinois, Inc. (10)
10.16         --     Management Agreement, dated April 1, 2000, by and between North American Medical Management
                     -Illinois, Inc. and Northwest Community Capco, Inc. (10)
10.17         --     Management Agreement, dated October 1, 1999, by and between North American Medical Management
                     -Illinois, Inc. and Silver Cross Managed Care Organization (10)
10.18         --     Management Agreement, dated August 1, 1996, by and between NAMM-Illinois, Inc. and Swedish
                     Covenant Managed Care Alliance, Inc. (10)
10.19         --     Amendment to Management Agreement, dated December 31, 1999, by and between Swedish Covenant
                     Managed Care Alliance, Inc. and North American Medical Management-Illinois, Inc. (10)
</TABLE>


<PAGE>   83

<TABLE>

<S>                  <C>
10.20         --     Management Services Agreement by and between Kansas City Physician Management, LLC
                     and New Century Health Quality Alliance, Inc. (10)
10.21         --     Management Agreement, dated April 1, 1996, by and between IPA Management Associates, Inc.
                     and Quality Care Network of Texas, Ltd. (10)
10.22         --     Full Service Management Agreement by and between Tri-Co, LLC and Tri-County Physicians
                     Association, Inc. (10)
10.23         --     Management Agreement, dated October 15, 1999, by and among PhyCor of Rockford, Inc., PhyCor,
                     Inc., Rockford Health System and Rockford Memorial Health Services Corporation (10)
10.24         --     Reserved
10.25         --     Addendum to Management Agreement, dated March 2001, by and among PhyCor of Rockford, Inc.,
                     PhyCor, Inc., Rockford Health System, Inc. and Rockford Memorial Health Services Corporation (10)
10.26         --     Service Agreement, dated November 30, 2000, by and between PhyCor of Western Tidewater, Inc.,
                     and Lakeview Medical Center, Inc. (10)
10.27         --     Service Agreement, dated September 30, 2000, by and between SynerPhy of Rome, Inc. and Harbin
                     Clinic, LLC (10)
21            --     List of subsidiaries of the Company (10)
23            --     Consent of KPMG LLP (10)
</TABLE>

(1)      Incorporated by reference to exhibits filed with the Annual Report on
         Form 10-K for the year ended December 31, 1994, Commission No. 0-19786.
(2)      Incorporated by referenced to exhibits filed with the Company's
         Registration Statement on Form S-3, Commission No. 33-93018.
(3)      Incorporated by referenced to exhibits filed with the Company's
         Registration Statement on Form S-3, Commission No. 33-98528.
(4)      Incorporated by reference to exhibits filed with the Company's
         Registration Statement on Form S-3, Registration No. 333-328.
(5)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
         Commission No. 0-19786.
(6)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1997, Commission
         No. 0-19786.
(7)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1993, Commission
         No. 0-19786.
(8)      Incorporated by reference to exhibits filed with the Company's
         Quarterly Report on Form 10-Q for the quarter ended March 31,2000,
         Commission No. 0-19786
(9)      Incorporated by reference to exhibits filed with the Company's Annual
         Report on Form 10-K for the year ended December 31, 1999, Commission
         No. 0-19786.
(10)     Filed herewith.